Good morning, and welcome to the Karnov Group Q3 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal our conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star and then two. Please note that this event is being recorded. I would now like to turn the conference over to Chief Executive Officer Pontus Bodelsson. Please go ahead, sir.
Thank you. Welcome everyone to Karnov Group's earnings conference, where we will present the outcome of the third quarter of 2022. Please go to slide two. I am Pontus Bodelsson, President and CEO of the company. With me, I have our CFO, Jonas Olin, and our Head of Investor Relations, Erik Berggren. Jonas 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. Please go to slide three. We are satisfied with the outcome of the third quarter. Karnov Group's net sales grew by 18%, of which 13% was organic growth. This was due to strong sales on all our markets. Online sales continued to grow, and in the third quarter, we also had extraordinarily strong sales of school publications in Sweden.
The adjusted EBITDA margin was 35%, which is lower than the previous year. This is due to our preparations to become a European player. However, it is also the result of our strategic focus on customer centricity. We have identified areas where we can provide even more customer value with related expenses in the third quarter. We will address the margin more closely in the financial section presented later by Jonas. In the beginning of November, we received a formal clearance from the Spanish Antitrust Authority to complete our acquisitions in France, Spain, and Portugal. We expect to close the acquisitions on the thirteenth of November, and as you can see on our low leverage, we are ready to complete the acquisitions. Let's move over to slide four. In the third quarter, our organic growth was 13%. The growth is a result of our growing online sales.
We sell more licenses to new customers and to existing customers. Secondly, we have extraordinary offline sales in the quarter coming from the new school year. Apart from that, our standalone entities within EHS and Workflow Tools are delivering in line with expectations, contributing to an overall extraordinary growth quarter. Karnov Group strives to be a thought leader in the legal field. Our first priority is customer centricity, ensuring we provide solutions to our customers' challenges of today and their possibilities of tomorrow. As part of this, we invest in exciting legal tech possibilities, providing support in the development phase and also supporting the businesses in the go-to-market stage. Another part of our ambition to be a thought leader is our annual industry report, The Future of the Legal Profession.
The data and insights in this report are based on feedback from more than 3,100 full-time legal professionals in Denmark, Sweden, and Norway. Our ambition is that the report shall present a deeper understanding of our industry and the challenges and opportunities we face. We also hope to inspire and present a springboard for further dialogue. This year's report dug into topics such as work-life balance, legal tech, and how to embrace sustainability within the legal sector. Please go to slide five. I will now comment a little on our segments, starting first with Denmark. We did deliver stable growth in Denmark. The organic growth was 4.0% and the adjusted EBITDA margin was 35.3% in the third quarter. Our municipality solution, which celebrated one year on the first of September this year, has been well received in the markets.
In the third quarter, we have continued enhancing the solution. The latest enhancement was adding more practical case guides, helping the workflow of the social workers. We are now strengthening our support functions to prepare onboarding for more users. Turning the page to slide six. In Sweden and Norway, we had extraordinary sales in the third quarter. Organic growth was 22.4% and the adjusted EBITDA margin was 35.4%. The Swedish market had exceptional offline sales, which was driven by the sales of school publications. Our online business also performed well. Growth drivers are in line with the previous quarters, the public sector, municipalities, and EHS. Apart from that, our standalone entities developed in line with expectation. The new initiative, Rättsområdesanalyser, which is an add-on feature on the Juno platform in Sweden, has been well received by the test users.
We are now preparing the rollouts. Turning the page to slide seven. In the beginning of November, we received clearance from the National Commission on Markets and Competition to acquire the legal information businesses of Thomson Reuters in Spain and Wolters Kluwer in Spain and France. This means we can, at the end of November, complete the acquisitions and assume ownership. With this acquisition, we capture an attractive opportunity to create best-in-class offerings on the local markets with strong market positions. Further, some of the most innovative brands in the European legal information service market will come under one umbrella, creating a strong basis for new legal tech solutions. We have made two commitments with respect to the Spanish market. Firstly, we have committed to offer existing local content products and services, including legal databases and publications of the Spanish market separately under reasonable market conditions.
