Q4 2022 Thomson Reuters Corp Earnings Call
<unk> zero when your device and a coordinator will be happy to assist you I'd like to advise all parties that this conference is being recorded for replay purposes, and now allow me to hand, it over to your host Gary The word is yours.
Thanks, Dan.
Good morning, and thank you everyone for joining us today for our fourth quarter and full year 2022 earnings call I'm joined today by our CEO , Steve <unk>, and our CFO , Mike Eastwood, who will discuss our results and take your questions following their remarks.
To enable us to get to as many questions as possible. We would appreciate it if you'd limit yourself to one question and one follow up each when we open the phone lines.
Today's presentation, when we compare performance period on period, we discuss revenue growth rates before currency as well as on an organic basis. We believe this provides the best basis to measure the underlying performance of the business.
Today's presentation contains forward looking statements and non <unk> financial measures actual results may differ materially due to a number of risks and uncertainties discussed in reports and filings that we provide to regulatory agencies. You may access these documents on our website or by contacting our Investor Relations Department.
I'll turn it over to see Patrick.
Thank you Gary and thanks to all of you all.
All of you for joining us today.
<unk> 2022 was a year of great change and progress of Thomson Reuters. So let me start by reviewing some of our key accomplishments.
First we delivered another year of strong financial results meeting or exceeding our key financial targets.
Q4, and the full year organic revenue rose, 6% driven by a 7% recurring revenue the.
The big three segments also grew 7% organically.
Unprecedented deflationary pressure and continued investments.
Full year margins Rose 410 basis points to 31, 35, 1% and we achieved a free cash flow forecast of $1 $3 billion.
Due to our 'twenty to 'twenty two performance and continued solid book of business, our full year 2023 outlook for organic revenue and adjusted EBITDA margins are unchanged from our commentary last quarter, Mike will provide more details on our outlook later in the call.
We successfully completed our change program at year, and delivering our financial targets and making significant progress in transforming Thomson Reuters into a more streamlined and scalable business.
Ultimately change program progress provides a strong foundation for sustainable future growth.
I will discuss these benefits in more detail in a minute.
2022 was also a year of progress from an innovation and product perspective.
Highlight was the September launch of with more precision.
With pool 2022 successes range from a continued focus on product stability performance and user experience improvements to new offerings and capabilities added across our portfolio.
We also added a number of new third party product integrations.
Our capital capacity and liquidity remain a key asset that we are focused on deploying to create shareholder value and we made good progress on this during 2022.
Through year end, we repurchased $1 $3 billion on the $2 billion share buyback program, we announced in June 2022.
We plan to complete the program by early Q2 as.
As Mike will review in more detail after completing the buyback we intend to execute a return of capital with.
With a concurrent share consolidation of at least $2 billion funded by proceeds from our sales of <unk> shares.
We also made progress on M&A, having closed the 500 million dollar acquisition of short trip on January three.
This follows three smaller tuck ins during 2022, we.
We continue to assess inorganic opportunities and we are optimistic that we'll be able to execute additional strategic transactions in 2023, while simultaneously completing the $2 billion share buyback program and $2 billion return of capital.
Lastly, let me briefly comment on market conditions as we enter 2023.
While we acknowledge a challenging and uncertain macroeconomic environment, we are blessed with a highly resilient business.
80% of our revenues are recurring and.
And we operate in historically stable and growing in markets.
We're closely monitoring our customer sales activity and continue to see the sales cycle lengthening in corporates, but as we mentioned last quarter, while activity you'll have a roll through early Q1 remains on track to deliver our 2023 targets regardless of how the macro unfolds.
Our focus will remain on leveraging our content technology and a service for the benefit of customers.
Now for the results for the quarter fourth quarter reported revenues grew 3%, including a 2% drag from foreign currency and a 1% from recent divestitures organic revenue.
Which is a constant currency metric rose, 6% organic recurring revenue again grew 7% with transactional revenue growing 5% in line with our expectations adjusted.
Adjusted EBITDA increased to $633 million, reflecting a 950 basis point margin improvement to 35, 9%.
Excluding costs related to the change program. The adjusted EBITA margin was 39, 3%.
Adjusted earnings per share.
Rose 70%.
Year over year to 73 cents.
Turning to fourth quarter results by segment, the big three businesses achieved organic revenue growth of 7%.
Legal organic revenue growth moderated to 5% from 6% pace in recent quarters. The slight deceleration was driven by weaker performance in our elite and government businesses, which Mike will cover in more detail later.
Apart from this demand for our legal solutions remains very healthy across all key segments, and we expect to return to the 6% growth trend in the second half of 2023.
Driven by continued momentum in west Little practical law high cube and other T offerings.
Turning to corporates organic revenue growth momentum continued with revenue up 9% recurring revenue rose, 11%, while transactional revenue softened as expected.
Tax and accounting had another solid quarter with organic revenue growth 8%.
Our Latin American business led by Domingo grew over 25% in the quarter and remains a key growth driver.
What is news organic revenues increased 10% in Q4 growth continued across all lines of business, especially at the Reuters events and.
And finally global principal clinic revenues were down 1% again better than expected due to improved retention better third party print revenue and timing benefits, we expect to normalize in the first quarter of 2023.
In summary, we're pleased with our results and the solid momentum across our businesses.
Full year reported revenues rose, 4%, including a nearly 2% foreign exchange drag and organic revenues grew 6% adjusted EBITDA increased 18% to $2 $3 billion, driven by revenue growth and savings associated with the change program, resulting in a <unk>.
Margin of 35, 1% excluding.
Excluding change program costs.
Adjusted EBITDA margin was 37, 7%.
380 basis points higher than in 2021 adjust.
Adjusted earnings per share for the year was $2 56, compared to $1 95 per share in the prior year.
