Wolters Kluwer, a global provider of professional information, software solutions, and services, reported a strong performance for the Full Year 2023, with a 6% organic growth and an increase in adjusted operating profit margin. The company also proposed a significant dividend increase and announced a substantial share buyback plan for the coming year.
Key Takeaways
- Wolters Kluwer showed a 6% organic growth and a 30 basis point increase in adjusted operating profit margin to 26.4% for the Full Year 2023.
- Diluted adjusted earnings per share (EPS) increased by 12% in constant currencies.
- A 15% increase in total 2023 dividend per share to €2.08 has been proposed.
- The company announced a share buyback plan of up to €1 billion for 2024, with €100 million already completed.
- Health, Tax & Accounting, and Legal & Regulatory divisions reported strong performance.
- The Corporate Performance & ESG division is focusing on innovation and growth, with significant investments planned.
Company Outlook
- The outlook for 2024 includes good organic growth, improved margin, stable cash flow, and mid- to high single-digit growth in diluted adjusted EPS in constant currencies.
- Expectations for divisional organic growth vary, with Financial & Corporate Compliance and Corporate Performance & ESG aiming for in-line or better growth, and Tax & Accounting slightly below.
Bearish Highlights
- Some headwinds in nonrecurring revenues have been reported.
- The Tax & Accounting division is investing in a global audit cloud suite, which may affect short-term margins.
- The Corporate Performance & ESG division experienced slower implementations due to third-party involvement.
Bullish Highlights
- Strategic changes and investments in innovation, including generative AI, are expected to drive future growth.
- The Health division delivered strong organic growth, particularly in Clinical Solutions.
- The company is open to acquisitions to strengthen its product offerings, particularly in CP & ESG and generative AI spaces.
Misses
- Cash flow guidance for 2024 is at 95%, returning to a normal level after being stable at €1.2 billion.
- The company anticipates some challenges with the Corporate Transparency Act's budgeting process.
Q&A Highlights
- Nancy McKinstry highlighted the strong performance of the Health division and significant investments in CP & ESG innovation.
- The company is cautiously optimistic about the Corporate Transparency Act's potential and is investing in expert solutions to maintain market leadership.
- Margins are expected to improve modestly in 2024, with a focus on cost base and open positions.
- Positive feedback on AI products suggests potential for up-selling opportunities.
Wolters Kluwer (ticker: WKL) has demonstrated resilience and strategic foresight in its Full Year 2023 results. The company's commitment to shareholder returns is evident in its proposed dividend increase and the €1 billion share buyback program. With a strong balance sheet and a clear focus on innovation and market leadership, Wolters Kluwer is poised for continued success in the evolving global market.
Full transcript - None (WOLTF) Q4 2023:
Operator: Hello, all, and thank you for joining us for Wolters Kluwer's Full Year 2023 Results Call. My name is Lydia, and I'll be your operator today. As a reminder, today's call is being recorded. [Operator Instructions] I'll now hand you over to your host, Meg Geldens, Vice President of Investor Relations, to begin.
Meg Geldens: Thank you, Lydia. Welcome, everyone, to the Wolters Kluwer Full Year 2023 Results Call. Today's earnings release and the slides for this presentation are available for download from the Investors section of our website, wolterskluwer.com. With us on the call today are Nancy McKinstry, our CEO; and Kevin Entricken, our CFO, who will discuss our 2023 results and take your questions at the end. Before we start, I'll remind you that some statements we make today may be forward-looking. We caution these statements are subject to risks and uncertainties and may cause actual results to differ materially from those indicated in these statements. Factors that could affect our future financial results are discussed in Note 2 of today's release and in our annual reports. As usual, in the presentation today, we will refer to adjusted profit, which excludes nonbenchmark items. We refer to growth in constant currency, which excludes the effect of currency movements. And we refer to organic growth, which excludes both the effect of currency and the effect of acquisitions and divestments. Reconciliations to IFRS numbers and further information can be found in our release. Following the organizational change implemented in March of 2023, we will present the results for the new 5-division structure and compare to pro forma figures for 2022. And at this time, I'd like to hand the call over to our CEO, Nancy McKinstry.
Nancy McKinstry: Thank you, Meg, and hello, everyone, and thank you for taking the time to join us on this call. I will start by giving you the key highlights from last year and then Kevin Entricken, our CFO, will talk you through the financials in more detail. After that, I'll return to discuss divisional developments and the progress that we are making against our current strategic plan, and then I'll finish with an outlook for the year ahead. So let's begin with the highlights of 2023. We delivered organic growth of 6% and an increase in our adjusted operating profit margin for the full year despite macroeconomic and geopolitical headwinds faced in a few areas. Diluted adjusted earnings per share increased 12% in constant currencies, while adjusted free cash flow was approximately €1.2 billion, in line with our guidance. ROIC improved significantly, and the balance sheet remains very strong. It was another year of substantial returns for our shareholders in the form of dividends and share buybacks. With regard to our strategic and sustainability goals, I'm pleased to say that we made significant progress. Expert solutions grew 8% and now represent 58% of total revenues. We are investing in product development at record levels and in recent months have launched several important new solutions or product features to support our customers. Last year, we made several organizational changes, which will bring benefits in the future years. We formed a new Corporate Performance & ESG software division and made significant progress in centralizing key functions. With respect to our own sustainability performance, we are pleased to report increases in both our employee engagement and employee belonging scores. And as previously reported, our near-term admissions reduction targets were validated by SBTi last year. I will come back on these strategic and divisional developments. But first, Kevin will present the financials.