Secondly, we have committed to not enter into exclusivity agreements with authors. These commitments prove our long-term ambition on the new markets. Please go to slide eight. We are happy to announce that Guillaume Deroubaix will assume the position as CEO of Region South. He is an experienced business leader and comes from the position as COO of LexisNexis, France. With more than 20 years of experience from the legal information solutions market, he brings the combination of great industry knowledge and knowledge of the local markets. At the start, Guillaume will focus on the Spanish and Portuguese markets before assuming the position as CEO of Region South during the spring of 2023. Please go to slide nine. I will now hand over the floor to our CFO, Jonas Olin, who will tell us more about the financial results in the third quarter.
Thank you, Pontus. Let's start with an overview of our net sales, switching to slide 10. Net sales in the third quarter were SEK 263 million, corresponding to a top-line growth of 18.4%. The organic growth was strong at 13.2%, while the acquired growth from Echoline, BELLA, and Ante was 2.3%. Currency effects were a little stronger, a little higher this quarter, due to the weaker Swedish krona and amounted to 2.8%. The organic sales growth was driven by sales to new customers and upselling to existing customers within the public sector, municipalities, and the EHS vertical. The Swedish Norwegian segment was the main driver of the organic growth in this quarter, with growth in all its units.
The extraordinary offline sales in the Swedish market related to the school publications and had a positive impact on the organic growth. If we consider this item and exclude that, we assess that its organic growth would have been 5.4% on group level in the third quarter. Let's move to slide 11, please. On this slide, you see the net sales development in two different views, and you can clearly see the effect from the extraordinary offline sales in this quarter, as offline sales grew and subscription-based sales declined in the third quarter. The offline business increased its share of our sales by four percentage points, meaning that the online sales amounted to 78% in the quarter.
The share of our subscriptions in our sales to the right in this slide decreased to 84% in the quarter, which is a three percentage point lower than last year. Adjusted for the extraordinary offline sales, both the online and the subscriptions part would have continued to increase, and this quarter by two percentage points. Moving to slide 12. In the third quarter, adjusted EBITDA was SEK 93 million. This is an increase of SEK 5 million or approximately 6% compared to the previous year. The adjusted EBITDA margin amounted to 35.3%, which is a decline mainly explained by the increased operational expenses relating to investments and optimization of the organization getting ready for the European expansion.
I take this opportunity to remind you all that the group is growing by approximately 150% in net sales following the acquisitions in France, Spain, and Portugal. Furthermore, the consolidation of the legal tech startups in the Danish segment, which are in the scale-up phase, has had a minor dilution on the margin. In the third quarter, we had items affecting comparability of SEK 8 million, and this is mainly related to legal expenses in connection with the competition authority process in Spain, as well as continued preparations for the coming integration work. Let's move to slide 13. In Denmark, we grew steadily. In the third quarter, sales increased by 9.4%, of which organic growth was 4%, and the acquired growth amounted to 1.1%.
Due to the weaker Swedish krona, currency effects had a positive effect by 4.3% of the net sales. Organic growth was driven primarily by online sales, where we can see an increased demand for our solutions. In the third quarter, we received additional orders relating to our new municipality solution, and we are now launching additional supporting functions to prepare the onboarding of new users. Adjusted EBITDA amounted to SEK 43 million, and the adjusted EBITDA margin was 35.3%. The decrease is due to what we have mentioned earlier as we have continued the preparation for the European expansion as well as progress for future customer value, both with related external expenses for organizational development as well as higher personnel costs, primarily affecting the Danish segment.
