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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good afternoon and welcome to the Karnov Second Quarter 2022 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now let to the core over to Pontus Bodelsson, CEO. Please go ahead.
Welcome again, everyone, to this earnings conference for Karnov Group where we're again to present the outcome of the second quarter of 2022. Please go to Slide 2. 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 second 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 3. In the second quarter, we have delivered on an increased demand for our services with strong growth coming from both our segments. Net sales grew by 13% in the second quarter and organic growth was 9%. We have, during the quarter, invested resources in preparing for this transformative acquisitions in France, Spain and Portugal. We are expecting a decision from the Spanish Antitrust Authority in September and are ready to complete the acquisitions.
The adjusted EBITDA margin was 33%, which is a little over than the previous year, mainly due to our preparations for the European expansion. We will address the margin more closely in the financial section presented later by Jonas. Our leverage is still on the extraordinary level leverage of 7.9x at the end of the quarter as we have prepared to complete the transformative acquisitions in Spain and France. Let's move over to Slide 4. In the second quarter, our organic growth was 8.5%. The growth is a result of selling more licenses to new customers and to existing customers. Further, our standalone entities with the EHS and workflow tools are delivering in line with expectations. Society in general is becoming increasingly legalized. This is also -- this also increases the need for legal information and compliance. Our customers need fast access to deep knowledge and our promise as a network of authors and experts provide our customers their needed trust and efficiency.
With customer centricity, innovation and deep conscience, we enable our customers to make better decisions faster. It's all about investing in solutions to our customer challenges of today and possibilities of tomorrow, not to forget continuously strengthening our legal platforms with more contents, features and tools.
Please go to Slide 5. I will now comment a little bit on our segment, starting firstly with Denmark. Our Danish businesses continue to perform well. The organic growth was 4.9% and the adjusted EBITDA margin was 35.5% in the second quarter. Our municipality solution, which was launched in Denmark in Q3 last year, has been well received in the market.
In the second quarter, we have received additional orders and more than 10 municipalities now use our platform with related products. The municipality solution is a cross border initiative, as the product is appreciated by our customers in the Swedish market. To promote the rule of law and tax, we have, during the second quarter, held our annual event Karnov Skattepris. This year was the 24th time the award was given. We have [ paid ] tribute to those who have made a significant contribution to the promotion of tax law in Denmark. This year, the Danish tax minister, Jeppe Bruus, awarded the winners. [indiscernible] received the Tax Award of the Year, and Laura Fredslund and Asta Naja Helms received the Special Award of the year. Turning the page to Slide 6. In Sweden/Norway, our strong growth trends continues. In the second quarter, organic growth was 11.9% and the adjusted EBITDA margin was 30.1%. These growth drivers are in line with the previous quarters, the public sector, the municipalities and EHS. We see a market trend with increased demand for our services, both from law firms and the public sector, which we are able to deliver on.
Our Norwegian business, DIBkunnskap, released the document management solution called dflow in Norway and have their first sales of the solution. They have also continued its launch of its IFRS service on the Swedish market. In the second quarter, we soft launched the new feature Rättsområdesanalyser on the JUNO platform. It's an add-on where our experts select some of the most important legal events in different areas of law and publish in-depth analysis comments on the platform.
Turning to Slide 7. In December, we announced that we have signed a binding offer to acquire carved out legal information-based businesses in France, Spain and Portugal. The acquisition is transformative for Karnov Group, in line with our ambition to be a European player. Through the acquisitions, we will get a strong market presence on the Spanish and French markets, increasing the total addressable market by a little more than 9x.
We have, during the first 6 months, worked on a merger plan to ensure successful integration. As part of the work stream process, we have invested in our organization for the European expansion. We expect the decision from the Spanish Antitrust Authority during September, and we are ready to complete the acquisition, both financially and on the operational level.
Please go to Slide #8. I will now hand over the floor to our CFO, Jonas Olin, who will tell us more about the financial results in the second quarter.