Let me finish on the financials for the fee for the full year by noting that we met or exceeded nearly all of that 2022 guidance metrics.
The only exceptions with Capex, which was slightly higher due to inflationary pressures and total revenue growth, which was impacted by the Q4 divestitures.
Now I will spend a few minutes discussing the completion of the change program and several growth updates.
The end of 2022 brings to a closeout change program.
Which was an extraordinary 20 months 24 months of effort and progress at Thomson Reuters as a reminder.
The change program had two overarching goals first transitioning from a holding company to an operating company and second from a content company to a content driven technology company.
We pursued these two goals through dozens of work streams in total we invested just shy of $600 million and have broadly delivered against our financial targets with $540 million of run rate savings achieved as of December 31st.
We highlight a number of key accomplishments on slide 11.
While there remains work to do.
We are very proud of what we've accomplished and how we have transformed the business today, we are a more focused and performance driven company.
With improved organic revenue growth and profitability and a stronger portfolio.
Looking forward, we believe the largest legacy of the change program will be the foundation that it provides for improved and sustainable growth.
This includes a simpler product portfolio with more focused investment on our best opportunities.
Improved customer facing capabilities, including digital and self serve Ria.
<unk> customer platforms and user experience and service enhancements.
Modernized technology, including expanded IP is our conversion to the cloud improved cyber resilience and reduced debt.
And lastly, upgraded talent with a more flexible footprint scaled global capability centers and a truly world class talent across the organization.
The resulting more streamlined and scalable business along with the success from our product and engineering organizations provides us with confidence in our ability to organically innovate, which we believe positions us well to sustain our recent healthy organic revenue growth in the future.
Building on that point I'll mention a few factors that have contributed to our revenue acceleration in recent years.
During our March 2021, Investor Day, we discussed the seven strategic growth priorities shown on slide 13.
We continue to focus our investment on these key businesses, which grew 8% on a combined basis in 2022 up from six 5% in 2021.
Product innovation remains an important focus our launch of Westwood precision was a key 2020 to highlight.
And the good news there continues to date, we have recorded more than 750 precision sales across all customer types, including CT systems in 14 States. We remain confident this momentum will continue in 2023.
Aside from wistful 2022, so a number of key offerings in key enhancements across the portfolio.
Including expanded high Q contract lifecycle management capabilities, and a new document intelligence offering in a legal portfolio.
Our new free trade agreement analyzer offerings, and our global trade management area, a new global beneficial ownership solution for clear and expanded features and capabilities across several products.
<unk> portfolio.
Looking to 2023, we have a strong and focused product road map that we expect to deliver continued value for our customers and growth potential at Thomson Reuters.
In addition to driving organic growth with focused on creating shareholder value through the deployment of what we estimate to be $11 billion of capital capacity between now and 2025.
This leaves us in an enviable position to both fund strategic M&A.
And significant capital returns to shareholders, Mike will cover shareholder shareholder returns in his commentary and I'll briefly discuss our approach to M&A.
As we've stated in the past, we're not looking for transformational deals or to add new operating segments. Instead, we are focused on acquiring high quality assets.
The constraints in our big three customer segments, we list several areas of interest on slide 15.
We will remain disciplined in our approach.
And we will be patient and searching out assets that meet our criteria, including strategic operational and cultural fit in addition to meeting our financial hurdles.
While we continue while we can see that a range of situations.
Our focus is on purchases that can replicate attested and successful M&A playbook in which we acquire quality assets in our areas of expertise. We then integrate and invest behind the acquired assets and leverage our extensive distribution and large customer reach to grow these businesses over a multiyear period.
This playbook has been executed many times in the past and most recently with the 2019 acquisitions of confirmation and high Q in both cases revenue has doubled during a three plus years of ownership and we continue to see strong potential for both assets.
Many earlier examples are the same playbook, including the 2013 acquisition of practical law among others.
They're moving from strategy to execution. We're excited to have closed the acquisition of Shaw prep on January three and we welcome the short prep team to Thomson Reuters, we see short prep is a great fit with the acquisition approach in criteria I, just discussed and we're focused on executing our acquisition playbook.
Our significant growth from this business over time.
Sure.
Best in class provider tax workflow automation software and services.
Its offerings streamline and automate first mild pain points for accountants significantly reducing time and increasing efficiency of tax return workflows. We believe <unk> trained AI models are years ahead of the competition and it's automated coverage of tax documents is industry leading.
<unk> is a compelling strategic fit with our tax and accounting business.
In combination with our leading research and client software.
Perhaps document collection and data extraction technology allow us to offer truly end to end automated workflow solutions.
I'll close my comments by noting that we're in a strong position with significant dry powder and what we believe is an increasingly buyer friendly market.
We are optimistic that we can complete other short like acquisitions in the next 12 to 18 months that strengthen the proposition of our big three segments.
Closing I will leave you with two key messages first.
Our success in completing the change program positions us well to deliver improved consistent growth in the future.
Second we are making progress in that deploying up significant financial capacity and remain focused on doing so.
Way that creates shareholder value.
Mike over to you. Thank you, Steve and thanks for joining us today.
As a reminder, I will talk to revenue growth before currency and on an organic basis, let me start by discussing our fourth quarter revenue performance of our big three segments.
Revenues rose, 7% organically and 5% at constant currency for the quarter.
This marks the seventh consecutive quarter, our big three segments in aggregate had grown at least 6%.
Legal professionals organic revenue growth rate moderated slightly to 5%, which I will discuss on the next slide.
Organic growth was driven by less law practical law and Ikea.
In our corporate segment organic revenues increased 9% for the quarter driven by recurring revenue growth of 11%.
Offset by 5% decline in transactional revenues.
Practical law clear direct tax and global trade were key drivers of recurring revenue growth.
And finally tax and accounting organic revenues grew 8% driven by recurring revenue growth of 8% and transactional revenue growth of 10%.
