Wolters Kluwer N.V. (WKL) Earnings Call Transcript & Summary

Okay. I think we're going to start. Good morning and welcome, everyone. Welcome to the Wolters Kluwer Full Year 2019 Results Presentation. Today's earnings release and the slides for this presentation are available for download on the Investors section of our website, wolterskluwer.com/investors. With me today are Nancy McKinstry, our CEO; and Kevin Entricken, our CFO. Nancy and Kevin will shortly discuss the key features of our 2019 results. Following their comments, we will open the call to your questions. Before we get started, let me remind you that some statements we make today may be forward-looking. We caution these statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Factors that affect our results are discussed in our annual report. This year, we began reporting under the IFRS 16 lease accounting standard. Financials for 2018 have been restated for IFRS 16. On today's call, 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 can be found in the notes to our financial statements. So with this -- with that, I give the floor to Nancy.

Thank you, Meg, and thank you all. Good morning. Thanks for coming in, and for those of you on the webcast, thanks for joining. I want to start by giving you some highlights for 2019, and then Kevin will come up and talk about our financial results in more detail. Then I'll discuss divisional performance and some progress against our strategic goals and then, finally, complete the talk with the guidance for 2020. So let's look at the highlights. I'm pleased to report that we had another year of good performance across the group, delivering 4% organic growth driven by digital products and services revenues, which grew 6% organically. We also achieved further improvement in our margin, exceeding our own expectation and guidance. We delivered 11% growth in diluted adjusted earnings per share in constant currencies, and our adjusted free cash flow was over EUR 800 million. And we ended the year with an even stronger balance sheet and an improved return on invested capital. Our share buybacks, coupled with last year's increased dividend, meant that a very substantial portion of our free cash flow was returned to shareholders in 2019. As some of you may know, we started last year with a launch of our 3-year plan, which goes from 2019 through 2021. Our first strategic priority is to grow our expert solutions. Expert solutions across the group continue to be the fastest-growing digital products, delivering organic growth of 7% in 2019. We also sustained significant investment in enhancing these products, strengthening our distribution channels and entering adjacencies. Our second strategic priority is to advance domain expertise and transform our information products. We've been working on enriching our content, improving our user interfaces and using advanced technologies to add functionality and automation. This strategic goal will take longer to develop, but we're very excited about the opportunities that we see today. Our third priority is to drive operational agility. We made a lot of progress on this front in 2019. We implemented new global enterprise systems across back office and front office functions, including finance, procurement and HR. We also strengthened security with -- across the enterprise and made good transitions of our products to the cloud. So with these highlights, I'd now like to turn it over to Kevin, who will talk about our financial performance in more detail.

