Earnings Transcript for WTKWY - Q2 Fiscal Year 2020

Operator: Hello and welcome to the Wolters Kluwer Half Year Results 2020 Conference Call. My name is Rosy and I'll be your coordinator for today's event. Please note this conference is being recorded. [Operator Instructions] I will now hand you over to Meg Geldens, Head of Investor Relations to begin today's conference. Thank you.

Meg Geldens: Thank you Rosy and welcome everyone to the Wolters Kluwer half year 2020 results call. Today's earnings release and the slides for this presentation are available for download on the Investors section of our website, wolterskluwer.com. On the call with me today are Nancy McKinstry, our CEO; and Kevin Entricken, our CFO. Due to COVID-19, we are all dialing into this call remotely from various locations around the world. We thank you in advance for your understanding in case we experience any delays during this event. Nancy and Kevin will shortly discuss the important features of our first half results and following their comments, we'll open the call to your questions. 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 these statements. Factors that could affect Wolters Kluwer's future financial results are discussed in Note three to the half year earnings release. The COVID-19 pandemic has led to some disruption in our end-user markets and created significant uncertainty in terms of economic conditions around the world. If the situation deteriorates or persist for an extended period of time in key regions or businesses, then the risk of a significant impact on the Group's business due to this pandemic will increase. In addition to Note 3, we also refer you to Note 30 of our annual report for details on other risks. And as usual, we'll refer today to adjusted profits which exclude non-benchmark items. We also refer to growth in constant currencies which exclude the effect of currency movements. And we refer to organic growth which excludes both the effect of currency and the effect of acquisitions and disposals. Reconciliations to IFRS numbers and further information can of course be found in the notes to the financial statements. And so at this time, I am happy to turn the call over to our CEO, Nancy McKinstry.

Nancy McKinstry: Thank you, Meg. Hello everyone and thank you for joining us on this call. Before I start, I would like to thank all employees of Wolters Kluwer for their enormous efforts and dedication during what has been an unprecedented and challenging time for everyone. Since mid-March, our attention has been on ensuring the safety of our employees safeguarding the continuity of the business and providing as much support as we can to our customers during this difficult and disruptive time. Today with approximately 95% of our employees still working from home, we are monitoring everyone's well-being regularly to help steer how we can best assist them. Across all segments, we've been focused on supporting our customers whether it is by providing access to medical resources or by launching new solutions that help our customers manage COVID-19 challenges. Underpinning all of this has been a global incident management organization that has been active since the pandemic began and our global IT infrastructure team who has been involved at many levels. Against this backdrop, we are encouraged by how the business performed in the first half. Our first half results speak not only to the quality and resilience that we have built at Wolters Kluwer over many years, but also the agile manner in which team responded to this crisis on all fronts. If anything, the crisis has reinforced our commitment to our strategic direction. While our financial trajectory has been altered somewhat, we remain very committed to our strategic priorities, growing our expert solutions; advancing our information products and services; and driving operational agility. After a strong first quarter and helped by the rapid rollout of a solution to enable our bank customers to participate in the U.S. Paycheck Protection Program, otherwise known as PPP, we delivered 3% organic growth in the first half. Rapid action on cost containment, a few one-off factors, as well as some underlying improvement pushed up the first half margin and adjusted operating profit which in turn drove an increase in diluted adjusted EPS and in adjusted free cash flow. Our balance sheet and liquidity position remains strong, enabling us to continue with dividends and share buybacks. I will now turn the call over to Kevin Entricken, who will cover our financial performance. After that, I will come back to discuss divisional developments and provide you with some examples of how we are progressing on our strategic priorities. Kevin?

