Wolters Kluwer Nv

Good day and thank you for standing by. Welcome to the Volta's Clua Half Year 2023 Results Webcast and Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. and you are in the queue to ask a question. Please be advised that today's call is being recorded. I would now like to hand over to your host, Meg Gowdans, Vice President, Investor Relations, to begin today's conference. Please go ahead.

Thank you, Operator, and welcome, everyone. Welcome to the Voltoscuro first half 2023 results presentation. Today's release and the slides are now available for download on the investor section of our website. On the call with me today are Nancy McKinstry, our CEO, and Kevin Entrykin, our CFO. As we have been recently, we're dialing in from various remote locations, so thank you in advance for understanding in case we experience any delays during the event. Nancy and Kevin will shortly discuss the important features of our half-year program. results. Following their comments, we'll open the call to your questions. Before we start, I'll just remind you that some statements we make today may be forward-looking. We caution that these statements are subject to risk and uncertainty that may cause actual results to differ materially from those indicated in the statements. Factors that could affect future financial results are discussed in our 2022 end report and in note two of today's release. As usual today, we will refer to adjusted profits, which exclude non-benchmark items. We refer to growth in constant currency, which excludes the effect of exchange rate movements. And we refer to organic growth, which excludes both the effect of currency and the effect of acquisitions and disposals. You can find reconciliations and further information in note four of today's release. So at this time, I'd like to hand over the call to Nancy McKinstry.

Thank you, Meg. Hello, everyone, and thank you for joining us on the call. In keeping with our usual practice, I will start with the highlights of the first half. Kevin will then discuss the financial results in detail. After that, I will come back to discuss divisional developments and the progress we've made against our strategic goals, including how we are deploying artificial intelligence. Following this, I will conclude with the outlook for the remainder of the year. So let me start with the highlights on slide four. Financially, we delivered healthy organic growth of 6%. The development of our operating margin and cash flow were in line with our expectations for the first half. We are on track to meet our full-year guidance. Diluted adjusted EPS rose 2% in constant currencies, and we were pleased to see return on invested capital reach 15.4%. The share buyback contributed to a slight increase in leverage But at 1.5 times, our balance sheet remains very healthy. In the second half of our current three-year plan, we've taken some bold steps to advance our strategic and ESG goals. Expert solutions now make up 58% of total revenues and grew 7% organically. Within this cloud-based software grew 15% organically. Product development spending increased compared to a year ago to 11% of total revenues. We formed a new division in March this year, Corporate Performance and ESG, which will help us accelerate our expert solutions and extend our reach into the ESG market and other adjacencies. Importantly, in the first half, we centralized nearly all of our product development teams into the DXG organization, and we've created a unified branding, communication, and digital marketing team at the center. At the same time, we continue to make progress on key sustainability goals. So with those highlights, I'd now like to hand it over to Kevin, who will take you through the financials.

Thank you, Nancy. Let's start with the highlights on slide six.

First half revenues were €2,725,000,000, an increase of 4% in constant currencies. Organic growth was 6%, moderating slightly from 7% growth a year ago, which was as we anticipated. Adjusted operating profit was 711 million euros, a decrease of 4% in constant currencies. As a result, the margin declined 210 basis points to 26.1%. This was in line with our expectations and reflects an increase in innovative product investments personnel costs and related expenses. Diluted adjusted earnings per share increased 2% in constant currencies. This was driven by higher adjusted net profit and a reduction in the diluted weighted average number of shares outstanding. Adjusted free cash flow was 495 million euros, a decrease of 2% in constant currencies. And lastly, net debt to EBITDA was 1.5 times slightly higher than a year ago. Let's look at revenues more closely on the next few slides, starting with divisional trends. Slide seven shows our new five division structure. The comparative figures are presented on a pro forma basis. Overall organic growth was 6% with some variation between divisions. Health grew 6% organically in line with the prior period. Growth continued to be led by our clinical solutions business at 7%, while learning, research, and practice delivered sustained 4% growth. Tax and accounting grew 8% organically, slowing slightly compared to a year ago. This strong performance was again supported by double-digit growth in cloud-based solutions. Financial and corporate compliance achieved 1% organic growth compared to 6% a year ago. The division performed well in light of some very challenging comparables for the transactional and other non-recurring revenue streams. Legal and regulatory delivered 4% organic growth in line with the prior period. Growth was led by digital information solutions, which grew 8% organically. And finally, the new division, corporate performance and ESG, grew 10% organically, slowing slightly from a year ago. as in tax and accounting, cloud-based software revenues grew at a double digit rate.

Now let's look at revenues by type on slide eight.