Recurring revenue growth was driven by ultra tax and the segments business in Latin America.
Legal professionals organic revenue growth moderated slightly to 5% from the recent 6% pace.
Momentum across much of our legal segment remains strong.
However, weaker performance at our elite legal ERP software and government businesses led the growth rate.
Two 5% in Q4.
As we show on Slide 19 government and elite are a bit less than 25% of our legal professionals revenue.
The remaining majority led by key franchises, including West La practice.
Practical law and Ikea accelerated throughout 2022.
Growing by 7% year over year in Q4.
We expect this level of growth to continue in 2023.
Bolstered by growing contribution from west La precision upgrades.
Let me provide some color on elite and government.
ALLETE is in the early stages of a transition from legacy on premise software solutions to a cloud based SaaS offerings.
We see this transition as a long term positive as it will drive stronger recurring revenue and improved margins.
However, during the transition lower professional services revenue associated with the SaaS offerings versus the legacy offerings will be a revenue headwind.
This impact is already incorporated in our 2023 outlook. However, it had a somewhat larger than expected impact on Q4 results.
Our government revenue decelerated in the second half and especially Q4.
This resulted from 2022 slowdowns into release of federal funding for and guidance around key benefit programs.
A slower flow of funds caused a number of contract delays for our risk fraud and compliance our RFC offerings.
We do not believe we have lost share with our government RFC businesses, and we continue to have robust pipelines of future activity.
The procurement impediments have largely been resolved, which we expect to result in a return to stronger bookings growth over the next few quarters.
It is worth noting approximately 40% of our RFC revenue is in our corporate segment, which continued to deliver double digit growth for both Q4 and the full year.
For our legal professional segment in total we believe 5% growth is likely again in Q1 with a return to the prior 6% trend likely in the second half of 2023.
As government improves and strong growth continues from our west La practical law and hygiene businesses.
Moving to Reuters news.
Organic revenues increased 10%.
Growth was led by events and the news agreement with the data and analytics business of <unk>.
Lastly, global print organic revenues declined 1%.
The decrease was better than expected due to improved retention.
Better third party print revenue and timing benefits, which are expected to normalize in the first quarter of 2023.
On a consolidated basis fourth quarter organic revenues increased by 6%.
Turning to our profitability adjusted EBITDA for the Big three segments was $618 million.
Up 27% from the prior year period, with a 43, 9% margin rising 810 basis points.
Improvement over prior year was due primarily to higher revenues change program savings and lower annual bonus accruals.
As a reminder, the change program operating cost are recorded at the corporate level.
Moving to Reuters news.
Adjusted EBITDA was $40 million up $25 million year over year with a margin of 19, 8%.
Up sharply from the prior year.
Events revenue growth and a currency benefit drove margins.
Global Print's adjusted EBITDA was $59 million with a margin of 36, 1%.
An increase of 20 basis points.
In aggregate total company adjusted EBITDA was 633 million, a 40% increase versus Q4 2021.
Excluding cost related to the change program in both periods adjusted EBITDA increased 31%.
The fourth quarter's adjusted EBITDA margin was 35, 9% or 39, 3% on an underlying basis, excluding cost related to the change program.
Turning to earnings per share.
Fourth quarter adjusted EPS was <unk> 73.
Up from 43 in the prior year period.
The increase was mainly driven by higher adjusted EBITDA.
Currency had a <unk> <unk> negative impact on adjusted EPS in the quarter.
Let me now turn to our free cash flow performance for the full year.
Reported free cash flow was 134 billion up 7% from $1 two 6 billion in the prior year period.
Consistent with previous quarters. This slide removes the distorting factors impacting our free cash flow.
Working from the bottom of the page upwards, the cash outflows from discontinued operations was $1 million less than the prior year period and reflects payments to the U K tax authority related to the operations of our former <unk> business.
Also in the 12 months, we made $324 million of change program payments as compared to $166 million in the prior year period.
If you adjust for these items comparable free cash flow from continuing operations was $1 7 billion.
$241 million higher than the prior year period.
I'm merely due to higher EBITDA.
I will now provide an update on our capital structure and several capital allocation items.
As you can see our capital structure and liquidity position remains strong as we exited 2022 and they have improved with the recent sale of <unk> shares.
We had $1 1 billion of cash on hand at December 31.
And more than $2 billion as of January 31, with the proceeds received from the sale of <unk> shares to Microsoft.
We have an undrawn $2 billion revolving credit facility.
And we also have approximately $1 billion of availability on our $2 billion commercial paper program.
Note that half of the commercial paper borrowings at year end were used to fund the <unk> acquisition, which closed on January 3rd.
Our December 31 leverage ratio was one seven times below our two five times internal target as noted in our value creation model.
Next I will provide several updates on our London stock Exchange group holding.
On January 31, we sold 10 5 million shares to Microsoft for approximately $1 billion of gross proceeds.
Leaving us with 61 5 million shares valued at approximately $6 billion, including the value of our FX hedges.
In the past, we have discussed our ability to monetize one third of our <unk> shares in each of 2023 2024 and 2025.
Our vesting schedule is actually a bit more front loaded, allowing us to monetize approximately 31 million shares this year.
Combined with the $10 5 million shares sold to Microsoft. This is nearly 60% of the 72 million shares we owned as we entered 2023.
In terms of our 2023 plans, we will take a disciplined approach to our monetization, which we expect to begin in March.
After a L. Sag reports their year end results.
Subject to market conditions.
Given that both TR and Blackstone can monetize shares this year it would be prudent to assume the sales happen in appropriately measured tranches throughout 2023.
Two other quick points first our cost basis on the remaining 61 5 million shares after the Microsoft sell its $2 6 billion.
Well your math, we would assume a 25% capital gains tax rate on gains above $2 6 billion.
