Earnings Transcript for WTKWY - Q4 Fiscal Year 2020

Operator: Hello and welcome to the Wolters Kluwer Full Year 2020 Results Webcast and Conference Call. My name is Adam and I'll be your coordinator for today's event. Today's conference is being recorded. [Operator Instructions] I will now hand you over to your host Meg Geldens, Vice President of Investor Relations to begin today's conference. Thank you.

Meg Geldens: Good afternoon, everyone and welcome to Wolters Kluwer's full year 2020 results call. Today's results 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 lockdowns, we are all dialing into this call remotely from various locations around the world. So we thank you in advance for your understanding in case we experience any delays during the event. Nancy and Kevin will shortly discuss the important features of our full year results. 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 the statements. Factors that could affect Wolters Kluwer's financial results are discussed in Note 2 of today's earnings release. As we said in the release today, we've not been immune to the effects of the pandemic. In Note 2, we cover the main impacts, the measures we took and what further steps management might take if the situation deteriorates or persists for an extended period of time. We also refer you to the Notes of our most recent Annual Report for further discussion of risks. 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 disposals. Reconciliations to IFRS numbers and further information can be found in the Notes 3 of today's release. At this time, I'd like to hand over the call over to Nancy McKinstry, our CEO.

Nancy McKinstry: Thank you, Meg. Hello everyone and thank you for joining us on the call. Before I start, I'd like to express my gratitude to all of our employees around the world for their hard work and dedication during 2020. It's been an extraordinary time that has tested everyone. So thank you. It was a balancing act but the global team's agile response to the pandemic helped us deliver important financial, strategic and ESG results. We finished the year with 2% organic growth and improved margin, a 7% increase in diluted adjusted EPS in constant currencies. And we achieve 16% growth in adjusted free cash flow. This performance along with the strength of our balance sheet allowed us to provide reliable and consistent returns to our shareholders. On a strategic and ESG front, expert solutions continue to be our fastest growing category of products and through continued investments these and our other products delivered new innovations and value to our customers. I'm pleased to say that we registered a record level of employee engagement in this extraordinary year, and we were able to accelerate programs that help reduce our carbon emissions, such as data center consolidations. While the pandemic diverted us from our original financial plan, especially in terms of organic growth, it has fully reinforced and validated elements of our strategy. We are more committed than ever to evolve towards digital and expert solutions. That pandemic has reinforced the trend towards cloud-based software platforms. We recorded 19% organic growth in cloud software revenues last year. We also advanced our domain expertise by continued enhancement of our digital information products, particularly embedding AI and analytics to extend our value to customers. And the pandemic also made very clear the importance of strong internal systems, infrastructure, and digital marketing capabilities. I'm pleased with the progress that we made on our strategic priorities while successfully navigating the challenges of COVID-19. I will now turn the call over to Kevin Entricken, who will provide more detail and insight into our financial performance. After that, I will return to discuss divisional performance, provide an update on our strategy and finish with an outlook for 2021.