Kevin Entricken: Let me start with the financial highlights on Slide 6. Full year 2023 revenues were €5.584 billion, an increase of 5% in constant currencies. Organic revenue growth was 6%, in line with the prior year. Adjusted operating profit was €1.476 billion, an increase of 6% in constant currencies. The adjusted operating profit margin improved by 30 basis points to 26.4%. As expected, we delivered a margin increase in the fourth quarter, bringing us into our guidance range. Diluted adjusted earnings per share increased 12% in constant currencies. Adjusted free cash flow was €1.164 billion, a decrease of 2% in constant currencies. We ended the year with a net debt-to-EBITDA ratio of 1.5x. Return on invested capital increased to 16.8%. Let's look at revenues more closely on the next slide. Organic growth of 6% was led by the Tax & Accounting and Corporate Performance & ESG divisions. Health grew 6% organically. Steady growth in Clinical Solutions was complemented by Learning, Research & Practice, which benefited from the new revenues generated under the New England Journal of Medicine Contract won in 2022. Tax & Accounting delivered 8% organic growth, in line with the prior year and better than we had expected. Financial & Corporate Compliance delivered organic growth of 2% compared to 4% a year ago. The fourth quarter showed modest improvement on the 1% reported for the first 9 months of the year. Legal & Regulatory grew 4% organically, in line with the prior year. Strong 8% growth in digital information subscriptions was partly offset by print declines. Finally, Corporate Performance & ESG reported 9% organic growth, which was not quite as good as we had expected. Software sales were strong, but professional services revenue fell short of our expectation. Now let's turn to Slide 8 to review the revenues by type. The chart on the left shows our recurring revenues, which, together, make up 82% of group revenues in the full year. Total recurring revenues grew 7% in 2023. Digital and services subscriptions, which make up 74% of group, saw a strong 8% organic growth throughout 2023. Print subscription revenues declined 7%, back in line with historical trends. Other recurring revenues include tax software filing fees at TAA and nursing education and health. They were up 3% organically for the year. On the right, nonrecurring revenues are presented. These make up 18% of total revenues. Transaction revenues in our Finance & Corporate Compliance division declined 6% organically versus a decline of 2% in the prior year. These transactions are linked to M&A volumes, mortgage originations and other lending activity, all of which were challenged due to the rise in interest rates. ELM transactional revenues in our Legal & Regulatory division, which relate to legal invoice volumes, grew 12% organically due to the on-boarding of new customers. Other nonrecurring revenues, which were primarily software license fees and implementation services, grew 1% organically compared to 7% a year ago. The slowdown reflects lower professional services revenues in Legal & Regulatory and Corporate Performance & ESG. Now let's turn to division margins on Slide 9. As mentioned, the adjusted operating profit margin increased 30 basis points to 26.4%. This improvement follows the marked increase in the margin in the fourth quarter. This was due to operational gearing, mix shift and comparisons to a more normalized cost base in the fourth quarter of 2022. Margins improved in 4 of the 5 divisions with Financial & Corporate Compliance and Legal & Regulatory driving most of the improvement over the prior year. Now let's take a look at the rest of the income statement on Slide 10. Adjusted net financing costs reduced significantly to €27 million, largely due to higher interest income on our cash balances. As indicated in our outlook, we expect net financing costs to rise in 2024 as this interest income is likely to reduce as deposit rates come down. Adjusted net financing costs also include a €7 million net foreign exchange gain mainly related to the translation of intercompany balances. The benchmark tax rate on adjusted pretax profit increased to 22.9%. This increase was mainly due to the absence of last year's favorable adjustments and due to increased limitations on deducting interest in the Netherlands. Adjusted net profit after tax was €1.119 billion, up 6% overall and up 7% in constant currencies. Adjusted EPS was €4.55, an increase of 12% in constant currencies. This reflected the increase in the adjusted net profit and the 4% reduction in the weighted average shares outstanding as a result of share buyback programs. Now let's look at cash flow on Slide 11. As expected, our cash conversion ratio started returning to historical levels last year. Cash conversion was 100% in 2023 and we expect it will reduce further to around 95% in 2024. This return to normal is mainly due to working capital movements initiatives in the prior years that are now fully operational. In addition, CapEx is currently slightly ahead of depreciation as we have stepped up product development spending. CapEx was €323 million, reflecting an increase of 10% in constant currencies. At 5.8% of group revenues, CapEx is currently running near the top of our guided range of 5% to 6%. Net interest paid was €70 million, lower than a year ago due to the interest income mentioned earlier. Cash taxes increased to €325 million, partly due to payments in relation to prior years. All in all, adjusted free cash flow was €1.164 billion, down 2% in constant currencies. Now let's turn to the uses of cash on Slide 12. The main point on this slide is that we are returning more than 125% of our adjusted free cash flow, returned to shareholders in the form of dividends and share buybacks last year. Dividends totaled €467 million while last year's buyback amounted to €1 billion. Acquisition spend was relatively low, a total of €68 million, mainly for NurseTim and Invistics, which we acquired last year. We ended the year with an increase in net debt and a net debt-to-EBITDA ratio of 1.5x. Let's turn to our proposed final dividend for 2023 and our share buyback plan for 2024 on Slide 13. In view of the continued good financial performance and our balance sheet position, we're proposing an increase to the total 2023 dividend per share by 15% to €2.08 per share. This would bring the final dividend to €1.36 per share, subject to shareholder approval at our Annual General Meeting in May. With regard to our share buyback plans for 2024, we're today announcing our intention to repurchase up to €1 billion in shares this year. Of this amount, €100 million has already been completed in January and February. We have a third-party mandate in place to repurchase shares for €205 million starting this Friday through the end of April. Now let's turn to the next slide. Summing up, we had a good financial results despite a few headwinds in nonrecurring revenues. We delivered organic growth of 6% and a 30 basis point increase in margin. We saw favorable movements in net finance costs and tax. And combined with a lower share count, we delivered 12% increase in diluted adjusted EPS in constant currencies. ROIC increased to 16.8%. Adjusted cash flow was broadly stable at €1.2 billion as cash conversion returned to historic levels. More than 125% was returned to shareholders. Finally, we finished the year with a strong balance sheet and a net debt-to-EBITDA ratio of 1.5x. Now I'd like to turn it back to Nancy.