Lastly, the value of the foreign exchange hedges, we hold against our <unk> stake when the money as of December 31 by $310 million.
Down from that $650 million, we mentioned last quarter due to a stronger pound sterling.
We currently have nearly 90% of our remaining <unk> acquisition hedged.
From a liquidity and capital structure standpoint.
We remain in an enviable position with the low target leverage and strong cash flow bolstered by proceeds from the monetization of our <unk> state.
We remain focused on value creation, and we expect to continue with our balanced capital allocation approach that includes annual dividend growth.
Strategic M&A and capital returns.
We have ample capacity to pursue all three of these strategies in 2023 and beyond.
<unk> touched on our approach to M&A and recent <unk> acquisition.
So I will focus on the other two components of our balanced capital allocation approach.
We're making strong progress on the $2 billion and CIB or share buyback, we announced last June .
<unk> repurchased approximately $1 $5 billion worth of our shares as of the end of January .
We anticipate completing the $2 billion buyback by early April .
Following the completion of the NCI B, we plan to use proceeds from our outside dispositions to fund a return of capital in 2023 of at least $2 billion, which will be combined with a share consolidation or reverse stock split.
Assuming the current share price this transaction would reduce our share count by at least 17 million shares or three 5%.
A key advantage of the return of capital versus a share buyback is the speed of execution.
The shares were retired immediately upon the close of the transaction.
Given liquidity rules with NCI buyback programs. It will take several quarters at a minimum to return a similar amount of capital through a share repurchase program.
And finally today, we announced a 10% increase in our annual dividend to $1 96 per share up 18 from $1 78 and 2022.
This marks the 13th consecutive year of annual dividend increases for the company.
The increase will be effective with our Q1 dividend payable next month.
I will close this section with a reminder of our value creation model, which continues to guide our long term investment approach.
As we execute to these principles. We believe Thomson borders is positioned to consistently and sustainably drive strong operating and financial performance that builds value for our shareholders over the long term.
Let me conclude with our updated 2023 outlook.
As Steve outlined.
We are updating our 2023 guidance to incorporate current market conditions.
The <unk> acquisition and the Q4 2022 divestitures.
I will discuss our outlook over the next two slides.
We continue to project, our 2023 organic revenue growing by five 5% to 6%.
Including the divestitures, we discussed last quarter and share prep, we see total revenue growth rising by four 5% to 5%.
For the Big three we continue to expect six 5% to 7% organic revenue growth and we see total revenue growth of five 5% to 6%.
As a reminder, both total revenue growth and organic revenue growth or constant currency metrics.
We continue to forecast our adjusted EBITDA margin at approximately 39%, which is healthy expansion from the 2022 margin before change program costs of 37, 7%.
This incorporates the realization of significant change program cost savings.
Tempered somewhat by inflationary cost pressures and investments to drive customer success and fund growth initiatives and an estimated 50 basis points drag from <unk>.
We see our effective tax rate at approximately 18%.
In line with our prior view.
We forecast our accrued capex as a percent of revenue at approximately 7% above.
Above our prior expectation for the high end of the 6% to six 5% range.
The slightly higher capital intensity results from inflation inflationary pressures and product investments, we discussed last quarter. In addition to the inclusion of <unk>.
We also plan to invest $30 million in 2023 on real estate optimization projects.
Which will be incremental to our accrued capex outlook.
In 2023, we see M&A as a roughly $40 million free cash flow drag.
Resulting from <unk> integration cost and growth investments at sharp prep and thoughts race.
We expect positive free cash flow contributions in 2024 from these acquisitions as integration costs subside and revenue ramps.
All in we forecast free cash flow of $1 8 billion in 2023 below our prior one $9 billion to $2 billion outlook.
This incorporates the updated capital spending outlook, along with acquisition dilution and a $40 million impact from recent divestitures.
Excluding M&A, the divestiture impact and the real estate optimization spend our free cash flow outlook would have been within the prior range as is shown on slide 32.
While these items will weigh modestly on our 2023 free cash flow. We believe they are smart investments that will result in improved growth.
And profitability in 2024 and beyond.
As we think about our quarterly phasing. Please note the following.
Sure, perhaps revenue is highly seasonal with roughly half occurring in Q1 one.
One quarter in Q2, and the remaining quarter split between Q3 and Q4.
Foster more consistent throughout the year, leading to strong profits in Q1, but losses in the second half.
Sure <unk> will be integrated into our tax and accounting professional segment.
However, approximately 23% of revenue is with the global seven accounting firms and thus will be in our corporate segment.
For the full year, we see margin dilution of approximately 250 basis points to our tax <unk> accounting segment due to the inclusion of <unk>.
This includes a 300 basis point benefit to Q1.
Led by 500 basis point drag in Q3 and Q4.
For the first quarter of 2023, we see organic revenue growth at the low end of the full year of five 5% to 6% range.
We expect big three revenue to be consistent with Q4.
C growth moderating somewhat due to slower growth at borders views and a larger decline in print.
At Reorders, both by lower contractual price increase related to our <unk> agreement versus 2022.
And a lighter seasonal events calendar in Q1 impact growth.
We see a Q1 adjusted EBITDA margin of approximately 38%.
This includes our expectation for $20 million of severance in Q1, which will be a 120 basis point drag.
Let me now turn it back to Gary for questions.
Thank you Ben I think we are ready to begin the Q&A.
Certainly thank you allow me to inform our audience. If you wish to ask a question. Please press star one on your device. Thank you IRA.
First question today comes from <unk> <unk> from Canaccord. Please go ahead.
Good morning, Thanks for taking my questions and congrats on the quarter and guidance.
I wanted to kind of take a bigger look at 'twenty three.
Obviously this you've largely.
<unk> revenue and EBITDA guidance.