Thank you, Nancy. Let's start with headline figures on Slide 7. All in all, 2019 results were in line with or better than our guidance. Total group revenues increased 8% overall to EUR 4.612 billion, benefiting from a stronger U.S. dollar. Excluding currency, revenue growth was 5%. Excluding the effect of net acquisitions and disposals, organic growth was a solid 4%. Adjusted operating profit was EUR 1.089 billion and an increase of 11% overall and 5% in constant currencies. Excluding the effect of net acquisitions and disposals, underlying adjusted operating profit grew 7%. Margin increased 50 basis points to 23.6%, which was better than we had expected and, in fact, exceeded the top end of our guidance range. I'll come back to that in just a moment. Diluted adjusted earnings per share grew 11% in constant currencies, in line with our guidance. Adjusted free cash flow was EUR 807 million, an increase of 6% overall and 1% in constant currencies, also in line with guidance. Return on invested capital increased 11.8%, exceeding our guidance range. The balance sheet remained strong with our net debt-to-EBITDA ratio finishing the year at 1.6x. Now let's take a brief look at the divisions. All 4 divisions posted good organic growth. Health grew 4% organically, a modest slowdown from a year ago. Growth was driven by Clinical Solutions, which delivered organic growth of 6%. Tax & Accounting delivered 6% organic growth driven by our software products in both Professional Tax & Accounting and Corporate Performance Solutions. Governance, Risk & Compliance reported 4% organic growth driven by a pickup in recurring revenues and a strong better-than-expected performance in transactional revenues. Last but certainly not least, Legal & Regulatory beat our expectations with 3% organic growth for the year. Growth was lifted by a very strong performance in our Environmental, Health and Safety & Legal Software groups, which delivered 14% organic growth. Now let's turn to revenues by type on Slide 9. Recurring revenues accounted for 78% of total revenues and grew 5% organically, in line with a year ago. Recurring revenues include subscriptions and other renewing revenue streams. Nonrecurring revenue trends were mixed. Print book revenues declined 7% organically, a slight deterioration on the prior year performance, as we expected. GRC transactional revenues, including Legal Services and Financial Services transactions, grew 6% organically. On Legal Services side, this is where 2/3 of these transactional revenues sit, volumes remain quite buoyant, up 9% organically. Other nonrecurring revenues increased 1% organically with varying trends across the divisions. On the one hand, we had strong software license sales and implementation fees at CCH Tagetik in Tax & Accounting and at Enablon in Legal & Regulatory. But on the other hand, this revenue category also includes journal advertising and reprints in Health, which were soft in 2019. Now let's turn to adjusted operating profits. As mentioned earlier, adjusted operating profits increased 5% in constant currencies and the adjusted operating profit margin increased to 23.6%. As we announced in November, we recorded a onetime EUR 16 million credit related to the modernization of our U.S. employee benefits in the fourth quarter of 2019. This credit was distributed across the divisions. As you can see on this slide, including onetime items in both 2018 and 2019, the adjusted operating profit margin would have increased by 70 basis points. This margin increase was driven by operational gearing, cost efficiencies, mix shift and currency. In Health, as expected, we recorded a margin decline due to lower net positive onetime benefits. In Tax & Accounting, the margin increased by 200 basis points, mainly reflecting efficiency savings, operational gearing and lower restructuring costs. In Governance, Risk & Compliance, the margin increased 210 basis points, reflecting underlining cost savings and net positive onetime effect of the credit I mentioned earlier. In Legal & Regulatory, the margin declined, as we guided, due to the absence of prior period significant onetime benefits, the dilutive effect of acquisitions and increased investment in product development and digital marketing. Now let's turn to the rest of the income statement. Adjusted net financing costs were EUR 58 million, down from 2018. The decrease reflects a full 12-month effect on lower borrowing costs following the