Wolters Kluwer NV

AEX:WKL

Earnings Call Transcript 2022-Q4

[Operator]

Hello everyone, and welcome to the Wolters Kluwer Full Year 2022 Results Webcast and Conference Call. My name is Daisy and I'll be your coordinator for today's event. Today's conference is being recorded. [Operator Instructions]

I will now hand the call over to your host, Meg Geldens, Vice President of Investor Relations to begin today's conference. Please go ahead, Meg. Thank you.

[Margaret Geldens, VP, IR]

Thank you Daisy. Good morning and welcome everyone to Wolters Kluwer full year 2022 -- full year results call. Today's earnings release and the slides for this presentation are available on our website wolterskluwer.com. With us on the call today are Nancy McKinstry, our CEO; and Kevin Entricken, our CFO, who will discuss our '22 results and we'll 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 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 our future financial results are discussed in Note 2 of today's release and in our Annual Report. As usual in the presentation today we will refer to adjusted profits, which exclude non-benchmark items. We also refer to growth in constant currencies, 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 can be found in Note 3 of today's release.

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

[Nancy McKinstry, CEO]

Thank you, Meg. Hello everyone and thank you for taking the time to join us on this call.

I will start by giving you the key highlights of 2022. Then Kevin will take you through the financials in more detail, after that I'll come back to discuss divisional developments and the progress that we've made against our strategy, including the creation of a new division comprised of four of our enterprise software units. I will then finish with an outlook for 2023.

So let me start with the key highlights of 2022. I'm pleased to say that 2022 was a good year for us on many fronts. We sustained organic growth of 6% and drove a significant increase in our adjusted operating profit margin.

Excluding the favorable effect of the stronger U.S. dollar, we delivered 8% growth in diluted adjusted earnings per share in constant currencies. Adjusted free cash flow was €1.2 billion, an increase of 7% in constant currencies. ROIC improved to 15.5% and the balance sheet remains very strong. We returned more than 100% of our free cash flow to shareholders in the form of dividends and share buyback.

We also made significant progress on strategic and ESG goals. Expert Solutions grew 9% and now represent 56% of our total revenues. We increased both our employee engagement and belonging scores by 1% last year.

And we made very important progress against our TCFD roadmap completing an assessment of our greenhouse gas footprint and submitting our near-term targets to the science based targets initiative for validation. We also prepared plans to create a new division called Corporate Performance & ESG to leverage market opportunities and synergies. I will come back on all of these developments as well as the divisional highlights and the outlook.

But first, Kevin will present the financials in more detail.

[Kevin Entricken, CFO]

Thank you, Nancy.

Let's start with the financial highlights on Slide 6. Full year 2022 revenues were €5.453 billion, an increase of 5% in constant currencies. Organic revenue growth was 6% in line with the prior year. Adjusted operating profit was €1.424 billion, an increase of 7% in constant currencies. The adjusted operating profit margin improved by 80 basis points to 26.1%.

Diluted adjusted earnings per share increased 8% in constant currencies. Adjusted free cash flow was $1.220 billion, an increase of 7% in constant currencies. Including the effect of currency, most notably the stronger U.S. dollar, adjusted free cash flow increased 21%. We ended the year with net debt to EBITDA ratio of 1.3 times. These strong results led to a step up in return on invested capital to 15.5%.

Let's look at revenues more closely on the next slide. As you can see on Slide 7, all four divisions contributed to a year of robust organic growth. Health grew 5% organically compared to 7% in 2021. This reflected the continued high single-digit growth in Clinical Solutions, while Learning Research & Practice slowed due to a challenging comparable created by the ASCO journal added in 2021. Tax & Accounting delivered 9% organic growth, accelerating from 6% a year ago.

Across both Corporate Performance and Professional Tax & Accounting cloud-based software solutions achieved double-digit organic growth. Governance, Risk & Compliance delivered organic growth of 4% compared to 6% a year ago.

This was supported by robust growth in recurring revenues as GRC's total transactional revenue saw significantly slower growth compared to a year ago. Finally Legal & Regulatory recorded 5% organic growth versus 3% a year ago, benefiting from strong performance in software and in digital information solutions.

Let's turn to Slide 8 to review revenues by type. The chart on the left of this slide shows our recurring revenues, which together make up 80% of Group revenues. Of these recurring revenues, digital and service subscriptions shown in blue make up 72% of Group revenues. This significant revenue stream reported 8% organic growth in full year 2022 after slowing slightly in the second half. Print subscriptions were down 4% for the year after improving in the second half, while other recurring revenues in gray were up 2% organically for the year.

On the right hand of the slide, you will see our non-recurring revenues, which make up 20% of total revenues. Of these non-recurring revenues, GRC Legal Services transaction revenues showed by the dashed red line declined 1% organically in 2022 compared to a growth of 21% the year before. GRC Financial Services transaction revenues shown here by the dotted red line increased 2% organically in 2022 or 11% if we exclude the PPP program. This strength on the Financial Service side was due to continued double-digit growth and lien search and filing volumes, which more than offset a sharp decline in U.S. mortgage volumes.

Other non-recurring revenues represented by the solid dark red line includes on-premise software licenses and implementation fees as well as outsourced professional services. This non-recurring revenue stream was quite strong in 2022, up 7% organically versus 4% the year before. Mainly driven by higher licenses and implementation fees for Tagetik, Enablon, but also higher outsourced professional services in Tax & Accounting.

Let's turn to divisional margins on Slide 9. As mentioned the adjusted operating margin increased 80 basis points to 26.1%. Three divisions saw improved margin, while Legal & Regulatory posted a small margin decline due to one-time items in both years related to the Netherlands pension.

