Wolters Kluwer NV

AEX:WKL

Earnings Call Analysis

Steady Growth Amid Increased Investments

In the first half of 2023, the company saw a 6% organic growth and is on track for full-year guidance. Diluted adjusted EPS rose by 2% in constant currencies with a healthy return on invested capital at 15.4%. Adjusted operating profit was down by 4% to €711 million, and margins decreased slightly due to increased investments in innovation, personnel costs, and related expenses. The adjusted free cash flow also saw a small dip of 2%. Nevertheless, the financial position remains robust, with a net-debt-to-EBITDA ratio of 1.5 times. Expert Solutions, accounting for 58% of revenues, grew by 7%, and cloud-based software boomed with a 15% increase. The company is confident in its full-year margin improvements, as anticipated costs normalize post-pandemic.

Solid Financial Performance and Strategic Investments

The company demonstrated robust financial performance with a 6% organic growth rate. The growth was underpinned by strategic acquisitions such as NurseTim and Invistics, bolstering their education and healthcare offerings, respectively. While organic growth in various segments such as Health at 6% and Tax & Accounting at 8% was strong, the company faced margin pressures primarily due to increased personnel costs and investments in products.

Focused Deployment of Cash Flow and Shareholder Returns

Cash flow deployment was strategically allocated, with significant investments in share buybacks totaling €426 million, and dividends amounting to €247 million, signaling a strong commitment to returning value to shareholders. An interim dividend payout of €0.72 per share was declared for 2023.

Divisional Developments Reflect Strategic Pivots

The operations saw a realignment, with Legal & Regulatory now including enterprise legal management and other segments, each marking organic revenue growth. For instance, Legal & Regulatory informed solutions saw a 4% organic growth rate. Firm investments in digital transformation and AI integration are aimed at bolstering their product offerings and creating a more competitive market stance.

Optimistic Outlook and Guidance for 2023

The company reiterated positive guidance for 2023, expecting an adjusted operating profit margin between 26.1% - 26.5%, an adjusted free cash flow around €1.2 billion, and high single-digit growth in diluted adjusted EPS in constant currencies. Specific divisional performance outlook mirrors the overarching confidence with predictions of stability and improvements in respective adjusted operating profit margins.

Future Growth Opportunities and Margin Expansion

In the context of future growth, notably for 2024, while specific guidance was not provided, the company highlighted the potential in increasing recurring revenues and expanding Expert Solutions. These factors indicate confidence in the ability to sustain and potentially accelerate organic growth beyond current levels.

Earnings Call Transcript 2023-Q2

[Margaret Geldens, VP, IR]

Thank you, operator. And welcome everyone. Welcome to the Wolters Kluwer 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 Entricken, 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 results, following their comments will 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 risks and uncertainties that may cause actual results to differ materially from those indicated in the statements. Factors that could affect future financial results are discussed in Note 20, 2022 Annual Report and in Note 2 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 4 of today's release.

At this time, I'd like to hand over the call over to Nancy McKinstry.

[Nancy McKinstry, CEO]

Thank you, Meg. Hello everyone and thank you for joining us on the call. And 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 additional 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 04. Financial we delivered healthy organic growth to 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. Deluded 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.

[Kevin Entricken, CFO]

Thank you, Nancy. Let's start with the highlights on Slide 06. First half revenues were €2.725 billion, an increase of 4% in constant currencies. Organic growth were 6%, moderating slightly from 7% growth a year-ago which was as we anticipated. Adjusted operating profit was €711 million, 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, a decrease of 2% in constant currencies. And lastly, net-debt-to-EBITDA was 1.5 times, slightly higher than the year ago. Let's look at revenues more closely on the next few slides starting with divisional trends. Slide 07 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. Past through 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 & accounting grew 8% organically, slowing slightly compared to a year-ago. This strong performance was again supported by double-digit gro0wth in cloud-based solutions.