In addition, the consolidation of the legal tech startups acquired in Q4 last year also had a dilutional effect on the margin in Denmark. Moving on to slide 14, we can continue with the Swedish-Norwegian segment. We deliver a very strong quarter in Sweden and Norway. Net sales increased by 27.2%. Organic growth was strong as 22.4%. Acquired growth from Echoline in France accounted for 3.5%, while the currency effects had a positive impact of 1.3%, mainly connected with the Norwegian krona. As I mentioned earlier, offline sales and school publications were extraordinarily strong in the third quarter, and excluding the positive impact, the organic growth in this segment would have been 6.8%. We continue to have a strong online sales, succeeding in selling to new customers and upselling to existing customers.
Growth drivers, as mentioned, are especially the public sector, municipalities, and our EHS companies. Adjusted EBITA improved by 31% in the quarter, and the adjusted margin improved to 35.4%, and both are due to the higher sales. Let's continue with slide 15, and this is our cash flow and the leverage levels. In the third quarter, adjusted operating cash flow amounted to SEK 26 million, which is an improvement of SEK 30 million compared to the previous year. This is mainly due to the timing of the royalty payments that we mentioned last quarter, where a payment of SEK 37 million was done in the second quarter this year, compared with the third quarter last year. A reminder that this has no effect on the annual cash flow as it is a pure timing effect between Q2 and Q3.
Our leverage was 0.9x at the end of September. As we have mentioned before, the bridge financing for the acquisitions has been in place since the intended acquisitions were announced in December. This means that we are financially prepared to complete the transaction and the acquisitions in France, Spain, and Portugal at the end of this month. I'm now handing over to Pontus again, who will present the last slides.
Thank you, Jonas. Please switch to slide 16. I just want to conclude this presentation by presenting a summary of the highlights of Q3. We are satisfied with the outcome of this quarter as we continue to grow our online business and have an organic growth above 13% in the quarter. Online drivers are the public sector, municipalities, and the EHS vertical. In the beginning of November, we received clearance from the Spanish Antitrust Authority, and we are now cleared for European expansion. We expect to complete the acquisitions in the end of November, and we are ready to initiate the integration plan. Guillaume Deroubaix, our intended CEO of Region South, joined us on the first of August, and he is now eager to get started. Please switch to slide 17. 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. Yes, I hope the host is still there.
Apologies, sir. Ladies and gentlemen.
No problem.
Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press star and then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the star keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two. Again, if you would like to ask a question, please press star and then one. The first question we have is from Daniel Ovin from Nordea.
Yes. Good morning, Pontus and Jonas, and thank you for taking my questions. The first question is on the rather large offline sale that you had in Sweden. Perhaps you can elaborate a little bit more around what this is, and also highlight if we should see this purely as a one-off. That is the first question.
Yes, indeed, Daniel. This is an extraordinary one-off sales, and it's nothing that we could expect happening also next year, so we should be humble there. It's related to the start of the school year in Sweden, so it's about school publications. Great to have it on board, the Q3, but nothing to be expected in the coming years.
Okay, great. Thank you. I wonder a bit about I also read that you had a positive effect on your net finance line, financial line, SEK 23 million from adjusting the earn-out for the DIB acquisition. I just wonder, does this mean that it's not meeting expectation? I think you talked about DIB growing around roughly 10% per year at the time of the acquisition. That has not been delivered or has not continued? Perhaps you can share a little bit more around what this is concerning. Thank you.
Sure, I can do that. This is connected to the earn-out that we had in the agreement when we acquired DIB. The earn-out was a little bit more stretched than our main expectations, so those expectations are not met. DIB is still continuing to perform very well according to our expectations.
Okay. It's performing basically in line with what it did before the acquisition. There's not been any material slowdown.
Not at all. Definitely not.
Great. Okay, perfect. And then also I wonder about this cost you're taking in Denmark, which you're actually not putting as a one-off. You still include it seems like, in the adjusted EBITDA number, and it seems to be it was SEK 5 million this quarter, SEK 3 million last quarter. How should we think about this going forward? I mean, is this something that's gonna continue increase or is it a few more quarters, or how should we think about that cost number?