Kevin Entricken: Thank you, Nancy. Let me start with the financial highlights on Slide 7. Full year 2020 revenues were €4,603 million, an increase of 1% in constant currencies. Organic revenue growth was 2%. Excluding revenues associated with the U.S. Payroll Protection Program, also known as PPP, organic growth would have been 1%. Adjusted operating profit was €1,127 million, an increase of 5% in constant currencies. The adjusted operating profit margin improved by 80 basis points to 24.4%. This was supported by cost savings and one-off benefits, which I'll come back to in a moment. Diluted adjusted earnings per share increased 7% in constant currencies. Adjusted free cash flow was €907 million, an increase of 12% overall, and 16% in constant currencies. And lastly, net-debt-to-EBITDA was 1.7 times, slightly higher than a year ago. Let's look at division revenues on the next slide. All four divisions experienced slower growth due to the pandemic. Health grew 3% organically compared to 4% in 2019. This was driven by a strong growth in clinical solutions and digital solutions in Learning, Research & Practice, which helped mitigate an accelerated decline in print formats. Tax & Accounting delivered 2% organic growth compared to 6% the year before. Not only did the division face a challenge in comparable, but also market conditions for new software sales were more difficult around the world. Governance, Risk & Compliance also delivered 2% organic growth. This is our most cyclical division due to a relatively high proportion of transactional revenues. Nonetheless, the success of our TSoftPlus innovation, which helps banks lend under the PPP program, allowed the division to offset a steep decline in core transactional volumes. Finally, Legal & Regulatory recorded an organic revenue decline of 2% compared to 3% growth the year before. This reflected an accelerated decline in print formats and slower growth in our software businesses. Let's take a closer look at print revenues on Slide 9. This slide shows our revenue by media format. The highlight here is that digital revenues grew 5% organically. In contrast, print revenues declined by some €80 million in total, placing downward pressure on organic growth last year. With this decline, print is only 9% of total revenues compared to 11% in 2019. As you can see here, the services revenues declined. This reflects the downturn in non-recurring services revenue streams, which were impacted by the pandemic. I will discuss those on the next slide. The left chart on this slide shows our recurring subscription-like revenues, which together make up 80% of our total revenues. On the right you see our non-recurring revenues, which make up the remaining 20%. Of the recurring revenues, digital and service subscriptions, shown in blue is by far the biggest component, 70% of group revenues. This important recurring revenue stream has held up very well through 2020, slowing only modestly in the second half of the year. Total organic growth for the year was 6%. Of the non-recurring revenues on the right, the top solid purple line is the transactional revenues and Legal Services. You can see the clear downturn in the first half of 2020, which came as a result of a market wide decline in new company formations, search and filing activity and M&A related volumes last year. The dashed purple line represents Financial Service transactions revenues, which excluding PPP also dropped due to the market wide decline in commercial lending. The lower solid line represents non-recurring software licenses and implementation fees. The pandemic caused many organizations to postpone or curtail software implementations last year. In addition, this trend is linked to the growing market preference for cloud-based software. Let's turn to division margins on Slide 11. As mentioned earlier, the adjusted operating margin increased by 80 basis points to 24.4%, driven by Health and Tax & Accounting. Starting in March, we implemented a freeze on travel and in-person events, and took action to reduce promotional and other discretionary expenses. We also slowed the pace of hiring, these savings are temporary. We also drove more sustainable structural savings from ongoing efficiency programs. In addition to cost savings, the margin increase also reflected a one-off insurance reimbursement of €12 million and the margin on the PPP revenues. These savings and one-off benefits allowed us to fully sustain our investment in product development, technology infrastructure, and digital marketing. Additionally, they allowed us to bring forward a number of efficiency programs, leading to an increase in restructuring spend. Restructuring was €49 million in 2020, compared to €26 million in 2019. The increase in restructuring was primarily in GRC, and Legal & Regulatory, which explains why the margins in these two divisions declined year-on-year. Let's turn to the rest of the income statement on Slide 12. Adjusted net financing costs decreased to €46 million. This was principally due to a €24 million net foreign exchange gain related to the translation of intercompany balances due to the depreciation of the U.S. dollar against the euro. Partially offsetting this foreign exchange gain was a fall in interest income in our U.S. cash balances following the sharp cut in the U.S. Fed funds rate in 2020. The foreign exchange gain and other factors also led to a more favorable benchmark tax rate of 23%. As a result, adjusted net profit after tax was €835 million, up 6% overall, and up 4% in constant currencies and with the diluted weighted average shares outstanding reduced by 2% as a result of the share buybacks, diluted adjusted EPS increased 7% in constant currencies. Now turning to the IFRS income statement, reported operating profits increased 7% to €972 million. This improvement was driven by the higher adjusted operating profit and the absence of impairments. Other non-benchmark items reversed to a net expense mainly arising from transaction costs on last year's acquisitions. The reported effective tax rate increased to 23.1%. The lower rate of 22% in 2019 had a favorable impact by tax exempt investments and the finalization of tax audits. Let's turn to cash flow on Slide 14. Most notable here was an increase in the full year cash conversion ratio from 96% in 2019 to 102% last year. This was driven by working capital movements. We had a €39 million inflow in 2020, compared to a €27 million outflow in 2019. The working capital movement reflects favorable timing on collections. CapEx increased slightly to €231 million broadly stable at 5% of revenues as we fully sustained investments in new and enhanced products and in infrastructure. Cash taxes and cash interest increased. The cash effect of restructuring is positive as the restructuring provisions made in the second half of 2020 will see cash outflows in 2021. All-in-all, adjusted free cash flow was €907 million, up 16% at constant currencies, mainly reflecting the strong cash conversion and the timing of cash spending on restructuring. Let's turn to uses of free cash flow on Slide 15. The majority of free cash flow was returned to shareholders in the form of dividend payments of €334 million and share buybacks totaling €350 million. This was a relatively active year for acquisitions. We spent a total of €406 million primarily on three software businesses CGE, XCM Solutions, and eOriginal. Nancy will cover these in more detail in a moment. It was also a busy year for divestments. We sold eight small non-core assets, which brought in net cash proceeds of €48 million. Most of the disposals were in our Legal & Regulatory division. You can find more detail in the notes of the press release issued earlier today. You will also see in the release that we have now combined our Prosoft assets in Brazil with those of a larger rival in return for a minority stake. We expect to complete this transaction in a few months. We ended the year with a modest increase in net debt, leaving our balance sheet in good condition with a year-end leverage ratio of 1.7 times. Let me now update you on our proposed final 2020 dividend and our share buyback plans for 2021 on Slide 16. In view of the 2020 performance and our strong balance sheet position, we are proposing to increase the total 2020 dividend per share by 15% to €1.36. This will bring the final dividend to €0.89 per share. This proposal is subject to shareholder approval at the Annual General Meeting in April. We completed the 2020 share buyback plan of €350 million and today we are announcing plans to repurchase up to another €350 million in shares in 2021. These amounts include repurchases to offset incentive share issuance. So far this year, we have already completed €50 million in buybacks, and we have just signed a third-party mandate to implement further €70 million starting on Friday up until May 3 of 2021. So to sum up before I hand back to Nancy, despite the challenges posed by the pandemic, we are pleased with the results of 2020. The resilience of our recurring revenues and the quick response of the whole organization to opportunities and challenges last year allowed us to deliver 2% organic growth and an 80 basis point increase in margin. This plus a favorable benchmark tax rate and lower share count drove 7% increase in diluted adjusted EPS in constant currencies. We delivered a 16% constant currency increase in adjusted free cash flows, most of which was returned to shareholders in the form of dividends and share buybacks. We spent over €400 million on acquisitions, including three important software ones and ended the year in a very strong financial position with a net-debt-to-EBIT ratio of 1.7 times. I'll now turn it over to Nancy to cover divisional performance.