Financial & corporate compliance achieved 1% organic growth compared to 6% a year ago. The division performed well in light of some very challenging comparable for the transactional and other non-recurring revenue streams. Legal & 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 & ESG grew 10% organically, slowing slightly from a year-ago. As in Tax & Accounting, cloud-based software revenues grew at a double-digit rate. Now let's look at revenues by type on Slide 08. The chart on the left of this slide shows organic growth of our recurring revenue streams. These make up 82% of total revenue. Digital & Service subscriptions shown on the blue line make up 74% of group revenues and grew 8% organically in lined with the comparable period a year ago.

Print subscription and other recurring revenue trends were broadly in line with the year ago. The chart on the right hand side shows organic growth for our non-recurring revenue streams. Here we say 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% the year ago.

Let's turn to margins on Slide 09. 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 rising cost was as expected and we're seeing 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 guide and from 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 nonexistent during the lockdowns. By the second half of 2022 however, hiring picked up as began filling open positions. Also, by the second half of 2022, spending on travel events of and off its expenses started to come back. On this Slide, you can see the rise and the number of employees as we filled up in 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 the year-ago at €10 million. This was due to higher interest income on our cash balances and a €5 million noncash net foreign exchange gain on the translation of inter-company 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 the year-ago at 23.3% due to favorable movements in our differed tax positions. After-tax adjusted net profit was therefore €537 million 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 and €17 sets.

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 profit. The cash conversion ratio decreased to 95%. This is due to capital expenditures of a €157 million an increase of 13% in constant currencies. The increase in CapEx reflects a higher level of product development spending compared to a year ago. I remind you that we continue to expect cash conversion to be approximately 100% for the full-year. Interest paid of €18 million was significantly lower than the prior period while tax is paid where a €176 million in line with the prior period. Summing this up, adjusted free cash flow was €495 million down 2% in constant currencies.

Now, a few comments on how we deployed that cash flow on Slide 13. Acquisition spending was €56 million. Cash deployed towards dividends was €247 million. This was lower than the 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 pay the tax just after the half-year results in July. Cash deployed for share buybacks totaled €426 million, this was higher than the year ago because this year our share repurchase program is more front-end loaded than last years. As a result, net debt increased just over €200 million compared to year-end 2022 to €2.5 billion. 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 continued delivering returns to shareholders.

Let me touch now on the interim dividend and update you on the progress with this year share buyback on Slide 14. As a matter, policy the interim dividend for 2023 was set at 40% of the prior year total dividend. This means, we'll payout €72 per share to shareholders in September. As of August first, we have completed just over half of this year share buyback plan of up to €1 billion, having spent €504 million to date. We have now also signed mandates with third parties to execute referred their €300 million in the next three months. Let me some mow 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 and adjusted operating profit and a decline in cash conversion. Returns on invested capital reach 15.4%. Our balance sheet remains in strong condition for the net-debt-to-EBITDA a 1.5 times. And then, now I'll hand it back to Nancy to cover divisional developments.

[Nancy McKinstry, CEO]

Apologies, everyone. I will start with Health on Slide 17. Health achieved 6% organic growth led by Clinical Solutions. The adjusting 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 clinical decision support to all UpToDate, our drug information solutions and our patient engagement solution Emmi. Growth was driven by good renewal rates and new customer wins. In June, we acquired Invistics, 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 benefitted from the inclusion of New England Journal of Medicine and early success for Ovid synthesis.

