Guidance for ordinary free cash flow and diluted ordinary EPS is in constant currencies (EUR/USD 1.29).
Guidance reflects IAS 19R and IFRS 11, the removal of the pension financing credit or charge from ordinary figures, and includes the estimated impact of performance share issuance offset by share repurchases.
Guidance is based on constant exchange rates. Wolters Kluwer generates more than half of its ordinary EBITA in North America. As a rule of thumb, based on our 2012 currency profile, a 1 U.S. cent move in the average EUR/USD exchange rate for the year causes an opposite 1.0 euro-cent change in diluted ordinary EPS.
- Legal & Regulatory: We expect our North American operations to see good organic growth in revenues, driven by Corporate Legal Services. However, European legal and regulatory markets are expected to remain challenging. As indicated in February, we expect the divisional margin to contract and to be offset by margin improvement in other divisions.
- Tax & Accounting: We expect organic growth and margins to be similar to 2012. Growth in software should continue across the division, while trends in print and bank products are expected to remain weak.
- Health: We anticipate another year of strong growth in Clinical Solutions. Market conditions for print journals and books are expected to remain soft. Margins will reflect investment in new products and global expansion, compensated by the positive effect of the ongoing mix shift towards Clinical Solutions.
- Financial & Compliance Services: Faces tough comparables in Originations & Compliance, while Audit is expected to see some revenue attrition over the coming 12-18 months as it migrates Axentis customers to TeamMate and other software platforms. We expect good growth in Finance, Risk & Compliance (FRC). Market conditions for our European transport business are expected to remain challenging. We expect divisional organic growth and margin to see improvement in the second half.
Ordinary net finance results are expected to be approximately €130 million in constant currencies, including the temporary negative carry caused by early refinancing of our bonds due in 2014.
The full year benchmark effective tax rate on ordinary income before tax is expected to be broadly in line with the benchmark tax rate of 2012 (27.7%).
The impact of divestitures made in the year to date is expected to be slightly dilutive to earnings in 2013.
Anti-dilution policy with regard to performance shares
Wolters Kluwer has a policy to offset the dilution of its performance share issuance annually via share repurchases. To accomplish this in 2013, the Company has completed share repurchases of €20 million as of July 9, 2013.
Wolters Kluwer provides legal, tax, accounting, health, and financial compliance professionals the essential information, software, and services they need to make decisions with confidence. Our strategy focuses on accelerating our organic revenue growth and improving returns.
- Expand our leading, high growth positions: We are focusing the majority of investment on high growth segments in our portfolio where we have achieved market leadership. These positions, such as Clinical Solutions and Finance, Risk & Compliance, provide global expansion opportunities. In addition, we will continue to drive growth in digital solutions and services across the divisions.
- Deliver solutions and insights: We will continuously invest in our products and services to deliver the tailored solutions and insights our professional customers need in order to make critical decisions and increase their productivity. We are investing in mobile applications, cloud-based services and integrated solutions. Product investment, including capital expenditure, is expected to remain approximately 8-10% of revenues in the coming years.
- Drive efficiencies: We will continue to find more ways to drive efficiencies in areas such as sourcing, technology, real estate, organizational processes, and distribution channels. As in the past, these operational excellence programs will deliver cost savings to support investments and margin expansion, while mitigating cost inflation. In 2013, restructuring costs are expected to be funded by cost savings.
First-half 2013 results
The interim financial statements have not been audited or reviewed.
In the first half of 2013, Wolters Kluwer revenues were stable overall at €1,742 million. Excluding the effect of exchange rate movements, revenues rose 1%. On an organic basis, revenues increased 1% in the first half, following 3% organic growth in the second quarter.
Revenues from North America rose 2% organically, while revenues generated in Europe declined 2%. Revenues derived from Asia Pacific and the Rest of World rose 8%.
Ordinary EBITA declined 2% to €334 million and the ordinary EBITA margin declined to 19.2% (HY 2012: 19.6%). At constant currencies, ordinary EBITA was stable. On an organic basis, excluding the effect of currency, acquisitions and divestitures, ordinary EBITA declined 1%, principally as a result of investments in growth opportunities, dilutive disposals, and the timing of restructuring charges.