Kevin Entricken: Thank you, Nancy. First, let's cover headline figures on slide seven. First half revenues were €2.294 billion, an increase of 3% in constant currencies. Organic growth was also 3%. Excluding the revenues associated with the PPP software solution, organic growth would have been 2%. Adjusted operating profit was €577 million, an increase of 14% in constant currencies. The adjusted operating profit margin increased by 270 basis points to 25.2%. This was supported by temporary cost reductions lower restructuring charges and one-off factors which I will come back to in a moment. Diluted adjusted earnings per share increased 18% in constant currencies. Adjusted free cash flow was €336 million, an increase of 12% overall and 10% in constant currencies. And lastly, the rolling 12-month net debt-to-EBITDA ratio was 1.5 times. Turning to slide 8, we'll take a look at our four divisions. All four divisions were affected by the COVID-19 crisis albeit in different ways and to different degrees. Health grew 3% organically, following a slowdown in the second quarter. Tax & Accounting recorded 3% organic growth, also slower in the second quarter, as it faced not only challenging comparables in Europe and the United States, but also more difficult conditions for driving new software sales. The division also saw an impact from delays in the U.S. tax filing season. Governance Risk & Compliance recorded 6% organic growth due to the rapid deployment of the PPP solution, enabling our bank customers to participate in the U.S. Paycheck Protection Program. Without that product, organic growth would have been 1%. Legal & Regulatory has so far been the most impacted. Organic growth turned negative, declining 2% in the first half, primarily due to an accelerated decline in print formats. Let me provide more color on the developments of revenue by media format on slide 9. Here you see our revenue by media format. I would like to draw your attention to the impact of print on our first half revenues. While print only makes up 7% of total revenues, it fell by €37 million in the first half, shaving nearly two percentage points off organic growth rate. Fortunately the impact on margin is less severe. Now, I'd like to turn to revenues by type on slide 10. This slide shows the trends in revenue by type over the past 2.5 years and through the first half of 2020. On the left, you'll find recurring subscription-like revenues. On the right, transactional and nonrecurring revenues. I won't go into the detail on the green lines which are print. Suffice to say, print saw an accelerated decline, but it's a relatively small part of revenue. The most important category is recurring, digital and service subscription revenues depicted by the dark gray line. This is the strategic backbone of Wolters Kluwer. It accounted for 71% of group first half revenues. This important recurring revenue stream sustained steady 6% organic growth over the period. The light gray line in the middle represents other recurring revenues. The downturn here is mainly due to the extension of the U.S. tax filing deadlines, which were moved from the second quarter to the third quarter. As a result we expect to recognize revenue from e-filing fees and bank products in the third quarter. On the right, the highest solid line is legal service transaction revenues, where we saw a clear dip in the first half after a strong growth in recent years. This is tied to the falloff in M&A volumes at company formations. The lowest solid line mainly represents nonrecurring software licenses and implementation fees. The downturn here is evidence of the cautious spending patterns of our customers. Many organizations are postponing enterprise software installations until conditions become clearer. This trend may also be a sign of an accelerated shift to the cloud. Now let's turn to adjusted operating profits on slide 11. As mentioned earlier, adjusted operating profit increased 14% in constant currencies to €577 million. The adjusted operating margin increased by 270 basis points to 25.2%. The margin benefited significantly from temporary cost reductions, but also from a €10 million reduction in restructuring charges and some onetime factors. These factors helped increase margins across all divisions. Health recorded a margin increase of 270 basis points reflecting the general factors I just mentioned. Tax & Accounting saw the margin increase by 260 basis points reflecting similar factors but also improved margins in Corporate Performance Solutions. In Governance Risk & Compliance, the margin increased by 280 basis points, reflecting not only temporary cost reductions and lower restructuring charges, but also an insurance reimbursement and the benefit from the PPP solution. Finally Legal & Regulatory recorded a 70 basis point increase despite the revenue decline. This reflects the temporary cost reductions as well as increased scale in the EHS/ORM software business. I'd like to come back to the nature and timing of cost savings on the next slide 12. During the second quarter, we froze all travel and put a hold on non-critical hiring. We also made some other temporary cost reductions some of which we expect will start to unwind in the coming months. We are now taking additional cost actions which will require upfront investment and restructuring, but which will drive longer-term sustainable savings. These short-term and longer-term responses on costs will help to protect our full year 2020 adjusted operating profit margin. Importantly though, we are aiming to sustain investment in product development at 8% to 10% of revenues and we intend to continue with key investments in sales and marketing globally. Now let's turn to the income statement on Slide 13. Adjusted net financing costs were €25 million, down from the prior period, reflecting exchange rate movements. Our share of profits from equity accounted investees net of tax was €5 million. This was due to the release of the provision related to the May divestiture of our stake in Logical Images. The benchmark tax rate reduced to 23.5%, benefiting from lower interest charges and deduction limitations in the Netherlands and the favorable impact of tax losses in 2020. Adjusted net profit after tax was €426 million, up 16% in constant currencies. Finally, the diluted weighted average shares outstanding was reduced by 2% as a result of share buybacks. As a result, diluted adjusted EPS increased 18% in constant currencies. Turning to cash flow on Slide 14. The first half cash conversion ratio declined to 84% from 90% a year ago. This was primarily driven by the increased capital expenditure and increased working capital outflows. Capital expenditures increased to €121 million, largely due to higher investments in critical products and systems. Working capital outflows increased to €69 million, reflecting the timing of payments. All in all, despite the lower cash conversion, adjusted free cash flow was €336 million, up 10% in constant currencies, driven by the 14% increase in adjusted operating profit. Turning to Slide 15 to summarize how we've deployed that free cash flow. €210 million went toward the final 2019 dividend paid to our shareholders in May. Acquisition spend was modest at €26 million. Spending primarily related to CGE Risk Management Solutions, which was acquired by the Legal & Regulatory division's EHS/ORM software group. Cash proceeds for divestitures were €20 million and reflects the divestment of certain Belgian training assets, the sale of certain businesses in Germany and the sale of stakes in Medicom and Logical Images. We deployed €154 million towards share buybacks in the first half. Overall, this led to a small reduction in net debt, which combined with an increase in 12-month rolling EBITDA, moved our leverage ratio lower to 1.5 times. Now let's focus a bit more on the dividends and share buybacks on Slide 16. At the start of this year, we set the interim dividend at 40% of the prior year total dividend. This means we will pay out €0.47 per share to shareholders in September. Also at the beginning of the year, we announced plans to spend up to €350 million on share buybacks in 2020. We're making progress. Through August 4, we purchased €175 million worth of shares, and we have signed to complete an additional €100 million in the next three months. To sum up our results on Slide 17, our results demonstrate the resilience of our recurring digital information software and services portfolio, our agile and immediate response to the COVID-19 crisis and prudence around the balance sheet and liquidity. Despite the COVID-19 challenges, we achieved 3% organic growth or 2% excluding the revenues associated with PPP. Immediate action to contain costs and certain one-off factors benefited the adjusted operating margin. We expect some of this will reverse in the second half. Diluted adjusted EPS increased 18% in constant currencies, benefiting from a higher adjusted operating profit, a lower tax rate and lower share count. The growth in adjusted operating profit drove a 10% increase in adjusted free cash flow in constant currencies despite the lower cash conversion. Our financial position remains strong with net debt-to-EBITDA of 1.5 times, and our recent refinancing has improved our liquidity and extended our debt maturity profile. We're delivering shareholder returns with an interim dividend of €0.47 and continue to make progress on our share buyback program. I'd now like to hand the presentation back to Nancy to cover divisional developments.