If we exclude those one-time items, Legal & Regulatory would have seen an increased margin. Across the board the margin increase was driven by a favorable currency mix, operational gearing and the continued shift in business mix. Of the 80 basis point improvement in margin, half was due to favorable currency mix. These factors more than offset an increase in operational costs, including an increase in product development spending.

Now let's turn to the rest of the income statement on Slide 10. Adjusted net finance costs were €56 million, lower than the prior year mainly due to higher interest income on cash balances. Adjusted net financing costs included a €5 million net foreign exchange loss mainly related to the translation of inter-company balances. This non-cash loss was lower than we had guided in early November '22 as the U.S. dollar reversed course and depreciated in the final two months of the year. The benchmark tax rate on adjusted pre-tax profit increased to 22.6%.

This increase was mainly due to new restrictions on tax deductibility of finance costs in the Netherlands for 2021 had benefited from a one-time release of contingencies following the closure of tax audits.

Adjusted net profit after tax was €1.059 billion, up 20% overall and up 6% in constant currencies. And lastly, diluted adjusted EPS increased 8% in constant currencies to €4.14. This reflected the increase in adjusted net profit and the lower weighted average shares outstanding due to our share buyback program.

Now turning to cash flows on Slide 11. Our cash conversion ratio was strong at 107%, but down from the prior year as we expected. CapEx was €295 million, up 16% in constant currency. CapEx spending was 5.4% of Group revenues, which was within our guided range of between 5% and 6% of revenues.

Cash interest paid was €45 million lower than a year ago due to the interest income mentioned earlier. Cash taxes increased to €289 million, reflecting the increase in net profit and the new U.S. tax rules on the capitalization of R&D. Net cash outflows related to restructuring were only €12 million, less than half of the outflows in 2021. All in all adjusted free cash flow was €1.220 billion, up 21% in reported currencies, and up 7% in constant currencies.

Now let's turn to the uses of cash on Slide 12. More than 150% of adjusted free cash flow was returned to shareholders in the form of dividend payments and share buybacks. Dividends totaled €424 million. Acquisition spending totaled €95 million, largely related to the acquisition of IDS in Governance, Risk & Compliance.

Net cash proceeds from divestments generated €103 million, primarily related to the sale of our French and Spanish Legal & Regulatory publishing asset. And cash deployed towards last year's buyback amounted to €1 billion. We ended the year with a slight increase in net debt, and a net debt to EBITDA ratio of 1.3 times.

Let's turn to our proposed dividend for 2022 and our share buyback plans for 2023 on Slide 13. In view of the continued good financial performance and our balance sheet position, we are proposing an increase to the total 2022 dividend per share by 15% to €1.81 per share. This would bring a final dividend to €1.18 per share, subject to shareholder approval at our Annual General Meeting in May.

With regard to our share buyback plan for 2023, we are 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 €160 million starting this Friday through the end of April.

So now to sum up results. 2022 was a good year financially. We delivered robust organic growth of 6% and 80 basis point increase in the margin. A strong operating result and the lower share count drove 8% increase in diluted adjusted EPS in constant currencies.

Return on invested capital stepped up to 15.5%. Adjusted free cash flow increased to €1.2 billion, up 7% in constant currencies. And of this more than a 100% was returned to shareholders in the form of dividends and share buybacks. We finished the year with a net debt to EBITDA ratio of 1.3 times.

And now I'd like to turn the call back over to Nancy.

[Nancy McKinstry, CEO]

Thank you, Kevin.

Let's begin with a review of the key developments for the four divisions, starting with Health on Slide 16. Health delivered 5% organic growth and improved its operating margin by 70 basis points, benefiting from the continued shift towards Clinical Solution and favorable currency mix. Slowing modestly after the strong performance in 2021 of 8% growth, UpToDate drove a high single digit organic growth driven by renewals and new customer wins.

Our drug databases delivered good organic growth and Emmi, our patient engagement offering, saw a marked improvement with high single digit growth. Legal, Research & Practice delivered 3% organic growth against a tough comparable created by the ASCO journal publishing contract implemented in early 2021.

Our medical research platform, Ovid, delivered strong organic growth driven by subscription renewals. We expanded our open access offering with the acquisition of IJS Publishing Group. Our digital nursing education and practice business delivered 6% organic growth, and in early 2023 we extended our test preparation solutions with the acquisition of NurseTim.

Turning now to Tax & Accounting on the next slide. Tax & Accounting delivered 9% organic growth, accelerating from 6% a year ago. This was led by strong performance of our cloud-based software solution. The margins increased by 80 basis points, reflecting operational gearing and a favorable currency mix.

Corporate Performance grew 15% organically led by CCH Tagetik, which was up 19%. CCH Tagetik, Vanguard and our U.S. corporate tax unit have now been fully integrated bringing increased scale to our North American position in Corporate Performance.

Our North American Professional Tax & Accounting Business grew 9% organically with continued success from our cloud CCH Axcess suite, combined with a strong year in outsourced professional services and transactional fees. The European and Rest of World Professional and Tax & Accounting businesses delivered 6% organic growth. In Europe we continue to build out our cloud collaboration software. And in Asia Pacific, China had a strong growth in subscription revenues.

Moving now to Slide 18, Governance, Risk & Compliance delivered organic growth of 4% with robust recurring revenues overcoming a challenging comparable for transactional revenues. Margins increased by 50 basis points, driven by operational gearing and favorable currency mix. Legal Services delivered 3% organic growth as robust growth in recurring revenues offset a decline in Legal Services transactional revenues.

