Wolters Kluwer 2023 Full-Year Report

Wolters Kluwer, a global leader in professional information, software solutions and services, today releases its full-year 2023 results.

Highlights

• Revenues €5,584 million, up 5% in constant currencies and up 6% organically.
  • Recurring revenues (82% of total revenues) up 7% organically.

  • Digital & services revenues (94% of total revenues) grew 6% organically.

  • Expert solutions (58% of total revenues) grew 8% organically.

  • Cloud software (16% of total revenues) grew 15% organically.

• Adjusted operating profit €1,476 million, up 6% in constant currencies.
  • Adjusted operating profit margin up 30 basis points to 26.4%.
• Diluted adjusted EPS €4.55, up 10% overall and up 12% in constant currencies.
• Adjusted free cash flow €1,164 million, down 2% in constant currencies.
• Net-debt-to-EBITDA of 1.5x; return on invested capital (ROIC) improved to 16.8%.
• Proposed 2023 total dividend €2.08 per share, an increase of 15%.
• Share buybacks:
  • Completed 2023 share buyback of €1 billion.
  • Announcing 2024 share buyback of up to €1 billion, of which €100 million is completed.
• Outlook 2024: expect good organic growth and further improvement in adjusted operating profit margin, with the increase in diluted adjusted EPS to be dampened by higher financing cost and tax.

Full-Year Report of the Executive Board

Nancy McKinstry, CEO and Chair of the Executive Board, commented: “We achieved 6% organic growth and a year-on-year increase in adjusted operating margin, despite macroeconomic and geopolitical headwinds. Strong momentum in recurring revenues compensated for challenges in some of our non-recurring revenue streams. We met our financial and sustainability goals, while increasing investment in product innovation, including in generative AI, to support future growth. We look forward to delivering another year of good organic growth and margin improvement in 2024.”

_{∆: % Change; ∆ CC: % Change in constant currencies (€/$ 1.05); ∆ OG: % Organic growth. Benchmark figures are performance measures used by management. See Note 3 for a reconciliation from IFRS to benchmark figures.}

Full-Year 2024 Outlook

Our group-level guidance for 2024 is shown in the table below. We expect sustained good organic growth in line with prior year and a further modest increase in the adjusted operating profit margin. Margin improvement is expected to be realized in the second half of the year, mainly due to timing of investments.

_{*Guidance for adjusted operating profit margin and ROIC is in reporting currency and assumes an average EUR/USD rate in 2024 of €/$1.11. **Guidance for adjusted free cash flow and diluted adjusted EPS is in constant currencies (€/$ 1.08). Guidance reflects share repurchases of €1 billion in 2024.}

In 2023, Wolters Kluwer generated over 60% of its revenues and adjusted operating profit in North America. As a rule of thumb, based on our 2023 currency profile, each 1 U.S. cent move in the average €/$ exchange rate for the year causes an opposite change of approximately 3 euro cents in diluted adjusted EPS¹.

We include restructuring costs in adjusted operating profit. We expect 2024 restructuring costs to be in the range of €10-15 million (FY 2023: €15 million). We expect adjusted net financing costs² in constant currencies to increase to approximately €60 million. We expect the benchmark tax rate on adjusted pre-tax profits to increase and to be in the range of 23.0%-24.0% (FY 2023: 22.9%).

Capital expenditures are expected to remain at the upper end of our guidance range of 5.0%-6.0% of total revenues (FY 2023: 5.8%). We expect the full-year 2024 cash conversion ratio to be around 95% (FY 2023: 100%) due to lower net working capital inflows.

Our guidance assumes no additional significant change to the scope of operations. We may make further acquisitions or disposals which can be dilutive to margins, earnings, and ROIC in the near term.

2024 outlook by division

Our guidance for 2024 organic revenue growth by division is summarized below. We expect the increase in group adjusted profit margin for 2024 to be driven primarily by our Health, Legal & Regulatory, and Corporate Performance & ESG divisions. The Tax & Accounting margin is expected to decline slightly due to increased product investment.

Health: we expect full-year 2024 organic growth to be in line with prior year (FY 2023: 6%).

Tax & Accounting: we expect full-year 2024 organic growth to be slightly below prior year (FY 2023: 8%), due to slower growth in non-recurring outsourced professional services and the absence of one-off favorable events in Europe.