Nancy McKinstry: Thank you, Kevin. I'll begin with a review of full year performance of our four divisions starting with Health on Slide 19. Health achieved 3% organic growth driven by our Clinical Solutions group. The adjusted operating profit margin increased reflecting cost savings, lower restructuring charges and the ongoing mix shift to Clinical Solutions. Clinical Solutions sustained 6% organic growth despite the amplified pressures on hospital budgets due to the pandemic. In clinical decision support the UpToDate suite saw continued strong growth driven by renewals, upsells and new customer wins. The UpToDate Advanced module now has over 1150 hospitals subscribing. Our drug databases delivered good growth, benefiting from closer integration with UpToDate. Learning, Research & Practice revenues were broadly flat on an organic basis despite an accelerated decline in print revenues. Medical and nursing books declined 39% reflecting last year's disruption in distribution and in medical and nursing education programs, as well as a renewed shift to online learning. In fact, our digital learning solutions for nursing such as Lippincott CoursePoint+, PrepU and vSim generated double digit organic growth. Turning to, Tax & Accounting on Slide 20. In Tax & Accounting, organic growth slowed to 2% against a strong comparable while the margin increase due to cost savings, operational gearing and a one-off insurance reimbursement. Corporate Performance Solutions which include CCH Tagetik for financial performance management, and TeamMate for internal audit saw organic growth slow to 8% compared to double digit growth in the prior year. Due to the pandemic market conditions for on-premise software license sales and software related implementation services were more difficult. In both performance management and audit, our revenue growth was driven by the strong performance of the cloud-based versions of these products. Our Professional Tax & Accounting businesses overall recorded 1% organic growth led by Europe. Around the world, software grew well albeit slower than in the prior year. And this growth was driven by renewals especially of cloud-based software. New sales, upselling and add-on sales of software modules were challenged by cautious spending patterns among professional firms. Our content-oriented businesses in the U.S. and Asia Pacific face declines in print and training revenues. Moving to Slide 21. Governance, Risk & Compliance recorded 2% organic growth, including the revenues associated with the U.S. PPP program. As in another divisions, the adjusted operating profit margin reflected cost savings but this was more than offset by increased restructuring and investments. Legal Services posted an organic decline of 2%. As our legal representation and compliance business CT Corporation faced a steep 10% decline in transactional revenues. These transactional revenues reflect the impact of the pandemic on new business formation, mergers and acquisitions and other transactional activity. Financial Services delivered 7% organic growth driven by our Compliance Solutions unit which delivered double digit growth benefiting from the early rollout of the TSoftPlus software solution for banks to lend under the PPP program. Finance, Risk & Reporting recording mid-single digit organic growth with good momentum in recurring software revenues partially offset by lower software license sales. Lien Solutions declined 2%. Here there was a sharp decline in transaction volumes due to the fall in commercial lending last year but strong growth and new products helped to mitigate the impact. Now, turning to Legal & Regulatory on Slide 22. Legal & Regulatory revenues declined 2% organically mainly due to a sharp decline in the rate of print revenues. In addition, training and other non-recurring revenue streams were weak. The margin decreased by 30 basis points as cost savings were more than offset by stepped up investment in product development and the acceleration of key efficiency initiatives. Our software businesses, EHS/ORM & Legal Software delivered organic growth of 5% compared to 14% in 2019. The cloud-based version sustains strong double-digit growth, which more than offset declines in license and implementation service revenues. Information services recorded 3% or organic revenue decline, as lockdowns caused an accelerated decline in print formats. Both print subscriptions and print books recorded declines in the mid-teens. Encouragingly, our digital information products, which now account for some 67% of the unit's revenues performed very well delivering 6% organic growth. Now, let me update you on the progress we've made on our strategic goals in the next slide. While the global pandemic shifted our growth trajectory from the original plan, it has reinforced our strategy, the evolution towards digital and expert solutions, the transition to cloud-based software platforms, and the investment upgrade internal systems infrastructure and digital marketing capabilities. And we made a lot of progress last year. On the first priority to grow our expert solutions, we advanced both organically and through portfolio actions. Expert solutions reached 54% of our total revenues, and on an organic basis grew 6% including PPP. The recent acquisitions, which I will touch on in a moment, and disposals well also helped drive this forward. Our second priority to advance domain expertise was fueled by new product launches, which provided enhanced value through AI, predictive analytics and integration with other workflow tools. And finally against our third priority, which is to drive operational agility. This past year really tested the organization. Around the world, our teams embrace the change, responding to customer needs and market opportunities, managing the transition to work from home, while remaining focused on product roadmaps and important infrastructure initiatives. Turning to the next slide. Among the best performing products during the pandemic has been our cloud-based software platforms. Over the past three years, our revenue from cloud software has nearly doubled, driven by organic growth and selected acquisitions. In 2020, cloud software accounted for over a quarter of our total software revenues after recording 19% organic growth. The pandemic has stimulated interest in cloud-based software and collaboration tools as professionals adapt to remote working conditions. Particularly strong double-digit growth was recorded about by our cloud software in Tax & Accounting, and Legal &Regulatory. Let's take a closer look at an example on the next slide of one of our expert solutions that we acquired four years ago to enter into an attractive global adjacency which is to serve the office of the CFO. This product is called CCH Tagetik. This is a comprehensive, unified performance management platform for financial close, planning, forecasting and regulatory compliance. Today it serves more than 1200 global enterprises and thousands of users. CCH Tagetik enables financial personnel to spend less time managing and controlling processes and more time focused on strategy and driving business results. In 2020 CCH Tagetik delivered continued strong performance despite the pandemic with double digit organic growth supported by its cloud-based software. We continued adding resources to capitalize on the market potential and rapidly expanded, for example, our network of implementation partners. Investments and innovation yielded various promising new products in 2020. Most notable is the new Smart NOW module, which was rolled out last year to enable corporate finance teams to rapidly perform the scenario analyses necessitated by the pandemic. Turning now to Slide 26. In September, we acquired XCM Solutions, which is a cloud-based workflow solutions provider for professional Tax & Accounting firms. This acquisition offers synergies with CCH Axcess, our cloud-based module software suite in North America. And in December we have completed the acquisition of eOriginal which is a lender in digital lending solutions with a proven track record of growth and customer adoption. This acquisition extends our GRC compliance solutions position in U.S. mortgage into the fast-growing digital loan closing and storage adjacency. Both targets were former cloud software partners integrating with CCH Axcess, and Expere respectively. We expect both businesses to deliver a return on invested capital above 8% after tax within three to five years. Now before I moved to the outlook, I'd like to share a couple of ESG achievements for - that we accomplished in 2020. In the year of COVID, almost 95% of our workforce pivoted to working from home in a few weeks. As you may know, we conduct a survey of our workforce every year. And I'm pleased to say, we registered a record level of employee engagement in this extraordinary year, more than 10 percentage points ahead of the high performing benchmark. We attribute this to our focus on the health and safety of our teams, a step up in internal communications, and our investments in technology infrastructure and virtual collaboration tools. Not only were our teams more engaged than ever, we stayed productive and focused on customers, which enabled us to drive growth in margins while protecting jobs and investments. As part of our data center consolidation program, we migrated applications to more energy-efficient cloud platforms and consolidated 11 data centers. Travel related carbon emissions per FTE declined by 72% as a result of the freeze on travel. We expect the increased use of virtual collaboration will help us minimize travel also after the pandemic. And finally, we reduced the environmental impact of our offices by closing [smaller] offices and reducing our office footprint by 7% organically. Now, let me wrap up with an outlook for 2021 beginning on Slide 30. As indicated in our release, we currently expect economic activity and spending patterns to be subdued for most of 2021, with a gradual recovery starting in the second half. While the first half of 2021 faces a challenging comparable, we do expect to show improvement in organic growth for the full year supported by three divisions. We also expect to increase our adjusted operating profit margin into the range of 24.5% to 25%. We expect adjusted free cash flow to be between €875 million and €925 million in constant currencies, and we expect return on invested capital of around 12%. And finally, we expect mid single digit growth in diluted adjusted EPS in constant currencies. And now to wrap up with a summary of our outlook by division. In Health, we currently expect full year organic growth to improve over 2020 levels. Adjusted operating profit margin is expected to be stable year-on-year as temporary cost savings fade. In Tax &Accounting, we currently expect organic growth to improve moderately from 2020 levels. Adjusted operating profit margin is expected to decline due to the absence of one-time benefits and the fading of temporary cost savings. In Governance, Risk & Compliance, we currently expect organic growth rate to be slightly below 2020 levels. This is mainly due to our expectation that revenues associated with the 2021 PP Program will be not as significant as they were in 2020. The adjusted operating profit margin is expected to improve on the back of lower restructuring. And finally, in Legal & Regulatory, we currently expect the division to return to positive organic growth driven by digital information and software revenues. The adjusted operating profit margin is expected to improve as a result of lower restructuring. Thank you very much for your attention. Operator, we can now turn to questions.