CT Corporation delivered low single digit organic growth compared to a double-digit increase a year ago. Enterprise Legal Management, which provides spend and matter management software posted strong organic growth, driven by transactional volumes. Financial Services grew 6% organically driven by robust recurring revenues and 2% organic growth in FS transactional revenues.

Compliance Services posted 6% organic growth, supported by sustained recurring revenue growth. Here a decline in mortgage transaction volumes was more than offset by another year of double-digit growth from Lien Solutions. IDS, which we acquired in April is being integrated with our existing loan compliance solutions business. Finance, Risk & Reporting delivered 4% organic growth despite the impact of suspending business in Russia and Belarus.

Moving now to Slide 19, Legal & Regulatory had a very good year, growing 5% organically. The adjusted operating profit margin decreased slightly, but this was due to one-time items. Excluding these items, the margin would have increased. EHS/ORM & Legal Software delivered organic growth of 16% accelerating from 8% in 2021.

At Enablon organic growth was lifted by a combination of double-digit organic growth for its cloud-based software and an increase in license fees for its on-premise software. Legal Software, which is mainly Kleos and Legisway also recorded double-digit organic growth and expanded its offerings with the acquisition of Level Programs in June and Della AI in December.

Information Solutions recorded 3% organic growth, driven by 6% growth for digital information solutions. Print revenues declined 8%. We successfully completed the divestment of our French and Spanish publishing assets in November. Digital information solutions now represent over 75% of the unit's revenues and the team delivered many new and enhanced solutions across the division in 2022.

Now let me turn to the progress we've made in the first year of our current strategy on the next slide. Our first priority is to accelerate our Expert Solutions. We invested at record levels last year with organic product development spending at 11% of total 2022 revenues. Across the Group, Expert Solutions grew 9% organically.

Our second priority, expand our reach, here there are several notable developments that we made last year. Health signed a partnership with Microsoft, whereby third parties such as virtual care companies can build on Azure and easily integrate our digital health architect content as a service. CCH Axcess further rolled out its marketplace bringing on board additional third-party solutions.

We also launched Legisway in the U.S. market. Several of our enterprise software units built out their ESG offerings, and this has ultimately led us to create a new division to harness these efforts. Our third priority evolve our core capabilities, here we've taken early steps to strengthen our capabilities in sales and marketing and customer support. We also made significant progress in advancing our ESG performance on several fronts.

So let me touch on that on the next slide. Advancing our performance against material ESG objectives is firmly embedded in our strategy. We made progress on many fronts, but I want to highlight just two. Firstly, we improved our employee engagement and belonging scores by 1 point to 77 and 73 respectively.

As you may know, we conducted annual survey to measure engagement and belonging. These results give us insights into how we can support, develop, and retain our highly engaged high-performing workforce. Secondly, we made significant progress on our commitment to align with the guidelines recommended by the TCFD and to set Science Based Targets.

I'm very pleased to say that we have now submitted our near-term targets to SBTi for validation. This will take some time, but we are confident we prepared a robust plan. We continue to receive AAA ratings from MSCI and our Sustainalytics ESG risk rating score has improved slightly in recent months and places us in the top eight percentile for Software & Services industry.

Now turning to the next slide. Today we are announcing that in March, we will bring together four of our global enterprise software businesses to form a new division Corporate Performance & ESG. This new division will be comprised of our Corporate Performance unit CCH Tagetik, our EHS/ORM solution Enablon, our Finance, Risk & Reporting unit as well as our Internal Audit Solutions TeamMate.

All four businesses serve global corporations and banks with cloud and on-premise solutions and have leading market positions in their specific areas of expertise. Combining these assets will allow us to accelerate synergies and leverage their combined global strengths to meet the growing demand from corporations and banks for integrated financial, operational and ESG performance solutions. We are excited about the value we can bring to our customers with this new division.

So now let me finish up with an outlook for 2023. Slide 24 provides our specific guidance for 2023. We expect our adjusted operating profit margin to increase and to be in the range of 26.1% to 26.5%. We expect adjusted free cash flow to be around €1.2 billion and return on invested capital to increase to be in the range of 16.5% to 17%. And we are guiding to high-single digit growth in diluted adjusted EPS in constant currencies.

Let me conclude with the trends we expect for each of our divisions on the next slide. As indicated in our release, we expected in the first half of 2023 organic growth will be slower and margins will ease compared to the prior year period. For the full year we expect all divisions to achieve organic growth in line with 2022 levels, and we expect the Group margin to improve driven by Tax & Accounting and GRC. We have seen a good start to this year and we look forward to continuing to execute against our strategy.

So thanks very much for your attention. Operator, we can now turn to questions.

[Operator]

[Operator Instructions] Our first question today comes from Adam Berlin from UBS. Adam, please go ahead, your line is open.

[Adam Berlin, UBS]

Good morning everyone. I've got three questions if I can. The first question is on Tagetik in the Tax & Accounting segment, which grew 19%. Can you talk a little bit about what drove the strong performance in that division? Was it Europe just doing really well in Europe or have you started to make traction in the U.S. and is that helping the acceleration in Tagetik? That's the first question.

The second question is on the new segments. I just wanted to check, does the guidance you've given around sustainable organic growth by segment also apply to the new segments or is there going to be some moving parts around that, that we should just think about? And also when are we going to get the margin by new segments, so we can model it according to the new segments?

And then a third question is, the Legal & Regulatory business doesn't seem to have changed in size, despite taking the EHS business outside of -- Enablon outside of L&R. So what's gone in to Legal & Regulatory and the new segment cut that was to note, to say that the total revenue stay the same. Thanks very much.

