Karnov Group AB (publ)

Welcome everyone to Carnum Group's earnings conference, where we will present the outcome of the third quarter of 2024. Please go to slide two. I'm Pontus Bullersson, President and CEO of the company. With me, I have our CFO, Magnus Hansson, and our Head of Investor Relations, Erik Bergen. 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 of the third quarter. Please go to slide three. We deliver strong margins improvement in the quarter, as synergies are coming through according to plan. The improvement is a little more than three percentage points in the third quarter. We have expanded our mission critical legal information solutions for our customers, launching AI-supported services on all markets, and our new flagship products in France. We have also completed a technical carve out in Spain, and the technical risk in the integration is now removed. Now we are ready and moving into the next phase, with focus on profitable growth with a new country manager. Net sales grew to 648 million SEC in the quarter. The organic growth was 2%, with region north driving organic growth in the quarter. Sales in region south were stable, with France growing and Spain being reshaped in line with the integration plan. The adjusted EBITDA margin was 22% in the third quarter, a significant improvement. Synergies from our initiatives are coming through as expected. By the end of the third quarter, we have harvested synergies on an annual run rate basis of 9 million euro. I'll dig deeper into the synergies in the coming slides. At the end of September, our leverage was at 3.1 times EBITDA last 12 months, a slight increase compared to June, driven mainly by negative currency effects and seasonal negative cash flow. Let's move over to slide four. We continue to improve margins, harvesting cities from our two initiatives. During the quarter, we have divested our holdings in Ante, legal cross border and procurement link. The divestments have impacted net profit in the quarter with 23 million SEC, this generates cost savings going forward. We have also continued optimizing the organization both in region north and region south. In connection with the acquisition of region south, we launched a technical merger project, gathering all content, products and customers of our two Spanish businesses in one same environment. I'm pleased to say we have now completed the technical carve out and that no technical risk is remaining in Spain for counter. That means we now can launch the next phase of the integration with focus on profitable growth. To ensure future commercial success in Spain, we have appointed Alexandra Orquist as country manager in Spain. She has the right set of skills, having been an important component in creating the organic growth in region north. And she has experienced from uniting two organizations into one successful business. At the end of the quarter, we launched our AI supported solutions. Sales is progressing on all markets and feedback from our customers confirm that the solution brings significant value and efficiency uplifts. Our AI solutions are sold exclusively in a new top tier package in region north, while being sold as an add on in region south in line with local market practices. Next slide please. Our competitive advantage is our extensive proprietary legal contents and our long customer relationships. We create significantly enhanced customer value with our AI solutions. 25 years ago, we transitioned our customers from books and libraries to databases. Now we enable our customers to interact with 200 years of mission critical knowledge through our AI solutions. We have conducted a customer survey, which confirms that the solution brings significant value and efficiency uplifts. 87% of the users assess AI make their work significantly more efficient. 70% assess our AI make their work easier. Recently, Borne and Jalle, one of Denmark's three largest law firms, choose to buy the AI solutions for all its lawyers, paralegals and student assistants. In region south, we have launched the AI solution as a value enhancing add on on our products. Our French business has launched new flagship products and Spanish business Aranzadi has launched an updated legal research platform. The AI solution has been confirmed as a value enhancing component on both markets with pleased customers. Next slide please. We have a strong focus on harvesting synergies from our initiatives. The synergies from the region south integration come progressively over the period. And at the end of the third quarter, the annual run rate synergies amounted to 5 million euro. During the quarter, we have continued harmonizing the organizations. We reiterate our ambition to generate synergies of 7.5 million euro on an annual run rate basis by the end of 2024 and 10 million euro by the end of 2026. Next slide please. In February this year, we launched our group wide acceleration initiative. The synergies are being harvested in region north and group in the first phase, while synergies in region south are part of the second phase. Our ambition is to generate cost efficiencies of 10 million euro with full effect on run rate basis at the end of 2026. At the end of the third quarter, the annual run rate synergies amounted to 4 million euro. Next slide please. In this slide, you can see our two cost efficiency initiatives running until the end of 2026 with the ambition of harvesting efficiencies of 20 million euro in total. And that we now by the end of the third quarter have harvested annual run rate synergies of 9 million euro. Next slide please. I will now comment a little on our segment performance, starting with region south. The financial performance is in line with our expectations. The adjusted EBITDA is improving compared to our baseline as synergies are coming through as expected. We are pleased to see growth in France while we progress with the product rationalization and optimization of the sales force in Spain. During the past period, we have prioritized keeping a high pace in the integration and this has slightly affected the sales work. Now we are ready and launching the next phase in the integration in Spain with new leadership to generate profitable growth. I'm pleased to say we have now completed the technical carve out and that no technical integration risk is remaining in Spain. This means that we can now launch the next phase of the integration with focus on profitable growth. To ensure future commercial success in Spain, we have appointed Alexandra Åqvist as country manager in Spain in addition to her role as CEO region north. She has the right set of skills such as customer centric mindset and the result oriented leadership. She has also experienced from uniting two organizations into one successful business. Next slide please. Region north continues to deliver profitable growth. The growth is driven by increased subscription based online sales, especially within the public sector. The acquired carved out Schultz legal information business has contributed with 24 million SEC in net sales in the quarter. The margin improvement of close to three percentage points is a result of synergies coming through from our acceleration initiatives and operational leverage from the increased net sales. We progress with the integration of the acquired carved out Schultz legal information business. The integration is based on the Kano playbook. We have a transitional service agreement in place with Schultz, ensuring a smooth customer experience during the integration. Next slide please. With that said, I will now hand over the floor to our CFO Magnus Hansson. He will tell us more about the financial results in the third quarter. Magnus, the floor is yours.