redemption of our EUR 750 million eurobond in April 2018. The benchmark tax rate decreased to 23.6%, which was better than we had expected and reflects tax law changes and the conclusion of tax audits. Adjusted net profit after tax was EUR 790 million, up 9% in constant currencies. The increase in adjusted operating profit, coupled with lower diluted weighted average share count, resulted in 11% increase in diluted adjusted EPS at constant currencies. Now let's turn to the IFRS income statement. Reporting operating profit declined 6% to EUR 908 million. The decline was largely due to the prior year book gain of EUR 159 million on disposals. Amortization of acquired intangible assets declined to EUR 144 million. As announced in November, we recorded an impairment of EUR 38 million largely related to our patient engagement solution, Emmi, to reflect a more conservative forecast for this business going forward. Decrease in IFRS-reported effective tax rate reflect the fact that the prior year was impacted by taxable gains on disposals of core search and probation medical. Now let's take a look at cash flow. As you can see from Slide 13, our cash conversion ratio reduced to 96% from 104% a year ago as we had guided. This primarily was driven by a EUR 27 million working capital outflow due to timing of payments. Note that under IFRS 16, we add back not only depreciation of property, plant and equipment and internally developed assets but also appreciation of right-to-use assets when calculating EBITDA. Adjusted EBITDA reached EUR 1.382 billion in 2019, an increase of 4% in constant currencies. Capital expenditures were EUR 226 million, which at 4.9% was slightly below our normal CapEx range of 5% to 6%. Repayment of lease liabilities was EUR 80 million, and the increase here largely reflects payments of our new office in New York City. Paid financing costs reduced materially to EUR 46 million over the comparable period and include final coupon payments on the eurobond that matured in 2018. Cash taxes paid were EUR 195 million, reflecting favorable timing of payments and refunds while EUR 218 million included tax paid on disposals. Including the remaining smaller items, adjusted free cash flow was EUR 807 million, up 1% in constant currencies, which was in line with our guidance. Now a few comments on how we deployed this free cash flow. As you can see from Slide 14, EUR 280 million went toward dividend payments to our shareholders during 2019. Acquisition spending was much lower in 2019 at just EUR 35 million. This was mainly related to the purchase of CLM Matrix, a contract life cycle management tool which became part of GRC's enterprise legal management unit. Cash proceeds from divestitures were EUR 39 million, and that reflect a few small disposals, mainly our 40% stake in an Austrian information business. We spent a total of EUR 350 million on share buybacks during the year. And finally, we had EUR 113 million net increase in lease liabilities largely related to the multiyear lease we signed on our new office in New York City. The bottom line was a EUR 50 million reduction in net debt by year-end, leaving us with a net debt-to-EBITDA ratio of 1.6x. Now let me update you on our proposed dividend distribution and our share buyback plans for 2020. In view of the good performance last year and our strong balance sheet position, we are proposing an increase of the 2019 dividend per share by 20%. This will bring the final dividend to EUR 0.79 per share, and the total dividend for 2019 to EUR 1.18. This proposal is subject to shareholder approval at the Annual General Meeting in April. With regard to the 2020 share buyback, we are today announcing plans to purchase up to EUR 350 million in shares, including repurchases to offset incentive share issuance. We have already made a start on this program and have completed EUR 50 million in buybacks to date in 2020. So to sum things up, we are pleased to report sustained 4% organic growth and improved adjusted operating profit margins. Diluted adjusted EPS increased 11% in constant currencies. Adjusted free cash flow was EUR 807 million, up 1% in constant currencies. Combining dividends and share buybacks, we returned 70% of adjusted free cash flow to shareholders last year. Return on invested capital improved to 11.8%, and our financial position remained strong with net debt-to-EBITDA at 1.6x. With that, I'd like to turn it back to Nancy for an update on divisions.

