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Welcome to the Karnov Group Q2 2023 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Pontus Bodelsson; and CFO, Magnus Hansson. Please go ahead.
Welcome, everyone, to Karnov Group's earnings conference where we will present the outcome of the second quarter of 2023. Please go to Slide 2. I am Pontus Bodelsson, President and CEO of the company. With me, I have our new CFO, Magnus Hansson; and our Head of Investor Relations, Erik Berggren. Magnus and I will present the outcome of the 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. We've had strong growth in the second quarter, and that is thanks to strong efforts across the group. During the second quarter, net sales grew to SEK 608 million. The organic growth was 8%, coming from Region North. Our positive sales development is thanks to higher online sales where our legal core businesses have steady growth and are supported by our fast-growing EHS and workflow businesses. The adjusted EBITDA margin was 18% in the second quarter, which is in line with the pro forma margin for Q2 2022, including Region South. At the end of June, our leverage was at 3.6x EBITDA last 12 months. We have now completed the refinancing of our business, on that will Magnus talk more about later in this presentation. Let's move over to Slide 4. The market for our core offering, Legal Information Solutions is characterized by long-lasting customer relationships as the solutions are mission-critical for the users. Our businesses have a long history in the local markets and are resilient in weaker economic cycles. I am pleased with the growth in the second quarter, where Region North has driven the group's organic growth, while Region South has been stable despite the ongoing integration. Our EHS and workflow businesses continue to perform well and support the group's growth. ChatGPT has taken the world by storm. I believe generative AI will change the way we search for information. Our proprietary content is a competitive advantage as it guarantees certainty while ChatGPT can generate hallucinations, we can guarantee that the text generated is correct. What Karnov Group has is the proprietary content and the access to technology as well as expertise within those fields. That is a strong combination. Hence, we embrace the AI revolution as we see great opportunities of enhancing the interaction with our content and provide our customers more value. We are convinced our colleagues and our culture are vital for our future success. It is also a topic where I personally am very engaged in. During the second quarter, we have established our new core values: Customer Centricity, Collaborative Community, Trust and Openness and finally, Curiosity and Knowledge. These have been developed with our employees involved, and they have now been integrated across our European businesses. Please go to Slide 5. I will now comment a little on our segments, starting first with Region North. The performance on our historical home markets is strong. The organic growth is driven by our ability to increase customer value as well as attracting new customers, for instance, within the public sector. Our EHS businesses and DIBkunsskap contributes positively to the growth. They continue to perform well in new sales with limited churn. Alexandra Åquist, who has been the CEO of Norstedts Juridik the past 3 years, now being the CEO of Region North has had a positive commercial impact on our business with her strong focus on customer centricity. Under her leadership, we are now establishing a new organization with, for instance, the product team in Denmark and Sweden, united under one umbrella. We believe in cross-border collaboration where products developed on one market can benefit customers in many. I spoke earlier about the adoption of AI solutions within Karnov Group. And I will come back to that topic later in this presentation. In the second quarter, we have launched a new back-end solution on our platform based on deep learning models. The solution anonymizes case law documents in an efficient way, thereby ensuring data protection and compliance. Our municipality solution is becoming an increasingly important tool for civil servants in municipalities. Our focus onwards is to continue to enhance the solution. Our case guides on the platform, which our practical handbooks are appreciated among our customers. We will continue to stay close to the market to capture these opportunities in both Denmark and Sweden. Turning the page to Slide 6. Region South has now been part of the Karnov family for 8.5 months, all progressed in line with expectations in this segment. Both net sales and earnings development are stable. From a cultural point of view, I'm pleased that we work very well together, having a common purpose and vision of providing premium content to support legal professionals in Europe. In the second quarter, Lamy Liaisons launched the new platform, Lamy Play, which is an e-learning platform, a requested solutions in the market. Our Spanish businesses have started selling cross-organizational utilizing the combined product portfolio. One example is the whistleblower tool, comply law, cross-developed and cross-sold. We are currently investigating additional opportunities within this field. We progressed with the merger onto one common tech platform in Region South. Our Spanish tech team is experienced in merging content onto one common platform, having onboarded Lamy Liaisons to the tech platform a few years back. As earlier announced, our intention is to harvest synergies of EUR 7.5 million with full effect starting at the end of 2024. And additional EUR 2.5 million with full effect starting at the end of 2026. Cost to achieve these synergies are estimated to amount to EUR 24 million. Turning the page to Slide 7. Companies within the legal information solutions markets have a great opportunity to bring new customer value, reaping the benefits of artificial intelligence. However, we also have a great responsibility of delivering trustworthy solutions that provide correct outputs as we support not only our customers but also our supporting pillars of democracy. Our proprietary content is a competitive advantage as it guarantees certainty. In our product portfolio today, we have, for instance, Jurimetria, a great prediction tool for case law, helping you define the most suitable procedural strategy for success. In the back end, we also have deep learning models for anonymization of case law data and legal compliance. Our tech organization is skilled. We develop us with expertise from across the globe. We also have support from third-party specialists to support our future ambitions of balancing efficiency and uncertainty. Please go to Slide 8. I will now hand over the floor to our new CFO, Magnus Hansson, who I'm so happy to have beside me. He will tell us more about the financial results in the second quarter.