Operator: Thank you. [Operator Instructions] Our first question today comes from Sami Kassab from Exane BNP Paribas. Sami, your line is now open.

Sami Kassab: Thank you very much. Good morning, Nancy. Good morning, everyone. I have three questions, please. First of all, Q4 organic revenue growth seems to have declined by perhaps 1%, understandably, but rare at Wolters Kluwer. Can you talk about how you see Q1 organic revenue growth will it return to positive territory and perhaps comment on how the new sales activity have performed in the first two months of '21, please, Nancy? Secondly, in several of your software businesses like in ORM, on-premise license revenues have declined last year. Is that largely a temporary phenomenon due to COVID-19 or is that marking the beginning of a new trend as customers accelerate the migration away from on-premise to the cloud? So I guess, do you see on-premise revenues growing again? And lastly, you disclosed the number of hospitals using UpToDate Advanced.? Can you please put that number into context by disclosing how many hospitals is going to use UpToDate worldwide? Thank you, Nancy.

Nancy McKinstry: Yeah, Kevin, why don't you talk about the Q4 projection of the decline in our Q1 thoughts? And I'll comment on the other two questions. So Kevin, do you want to take the Q4 question?

Kevin Entricken: Sure, absolutely. Sami, you are right, we did see an organic revenue decline in the fourth quarter. As you remember, we reported a 3% organic growth for the nine months and then 2% overall for the year. So fourth quarter, we did see some easing, largely due to tough comparables from the prior year. And as you mentioned, also print revenues were under extreme pressure during the pandemic and the fourth quarter is a big selling season. We do expect, moving into 2021, to see a return to growth in the first quarter. So clearly, that will contribute to improved organic growth going forward. And coming into the year, we are seeing, resilience in our pipelines, we are seeing resilience in our sales channels, so that is an outlook that we've seen so far this year. Nancy, maybe over to you.

Nancy McKinstry: Yeah, thank you. And just a quick add-on to Kevin. We also saw a good starting inventories, so well that happens to be one of the key metrics that we look at, so that also supports our expectation for 2021. In terms of on-premise versus cloud, what we're seeing is that the trends that existed before COVID have gotten accelerated. And so what you see is, all of our customers are now focused on their own digital transformations and we see cloud computing being a real focus. And so the growth in cloud at 19% last year, I think that illustrates the attention now that customers are putting on cloud solutions. So we offer, our software on-premise and offer it in the cloud pretty much across the board. And in some cases, we're the only cloud provider in the respective market. But ultimately, the customer gets to make the choice. So we fully expect that cloud will become the more predominant selection by our customers in 2021. But there may be some solutions where certainly still on-premise grows year-over-year, but you know, cloud really is the future. And then in terms of UpToDate Advanced, what we can indicate to you is about our penetration in the U.S. is around 60% to 65% of the hospitals. Outside the U.S., it's really still, you know, and outside of the U.S. and Western Europe, it's still relatively small penetration. And we talk more about users and we have over 1.5 million users on UpToDate. So UpToDate continues to grow well, and the integration that we've now done between UpToDate Advanced, and both Emmi in patient engagement and our drug database is also being well received by our customers. So operator, we can continue.

Operator: Our next question comes from Nick Dempsey from Barclays. Nick, your line is now open.

Nick Dempsey: Yeah, good morning, guys. So I've got three questions. First of all, just on prints across the group, you've seen a very heavy fall in 2020 in many corners of your print business. Should we think about an easy compensate there for 2021? Or is it potentially the case in some parts of the group, printers just going away and it's gone away faster but it isn't coming back, so you don't get any kind of bounce back of that extra heavy fall? And second question, we heard from Thomson Reuters yesterday, their Tax & Accounting Professional division grew excluding timing issues, 5% organic in Q4 2020. You've clearly seen a decline in Tax & Accounting in Q4. I appreciate a smooth [print] from the number but that still looks like quite a big difference. So can you talk about whether they're gaining share or are there any other factors driving that difference? And also on Thomson Reuters, they pointed to a new investment program hoping to accelerate group organic, should we worry about future competitive risks in Tax from that investment? And last question, on Slide 24, it talks about the growth in software, and that's helpful. I'm interested in the other digital part of that pie, is any of the growth in software to a degree coming out of other digital as people upgrade the software, or are they just completely separate thing?

