Guidance for adjusted free cash flow and diluted adjusted EPS is in constant currencies (EUR/USD 1.33). Guidance for EPS growth reflects the announced share repurchases. Adjusted operating profit margin and ROIC are in reported currency.
Our guidance is based on constant exchange rates. Wolters Kluwer generates more than half of its revenues and adjusted operating profit in North America. As a rule of thumb, based on our 2014 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 adjusted EPS. Currency is expected to have a more significant influence on results in 2015 than in recent years.
We expect adjusted net financing costs of approximately €100 million, excluding the impact of exchange rate movements on currency hedging and intercompany balances. We expect the benchmark effective tax rate to be between 27% and 28% in 2015. We expect a cash conversion ratio in line with our historic average of 95%, and capital expenditure between 4% and 5% of revenue.
Our guidance assumes no significant change in the scope of operations. We may make further disposals which could be dilutive to margins and earnings in the near term.
2015 outlook by division
- Legal & Regulatory: we expect Corporate Legal Services (CLS) to achieve organic revenue growth, albeit at a more moderate pace in the second half. This is expected to be more than offset by organic decline in Legal & Regulatory Solutions, due to continued weakness in print formats. Margins are expected to contract modestly, due to cost inflation, additional product investment and restructuring.
- Tax & Accounting: we expect underlying revenue momentum to be similar to 2014, with growth in software solutions more than offsetting ongoing decline in print publishing and bank product revenues. First half growth is expected to be more muted due to normal seasonal sales patterns. We expect margins to improve modestly.
- Health: we foresee steady revenue performance, supported by robust growth in Clinical Solutions. The combined Medical Research, Professional & Education is likely to see growth in digital revenues offset by continued decline in print formats. Margins are expected to rise despite increased product investment and additional restructuring.
- Financial & Compliance Services: organic growth in our Finance, Risk & Compliance and Audit units is likely to moderate from the strong double-digit growth achieved in 2014. Market conditions for Originations are mixed, with U.S. refinancing volumes still declining, but new lending regulations providing opportunities for growth.
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, which aims to accelerate our organic revenue growth and improve returns, is centered on the following three imperatives:
Expand our leading, high growth positions: We are focusing the majority of our investment on high growth segments in our portfolio where we have achieved market leadership. These positions, which include Corporate Legal Services, Tax & Accounting software, Clinical Solutions, and Finance, Risk & Compliance and Audit, provide global expansion opportunities. In addition, we will continue to drive growth in digital solutions and services across all divisions.
Deliver solutions and insights: We 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 drive efficiencies in areas such as sourcing, technology, real estate, organizational processes, and distribution channels. These operational excellence programs will deliver cost savings to support investments and margin expansion, while mitigating cost inflation.
Dividend Policy and 2014 Dividend
Wolters Kluwer has a progressive dividend policy under which the company expects to increase the dividend per share each year. At the upcoming Annual General Meeting of Shareholders, we will propose increasing the dividend over the 2014 financial year to €0.71 per share (2013: €0.70). Dividends will be paid in cash on May 13, 2015 for ordinary shareholders, or on May 20, 2015 for holders of American Depository Receipts (ADRs). Shareholders can choose to reinvest their Wolters Kluwer 2014 dividends by purchasing further shares through the Dividend Reinvestment Plan (DRIP) provided by ABN AMRO Bank NV.
Anti-dilution policy and share buy-back 2015
Wolters Kluwer has a policy to offset the dilution caused by its annual performance share issuance with share repurchases. In line with this policy, the company intends to repurchase up to €40 million in shares in 2015. Given the improvement in our leverage over the past few years, the company announces its intention to return cash to shareholders by repurchasing an additional up to €100 million in shares, bringing the total intended buy-back up to €140 million in 2015.
Full-year 2014 results
Group revenues increased 3% overall to €3,660 million, up 3% in constant currencies. Excluding both the impact of exchange rate movements and the effect of acquisitions and divestitures, organic revenue growth was 2%, an improvement on the prior year (2013: 1%). The fourth quarter saw improved transactional revenues and some benefit from one time sales.