Nancy McKinstry: Thank you, Kevin. I'll begin with a review of the first half performance of our four divisions, starting with Health. Health achieved 3% organic growth, driven by our Clinical Solutions group. The adjusted operating profit margin increased, reflecting temporary cost reductions and lower restructuring charges. Clinical Solutions sustained 7% organic growth despite the challenging market conditions. UpToDate performed strongly, and the UpToDate Advanced module now has over 1,000 hospitals around the world subscribing. Our Drug Information business also performed well, benefiting from closer alignment with UpToDate. Learning, Research & Practice saw revenues decline 1% organically. Digital revenue growth of 6% was more than offset by an accelerated decline in print formats. The COVID-19 disruption has had a significant impact on our printed books and journals and also on revenues from advertising and conferences. Increased demand for online education helped drive strong growth in our digital solutions for nursing schools. Now turning to Tax & Accounting on slide 20. Tax & Accounting recorded 3% organic growth and the margin increased 260 basis points, mainly by temporary cost reductions, operational gearing and certain one-off factors. Corporate Performance Solutions, which includes CCH Tagetik and TeamMate saw organic growth slow to 12% against a strong comparable and amidst more challenging conditions for new software sales. In both, performance management and internal audit, revenue growth was driven by the cloud-based versions of these products. Our Professional Tax & Accounting businesses recorded slower organic growth of 2% in the first half as we faced a tough comparable and a more difficult new sales environment. In North America, the delay in the IRS filing deadlines deferred revenue from e-filing and bank products into the second half. Our U.S. cloud suite, CCH Axcess, performed well. In Europe, organic growth slowed to 5% against exceptional performance in the prior period. Now let's talk about Governance, Risk & Compliance on slide 21. GRC recorded 1% organic growth, excluding the PPP solution mentioned earlier. As elsewhere, the adjusted operating profit margin reflected temporary cost reductions and one-off factors. Legal Services posted organic decline of 1%. Our legal representation and compliance business, CT Corporation, achieved positive organic growth in its recurring service subscriptions, but this was more than offset by a sharp downturn in CT's transactional revenues as M&A volumes and related company formations were impacted by COVID-19. Financial Services revenues grew 16% organically due to the rapid deployment of our Compliance Solutions team of a software solution to enable our bank customers to participate in the U.S. Paycheck Protection Program. Lean Solutions held up well despite a decline in UCC search and filing transactions and Financial, Risk and Reporting recorded good organic growth. Finally, let's now cover Legal & Regulatory. Legal & Regulatory revenues declined 2% organically due to an accelerated decline in print formats. In addition, training and other non-recurring revenue streams were weak. The margin increased, reflecting the temporary cost reductions we initiated in March as well as improved scale in the software business. Our EHS/ORM and legal software units together saw organic growth slow to 11%. Our recurring cloud-based solutions sustained strong growth, which more than offset revenue declines in non-recurring on-premise license and implementation services. Our legal software unit sustained high single-digit organic growth. Information Solutions revenues declined 4% organically due to the accelerated decline in print formats. Both print subscriptions and print book revenues recorded high-teens declines. The digital information products, however, which now account for nearly 70% of the unit's revenues, delivered 6% organic growth. Now, let me remind you of our strategic priorities. While COVID-19 is impacting our near-term financial performance, we remain committed to the strategic priorities we set out at the start of 2019. And despite the disruption, we are making progress on this strategic plan. Let me recap our strategic priorities. Our first strategic priority is to grow our expert solutions. Expert solutions make up just over half of our revenues today, and our goal continues to be to scale these solutions by extending the offerings and broadening distribution. Our second priority is to advance domain expertise, which means we want to continue transforming our information products and services by enriching their content with advanced technologies to create more value for our customers. And our third priority is to drive operational agility. We are improving the organization's ability to respond quickly to opportunities and change. We support these objectives with sustained organic investment at 8% to 10% of our revenues allocated to the opportunities with the greatest long-term return on investment. We continue to fund our infrastructure investments by driving underlying cost savings. We will continue to evolve our technology towards fewer scalable platforms and to transition our on-premise software solutions into the cloud. Strong organic growth and a few select acquisitions have now nearly doubled our revenues from cloud software over the past three years. Today cloud accounts for just over a quarter of our software business. Cloud software grew 24% in 2019 and 19% in the first half of 2020. The COVID-19 pandemic appears to be stimulating renewed interest in cloud-based software and collaboration tools as professionals adapt to remote working conditions. Our Tax & Accounting software business is the most advanced in the journey to the cloud. The CCH Axcess suite was launched six years ago. In Legal & Regulatory where software is still a relatively small part of the division's revenues, we started to see a shift to the cloud a few years ago with Enablon's EHS/ORM cloud platform. In GRC there are signs that large banks who had been reluctant to move to the cloud are now taking a fresh look at hosted solutions. Let me give you an example to illustrate the benefits of the cloud for our banking customers. About a year ago GRC's Finance Risk & Reporting unit launched a SaaS version of its OneSumX regulatory reporting solution partnering with Microsoft Azure to provide premium and secure hosting to banking clients. We are currently investing to cover more geographies and to extend its capability. The cloud version offers the same functionality as the on-premise software product but brings many additional benefits to the customer. First of all, it release customers having to maintain and host the IT infrastructure. Wolters Kluwer handles the installation hosting and fine-tuning of the system for the customer. This reduces the overall cost of ownership. The SaaS version also brings automatic access to our unique Wolters Kluwer regulatory update service produced by our in-house regulatory experts. Our first customer was BNG Bank of the Netherlands and since then we have signed five other financial service customers including notably two quite large banks for the cloud solution. It is still early days but we are excited about this promising innovation. Now turning to slide 26, I want to make a few comments about sustainability. As we continue to drive forward with our strategic priorities, we are also continuing to pay close attention to our performance on environmental social and governance matters. We are currently launching a new code of business ethics to reinforce the culture of integrity and openness. This new code will form part of our annual mandatory compliance training for all employees globally. This year we also strengthened our Green is Green program which aims to support our office managers and employees to adopt environmentally sound practices. The work we are doing here will lay the foundation for setting environmental targets for future years. Now let me wrap up with a few words on the outlook for the remainder of this year. So turning now to slide 28. As you know the COVID-19 pandemic continues to create challenges for our customers and economic uncertainty. Until we have greater clarity on the outlook our specific 2020 guidance remains suspended. We expect recurring revenues for digital information software and services subscriptions to show resilience. But we note that new sales of subscription products have been difficult in the current market conditions. We expect that as we saw in the second quarter transactional and other non-recurring revenue streams will remain weak. We expect full year revenues in Health to show positive but slower organic growth; but revenues in the other three divisions excluding PPP revenues and GRC to decline -- to be -- or to be broadly stable. Our response on the cost side is aimed at protecting the full year adjusted operating margin while sustaining investment in key products and strategic infrastructure. We are in a strong financial position and we remain confident in our strategic direction and the company's long-term prospects. With that we are now happy to take questions. So I'll turn it back to our operator.

