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 reporting currencies.
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. Dollar cent move in the average EUR/USD exchange rate for the year causes an opposite 1 euro-cent change in diluted adjusted EPS. Currency is expected to have a more significant influence on results in 2015 than in recent years.
For the full-year, we expect adjusted net financing costs of approximately €100 million excluding the impact of exchange rate movements on currency hedging and intercompany balances. Including the effect of currency and assuming June period-end exchange rates (including a EUR/USD rate of 1.12) prevail until year-end, we estimate adjusted net financing costs of around €125 million. We expect the benchmark effective tax rate to be between 27% and 28% in 2015. We expect our cash conversion ratio to return towards 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 due to challenging comparables. We continue to expect organic decline in Legal & Regulatory Solutions, due to weakness in print formats and still challenging economic conditions in Europe. Margins are expected to be constrained by cost inflation, increased restructuring in Legal & Regulatory Solutions, and additional product investment.
- Tax & Accounting: we expect full year organic revenue growth to be similar to 2014, with growth in software solutions more than offsetting ongoing decline in print formats and bank product revenues. We expect full year margins to improve even with increased product investments.
- Health: we foresee steady organic revenue performance, supported by robust growth in Clinical Solutions. Health Learning Research & Practice (the new name for the combined Medical Research and Professional & Education units) is expected to see growth in digital revenues offset by continued decline in print formats. Margins are expected to rise despite increased product, sales and marketing investment and additional restructuring.
- Financial & Compliance Services: we expect the division to achieve positive organic growth driven by our Finance, Risk & Compliance and Audit units, with comparables becoming challenging in the second half. In Originations, the outlook for mortgage volumes remains mixed, but new U.S. lending regulations (TILA RESPA) are providing opportunities for growth.
Strategy
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.
New divisional organization
Wolters Kluwer will combine Corporate Legal Services and Financial & Compliance Services into a new division in order to pursue deeper synergies between these businesses and leverage their combined leadership, domain expertise, and technology skills to deliver greater value to our customers. The new division ─ to be named GRC Solutions ─ provides us with the opportunity to better serve our global legal and financial customers as we continue to see markets for governance, risk, and compliance solutions converge.
Wolters Kluwer GRC Solutions will be led by Richard Flynn, currently Group President & CEO of Corporate Legal Services. As a result, Legal & Regulatory Solutions will become a stand-alone division under the continued leadership of CEO Stacey Caywood.
Our internal audit software unit (Audit) will be transferred to the Tax & Accounting division, facilitating closer links with our corporate tax and accounting customers. The internal audit software product, TeamMate, will continue to be offered as part of the OneSumX platform for financial services.
We will report our full-year 2015 results under both the current structure and the new divisional organization.
Dividend policy; Introducing interim dividends
Wolters Kluwer has a progressive dividend policy under which the company aims to increase the dividend per share each year. The dividend pay-out ratio will therefore vary from year to year. The 2014 financial year marked the 9th consecutive annual increase in dividend per share under this policy. For more than 25 years, the company has either increased or maintained its dividend per share.
Wolters Kluwer plans to move to semi-annual dividend frequency starting with an interim dividend for the current year. Following and subject to a final resolution, we intend to declare an interim dividend on September 22, 2015. The intention is to set the interim dividend at 25% of the prior year’s total dividend. The ordinary shares will trade ex-dividend on September 24, 2015 and an interim dividend of €0.18 per ordinary share will then be distributed on October 12, 2015. (ADR dividend payment date: October 19, 2015). This change aligns the timing of our dividend payments more closely with operating cash flow generation.
The final dividend payment over the 2015 financial year remains planned for May next year and is subject to approval at the Annual General Meeting of Shareholders in April 2016.
Anti-dilution policy and share buyback 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 earlier this year announced its intention to repurchase up to €40 million in shares in 2015. In addition, we announced a plan to repurchase an additional amount of shares for up to €100 million, bringing the total intended buyback to €140 million in 2015. Under this program, which was completed on July 1, 2015, we repurchased a total of 5 million shares for a total consideration of €140 million (average price €28.13).
First-half 2015 results
The interim financial statements have not been audited or reviewed.
First-half 2015 revenues increased 17% overall to €2,015 million, reflecting the depreciation of the Euro against the U.S. Dollar, British Pound and other currencies. Excluding the impact of exchange rate movements, revenues grew 3%. Excluding also the effect of acquisitions and divestitures, organic revenue growth was 2%, an improvement on the comparable period (HY 2014: 1%).