Thank you, Kevin. I will start by giving you some updates on the Health division. Health delivered 4% organic growth driven by Clinical Solutions. The adjusted operating profit margin declined as we had guided. On an underlying basis, there was an increase in Health's margin despite increased investments in sales and marketing and product development. Clinical Solutions delivered 6% organic growth, led by our clinical decision tool UpToDate, which grew 9% organically. UpToDate renewals and new sales were good, particularly in North America, and the rollout of the new module, UpToDate Advanced, made progress. Our drug information products continued to show robust growth and have seen early benefits from our sales reorganization and our move to solution selling. Our patient engagement solution, Emmi, recorded soft new sales mainly attributed to hospital budgets remaining constrained in this area. We are adding new features, and we are supplementing the integrated sales organization with more product specialists. Learning, Research & Practice recorded 1% organic growth with digital revenues up 3%. Our digital medical research platform, Ovid, saw good growth, and our digital nursing solutions performed very well, delivering solid double-digit growth. Offsetting most of this digital growth was the continued decline in printed books and journals,as well as softness in advertising and continuing medical education. We remain focused on transforming our leading medical content into digital solutions. Tax & Accounting delivered 6% organic growth, slightly better than we had expected and driven by the strong performance in software in both Corporate Performance Solutions and the Professional Tax & Accounting segment. The divisional adjusted operating profit margin increased driven by efficiency savings, operational gearing and lower restructuring costs. Corporate Performance Solutions, which includes CCH Tagetik and TeamMate, grew 17% organically. These expert solutions saw strong demand from existing and new customers around the world, in particular for our cloud-based options. Our Professional Tax & Accounting businesses performed well driven by 6% growth in software. North America saw a moderation in organic growth as expected. Our U.S. cloud suite, which includes CCH Axcess and Practice Management Solutions, continued to see strong growth. However, our U.S. research and learning group experienced a decline as we anticipated with demand for content around the U.S. tax reform falling. Professional Tax & Accounting in Europe recorded an exceptionally strong year with organic growth of 8%. This was driven to a large extent by our cloud collaboration tools. We expect this to pose a challenging comparable in 2020. Asia Pacific & Rest of World saw mixed performance with strong growth in China offset by softness elsewhere. For Governance, Risk & Compliance, the division delivered 4% organic growth, in line with prior year. The divisional margin increased 210 basis points, reflecting operational efficiencies and net positive onetime items recorded in the fourth quarter. Legal Services sustained 5% organic growth with CT, who is the U.S. leader in legal representation services, delivering strong growth, including better-than-expected growth in transactional revenues. Our Enterprise Legal Management's unit saw muted growth as lower software maintenance offset an increase in volume-driven revenues. For Financial Services, this unit delivered 3% organic growth led by finance risk and reporting, which recorded high single-digit growth driven by new software licenses of OneSumX. OneSumX is investing in the cloud-based version of its regulatory reporting solution. Compliance Solutions recorded stable revenues while Wolters Kluwer Lien Solutions saw positive but slower organic growth as the U.S. commercial lending market plateaued in the second half of 2019. And for our fourth division, Legal & Regulatory delivered better-than-expected growth at 3% organic growth, having outperformed throughout the year, including in the fourth quarter. The adjusted operating profit margin declined, as guided, reflecting lower net positive onetime items, dilutive acquisitions and increased investments. Our EHS & Legal Software group delivered 14% organic growth. Enablon had a particularly strong 2019. Legal & Regulatory Information Solutions delivered 1% organic growth, which marked an improvement on 2018 when growth was flat. Growth in digital products is still being largely offset by print declines, but we appear to be close to a tipping point. Digital revenues grew 5% organically driven by legal research solutions, such as ONE in Italy, NAVIGATOR in the Netherlands and Cheetah and RBsource in the U.S. Print formats continued to decline as we expected, and we continue to drive cost savings in that part of the business. Investments to enhance our digital legal solutions were increased, and we're working to enhance these products further by applying advanced technologies. Now I'd like to give you a very brief update on how we're doing against the strategy that we launched in 2019. The current plan is focused very much on organic growth. We will consider acquisitions, but we remain focused on driving innovation to support good organic growth. This organic growth is being supported by a reinvestment of 8% to 10% of our revenues back in enhancing and driving new