Well, it's all about getting ready for the European expansion. We try to adjust our organization and corporate office and so on. It's nothing that we do believe will occur every quarter. We monitor, of course, our management resources and so on to be sure to take on board all those 1,000 new employees and 150% more of revenue. For the time being, we can't say that this is something that will continue to grow, not at all. Again, it's a big bite in Spain, France and Portugal, so we tend to monitor it really closely.
I can add a little. As mentioned, the organization and these SEK 3 million-SEK 5 million will reoccur every quarter on a similar level, but we don't expect them to increase.
Okay, okay. It's basically a cost for setting up the organization that will continue, but now you will also get sales and profit, I guess. Is that the way to look at it?
I mean, the corporate office has been fairly small in the past, and we are growing 150% on the top line. By employees, FTEs, we go from 300 to 1,300. Of course, that requires a little bit of a higher cost for the head office. We have a slight cost increase and a higher cost base going forward, but not bigger than this.
Yeah. Okay, perfect. Also a question on these consolidation costs for legal startups in Denmark. I think you mentioned on the call that that is from acquisitions you made in Q4 last year. That means that you will annualize that in Q4 this year. We should not see any year-over-year impact any longer from that. Is that correct?
I think in Q4 last year, it was a very neutral outcome. You might have an effect maybe one, possibly two quarters ahead, but then it will be annualized. You're correct.
Yes. Okay, perfect. I actually have a few more questions. I hope it's okay if I go on. That is related to the Spanish and French acquisition then. I think you gave in the press release here, you gave pro forma numbers for 2021 of EUR 123 million in sales and EUR 16.7 million in EBITDA. I remember when you the press release on the acquisition about a year ago, then you had a pro forma EBITDA and sales of EUR 123.9 million and EUR 17.1 million in EBITDA. That suggests that there's basically not been any sales growth and that EBITDA has been coming down a bit. Can you comment on that? Perhaps also, if you can give an indication on how it's been developing during 2022.
To the best of our knowledge, we still have not got the keys to the companies, as you know. To the best of our knowledge, it has continued to develop in line with previous year. It is a stable development, and I think they are also waiting for us to take over, and start working together and develop the companies together.
Also these extra amendments that you're making in the contract that you will keep launching existing products in Spain for the next three years. What does that mean? Does that suggest services that you would otherwise not have and would that imply extra cost or maybe you can comment a bit around that?
Well, it's two commitments. One is the one you mentioned that we have to sell products not only bundle packages, so to say. We are able to keep those already packaged products that we've got, for example, Fusión, which is an important offering that we've got coming from TR, Aranzadi in Madrid. But we are not allowed to just sell bundle products, so to say. Not to sell just packages, but also product by product. That's one of our commitments. Number two is the fact that we are not allowed for a three-year period to have exclusivity contracts with our authors and experts. That's not a problem at all because we don't have that kind of contracts from the beginning.
All in all, we don't think that these commitments are causing us any trouble. We are of course interested in giving and presenting the best customer value, and definitely possible going forward, and it's not impacting the cost efficiencies that we see going forward either. All in all, a good situation.
Okay. You don't have exclusivity contracts in the Nordic region?
No.
No. Okay, great. Great. All right. Just one last final question, and that is on Q4 now, when you're basically consolidating these businesses. Can you say anything? I mean, is there anything we should be aware of in terms of, you know, large one-off costs or anything that's particular to this quarter that you can remind us of or highlight that we should be aware of when we model the Q4 numbers? That's the last question. Thank you.
We are consolidating as of the thirtieth of November, so you will have one month of impact. The business is fairly stable, just as we have in the Nordics, so I think that would be a good base for the model. When it comes to one-offs, yes, there will be some additional one-offs when we now close and finalize the deal. The amount, I don't have a specific number at this point, but there will be some one-offs connected to this as well. Most of the one-offs were taken, but there will still be some fees that are based on the success of this transaction.