Thank you, Pontus. So let's start with an overview, switching to Slide 9. The net sales development within Karnov Group has been strong for the past years. This growth trajectory continued in the second quarter with net sales increasing to SEK 608 million, which is an increase by SEK 61 million compared to the pro forma Q2 numbers, including the historical performance of Region South. The organic growth was 8.2%, all coming from Region North. Currency effects were 4.8% in the quarter as the Swedish Krona decreased in value. The growth in Region North is driven by upselling to its existing customers as well as attracting new customers, especially in the public sector. Region South has stable net sales development in line with our expectations. Adjusted for the weak Swedish Krona, the underlying performance was in line with previous year. Next slide, please. The adjusted EBITDA increased by 4% in the second quarter and amounted to SEK 109 million. This corresponds to an adjusted EBITDA margin of 18%. The earning capabilities in Region North are still strong as regional reported adjusted EBITDA of SEK 103 million, corresponding to an adjusted EBITDA margin of 39.7% in the second quarter. Region South had an adjusted EBITDA of SEK 25 million and an adjusted EBITDA margin of 7.2%. Items affecting comparability amounted to SEK 29 million in the second quarter and is, of course, related to the integration of Region South. Our earnings in the Nordics continued to be on a high level as we have been able to defend the margin despite the high inflation. The ambition and short-term focus in Region South is to harvest the synergies during the coming years to increase the margins in the region and thereby increasing the margins in the group. Let's move to Slide 11, please. On Slide 11, you see the net sales development within online and off-line split into segments. In Region North, the online sales increased by 15%, compared to the second quarter last year and amounted to 93% of net sales in the quarter. In Region South, the online sales accounted for 76% of net sales. Please move to Slide 12. Subscription-based sales increased in the second quarter. As previously announced, Region South has a similar subscription based sales as Region North. And the effect from the acquisition, therefore, do not change the split to a large extent. The subscription-based sales, of course, generate a strong operating cash flow, which I will come back to shortly. Next slide, please. As I said earlier, Region North performs well on top line, and we are pleased with the outcome of the second quarter. Net sales amounted to SEK 259 million. Organic growth was 8.2%, while the weaker Swedish Krona generated currency effect of 4.9%. The growth is driven by online sales and we continue to strengthen our market position among municipality and public sector in general. Adjusted EBITDA reached SEK 103 million in the second quarter. This is an increase of SEK 15 million compared to last year. The adjusted EBITDA margin amounted to 39.7%. The increase is mainly explained by the increased net sales falling through to operating profit. Depreciation increased by SEK 5 million compared to the previous years due to the increased capitalized development. Please move to Slide 14 which is the Region South segment. Net sales in Region South increased by SEK 28 million compared to pro forma Q2 last year. The increase is explained to the full extent by currency effects and the underlying performance is stable. We have, for example, great traction within the e-learning area. The adjusted EBITDA margin was 7.2% in the second quarter and an adjusted EBITDA margin for the first 6 months is in line with pro forma figures from last year. Moving to Slide 15 which presents group functions. The group function consists of functions for group-wide task, for example, Group management, Investor Relations and Group Finance. Expenses in the second quarter reached SEK 19 million compared to SEK 18 million in the first quarter.
Please go to Slide 16. Karnov Group has a very strong cash generation. Both our segments generated cash in the second quarter. Region South has a slightly later seasonal dynamic with a more widely spread invoicing during the year. In the second quarter, adjusted operating cash flow amounted to SEK 60 million, which is a net improvement of SEK 79 million compared to last year. During the second quarter, we have completed the refinancing of the business. Our new agreement is in Euro to better reflect our new cash flow. Our cash balance was solid at SEK 456 million. The leverage was 3.6x EBITDA last 12 months at the end of June. The increase compared to Q1 is, of course, explained by the weakened Swedish Krona. And by that, I'm now handing the floor back to Pontus.
Slide 17, please, then. Thank you, Magnus. So good to have you onboard. These are our highlights of Q2. Karnov Group has delivered a strong financial performance in the second quarter, with increased organic growth in the Region North and stable development in Region South. We have completed the refinancing of the group and have a solid financial position. AI is a game changer, and we embrace the change. Our proprietary content is a competitive advantage as it guarantees certainty. We are developing new solutions to reap the benefits of AI and we launched some of these during the autumn. Our colleagues and culture are vital for our future success. Our new core values were established and rooted in Q2, and we will work intensely to continue our strong growth course.
Please switch to Slide 18. On the 5th of October, I look forward presenting our strategy and future ambitions on Karnov Group's first Capital Markets Day. We will be in Stockholm and the CMD will focus on topics such as AI, European growth and a deep dive in Region South. I hope to see many of you there. Please go to Slide 19. 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.
[Operator Instructions] The next question comes from Daniel Ovin from Nordea.
My first question is on the EBITDA development in the South region. It was down now 7% year-over-year, and that's a pretty big change in territory from the 21% growth in Q1. So maybe you can shed some light on what is driving this? And also if there's some indication of what we should expect going forward? That's my first question.