Nancy McKinstry: Yeah, so why don't I start with print and then Kevin, you can maybe start with the Tax & Accounting, Thompson comparative and then I'll chime in a little bit there and finish up on the software question. So on print, today with these results, right, 91% of our revenues come from digital products and services. So still print is a relatively small percentage of what we do. It is largely focused in, our HLRP unit and in Legal & Regulatory. And what you see is we saw significant declines, minus 16% overall and books declining closer to 26%. In some markets, like India, books declined 70%. So, we - and that was largely due to both disruptions in distribution channels, but more because nursing and medical schools and other kinds of academic programs either closed or it shifted very much to digital. So, what does that mean for this year? It means that we expect still print to decline in 2021, but we expect it to decline at a lower rate. So Nick, you've been following for many years, we used to say, print declining sort of 3% to 4%, then we saw a step up post the global financial crisis down to sort of 8% to 10%. Now we're seeing a step down even further. So we expect that this will, at some point wind out completely from our portfolio, but it's ultimately up to the customer. Kevin, do you want to start with the Tax & Accounting?

Kevin Entricken: Certainly. Nick, you are right, it really is not a comparable, easily comparable between what Thompson is reporting and what Wolters Kluwer reports. You're right, they do strip out print, we do have print in our results and as you know, print was under pressure in 2020. Another thing that I would point to is, they may have had a push on transactional revenues. We've stopped selling transactional revenues and as we migrate to the cloud, that will be less and less of a contributor going forward. And finally, they announced they had a benefit of accelerating the release of some UltraTax, state tax software from January into December. So that is likely something that has flattered the organic growth reported by Tax & Accounting in Thompson. So unfortunately, it's not an apples-to-apples comparison, I will say that, we did have a tough comparable but still, we're very pleased with the uptake in software, very pleased with the cloud results that we have had around the world in Tax & Accounting. And we are very optimistic for what the future holds for this group.

Nancy McKinstry: Yeah, and I would just echo two things. One is, as you know, with the way cloud is recognized around the world, it means that as that becomes the preferred solution for customers and in tax, we are still the only player in the U.S. that has a full SaaS suite. So as customers select that mode of our software, it does take longer obviously for that to be recognized in some of our products, not all of them, but some of them. And so that is also a factor. And then finally, I would just echo that we feel really comfortable with our market position in Tax & Accounting. We have state-of-the-art products. We have very, very strong distribution and as Kevin said, we're very optimistic about kind of the future there. Just moving on to the growth in software, what you see is that overall, software is a growing part of what we do. It grew 6% in total, but cloud is growing 19%. So most of that is again customer's selecting cloud as the preference versus on-premise. Just back to Sami's question, some on-premise solutions are still growing but some are beginning to shrink as customers migrate. So there's a little bit of migration from on-premise into SaaS in these numbers, but most of it is just that customers, new customers are selecting SaaS as the preferred approach. So hopefully Nick the answer to your questions, yeah?

Nick Dempsey: Great, thank you.

Operator: Our next question comes from Katherine Tait of Goldman Sachs. Katherine, your line is now open.

Katherine Tait: Good afternoon, everyone. Thanks for taking the questions. And firstly, thank you so much for giving this split between the cloud and on-premise software revenue, I found that super helpful. And the question, I suppose how you think about that evolving going forward? And what proportion do - we've clearly seen a big sort of boost to cloud over the last 12 months, for obvious reasons but how should we expect this sort of mix between the two to evolve going forward? And do you need to invest more in your kind of cloud offerings, either organically or inorganically in order to kind of drive this? Just would be interested to hear your perspectives on that? Secondly, and it'd be great to get an update on current trends you're seeing across your transactional businesses, and any other key considerations that we should bear in mind around those, in particular? And then finally, coming back on the sort of Thompson question, I think they also talked about putting through pricing on some of their tax product, or return to pricing of around 4% to 5%. And you've obviously pointed to a sort of improving - a moderate improvement to, I think, the organic growth of last year, within your sort of tax business. But is sort of 4% to 5% tax pricing within the Tax division, something that that we should expect from you guys going forward as well, or is the growth being driven by other areas? Thanks very much.

Nancy McKinstry: Yeah. So Kevin, I'll take question one and three, if you could cover the transaction revenues question. So on the mix of software, just to put it in context, right? Our strategy for several years has been to become an expert solution company, 54% of our revenues currently fall into that category, of which software is a component of that and software growing well across all four divisions. Cloud is, cloud first has also been a very deliberate strategy for us, because we see that when we can be first to market with cloud, we can gain customers. And as you would imagine, in the software business where everybody has renewal rates above 90%, gaining new customers is not so easy, right? And getting customers to switch is not so easy. So we found early on, when we launched the cloud suite in North America, which has now been, I think we're going on year seven, of being the only full suite in North America that's available, we found we were gaining share against other players. And so that was very instructive for us. So in all of our markets where we can, we are cloud first, which means that you should see that cloud will continue to grow at double digit levels in the medium term. Now, again, some of that may come at the expense of on-premise, some of it may be on-premise still growing, and on top of that. But we fully expect that this pie chart that we put forth will be more and more cloud over time. Kevin, do you want to cover what we see with transactions, both in legal and financial services?

Kevin Entricken: Sure. I think we've talked about print, specifically looking at the GRC transaction revenue. You know, it clearly had a very tough comparable in 2020 compared to 2019. And we did see declines in transaction revenue. Although I will say, in the fourth quarter, we began to see a return to growth in some of our UCC products. Also, in our Lien Solutions transaction revenue, that business is 100% transaction. Again, we did see declines throughout 2020. Although in the fourth quarter, we did see those declines start to abate. So obviously, this has come into our thinking as we forecast out for 2021 and going forward.

Nancy McKinstry: And then in terms of pricing, Katherine, we have been able to continue to get price kind of across the board, even during this pandemic period, again, partially driven by the fact that we've continued to invest 8% to 10% of our revenues back in new products and product enhancements. So we have a lot to demonstrate to our customers, why there is increased value. So and we do tend to get more price on our software and expert solutions than we would get on our more traditional content centric products. So that's - we've typically, they've have been more overall sort of in the 2% to 3% kind of level with some of our software products getting higher than that. But I wouldn't want to say that overall, we're getting 4% to 5% across the whole portfolio. We're getting more like 2% to 3%, with again, software getting more of that. I also would remind you that we're a global business in tax. So we have almost 40% of our revenues coming from Europe and other countries in the world, so it's broader than just North America.