Thank you Pontus. So let's start with an overview, switching to slide 12. The net sales grew by 5% in the third quarter reaching 648 million SEC. The growth is driven by increased online sales, mainly new customers acquired from the carved out Schultz business. Currency effects had a negative impact on net sales of a little more than 2%. The acquired carved out Schultz legal information business has contributed with 24 million SEC in the net sales in the quarter, mainly relating to acquired customers on the Danish municipality market. Our EHS businesses continue to perform well with strong new sales and low churn. Please go to slide 13. Breaking down net sales on segment level, we see continued strong organic growth in region north and stable sales in region south. Organic growth is driven by online sales within the public sector supported by our EHS businesses and tax and accounting business. As we mentioned before, we expect continued flat sales in region south in the short term. We are pleased to see France generating growth and we are launching the next phase of the integration in Spain to generate profitable growth. Next slide please. On slide 14, you see the net sales development within online and offline split into segments. In region north, the online sales increased by 18% compared to Q3 last year and accounted for 90% of the net sales in the quarter. In region south, the online sales declined by 3% compared to Q3 last year and accounted for approximately 81% of net sales in the quarter. The decline was mostly driven by negative currency effects. Please change to slide 15. Subscription based sales increased during the third quarter and represent 90% of sales in the quarter. Please change to slide 16. The adjuster beta amounted to 143 million SEC in the third quarter. This corresponds to an adjuster beta margin of 22.1%, which is an improvement of a little more than three percentage points. Synergies are coming through as expected while cost of goods sold is decreasing due to the increased online sales. Items affecting comparability amounted to 63 million SEC during the third quarter and are related to the integration of region south as well as the group wide acceleration initiative. At the end of the third quarter, we have harvested synergies within the group of 9 million euros on an annual run rate basis. The effect in the quarter amounted to 1.9 million euros. As earlier announced, we are delivering on our plan to harvest synergies of 20 million euros with full effect on an annual run rate basis by the end of 2026. Let's move on to slide 17, please. Region north has a strong growth trajectory. In the third quarter, net sales amounted to 321 million SEC. Organic growth was 7.4%. The growth is driven by online sales. We continue to strengthen our market position in the public sector, EHS and tax and accounting. Adjuster beta reached 141 million SEC in the third quarter. This is an increase of 26 million SEC compared to last year. The adjusted beta margin amounted to 44.1%. The improvement is due to two main components, efficiency from the acceleration initiative as well as operational leverage from increased net sales. The effect on EBITDA level from the acceleration initiative amounted to 0.8 million euros in the quarter. Please move on to slide 18, which is the region south segment. Net sales in region south decreased by 13 million SEC compared to the third quarter of last year, mainly driven by negative currency effects of nine million SEC. We are pleased to see growth in France while we're reshaping the Spanish business in the next phase of the integration to generate profitable growth. With the technical carve-out now completed, we are confident in our ability to generate -in-class customer offerings in Spain. The adjusted beta margin was 8% in the third quarter. The effect on EBITDA level from the region south integration amounted to 1.1 million euros in the quarter. On an annual run rate basis, the harvested synergies amounted to 5 million euros by the end of the quarter. Moving to slide 19, which presents the segment group functions. Group functions consists of functions performing group-wide tasks. Expenses in the third quarter was 23 million SEC compared to 22 million SEC in the second quarter. Please go to slide 20. The adjusted free cash flow was minus 32 million SEC in the third quarter, which is an improvement of 33 million SEC compared to Q3 of last year. -to-date, our adjusted free cash flow is 15 million SEC stronger than last year. The leverage was 3.1 times EBITDA last 12 months at the end of September. We are now entering our invoicing season in Q4, which typically generate a strong cash flow for Cardinal Group. I'm now handing over to Pontus again, who will present our last slides.

Thank you, Magnus. Please switch to slide 21. We deliver strong margins improvement in the third quarter as synergies are coming through according to plan. The margin improvement is more than three percentage points in the third quarter. We have completed the technical carve-out in Spain and the technical risk in the integration is now removed. Now we're launching the next phase with focused profitable growth with a new country manager. We have expanded our mission-critical legal information solutions for our customers, launching our AI solutions in region south and region north and new versions of the flagship products in France. Please go to slide 22. 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.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Predrax Savinovich from Carnegie. Please go ahead.