So the EBITDA margin in Region South is in line with our expectations and also if you look at the year-to-date numbers, it's in line with the pro forma numbers for last year. So we will continue to come back to the synergies coming late 2024. And we are very pleased with the progress of the integration. And of course, the main focus at the moment being the tech integration.
Okay. You also mentioned in the report here that the churn in the South region has been coming up a bit. So I just wonder perhaps that explains a bit of the weaker performance. And also, I wonder what would be the impact on sales roughly from that? And also, how should we think about that churn going forward? I mean is it up? Does it continue to come up in Q3? Or has it stabilized? Or can you say anything around that? That's the second question.
No. No, we're not -- I don't think we're saying that the churn has come up in the Region South. We have -- we're saying that the churn is slightly higher in Region South than in Region North. So we don't see any increase in churn between Q1 and Q2 in Region South. So perhaps our mistake, but there's no increase in churn.
Okay. That's great. Then my final question on the -- just on the integration cost here. Now they were on the same level as in Q1. So is it -- should we expect them to continue in this kind of rate? Or would it be accelerating towards the end of this year and perhaps into 2024? Or can we say anything about the trajectory here on the integration costs?
So I expect the integration costs to be at about the same level in this year. And then slightly increasing and having a larger increase in Q4 2024, but quite stable until next year.
All right. Perfect. That's all my questions.
Yes. Of course, we had the SEK 24 million, and we're quite confident in that number as well, the SEK 24 million for the entire project.
The next question comes from Simon Jonsson from Berenberg.
To start, I would like to follow up on the previous question regarding the higher operating cost in Region South, could you provide some more color on what type of operating cost this is? And then also do you expect these costs to also increase in the coming quarters?
Again, I think the operating costs are quite. It's about the same types of cost that we have in the group. It's mostly personal and it's also, I mean, normal operating expenses. The second thing is that year-to-date, it's quite stable. So of course, there is a phasing in this as well. So we don't perceive this as an increase in operating expenses. We are quite happy with the performance in Region South and just spot on in line with our expectations.
All right. And then another question on Region South. When do you expect Region South to start showing some signs of organic growth. Is that next year? Or is it even further into the future?
I mean we don't give specific answers to that question. We are -- we have talked about in the past that we see some opportunities for organic growth in, not least in France. We are working quite hard on finding a way to improve that. In Spain, we are focusing on the integration project to make sure that we are ready with that by the end of 2024. And -- yes.
All right. And one final question from my side. It might be a bit early and this is maybe a better question for the CMD in October, but what do you think the financial implications will be of increased AI in your offering? Could this enable you to increase prices? And should we also expect higher R&D costs going forward?
Well, it's -- you can say, as long as we're helping our customers to become more efficient, we, of course, can also see that, that some of those efficiencies spillover for possibilities to raise the prices. So what we are aiming to see is, of course, raised efficiency among our customers. That is, again, to be balanced between efficiency and certainty. And we do see that, thanks to our proprietary content, we can both deliver efficiency and certainty and thereby, we stand out among the possible competitors in all our markets and thereby having an opportunity of raising prices as long as we are making them more efficient, of course. So thanks to the proprietary content. Thanks to the domain expertise that we have within our organization, we see that AI is a possibility not only for our customers, but also for ourselves, of course. On the top of that, we see that it's not only our customers that will become more efficient, but also Karnov Group as a whole, of course, because what we have already launched this spring is a tool, as I mentioned before during the presentation, of helping us anonymize cases in a more efficient way. So it's a 2-way thing. It's not only our customers becoming more efficient, but also Karnov Group internally. So we -- as I said, we embrace the AI development.
And on the cost side, what do you see there?
It's -- I think we consider this to be an opportunity. And with such opportunities, we always consider best bang for the buck. And if we see opportunities to improve our future earnings, then we will invest in that. But we are, of course, always careful with how and with what we invest in.
[Operator Instructions]
We have one question from the audience, and it is how we can accelerate the harvesting of synergies in Region South?
Yes, good question and something, of course, that we are focusing on all the time. We have a time plan for that, as we mentioned before, with reaping the first -- harvesting the first synergies in the end of 2024 with this EUR 7.5 million and we are constantly look into how this could be done in a more speedy way, of course. We work hard on the 6 work streams. Those are the finance, technology, content and office, sales customers and marketing product portfolio and HR. So we work hard on all those 6, but there is sort of a gateway, and that is the tech work stream. So that is defining the speed in a way. So what I can say about the tech work stream is that it's progressing very well. It's actually a little earlier than we had hoped for. So that's a really good sign. I would very much welcome you to the Capital Markets Day on the 5th of October. We will have our CEO for Region South, Guillaume Deroubaix with us then, and he can deep dive into all the details in these 6 work streams and thereby also answering this question really, really in-depth. So a very warm welcome to the 5th of October.
No more questions from the audience?
There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Okay. Thank you, everyone, for listening, and thank you for the questions. We will disclose the Q3 report on the 8th of November. So we are hopeful to hear from you then, if not earlier. For example, as I said at the Capital Markets Day on the 5th of October. Thank you very much. Have a nice day.
Thank you.