Nancy McKinstry: Thank you, Kevin. Let's begin with a review of the key developments by division, starting with our Health division on Slide 16. Health delivered 6% organic growth and improved its operating margin by 20 basis points, benefiting from operational gearing and the continued mix shift towards Clinical Solutions. Clinical Solutions delivered 7% organic growth, in line with the prior year. Our clinical decision support tools, drug databases and patient engagement solutions all achieved mid- to high single-digit organic growth, driven by strong renewals and new customer wins. During the year, we launched UpToDate AI Labs, a beta version of our leading clinical decision tool that leverages generative AI technology. Learning, Research & Practice delivered 5% organic growth benefiting from new -- the new revenues generated under the New England Journal of Medicine digital distribution contract, which we won in 2022. And Education and Practice organic growth moderated slightly as print book revenues turned down. Now turning to Slide 17. The Tax & Accounting Division delivered 8% organic growth, in line with the prior year and better than expected. The margin increased by 10 basis points as operational gearing was offset by higher personnel costs and related expenses. All regions performed well. North America grew 8% organically, driven by continued strong performance of our CCH Axcess cloud suite and strong growth in certain nonrecurring revenue streams such as professional services, though at a more moderate pace. Our European businesses grew 7% organically, led by cloud software, which grew 14% organically. Results in Europe benefited from one-off regulatory changes in both Germany and Spain. Asia Pacific and Rest of World also performed well with 5% organic growth lifted by nonrecurring revenues in China and India. Turning now to Financial & Corporate Compliance. This division achieved 2% organic growth for the full year, absorbing a sharp downturn in certain transactional revenue streams by delivering robust growth in recurring revenues. The margin increased by 160 basis points, reflecting tight cost control and a favorable revenue mix. Legal Services delivered 2% organic growth, driven by high single-digit growth in recurring service subscriptions. Legal Services transactional revenues declined 9% due to the downturn in U.S. M&A and IPO activity. Financial Services also grew 2% organically as 5% organic growth in recurring revenues more than offset a 3% decline in transactional revenues. Compliance Solutions was impacted by the market-wide downturn in loan and mortgage originations, while Lien Solutions also faced a challenging comparable. Let's now turn to Legal & Regulatory on Slide 19. In Legal & Regulatory, revenues reduced 4% overall due to the effect of the disposals of the French and Spanish publishing assets. On an organic basis, revenues grew 4%. The adjusted operating profit margin improved significantly by 120 basis points following the increase in the fourth quarter. This improvement reflects operational gearing and cost control partly offset by increased investments and higher personnel costs. Information Solutions grew 4% organically with our digital legal research solutions growing 8% organically. Print products now make up only 20% of this unit and declined as expected, in line with historical trends. Software, which includes Enterprise Legal Management solutions and other software applications such as Legisway, posted 5% organic growth. The ELM business unit benefited from strong growth in transactional revenues. Moving now to the new division on Slide 20. The Corporate Performance & ESG division was formed in March last year by combining 4 of our software businesses that support corporations in driving financial, operational and sustainability performance and mitigating risks. The new division delivered 9% organic growth, driven by 11% organic growth in recurring revenues. The adjusted operating profit margin declined due to higher personnel costs, increased product investment and higher spending on sales and marketing. Our EHS/ORM platform, Enablon, grew 16% organically driven by strong growth in both recurring cloud subscriptions and on-premise software license fees. Across Corporate Performance, internal audit and FRR, organic growth was 7%. The CCH Tagetik Corporate Performance Management platform delivered 20% organic growth, driven by double-digit growth in both cloud and on-premise software. CCH Tagetik service revenues declined, falling short of our expectations. This was mainly due to a higher proportion of the software deals that were tied to third-party implementation partners. TeamMate, our internal audit solution, delivered double-digit organic growth. And as previously reported, Finance, Risk & Reporting revenues were impacted last year by the conclusion of 2 large implementations and the exit from Russia and Belarus. Now let me turn to the next slide and talk a little bit about our progress against our 3-year plan. We made significant progress in the second year of our current 3-year plan. On our first priority, we saw expert solutions grow 8% organically and reached 58% of our total revenues last year. Product development spending was at record levels, 11% of our 2023 revenues. We increased our annual spending towards generative AI, began testing dozens of use cases and launched beta and commercial versions in the health and legal markets. We also made significant investments to launch offerings to support customers with new regulations such as the Corporate Transparency Act and Pillar Two. On our second priority, the most notable development was the formation of the new division, Corporate Performance & ESG, which positions us to expand further into sustainability data collection, analysis and reporting and audit solutions. In Health, we strengthened our position in nursing education and test preparation with the acquisition of NurseTim. And we broadened our hospital offering with the acquisition of Invistics, an AI-enabled solution to detect drug diversion. And lastly, on our third priority, we made several internal changes last year. We centralized nearly all of our product development teams into our DXG organization. We created a single global branding and communication function, and we centralized our worldwide finance organization. At the same time, we improved our employee engagement and longing scores and achieved SBTi validation of our near-term emissions reduction targets. Now let me update you on how far we've come with generative AI. In 2023, we increased investment in the newly scalable generative AI technology and rolled out our first applications. UpToDate launched a Gen AI-enabled beta version, and we added Gen AI features into legal research solutions in China and Germany last year. A few weeks ago, we unveiled Gen AI capabilities for one of our medical education solutions in India. The Gen AI tool draws on our quality proprietary content and deep domain expertise. And in all cases, the Gen AI feature helps the user get to more succinct answers or quicker insights than ever before. All of these developments follow our responsible AI principles. These innovations build on our 10 years of experience embedding artificial intelligence into our solutions. As we've noted before, around 50% of our digital revenues are from products that leverage AI to drive enhanced value for our customers. We expect to be adding more Gen AI features in 2024. I'd now like to turn to some of the innovation we've been working on in the new Corporate Performance & ESG division on the next slide. One of the products at the heart of CP & ESG is the CCH Tagetik corporate