[Nancy McKinstry, CEO]

Great, thank you. So just starting on Tagetik, they had good growth across all regions. In 2022 we also expanded into some new countries in Asia-Pacific and saw a good performance there. We've increased our penetration in the North American market. And of course, Europe is really the cornerstone of the business. So most of the growth came from new logo acquisitions, new customers, but then we are also continuing to increase the wallet share of some of our existing base as well. So we're very pleased with the performance coming out of Tagetik.

In terms of the new segments, the organic growth guidance that we gave by division will hold. So even as we re-orient the divisions and move the four businesses into the new division of Corporate Performance & ESG from a total Wolters Kluwer perspective that guidance will stay as we indicate.

And you should get additional information on the margins of the new division in June before the June results will show you sort of the 2022 look and then the 2023 look under the new composition.

And then Legal & Regulatory, Enablon is moving into the new division, but our Enterprise Legal Management solution business, which is currently in GRC will move into Legal & Regulatory. And the rationale for that is that we want to bring together our legal software businesses so that we can again get some better synergies from a technology perspective and also accelerate some of our growth, particularly of ELM outside of the North American market.

[Adam Berlin, UBS]

Fantastic. Thank you very much indeed.

[Operator]

Thank you. Our next question today comes from Nick Dempsey from Barclays. Nick, please go ahead, your line is open.

[Nick Dempsey, Barclays]

Yes, good morning. I've got three questions as well. So the first one, given that there are still some headwinds to transactional revenue in GRC in 2023 compared to I guess a normal year and you're still able to guide to the same growth again in '23 as you achieved in '22. Does that mean that we could logically hope for some room for improvement again in 2024 on organic growth versus '23?

Second question, your GRC organic growth guidance is the thing that I guess is most comfortably ahead of market expectations in '23. When you look at the transactional organic growth that was pretty good in 2022 considering the mortgage challenges. So how are you kind of holding the organic. Is it because the subscription part will get better or is it that you expect continuing good growth in liens or is it the fact that you have easy comps in some of the areas that were weak in '22?

And then my third question, when we're talking about creating the new legal division, certainly the half of that division was growing 3% organic in 2022, do you have a path to grow that closer to the Group level or does it make sense to now think about selling that business and reinvesting in the new area of Corporate Performance & ESG?

[Nancy McKinstry, CEO]

Sure. So, Nick, I'll take the last question first and then ask Kevin to comment on transactional developments in GRC and both comparing to '22 and a few comments maybe about '24. So on Legal & Regulatory, the key is, if you look at what the division has accomplished over the last five years, it's actually pretty remarkable in terms of some of the disposals and the acquisitions that we've made. What you see is that we have very strong positions in the legal market both for law firms as well as corporations. And the key for us is that organic growth in our digital product lines remains high.

So this year it was 6% -- this past year was 6%. So what -- and what you see is as that continues to grow at those positive levels, print continues to get smaller and smaller. So today within Legal & Regulatory, print is only now about 20%, and that still does weigh on the divisions, but if you look at forward to '24 and '25, what you will see is that, that division will become more and more digital.

So we are happy with the Legal & Regulatory performance and we really see it now as becoming a digital business around some of our information solutions as well as legal software. So there are no plans to dispose of Legal & Regulatory, we're really happy with where they're going, and we see it as core to the overall business of Wolters Kluwer.

So, Kevin, do you want to talk about transactions?

[Kevin Entricken, CFO]

Sure. In GRC, it's worth reminding everybody that just over 60% of revenues are recurring, so we've got some good visibility there. The remaining revenues that are transactional, as you can imagine those are probably the hardest ones to predict. And in 2022 we did see some mixed results. And as you mentioned comparables did play a big part of those results in Legal Solutions in particular, we saw '21 growth in the prior year. And then last year a quick deceleration.

We have considered all of this as we set guidance going forward. And we do recognize that potentially we are setting into some economic headwinds. However, our guidance does reflect that. It does reflect our thinking on transactions, and it also reflects what we do see on the subscription portfolio, which certainly is quite robust at this time. So that has gone into our thinking. Nick, hopefully that helps you with your question.

[Nick Dempsey, Barclays]

Can I just ask about my question on '24 where -- is there any potential to improve Group organic simply as a result of GRC having fewer headwinds in '24?

[Nancy McKinstry, CEO]

Yes, I think it's too early to tell right now. I mean, as you can see really the metrics that we focus a lot of attention on is of course Expert Solution growth as well as our overall digital growth, and you saw that in '22, up 9% and 7% respectively. So that's kind of the core, and then there is a lot of moving parts, both on what remains in print and the transactional. So I think it's too early to talk about transactional revenues at this point.

[Nick Dempsey, Barclays]

Very good. Thank you.

[Operator]

Thank you. Our next question is from Omar Sheikh from Morgan Stanley. Omar, please go ahead, your line is open.

[Omar Sheikh, Morgan Stanley]

Thanks very much. I've got three as well if I could please. Maybe the first one on margin for Kevin. Just wondering if you could maybe just give us some color on what you're assuming at the bottom and the top end of the guidance range. Because from your comments about '22, it sounded like you had about 40 basis point tailwind in '22 from operational gearing and the business mix. I'm just wondering while given that you haven't -- given you have -- you're expecting the same revenue growth, why you wouldn't expect the same sort of 40 basis points as the bottom end of your margin guidance range for 2023? That would be a helpful starting point.

And then secondly, on the new division, Nancy you mentioned that you're expecting to accelerate synergies from creating this new division. Does that mean that you're expecting a positive impact on overall Group growth from the reorganization or is this just kind of more cosmetic, should we assume it, that it's more cosmetic than actually driving incremental growth for the Group?