Katherine Tait: Thanks very much.

Operator: Our next question comes from Matthew Walker of Credit Suisse. Matthew, your line is now open.

Matthew Walker: Thanks very much. Good afternoon, everyone. A few questions, please. The first one is, do you think the 5% to 6% investment level on CapEx is enough in a sort of increasingly competitive world? Second question would be on provisions. It looks like you did take some quite large provisions somewhere between €25 million and €30 million. To what extent do you think that those could be reversed in 2021? And then can you give us an update on how much PPP you generated in the year in sort of millions of euros? Thanks.

Nancy McKinstry: Okay. So Kevin, do you want to handle those three?

Kevin Entricken: Sure.

Nancy McKinstry: And I'll chime in after.

Kevin Entricken: Yes, absolutely. As far as CapEx is concerned, yes, we do expect that we'll continue to invest 5% to 6%. The question on whether we think that's enough going forward, I would say that our investment in CapEx is actually getting more efficient as we move forward. As you know, we do have a digital solutions group that invests in technology and that technology is often reused again and again throughout the organization. So when I look at our CapEx spend of 5% to 6% today, say compared to several years ago, it's much more efficient. So we're getting a bigger bang for the buck on that side of things. Just to remind you, overall, we also guide to 8% to 10% of our total revenues. So that would include both CapEx and operating expense in new products and new innovation. And we do believe that that will drive our organic growth going forward. Secondly, provisions, we did indeed take provisions on returns and on bad debt in 2020. That is all due to the backdrop of the pandemic. And knowing that some of our customers are a bit challenged, so we thought it was prudent to take those provisions. Obviously, as we go into 2021, we will evaluate that situation and take a hard look at our collections. It is worth noting, though, we did have a very strong year in our cash conversion, largely due to working capital. So I'm very pleased with the actions our team has taken around the world in making sure our focus is on managing working capital. And finally, with regard to PPP, in 2020 total PPP revenues were approximately €27 million. As you know, the United States has announced an expansion of that program into 2021. But I would caution you, we do not expect an additional €27 million in 2021. We do expect some revenues, but significantly less, I would say maybe between 20% and 25% of the level of revenues we saw in 2020. So that is our thinking going forward with guidance on the PPP program.

Matthew Walker: Thank you very much. Thanks a lot.

Operator: Our next question is from Matti Littunen from Bernstein. Matthew, your line is now open.

Matti Littunen: Hello, good morning. I noticed there was quite a material savings from sales cost especially relative to revenue, which is mainly travel related. Or were there any notable products or channel mix effects, for example, on the sales and marketing side? And then another question on Legal Services' transactional revenue, you mentioned a slight recovery in Q4. But looking at U.S. business trends, business formation and M&A data, there seems to be a rebound almost to 2019 levels, if not beyond. Should we expect this to pick up faster in Q1? Thank you.

Nancy McKinstry: Yeah, so I'll take the first one. And then maybe Kevin, you can talk about legal transactions and we should distinguish between volume and revenues. Sales growth or sales cost, yes, it was largely travel related. We continue to add salespeople in our faster growing areas of the portfolio. I, again, was really proud of the team's ability to transition from field selling where they had a lot of in-person customer contact to digital and virtual. So we're investing in our digital capabilities and investing and adding some new people, again in selected areas, so most of the savings came out of both. Some lower commissions as new sales were more sluggish, but largely travel related cost. So I actually feel good about our selling capabilities. I think one of the things that could be quite interesting is to see how much of the virtual selling remains post the pandemic, because we proved that we could sell very large contracts in a virtual way. So we're in good shape on the sales side. Kevin, do you want to talk about transactions?

Kevin Entricken: Absolutely. As we mentioned, we did see a bit of a turnaround in Legal Service transactions in the fourth quarter. Interesting to note on that though, some of those new formations have a lot to do with the high-end unemployment rate in the United States where a lot of individuals who are now at home and not employed with their former employer are forming their own legal entities to start for themselves, small businesses. So that may have something to do with some of the statistics we see in the market. Obviously, that is a small part of our business. We do see more on the corporate side and you know legal entity formations there. But overall, we are beginning to see a bit of a turnaround for the better in Legal Service transactions. And that has been built into our thinking for the forecast going forward.

Matti Littunen: Very helpful. Thank you, both.

Operator: Our next question is from Patrick Wellington of Morgan Stanley. Patrick, please go ahead. Your line is open.

Patrick Wellington: Yeah, good afternoon, everybody. A couple of questions. The first one that is on Slide 10, if one looks at, I think Nick covered what might happen to print this year because we think that might have a better year in 2021. But that sort of dark purple line of other non-recurring revenue looks as though it's going steadily downwards in the charts. What should we think about being in there? There must events in training in there, what sort of assumptions have you about that for 2021? Secondly, just on taxation, there's been a couple of questions on taxation related to Reuters. But I suspect underlying it says those questions are saying, look, Tax has been the organic growth driver of the group in the last two or three years, and it's slipped to 2% in 2020, you're only looking for moderate improvement in 2021. So what, remind us exactly why Tax is going to be so muted in 2021? And would you expect it to return to faster rates of growth and maybe that sort of group leadership again sort of beyond 2021? And then certainly, Nancy, the cloud message is very strong. But cloud is only about 11% or 12% of group revenues. You've been acquiring cloud businesses, you've been selling print businesses, I mean, how quickly do we think or how big is that cloud business going to get over time? And do you feel the need for more acquisitions maybe just to speed up that process?