In education and practice, both moderated in large part due to print book revenues turning down after rising a year ago. We acquired test preparation provider NurseTim 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 & 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 Axcess, processed and 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 benefitted 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 & Corporate Compliance which is now comprised of CT Corporation and compliant solutions including Lien achieved 1% organic growth despite a downturn in transactional and nonrecurring 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 U.S. 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 and the units recurring revenues helped offset a downturn in transactional and other nonrecurring revenues. In total, Financial Services' transactional revenues declined 5%. This includes lien transactions which was 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 & Regulatory on Slide 20. Legal & Regulatory now includes enterprise legal management while the Enablon 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 & Regulatory information solutions delivered 4% organic growth driven by digital products which grew 8% organically. Legal & 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 nonrecurring 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 Tagetik, 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 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 Tagetic 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 old steps in the first half of this year. To accelerate expert solutions, we increased our product investment to an 11% of group revenues. Expert Solutions grew 7% organically with cloud-based software up 15%. In a two small bolt-on acquisitions NurseTim which strengthens our position in nursing test preparation and Invistics which adds to our existing AI-enabled software offering from 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 success up to expand our reach into the market for ESG data collection analysis reporting and audit solutions. We continued expanding partnerships for example LTIMindtree which is a channel partner for CCH Tagetic and with Laerdal where we just launched a virtual reality training solution for nursing. Firmly 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 -- ESG 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 it 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're taking. For nearly two decades, we've 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 CCH, I could too set this monitor LegalVIEW, BillAnalyzer, 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 in Wolters for our compliant solutions.

We've been embedding AI tool 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 proving tools that support document drafting and summarization. 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 the 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 a wealth of technology experience and expertise and with a robust approach to governance. Now I'd like us to turn into 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 in constant currencies and roll it 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 & 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 & 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 & 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 attention, we'll now be happy to take questions. Operator, if you could move to questions, please.

[Operator]

Thank you. [Operator Instructions] 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.

[Nick Dempsey, Barclays]

Hi, good morning or good afternoon. At the full-year '22 results you included in your guidance commentary that you expect Print book organic revenue growth to be in line with 2022, in other words 6%. You don’t add 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 book organic revenue growth in the second half of the year versus the first half. So, that's corporate performance in ESG and financial and corporate compliance. Can you just go to the reasons why you're expecting an improvement in the growth in the second half of the year for those two? And then, the third question. Just a bigger picture question. Is there a natural place in terms of organic revenue growth for you think subscription information businesses top out.

If we look at some of the best businesses in area like your tax unit to run at just risk division to struggle to get above 8% to 9% despite prime market conditions execution, et cetera. Then might to be fair to say that you can never have everything firing quite like that and 7% is a number that's very hard to beat for these sorts of businesses.

[Nancy McKinstry, CEO]

Yes. Why don’t I start with the big picture question and then ask Kevin to talk about the growth questions that you mentioned. So, big picture, if you just and Nicky you've known us for a long time. If you look back, the big transformation from print to digital, set the stage for a step-up in organic growth. And that's so quite a while because print proved to be pretty resilient. The next phase which and we've been in this phase for several years now has been towards Expert Solutions. And you can see that that's a growing part of what we do and they grow faster than the core. And so, we believe that this next phase around Expert Solution which is a lot around cloud computing and really becoming a software of 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 profits of the business and we're investing all very much across the whole portfolio in Expert Solutions in cloud software. Kevin, do you want to talk about the growth questions?

[Kevin Entricken, CFO]

Surely, Nancy. Nick, we usually do not give specific numeric guidance on organic growth but we have given you by decision 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, we do expect some groups to be in line with last year or 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 CP, ESG, 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 like you know 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 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.

[Nancy McKinstry, CEO]

And Nick, just -- is just add on what Kevin said is in FCC the transaction comparable helped a lot 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 tradition.

[Nick Dempsey, Barclays]

Thank you.

[Operator]

Thank you. We would take our next question. And next question comes from the line of Adam Berlin from UBS. Please go ahead, your line if open.

[Adam Berlin, UBS]

Yes, hi. Good afternoon. It's Adam Berlin from UBS. I want to ask a couple of questions about to should we start thinking about 2024. And I understand it's a bit early but can you give us a little bit of help thinking about our numbers for the next year will be helpful. So, my first question is and what needs to go right next year to accelerate the group growth to 7%. Is it just if, if the transactional and headwind the less -- and everything else kind of goes in along at the same rate. We kind of built the cup towards that 7% level or do other things need to happen so as to see that progress. And the second question is now that we kind of stabilized the cost base but all the -- those COVID one of the text that you talked about in the presentation, are we going to go back to a kind of 20 bips, 30 bips, a year margin progress. I'm assuming that the topline end up where we expected to do.