Thank you, Pontus. So let's start with an overview of the group net sales, switching to Slide #9.
Net sales in the second quarter was SEK 227 million, corresponding to a top line growth of almost 13%. The organic growth was -- we had another quarter of organic growth, strong at 8.5%. The acquired growth and currency effects were both just about 2% each. The organic growth drivers were mainly sales to new customers and upselling to existing customers within the public sector, municipalities and the EHS vertical, as Pontus mentioned.
The Swedish and Norwegian segment was the main driver of the organic growth with growth in all units, both Norstedts Juridik, but also Notisum as well as DIBkunnskap grew strongly. Also, the acquired companies performed in line with expectations in the quarter, mainly driven by Echoline who is active in the EHS vertical.
Let's move to Slide 10, please. On this slide, you see the net sales development in 2 different views, and you can see that also in the second quarter, both the online and the subscription-based sales grew. This is typical for our normal seasonal pattern where the second quarter was very strong in both online sales and subscription-based business.
First, to the left, you can see that the online business increased its share of our sales by 2 percentage points to 91%. The share of subscriptions in our sales, this one to the right, increased to 94% in the second quarter, which is 1 percentage point higher than the previous year.
Moving on to Slide 11. In the second quarter, adjusted EBITDA was SEK 74 million. This is an increase of SEK 4 million or approximately 6% compared to previous year. Adjusted EBITDA margin amounted to 32.6%, which is slightly below previous year, 35%. The lower margin is fully explained by 2 factors, totaling SEK 7 million. The first one is additional operational expenses of SEK 3 million relating to the investments and optimization of the organization. We are preparing for the European expansion, which requires some increased overhead as the group will grow 150% in net sales following the completion of the acquisition in Spain and France.
The second factor is relating to the long-term incentive program, LTIP 2019, which was completed in May. As the outcome was more successful than earlier expected, the adjustment was booked in the second quarter, giving a nonrecurring effect of SEK 4 million. If we exceed these 2 factors of total SEK 7 million, the underlying adjusted EBITDA margin would have been just above the level of the previous year.
In the second quarter, we had items affecting comparability of SEK 20 million, and this was due to the planned and transformative acquisitions in France, Spain and Portugal. The merger integration work has proceeded as planned as well as we have legal expenses and support during the Competition Authority process in Spain.
Let's move over to our segments and go to Slide #12. We'll start with Denmark. In Denmark, we continue to grow. In the second quarter, sales grew 9.5%, of which organic growth was almost 5% and the acquired growth amounted to 1.2% from the company's BELLA and Ante, which were acquired in Q4 last year. Currency effects had a positive impact of 3.4% on the net base due to the weaker Swedish krona.
Organic growth was driven by online sales where we see an increased demand for our solutions. And as Pontus mentioned earlier, we will see additional orders relating to our new municipality solution, and we have now onboarded more than 10 municipalities in Denmark. Adjusted EBITDA decreased by 3% and adjusted EBITDA margin was 35.5% in the second quarter. The lower margin is due to what I mentioned earlier, which is the investor resources in preparing for European expansion, as well as some costs relating to LTIP 2019 also affecting the Danish segment.
There was also a slight marginal effect in Denmark following the consolidation of the legal tech start-ups acquired in Q4 last year, BELLA and Ante that I mentioned before.
Let's move to Sweden on Slide 13. We continue to deliver solid growth in this segment. Net sales increased by 16.1%, organic growth was almost 12%, acquired growth from Echoline in France accounted for 3.4%, and the currency effects had a positive impact of 0.8% due to [ dip ] and the development of the Norwegian krona. Organic growth comes from good online sales to new customers and upselling to existing customers, and we are proud to say that we continue to gain market shares in the public sector and municipalities and in our EHS vertical. DIBkunnskap launched the new product dflow in Norway and it has been well received in the market.