Operator: Thank you. [Operator Instructions] And our first question comes from the line of Patrick Wellington from Morgan Stanley. Please go ahead.

Patrick Wellington : Hello, everybody. A couple of questions. Firstly, on the tax division you look for broadly flat revenues. But actually, if one looks at the components of the tax division you should be getting a benefit from e-filings growth in the second half and also the Tagetik businesses and TeamMate still doing well. So are you being a little bit conservative do you think in your concept of broadly flat for the year? Secondly, I think you mentioned in the context of the EHS and ORM software that you're beginning to see a bit of scaling up of the margins or improvement in the margins as the business scales up. Can you take a step back and give us a sense of the margin potential in those sorts of businesses? And we've seen a similar thing in Tagetik as well, I think. And then my third question is simply about the print revenues. And how do you regard this trend Nancy? I mean obviously you're seeing an accelerated decline this year. What happens when we if you like get back to normal conditions? Will print rebound, or will you see that turn into digital growth, or what is the -- what is your feeling about this accelerated decline of print revenues? Arguably it should raise the overall growth of the group going forward? Thank you.

Nancy McKinstry: Yes. So why don't I take the print revenue question and the EHS margins. And then maybe Kevin you can talk about tax, if that works for everybody. So on print, I don't see a rebound. I think if you look at the whole trajectory right over many years as you -- as we've been doing the transformation print kind of declined in sort of the low single-digit levels, and then after the global financial crisis that kind of went -- that decline accelerated to sort of minus 8% to minus 10%. And now you see an even more dramatic rate of decline. So I believe that print will not rebound with maybe the exception of textbooks. We still see in the education market that students historically have preferred the textbook with some e-components wrapped around that's what we see in some areas of medicine and legal textbooks. But in general, I would say that it might decline a little less, but it's not going to rebound in my opinion. And it's because customers get used to working in a different way. And as you know Patrick most of our customers also have the e-solution as well. So that allows them to have access to the information and the functionality that they need. On the margin question, what you -- just to remind everybody when we first bought Enablon and eVision the margins were quite low. And the whole premise was that we can scale these businesses more quickly under our ownership. That is in fact coming to fruition. And what you see is the margins kind of at some point step up. So it jumps a curve. It sort of gradually improves and then at some level of scaling on the revenue side you get a step-up in the margins. We've seen that with Tagetik already that the step-up is getting not at a fully mature software business, but clearly Tagetik is getting into the margin levels that sort of start with the two. EHS is not there yet, because we're investing a lot as we are integrating the various components we bought and as you know in that market in particular, it's still very much a land grab. So we are investing to build out the installed base. But EHS will get there over time. So we're quite happy with where we are our leadership in that segment. And again, that's an area you're going to see us continue to invest in. So, with that, Kevin, do you want to talk about tax and our view of the next six months?

Kevin Entricken: Certainly. In the first six months of the year we saw organic growth come down in Tax division to 3% from 6% the year before. Indeed we do expect to see a shift in the recognition of e-filing and bank product revenues from the second quarter to the third quarter. What we are seeing in general though across the Tax & Accounting division are our retention rates are holding up quite well, but we are seeing conservatism in spending on behalf of our customers. They're saying yes, I'm going to renew, but go and talk to me about that new thing today come back another day when we see a little bit more clarity. Similarly we still see good growth in our Tagetik and our TeamMate business in Corporate Performance Solutions, although, slightly lower than a year ago. Similar to new sales, the number of customers are delaying software implementation. So the services and the fees that we recognize around those services we are seeing delays in those. And we expect that will continue into the second half. So each of these trends is where we see total organic growth for the year in tax really coming in as flat compared to last year. And obviously, we'll update you if things change. But right now that is the view we have.

Patrick Wellington : Okay. But it's zero plus rather than zero minus would be the estimate.

Kevin Entricken: Yes, broadly flat as you said.

Patrick Wellington : Yes.

Nancy McKinstry: Yes. I would also mention Patrick just to remind you Europe had an exceptional year in 2019 given some of the regulatory changes that we were able to rapidly deploy some solutions against. So that -- even though we're still getting good growth out of Europe, it's not going to be at the same level it was in 2019.

Patrick Wellington : Okay. Typically conservative. Thank you very much.