products. That total investment is over EUR 400 million in last year, and that combines both CapEx and operating expenses. Organic growth is being lifted by expert solutions, which now make up just over half of our revenues and grew 7% organically in 2019. These digital products deliver not only information, but insights, analytics, workflow automation and productivity benefits to our customers. Our second priority is to advance domain expertise. This means we're transforming our information products and services by enriching content, leveraging advanced technologies to bring our customers more actionable intelligence and automated workflows. One of the more advanced examples of this kind of transformation is our nursing content, which we have evolved to nursing solutions, which provides students and faculty with new capabilities like testing and assessment. Our third priority is to drive operational agility. We want to further improve our organization's ability to respond to opportunities and to change. This was an area that we made very good progress on in 2019, both in front-office and back-office applications. So now I want to give you an example of an expert solution in our Legal & Regulatory group, which is focused on Enablon. Enablon and eVision operate in what is described as the EHS and ORM software markets. This stands for Environmental, Health and Safety and Operational Risk Management. As you may recall, we acquired Enablon a few years ago and then expanded that group with the acquisition of eVision in 2018 and, most recently, with the acquisition of CGE earlier this month. So these products provide customers with a module platform that helps corporations gather data in different ways, including mobile apps that allow input from the field in a real-time way. This helps our customers monitor what's going on and track the data, and if need be, they can act upon it to prevent workplace incidences and then, of course, report this data to stay in compliance. Enablon had a very strong year in 2019, growing at double-digit levels supported by both new contract wins as well as growth in service revenues. As I mentioned earlier, we also made very good progress on our goal for improving operational agility. An important initiative in this arena is to involve our products towards fewer global platforms, not only do customers get more advanced capabilities with this initiative but we also benefit from reduced complexity. We also continue to apply advanced technologies to our products, again, in order to provide our customers with more functionality. Another program we have, which is to bring more of our products into the cloud. A major stride was made last year in the GRC division, where FRR announced and launched OneSumX into the cloud, and that means that customers will be able to use the cloud-based applications for regulatory reporting. Finally, we made progress last year in upgrading more of our back-office infrastructure as well as moving to global enterprise solutions in procurement, finance and HR. We also continued and even accelerated programs to further strengthen security through technology and training. Before I go to the outlook, I wanted to just comment on some efforts around sustainability. I'm proud to say we notched up our employee engagement score last year, marking the fourth year that this independently generated metric has been above the standard for high-performing countries -- companies. We continue to place great importance on our annual employee compliance training programs, which include IT and data security training. We have a nearly 100% compliance among our employees for these programs. We are also working to manage ESG risk in our supply chain and, last year, made further progress on increasing the number of vendors that are committed to Wolters Kluwer Supplier Code of Conduct or an equivalent standard by year-end. So now moving to the outlook for 2020. We expect to deliver another year of solid organic growth supported by all 4 divisions. We expect to increase our adjusted operating profit margin in the range of 23.5% to 24%. We expect adjusted free cash flow to be between EUR 800 million and EUR 825 million in constant currencies. We expect return on invested capital to show incremental improvement to around 12%. And finally, we expect mid- to high single-digit growth in diluted adjusted EPS in constant currency. So now let's take a look at the outlook by division. In Health, we expect organic growth to be broadly in line with 2019 with Clinical Solutions continuing to drive growth. We expect the adjusted operating profit margin to be broadly stable due to increased investments in sales and marketing and product development. For Tax & Accounting, we expect organic growth to moderate from 2019 levels due to a challenging comparable in Europe and some moderation in the U.S. The margin is expected to see a further increase. For Governance, Risk & Compliance, we expect a slight improvement in overall organic growth due to investments in new products, and we expect the adjusted operating profit margin to be slightly lower than it was in 2019. In Legal & Regulatory, we expect organic growth to moderate slightly from 2019 levels, given the challenging comparable. The adjusted operating profit margin is, however, expected to improve. So thank you very much for your attention, and now we can move to Q&A.