By geographic region, North America saw an acceleration in organic growth to 5% (HY 2014: 1%) supported by all divisions. Revenues generated in Europe declined 2% organically (HY 2014: 0%) as deterioration in Legal & Regulatory Solutions outweighed improved trends in Tax & Accounting and Health in Europe. Asia Pacific & Rest of World saw steady 6% organic growth (HY 2014: 6%) with improved momentum in Tax & Accounting offsetting slower growth for Health and Financial & Compliance Services in this region.
Benchmark figures
First-half adjusted operating profit was €391 million, up 5% in constant currencies. The adjusted operating profit margin increased by 120 basis points to 19.4% (HY 2014: 18.2%) due to the effect of currency translation, the ongoing shift in business mix in favor of higher margin digital businesses, as well as the effect of operational gearing and efficiency programs. Adjusted operating profit included restructuring costs of €22 million (HY 2014: €19 million).
Adjusted net financing costs were €67 million compared to €49 million in first half 2014. Adjusted net financing costs included a net foreign exchange loss of €16 million mainly due to the revaluation of intercompany financial assets and liabilities into Euros. This currency revaluation loss, which was primarily as a result of the stronger U.S. Dollar, does not impact cash flow. In constant currencies, adjusted net financing costs were flat. 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 and/or investments available for sale.
Adjusted profit before tax was €324 million, up 24% overall and up 7% in constant currencies. The benchmark effective tax rate was 27.5% (HY 2014: 27.7%). Adjusted net profit for the period was €235 million, up 24% overall. Diluted adjusted EPS was €0.79, up 24% overall and up 5% in constant currencies.
IFRS reported figures
Reported operating profit, which includes amortization of acquired intangibles and non-benchmark items increased 31% to €281 million (HY 2014: €214 million) mainly reflecting the exchange rate movements and underlying growth in adjusted operating profits.
Financing results amounted to a net cost of €69 million compared to a positive net income of €25 million in the comparable period. The prior period included a €76 million revaluation gain on the non-controlling interest in Datacert. Profit before tax decreased 11% to €213 million (HY 2014: €238 million).
The reported effective tax rate increased to 23.4% (HY 2014: 15.8%), mainly due to the absence of last year’s non-taxable gain on the revaluation of the non-controlling interest in Datacert.
Total profit for the period decreased 19% to €162 million (HY 2014: €200 million) reflecting the absence of the Datacert revaluation gain and the currency revaluation loss. Diluted EPS also fell 19% to €0.55 per share.
Cash flow
Adjusted cash flow from operations was €340 million, up 15% overall and stable in constant currencies. This performance reflected the expected decline in cash conversion to 87% (HY 2014: 94%) as a result of working capital movements and increased capital expenditure. Capital expenditure rose 33% overall and 15% in constant currencies to €84 million (4.2% of revenues) compared to €63 million in the first half of 2014 (3.7% of revenues). The increase in capex was largely due to investment in new product development in Tax & Accounting and Health.
Paid financing costs declined to €82 million. The comparable period included an additional coupon payment relating to our €700 million Eurobond which matured in January 2014. Corporate income tax paid was €68 million, including a €22 million benefit primarily related to previously divested assets. Excluding this one-off settlement, the underlying increase was due to phasing in several countries and the absence of refunds received in the first half of last year.
Adjusted free cash flow was €170 million, up 25% overall and down 1% in constant currencies (HY 2014: €136 million). Cash spending against Springboard restructuring provisions were absorbed in adjusted free cash flow (it was previously treated as a non-benchmark item). Adjusted free cash flow excluded a €5 million one-off transactional tax payment related to last year’s consolidation of platform technology and a €22 million tax receipt relating to previously divested assets.
Acquisition spending, net of cash acquired, was €38 million (HY 2014: €166 million) and included €20 million relating to deferred payments on acquisitions made prior to 2015. The principal acquisitions in the first half were SBS Software, an accounting and payroll solutions provider in Germany; Basecone, an accounting workflow solutions provider in The Netherlands; and SureTax, a telecoms tax calculation engine in the U.S.
Cash dividend payments increased to €211 million. A total of €134 million was spent on the share buyback program during the first half of 2015, with the remainder of the share repurchases settled in July.
Net debt and leverage
Net debt was €2,069 million at June 30, 2015, reduced from €2,227 million a year ago but up from €1,897 million at year-end 2014. The leverage ratio, based on net debt and rolling twelve months’ EBITDA, was 2.1x as of June 30, 2015 (HY 2014: 2.6x). Our target leverage ratio remains 2.5x.
In June 2015, Wolters Kluwer concluded a one-year extension to our €600 million multi-currency revolving credit facility from July 2019 to July 2020, retaining an option to extend by another year.
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