Nancy McKinstry: Yeah, so why don't I start backwards? And then Kevin, you can cover the non-recurring question. So just first, we highlight cloud, in part because we are exceeding - seen in the market an acceleration there, right? So I think it's important for us to communicate that we are well positioned in cloud. So for us, it's a very exciting area. But cloud is just a subset of the expert solution category, right? And so expert solutions in 2020 grew 6% organically, so a good rate of growth despite the pandemic. So our investments are going into expert solutions, of which cloud is a subset. So we're well positioned to see expert solutions grow from in the - what is it now? 54%, we'd like to see it be sort of 65%, 70% over the medium term. How will we get there? We'll get there by continued growth, organically. And also, most everything we're buying over the last several years fits into that category of experts solutions. So the portfolio changes both on the divestment side and on the acquisition side, coupled with a very robust organic growth program, we will see the expert solution grow. And that will support, again, expansion of margin because when these products are at scale, they contribute better margins than digital, pure digital information products. So that's the strategy in cloud, we'll grow. We're, - but again, it's part of the overall expert solution identity. On Tax, you know tax is obviously, a core growth engine for us. We're really well positioned. We, the growth did slow down as - largely as a result of the pandemic, both in corporate performance solutions, which had been growing at double digit levels, slowed a bit because of the pandemic. So as we come out of the pandemic, we fully expect that we'll return back to those very solid double-digit levels. And then in Professional Tax & Accounting there that it's about continuing to upsell the customers. So again, we need customers to feel more secure about their own budgets, their own businesses because again, we're mostly serving professional firms. And as that happens, we fully expect that that growth, will rebound. And so it's going to be, we're again well positioned, so now it's just a question of how quickly customers feel better about the general economic conditions. Kevin, do you want to talk about non-recurring line?

Kevin Entricken: Absolutely. And I think Patrick, you started off the comment talking about print. And yes, print was very challenging in 2020. We do expect improved results in 2021 in print, but we are still expecting a decline. So print was 9% of revenues in 2020, it will become a smaller part of revenues going forward in 2021. So that's the first comment. When we talk about other non-recurring, we do expect to see some rebound in software implementations. But we are obviously looking at things such as training and such as advertising. We're looking at our customers being very cautious with spending in those types of discretionary areas. So we do expect that we will see certainly in the first half some muted results there. But overall, I think that other non-recurring will benefit from a better service revenue on the software side.

Patrick Wellington: Great, thanks.

Operator: Our next question is from Rajesh Kumar from HSBC? Rajesh, your line is now open.

Rajesh Kumar: Well, good afternoon. If we are looking at your contract revenue which are over multi-years, we finished 2019 with 25% of revenue that were multi-revenue booked over. So how's that contract portfolio looking right now? Is it at a similar level to 2019 or have you seen such contract extensions more skewed towards second half of the year? The second is on, you gave us some insights about how much of office closures you have managed to achieve. What do you think, is the proportion of structural cost reduction you've achieved during the current year? And then finally, beyond 2021, do you think, well, this could at any point get over the 5% type organic growth? Or do you think that would require for too many years of portfolio adjustments and declining print headwinds to go away before we can start thinking in that direction?

Nancy McKinstry: Okay. So why don't I take the first and the third, Kevin, and you can talk about structural cost savings. On contracts, we continue to have annual subscriptions but we also sell multi-year subscriptions. We didn't see a lot of changes in behavior in that, renewals held up very well. Starting inventories are in good shape, which is of course, as I mentioned, a very key metric for us. Generally, the rule of thumb is, the higher the contract value the more likely it's going to be multi-year. All of our multi-year contracts have price escalation clauses in them. So I didn't - we didn't see any real shifts in that, as a result of the pandemic. On the portfolio in terms of long-term growth, we clearly believe strongly that as the portfolio evolves towards expert solutions, that we will achieve higher levels of organic growth. And importantly, as I mentioned earlier, that will lead to margin expansion because these expert solutions behave largely like software businesses, so high retention rates and therefore, when they achieve a scale level, the margins typically begin with a two, sometimes even a three as we move in that direction. But on how quickly the print goes away, just one final comment there, it's really driven by our customers. But as you can see, it's becoming almost immaterial. So now a big focus for us is continuing to build experts solutions, but also transform some of our digital information products, products like audit and health. Products, like some of our legal databases in Legal & Regulatory, migrate those over into expert solutions by adding a lot of things around AI and analytics and those kinds of features to the products. And that's going well, and in the next couple of years that will also add to this, again this is overall goal we have to expand the expert solutions part of what we do. Kevin, do you want to talk about structural costs? Sorry, yeah.

Kevin Entricken: Certainly and you had mentioned Rajesh, office closures. As Nancy mentioned during her overview of the ESG achievements, we did in fact, close about 7%, when we look at our office footprint on square meter basis. We closed about 7% of our smaller offices in 2020. I do expect as we come out of the pandemic, that people will be eager to get back to the office but I expect it will be more of a hybrid type of situation. I can certainly see people coming to the office several days a week, but also working from home several days a week. And we will start to rethink our office strategy or our footprint on rental space in light of those changes. We're actually already doing that, where we are now more and more moving to standard office configurations, more that it can be flexible with regard to how we configure offices. So I do expect going forward that continued structural management down of office space will be part of the norm going forward. You know, that brings with it reduced utility expenses, other fees such as taxes, and so on, and so forth. So that is part of our ongoing plan to reduce structural cost bases.

Rajesh Kumar: Understood. Just on the first contracted revenue question, perhaps it would also help if you could give us some idea if the revenue recognition for a cloud-based contract might be different from a traditional on-site contract, in terms of weighting of revenue at the beginning of the contract and during the life? Are you seeing any new shifts there?

Nancy McKinstry: Yeah. So there is, for the products today, one of our largest cloud products is Tax, right, both in North America and in Europe. On-premise tax products always behave like a subscription. So we always got the annual revenue every year versus the way a typical licensed maintenance model works. Other products like TeamMate and other kinds of software was a traditional license maintenance model. So as we shift to cloud and EHS and corporate performance management and those things, yes, what you see is that the revenue is spread over the life of the contract in a prorated way versus the license maintenance model. But in Tax, there is no change in revenue recognition as we go from on-premise to SaaS.

Rajesh Kumar: Understood. Thank you very much.

Operator: Our next question is from Sarah Simon from Berenberg. Sarah, your line is now open.

Sarah Simon: Yes, afternoon, everybody. I've got two questions. Firstly, as we you think about the shift to cloud, can you talk about the pricing differential? Because obviously, on-premise means more CapEx for the customer and you're essentially taking on that burden. So how should we think about, let's say, an equivalent product moving from on-premise to cloud in terms of ARPU or however you want to measure it? And kind of related to that, how should we think about the change in costs for you in terms of delivering it and the margin on cloud versus on-premise? And then, secondly, just a quick one for Kevin, on the Tax & Accounting one-offs that helped the margin, can you just remind us what they were and how big they were in 2020? Thanks very much.