The net acquisitions and divestitures effect was to add €15 million to revenues with no change to ordinary EBITA in the first half. The ordinary EBITA margin of divested operations has been above Group average.
Ordinary net finance results, which include a settlement (related to Lehman Brothers) of €3 million, were €61 million (HY 2012: €62 million). Ordinary net finance costs exclude the employee benefits financing component and exclude results on the sale of investments in equity-accounted investees.
The tax rate on ordinary income before tax increased to 27.7% (HY 2012: 27.4%) due to an increased proportion of profits from higher tax jurisdictions, mainly the United States. Ordinary net income declined 2% overall and 1% in constant currencies. Diluted ordinary EPS was €0.66 (HY 2012: €0.67), declining 1% in constant currencies.
IFRS reported figures
Operating profit, which includes amortization of acquired publishing rights, as well as non-recurring or exceptional items, increased 15% to €285 million. Operating profit benefitted from a €50 million net gain on divestment of operations, principally relating to the disposal of Best Case Solutions in May 2013.
Net finance results were €51 million (HY 2012: €64 million), benefitting from a €12 million gain on the disposal of the minority investment in AccessData in March 2013. Net finance results includes employee benefits financing costs of €2 million and a €3 million settlement received in the first half related to Lehman Brothers.
The total effective tax rate increased to 29.3% (HY 2012: 24.3%) mainly due to higher taxable income in the U.S. resulting from capital gains on divestments. Profit for the period from continuing operations increased 20% to €166 million, driven principally by the disposal gains.
Discontinued operations recorded a loss of €2 million in the first half, compared to €19 million in the comparable period. Profit for the period including discontinued operations, rose 37% to €164 million (HY 2012: €121 million) and diluted EPS increased 38% to €0.55 (HY 2012: €0.40), largely as a result of the gains on divestments and lower losses on discontinued operations.
Ordinary cash flow from operations was €282 million (HY 2012: €313 million), a reduction of 8% in constant currencies. Cash conversion (CAR) was 85% compared to 92% a year ago, due to higher working capital outflows of €46 million (HY 2012: €18 million outflow) as a result of the timing of payments. Capital expenditures increased 4% at constant currencies to €70 million (HY 2012: €67 million) and represented 4% of revenues.
Ordinary free cash flow was broadly stable at €140 million (HY 2012: €142 million) as the effect of lower cash conversion was compensated for by lower cash spend on restructuring and lower cash taxes compared to first half 2012.
Acquisition spending in first half 2013 was €170 million (HY 2012: €7 million) including earn-out payments for acquisitions made in prior years. The main acquisitions in first half 2013 were Health Language in the U.S. and Prosoft in Brazil. Receipts from divestments, net of tax paid, were €75 million (HY 2012: €4 million). Divestitures during the first half of 2013 included Best Case Solutions and the minority interest in AccessData.
Following the decision announced in February 2013 to abolish the stock dividend, total cash dividend payments more than doubled to €205 million (HY 2012: €90 million). Share repurchases totalled €14 million in the first half. As of July 9, 2013, the share buy-back program of €20 million was completed.
Balance sheet and net debt
Net debt at June 30, 2013, was €2,276 million compared to €2,086 million at December 31, 2012, reflecting net use of cash during the period as a result of higher acquisition spend. The leverage ratio net-debt-to-EBITDA (12 month rolling basis) was 2.6x as of June 30, 2013, compared to 3.0x at June 30, 2012 and 2.4x at December 31, 2012. Our target net-debt-to-EBITDA ratio remains 2.5x, and we expect this leverage ratio to reach or be better than our target by year-end 2013.
In March 2013, Wolters Kluwer issued a new €700 million Eurobond with coupon rate of 2.875%. Part of the funds raised were used to redeem the perpetual cumulative subordinated bonds of €225 million (6.875%) in May. The remaining net proceeds of the bond will be used to refinance part of our €700 million 2014 senior bonds (5.125%) and for general corporate purposes.
Read the full 2013 Half-Year Results Report