The chart on the left of this slide shows organic growth of our recurring revenue streams. These make up 82% of total revenue. Digital and service subscriptions shown on the blue line make up 74% of group revenues and grew 8% organically in line with the comparable period a year ago. Print subscription and other recurring revenue trends were broadly in line with a year ago. The chart on the right-hand side shows organic growth for our non-recurring revenue streams. Here we saw growth turn negative as we'd expected. Legal service transaction revenues in our financial and corporate compliance and legal and regulatory divisions declined 4% organically compared to 3% growth a year ago. Financial services transactional revenues, which are in our finance and corporate compliance division, declined 5% organically. Print book revenues declined 1% organically compared to 13% growth a year ago. The last component, Other non-recurring revenues, which is primarily software licenses and implementation fees, grew 1% organically compared to 8% a year ago.

Let's turn to margins on slide 9.

As noted, the adjusted operating profit margin decreased by 210 basis points to 26.1%. This margin decline reflects a rise in personnel costs and personnel related expenses such as travel and events, wage inflation, and higher product investments. This rise in costs was as expected and was seen in all five divisions. We continue to expect the full year margin to improve as indicated in our guidance.

Let me explain what is driving our confidence in this guidance on the next slide.

As you may recall, in 2021 and in the first half of 2022, we saw a significant margin uplift. The margin uplift was caused by temporary cost savings that came about during the pandemic. Hiring slowed and travel and events were all but non-existent during the lockdowns. By the second half of 2022, however, hiring picked up as we began filling open positions. Also by the second half of 2022, spending on travel events and office expenses started to come back. On this slide, you can see the rise in the number of employees as we filled open positions. So by the second half of the year, our operating cost base was back to a more normal state. This underlies our confidence in reaching our margin guidance for the full year.

Now let's turn to the rest of the income statement on slide 11.

Adjusted net financing costs were significantly lower than a year ago at 10 million euros. This was due to higher interest income on our cash balances and a 5 million euro non-cash net foreign exchange gain on the translation of intercompany balances. As a result, adjusted pre-tax profits increased overall and decreased 2% in constant currencies. The benchmark tax rate on adjusted pre-tax profit was also better than a year ago at 23.3% due to favorable movements in our deferred tax positions. After tax, adjusted net profit was therefore 537 million euros, down 2% in constant currencies. Due to the ongoing share buyback program, the weighted average shares outstanding reduced by 4%. As a result, diluted adjusted EPS increased 2% in constant currencies to 2 euro and 17 euro cents. Let's turn to the cash flow on slide 12. Adjusted operating cash flow declined 5% in constant currencies, mainly reflecting the development of adjusted operating profits. the cash conversion ratio decreased to 95%. This is due to capital expenditures of 157 million euros, an increase of 13% in constant currencies. The increase in CapEx reflects the higher level of product development spending compared to a year ago. I'll remind you that we continue to expect cash conversion to be approximately 100% for the full year. Interest paid of 18 million euros was significantly lower than the prior period, while taxes paid were 176 million euros in line with the prior period. Summing this up, adjusted free cash flow was 495 million euros, down 2% in constant currencies.

Now, a few comments on how we deployed that cash flow on slide 13.

Acquisition spending was 56 million euros. Cash deployed towards dividends was 247 million euros. This was lower than a year ago because of the timing of the payment of the dividend withholding tax. Last year we paid this tax in June. This year we paid the tax just after the half-year results in July. Cash deployed for share buybacks totaled 426 million euros. This was higher than a year ago because this year our share repurchase program is more front end loaded than last year's. As a result, net debt increased just over 200 million euros compared to year end 2022 to 2.5 billion euros. This pushed our leverage ratio up slightly to 1.5 times. This still leaves us with a very strong balance sheet and ample room to pursue our strategic investments and continue delivering returns to shareholders.

Let me touch now on interim dividend and update you on the progress with this year's share buyback on slide 14.

As a matter of policy, the interim dividend for 2023 was set at 40% of the prior year total dividend. This means we will pay out 72 euro cents per share to shareholders in September. As of August 1st, we have completed just over half of this year's share buyback plan of up to 1 billion euros, having spent 504 million euros to date. We have now also signed mandates with third parties to execute a further 300 million euros in the next three months. Let me sum all this up before I hand it back to Nancy, moving to slide 15. We are on track to meet our guidance for the year. Organic growth was 6%, despite challenging comparables for non-recurring revenues. The margin decline was as expected and reflects a return to a more normalized cost base post-pandemic. Diluted adjusted EPS increased 2% in constant currencies, aided by lower interest and a lower share count. Adjusted free cash flow declined slightly in constant currencies, largely reflecting the trend in adjusted operating profit and a decline in cash conversion. Returns on invested capital reached 15.4%. Our balance sheet remains in strong condition with a net debt to EBITDA of 1.5 times. I'll now hand it back to Nancy to cover divisional developments.