You described it the small variance in free cash flow. So when you look at sort of the macro backdrop. The inflation can you maybe just talk to how you were able to maintain that is it mostly that sort of the topline trends, perhaps came in stronger than expected versus maybe when you sort of initiated that guide.
I think almost two years ago, and then maybe just expanding from that can you just talk about how we should think about longer term margins.
That backdrop the <unk>.
<unk>.
Moving to instead of that 40% or beyond the 40% Mark longer term I just wanted to Oh.
I'll leave it there thank you.
Yes, Thanks, Steve I'll start and I'm sure Michael supplement.
So look I think the sort of where.
Where we sit today and.
The signals we are sending for.
But for this year speak to two things one.
The resilience of our business and our business model, 80%.
Recurring revenues, serving stable and growing end markets.
With must have products and solutions. So I think that's the first and maybe most important part of it I think the second part of it is.
In 2020, we designed to change program, we've executed that in 'twenty, one 'twenty two and the principal sort of objective of that was not only the streamline the company and get us get us ready for whatever comes in 'twenty, three and beyond but also to build a sustainable platform for higher growth going forward and so.
We're very focused on lifting our organic growth rate in a sustainable and.
Meaningful way and that started with the investment in the seven and.
In the seven growth initiatives that we talked about at Investor Day in 2021 March of 'twenty, one and it's continued with the development of <unk>.
Sort of core capabilities like migration to the cloud <unk> digital and <unk>.
Self serve customer service data and world class data and analytics capability to support our salespeople and our products.
Okay.
And a real focus on organic product innovation.
<unk> <unk> of which the company Hasnt seen before so that's where it comes from.
And we'll say more about this as we move through 'twenty three but the focus is very much on driving a higher rate of organic growth.
That organic growth will lead to.
Higher margins.
Just related to the business model and the fixed nature of our cost base. So.
That's really the areas of focus Mark what do you want to add I'll add a couple of additional points.
Start with our outlook, which is provided on page 32, as a reminder to everyone. The total revenue growth guidance is below the organic revenue guidance due to the divestitures that we had in Q4 as a reminder, that was about $155 million of annual revenue and about $40 million worth of EBITDA is the first point.
In regards to confidence to December in Q4 bookings, so you'll hear us refer to it sometimes this ACB a book of business.
That gave us confidence given that those bookings feel our recurring revenue that Steve mentioned, 80% of our total we achieved 7% recurring growth in that recurring revenue in 2022 gave us confidence there.
To Steve's point on operating leverage as we sustained six approximately 6% organic growth longer term and higher the operating leverage we have about 65% of our fixed cost of our cost are fixed in nature, which provides the operating leverage and certainly we'll continue to make investments to help sustain and fuel that organic growth longer term.
So hopefully we addressed each of your questions.
Thanks, My quick follow up proportion of Opex from head count.
I was wondering I don't know if you can disclose that says I'm curious.
Sure about 65% of our costs our compensation related are vendors that includes base salary.
Annual incentive plan long term incentive plan commissions commissions being the variable compensation for our sales force so about 65% as compensation related.
Thank you.
Our second question comes from George Tong from Goldman Sachs. George Please go ahead.
Hi, Thanks, Good morning, I wanted to dive deeper into <unk>.
Factors, leading to your updated EBITDA margin guidance and free cash flow guidance can you discuss the.
The puts and takes behind the updates there as well as.
Where.
From a segment perspective.
The changes are.
Happening in contributing.
Within the year.
Sure in regards to the EBITDA margin George Let me address puts and takes from a tailwind perspective, certainly the change program cost savings, we referenced the $540 million of annualized savings through December 'twenty. Two is certainly a tailwind in regards to headwinds I would mentioned three George.
Inflationary cost pressures number one.
Second investments to drive customer success and to fund the growth initiatives in regards to the subset of customer success, that's referring to continuing to improve our end to end customer experience that will drive higher net promoter scores and then shot should drive higher retention as a reminder, georgia retention rates about 91%.
<unk> for total TR, but it varies by segment.
Third headwind in regards to EBITDA margin is 50 basis points drag that I mentioned from the <unk> acquisition for calendar year 2023. So those are the.
Puts and takes for the EBITDA margin in regards to free cash flow, which are noted on page 33, I'll just highlight again to three items there the divestitures that we did in Q4.
That's a reduction of absolute free cash flow of 40 million and then we are intentionally making investments for the two acquisitions. We recently completed with Sherpa and thought trace which we think is the right thing to do mid to long term and then lastly, the North America real estate optimization, we owned facility in Minneapolis St. Paul.
Paul.
In Dallas, we see an opportunity George to right size those facilities that we own.
Into smaller campuses for us going forward, which would provide a stronger employee experience as triangle workplace of the future.
For us.
Those are the thoughts George on those questions.
Got it very helpful.
<unk> successfully completed your change program in the fourth quarter can you discuss key product investment and cost initiative cost efficiency initiatives now.
Now that you're done with your change program as you look forward to 2023.
Yeah, I'll start George it's Steve.
So.
A couple of things.
Under the leadership of Matt Kane, who was our interim president Reuters for a period of time, we've launched of ongoing productivity initiatives and this is very much looking for opportunities.
Two to improve.
I'll speed, our efficiency and our effectiveness of good cross across the company all regions all products all segments.
And we see that.
Lots of opportunity, there and we'll just get better and better at doing that on an ongoing basis.
From a product investment standpoint.
Very pleased with the work that David Wong and Shaw and Mohawk, Jason Scar advisors down in terms of getting a focus not only on the seven growth initiatives.
But particularly on a series of pretty exciting product innovations.
And.
And launches this year. So we will continue to invest in Westwood precision.
We will migrate <unk> to the cloud.
We are making some investments in our indirect tax and our global trade areas.
Areas.