Continuing to the EBITDA margin. The adjusted EBITDA margin was unchanged at 30.1%, and this is although we had the impact of SEK 3 million from the completion of the LTIP 2019 program.
Let's move to Slide 14, please. This is where we see our cash flow and the leverage. In the second quarter, adjusted operating cash flow and cash conversion was negative. This is due to timing of royalty payments, I have explained that, as payment of SEK 37 million was done in the second quarter compared to the third quarter of the previous year. So I would like to point out that this has no effect on the annual cash flow as it is a pure timing effect between Q2 and Q3 compared to the previous year.
The leverage was 0.9x at the end of June. And as 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 not only operationally prepared but also financially prepared for the transformative acquisitions in France, Spain and Portugal.
I'm now handing it over to you again, Pontus, who will present the last few slides.
Thank you, Jonas. Please switch to Slide 15. I just want to conclude this presentation by presenting a summary of the highlights of Q2.
We deliver on an increasing market demand with net sales growth of 13% and organic growth of 9%. So we see growth in both our segments. In the second quarter, we have prepared our organization to grow into a European player with relating operational costs. We've chosen to optimize our business for the European expansion in collaboration with third parties, so that's our Nordic business's focus on growth. We are ready to execute the transformative acquisitions in France, Spain and Portugal, and expect a decision from the Spanish Antitrust Authority in the course of September.
Next slide, please. So 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.
[Operator Instructions] The first question comes from Daniel Ovin with Nordea.
First question is around the extra expenses here of SEK 7 million that's still included in the adjusted EBITDA. So I wonder a bit how to think about this going forward. As I understood it on the call, it seems like the long-term incentives program, that's a one-off but that can come back, but how about the other expenses for the organizational development? Is that something that we should expect to see also in Q3? That's the first question.
Yes, Daniel, I can take this one. I agree with you, it's completely clear that the LTIP adjustment is a onetime effect, which is nonrecurring. When it comes back to the SEK 3 million in operational development, that is on a level that will continue going forward as well as we are growing -- preparing for the expansion in Europe.
Okay. So that's Q3, Q4 also? And then also wondering why is this not the adjustment like the other SEK 7 million that is related to the acquisition? Basically, what is the difference there? .
We are increasing the organization a little bit to support the new structure going forward. We are growing 150% on net sales, and we will grow 4x when it comes to number of employees in the group. So we need a little bit of additional overhead costs going forward to support the new organization.
Yes. Okay. And so I understood correctly that it's probably going to be Q4 also or do you think it's a Q3 where we're going to see this SEK 3 million? .
You will see a little bit higher level going forward in the future.
Yes. Okay. Perfect. All right. Then also I have another question here on the organic growth that actually seems to accelerate a bit more than what we have seen in the last few quarters. And I understand you talked a lot about the environmental health and safety and the municipalities. Can you maybe elaborate a bit if that is what is driving this? And also, now when you're in the -- taking this to the Danish segment. Do you think that the organic growth in the Danish segment could approach the levels seen in Sweden and Norway? That's the second question.
Well, you're right that the EHS vertical is really important for us going forward, and it's also providing us with really good growth. So as you know, the EHS verticals are presented together with the Swedish results, so to say. So included in the Swedish result, we see the results for Notisum, our first EHS company, but also Echoline. And Echoline is a French company delivering in France and the Benelux countries among other companies -- countries as well, actually.
So we see that we are getting a foothold in the European markets, and therefore, we have great hopes for the EHS vertical going forward. We are also trying to get into EHS in Denmark and working hard on that. So maybe in the future, we also could see EHS not just in France, Sweden, the Benelux countries, but also in other countries. The other point, as far as I got it, was reflections on the municipality service that we've got. So we've been in the municipality sector in Sweden for quite some years. And the brand is strengthening all the time as we can see it in Sweden.