[Nancy McKinstry, CEO]

Yes Adam, thank you for your questions. We don’t give longer-term growth or margin guidance. When you cutting them we come up with our full-year results in February of 2024, well of course give you the guidance against the metrics that we use. But what I can say is that the key things that we would point to that speak to the health of the franchise at Wolters tour, one is the recurring revenue that continues to increase. As a percentage is 82% of our total and that's at 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'll have to wait till 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, we will need 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 intention 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 effect 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 seen and the strong net promoter scores that we have on our products which again speaks well to our positioning. And the 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 and but we are committed to continuing to improve our margin as well.

[Kevin Entricken, CFO]

Yes, Adam. I do think that looking at our guidance that we've give you today, we do expect the full-year margins with 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 base side. So, that does give us confidence that we will deliver that margin improvement guidance that we've given you today.

[Adam Berlin, UBS]

Okay. Thanks, very much.

[Operator]

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.

[Matthew Walker, Credit Suisse]

Thanks a lot for taking the questions. I hope you can hear me. So, the first question was on generative AI. And the question is when do you think you'll have an in viable products. How that really proclaims to you and will they be kind of deployed like an eagle across the whole division or will it be very sort of piecemeal for one per CCH even a one per CT Corp that kind of thing. And do you expect to price those up separately, will that be incremental to revenue growth. And then, the second one was on CapEx. And you pointed towards the up end to the 5% to 10% range. And so, if have a change, do you do we need to sort of start putting in close to 6% for the future? Thank you.

[Nancy McKinstry, CEO]

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 on with that product. And so, what we are doing is just saying you know how we're approaching this right because again we've been using AI for a long time. Every division is deploying some use cases very close collaboration with customers because at the end of the day you have to solve some kind of customer problem. So, in some cases as we're working through the process which is our normal innovation process, we decide to deploy a different kind of AI maybe NLP, your predictive analytic. Sometimes we believe that the gen-AI tool will work best.

So, you should fully expect that the products are moving 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 the price increase for example or then maybe some products like we have some pure AI products today that obviously create for a new revenue stream. So, we're confident in the process that we that has been driving innovation as a company and we're just viewing gen-AI as another opportunity for us. But again, we have to do it in close collaboration with customers because ultimately they are all we can spend more money if they believe they're solving a specific problem that they have.

Kevin, do you want to talk about CapEx?

[Kevin Entricken, CFO]

Yes. With regard to CapEx, Matthew, we 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, near the first half of the year we spent an 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 a 10%. So, I wouldn't read into this but there is a step change in our investment type still think long-term the 10% is the right place and CapEx between 5% and 6% 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 into.

[Matthew Walker, Credit Suisse]

Okay, that's very clear. Thank you.

[Operator]

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

[Silvia Cunio, Deutsche Bank]

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 through gas and opportunity to improve margins in corporate the pharma's and ESG? Is it going to remain a net or investment in the short-term and the segment progressively improve margins towards the group level of a time or after the structure releasing fees to keep in mind? And secondly, can you talk about trends in subscription renewals in U.S. Marine. I think it sounded positive in U.S. clinical solutions and just wanted to ask if you had any more color to say on these or other segments. Thank you.

[Nancy McKinstry, CEO]

Okay. So, I'll talk about customer trends and then Kevin can talk about margin developments in corporate performance in ESG division. So, in general retention is remains very high across the globe. 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 boards 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 & Regulator, what you would see is retention rates above 90%. So, again it prove 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, we continue to win new logo's across the board, obviously in places like our cloud products and in the new division we're winning lots of new logo's 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 the customer with additional modules. Almost all of our software products in 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 give us again confidence that we will deliver on our guidance for the full-year. Kevin, do you want to talk about margin developments?