Financial & Corporate Compliance: we expect full-year 2024 organic growth to be in line with or better than prior year (FY 2023: 2%) as transactional revenues are expected to stabilize.

Legal Regulatory: we expect full-year 2024 organic growth to be in line with prior year (FY 2023: 4%).

Corporate Performance & ESG: we expect full-year 2024 organic growth to be better than in the prior year (FY 2023: 9%) as Finance, Risk & Reporting revenues stabilize.

Progress against 2022-2024 strategy

We are two years into our current three-year strategic plan, which has three strategic priorities:

• Accelerate Expert Solutions: we are focusing our investments on cloud-based expert solutions while continuing to transform selected digital information products into expert solutions. We are investing to enrich the customer experience of our products by leveraging advanced data analytics and artificial intelligence.

• Expand Our Reach: we are seeking to extend into high-growth adjacencies along our customer workflows and to adapt our existing products for new customer segments. We are working to develop partnerships and ecosystems for our key software platforms.

• Evolve Core Capabilities: we are enhancing our central functions to drive excellence and scale economies, mainly in sales and marketing (go-to-market) and in technology. We plan to advance our sustainability and ESG performance and capabilities and to continue investing in diverse and engaged talent to support innovation and growth.

A more detailed discussion of our strategy and business model can be found in our annual report.

In 2023, we made important progress on our strategic plan. Expert solutions, which include our software products and certain advanced information solutions, accounted for 58% of total revenues (FY 2022: 56%) and grew 8% organically (FY 2022: 9%).

Today, around 50% of our digital revenues are from products that leverage artificial intelligence (AI) to drive enhanced value for our customers. During 2023, we stepped up experimentation and investment in large language models (LLMs) as generative LLMs became scalable. We began testing dozens of use cases, collaborating with selected customers, and launched beta versions in Health and Legal & Regulatory markets. For much of this work, we are partnering with Microsoft, Google, and other technology suppliers.

Second, we also made progress on extending our reach into high-growth adjacencies and geographies. The new Corporate Performance & ESG division, formed in March 2023, set us on a path to extend our enterprise software solutions into corporate workflows for ESG data collection, analysis, reporting, and auditing. In the Health division, the acquisition of NurseTim bolstered our position in nursing education solutions and test preparation while the acquisition of Invistics drug diversion detection software broadened our offering in the hospital market.

Third, we took significant steps in 2023 to evolve our core capabilities. We centralized most of our product development teams, more than doubling the number of FTEs that now report into our global development organization, Digital eXperience Group (DXG). We formed a unified branding and communications function and a unified financial organization to support the company globally. With regard to our specific ESG objectives, the most notable advances were the validation by the SBTi of our near-term emission reduction targets and improvements in key human capital metrics, including turnover, engagement, and belonging.

Financial policy, capital allocation, net debt, and liquidity

Wolters Kluwer uses its free cash flow to invest in the business organically and through acquisitions, to maintain optimal leverage, and to provide returns to shareholders. We regularly assess our financial position and evaluate the appropriate level of debt in view of our expectations for cash flow, investment plans, interest rates, and capital market conditions. While we may temporarily deviate from our leverage target, we continue to believe that, in the longer run, a net-debt-to-EBITDA ratio of around 2.5x remains appropriate for our business given the high proportion of recurring revenues and resilient cash flows.

Dividend policy and proposed final dividend 2023

Wolters Kluwer remains committed to a progressive dividend policy, under which we aim to increase the dividend per share in euros each year, independent of currency fluctuations. The payout ratio³ can therefore vary from year to year. Proposed annual increases in the dividend per share consider our financial performance, market conditions, and our need for financial flexibility. The policy takes into account the characteristics of our business, our expectations for future cash flows, and our plans for organic investment in innovation and productivity, or for acquisitions. We balance these factors with the objective of maintaining a strong balance sheet.

At the 2024 Annual General Meeting of Shareholders, we will propose a final dividend of €1.36 per share, which would result in a total dividend over the 2023 financial year of €2.08 per share, an increase of 15%. Dividends are paid in cash. Shareholders choose to reinvest both interim and final dividends by purchasing additional Wolters Kluwer shares through the Dividend Reinvestment Plan (DRIP) administered by ABN AMRO Bank N.V.