Yes. It's Nick Dempsey from Barclays. I've got 3, please. First of all, just looking at your free cash flow guidance. Bottom end of the range, you'd be going down year-on-year on a like-for-like basis. What would have to happen? Are you just being excessively conservative there? Or are we talking CapEx at the top end of the range to get there? Would it -- is it cash tax that could drive that? Or what could make it EUR 800 million? Second question, looking at the 11% margin at Legal. You've got Enablon, eVision, CGE in there, all of which should be, over time, comfortably above that margin sort of naturally, even if you're investing in them now. Where could that margin get to over time over sort of 5 or 6 years? Could we get a mid-teens or a higher teens margin eventually in Legal? Third question, just maybe a bit more color on how Health can achieve roughly the same organic growth in 2019. So are you assuming UpToDate can hold its level of growth? I know that's been maturing. Are you assuming that Emmi can turn around, and that's significant? Or are we relying on new products in Clinical Solutions to sort of hold our organic growth?

Okay. I'll cover Health, but why don't you cover cash flow and long-term margin on Legal & Regulatory.

Absolutely. On the free cash flow guidance, I would say the expectation is to be around the 95% conversion ratio as we've guided you to. That, I think, is the right place for this business to be. Last couple of years, it's been slightly above that. So that would be the first point. Second point is I do expect CapEx to be between 5% and 6%, in that range, and that is a step-up from where we landed in 2019. So that was the thinking going into the guidance. On the Legal & Regulatory margin, as we've noted, the margin there is a bit held back by the impact of acquisitions. The margin is dilutive on some of those acquisitions today. But as those businesses scale, we do expect them to be a lift to the overall margin of the business. So we haven't given a longer-term guide on that margin. But we do expect these are software businesses that -- typically, software margins are very healthy compared to some just inflation products. So we would expect to see margin improvement over time.

And on Health, as we look at 2020, what we are expecting is still good performance out of Clinical Effectiveness and both from UpToDate, but also from our drug information businesses. We're expecting a bit more growth coming out of international across that entire product portfolio and would expect that Emmi begins to stabilize. Emmi is quite a small part of the overall revenues. So it really is about the UpToDate business and the drug information businesses. On the Health Learning, Research & Practice side, we just expect continued good growth in digital. And as you know, they still have about 30%, 35% print. So we expect that to continue to decline. But again, as we reach more of a tipping point in that unit, over the long term, we would clearly expect stronger growth coming out of Learning, Research & Practice over the long term.

Tom here from Citi. A couple of questions. I've had 3, if it's all right. The first one is actually on transactional revenue. I think you said it was up 6% across-the-board organically relative to recurring up 5%. So obviously, it's helping. Can -- I think you've talked about some elements of transactional becoming maybe less of a tailwind in 2020. But can you just break out how we should think about the sort of main drivers of that transactional revenue? Just so we could sort of benchmark what the KPIs we are -- are that we should be looking at. That was the first question. Second question, Thomson Reuters, I noticed, saw sort of similar, I say -- I should say, similar acceleration in tax and accounting into the fourth quarter. I mean in fairness, I think you just sustained the growth, but it's a very good level of growth. I wanted to ask on the sort of competitive dynamic there? I mean their overall growth rate in tax and accounting is around 8%. Yours is around 6%. Both good numbers. But is -- should we view that as a share loss? Or is that just a different mix impacting? And then a very final question. Nothing to do with financials, but -- I'm actually following up a question, maybe for you, Nancy, on succession planning. I was asked this by an investor relatively recently, noting that you've been in place since 2003. just wanted to get a sense of your commitment to the business, but also succession planning as a sort of general sort of topic. It's not one that I've noticed come up before.

Okay. So why don't we go in reverse order. I'll start with succession planning. I have no plans to change my role. I'm very focused on driving the business. As you would imagine, it's quite rewarding, not just for Kevin and I but for the whole team, to have gone through the transformation and to now be in a very strong position to continue to improve our performance. So we do, however -- just to reassure investors, we do, however, have a robust talent management program at all levels, so not just for myself but across the board, and we have very strong management at the business. In terms of Tax & Accounting, competitively, we're in a strong position around the globe. As you may recall, we are still really the only provider in the U.S. that has a full cloud-based suite, and we've had that in the market now for 6 years. So we continue to see good growth in the cloud. I think that we basically would indicate that we do have mix issues, right? I think you may recall that Thomson has much more revenue coming out of the corporate market that grows a bit faster than the professional market, and we remain the leader in the professional market. So we're excited about the new things that are going on in Tax & Accounting, not just in North America but in Europe as well. And then transactions?