And then finally on leverage, you're at the low end or you're significantly below rather your 2.5 times leverage target. Can you just maybe give us some sense of how you're expecting to get back to that 2.5 times levered target, is that something you're thinking about for '23 or should we just assume that current levels, the kind of the new normal. Thanks.

[Nancy McKinstry, CEO]

Sure, thanks, Omar. So, Kevin, you want to talk about margin and leverage, and then I'll cover the new division.

[Kevin Entricken, CFO]

Yes certainly, and considering our margin guidance for 2023, obviously we've taken into account what our expectations are on organic growth and we've given you some indication in our commentary in the press release on what we expect by division. So, I do expect there will be a flow-through of organic growth into margin. But I'd like to remind everybody, we also expect a step-up in some costs that were muted during the pandemic years. So we do expect things like T&E to come back to more normalized levels as we go forward. So we will see some of those costs increase. That altogether has been reflected in our guidance range of the 26.1% to 26.5%.

Nancy, do you want me to take leverage?

[Nancy McKinstry, CEO]

Yes, why don't you take leverage, yes, yes.

[Kevin Entricken, CFO]

And as far as our leverage is concerned, yes, we are below the target of 2.5 times. I'll remind everybody that is a target, meaning there are times when we deviate from it. Years ago we were above that target. Most recently we have been below that target. Being below the target has allowed us to reward our shareholders with the 15% increase in dividends over the last couple of years and the buyback program that we're announcing today of €1 billion.

So we are below the target. I would say, I'm probably comfortable being slightly below the target, you know, as we go into some economic uncertainty than I would be, if I were above the target. So it's a target and we will deviate from time to time.

[Nancy McKinstry, CEO]

And then on the new division, the expectation around what -- for growth is, the growth guidance that we've given by division, it stands for 2023. As we look forward to '24 and '25 we do expect that by bringing these four businesses together, we will find additional opportunities. What we hear from customers and corporations and banks is that they have growing demands for integrated solutions around ESG, we are well-positioned to meet those demands.

And so, we anticipate that in '24 and '25 that we will be able to accelerate some of the growth coming from that new division because we'll have more opportunities to again do some product integration and create some new offerings.

[Omar Sheikh, Morgan Stanley]

Great, that's very clear. Thank you very much.

[Operator]

Thank you. Our next question is from Silvia Cunio from Deutsche Bank. Silvia, your line is open. Please go ahead.

[Silvia Cunio, Deutsche Bank]

Thank you. Good morning everyone. I would like to ask two questions. The first one is on revenues by geography. Within the mix revenues from Asia-Pacific and Rest of World be faster than the rest of 10% organically and the European business continued to expand its cloud and hybrid cloud solutions as well in Tax & Accounting. So can you please remind us of your competitive position outside of the U.S. and opportunities to sustain these faster growth rates?

Then the second question is on the Expert Solutions. In 2022 revenues increased by 9% organically and we've seen that software revenues was also up 9%, but cloud software up 17%. So wondering if you could please help us think about the drivers of these 17% growth. What was driven by volume, price or upselling perhaps and how do this compare with competitors in the space? Thank you.

[Nancy McKinstry, CEO]

Okay, thank you. So if you look at the geographic mix at Wolters Kluwer and the growth rates, North America still is our most important region and will remain so in -- certainly in the near and medium term. We do however see good growth coming out of Europe and Asia. Much of the growth in Asia comes from our global solutions that is supporting the good growth around the world as well as the rebound that we saw in both India and China as it's come out of the pandemic in the case of India and then in China, we saw some good growth in core products both in Health and in Tax & Accounting. But going forward again, you should expect that the U.S. will still be the primary region for the company.

As we look to the cloud growth of 17%, the vast majority of that is coming from new customer wins as well as some customers migrating from on-premise solution. We do get some from price, but that is not the major driver. It's really coming from the fact that our customers are very focused on digital transformation and cloud solutions help them achieve that. So again, mostly new customer wins as well as migration from some existing on-premise customers.

[Silvia Cunio, Deutsche Bank]

Okay, very clear. Thank you.

[Operator]

Thank you. Our next question is from Tom Singlehurst from Citi. Tom, please go ahead. Your line is open.

[Tom Singlehurst, Citi]

Thank you. It's Tom here from Citi. Thanks for taking the questions. First one, backward looking, specifically interested in the impact of the divestment of the legal information units in France and Spain, whether that was taken out the organic. The reason I ask is obviously originally you were guiding to slow down in 4Q organic and didn't transpire and I'm wondering whether that had some impact? So that was the first question.

The second question was on the organic growth guidance. Obviously the first time you've given organic growth guidance and it's a very, very good number. As one of the earlier questions alluded to, you obviously have much more comfort in transactional revenue outlook. And it's clear that a big part of that is Lien Solutions.

So, I'm just interested whether you could just give us a little bit more color on what specifically is driving growth in the Lien Solutions such that it will defy sort of what would, I suppose you would normally assume is the sort of negative impact of rising interest rates.

And then the very final question just a broad one and I am slightly surprised no one else has asked it on sort of Generative AI, in particular on some of the sort of workflow solution type tools, just whether you've got any sort of broad brush views on the risk or indeed the opportunity from Generative AI for your business? Thank you.

[Nancy McKinstry, CEO]

Okay. Thank you, Tom. So, Kevin is going to cover the organic growth question around France and Spain and touch on Legal Solutions. And then I'll finish up with ChatGPT. Yes.

[Kevin Entricken, CFO]

Sure, Tom, as far as the impact of the divestment of the Spain and France publishing assets in Legal & Regulatory, we closed on that business quite late in the year, I think we made the announcement in November. So their results were in 2022's organic growth calculation for the majority of the year.