Good morning, Pontus, Magnus and Eric. Thanks for taking my questions. I think first, if we could discuss a little bit more on the cashflow going forward. I mean, we know the Q3 normally looks like this with regards to seasonality, but if you can discuss what you expect for Q4 and for the first quarter of 25, thank you.

Yes, and of course, that's a forward-looking question, but yes to comment on that. We don't expect any changes to the seasonality. We continue to have a strong renewal season in region north in Q4 and Q4, Q1 in region south. So the seasonality we showed during last year and this year in Q1, I expect we see the same seasonality this year.

Okay, different topic then. Are there any risks do you see to region north now that Alexander is moving to south, given she's been quite important for executing in that region historically?

She's definitely been really important for region north and she'll be continuously having her eyes on region north as she will be CEO for region north also going forward, but we have given her some extra support to be able to continuously do this work. And also, which is really important, we have senior leadership in both Sweden and Denmark that definitely will continue the success in Denmark and Sweden. So no worries about that.

Okay, thank you.

The next question comes from Thomas Nilsson from Nordea. Please go ahead.

Hello, thank you for taking my call. I have some questions regarding the AI legal research assistant uptake. What are the early indications regarding uptake for the AI assistant packages and what expectations can we have for 2025?

Thanks for the question. It's really an important opportunity, not only for Kano, but for the legal industry as a whole. What we see is definitely a paradigm shift. I mean, as I said, what we did 25 years ago was important. I'd say this is even more important to the legal industry. What we have seen during the development phase is a huge interest from customers all over our four major markets. And as of today, we have a lot of meetings with interested customers. And well, as you know, it's a conservative business and industry, but they are definitely eager to take this opportunity. So I would say that we are looking forward to, I'm very optimistic and looking forward to 2025 regarding this. In terms of price uplifts, yes, as we said, it's a new package in North and it's additional services in South. So it's quite difficult to give you a general figure on this. But let me say that we expect at least 30% price uplift on these packages services. That's a round figure.

Okay, and thank you. And what I'm looking at is when we looked at Thomson Reuters launching Westrop Precision in the US, they had an uptake of like 6% in four months. And look at the recent studies by PricewaterhouseCoopers among UK top 100 law firms, they're at 16% of them purchasing these kinds of solutions. Do you have any target when it comes to penetration for 2025 or 2026?

Well, we haven't disclosed those targets, but I can guide you in a way saying that we have never felt as big interest in any of our newly launched services. I mean, we have had webinars in, for example, Sweden with over 1000 lawyers participating and also in Denmark and in the South as well, a lot of questions and interest. So I'll give you no figure on that, but we consider this a very interesting opportunity for the industry as a whole, for our customers, and therefore, of course, also for Kano.

Okay, thank you very much. Thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Simon Johnson from Burenberg. Please go ahead.

Morning, gents. A couple of quick ones from my side. First, the Marlion region's style was not great. We're excluding the synergies. What is going on here? It's been a bit lumpy for 40 to 40 previously, but any color would be appreciated.

Yeah, as you know, the integration in South in general and specifically in Spain has been one of our deepest focused in the last 18 months. So that has affected these numbers. But in South as a whole, starting out in France, we see a minor growth and that is thanks to the greater commercial focus we have in the business in France, and we are now during the autumn, now launching the three flagship products in new versions, including the AI solutions. In Spain, to go back to Spain, I'd say that we have focused a lot on the tech PMI tasks we have had there. As you know, we have had TSAs with Thomson Reuters until the end of November. So we have been extremely focused on making sure that we reach all those targets in order to have everything in our own environment. So what we have been focusing on is to have the content, the products and the customers in our own environment. And by that securing and making sure that there are no technical PMI risk whatsoever left in Spain. Having said that, that focus has of course, has of course taken a bit of focus from everything else we do in the Spanish company. So, but we have prioritized this and now it's time for the next phase. And as I said, a new phase with a new phase, so to say. So we are so happy to see the new management with a bit more of commercial focus and definitely more customer centric way of leading this former two businesses now into one in Spain. So that's a brief story of what we have been doing and how we see the next phase coming up and a greater focus on growth in the coming quarters.

Very clear. And then secondly, would it be possible to quantify the organic growth you saw in France during the quarter?

We typically don't disclose France and Spain separately. We can say that we had a small growth number in France and then a relatively small decline in Spain. It's still early days, but we can absolutely see some positive signs coming out of France. Now with what we've focused on during the last year and a half, being more commercially focused, launching the new flagship products and so on. So still early days, of course, but it's still small numbers but we can see growth.

Okay, and sequentially when you look at France from Q1 to Q3, Q2 to Q3, you're seeing a pick up there. We'll send the numbers.

Yes, we do. It's still quite small numbers, but we do.

Perfect, that was all for my end, thanks.

Thank

you.

There are no more questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

Okay, I think that's it. So thank you everyone for listening and for your questions. We will disclose our Q4 report on the 18th of February. So we hope to hear from you then, if not earlier. Thank you.