Nancy McKinstry: Yes, so on cloud pricing, you know of course, it varies depending on what products we're talking about. But in general, we want to, in the early adoption cycle, ease the customer's transition to cloud, right? Cloud is our preferred approach to serving our customers, so we want to make it attractive for customers to do that. So often in the beginning, when we first introduce a cloud product, particularly if we're first to market, we will price at parity so that we - the customers basically are choosing something that that works for them. And then over time, the cloud product pricing increases such that like today, for example, with CCH Axcess, which has been in the market for a number of years, that would be a higher cost than the on-premise version, because they're getting more value from not having to have your own IT infrastructure, but also the way the product works is highly, makes you highly productive relative to the on-premise product. So that's the basic strategy of how we think about pricing. On the margin question, most of our on-premise products today have higher margins, because they're at scale and cloud is still getting there. But we have, we know that, we've baked that into all of our numbers for years now. And we know exactly, you know, we model all of this so we know exactly when the crossover happens. The value of being in the cloud is we know and we see in every market segment that customers that are in the cloud, we are able to upsell them more effectively, so that the average revenue per client is higher than the equivalent on-premise product. So that is part of why we want to get them into the cloud as quickly as we can. Because we know that the way these products work, there's more benefits to the client, and therefore we can add more modules. Hopefully that answered your question.

Sarah Simon: Okay.

Nancy McKinstry: And then now in Kevin.

Kevin Entricken: Yeah, on the one-offs, Sarah, particularly in Tax & Accounting, two I would point to. We did get an insurance reimbursement for some costs incurred in 2019. That reimbursement came in 2020. We also had a favorable income, a favorable outcome rather on speed on real estate tax in one of our locations. For the company as a whole, those one-off items were relatively small, maybe 10 basis point, 20 basis points between those - between that range. So maybe a little bit more for Tax & Accounting but those are probably the two most notable items.

Sarah Simon: That's great, thanks.

Operator: Our next question is from Konrad Zomer from ABN AMRO. Konrad, your line is now open.

Konrad Zomer: Hi, good afternoon. Thanks for taking my questions. The first one is on your restructuring costs. You guide towards €15 million to €20 million for this year. And that's actually a little bit below what you normally guide for at the start of each year. And is that related because you used the pandemic in 2020 to focus bit more cost savings and restructuring? Or is it just because you feel that divisions like GRC, for example, are better prepared for the future? And then my second question is on the on-premise software revenues. They were obviously down organically in 2020. That's understandable if more and more people work from home. But do you think that's because of the migration towards cloud or is that because of what happened in the world in 2020? And do you think that that will come back in terms of positive organic revenue growth? Thank you.

Nancy McKinstry: Kevin, do you want to take restructuring? And I'll take on the software question.

Kevin Entricken: Absolutely. Yeah, Konrad, just to remind everyone, we spent about €49 million in restructuring in 2020, we are indeed guiding you to much less €10 million to €15 million in 2021. Part of that is a number of restructuring programs that we had originally planned for 2021. We accelerated into the fourth quarter of 2020, so that is why you do see our restructuring guidance for 2021 a little bit below what we usually spend.

Nancy McKinstry: Yeah, and then on the software, if you go to Slide 24, what you see is that these cloud products that we've listed here, they're becoming more mature. I mean most of them are then in the market, at least, sort of three years now plus and up to say six or seven years. And so for those products that have that maturity level, on-premise is likely to be at best flat because customers are clearly migrating to cloud. Almost everything we sell new is in the cloud. As we introduce new clouds, because these are the biggest ones, so there are there are products, cloud products that are only a year old or whatever, though. That's where you still will see on-premise grow during their early years as cloud first gets introduced, but as cloud matures, it is, the growth is definitely coming from cloud and on-premises becoming, at best, sort of flattish to declining depending on the maturity level. But again, that is exactly what we want to see. So I hope we're making that clear in our commentary.

Konrad Zomer: Yeah, sure. Thank you.

Operator: Our final question today comes from Henk Slotboom of The Idea. Hank, your line is now open.

Henk Slotboom: Thank you. Good morning, everybody. And I just got a small question. I'm a bit lost on the result in GRC. If I look at the full year, I can understand for the first half year, was helped by the PPP impact, by insurance share reinforcements. When I look at the second half though, and I'm struggling a little bit to find the connection between the €189 million operating profits you reported in the second half of 2019 and the €132 million in 2020, in the second half here. And now you already said part of the restructuring of the €49 million restructuring was based was spent in GRC. It was also clear that the transactional part of the business has been in a depressed business, but perhaps you could add some more color here so that I can better connect the two numbers? Thank you.

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

Kevin Entricken: Sure, absolutely. With regard to restructure, I think we mentioned that most of our restructuring was done in GRC, and Legal & Regulatory. So when you take a look at the margin impact in the second half of the year in GRC, restructuring does have a lot to do with that. When we look at transactional revenues, obviously, the first half of the year for GRC was flattered by the PPP, as we mentioned, that was approximately €27 million revenue. Other transactional revenues, as we talked about in the CT business, also in the Lien Solutions business, we did see some declines there as you might expect in this economic environment. So that is what is driving the phasing of revenues and cost savings in GRC, in particular,

Henk Slotboom: If I may be a little bit persistent, Kevin, you know, a little bit. How much of the restructuring part has been spent in GRC? Could you be a bit more specific, please?

Kevin Entricken: Do not have that off the top of my head. But out of the €49 million, I would say between GRC and L&R, we probably spent that €49 million probably spent close to €35 million on those two units. And if you were to say, half and half between those two would be a good proxy, off the top of my head.

Henk Slotboom: Okay, thank you very much. Stay safe and have a nice day.

Operator: We have no further questions. I'll hand back to Nancy for any closing remarks.

Nancy McKinstry: Just want to say, thank you again, everyone for joining us. Very much appreciate it. Take care. Bye-bye.