Operator: The next question comes from the line of Sami Kassab from Exane. Please go ahead.

Sami Kassab: Yes. Thank you. Good afternoon everyone. I have two questions. One is back on print in H2. Do you expect the rate of decline in print to slow down? I heard you answer to Patrick's question Nancy, but we also had Thomson Reuters guiding for a slowdown in the global print decline. There seems to have been issues with the lockdowns that prevented shipments. So would it be fair to expect a decline in print to improve in the second half of the year? And secondly when it comes to legal and regulatory it has declined in H1. You're expecting a decline for the full year, but are you seeing the rate of decline worsen in H2? Will it be worse than minus 2%? Thank you.

Nancy McKinstry: Yes. So just Patrick's question was sort of do I think print is going to rebound kind of post COVID. And I just think this is -- I mean, we've all seen the movie before if I can use that expression, right? I just think this is a factor that's allowing customers to rethink how they work. And so I don't think print is going to somehow rebound to pre-COVID rates of decline. I think we're at a new step down. If your question is more first half versus second half now I will remind you we do a lot more business in the second half of any year in the print book world. And so you may see the rate of decline get a little bit better, but that's only due to sort of seasonal patterns and comparables not due to I think somehow it's going to rebound magically. Now some of the disruption in the distribution channels are getting resolved. So again you'll see some benefit from that, but we're talking relatively I think modest levels of benefit on the print side. So again it might improve modestly because of these factors, but it's not suddenly where customers are going to wake up and order a lot of new printed products in our view. Kevin do you want to add anything on that before I talk about Legal & Regulatory?

Kevin Entricken: Yes I would agree Nancy that I do think we're seeing a new step down in print. However it is becoming smaller and smaller and thus less and less of a drag on overall organic growth.

Nancy McKinstry: Yes. It is still however a contributing factor in Legal & Regulatory. They still have more print than any other part of the portfolio and that is very much reflected in their results. What you see is the software business still growing nicely even though it slowed its growth it's still at double digits. The important thing I would highlight in Legal & Regulatory is that the information part of the business which is the lion's share of the division revenues at over -- slight over 80% you did see that our digital solutions grew mid single-digit organic growth which was very, very good to see and again reflects all of the investments we've been making in the digital products. But unfortunately print decline accelerating did kind of weigh on those other two growth areas. So what we anticipate is that the second half will look a lot like the first half, Sami. So you should sort of assume that that rate of decline continues because these trends are going to continue and it's largely a subscription business. So I would I think that's a safe assumption you can make.

Sami Kassab: Thank you very much, Nancy.

Operator: The next question comes from the line of Katherine Tait from Goldman Sachs. Please go ahead.

Katherine Tait: Good afternoon, everyone. Three questions from me. Firstly you talked about the second half being impacted by slowing new business trends which makes up completely. But I'm curious about the sort of potential lower levels of renewals and sort of the subscription value of some of your products in the second half and potentially going into the first half of 2021 as well. And can you give us a sense of what proportion of your subscription products are contracted on a sort of per seat or per user basis? And how you're sort of seeing the health of your end customers from that perspective evolving? And whether or not you see any risks there, or if you think that that's relatively robust and not something to be concerned about at the moment? And secondly in Clinical Solutions, I think you made a comment in the presentation that the patient engagement and software results have been a bit mixed. I'm just curious to understand that a little bit more. Is that a sort of issue with the product? Is it sort of COVID-19 disruption? Just some help unpicking that would be very helpful? And then finally on capital allocation you've clearly sort of reiterated your sort of support on the dividend and buyback. And are you seeing any sort of opportunity in terms of M&A? And has that sort of an outlook or pipeline changed for you? I'm interested to see any evolution in your thinking there? Thank you.

Nancy McKinstry: Great. Okay. So Kevin do you want to start with capital allocation and then I'll talk about Emmi and then I'll start on the renewal question and you can augment what I'll say. So...

Kevin Entricken: Okay. Absolutely. With regard to capital allocation Katherine, you did see a strong cash flow in the first half. That along with the predictability on renewal rates gave us the confidence to continue with our share buyback program and to continue with the interim dividend. With regard to M&A. we are always looking for ways to strengthen the portfolio. So we are keeping our eyes open. But I say if you look in the last two years our M&A has been a bit of a step down from years prior. We do still look at things that are in the pipeline. But at this stage of the game, I don't have insight into what will come up on the market. But right now we are still seeing a bit of a modest pipeline, but we will continue to look for opportunities as they come along.

Nancy McKinstry: So on Emmi what we meant with mixed performance there is, Emmi did decline in the first half and that's largely because of the new sales environment. What Emmi is, is it's a patient engagement product that helps patients do the necessary work that they need to do on their end in order to have better outcomes. And what we saw in the first half is of course most of the hospitals in the U.S were dealing with the pandemic-related patients and so elective surgeries were cancelled and just getting anybody's attention, as you might imagine was very, very difficult. So the product is well regarded. It's really about getting customers to pay attention and invest in this area. Some hospitals are very much on board with patient engagement, as a vehicle to create better outcomes, but other hospitals don't have this necessarily as a priority. So we anticipate that, it will continue to be a tough year for Emmi in the sense that again getting attention by people in the hospital environment is tough. And for many hospitals the COVID-19 situation has created financial hardships. So of course, adding new things into the mix is more difficult. So -- but we believe patient engagement is still a very good segment for us to be in, over the long-term. And we just see this as a bit of a speed bump now, given the conditions overall. To your question about renewals, we see broadly that, renewals are holding up nicely. We have invested a lot, in our products over the last years. And we see usage at very high levels which is always a precursor to -- or an indicator of the level of renewals. So usage is good. The quality and the Net Promoter Scores of our products are high. And so we anticipate that renewals will hold up nicely. Most of our pricing there is always some volume discounts that we do, right? So -- but the range of use -- when it's based on the number of users, it's always within a range. So a client would have to really step down, in terms of the number of users to fall into a new band. So there could be some of that, but we don't see that having a real impact on kind of the overall level of renewals. And so we fully expect that some customers may ask for price concessions or other kinds of things. But we are ready to deal with those situations, across the business. So again, we would say that we see the renewal environment being a resilient environment, given the quality of the products, and given again all the investments that we've made over the last five or six years.