And our hopes also for Denmark is giving the same directions. We base the municipality Karnov Kommune service in Denmark march on the experiences that we had from the Swedish market. So when we launched it in Denmark in September last year, we started from a, I'd say, better position than we had in Sweden. So the 10 municipalities that we've got onboard now is, I'd say, a very good start, and we hope to see a quicker development on the municipality markets in Denmark than we had from the beginning in Sweden. So that's about it. EHS is promising and the municipalities also. EHS in a wider geographical reach and the municipality still only in Sweden and Denmark.
Okay. And just to understand the potential here for -- the potential for Denmark here, perhaps. How much of the growth in Sweden and Norway is driven by the Benelux area? Maybe if you can just comment if it's a big part or it's a smaller or maybe even marginal part of the organic growth we see in Sweden/Norway.
The Benelux part is connected to Echoline completely. So that is the acquired part in the Swedish segment.
Yes. Okay. All right. I understand. Then a final question here also on the acquisition of the Spanish and the French assets here. You have -- previously, we've discussed that you have been aiming towards the end of the summer, basically. And now you're saying that this is progressing according to plan. Is that still your best estimate that this could go through end of the summer? .
Yes, end of the summer, autumn I'd say. It is, to us, of course, kind of a black box. We don't actually know because it's the Antitrust Authorities in Spain, and they -- we respect the process, of course, in that -- but it has -- our communication with the antitrust Authorities has been going as expected. We can't promise any deadline for a clearance, but we still hopefully clearance in September.
[Operator Instructions] The next question comes from Erik Moberg with Berenberg.
A follow-up question here on Sweden/Norway. Obviously, you've been outgrowing the market for the past years. And you mentioned that upselling is one aspect of it. If you just look at your current customer base, for how long do you think that upselling can continue to drive meaningful growth for this region?
Well, I'd say that in Sweden, we are continuously strengthening and trying to deliver even more value to our existing customers. But we are also adding new features and trying to deepen the EHS vertical, of course. I'd say that the new product drives still the municipality product. In Denmark, however, the municipality product is, as I mentioned before, quite new. So it's definitely driving the growth. And also, we've got the online library in Denmark, which is a fairly new product. That's growing. So yes, I'd say that we have fairly new products that's driving the growth. So it's not only selling to existing customers with more licenses, but it's also kind of new products.
Understood. But if you just look at Sweden and Norway on a stand-alone basis, do you see that upselling is starting to be sort of tapped out or do you still see untapped potential there if you just look at your -- solely on your current customer base?
Well, I'd say that the answer is best described by looking at the society as a whole. What we can see is that the legal sector and, therefore, also the society as a whole is getting even more complicated year-on-year. So by saying that we can see that the consultants need even more help going forward. So our authors and experts are even more sought after than before. By saying that we can see that we haven't seen really any lack of interest, at least [indiscernible]. On the contrary, you see that our services are more and more needed over the years. And that's, as you see, more general answer than -- into any specific services that we have. But it's definitely a feeling. The society is getting more and more complicated based on regulation, legislation and we are there to sort things out, so to say.
Understood. And then just to follow up on that and on the underlying revenue drivers. Is it possible for you to sort of break down in percentage-wise, how much of the growth comes from new customers versus upselling? .
That's a number that we don't disclose.
Okay. And then just one last question for me, just on the cash flow and the working capital. So if I heard you correctly, SEK 37 million stems from the timing of payables. But if I just look through like the working capital here, you also had an increase in receivables. If you perhaps kind of break down the moving parts and also elaborate a bit how one should think regarding Q3 and Q4, it would be really helpful.
I can mention the end of June where we have somewhat higher receivables, and that is connected to -- one thing is the acquisition. And the other thing is the development we had in the quarter with a little bit of higher sales. So that is the reason. Organic growth in the period.
There are no further audio questions. I would like to turn the conference back over to Pontus Bodelsson, CEO, for any final remarks.
Thank you, and thank you, everyone, for listening and for your questions. We will disclose our Q3 report on the 9th of November, and we hope to hear from you then, if not earlier. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.