performance management platform. The CPM platform is a single unified all-in-one information management system, which can handle most types of data supporting companies with their complex data collection, analysis and reporting needs. Powered by the Analytic Information Hub, CCH Tagetik brings financial, nonfinancial and operational data together into a single source, so users can efficiently locate data and prepare it for various reporting needs and regulation. This AI Hub is based on an open architecture and can connect into customers' existing systems via APIs. Using advanced technologies, the platform can also perform analytics and planning. We have begun investing to build digital connections. In November last year, we unveiled Enablon ESG Excellence, which is a seamless connection between Enablon and CCH Tagetik. Only a few months old, the solution has already won the top product of the year at the 2023 Environment + Energy Leaders Awards. This is our product integration in the division, but there will be more to come. Our ultimate vision is for the CPM platform to take inputs from any source and be able to export as required by the customer. So now let me finish with an outlook for 2024. Slide 25 provides our specific guidance for 2024. We expect another year of good organic growth and a modest improvement in our adjusted operating profit margin to be between 26.4% to 26.8%. We expect adjusted free cash flow to be broadly stable compared to the prior year in constant currencies. We expect a further increase in our return on invested capital to be between 17% and 18%. And we are guiding to mid- to high single-digit growth in diluted adjusted EPS in constant currencies. So now let me conclude by a look at our outlook for each division. In Financial & Corporate Compliance and Corporate Performance & ESG, we expect full year 2024 organic growth to be in line with or better than prior year. In Health and Legal & Regulatory, we expect organic growth to be in line with the prior year. And in Tax & Accounting, we expect organic growth to be slightly below the prior year. The margin increase will be primarily driven by Health, Legal & Regulatory and Corporate Performance & ESG. We've had a good start to 2024, and we look forward to continuing to execute against our strategy. Thanks very much for your attention, and now I'll turn it back to Lydia, our operator, who will turn to questions.
Operator: [Operator Instructions] Our first question today comes from Adam Berlin of UBS.
Adam Berlin: Three questions, if I can, please. Firstly, can you just talk a little bit about the Health segment, which obviously had the benefit in 2023 from the New Journal win, but you're still guiding for that 6% growth rate to be sustained into next year. So just into a little bit why Health is doing so well, that would be helpful. The second thing is CP & ESG margins, 10% in 2023, so down year-on-year. Obviously, you're investing in that segment. Can you give us a sense of where those margins will end up? How long it takes to get there? How far through the -- how much more cost that kind of is to go into the divisions and the product development? Just give us a help kind of modeling those margins longer term. And then the third question is on the guidance around cash, which was a bit lower than I expected. That was because of no working capital inflow. Can you just explain why there's no working capital inflow in 2024 where it has been in most prior years?
Nancy McKinstry: Okay. Thanks, Adam. I'll take the first two and then Kevin can talk about cash. So Health is clearly well positioned in our markets. It's had a strong trajectory of growth over the many years. And if you look underneath the sort of the hood of the division, what you see is continued good performance in our Clinical Solutions group, not just from UpToDate, but really from our drug databases and our patient engagement, and we're driving a lot of innovation now in the Clinical Effectiveness group. And so that will continue to provide good support for growth going forward. And then within Health Learning, Research & Practice, that's our more traditional part of Health, and what you see really is that the pressure from the print decline has really been removed a lot from that division. So that unit has become a very strong digital unit, and you see good growth in the Ovid online business as well as in our nursing assets. And so these Journal wins can come into the mix. But if you -- even if you were to remove them, you see some very good underlying performance across the Health business, really driven by both our market positions, which are strong, and the level of innovation that we're doing in that division. And then on CP & ESG in terms of the margin, as you noted, we are continuing to invest significantly in this division, not just in product development, but also in sales and marketing. If you look across this whole market segment, both Environmental, Health and Safety, Corporate Performance and then ESG, what you see is that it's a very significantly growth market and so it's a bit of what we would call a land grab. So we want to make sure that we have a lot of innovation going on and bringing a lot of new solutions into the market. And so that's reflective in margins. So if you look over time, as that unit scales, we fully expect the margin will improve. But it's a long-term perspective when it comes to getting to the margins that you would see in Health or Tax & Accounting. Kevin, you want to talk about cash?
Kevin Entricken: Certainly. Adam, our cash flow guidance for 2024 of around the 95% is really a return to what I would say is a more normalized cash flow. Over the last couple of years, we've launched a number of programs to improve on our working capital management, particularly in collections. And those programs are now fully operational, so the pickup that we've seen in the last couple of years, I would imagine, will return to normal. Also, during the pandemic years, we did see some unusual movements in cash flow, some acceleration, some slowdown. So again, 95% is where I would say is the more normalized level of free cash flow and I would expect that to continue into the future.
Adam Berlin: Can I just follow up? Can you just explain because given almost all the business is a subscription, why wouldn't you have a positive working capital inflow every year?
Kevin Entricken: We will have a positive inflow of working capital in 2024, just not to the same level as we’ve seen last year.
Operator: Our next question comes from George Webb of Morgan Stanley.
George Webb: I wanted to ask on two divisional areas, please. Firstly, on the Financial & Corporate Compliance side, as I think you mentioned, if we look back on 2023, subscription revenue is up 7%, transactional and nonrecurring were down. If we look into 2024, is there any reason that we shouldn't expect solid growth on the subscription side to continue? And then I guess I'm wondering what the range of scenarios are for the transactional and nonrecurring guide. And particularly if I look at the F&CC growth guidance, the bottom end of that to be in line or 2% growth for 2024 feels like it would have to bake in another year of transactional declines, which feels a little bit conservative. And then second question on the Tax & Accounting side, could you dig into where in particular you're putting investment? As I'm sure you've seen, Thomson Reuters (NYSE:TRI) have talked about accelerating growth across their main segments over the next few years. Maybe the acquisition of Pagero is fueling part of that on the tax side. I'm wondering if there's any changes to the competitive landscape as well.