Katherine Tait: Perfect. Thanks so much.

Operator: The next question comes from the line of Matthew Walker from Credit Suisse. Please go ahead.

Matthew Walker: Thanks a lot. Good afternoon. Hi everyone. Can you hear me? I've got three questions. The first is if there's a new sort of package from the U.S. government. Do you think there could be another bout of PPP for the second half of the year? That's the first question. Second question is just to pick up on Patrick's thing about tax. It does look like flat guidance for the full year implies quite a big negative number for the second half of the -- for the second half of the year. Thomson has just reported, they've talked about a 3% benefit from the IRS filings which would be sort of, 1.5% benefit on an H2 basis. So are you losing market share in tax? Because I really can't understand, -- even though new sales are getting harder, I really can't understand why the second half is sort of like minus 2% minus 3%, compared to a first half up and a Q2, slightly up. So that's the second question. And then you mentioned that some of the margin benefits in H2 -- sort of, some of the margin benefit from H1 will go away in H2. But you didn't say all of it. So could you just sort of walk us through the puts and takes for the full year margin? I understand, you're sort of pointing towards flat margin for the full year. But it was a big boost. Maybe you could sort of quantify what's happening on the travel and hiring savings, because you've sort of given us what restructuring might be and also what the insurance might be? Thanks a lot.

Nancy McKinstry: Okay. Thanks, Matthew. So Kevin, I will take the PPP and the market share question. But then, if you could again do the help with the math on the tax, H1 to H2. And then talk about the margins. So on PPP we don't anticipate the kind of magnitude of the program that was rolled out initially, in response to COVID-19. In fact, there was a fair amount of funds that were actually didn't end up getting lent out. So there's still money left in the first PPP program. But if you look at the sheer volume of lending, that will go on to use that money. And then anything else that might come -- the team right now and you never know, but the team right now does not believe that, it is a material level for us. But of course we're ready to help customers if that were to change. Then on tax, I can say with a good level of assurance that we're absolutely not losing market share. As I think you know, we are leaders in the professional segment of the market. Thompson leads in the corporate segment. And so in the professional market, we've been still the only provider with a full cloud suite with CCH Axcess. That's been out now six years. We continue to add new customers that, continues to do well. What we're seeing however, with all of that said is still the market remains very cautious right now in terms of adding new components to the products that they have. So again, renewal is doing very well still adding clients on CCH Axcess, but overall customers being cautious about new spending. So Kevin maybe with that comment do you want to describe a little bit more H1 to H2 on tax?

Kevin Entricken: Yes. I would remind everybody in our tax business our big selling season is in the second half. Accounting firms renew their software typically beginning early fourth quarter. So that's where our big selling season is. And as I mentioned earlier that's where we are seeing some pressure. Our clients -- our customers are renewing their products, but they are very reluctant to go into any new spending areas right now. I also mentioned that we are seeing a bit of delays and slowdowns in implementation of software. So that will impact our Corporate Performance Solutions business in the second half undoubtedly. So that is why we are giving you a view of broadly flat in the tax business so clearly a slowdown that we see on the horizon in second half of the year. I think the third...

Nancy McKinstry: And again the European comparable from 2019 is also something that's not at that level.

Kevin Entricken: It's very low too.

Nancy McKinstry: Yes exactly.

Kevin Entricken: Third question Matthew that you had was on the margin. I will stress that in the first half of the year there were a couple of factors that really flattened that margins. Number one we didn't really spend anything on restructuring in the first half compared to a spend of €3 million in the first half last year. So that obviously contributed. We did receive an insurance reimbursement in the first half of the year that obviously would not be a continuing item going forward. And due to COVID we have literally stopped travel. We have been working from home since mid-March so our travel and entertainment line item on the P&L is very, very meager. We do expect that in the second half we will open up a bit and we will start to travel particularly we want to get our salespeople back out in front of customers and our product development team as well. So we do expect those expenses to come back. We do expect to open up the hiring as we move forward particularly in sales and marketing and in technology. So I expect our personnel expenses will be higher in the second half of the year.

Nancy McKinstry: We also had – No, go ahead, sorry, Kevin.

Kevin Entricken: Finally and importantly in the second half of the year we are announcing today that we do expect to step-up in our restructuring expenses compared to the first half. Last year in total we spent €26 million on restructuring. We are now saying that we expect to spend anywhere from €25 million to €35 million in restructuring. So those will be investments that we will make in the second half of the year to protect margins in 2020 and but also to go into 2021 and the future with a stronger organization and more agile organization. So that's the reason why we're giving you the indications that we are. These restructuring programs are designed to protect margins in 2020 and to improve going forward.

Nancy McKinstry: Yes. The only thing I would add is keep in mind in the first half you have the benefit the margin benefit from PPP that won't recur again in the second half and even if the as I talked about the program is not likely to be anywhere near the level it was in the first half.

Matthew Walker: Okay. Thank you, Nancy. Thank you, Kevin

Operator: The next question comes from the line of Matti Littunen from Bernstein. Please go ahead.