Apologies, everyone.

I will start with health on slide 17. Health achieved 6% organic growth led by clinical solutions. The adjusted operating profit margin declined as expected due to the increase in personnel cost and related expenses coupled with higher product investment. Clinical solutions delivered 7% organic growth. with robust high single-digit growth for our clinical decision support tool UpToDate, our drug information solutions, and our patient engagement solution, EMI. Growth was driven by good renewal rates and new customer wins. In June, we acquired Invistus, a provider of AI-enabled drug diversion detection software for hospitals. Learning, research, and practice sustained 4% organic growth led by Ovid in medical research. Ovid benefited from the inclusion of the New England Journal of Medicine and early success for Ovid Synthesis. In education and practice, growth moderated in large part due to print book revenues turning down after rising a year ago. We acquired test preparation provider Nurse Tim in January and launched a virtual reality learning solution with our partner Laerdal for the nursing market. Turning now to the next slide. In tax and accounting, organic growth was 8% with cloud revenues up 18%. The operating margin decreased as expected due to an increase in personnel cost and related expenses. Performance was very good across all geographies. North America achieved 9% organic growth supported by continued strong uptake of our cloud-based suite for professional firms called CCH Access. ProSystem FX Engagement, our audit solution, continued to perform well in the U.S. market. Our professional service revenues grew at a more moderate pace, while print revenues in our U.S. publishing unit benefited from a favorable publication schedule. Europe delivered 7% organic growth driven by strong renewals of software. Cloud and hybrid cloud solutions delivered double-digit organic growth. Asia Pacific and rest of world revenues grew 7% organically, supported by double-digit organic growth in China. Turning now to slide 19. Finance and corporate compliance, which is now comprised of CT Corporation and compliance solutions, including Lean, achieved 1% organic growth despite a downturn in transactional and non-recurring revenue streams compared to a year ago. Operating margin declined as expected due to the increase in personnel cost and product investments. In legal services, CT, our US registered agent and legal compliance business, grew 1% organically. Here, 7% organic growth in recurring revenues more than offset a decline in transaction revenues due to a downturn in U.S. M&A and IPO activity. Financial services also grew 1% organically, as 4% organic growth in the unit's recurring revenues helped offset a downturn in transactional and other non-recurring revenues. In total, financial services transactional revenues declined 5%, This includes lien transactions, which were down 2% against a tough comparable, and mortgage-related transaction revenues, which were down 41% amid market-wide downturn in mortgage originations. Now let's turn to legal and regulatory on slide 20. Legal and regulatory now includes enterprise legal management, while the enable on business has been transferred to the new division. Total revenues and profits were impacted by the disposal of the French and Spanish publishing assets last year. On an organic basis, revenues grew 4%. The operating margin declined as expected due to the increase in personnel cost and related expenditures. Legal and regulatory information solutions delivered 4% organic growth, driven by digital products, which grew 8% organically. Legal and regulatory software, including enterprise legal management and legal practice management software, posted 4% organic growth. The slowdown from the prior period was largely due to lower non-recurring revenues. Now let's turn to our new division on slide 21. The new division was formed in March of this year by bringing together our enterprise software businesses, including CCH Tagedic, Teammate, Enablon, and Finance Risk and Reporting. Corporate performance in ESG revenues grew 10% organically, with recurring cloud software and on-premise maintenance revenues up 13% organically. The operating margin declined as expected due to a step up in investments to pursue growth opportunities. Our EHS ORM business in Enablon grew 18% organically, despite a tough comparable driven by new customer wins. Across corporate performance, internal audit, and FRR, organic growth was 7%, led by CCH Tagedic Corporate Performance Management Solutions, which posted 16% organic growth. Teammate, our internal audit solution, posted double-digit organic growth, benefiting from phasing and higher on-premise license fees. FRR revenues were impacted by the conclusion of two implementations in Europe and the exit from Russia and Belarus. Now let me turn to the progress we've made against our strategy during the first half of 2023. This is the second year of our current strategic plan, and I'm delighted to report we've made some bold steps in the first half of this year. To accelerate expert solutions, we increased our product investment to 11% of group revenues. Expert Solutions grew 7% organically, with cloud-based software up 15%. We made two small bolt-on acquisitions, NurseTim, which strengthens our position in nursing test preparation, and Invistus, which adds to our existing AI-enabled software offering for hospitals with a solution that detects drug diversion. The formation of the new division, Corporate Performance and ESG, will also help accelerate expert solutions and sets us up to expand our reach into the market for ESG data collection, analysis, reporting, and audit solutions. We continued expanding partnerships, for example, LTI Mindtree, which is a channel partner for CCH Tagedic, and with Laerdal, where we just launched a virtual reality training solution for nursing. Thirdly, to evolve our core capabilities, we have forged ahead with some significant steps this year. We have further centralized our product development teams, significantly enlarging the DXG product development organization, and enabling us to harness the power of this large pool of technology talent. We've also created a single unified branding, communication, and digital marketing function at the center to support the business globally. We advance towards key ESG goals, expanding initiatives that support employee engagement and belonging, and executing on programs that further rationalize our real estate and on-premise server footprints. Now I'd like to make a few comments on AI so that you're aware of the approach that we are taking. For nearly two decades, we have reinvested about 10% of our revenues in new product development and innovation each year. A growing part of this investment has been devoted to embed AI tools into our products. Today, around 50% of our digital revenues are from products that leverage artificial intelligence to some degree. You've heard us talk about CCHIQ, Sepsis Monitor, Legal View Bill Analyzer. These solutions could not exist without AI. but we're also using AI to enhance our solutions such as UpToDate and CCH AnswerConnect. And we're using AI to empower back office operations that exist within our CT corporate business, as well as in Walter's Core compliance solutions. We've been embedding AI tools such as machine learning, natural language processing, predictive analytics, and deep learning into our products. We view generative large language models as another powerful AI tool that can be deployed to the benefit of our customers. We are currently evaluating dozens of use cases across all divisions, some in close collaboration with our customers. Use cases range from adding a human-like conversational interface to our content to providing tools that support document drafting and summarizations. We are also partnering with large tech firms such as Google and Microsoft. In our specific markets, it's critical that we deliver accurate, reliable, and up-to-date answers, and that we follow a careful, responsible process to ensure that technology is deployed with the right guardrails. I believe we are well positioned to deliver for our customers with our rich and proprietary content, our deep domain expertise, our close partnerships with customers, our wealth of technology experience and expertise, and with a robust approach to governance.