On transactions, really, a tale of 2 different revenue streams. The Legal Service transactions, where we help our clients register new legal entities, was very strong at 9%. That was better than we expected. We expected that to slow down a little bit in '19 and really continue to maintain good growth. On the Financial Service transaction side, where we have transactions related to mortgage volumes and related to corporate lending, on the mortgage volume side, we did continue to see a decline there, but that is becoming a very small part of the business. On the corporate lending side, while we saw some moderation, we still saw some good growth in that particular area. So that is a bit of a sum-up of transaction revenue. With regard to our mix on growth rates in Tax & Accounting versus Thomson, I would say that we're seeing very good growth on our tax professional side, but even better growth on the corporate side with our Tagetik and TeamMate products. The corporate market tends to grow faster than the professional side. So it is a bit of a mix shift when you compare us to others in the market.

It's Matthew Walker from Crédit Suisse. Three questions, please. The first is on sort of extraneous impacts. So any impact of coronavirus? Or any impact from the data hacking problem that occurred during the year? Second question is on, again, going back to free cash flow. I'm a bit perplexed to why the midpoint of your guidance for free cash flow is still so low. I mean you mentioned that CapEx could step up and that could hold back the growth a little bit. But actually, when you look at it, that's like a EUR 35 million movement, but you also have minus EUR 27 million of working capital. So those are broadly equal. So can you just explain why free cash flow is not growing in line with the expected operating profit growth? And thirdly, on UpToDate, you mentioned Advanced is now in 850 hospitals. What percentage of that is the total? How should we look at the penetration of Advanced relative to the core UpToDate product? How much runway is there for that to go?

Okay. So on the extraneous factors, we -- the coronavirus, our focus is very much on employee safety and making sure they're supported. So way too early to tell what the impact might be there. I would remind you that North America remains our biggest market. So from that standpoint, the virus has been more localized in geographies where it's a relatively small part of overall. But again, too early to tell. In terms of the malware attack, I would want to remind you that there was no data breach. As you know, we took our systems off-line very proactively. We don't see any long-term effect from that occurring. I would say if you just look, though, at cloud adoption, this is broadly across all the places. We have cloud products in every division. What you -- what we are seeing and would expect to see is you get a real ramp in the beginning as you move early adopters to the cloud, and that's been driving good growth across. Our cloud solutions have grown very rapidly. We would expect, over time, not specifically for 2020, but over the sort of medium term, at some point, you kind of moderate, right, as the next wave of growth comes from that. So we do expect that cloud migration will take a long period of time to occur, and that's just not related specifically to the whole question of security but just an important element to recognize. And then as it relates specifically to UpToDate Advanced, we're still very early days. There's something, I think, like 6,000 hospitals in the U.S. As you know, we have pretty high penetration from UpToDate. So we're really just at the beginning stages. And then, of course, outside of the U.S., very early days. And we're still building out the product. So we would anticipate that as we continue to build out the number of pathways that we have in UpToDate, coupled with the early adopters beginning to build that reference base that is so important in our market, that, that will continue to grow nicely. And then cash flow?

Free cash flow, I would say for a business like ours, a healthy cash conversion is 95%. That's the guidance we're giving you. I will point out that in 2018, we're actually above that at 104%, and in '17, we were just slightly over 100%. So I think what we're seeing is more normalized cash conversion. The step-up in CapEx from 2019 to 2020 is incorporated in that guidance. So that's why we've set the guidance range as we are.

But just -- sorry, just come back on that. I mean as I said, you've got -- the step-up in CapEx is like EUR 35 million, but you have a minus of EUR 27 million working capital. So are you saying that you expect negative working capital to continue? Because otherwise, the 2 factors should offset each other.

I would say that the negative working capital will probably -- we'll work very hard to make sure that, that doesn't continue going forward. But the thinking that we put into that guidance range, I'll leave you to draw conclusions from that. But you should expect a step-up in CapEx.

It's Patrick Wellington at Morgan Stanley. A couple of questions. Expert systems are 50% of the total. So are non-expert systems the other 50% of the total? How do you define under -- something that's not an expert system, if you like? A similar question then on financials. I mean your -- in your guidance, you allow potentially for the margins go down, 23.5% to 24% versus 23.6%. As you pointed out, the underlying margin went up 70 basis points last year. So again, why should -- under what circumstances would you expect that to happen? Or do you think it's more likely that you'll again exceed your range as you did this year? And then thirdly, acquisition spend, quite low this year. Has your experience with Emmi put you off, Nancy? Or are you still out there looking for stuff?