Share buybacks 2023 and 2024

As a matter of policy since 2012, Wolters Kluwer will offset the dilution caused by our annual incentive share issuance with share repurchases (Anti-Dilution Policy). In addition, from time to time when appropriate, we return capital to shareholders through share buyback programs. Shares repurchased by the company are added to and held as treasury shares and are either cancelled or utilized to meet future obligations arising from share-based incentive plans.

In 2023, we completed share repurchases of €1 billion (8.7 million shares at an average price of €114.44). See Note 8 for further information on issued share capital.

Today, we are announcing our intention to repurchase shares for up to €1 billion during 2024. In the year to date, up to and including February 19, 2024, we have repurchased €100 million in shares (732,722 shares at an average price of €136.48). Assuming global economic conditions do not deteriorate substantially, we believe this level of share buybacks leaves us with ample headroom to support our dividend plans, to sustain organic investment, and to make selective acquisitions. The share repurchase program may be suspended, discontinued, or modified at any time.

For the period starting February 23, 2024, up to and including April 29, 2024, we have mandated a third party to execute €205 million in share buybacks on our behalf, within the limits of relevant laws and regulations (in particular Regulation (EU) 596/2014) and the company’s Articles of Association. The maximum number of shares which may be repurchased will not exceed the authorization granted by the Annual General Meeting of Shareholders.

Net debt, leverage, credit facility, and liquidity position

Net debt on December 31, 2023, was €2,612 million, up from €2,253 million on December 31, 2022. The net-debt-to-EBITDA ratio increased to 1.5x at year end 2023 (FY 2022: 1.3x). Gross debt includes the €700 million Eurobond (8-year term; 3.750% annual coupon) issued on April 3, 2023.

Our €600 million multi-currency credit facility remains fully undrawn. As of December 31, 2023, net cash available was €989 million⁴.

Full-Year 2023 Results

Benchmark figures

Group revenues were €5,584 million, up 2% overall and up 5% in constant currencies. Excluding the effect of currency and the net effect of divestments and acquisitions, organic revenue growth was 6%, in line with the prior year (FY 2022: 6%).

Revenues from North America accounted for 64% of total group revenues and grew 5% organically (FY 2022: 6%). Revenues from Europe, 28% of total revenues, grew 7% organically (FY 2022: 6%). Revenues from Asia Pacific and Rest of World, 8% of total revenues, grew 9% organically (FY 2022: 10%).

Adjusted operating profit was €1,476 million (FY 2022: €1,424 million), up 6% in constant currencies. The related margin increased by 30 basis points to 26.4% (FY 2022: 26.1%), in line with our full-year guidance range. The margin improvement follows a margin increase in the fourth quarter driven by operational gearing, mix shift, and the comparison to a more normalized cost base in fourth quarter 2022. Personnel costs increased as expected due to an increase in the number of employees and due to wage inflation. In addition, there was an expected increase in personnel-related expenses, such as business travel, events, and training costs.

Product development spending (including capitalized spend) increased in constant currencies and amounted to 11% of revenues in 2023 (FY 2022: 11%). Restructuring expenses, which are included in adjusted operating profit, increased to €15 million (FY 2022: €6 million), at the upper end of our guidance range.

Adjusted net financing costs reduced to €27 million (FY 2022: €56 million) due to higher interest income on our cash balances. Included in adjusted net financing costs was a €7 million net foreign exchange gain (FY 2022: €5 million net foreign exchange loss) mainly due to the translation of intercompany balances.

Adjusted profit before tax was €1,450 million (FY 2022: €1,368 million), up 6% overall and up 8% in constant currencies. The benchmark tax rate on adjusted profit before tax increased to 22.9% (FY 2022: 22.6%), mainly due to lower prior year favorable adjustments combined with the increased limitation on interest deductibility in the Netherlands. Adjusted net profit was €1,119 million (FY 2022: €1,059 million), an increase of 7% in constant currencies.

Diluted adjusted EPS was €4.55 (FY 2022: €4.14), up 12% in constant currencies, reflecting the increase in adjusted net profit and a 4% reduction in the diluted weighted average number of shares outstanding to 246.0 million (FY 2022: 255.8 million).

IFRS reported figures

Reported operating profit declined 1% to €1,323 million (FY 2022: €1,333 million), mainly due to significantly lower divestment results: we incurred a net disposal gain of €4 million in 2023 compared to a gain of €75 million in the prior year. Amortization and impairments of intangible assets decreased 9% due to reduced impairments in 2023.