Nancy McKinstry: Okay. So why don't I start with tax and then I'll comment a bit on the strategy in FCC as it relates to subscriptions and ask Kevin to specifically talk about the transactional assumptions that we've made in our guidance for FCC. So on Tax & Accounting, we are investing in innovation in that division as we are across the enterprise. Very exciting developments for 2024 around the launch of our global audit cloud suite. As you know, a lot of our growth in Tax is driven that we've been first to market with cloud. We remain in the U.S. the only provider with a full cloud suite in Tax & Accounting and all the other sort of activities that accountants do. And so we continue to gain new customers as well as continuing to up-sell. And then in Europe, again, we continue to roll out our cloud solutions, both in Tax and that's where we will start with our global audit rollout. So we feel very good about our market position. That division continues to perform exceptionally well, and we'll continue to invest. We are not -- just to be clear, right, we really are the market leader in the professional firm versus Thomson and others who are more focused on the corporate side of tax. And then as we look at FCC, one of the things that we have been doing in that division is creating more subscription products. And so over the last -- if you look over the last 5 years, we have been working to do different kinds of bundles of services and sell them as a subscription. So that's been fueling a lot of the growth along with better retention among our core customer base. And so again, if you look at things like the Corporate Transparency Act, not only will we help customers on a transactional basis, but we are also selling that service as a subscription as well. So that's part of the long-term strategy, and we do expect solid performance in subscriptions for FCC in 2024. Kevin, do you want to talk about assumptions in FCC around transactions?
Kevin Entricken: Certainly. George, as you know, the transactional part of the FCC division makes up about 40% or so of revenues. That's the harder revenue stream to predict as compared to subscriptions, where we have a lot of predictability and very stable retention rates. Through 2023, we did see transactions under a lot of pressure largely due to increasing interest rates. We certainly saw mortgage volumes under pressure, and frankly, M&A volumes under pressure, which is a knock-on effect to new corporate formations. I would say, as we exited the year, we started to see some stability in those transactional products, but I would say it's a little too early to say that it's a true recovery yet. But obviously, our comparable will be more forgiving in 2024.
George Webb: Super. That's very clear. And Nancy, if I can just ask one more quick one. Just on the Corporate Performance & ESG side, I don't think I quite caught -- I think you might have mentioned something around implementations in Q4, which is maybe a little bit slower than expected. Could you just recap what was happening there and then just talk a little bit about the pipeline, please?
Nancy McKinstry: This is in Corporate Performance & ESG, is that right, George? Yes.
George Webb: Yes, yes. Correct.
Nancy McKinstry: Yes. So what happened in 2023 is that our service – our professional services, which are linked to the sale of the software, right, we ended up – what you see is that the average deal size is increasing quite significantly in the Tagetik unit. And as a result of that, more of the services are done by third-party implementation partners like the big 4 and we have partnerships with a number of these kinds of large providers. And so as a result of that, what we had forecast did not come to reality. So as we look to 2024, what we are doing is now basing our forecast on professional services based on the experience that we had in 2023, where we do less of the implementations and partners do more.
Operator: Our next question comes from Nick Dempsey of Barclays.
Nick Dempsey: A couple of follow-ups to George's question [indiscernible] George's the question [indiscernible] as well.
Nancy McKinstry: Could you just speak up a little bit? It's a little hard to hear you. Sorry to interrupt. Yes.
Nick Dempsey: Sorry. Can you hear me now?
Nancy McKinstry: Perfect. Yes.
Nick Dempsey: Okay. Sorry. So yes, in terms of FCC, when we're talking about potentially some stability in the transaction line, although I understand why you'd be cautious about guiding on that, and if we're then also looking at maybe 7% again in the digital services subscription line, when we've got the U.S. Corporate Transparency Act kicking in, shouldn't we perhaps hope that there would be an extra benefit in that line? And so therefore, unless transactions go down decently again, the 2% to 3% sort of range we're talking about feels a bit cautious. That was one on FCC. Then on just this question about third-parties and the implementation in Corporate Performance & ESG. Is this a new trend? Is this something that you've only really encountered in Q4? Did it happen to be that you had more deals that were weighted to that kind of implementation in Q4? And then, yes, my third question is we've heard from Thomson Reuters, we've heard from RELX. Thomson Reuters specifically guiding to group organic revenue growth accelerating in the next couple of years. RELX, I guess, implicitly pointing to some acceleration over that time. So do you expect to be able to continue improving group organic growth over the next few years like those peers?
Nancy McKinstry: A lot there. So let's see if we can unpack it a bit. So in terms of FCC, this is our most difficult division to forecast, right, because, as you know, it's very difficult to -- within the transaction line, there's quite a lot of different services that we deliver both for banks and lenders as well as for corporates and law firms. And so what you said, it sounded like you were in one of our budget meetings, Nick. We try to go through that exact same sort of piece parts on it. What you should expect is continued good performance in the subscription lines and that's, again, driven by a lot of good go-to-market and innovation transactions. As Kevin pointed out, we clearly saw some stabilization in the fourth quarter. So we're predicting stabilization in 2024. And then as it relates to the Corporate Transparency Act, we haven't budgeted a lot for that at this point because it's really hard to tell. We are clearly -- right now we are leading the market. We have this amazing digital solution platform out there. We're building a lot of awareness. We have a pipeline. We're closing business. But very hard to tell exactly how it's going to transpire over the year because there are no penalties at this moment for not filing with FinCEN. So customers know they need to do it, but I suspect it's going to be kind of a gradual build so that's how we look at FCC for the year. On the third-party implementations, yes, it was -- I have to say that it really was something that began to happen in the second half of last year and really in the fourth quarter. And I think that we didn't have a full understanding that as we were selling these much larger software deals, that, that was all going to go to the third parties. And so that was a learning on our part and that's a learning that we're going to take, obviously, into 2024. And then, Kevin, do you want to take the last question on how we see our acceleration of growth going forward?