The ongoing work that Christy.
Launching content modernization, we think would lead to a platform.
Around some pretty interesting new launches down the track and things like clear <unk>.
There is a focus list of half a dozen or so areas that we're particularly going to call out through this year.
Where our customers have told us that this demand and there is interest and so we're excited to pursue that George I would just supplement our cloud migration, which we are at roughly 50% of our revenue available in the cloud at the end of December 'twenty, two kirstie team is driving that to nearly 90% by the end of 2023.
<unk> when it lists that <unk> tax and accounting professionals business, we're continuing to invest in confirmation virtual office Ultra tax there and then lastly to support our sales go to market teams were making continued sustained investments in our commercial tools and processes to help the sales team to be more productive and efficient.
Very helpful. Thank you.
Our next question comes from Heather <unk> from Bank of America Securities. Please go ahead.
Hi, Thank you for taking my question There've been some headlines for the legal industry is just regarding.
The labor base and from Les Austin and just.
Tougher environment for the sector, especially admit I guess slower.
Deals.
<unk> on the corporate side I'm, just curious kind of what you're seeing with regards to demand from your customers.
And legal customers' willingness to spend on a new tech.
Going into potentially tougher Aaron <unk> 23.
Yes, thanks for the question.
So a couple of things.
Signaled in our comments, we saw an acceleration in Q4 about four legal products franchise, so with more practical law <unk> products of that nature.
We see that continuing we're not our business model is not based on on hits.
So to the extent that the number of lawyers goes up or down that doesn't drive.
There's not a direct correlation instead, what we see is an acceptance.
Across the legal profession, so large global large to mid to small firms.
Need to significantly up their investments in information and technology.
Order to be more productive more profitable.
And at the global large that's being driven by sort of demand from general counsels and all the way through down to small weird I just cant get the talent.
The talent sort of shortages continues and.
And we don't see that changing so we do see a real tailwind here for our legal business in terms of TR as a key driver of a transformation of the profession.
To a much more technology driven and dependent.
Set of activities across general counsel offices and law firms.
Pretty excited about playing.
A huge well in that in the coming years, and we think with more practical or high too.
Contract Express the acquisition of <unk> in our document intelligence plans.
Plus our M&A pipeline that we can.
But we can be a sort of a significant beneficiary of that transformation over the next few years.
Heather I would just add in addition to law firms in general accounts. We also had government, which is a big use of our legal products at west La precision has now been adopted by 14 States led by Steve <unk> team, we expect that to continue to expand in Q1, and Q2 and Thats a big draw once the states adopt west La Presse.
<unk>, that's a draw for law firms and others to get that what's the court systems that's correct.
That's great to hear and as a follow up just you know it.
That's helpful to hear whats going on the legal market could you potentially provide.
Some color on what Youre seeing on the consulting side as well again just.
Admit all the sort of macro uncertainty.
Heather can you can you just say a few more words to explain that one in particular.
Yeah, just kind of where the demand is coming from on the consulting side and what you're hearing from your customers given given some of the economic uncertainty.
Yes, so we don't have a big <unk>.
Consulting or advisory business, we have some.
I apologize.
Yeah, I actually amount of accounting I'm very sorry.
And then on accounting, Okay, sorry, yes, sorry, yes got it.
No. That's okay. That's okay. So look on the tax and accounting front.
What we see is happening firstly.
The number of returns and.
The complexity of returns just keeps going up and up and up and.
And I think it is.
It's a bulk funded suggest that that's going to reverse anytime soon.
Particularly in the United States and so the demand for for our software the fundamental underlying demand for our software.
Does that compete with us on the tax return side or what.
The order confirmation side I think the same is true.
Firstly, secondly, with a generational shift what's about to.
A lot of a lot.
Sort of certified pressing accountants.
Getting towards the end of their careers and there's not the same number of new graduates coming through with the sort of bottom of that of that talent funnel.
And as a result, the profession is becoming more and more dependent.
Yeah.
Automated technology based solutions and that was really the sort of thesis behind our acquisition of <unk>. What <unk> does is afforded by the document ingestion process using AI for tax return so types a lot of our labor in.
The grunt work out of preparing texture tenants.
And so this was also similar to my comments on Louisville section accounting groups going to become increasingly dependent on technology that automates that core tax.
Tax return and audit process, and we think we're making the right investments to be a beneficiary of that going forward and certainly our results.
In recent years in terms of economy give us cause for optimism there.
The talent that we have.
Leading FX accounting franchise of the talent that we're attracting retaining developing within that business on both the product engineering go to market side.
Reinforces that confidence.
I would just add to the recent acquisition of sharp drop in accounting really further double downs in regards to our confidence in that space. Just a reminder, heather the menu of business in Brazil, that's led by Adrian <unk>.
That business continues to grow about 25%, it's about $100 million in revenue now, 25% annual growth and my confidence in the team there driving new customers new logos of about 10% annual increase there. So thats also a feel for the tax and accounting overall growth.
Yeah.
Great. Thank you so much.
The following question comes from Vince Valentini from TD Securities. Please proceed.
Alright, thanks very much.
Steve Am I interpreting your opening remarks properly when you say you want growth to improve so youre, making investments this year to improve growth.
In future years.
Does that mean your bar at lease expiration really is for the big three segments to do better than six 5% to 7% growth in 2024.
Yes.
Simple answer yes.
We have.
We are very lucky.
Ambitions for our big three growth and profitability and we think we're just getting started.
To my point comments to two two.
Habits questions, we see real potential in the legal profession.
The real potential in the tax accounting profession.
We think we can get our government business, well and truly back on track.
And we think we've got an opportunity in.
In corporates, whereas I've talked about before.
It's a relatively new area of focus for us as a company and.
And one of the areas in corporates, but not the only variable pay and expansion and the risk of our risk towards the commodity franchise so across the board.