Matti Littunen: Hi. Good afternoon. A question on EHS, ORM software. You mentioned that nonrecurring revenues declined due to, sort of, on-site transactional revenues being disrupted. Was this due to an investment slowdown in the customer industries, or was there some contribution from travel restrictions due to COVID-19 on on-site visits? And the second one actually a follow-up on the M&A pipeline. So you've previously said that the prices for private companies in the target industries have been too high to fit your acquisition criteria. Do you expect any change to this based on what you're seeing currently in the market during the crisis? Thank you.

Nancy McKinstry: Kevin do you want to start with that and then I'll take EHS.

Kevin Entricken: Sure. I will agree with you that we have seen valuations are quite high in market right now particularly in areas that are very attractive. So far, we have not seen prices come down. I think many companies that don't have to sell probably would not drop their price and probably would hold on and not sell in this particular economic environment. Nonetheless, we continue to be active in looking to the market. And clearly if we can find something that fits our strategic direction and fits our financial criteria as -- just as a reminder, we want all of our acquisitions to be EPS accretive in the first year. And we want to make sure they cover our weighted average cost of capital in years three to five at a minimum. So we will work diligently to make sure that if we see the right opportunity that we're also disciplined from a financial point of view.

Nancy McKinstry: And then on EHS what we saw and this is kind of a trend we have been seeing, but I do believe that the COVID-19 situation has accelerated the focus of customers on cloud solutions. So the mix between cloud and on-premise and EHS has been shifting towards cloud for the last couple of years, but now it's accelerating towards cloud. And so, the nonrecurring on-premise license sales in the first half were less than the SaaS solutions and implementations. To your point, there were some disruptions with implementations, but a lot of that can be done remotely. So that was not a major factor. But, of course, as new sales flow, implementation services also flow, right? They're related to each other. And we did see -- we do serve in the space, the oil and gas industry and certainly with -- in the beginning of the year, with oil prices being hard hit, we did see some pausing among some of our customers, but that now seems to be abating and we seem to be making traction on the sales side. So I think one of the things that I saw that we -- I think, both Kevin and I were encouraged by is, these are really big contracts, right, multimillion dollar, multi-year contracts and it's always been the situation pre-COVID that sales reps had to be out front and center, physically there -- these are lengthy contracts a lot of in-person activity. And we have been able to close sizable deals in this space from mid-March to now without the reps, without the sales team and the legal teams being front and center. So that does show me that clients are adapting to kind of this new way of selling, for large contracts. We've always done a lot of virtual selling, but for big-big deals, it's generally required some level of in-person activity and we are seeing that people are adapting to buying in a completely virtual way.

Matti Littunen: Very helpful. Thank you, Nancy and Kevin.

Operator: The next question comes from the line of Sarah Simon from Berenberg. Please go ahead.

Sarah Simon: Yes. Hi. My interesting questions have actually been asked, but just a couple of small ones. Kevin can you quantify the size of the insurance refund, just so we can sort of work out the impact on the margin? And then, the delay in the IRS filing revenues, what kind of magnitude should we be thinking about there in terms of the impact on growth? Thanks.

Nancy McKinstry: Kevin, you want to take both of those?

Kevin Entricken: Yes. Starting off with the insurance reimbursement, it's approximately €9 million in the first half of the year. And I do not expect that there will be an additional material amount in the second half of the year.

Nancy McKinstry: And e-file fees Kevin, in tax?

Kevin Entricken: E-file fees, I would imagine, we will see those fees come up in the third quarter, but they were modest compared to the overall revenue in Tax & Accounting. So there will be some bump. But again, I still believe that guiding you to broadly flat for the full year for Tax & Accounting is the right place to be, based on what we see right now.

Sarah Simon: Great.

Nancy McKinstry: Because still the vast majority of the filing got done before April 15 and then the deadline it went from April 15 to July 15, right? So there was definitely a long tail there. But still many, many customers filed before July.

Sarah Simon: Okay. Got it. Thanks.

Operator: The next question comes from the line of Matilde Durazzano from Barclays. Please go ahead. Hello, Matilde Durazzano, your line is now open. Please go ahead with your question.

Nick Dempsey: Yes. It's Nick Dempsey. Can you hear me?

Nancy McKinstry: Yes. Hi, Nick.

Nick Dempsey: Yes. So still don’t know how that happens. Yes. Just one question left. You have a proud record of improving your operating profit margins every year since 2014, profitability before that for a few years. When you look at 2021, you've got a tough comp from some of the discretionary savings you're making. Could have some drags on growth from disruption to new subscription sales in the middle of 2020. And you'll get help from the fruits of restructuring in 2020 for sure. But do you think balancing all that out that you might be able to continue to step that margin up in 2021?

Nancy McKinstry: Kevin, do you want to?

Kevin Entricken: Sure. I would say, Nick, you're right. We have had success at improving margins and organic growth over the last several years. Clearly, the disruption of COVID-19 is not welcome. But then again, I do think that our teams around the world have been very agile in responding to them and very thoughtful about what we can do going forward to protect the margins in 2020 and to continue to have a good development of margins. Obviously, right now, we're not going to be giving you any guidance on 2021. We'll have more to say about that, as we present full year results in February. But our goal has always been to improve and deliver value to our shareholders and the ways we do that are always looking to strive to improve organic growth and modest margin improvement.

Nancy McKinstry: Yes. I would also point you Nick to the mix shift; the expert solutions, which continue to grow well above the group average, have in general higher margins than core digital information products. Now, again, some of those products are not yet at scale, but as we are scaling them and the mix is shifting towards them that gives you an inherent benefit on margin. That's going to be there no matter what, right?