Now I'd like us to turn to our outlook.

As indicated in today's release, we reiterate our group level guidance for 2023. We continue to expect an improvement in our full year adjusted operating profit margin to be between 26.1 and 26.5%. We continue to expect adjusted free cash flow to be around 1.2 billion euros in constant currencies and ROIC to be between 16.5 and 17%. And lastly, we continue to expect high single digit growth in diluted adjusted EPS in constant currencies. Now let me conclude with an outlook by division on slide 26. As you can see, this has been recast to reflect our new organizational structure. In health, we continue to expect organic growth to be in line with the prior year and the adjusted operating profit margin to be stable year on year. In the tax and accounting division, we expect organic growth to be lower than the prior year, and we expect the adjusted operating profit margin to decline slightly compared to the prior year. In the finance and corporate compliance division, we expect organic growth to be slightly lower than or in line with the prior year and the adjusted operating profit margin to improve slightly. In legal and regulatory, we expect organic growth to be in line with prior year and the adjusted operating profit margin to increase. And in the newly formed corporate performance at ESG Group, we expect organic growth to improve slightly from the prior year and the adjusted operating profit margin to increase. Thanks very much for your attention. We'll now be happy to take questions. Operator, if you could move to questions, please.

Thank you. As a reminder, to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. We will take our first question. Your first question comes from the line of Nick Dempsey from Barclays. Please go ahead. Your line is open.

Good morning or good afternoon. Of the four year 22 results, you included in your guidance commentary that you expect group organic revenue growth to be in line with 2022, in other words, 6%. You don't use that exact wording in this release, so are you still happy with 6% for 2023? Second question, just wondering if you could zoom in on the two places in the group where you're predicting a clearly better rate of organic revenue growth in the second half of the year versus the first half.

So that's corporate performance in ESG and financial

software business will support longer-term growth. So we don't see a top-up or a cap on our growth potential, but we do want to say that it's incremental by the nature that you need to bring your customers along. And so it will take us a while to move our customers from on-premise software to cloud. And as a result, you see a gradual improvement in organic growth versus sort of a major step up from one year to another. But we're confident in the long-term growth prospects of the business, and we're investing very much across the whole portfolio in expert solutions in cloud software. Kevin, do you want to talk about the growth questions?