No.
We're pretty excited about the growth prospects, we've got a mic.
The right set of investments in products and in talent.
And our track record I think is building in those.
Areas and you attribute to the to Georges question around EBITDA margin and free cash flow guidance.
For me Thats, a positive story, because we see opportunities to invest further to drive growth in the out years.
So.
Notwithstanding the economic climate in 2023.
We're pretty excited about what we see in the investment opportunities in front of us and Vince just to clarify those investment opportunities organic and inorganic to appeal that big three long term growth.
Yes for sure.
One quick follow up for you on similar topics are different angle is is price increases you've talked previously about a bit of a lag.
Impact where your your wage costs and other input costs have gone up and it will take a little while to catch up with your rate increases.
That cycle will complete by 2000 by the end of this year. So the margins in 2024 should not be.
<unk> negatively impacted by that dynamic.
Okay Thats great question.
That should largely be completed by the end of 2023, just given the long term nature of some of our multiyear contracts there will be some that will go over into 2024, but substantially complete by the end of 'twenty three as those contracts materialize and mature.
Thank you.
The following question comes from <unk> <unk> from RBC. Please go ahead.
Yes, thanks very much.
Two quick ones for me, maybe starting with you Steve.
When you laid out the change program.
And when you stepped into your role you talked about.
A couple of different phases, and what you wanted to do cross selling was one that was more medium term. Once you had your organization kind of in a position to do more of it. So just what are your latest thoughts on boosting that activity looking forward and secondly on.
The outlook I get the question.
And maybe this is a victim of your own success going back a couple of years. When you provided three years outlook. Just wondering what your latest thoughts are when you think about 2024 and 2025 and the provision of.
Your expectations or guidance for those years.
Yeah.
Sure.
Let me take the second one first we're not today providing guidance for.
24, <unk> as we get through the year and I think.
More confidence and clarity around some of these investments I think we'll be in a position to come back to you.
With some more clarity there.
The only thing I would sort of double down on the comments on that.
In reference to Heather's question, Joe We just we see.
Lots of opportunities to invest.
And and what's a promise within our core <unk> franchise.
Franchise.
Indeed, as you say call out cross selling and it's part of the China program, you know Theres a couple of areas where.
A few areas, where we really saw areas for improvement. The first was in the complexity. The number of products. The number of solutions overly complex. When we started this process and thats, where the divestitures of upcoming <unk>.
Second is we saw some really soft soft spots and poor performance in terms of that.
Of our customer service.
Both in terms of the upfront sales process, but more importantly to support the follow through the change programs invested heavily against that and we're starting to see the results in improved NPS.
But it's early days and the third is as you say.
Cross selling it's not something we do particularly well.
Across the board as a company, we're not a consistency across our different segments and this is where the shift to an operating company is really important because it ensures that we take best practices and.
And spread them across the entire company, we have an effort that started in corporates around next generation customer success that is focused squarely at improving our cross.
Cross selling will extend that to our other franchises. This year mixed and what I would say, though is that we're still in the early days in terms of seeing the benefits of that.
Thank you very much.
Thanks Kurt.
Our next question comes from Matt Zhang from CIBC. Please go ahead.
Hi, This is actually Scott Fletcher.
I wanted to ask a question on M&A valuations.
Wondering if we should look to share preface the price you pay for sure as a benchmark for what you might be willing to pay for future deals I mean, obviously there is more to the pricing.
Mitch you pay when it comes to the price to price but.
Just looking to get a sense of what the amount of acquired revenue might be given the capital plans you laid out.
Yes, Scott that's a good question I wish I could I wish I could sort of predict I mean, we are in the marketplace in pretty active discussions on a bunch of different targets as you would expect us to be.
Bob.
We are.
Mike and his team are particularly rigorous in terms of the financial hurdles, we say, but we're equally.
I hope for as it pertains to making sure that the.
The proposition that we might acquire is beneficial to our customers.
Bob.
And.
Our segment presidents and broad pick a really play a very important role in informing that we want to make sure that the sort of products and technologies.
Christine we're not interested in acquiring ticked it having to fix things.
And Thats, where David Wong Choi models with Jason's garbage Kristy Ronco, who are really really wide and so and then last but not least culture.
Rob.
We're always looking to improve.
Sales in our culture.
So we certainly not oblivious to the idea of of of benefitting, having the entire benefit from injection of new talent coming through an acquisition with maryalice future keeps us all honest in terms of.
Make sure we can put put businesses together.
And go for ways.
And so.
But those are the criteria valuations they have definitely come down.
I am hopeful that they will stay at reasonable levels.
Through this year and next as we deploy.
The a portion of the $11 billion in capital on M&A.
But but.
Since I think the sort of the playbook that I described in my remarks of taking existing products and using our distribution does afford us the ability to pay a full price and still extract very significant value for our shareholders and thats really where were focused rather than sort of trying to find the.
To achieve this deal and have to do a turnaround of a an acquisition target.
Great. Thank you for that.
Thanks Scott.
The following question comes from Andrew Stein, There, Matt from J P. Morgan. Please proceed.
Hi, This is actually Stephanie Anthony in for Andrew.
Just ask a question about client retention.
Wondering if you can just comment on what you've seen.
2022 in terms of your client retention rate versus 2021, and whether you've seen any improvement on that front, maybe from some of the.
Some of the changes that you've made to go change.
Each program.
Sure Stephanie in regards to retention for 2022, we saw nearly a 50 basis point improvement overall.
As we've discussed before Stephanie that varies by segment and subsegment and for the benefit pool group, our highest retention is with Neal Stern <unk> customers within our global large law firm at 95% plus.
Not higher also parts of our government business has very very high retention, where we have the greatest opportunity Stephanie is with our smaller firms and I had mentioned during the prepared remarks and in the prior question about continued investments in our customer success.