Revenues from North America (55% of total revenues) increased 3% organically, with all four divisions enjoying growth in this region. Revenues from Europe were flat on an organic basis, as growth in the Financial & Compliance Services, Tax & Accounting and Health divisions was offset by decline in Legal & Regulatory Solutions Europe. Asia Pacific and Rest of World, which represented 8% of group revenues in 2014, grew 7% organically, driven by Financial & Compliance Services, Health, and Tax & Accounting.
Adjusted operating profit was stable at €768 million in constant currencies. The adjusted operating margin eased to 21.0% (2013: 21.5%), as expected, and within our guidance range (20.5%-21.5%). Full-year restructuring costs amounted to €36 million, higher than originally announced in February 2014 (€25-€30 million) as additional actions were carried out in the fourth quarter, largely in Legal & Regulatory Solutions in Europe. Excluding restructuring costs in both 2013 and 2014, the adjusted operating profit margin would have increased by 10 basis points.
Adjusted net financing costs declined to €113 million (2013: €117 million), reflecting the benefits of last year’s debt refinancing and a €12 million loss on currency hedging and revaluation of intercompany balances mainly due to the appreciation of the U.S. Dollar to EUR/USD 1.21 at 31 December, 2014. As a reminder, adjusted net financing costs exclude the financing component of employee benefits, results of investments available-for-sale, and disposal and/or revaluation gains/losses on equity-accounted investees.
Adjusted profit before tax was €654 million, up 1% from €647 million in 2013. The benchmark effective tax rate on adjusted profit before tax was 27.6%, unchanged from the prior year. Diluted adjusted EPS was €1.57, up 1% overall and up 3% in constant currencies.
IFRS reported figures
Reported operating profit declined 8% to €569 million (2013: €619 million) due to lower disposal gains, higher exceptional costs, and higher amortization of acquired intangibles.
Reported financing results amounted to a negative €56 million (2013: negative €128 million) and included adjusted net financing costs of €113 million, employee benefits financing costs of €5 million, a €14 million loss on investments available-for-sale, and a €76 million revaluation gain on our 38% minority interest in Datacert triggered by the purchase of the remaining 62% in April 2014. Profit before tax from continuing operations thus increased 5% to €512 million (2013: €490 million).
The reported effective tax rate declined to 7.4% (2013: 28.0%) mainly as a result of the non-taxable revaluation gain on Datacert and a positive tax impact related to previously divested assets. The positive tax impact was partially offset by the taxable transfer of assets within the Group as part of the consolidation of our platform technology. There were no discontinued operations in 2014 (2013: €7 million loss). Total profit for the year increased 37% to €474 million (2013: €346 million) and diluted EPS increased 37% to €1.58 per share.
Adjusted cash flow from operations was €764 million (2013: €727 million), up 5% overall and up 3% at constant currencies. The cash conversion ratio was significantly better than expected at 100% (2013: 95%) as a result of prudent working capital management and strong inflows in the fourth quarter. The full year saw an autonomous working capital contribution of €4 million (2013: absorption €22 million). Capital expenditures amounted to €148 million (4.0% of revenues), stable compared to €148 million in 2013 (4.2% of revenues).
Adjusted free cash flow was €516 million, up 3% overall and up 1% in constant currencies. This was despite an increase in paid financing costs, due to an additional coupon payment, and an increase in corporate income tax paid, due to timing of payments. The net use of restructuring provisions amounted to €9 million compared to €11 million in the prior year.
Acquisition spending, net of cash acquired, was €178 million (2013: €192 million), including €18 million related to earn-outs on past acquisitions (mainly Prosoft). The majority of the acquisition spending relates to the acquisition of the remaining 62% of Datacert. Smaller acquisitions included Financial Tools, now part of our Financial & Compliance Services division, LexisNexis Poland in Legal & Regulatory Solutions, and Chinese audit software provider Dingxin Chuangzhi in Tax & Accounting.
Cash proceeds from disposals, net of tax, were €29 million (2013: €63 million), relating mainly to the divestment of Canadian legal assets as well as a reduction in corporate income tax paid in relation to previously divested assets.
Net debt and leverage
Net debt reduced to €1,897 million as of December 31, 2014, compared to €1,988 million at December 31, 2013. The leverage ratio net-debt-to-EBITDA was 2.1x at year-end, improving from 2.2x at year-end 2013. Our target leverage ratio remains 2.5x.