Reported financing results amounted to a net cost of €27 million, significantly lower than in the prior period (FY 2022: €57 million cost) due to higher interest income on cash balances. The reported effective tax rate increased to 22.4% as the prior year included a significant tax-exempt divestment gain (FY 2022: 19.5%). As a result, net profit for the year decreased 2% overall to €1,007 million (FY 2022: €1,027 million). Diluted EPS increased 2% to €4.09 (FY 2022: €4.01), benefitting from the lower weighted average number of shares outstanding.

Cash flow

Adjusted operating cash flow was €1,476 million (FY 2022: €1,528 million), down 3% overall and down 1% in constant currencies. This reflects a cash conversion ratio of 100% (FY 2022: 107%) returning to historical levels (95%-100%). Working capital inflows of €98 million were significantly lower than in the prior year while capital expenditures increased 8% overall and 10% in constant currencies. Net capital expenditures were 5.8% of revenues (FY 2022: 5.4%). Cash payments related to leases, including lease interest paid, were €74 million (FY 2022: €81 million). Depreciation of physical assets, amortization and impairment of internally developed software, and depreciation of right-of-use assets totaled €299 million (FY 2022: €306 million).

Net interest paid, excluding lease interest paid, reduced to €17 million (FY 2022: €45 million), reflecting higher interest income on cash and cash equivalents. Income tax paid increased to €325 million (FY 2022: €289 million). The net cash outflow related to restructuring was €1 million (FY 2022: outflow of €12 million). As a result, adjusted free cash flow was €1,164 million (FY 2022: €1,220 million), down 2% in constant currencies.

Total acquisition spending, net of cash acquired and including transaction costs, was €68 million (FY 2022: €95 million), and primarily relates to the acquisitions of NurseTim on January 9, 2023, Invistics on June 7, 2023, and tax content and tools provider MFAS on October 31, 2023.

Dividends paid amounted to €467 million (FY 2022: €424 million). The cash deployed towards share repurchases was as announced, €1 billion, and in line with prior year (FY 2022: €1 billion).

Sustainability and ESG achievements 2023

In 2023, we continued efforts designed to attract, engage, develop, and retain talent globally. Our employee turnover rate improved to 9.8% (FY 2022: 15.3%) despite still competitive markets for technology talent. Our employee engagement score improved 1 point to 78 and our belonging score improved 2 points to 75.

In November 2023, the Science Based Targets initiative (SBTi) validated our near-term emissions reduction targets under which we intend to reduce absolute scope 1 and 2 greenhouse gas (GHG) emissions by 50% and absolute scope 3 GHG emissions by 30% by the year 2030 from a 2019 base year.

Our annual scope 1 and 2 emissions, which are entirely accounted for by our offices around the world, reduced by 8% in 2023 compared to the prior year. At year-end 2023, our global office footprint (m²) was reduced by 5% compared to year-end 2022, bringing the cumulative reduction from 2019 baseline to 25%. Our server decommissioning program led to the closure of 12 data center locations and the decommissioning of 1,542 servers. In 2023, total business travel related emissions returned to pre-pandemic absolute levels, but business travel emissions per FTE were 16% below 2019 baseline level.

In preparation for compliance with the EU Corporate Sustainability Reporting Directive and European Sustainability Reporting Standards (ESRS), which become mandatory as of financial year 2024, we have carried out an initial double materiality assessment based on the ESRS and will be providing additional disclosure in our annual report.

Our sustainability efforts were recognized with an improved 14.4 ESG risk rating from Morningstar Sustainalytics, which qualifies Wolters Kluwer as top-rated and in the leading 5% of 1,109 companies in the Software & Services industry.

 

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[1] This rule of thumb excludes the impact of exchange rate movements on intercompany balances, which is accounted for in adjusted net financing costs in reported currencies and determined based on period-end spot rates and balances.

[2] Adjusted net financing costs include lease interest charges. Guidance for adjusted net financing costs in constant currencies excludes the impact of exchange rate movements on currency hedging and intercompany balances.

[3] Dividend payout ratio: dividend per share divided by adjusted earnings per share.

[4] Total cash and cash equivalents of €1,135 million less overdrafts used for cash management purposes of €146 million.