Certainly, Nancy. Nick, we usually do not give specific numeric guidance on organic growth, but we have given you by division what we expect to see for the full year. And I think if you work that out from our press release and some of the comments Nancy made a little bit earlier on this call, you know, we do expect some groups to be in line with last year, some groups to be slightly ahead, some groups to be slightly behind. You can kind of work out that overall for the full year, we do anticipate that organic growth will likely be similar to what we saw in 2022. I think your next question was on two specific divisions. One was the outlook for better performance in CPE, S&G, and then you also asked about the FCC division. Certainly in corporate performance and ESG, we're very excited about this group. We saw very good growth in the first half of the year, and we do expect that trend to continue into the second half of the year. When Nancy and I sit down with the management team and looking at the sales pipeline, we're very encouraged by developments here. And I will remind you that typically the second half is a stronger performance, in that group for things like software implementation and new license fees. So clearly, very optimistic about the outlook there. With the FCC group, what we have said in our guidance is we expect organic growth could be slightly lower or in line with the prior year. We do see very good performance in the recurring nature part of that portfolio, but I'll remind you, FCC does have more transactional revenues than other parts of the group, and we saw a little bit of weakness in those transactional revenues in the first half, largely because due to mortgage volumes and new legal formation. So that would be our outlook for the FCC group. So hopefully that helps you get a bit of a view on our confidence and the guidance going forward.

And Nick, just real quick to just add on what Kevin said is in FCC, the transaction comparables help a lot, right, in terms of the second half comps being a little more favorable than the first half. So that's why we have confidence in our guidance in that particular division.

Thank you. Thank you. We will take our next question. Your next question comes from the line of Adam Berlin from UBS. Please go ahead, your line is open.

Yeah, hi, good afternoon. It's Adam Berlin from UBS. I want to ask a couple of questions about, since we start to think about 2024, and I understand it's a bit early, but if you can give us a little bit of help thinking about our numbers for next year would be helpful. So my first question is, what needs to go right next year to accelerate the group growth to 7%? Is it just if the transactional growth headwinds are less and everything else kind of goes along at the same rate, we kind of will tick up towards that 7% level or do other things need to happen for us to see that progress? And the second question is now that we've kind of stabilized the cost base for all those COVID one-off effects that you talked about in the presentation, are we going to go back to a kind of 20, 30 bps a year margin progress, assuming that the top line does what we expect it to do?

Yeah, Adam, thank you for your questions. You know, we don't give longer term, you know, growth or margin guidance. You know, when we come out with our full year results in February of 2024, we'll, of course, give you the guidance against the metrics that we use. But what I can say is that, you know, the key things that we would point to that speak to the health of the franchise of Walters Chlor, one is the recurring revenue. that continues to increase as a percentage. It's 82% of our totals, and that's up 7% through the half year. Similarly, expert solutions, which is where we're investing, that is also up 7%. So that's where the capital is going. And so we are confident that as we continue to grow the business in the future, that you'll continue to see progress on organic growth, what the rate is for 24. You know, you'll have to wait until February to hear more about that. But we are confident in the, as I say, in the prospects of the business. The other thing that really we talk a lot about, and that's really what starts to happen in the second half, is it really becomes all about the next year. So we focus a lot of attention on retention. and a lot of attention on making sure all the new sales come in in the second half because, of course, new sales don't affect the current year all that much, but they certainly affect the next year. So that's what we do as an operating team, and as Kevin mentioned, we feel positive about the pipelines, very positive about the retention rates that we're seeing and the strong net promoter scores that we have on our products, which, again, speaks well to our positionings. And, you know, same thing on margins. Kevin, I don't know if you want to talk a bit about that. You are seeing that the cost base is sort of stabilizing or getting back to sort of the pre-COVID volatility that we saw, but we are committed to continuing to improve our margin as well.

Yeah, Adam, I do think that looking at our guidance that we've given you today, we do expect the full year margins will improve. We've given you a range of 26.1 to 26.5. So margin improvement is incorporated into our thinking. As you mentioned, our cost base is coming back to normal now, now that we've fully emerged from the pandemic. And in the second half of last year, we were really getting back to that normal state. So the comparable year-on-year in the second half is going to be a little bit more forgiving on the cost-based side. So that does give us confidence that we will deliver that margin improvement guidance that we've given you today.

Okay. Thanks very much. Thank you.

We will take our next question. Your next question comes from the line of Matthew Walker from Credit Suisse. Please go ahead. Your line is open.

Thanks a lot for taking the question. Hope you can hear me. So the first question was on generative AI. And the question is, when do you think you'll have identifiable products out there ready for clients to use? And will they be kind of deployed like in legal across the whole division? or will it be very sort of piecemeal, so one for CCH, one for CTCorp, that kind of thing, and do you expect to price those up separately so they'll be incremental to revenue growth? And then the second one was on CapEx, and you pointed towards the upper end of the 5% to 6% range, and so is that a change? Do we need to sort of start putting in close to six for the future. Thank you.