[Kevin Entricken, CFO]

Certainly. In the CP ESG group, our new division there we're very excited about the growth prospects. And right now the margins are reflecting that mode. We are investing in innovative products and enhancements in that group. As mentioned earlier, we're also seeing a step-up in personnel mostly in product development personnel and some division set-up 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, Tagetik, Enablon, TeamMate and our FRR business are all global software businesses.

Software businesses as a rule when they get this scale, do tend to have margins higher than the group average. So, for the time being we are in an investment mode but we do anticipate margins will improve gradually as we mature those products.

[Nancy McKinstry, CEO]

And I would also just say in that tradition, we've just launched a couple of new products in 2023 around ESG and reporting both Tagetik as in ESG and sustainability solution market and TeamMate just launched just very recently an ESG solution. So, we are investing our team to drive our market leading position and so do the ESG part of what we're doing which is why we brought these businesses together and formed 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.

[Silvia Cunio, Deutsche Bank]

Very clear. Thank you.

[Operator]

Thank you. [Operator Instructions] 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.

[Lisa Yang, Goldman Sachs]

Hi, thanks for taking my question. There was a question earlier about giving more color about divisions which is activate new things as that we gain for. My question would be the opportunity, it looks like you're talking about a slowdown partly lower growth. In Tax & Accounting, and Health, and in H2 versus sort of H1 based on the guidance I think Tax & Accounting was still at 8% generating some slow growth in for the full-year. I'm assuming Health still at 6% in H1. Well played and then did move back to 5%. So, what's driving on that’s a potential slowdown, that's the first question? And secondly, it's on the margin. I think they have, it really held the cost base have normalized. So, I'm just wondering what you mean by on the expected comp level of a differing margin increase in Q4.

What if then it will consider anything -- will choosing modules still be down year-on-year and coming Q4 there have been FCC improvement. And just based on what you say looks like the cost base have already normalized, so just wondering if you can clarify that. And the third question is on AI. Is it fair to assume that we hear CTI because you've been investing in AI technology for a long period of time and that’s going to just help you with retention and pricing while that being a big game changer and cuts the rest of you and enlarging. What we could think about it. And on the overhand, do you see any potential risks especially when it comes to how would you protect your IP and how much of that is been proprietary like I think we can bring in enough rate on the risk products as well. Thank you.

[Nancy McKinstry, CEO]

Okay, thanks Lisa. So, I will take the AI question and just talk about Tax & Accounting and Health on the growth side. And then Kevin, if you could handle margin questions in the second half. So, let's start with AI. As I mentioned in my remarks today, 50% of our digital revenues are both those products that make up that 50% include some form of AI. So, we have some products that are purely AI and then we have others that use different kinds AI to provide value to customer. So, we are well-positioned in the AI world. It runs the gambit in terms of what it does for us, right? Again the whole focus we have one innovation is around what's the customer's main 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 weave of gen-AI is that it's really you can't do it with just technology. You really need the deep domain expertise and you need a proprietary data and content. Think about our customers. They make incredibly important decisions that have very large and then implications if they don’t get it right. And so, the nature that kind of our whole value proposition is 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 -- gen-AI is just another tool for that. So, on the risk side that you mentioned, we are only deploying gen-AI against our proprietary data sets.

So, we're not using the World Wide Web kind of applications. And so, as a result of that, we don’t have hallucination, we really can be confident that 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 if we continue to add value with clients that we see the risk to any part of the business. And then just very quick on TAA, the growth of that it slows a little bit but all around the transactional part of what we do in Tax we had a very robust tax outsourcing of 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 around being between the numbers and so there's nothing fundamental that wean on. And the Health business remains attractive market for us. So, Kevin, you want to talk about margin developments in the second half?