Light optimistic as we continue those investments into end to end customer experience, we're going to see a direct correlation in the continued improvement so roughly 91% overall, we definitely see opportunities to continue to improve retention in 'twenty three 'twenty four 'twenty five.
Also embarked on and are our initiatives within our corporate segment led by Brian Ceccarelli, and Maria there, others, and which will be expanding our NR initiative.
Two legal and tax as we go through 'twenty three 'twenty four so we definitely see continued upside Stephanie and retention and the <unk>.
Coming years.
Okay, great. Thank you for that.
Sure.
Up next is them enough Patnaik from Barclays. Please go ahead.
Hi, Good morning. This is roni Kennedy out from an off thank you for taking my questions May I ask do you.
Provide kind of insight on the organic growth component components, I guess, specifically for the big three in terms of pricing the cross and upsell innovation et cetera.
What they were for the fourth quarter expectations for first quarter and 23.
Overall, and we don't go into that level of granularity.
Item that we have consistently shared is in regards to price.
Where my price varies by segment and Subsegment, what we had shared.
In the past is that our tax and accounting professional business historically has been about 5% price uplift on an annual basis.
With corporates being about 3% and our legal business being about two and a half roll in what we see as we go into 2023, if I link back to the <unk> question, we do see higher price lift in 2023.
2022 defenses question with our multiyear contracts and just that natural extension, so price increases will be a little bit higher and the reference points I just made in 2023, but we don't go into any additional granularity Roland in regards to the components thereof organic growth.
Understood. Thank you and then May I, just confirm with regards to 'twenty three guidance.
Assumptions.
Can you flush out on the mix of what subs non subs revenues will be the assumptions around the transactional print.
And events and then also can I confirm quantification of margin impacts from.
Benefits of divestitures, and if there was kind of a run rate of the portfolio pruning.
Yes.
Sure, let me address each of those.
Roland in regards to 2023 print we are we had a really strong year in 2022 and based on the factors that I mentioned in the prepared remarks, we would anticipate print reverting back to more of the historical declines of 4% to 5%.
In 2023, so 2022 with just an unusually strong year for us there.
In regards to the events business, we think borders overall will be approximately 5% organic growth in 2023.
We had a strong year in 'twenty two from borders news for the reasons that I mentioned, including borders events and the news contract with the London Stock Exchange group. There. So print roughly minus five for modeling purposes, Rolling Rowland where orders news overall about 5% we did get a strong.
Uptick in Reuters events in 'twenty two.
Which will be less in 2023 transactional revenue I think it will be fairly comparable in 23 versus.
'twenty two there.
Thank you that's helpful.
And then sorry with regards to margin impacts on planned divestitures and a potential run rate any on how to think about that.
Thank you.
Ft in 2022 with those divestitures that we did in Q4 was $155 million rolling in annual revenue and $40 million.
Annual EBITDA.
So with that Youll see a little bit of benefit.
From margin accretion as a result of those divestitures, which we have incorporated in our full year guidance.
Thank you I appreciate it.
Okay. Thank you Roland.
Oh.
I think we have one more I think we have time for one more question.
Our final question today comes from <unk> <unk> from Scotiabank. Please proceed.
Yes. Thank you for squeezing me in.
I wanted to ask you now that you delivered in furniture change program can you discuss if there are specific geographies or areas you talked about maybe a risk as a potential new area, where you want to focus on can you can you discuss a little bit what you are looking to amplify in terms of invest.
<unk> new areas core investments.
And also when you look at the $2 billion return program on capital can.
Can you provide some guideposts as to when that program will be initiated and the needed milestones to be achieved in order to begin the process. Thank you.
Yes, I'll take the first part.
I think in terms of the investments certainly.
We'd like to take advantage of Av.
Of opportunities to grow our franchises internationally.
And we see opportunities to build on recent successes in Latin America.
We also see opportunities.
The southeast and northeast Asia.
So we will be.
We'll be looking to sort of develop those plants through this year.
On the in terms of the.
In terms of the sort of product lines.
As I said in my remarks, we don't we don't think we need to sort of step too far out beyond Val <unk> three and we think we've got lots of growth potential in serving customers to begin with.
In and around the big three but areas like risk.
We have a really interesting starting position.
Yes.
<unk> and.
Trs is that.
We think sort of enables us to play in a much bigger wagon that space, particularly.
Expanding beyond their core.
Government franchising and corporate <unk> other.
Areas like ESG.
We got a sort of natural right to play and so we're looking we're looking at.
Expansion opportunities in and around that but it's very much serving the head of tax and a general counsel and head of risk with with.
At ways in which we can help them navigate an increasingly complex regulatory and compliance related environment, that's what we do well.
We are the company that can help our customers and their advisers navigate those environments with.
Content, driven technology and so those are really the areas.
Mike.
In regards to the capital returns disappointed clarification.
$2 billion in CIB, a share buyback that we began in June of 'twenty. Two just to reiterate that will be completed in early April with about $1 5 billion complete with that to your direct question on the return of capital Let me share the sequencing step one in the sequencing is the monetization of <unk> shares.
As I noted in our prepared remarks today that will be appropriately measured tranches throughout 2023, meaning we will have a very disciplined approach. There. So step one is to <unk> monetization.
Two is to return of capital we'll use the proceeds from the <unk> monetization to fund the return of capital and third we will have a concurrent share consolidation, which will result in about $17 million reduction in share count based on todays share price there. So the timing will be driven.
By the timing as to when we complete the <unk> monetization.
Okay. Thank you very much Greg.
Great I think we'll end the call there thanks, everybody for your time and attention and feel free to reach out if you have any follow ups I have a good day.
Thank you for joining everyone that concludes your conference you may now disconnect. Please enjoy the rest of your day Goodbye.