So there really was not any kind of impact one way or the other on those businesses for 2022. Obviously with those coming out in '23, that will certainly help organic growth going forward, but it is a smaller business. So I can't imagine it's going to have terribly a material impact. But nonetheless, those businesses did grow below the Group average.

With organic growth, one thing I had to remind you, we're not giving numerical guidance on organic growth. As is our practice though, we will give you what we're seeing by division. And I think if you look in our division commentary on Page 2 of the press release, you will see what our thoughts are on how growth will go in the future. With regard to transaction, as I mentioned earlier, that's the hardest business for us to predict because it is the most cyclically volatile. But there are a mixed bag of what we saw in '22.

We did see mortgage volumes come down as you would expect as overall the mortgage market came down. The Lien Solutions was quite robust. And that was following the trends we saw in corporate lending, and companies placing liens or searching for liens. So that business did quite well in '22. As I say, hard exactly to predict what the future will hold. But we do recognize that we are going into somewhat of an uncertain economy going forward and we've incorporated that into our guidance.

[Nancy McKinstry, CEO]

Yes, in lien we also have launched, this goes back probably four years ago now an offering in the motor vehicle market, which is a little bit counter-cyclical or counter to some of the lending trends. And so, that's -- it's a small business right now, but it's been contributing nicely to growth. So that helps as we look forward. And then on Generative AI, lots of course discussion on ChatGPT, we've been experimenting with Generative AI for several years now.

There is a number of solutions out there. I think what makes ChatGPT notable is in fact because it's really operating at such scale in terms of the amount of data that it's using. We see that the opportunities right now for us are very focused on internal applications looking forward to be used in customer support, we do a lot with bots, again it help us with that today and other kinds of processes that we have internally to Wolters Kluwer from a trying to find efficiencies in productivity.

And then we are experimenting with some of these newer technologies as it relates to our customer products. But we really see this very much as an evolutionary step in AI, about 40%, 50% of our products use AI today and then that capability is embedded. And so, we just see this as sort of a next step there. So more to come as the technology matures.

[Tom Singlehurst, Citi]

That's very clear. Thank you very much.

[Operator]

Thank you. Our next question is from Sami Kassab from BNP Paribas. Sami, please go ahead. Your line is open.

[Sami Kassab, BNP Paribas]

Thank you very much and good morning everyone. To start with, could you please comment on the year-to-date trends within Financial Services and Legal Services transaction revenues? And possibly excluding mortgage, you know, it's been a difficult place there. Secondly Thomson Reuters recently guided for some revenue pressure at Elite, their Legal Software as it moves from on-premise to the cloud. Do you see any similar pressure with Legisway or any other legal software you have? And then at 11% product development spending, came above the historical range and the three year guidance. What's driving that? Is that reflective of better growth opportunities ahead you want to capitalize on? Is this reflective of a worsening of the competitive landscape or is it just the evolution of the revenue mix?

And lastly...

[Nancy McKinstry, CEO]

Okay -- yes -- no, go ahead, Sami.

[Sami Kassab, BNP Paribas]

And lastly, I heard the comment on L&R, but I'm still keen to ask the following idea or debate the following idea with you, Nancy please. You did sell the Nordics to Karnov, you sold France to Karnov, you sold Spain to Karnov. What makes Germany and Italy so specific that you're seeing they are best kept within the Group? Thank you, Nancy.

[Nancy McKinstry, CEO]

Yes. Okay. So why don't I take that sort of in reverse order, and Kevin can touch on Financial Services and Legal transactions at the end. So just looking at our enterprise legal software business, which operates primarily in the U.S. and then we have several software solutions in Europe, they had a good year last year, our pipelines are robust coming into 2023. So we're confident that they will continue to be able to deliver growth.

We have not yet -- we are aware of course of economic headwinds. But we have not yet seen that impact our business in terms of the outlook. We also have on top of the core solutions, we have other offerings, things like our LegalVIEW, BillAnalyzer in the U.S., which continues to grow nicely. So we have quite a robust set of products within those businesses that creates some level of diversification for us.

On product development spend, the 11% reflects investments across the board in every division both on enhancements and on new very focused on cloud products. So we do see more opportunities, which is why we have invested a bit more. I would also say that we are able to stretch our development investments further as we have leveraged core centralized technologies as well as the fact that technology costs tend to go down as things mature. So we feel really good about our innovation pipeline and believe that, that will continue to sort of invest at that sort of 10% kind of level, 10%, 11% over time.

And then on Europe, I would say again what is different about our country positions that remain in Europe, it's really that we have leading positions. We did not have a leading position in France, we did not have a leading position in Spain, it was a market of sort of three equals there. So we really -- core to our strategy has always been to be the market leader, which we define as sort of number one or a close number two. And so, the positions that remain in our European portfolio really are very strong and we can continue to build on those.

So, Kevin, do you want to talk about transactions?

[Kevin Entricken, CFO]

Sure. Sami, as far as transaction revenues, we did see a mix of performance in 2022. We did note that we did see some softening towards the end of 2022. I would say coming out of the year this year, the first month or so in '23. I would say, pretty much the same, so in line with our expectations. So, no real surprises there. With regard to other parts of our business, when we look at the guidance that we gave you, we're looking at things like subscription inventories and sales pipelines, and through the first month of this year, those are holding up with our expectations.

[Sami Kassab, BNP Paribas]

Thank you very much.

[Operator]

Thank you. Our next question is from Lisa Yang from Goldman Sachs. Lisa, please go ahead. Your line is open.