Thanks, Matthew. I'll take generative AI, and then Kevin can talk about CapEx. So we already have a gen AI application in the marketplace in China, which is in the legal market. We have this product called Bold, and we've already deployed some gen AI tools with that product. And so what we are doing, just so you know how we're approaching this, right, because again, we've been using AI for a long time. You know, every division is deploying some use cases, very close collaboration with customers, because at the end of the day, you know, you have to solve some kind of customer problem. So in some cases, as we are working through the process, which is our normal innovation process, we decide to deploy a different kind of AI, maybe, you know, NLP or predictive analytics. Sometimes we believe that the Gen AI tool will work best. So you should fully expect that products are rolling out over the course of 23 and 24 that have elements of Gen AI incorporated into those products. And we will do it case by case, whether it supports the retention processes that we have, so no necessarily incremental revenue, but supports a price increase, for example. Or there may be some products, like we have some pure AI products today that obviously create brand new revenue streams. So we're confident in the process that has been driving innovation at the company level. And we're just, you know, viewing Gen AI as another opportunity for us. But again, we have to do it in close collaboration with customers because ultimately they're only going to spend more money if they believe they're solving a specific problem that they have. Kevin, do you want to talk about CapEx?

Yes. With regard to CapEx, Matthew, we've guided you to the upper end of our range of 5% to 6%. That has everything to do with product development. Most of our CapEx is development of technology tools. As we mentioned, the first half of the year, we spent 11% of our revenues on product development. That's both CapEx and OpEx. That's a little bit higher than what we typically guide to at 10%. So I wouldn't read into this that there's a step change in our investment. I still think long-term, you know, the 10% is the right place and CapEx between five and six is the right place. But for this year, based on what is on the drawing board right now, some exciting innovative ideas, that's what we're guiding you to.

Okay. That's very clear. Thank you.

Thank you. We will take our next question. The next question comes from the line of Silvia Cuneo from Deutsche Bank. Please go ahead. Your line is open.

Thanks. Good afternoon, everyone. I have a couple of questions left. The first one is on the new segment. Can you please talk about the potential future progress and opportunity to improve margins in corporate performance and ESG? Is this going to remain an area of investment in the short term? And can the segment progressively improve margins towards the group level over time or perhaps are there structural differences to keep in mind? Then secondly, can you talk about trends in subscription renewals and new customer wins? I think it sounded positive in US clinical solutions. and just wanted to ask if you had any more color to share on these or other segments. Thank you.

Okay, so I'll talk about customer trends, and then Kevin can talk about margin developments in the corporate performance and ESG divisions. So in general, retention remains very high across the group. It's something that, again, we have invested a lot in terms of continuous improvements in our products, adding lots of new pieces of functionality, including all the things we talked about with artificial intelligence. And that supports both the higher renewals as well as supports price increases that we typically take year on year. So we're very pleased with our renewal developments across the board. What we are seeing, which again bodes well for the future of the business, is that as we transform from digital information into expert solutions, our retention rates rise from sort of mid to high 80% of retention. into the 90s. And so if you look, for example, at digital information in legal and regulatory, what you would see is retention rates above 90%. So again, it proves that these investments we're making to transform the content businesses into expert solutions is working. So very pleased with the retention developments. New wins, you know, we continue to win new logos across the board. Obviously, in places like our cloud products and in the new division, we're winning lots of new logos because these markets are faster growing markets. And what we do is we have this strategy called land and expand. And so what we do is as we win a new customer, we also focus on upselling customers. the customer with additional modules. Almost all of our software products and our expert solutions are module in nature. So we tend to not just win a new customer, but then continue that sales process. And so if you look at our pipelines, they remain strong, and that gives us, again, confidence that we will deliver on our guidance for the full year. Kevin, do you want to talk about margin developments?

Certainly. In the CP, ESG group, you know, our new division there, we're very excited about the growth prospects. And right now, the margins reflect investment mode. We are investing in innovative products and enhancements in that group. As mentioned earlier, we're also seeing, you know, a step up in personnel, mostly in product development personnel. and some division setup costs in the first half, but do expect the margins to improve. In fact, in our guidance for the full year, we do expect the new division's margins to improve over the prior year. If you think about the longer term for these businesses, these are software businesses, you know, Tagedic, Enablon, Teammate. And our FRR business are all global software businesses. Software businesses, as a rule, when they get to scale, do tend to have margins higher than the group average. So for the time being, we are in investment mode, but we do anticipate margins will improve gradually as we mature those products.