Nick Dempsey: That’s great. Thanks guys.

Operator: We have our final question and this comes from the line of Rajesh Kumar from HSBC. Please go ahead.

Rajesh Kumar: Hi, good afternoon. If we start -- if you look at the slide number 12, in temporary cost reductions you have highlighted virtualized, postponed or canceled, internal and external meetings, conferences training, whereas, you're also looking at some of the structural cost reductions in travel from second half onwards. Why don't you consider virtualization of these activities as a structure change not a temporary one?

Nancy McKinstry: Yes. So we -- yeah so a couple of things, right, which is just to be clear right, is that as Kevin mentioned nobody is traveling at the company. So we are not going to conferences ourselves. We are not hosting in-person conferences with customers, training in-person et cetera, so all of that has halted. Now in terms of what we do for customers so what's -- what -- when we talk about the cost side, we're talking about our own behavior inside the company, right? If we talk about the customer-facing things that we're doing we've always done a lot of virtual training even virtual installs and implementation. That continues. The conferences we primarily -- we work with medical societies to run some of their conferences we have moved that to virtual activities. It's still early days. We have had a number of successful activities. But as you might expect the business model can be different than the in-person. So I think in terms of the virtual conference business it's still early days to figure out how much of that can permanently get moved from in-person. I think on the training side, there's always been a lot of virtual training. So that will continue. So I would say on the customer-facing side, we have the capabilities and we've been rolling that out in partnership with our customers. But again it's not completely clear to us how much of the revenues of the prior business model get transferred over. So we're being quite cautious I think on just how that might develop.

Rajesh Kumar: Understood. Okay. That's reasonably clear. In terms of the longer term sustainable cost actions you talk about on the slide. I'm talking about a blue sky scenario, not a guidance for second half or 2021. From the pandemic, what have you learned in terms of the cost savings you could achieve structurally? Are we talking about 50, 60 basis point opportunity here or more like 300 to 500 basis point opportunity?

Nancy McKinstry: Kevin, do you want to tackle that one?

Kevin Entricken: Yeah. I think on that, if you look at what we've been doing over the last several years, we've really been constantly restructuring. In fact I mentioned that last year we spent €26 million on the restructuring. I believe in the years prior to that the balance has been about the same. Restructuring that we'll be doing now the investment will be between €25 million and €35 million. But we do believe that there are structural cost savings that are achievable out there. We have not quantified them, but they have been part of the margin improvement story over the last several years. Now we will constantly look at our portfolio. As technology evolves as we go into new markets and new product lines, our cost base will adjust and will change. So we will be aggressive with the appropriate restructuring and you should expect the investment this year will yield results as we have in the last several years.

Rajesh Kumar: Understood. I've got two more. One is on the -- a follow-up on earlier questions on the subscription revenues. What portion of the subscription revenue is volume linked, i.e., you can see some variance in that as you see increased level of churn or employment reduction at your customers? And the final one is just in terms of the growth story. When you look at the post pandemic world, I know we are not in the post pandemic world yet, but what are the opportunities – new opportunities you see in terms of revenues or segments where you should be investing more capital or deploy more capital?

Nancy McKinstry: Yeah. So, why don't I take the last question, and Kevin, maybe you can comment just again reminding how the subscription model works and how the volume components work. So, on the last question, a great question, right? Because we've obviously stepped back and said, what are the possible silver linings that come out of this crisis and I think what you're going to see, which is very similar to what we saw coming out of financial – global financial crisis is that the trends in the market accelerate, right? And the trends that we're seeing that offer us opportunities that accelerate are really cloud like customers, even with the example, I used in the presentation, large banking clients who historically were not moving to the cloud. Everybody recognizes that being in the cloud is helpful to virtual work. And so we expect that cloud migration will accelerate. We are well positioned across the board with having solutions that are in the market and relatively mature from a product perspective. So, we plan to continue to invest in cloud products and in the go to market. So, that is an area that we clearly see as an opportunity. I think the second area is around collaboration tools. Again, we have a number of solutions in the market, but that's an area, again, that we will be investing even more than we do today because we see that as a growth opportunity. And then, Kevin, do you want to talk about renewals order of subscription models and how that works?

Kevin Entricken: Yeah. On the subscription models, in several cases, we do sell a subscription based on the number of professionals in a law firm or an accounting firm, it's based on bands. So a law firm that has 10 to 25 professionals would pay one price, a law firm that employ 50 to 100 professionals would pay a different price. So we don't necessarily expect that you would see a real change in those levels. Now that being said, if you had a law firm that's employed 75 professionals and significantly downsized due to the COVID situation and now only employed 30 professionals, yes, that would be a step down in that total subscription offering. Other areas such as in our health business, our UpToDate business, we have 25 different specialties. So the number of doctors increases with the increase in those specialties. We've seen that trend over a number of years. I can't imagine you'd see a hospital say, we're no longer doing oncology in our practice, and we want a discount for that. So, I don't necessarily expect that we would see a real step back there. I actually would say that the demand for health care is even greater. And that's one of the areas where we really sell value with our products is to help our professionals keep up with that demand and that complexity. So a major, major step back in the number of tax and accounting or health care professionals would certainly impact us, but I don't necessarily see that happening going forward.

Rajesh Kumar: Thank you very much.

Operator: Okay. So we have reached the end of the Q&A section of this conference. So I will hand back to Nancy for any concluding remarks.

Nancy McKinstry: Yeah. I would just thank you again for joining us, and very much appreciate all the questions and wish you all continued good health and safety over the next many months till we see you again. Thank you.

Operator: Thank you, everyone, for joining today's conference. You may now disconnect your lines.