[Lisa Yang, Goldman Sachs]

Hi, good morning. Only have a few questions left now. Just thinking about your 2022 margins, obviously you raised the guidance of H1 and you came out at the bottom end of the range. I'm just wondering if there's anything that sort of happened at the end of the year to basically not -- that gets delivered as slightly better performance because it sounds like you were maybe more positive at the H1 results. And thinking about 2023, that's the second question on the margin, I'm just wondering why you expect margins to be stable in Legal & Regulatory and also in Health given the operating leverage. And I guess in Legal, that's a segment where obviously margins are lower. So just wondering like what's driving this lack of margin improvement in that segment? And just lastly, really quickly just on UpToDate, I mean, obviously that continues to grow really nicely up you said high single digit, do you expect that to obviously continue for the coming years. Maybe if you could comment a bit about the drivers and how much contribution you're now getting from international expansion? Thank you.

[Nancy McKinstry, CEO]

Great, thank you. Kevin will take the margin questions. Yes.

[Kevin Entricken, CFO]

Yes, I would say that, in the 2022 margin, a couple of things are at play as we go into the end of the year. We did obviously as you mentioned upgrade the margin at the half year. As we moved into the final months of the year, you did see a little bit of weakening in the U.S. dollar, and obviously that does impact our margin.

But more notably we did step up some investments, particularly in our GRC software businesses, so that also is embedded in our '22 margin results. For '23 margins, it's much of the same story when we look at stable margins in our Health business and our L&R business, we do have a number of product ideas and enhancements for innovation that is incorporated in that margin guidance. So that is why we've given you the view that we have.

[Nancy McKinstry, CEO]

And then on UpToDate, we did achieve high single digit organic growth in 2022, we had a strong renewal season, we continue to win new customers around the world. We are seeing good growth in the non- U.S. markets and we expect that, that will continue. We've also launched some new products in UpToDate like the Digital Health Architect, which is a content-as-a-service product.

So this allows virtual care companies and other sort of non-hospital units to use the UpToDate product within their kind of workflow or within their ER, EHS systems. And so those kind of new products are also adding to the future growth opportunities for UpToDate. So we feel very pleased about UpToDate remain sort of a cornerstone product within Clinical Solutions. But we've also had very good growth coming from our drug database businesses, not just in the U.S., but outside the U.S.

And it was nice to see kind of any rebound and getting to growth territory. So all in all within clinical effectiveness very good growth prospects looking forward. So while the hospital market in the U.S. in particular is under pressure, we continue to see that we're performing well despite that.

[Lisa Yang, Goldman Sachs]

Thank you very much. A quick follow-up. So on the disposals, you announced in [indiscernible] but is it fair to assume that these were lower margin than the segment or yes, how should we think about the impact of the disposal of margin?

[Nancy McKinstry, CEO]

Yes, so France and Spain were lower margin than certainly the Group average of Wolters Kluwer. Yes.

[Lisa Yang, Goldman Sachs]

Of the Legal & Regulatory?

[Kevin Entricken, CFO]

Yes in Legal & Regulatory as well.

[Nancy McKinstry, CEO]

Yes.

[Lisa Yang, Goldman Sachs]

Okay. Thank you very much. Thank you.

[Operator]

Thank you. Our next question is from Matthew Walker from Credit Suisse. Matthew, please go ahead. Your line is open.

[Matthew Walker, Credit Suisse]

Thanks. Hi Nancy, hi, Kevin. Yes, I've got a few questions please. The first one would be on price increases, and I guess this goes across the whole Group. What kind of price increases are you putting through for '23 and then how does that compare to '22? The second question would be on acquisitions, I mean compared to the other groups your acquisition spending is much lower, your buyback is higher. Can you just explain around why you're not doing more on the M&A front? And then final question is on tax. You've indicated it could grow another 9% again, which is also a pretty high rate. I think back when you did the tax, Investor Day, you indicated there been some one-off, some companies that you bought were -- there were some people doing filings et cetera. How can you sustain such a high growth rate in tax for '23?

[Nancy McKinstry, CEO]

Okay. So, I'll take and then Kevin feel free to chime in. So on price, I think as we've talked with all of you in the past, we try hard to do very surgical pricing, meaning price to value across the portfolio, we have thousands of products. Second philosophy around price is to cover wage inflation through our price increases. So we balance value to customers and of course attempting to get wage inflation covered.

So we began to see the markets kind of move on the wage side really going back to '21. And of course, we have to price virtually a year out because of the recurring nature of our business model. So if you look at the price increases we put in place in '22 and '23, they're really sort of at similar levels of rate of increase. So we used to guide sort of 2% to 3%, sort of pre-pandemic coming out of the pandemic in '22-'23, it's a bit higher than that. But again very much focused on where we have extremely strong products and good market position. So there is more coming from price in '22 and '23.

Acquisition spend, I'll start and Kevin can chime in. Our growth -- our strategy is very organically growth focused. So we see M&A as really augmenting that, and our M&A in the last several years is really focused on largely entering adjacent spaces and some product gap filling where that makes sense. We are very active looking at different opportunities, not just for M&A, but also partnerships.

And we will continue to do that. I do see that our activity does reflect the fact that asset prices remained very high. So of course we will stay financially disciplined. So I think a little bit of the explanation for why we see less activity in '22, and likely in '23, it relates to sort of the market. There is not a lot of inventory out there, and then the properties that are out there that we're interested in remain expensive. So we'll continue to look, but, as I say, we are very focused on organic growth.

And then tax, we have guided to similar levels to '22. We have a terrific business both in North America and in Europe and Asia Pacific smaller business, but well positioned. And the growth is coming largely from cloud. We still remain the only provider in the U.S. with a full cloud suite and we have a growing cloud offering in Europe.