Perfect. Okay. That's all my questions. Thank you very much.
Thank you.
Thank you. Ladies and gentlemen, again, if you have a question, please press star and then one now. The next question we have is from Erik Moberg from Berenberg.
Morning, Jens. Just a follow-up question on the cost side. You also mentioned that another reason for the increase was due to investments in areas where you feel that you can increase customer value. What areas are you referring to? And if you could quantify the increase from this would be really helpful.
Good morning. Thank you. Well, we could see that we are entering into, for us, a giant European expansion. Bearing in mind that it's easy to fall into the trap to just focus on Spain, Portugal, and France, we are fully aware of the fact that we will have to also continue to focus even harder actually on the Nordic markets. That's why we are eager to make sure that we still focus on customer centricity and improving customer value whenever that's a possibility. We focus a lot on this in the Nordic countries, and we have found a few ways to improve the platform going forward. We will never be anything else than on our toes to make sure of that. There's no specific things that I or that I'm able to go into actually, but it's more of a full focus going forward.
That's what I can tell at the moment.
Okay. Fair enough. Just looking into 2023, when it comes to the legacy business, should we sort of assume similar margins as of right now in Q3? Or do you see, yeah, sort of potential for improvement from this level?
Well, we don't see any big changes going forward on the margin. No.
In regards to just when we're sort of like bridging the growth going into next year and, especially in Sweden, obviously, once again, organic growth was impressive, even excluding the one-off in the offline sales. You mentioned you continue to take share within municipalities and environmental health and safety. If we look into next year, what do you see as the most crucial driver for Sweden, if we just sort of rank in terms of price increases versus increased penetration in municipalities and environmental health and safety?
Well, we could keep on. As I've said before, we keep on adding more and more customer value. By doing that, hopefully we will make our customers being even more efficient. If we are doing that, it might result, of course, in price increases, but we always start from the customer value perspective. In terms of the different segments, so to say, we see that EHS is still very interesting. As you know, it's a Swedish company called Notisum, and it's also a French company based in Paris and Toulouse, Echoline. The EHS vertical is growing rapidly. That's something to bear in mind. We could also see that the Norwegian company, DIB, which is included in these segments within Norway, is growing well. DIB entered into Sweden, and we still hope to see more from DIB, growing further in Sweden.
Okay. Fair enough. That's all from me. Thank you very much.
Thank you.
Thank you. Ladies and gentlemen, again, if you would like to ask a question, please press star and then one now. The next question we have is from Sara Stenlund from SEB.
Hi, everybody. Good morning. Most questions have been exhausted, but I just wanted a quick follow-up, you mentioned rising employee costs primarily in Denmark. Are these completely attributable to new hires and the expansion of the head office you're talking about? Or is there also some wage inflation effect showing up already in there?
As of right now, this is connected to the increase of the head office as we are growing, as we said. We do not currently see almost any effect of the inflation in neither in Denmark or Sweden at this moment. Of course, we see for the future, but it has not affected in Q3 at all, more or less.
All right. Good to know. I think that's all for me, but I just, you mentioned the EHS entities here. Are you examining at all sort of synergies or integration between those two entities that you have in France and Sweden going forward, or what is the plan with those?
Yes. I'd say that Notisum and Echoline are identifying opportunities together, and there are of course also the EU law that they can work together on. There's a certain product called Checkup that they are working on together. Those are of course separate entities, but they are working together finding synergies. That's more to come from both of them and also together.
All right. Great. Thank you.
Thank you.
Thank you. Sir, it seems that that was our final question. That concludes our question and answer session. I would like to turn the conference call back over to Pontus Bodelsson for closing remarks. Please go ahead, sir.
Thank you very much, and thank you everyone for listening and for your questions. We will disclose our Q4 report on the February 15th, so we hope to hear from you then, if not earlier. Have a good day. Thanks.
Thank you, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.