Kevin Entricken: Sure. Well, Nick, as you know, we don’t give organic growth guidance. But I can tell you that as we invest in the portfolio, we’re investing more in what we call our expert solutions where we take our deep, rich content and embed it with technologies to form a better outcome for our customers so they can make decisions with confidence. Those technologies are largely software technologies, often they’re SaaS technologies. That’s where we’re directing the majority of our capital investments. Those software businesses tend to be higher growers, as you see in the results. We see software or digital subscriptions and service-type businesses growing at 8%. And as they get to scale, those margins are very healthy, as you can see in, say, the Tax & Accounting group. So over time, as we make these investments in expert solutions, I would hope to see that kind of growth trend continue.
Operator: Our next question comes from Sami Kassab of BNP Paribas (OTC:BNPQY).
Sami Kassab: I have three questions as well and would like to come back on the Corporate Transparency Act to start with, please. With over 30 million U.S. SMEs now required to file the BOI report by year-end, the regulatory change we're dealing with here looks like a multibillion-dollar opportunity for the division, and yet you have not budgeted much as you just said. So can you please comment on the timing and the extent of the CTA opportunity. If not for '24, then perhaps for '25, '26. My second question is on the head count growth...
Nancy McKinstry: Yes, go ahead.
Sami Kassab: So my second question is on head count growth. Last year, head count grew at what seems to be the fastest pace in 20 years. So what are your plans in terms of recruitment for '24 and '25? Would you say that you're now fully staffed? Or do you plan to continue expanding head count at a faster pace than in previous years? And lastly -- the last question, if I may, is on your margin guidance for '24. In the context of presumably lower cost inflation and given the cost efficiency gains from deploying Gen AI internally, the guidance perhaps looks a bit underwhelming to me. So is that because the benefits of Gen AI you see being offset by higher investments in '24? So can you please discuss and perhaps quantify the impact that Gen AI is likely to have on your cost base, please, Nancy.
Nancy McKinstry: Okay. Okay. So I'll ask for some help with Kevin on the head count question. On Corporate Transparency Act, we have put in some revenues in the budget, but not a substantial amount and that's because it's too early days. As you point out, every corporation has to do this and the rules are such right now that any modest change, like if you're a beneficial owner and you change your address, you have to refile. So we clearly feel optimistic that this will be an ongoing service line for us. We're well positioned in the marketplace, tremendous interest by our clients and understanding what they need to do. But with that said, it's very early days, right, and so we are taking a conservative approach. I think what I get excited about is not only that this is more than a onetime kind of activity, but for the first time we're actually taking our platform not only to our Legal customers and FCC, but we are also taking it to our accounting customers in TAA. And I think there's -- right now, they're sort of inside the company. We're trying to almost take a bet who's going to be a bigger source of filings in the short term, the accountants or the lawyers. And so we're excited, but it's very early days. So we'll update you probably at the half year with just kind of how we're seeing some things. And then on the margin guidance, just as it relates to Gen AI. So as I mentioned, we have literally hundreds of use cases that we're working with in 2 arenas. So we're working with our clients in every single division on commercial applications. And then we are also working inside Wolters Kluwer, specifically looking at how AI can help us in 3 major areas: coding; programming, where we are already seeing some good productivity benefits, editorial; and in marketing and communications. And so we fully expect again that we will get some efficiencies from the use of Gen AI inside Wolters Kluwer, but it's too early to quantify that at this stage of the game. And then we're still obviously doing a lot of work and you should expect more commercial applications to be launched in the course of 2024. So we're very excited about Gen AI, but again very early days. So you have to sort of wait and see a bit how clients are integrating these new applications into their workflow. Kevin, do you want to talk about head count growth and what we anticipate for '24?
Kevin Entricken: You're absolutely right. We did see a noticeable increase in head count in 2023, particularly in the Tax & Accounting group. Maybe as a comparison, last year at this time, we had about 700 open positions that we were looking to hire. That number has come down meaningfully. Today, if you look at our recruiting website, we're probably looking for about 460 heads. A lot of the heads that we've added are primarily in technology development and in sales. And of the open positions we have now, I would say the same, certainly looking for more technology folks in order to develop, particularly around Gen AI and other product initiatives. So we're pretty optimistic actually that we've been as successful as we have in filling a lot of open seats. But there's still room for bright people to come to Wolters Kluwer to work and we're delighted to open the doors to them.
Nancy McKinstry: Yes, yes. I would just say that, Sami, the issue is the whole COVID effect, there were a lot of puts and takes, right? So we had a lot of open heads in 2022. It was frankly our single biggest challenge was getting those filled. We did a really good job last year filling them, as Kevin points out. So I don’t think you should expect this sort of substantial growth that occurred because of that fact we had so many open positions. So I would say if you’re – in terms of your modeling, you should sort of go back to more normalized levels that we had pre-COVID.
Operator: Our next question comes from Lisa Yang of Goldman Sachs.
Lisa Yang: The first one is on the phasing of margin, I think, you mentioned for 2024. Obviously, in '23, there was quite big swings between H1, H2. So I'm just wondering like do you see similar swings or how do you see basically the phasing for 2024, in particular? And you talked about investment plan. So could you maybe just provide a bit more details in terms of the many areas of investments? Is it Gen AI? Is it a particular division? Were you planning to launch more products? That's the first question. The second one is also related to margin. But in FCC, there was quite a sharp improvement in margin in 2023. I was just wondering if you can give us a bit more color in terms of the margin of nonrecurring versus recurring, whether there might have been a tailwind last year. And as transactional revenues basically come back, how do you see basically the margin shaping in 2024 and onwards? I don't think you have commented specify on FCC. And then on Corporate Performance & ESG, I was just wondering how you're thinking or if you could maybe describe the recent evolution of the competitive landscape. I mean, you mentioned the land grab and I'm sure there's obviously a lot of other competitors who are also trying to grab these opportunities. So I was just wondering if you can maybe just comment on that and how basically Wolters is sort of positioned? And what does that mean in the future in terms of like pricing and also the market intensity you have to maintain given the evolution of that -- of the competition?