[Kevin Entricken, CFO]

Yes, 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 in 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 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.

[Lisa Yang, Goldman Sachs]

So, alright. Yes, thank you.

[Operator]

Thank you. We will take our next question. And the question comes from the line of Tom Singlehurst from Citi. Please go ahead, your line is open.

[Tom Singlehurst, Citi]

Good, and 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. That I just wanted to double check with chat. Because last year, you're absolutely right, the first half seen behind margin and something like 200 basis points up from the previous year which speaks about with low investment. And that unwinds in the first half of this year. And then, you talked about the investment. But two points, actually, one is that the nine months last year, you're up 50 basis points in the fourth quarter you're up 80 in terms of margins. So, is that I mean that suggests the fourth quarter margin is improving I suppose last year. One question. And that's why -- why is the phasing still's key to the fourth quarter this year, what you'd expect at least in the third quarter.

And then secondly, in absolute euro's and euro sense, I think I'm right in saying that the implication is your overall cost base will be down year-on-year, so 2H on 2H in order to make the margin. And I suppose that might of the currency in which case just maybe confirm that. And well, I'm just really interested in just on the spending how that mechanic happen given no and because you said there was a 40 basis point or so tell and from currency last year which doesn’t seem to be unwinding and so you're like. That was the first question. And then, second on cash flow. Is you have delivered slightly below the 100% cash conversion, maybe that's the answer. But essentially, as far as I can tell in absolute terms for this full-year profit it's roughly 2x, 1H profit. And yet we're looking for the cash flow to comfortably more than double. What are the moving parts there, thank you?

[Nancy McKinstry, CEO]

Kevin, do you want to?

[Kevin Entricken, CFO]

Yes, 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 a 100% cash conversion, we are very cash generative company and we do have a good line of sight on that on a terrain our collection metrics as a matter of course through the year. So, we do expect to convert just about a lot of our operating profit into cash next year or at the end of this year at about a 100%.

[Tom Singlehurst, Citi]

Thank you.

[Operator]

Thank you. [Operator Instructions] We will take our next question and the question goes from the line of Konrad Zomer from ABN AMRO - ODDO BHF. Please go ahead, your line is open.

[Konrad Zomer, ABN AMRO]

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 would in the first half. And the number of job openings has come down from about a 1000 to about 500. Can you share with us what sort of jobs were filled with those 500 people; where they mainly sales and marketing or technological experts or I know people that focus on AI? And given that the growth rate of the company overall, it's at a historically high level, which you not expect and those people to keep going up in proportion to that higher level of revenues.

I am to I understand the whole COVID impact from last year. But it seems fair to assume that the growth in personnel growth ultimately catch up with the its growth in revenues?

[Nancy McKinstry, CEO]

Yes. So, maybe I can start and Kevin can chime in. so, we had significant open positions in 2022 for it really a combination of a couple of things. One was during the peak of COVID 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 we've planned but we had a bit higher uptake 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 just a number of open position mostly in tech and sales and product management. That's where the bulk of the hiring has been. So, we've are really pleased that we've been able to fill and manage all these things I just talked about successfully were into 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 or labor across 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 we'll continue to fill the open heads but it's really we're well into sort of what I would call a quite a stable situation. So, then back to your question on should you expect personnel to grow? We've the growth rate of the company. Of course there'll be some growth but given that most of what we're hiring is tech talent. What we see is that we are getting increasing productivity benefits in our tech organizations. And that comes for both the stale effect as we bring these units together. It comes from the reuse of the technology to -- grow and of course technology cost typically go down over time.

So, for and just for example, the 10% to an 11% that we invest in product enhancement 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 drop job growth as we continue to expand organic growth. So, hopefully that answered your question.

[Konrad Zomer, ABN AMRO]

Yes, absolutely. Thanks, very much.

[Operator]

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

[Nancy McKinstry, CEO]

So, we just want to say thank you very much for attending and wish you a good rest of your day or evening.