Yeah, and I would also just say in that division, you know, we've just launched a couple of new products in 2023 around ESG and reporting both Tagedec has an ESG and sustainability solution in the market and Teammate just launched just very recently an ESG solution. So we are investing to drive, you know, our market leading position in sort of the ESG part of what we're doing, which is why we brought these businesses together and form the new division. So we're very excited about the capabilities that we have. We're really well positioned in the market to help clients with all of the aspects of data collection, reporting, and audit in the ESG realm.

Very clear. Thank you.

Thank you. Once again, if you wish to ask a question, please press star 1 and 1 on your telephone. We will take our next question, and the question comes from the line of Lisa Yang from Goldman Sachs. Please go ahead. Your line is open.

Hi. Thanks for taking my question. There was a question earlier about giving more call about divisions which should accelerate in terms of organic growth. My question would be the opposite. It looks like you're talking about a slowdown, slightly lower growth in tax and accounting and health in H2 versus H1 based on the guide. In tax and accounting, you're still at 8% getting to slightly lower growth for the full year. And similarly in health, you're at 6% in H1. It looks like you're going to be more back to 5%. So what's driving that potential slowdown? That's the first question. Secondly, it's on the margin. I think you laid out pretty clearly how the cost base has normalized. So just wondering what you mean by you expect the group level of electronic margin to increase in Q4. What does that mean for Q3? Do you think Q3 margin will still be down the year and in Q4 they're going to see the improvement? Because based on what you say, it looks like the cost base has already normalized. So just wondering if you can clarify that. And the first question is on AI. Is it fair to assume that With GMC-AI, because you've been investing in AI and technology for a long period of time, that's going to just help you with retention and pricing rather than being a big game changer in terms of revenue and margin. Is that the way to think about it? And on the other hand, do you see any potential risk, especially when it comes to how do you protect your your IP and how much of that is proprietary. I don't know if you can maybe elaborate on the risk part as well. Thank you.

Okay. Thanks, Lisa. So I will take the AI question and just talk about tax and accounting and health on the growth side.

And then, Kevin, if you can handle margin questions in the second half. So let's start with AI. You know, as I mentioned in my remarks, you know, today 50% of our digital revenues are, you know, those products that make up that 50% include some form of AI. So, you know, we have some products that are purely AI, and then we have others that use different kinds of AI to provide value to customers. So we are well-positioned. in the AI world, it runs the gamut in terms of what it does for us, right? Again, the whole focus we have on innovation is around what's the customer's pain point and then how to solve it. And we solve it through a combination of our deep domain expertise and technology. And so why we are confident in our ability to navigate this next wave of gen AI is is that it's really, you can't do it with just technology, right? You really need the deep domain expertise and you need the proprietary data and content. You know, think about our customers. They make incredibly important decisions that have very large implications if they don't get it right. And so the nature that, you know, kind of our whole value proposition is, you know, you can be assured that if you use our products, you will be right and you will have a positive impact. And so AI is just, you know, Gen AI is just another tool for that. So on the risk side that you mentioned, you know, we are only deploying Gen AI against our proprietary data sets. So we are not using the World Wide Web kind of applications. And so as a result of that, we don't have hallucinations. You know, we really can be confident that that, you know, the quality and the accuracy is there. And so that allows us to protect our IP. It allows us to mitigate any risks from a customer perspective. And so we continue to deploy this and we feel confident. We see it much more as an opportunity to continue to add value with clients than we see, you know, the risk to any part of the business. And then just very quick on TAA, the growth slows a little bit, but all around the transactional part of what we do in tax, we had a very robust tax outsourcing business in 2022. And we expected that that wouldn't continue fully in 2023. So that is what is driving the delta in the growth for tax, 22 to 23, but again, a very impressive rate of growth regardless. And then in health, it's really just rounding between, you know, the numbers. And so there's nothing fundamental going on in the health business remains, you know, attractive market for us. So Kevin, do you want to talk about margin developments in the second half?

Yeah, certainly, Lisa. With regard to margin development in the second half, we are guiding to the improvement for the full year, although I think most of that improvement you'll start to see come the fourth quarter. For the nine months, I expect the margin will still be down year on year compared to the prior year because, as you know, we were ramping up hiring in the second half, and we're probably closer to more of a complete drop. you know, personnel component as we exited the year last year. So I expect most of that margin improvement based on the comparables to come in the fourth quarter of the year.

Very clear. Thank you. Thank you. We will take our next question. And the question comes from the line of Thomas Singlehurst from Citi. Please go ahead. Your line is open.