Yes. Yes. so why don't I start there? I think as you'll recall, when we launched this 3-year plan, this is the most organically focused plan we've had in my tenure, and that's a great place to be because we see lots of opportunities to continue to innovate in our core markets. With that said, we were -- of course, are still looking at acquisitions, primarily either to roll up our existing positions, there's not a whole lot of those kinds of opportunities, and then adjacencies. So we're still looking. I think as you probably hear from all of your clients, asset prices are very, very high. So of course, we have to remain disciplined in that effort. But an example of -- for example, CGE, while small, is a terrific example where it's an adjacent market. We already had a partnership with them in the Enablon space, and so that's a nice addition. So you should expect some level of that to continue. On expert solutions, so what is the difference? I think that's a really important question. We define expert solutions as products that have elements of information and content expertise, coupled with technology that deliver customers a very defined benefit. So I'll contrast. UpToDate is an expert solution. Why is that? We know that hospitals and doctors and nurses who use UpToDate will be able to lower their morbidity and mortality rates. We've proven that over and over again through lots of external studies. Contrast to Ovid, a fantastic product, but it is a research product, right? It is used primarily by pharmaceutical companies and scientists and doctors doing research. There is obviously large benefits from the use of Ovid, but it's not something that you could go to a client and say, "If you use Ovid, you will get x, y, z in terms of defined and measurable results." So that's what the definition is. And so we fully expect that expert solution revenue, which is around slightly more than 50% today, will grow. And as that grows, it will support not only stronger organic growth but, very importantly, margin expansion. Because when the expert solutions are at scale, they are higher margin than a traditional digital products. So that's one point. And then the second point, just real quick, is we are in the process, as part of our second priority around advancing domain expertise, of remaking some of these digital information products, like an Ovid, into an expert solution. So we have a very defined amount of revenue that we want to take from that bucket of information products into the expert solution route. It is probably the hardest thing we have to do because there's not one thing that makes an expert solution, but it's a very focused effort because we really believe that that's the future of the business.

And Nancy, while we're on this subject, I noticed Sami isn't here, does this require a huge pickup in your sales and marketing expense to sell these expert systems? Or can that be contained within the normal parameters?

Yes. I think what you will see is we still believe that the range on CapEx -- that Sami's real thing, right, is the range on CapEx is still very much in what we need to support the business. So we don't expect any kind of -- it may go from the low end to the higher end of the range, but we don't expect that to change materially. On sales and marketing, we're already making changes there, both really advancing our digital marketing, so taking some of our traditional marketing spend and moving it to digital. And then within the wholesales arena, as you may recall, we have been stepping that up over, say, the medium -- the last 10 years. We think what we have now is fine. But the way we spend that money may change a bit as these products do require pretty high level of expertise from our sales team.

And on the margin, traditionally, when we've given you guidance, we've given you a guidance range of about 50 basis points. We've done that again for 2020 from 23.5% to 24%. But we have also said we expect improvement in that margin on -- over 2019, which was 23.6%. So we've given you a range, but we've also said we expect improvement.

If I may, I've got 3 questions from the web. From Rajesh Kumar at HSBC. How much of the CapEx pertains to maintenance as opposed to innovating or investing in new products? So put another way, if you were not spending any money on new products, what would your CapEx to sales be? I don't think we've disclosed this before, but maybe you can make some comments on that.

No. I would say we don't disclose specifically what is maintenance, what is new product, but it is a consistent mix of both. We are always looking to innovate. We are always looking to come out with new products and product enhancements. At the same time, we want to keep the products that are in the market very fresh, very vibrant, and we're constantly looking to improve the user experience of those products. So it is a mix, and it will be consistently invested in over the long term.