Nancy McKinstry: So Kevin, do you want to -- you'll take all the margin questions. I'll talk briefly about investment areas and then the question on CP & ESG. So we are investing across the portfolio. And as we think about the products portfolio, we -- by division, right, we talk about nascent and high growth and then mature and then declining. And we're clearly putting our capital into the nascent and the high growth, and every division have products in both of those categories. I would say broadly, we are -- clearly, the bulk of our investment is going into expert solutions. These are products that are growing very fast. They are very sticky. And so when they reach scale, they have favorable margin characteristics. So if you go through the portfolio, anything that we're describing as an expert solution, you can ensure that -- or know that we're investing there. I would say, in particular, we're making substantial investments in the CP & ESG division because we are the market leader right now and having the component parts that are going to be required to really be a major leader in the -- down the road in the whole area of ESG. So what distinguishes us from other players in the marketplace, it's that we have both the ability to comply with reporting. But we have the analytics, we have the audit assurance and we have the operational elements through our Enablon platform that allows corporations to not just do reporting, but -- and compliance, but to really begin to operationalize their whole focus on sustainability and ESG. And that's what makes us unique in the marketplace. So we believe there will continue to be consolidation. You should expect that we will make some level of acquisitions in this area as well because we are committed to be one of the market leaders in the next 3 to 5 years, and we're well positioned right now to do that. Kevin, do you want to talk about margins?
Kevin Entricken: Sure. Lisa, to start with your question on phasing and margins, I would say in 2023 it was a year when we were kind of fully coming out of COVID, and that's where you saw a bit of the imbalance in margin progression first half versus second half. I think in 2024, what you should expect is a more normalized pattern in margin. I think you'll see a little bit more modest improvement in the first half and that growing a little bit in the second half. And that really has everything to do where we're coming back to a more normalized cost base where we're filling our open positions. We're traveling more. Obviously, we're going to conferences more. So the margin improvement that we expect in '24, a little bit modest in the first half, a little bit better than the second half. On your question on FCC margins and the sharp improvement we saw on the margins, being that this is our most cyclical division with almost 40% of those revenues being transactional, we sort of have a game plan in this division. Whenever we do see the economic situation turning, we have a playbook on their shelf that says, what do we do to protect margins? That's exactly what you saw in 2023. It's frankly the exact playbook you saw during the last economic downturn. So that has everything to do with the improvement in margins that you saw in 2023.
Lisa Yang: And for 2024, how do you see the margin shaping up for that division?
Kevin Entricken: I certainly do expect that in that division, I think we have given you some guidance on what to expect in that area. But largely, I would expect the margin improvement to be similar to what we’re guiding to for the group overall.
Operator: Our next question is from Silvia Cuneo of Deutsche Bank.
Silvia Cuneo: I'd like to ask a couple of questions. The first one is about the appetite for M&A, going back to the earlier comments. Since in the release you point out that in the longer run a net debt-to-EBITDA ratio of around 2.5x could be more appropriate for the business, I wanted to ask if perhaps the appetite for M&A has increased, not only in the CP & ESG segment that you mentioned, but maybe also in the generative AI space more broadly to jump start the development of some products. And the second question is related to this. Since October, you launched the first beta versions of some of the AI products, like for UpToDate. I wanted to ask if you could please discuss what feedback from clients you have received so far? How more actionable are these products? And do you think clients will be willing to pay more for this as an up-selling opportunity.
Nancy McKinstry: Yes. Great. So on the M&A side is that, I think, many of you know how we approach M&A is that each division has a game board of companies that they would like to acquire or build partnerships with, right? And typically, those companies are really adjacent to what we do. So we look at our clients’ workflow and look at what they – basically, what do they do after they’re using our products. And so each division has that. I would say, because the CP & ESG market is the most fragmented of many of the markets that we serve, that’s where we see more opportunity. Many of these companies, however, are quite small and so I’m not sure you should draw too much around the total capital commitment there. So we are looking actively in every division. I would say that while public multiples have come down in some segments, we typically buy privately held companies. We still see asset prices at high levels. And so of course, we always have to balance the return on investment we’re going to make from anything we might acquire. I think the positive of where we sit today as Wolters Kluwer is that we don’t need acquisitions to achieve our growth ambitions going forward, but we clearly do have desire in each of our divisions to acquire certain things. And then on Gen AI, so far, the feedback has been very positive. As you point out, how we see the monetization of this is more in sort of the up-selling of the Gen AI product on top of the core products that they take. In some cases, like the drug diversion product, that is a pure AI product. And so there, you’re getting, obviously, a completely new revenue stream. But more of the Gen AI, I believe, will be monetized sort of in the up-selling mode. And so it’s early days, but the feedback on the solutions that we’ve launched is very positive. What it’s doing is really optimizing the workflow of the clients and that again leads to productivity benefits, which again is very much a thing that our clients are always looking for.
Operator: [Operator Instructions] Our next question comes from Tom Singlehurst of Citi.
Tom Singlehurst: Three questions, I'm afraid. First one, I mean, Kevin, you mentioned you don't give guidance. But of course, last year, you did give guidance on the revenue line, saying it would be at least 6%, I think, or it will be in line with the previous year. I'm just -- I mean, you're obviously reluctant to talk about whether it will accelerate. But can we be 100% certain that it will stay at the 6% level, it would be 6% or better? That was the first question. The second question was on CP & ESG. I'm just interested at high level whether you think there is any risk of backsliding from policymakers or enterprises on the sort of importance of ESG reporting and whether that's -- there's been any diminution of the longer-term opportunity in your thinking? I mean, obviously, you still grew very comfortably in the fourth quarter, but it would be interesting to get a sense of whether you think that's just timing and just that third-party implementation or whether those -- some reduction in the potential opportunity. That was the second question. And then the third one on cash conversion. Obviously, working capital is part of that. But you talked explicitly about capital intensity going up. CapEx has been running ahead of depreciation for a couple of years now, which I presume is sort of capitalized R&D. Can you just talk about how that interplay between CapEx and depreciation will resolve? Will depreciation go up and put pressure on margin? Or will the CapEx eventually sort of come back down again?