Good afternoon. It's Tom here from Citi. Thank you very much for taking the question. The first one, and I really apologize for being boring on this margin point, but I just wanted to double, triple check because last year, you're absolutely right, the first half, super high margin, it was something like 200 basis points up from the previous year, which speaks to that sort of low investment, and that unwinds in the first half of this year. And then you talk about the investment, but Two points, actually. One is at the nine months last year, you were up 50 basis points. In the fourth quarter, you were up 80 in terms of margin. So that suggests that the fourth quarter margin was improving, I suppose, last year. That's one question. And therefore, why is the phasing still skewed to the fourth quarter this year when you'd expect it to be to the third quarter? And then secondly, in absolute euros and euro cents, I think I'm right in saying that the implication is that your overall cost base will be down year on year, sort of 2H on 2H, in order to make the margin. I suppose that might just be currency, in which case just maybe confirm that. But I am just really interested in just understanding how that mechanic happens, given we know, because you said there was a 40 basis point or so currency. uh last year which doesn't seem to be unwinding in any material way so that was the first question and then second on cash flow um uh you've you've you have delivered slightly below the 100 cash conversion maybe that's the answer but you know essentially as far as i can tell in absolute terms sort of full year profit is roughly 2x 1h profit um yet we're looking for the cash flow to comfortably more than double um What are the moving parts there? Thank you. Kevin, do you want to?

Absolutely. On the margin question, Tom, it really does have to do with the comparables. And the improvement we expect in the second half of the year has to do with the fact that we were more fully staffed back in 2022. where we had much more open positions in the first half of 2022. So the comparables just work out in such a way that we do expect to see a better margin performance in the second half of this year. And as I mentioned a little bit earlier, likely see a lot of that margin improvement in the fourth quarter. With regard to the cash flow, we are guiding to 100% cash conversion. We are a very cash generative company, and we do have a good line of sight on that. We've monitoring our collection metrics as a matter of course through the year. So, you know, we do expect to convert, you know, just about all of our operating profit into cash next year or at the end of this year at about 100%.

Thank you.

Thank you. Once again, if you wish to ask a question, please press star 1 and 1 on your telephone. We will take our next question, and the question goes from the line of Conrad Sommer from ABN AMBRO ODA BHF. Please go ahead. Your line is open.

Hi, good afternoon. Thanks for taking my questions. Just one, please, on the recruitment of personnel. because it's obviously one of the key reasons why margins were down as much as they were down in the first half. And the number of job openings has come down from about 1,000 to about 500. Can you share with us what sort of jobs were filled with those 500 people? Were they mainly sales and marketing or technological experts or people that focus on AI? And given that the growth rate of the company overall is at a historically high level, would you not expect the number of people to keep going up in proportion to that higher level of revenues? I understand the whole COVID impact from last year, but it seems fair to assume that the growth in personnel will ultimately catch up with the growth in revenues.

Yeah, so maybe I can start, and Kevin can chime in. So we had, you know, significant open positions in 2022, really a combination of a couple things, right? One was that during the peak of COVID, you know, it was difficult to recruit. There was a lot of uncertainty, so that slowed quite a bit. Then we faced a very robust labor market where it was both our turnover rate increased and it was difficult to fill positions. And we did a couple of early retirement programs, which were what were planned, but we had a bit higher uptake of people wanting to take those than we had expected. And then we had the Russian-Ukraine situation where we had a series of IT partners that had quite a big footprint in Ukraine. And so we had to shift a lot working with them. And so as part of that shift, we also decided to move some of that into our own employee base. So all of that came together, right, really in 22, where we had, you know, just a number of open positions, mostly in tech and sales and product management. That's where the bulk of the hiring has been. So we are really pleased that we've been able to fill and manage all these things I just talked about successfully. We're well down to only, I think, about 500 open positions, most of which are replacements. We see turnover rates come down well. We see a stabilization of labor costs happening in 2023. So we're well positioned now with the right mix of people. in the right geographies where we need them to be. And so, you know, we'll continue to fill, you know, the open heads, but it's really, we're well into sort of what I would call quite a stable situation. So then back to your question on, you know, should you expect personnel to grow with the growth rate of the company? You know, of course, there'll be some growth, but given that most of what we're hiring is tech talent, You know, what we see is that we are getting increasing productivity benefits in our tech organizations. And that comes from both the scale effect as we bring these units together. It comes from the reuse of the technology tools. And, of course, technology costs typically go down over time. So just for example, the 10 to 11% that we invest in product enhancements and new products, we get more for that 11% today than we would have gotten a decade ago. So that means that the rate of hiring is not going to be totally correlated with the growth rate of the company, but we clearly will see some job growth as we continue to expand organic growth. So hopefully that answered your question.

Yeah, absolutely. Thanks very much.

There seems to be no further questions at this time. Nancy, do you have any closing remarks?

No, we just want to say thank you very much for attending and wish you a good rest of your day or evening. This concludes today's conference call.

Thank you for participating. You may now disconnect.