And then of course we have some newer product lines both in audit and what we call this outsourcing tax business that delivered good growth last year, and we expect a good growth in '23 as well. So we feel confident in our guidance for the Tax & Accounting division.

[Matthew Walker, Credit Suisse]

Okay. Many thanks. Thank you.

[Operator]

Thank you. Our next question is from Henk Slotboom from The Idea. Henk, please go ahead. Your line is open.

[Henk Slotboom, The Idea]

Good morning Nancy, good morning Kevin and good morning Meg. I'm intrigued about your new division you're setting up, and a couple of questions about that, if I can. First of all, as we can see on Slide 22, it will account for a pro forma 12% of sales, is that a basis that is large enough for you that offers a nice basis for further organic growth or does it require investments, are you missing certain parts you would like to offer to your -- like to be able to offer to your clients as well?

The second thing is, the integration of these four units on which the building blocks on which the new division is based, does that require additional integration costs. And what kind of impact will it have on product development spending?

And the last question that is attached to this subject is, you're taking away a couple of very rapidly growing elements to Tagetik, was already mentioned earlier from existing divisions. And to what extent will it affect the organic growth of the other divisions going forward? Those were my questions.

[Nancy McKinstry, CEO]

Yes. Thank you. So, Kevin, you will take the last one on the growth. So, it is 12% of Group revenues when we -- as we form this new division. But it's growing faster than the Group average. This division will grow -- has grown in the past at double-digit levels, we would expect that in '23 as well. If they operate today in large and growing markets, and ESG is a large and growing market as well.

So we see in the future that this division will have upside potential to grow. That growth will come from continuing to acquire new customers for our core products and then up-sell that customer base with both existing ESG solutions, but the new solutions, which we will create. And what you see in the -- particularly in the corporate market and in the banking market is that ESG is, we call it a team sport right. It really involves several different functional areas within most corporations, including the office of the CFO, sustainability operations.

And so, we have solutions that cover each of those functions and we're uniquely positioned in the market because we do have a broad range of solutions. So the goal behind this is that today we already have combined solutions for example between Tagetik and Enablon.

But as we form this division, we believe that we'll have more opportunities not only for product integration and creating new solutions, but a lot around the go to market. How do we tap in to our installed base and up-sell with these ESG solutions.

So in the guidance we've given you, all of the costs for additional product development and integration is all embedded in the guidance. So you shouldn't expect anything new from what we're telling you today. But again, this is really designed to set forth a path for accelerated growth in these four product areas, largely again tapping into not just the core, but also some additional ESG opportunities. So, Kevin on...

[Kevin Entricken, CFO]

The faster growing properties, you're absolutely right, we put a table in the appendix of the press release just showing what growth would have been on a pro forma basis. Corporate performance in ESG would have had 12% organic growth in 2022. And you see what the relative growth is in the other areas. However, I will like to remind you that, each of our divisions separate from these assets also has fast growing businesses.

So for instance in Tax & Accounting, cloud software as we commented earlier is a double digit growth business. You will see that also in Legal Software, there we also see very good growth in Legisway, Kleos and now adding to that division Legal & Regulatory division will be ELM.

So, we will give you more of an insight into what pro forma numbers will look like in the first half of the year. So stay tuned for that. But I'm not concerned necessarily that these fast growing assets are going to put a shadow on the other businesses, because in their own right, they've got their own fast-growing strong contributors.

[Henk Slotboom, The Idea]

Okay, very clear. Thank you very much. Have a nice day.

[Operator]

Thank you. We will now take our last question from Konrad Zomer from ABN AMRO. Konrad, please go ahead. Your line is open.

[Konrad Zomer, ABN AMRO]

Hi, good morning everybody. I've got two questions please. The first one on the new division and the relationship with your Expert Solutions growth rate, which has been 9% for the last two years above the average of the Group. It's been one of the main focus points in your strategy. What do you think the impact on the growth rate of the cloud-based Expert Solutions business could be because of the new division, is it going to accelerate that growth rate or is it going to deviate it and be slightly less one of the key focus points?

And the second question is, on your guidance, you imply the results both in terms of margins and in terms of growth are likely to be second half weighted. Is that purely because of transactional revenues facing a more difficult environment in the first half than the second or is it just because of tougher comparables with 2022?

[Nancy McKinstry, CEO]

Okay. So in terms of the new division, all of the solutions offered by the new division are categorized as Experts Solutions, they contribute to that 9% growth rate that we had in 2022. The growth guidance that we're giving for 2023 includes the new division, right. So that won't see accelerated growth beyond what we're already guiding today in 2023.

The goal of forming the new division, as I said is to be better positioned to meet these growing needs that we hear from customers today, and to by bringing them together, integrating products a little bit more tightly, changing some of our go to market that we will be positioned for further growth in '24 and '25.

So that's why we -- that's one of the motivations behind this is really being very much driven by the market. When we go out and talk to customers, it's clear that they have needs out there that are not fully been met. And we believe that we can meet those needs as we bring these assets together.

[Kevin Entricken, CFO]

And Konrad, in our guidance, yes, you should expect a second half weighting in our guidance and that has everything to do with comparables in many of our businesses. If you remember, we did have a very strong first half with regards to the transaction revenues. So that will be a tough comparable. And then, I expect in the second half, it will be more forgiving. So it is the comparables at play here in our guidance and the phasing around our growth.

[Konrad Zomer, ABN AMRO]

Okay. Thank you, both.

[Nancy McKinstry, CEO]

So I think that concludes our call. We want to thank you all very much for your attention and we look forward to seeing you over the course of 2023. Thank you.