Nancy McKinstry: Okay. So I'll cover CP & ESG. And then, Kevin, if you could cover guidance and cash conversion. So if you look at the market of ESG, right? So just to be clear, right, we have these 4 software assets in our division. Each of them have plenty of growth opportunities within their core. So if you're a buyer of Enablon's core product line, you're using that for workplace safety, you're using that for getting the most out of your assets in terms of permitting to work, et cetera. Same thing with Corporate, with Tagetik, you're using it for financial consolidation. So think about ESG as kind of the icing on all of these assets, and we are positioned to bring these assets together and give our clients tremendous opportunities to do efficient reporting and compliance and operational measures in the whole area of ESG. So that's the landscape of what we have in this division. As you talk to clients -- so while there's a lot of sort of political rhetoric around ESG, when you go out and talk to clients, they're highly committed to their ESG programs and that's because most of them are quite long term. So you have both the regulatory framework, which is in Europe the CSRD is mandated by 2025. So clients are already getting ready in '24 for that. You have states like California in the U.S. also mandating certain kinds of reporting. So you have the regulatory reporting compliance requirements that clients are absolutely going to have to work on and then you have the operational side. And if you go and you talk to large industrial companies, they have been working on operational elements of ESG for many years now. And because their investment cycles, if you build a plant, for example, it's a long-term investment cycle, you are already working on that and you're not pulling -- they're not pulling back. So we still see the ESG market as robust and that client commitment is there. They may talk about it a little bit less, but the commitment and the operational elements that they're working on is absolutely full steam ahead. Kevin, you want to talk about guidance and CapEx conversion?
Kevin Entricken: Absolutely. Tom, on our guidance, we don’t give you numerical guidance, but we have in our outlook section tried to give you an indication of where we see each of the divisions are going. The only one where we see a little bit of easing is in Tax & Accounting on their growth because it’s going to be a tough comp next year, particularly in Europe, where we’ve had a really strong 2023. We said 2 divisions, Legal & Regulatory and Health, are going to be in line with the prior year. So I guess we are giving numerical guidance there. But the other 2 divisions noteworthy is Financial & Corporate Compliance, where we said in line or better. And as we talked about earlier on the call, while it’s hard to predict transactions, I do think the comparables get a little bit more forgiving in 2024. And then our fastest-growing division, the Corporate Performance & ESG, we are definitely signaling that, that will be better than the prior year. So when you add all that up, I hope it helps you get to a place that you can get comfortable with in your models. When we talk about cash conversion. As we talked about earlier, we will see positive working capital in 2024 movements, but not to the extent that we’ve seen in the last couple of years because we’ve now kind of operationalized a lot of improvement areas, particularly in collections. With regard to CapEx, I think we’ve given you a range of guidance between 5% and 6%. This – in 2023, we were at the upper end of that guidance, we were at 5.8%. I would probably guide you the same way in 2024. We’ll probably be closer to the 6%, to the 5% on that one. So if you kind of add all of that up, I do think you’ll see CapEx grow in 2024 and you will see positive movements in working capital still positive, but not to the extent they were in the prior year. So I hope that helps you get to where I’m guiding you, which is a more normalized cash conversion of around 95%.
Operator: Our final question comes from Konrad Zomer of ODDO BHF Securities.
Konrad Zomer: The first one is on your generous shareholder remuneration policy. Given that your adjusted free cash flow has been good, but has not significantly grown over the last few years, it's no surprise that you've now allocated 125% of your adjusted free cash flow to shareholders. With AI investments picking up and generally the capital intensity of your business picking up, is that something that you use to get that leverage ratio closer to the target of 2.5? Or is that a line of thinking that is not the way you look at it? And my second question is I've understood that some of those contract wins in CP & ESG can be quite bulky. And given that you've now, let's say, sourced the implementation to third-parties, does that outsourcing go at the expense of margins? Or is that just something that is not really noticeable at a margin level?
Nancy McKinstry: Okay. Kevin, do you want to take those?
Kevin Entricken: Sure. If you take a look at the shareholder remuneration, yes, I do think that we do want to reward our shareholders and we do have strong results in order to do that. So the 125%, we're delighted we can do that through not only a progressive dividend, but an additional share buyback program of €1 billion in 2024. Our leverage at the end of 2023 was 1.5. Yes, the target is 2.5. But I really look at that as a target, I don't look at that as a mandate to get to that target. So with the investment plans we have baked into 2024, I'm sure we will be very comfortable with our net debt-to-EBITDA ratio, but still allow us to make the investments in product and innovation that will grow the business long term. With the CP & ESG contract wins, indeed, we are seeing larger deals come through. And it's probably to be expected. If we're selling larger contracts, those customers may reach out to one of the big 4 or another implementation partner to help them with that. We will still do implementations as well. But when it comes to what we expect going forward, probably more deals will be third-party sourced on the service end of it than were in the past. And we're fine with that because we see the software revenue, the license revenue, our expectation is going to go up quite strongly because of the demand in the market for not only Corporate Performance Solutions, but environmental health and safety solutions. So we'll be able to navigate very well in both environments where we are the principal on those service contracts or the agent on the service contracts.
Nancy McKinstry: Yes. And then just in terms of margin, we clearly have a higher margin on the software than we have on any professional services. And that's true not just in CP & ESG, but frankly, across the enterprise. So I think that -- any more questions? Yes, yes. Great. Yes. Thank you very much, everyone. Appreciate it, and have a good rest of your day. Bye-bye.
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