Guidance for adjusted free cash flow and diluted adjusted EPS is in constant currencies (€/$ 1.11). Guidance for EPS growth assumes the announced share buyback program (2016-2018) is equally spread over the three year period. Adjusted operating profit margin and ROIC are in reported currency.
Our guidance is based on constant exchange rates. In 2016, Wolters Kluwer generated more than 60% of its revenues and adjusted operating profit in North America. As a rule of thumb, based on our 2016 currency profile, each 1 U.S. cent move in the average €/$ exchange rate for the year causes an opposite change of approximately two euro cents in diluted adjusted EPS.
Restructuring costs are included in adjusted operating profit. We expect these costs to return to normal levels of around €15-€25 million this year (2016: €29 million). We expect adjusted net financing costs of approximately €110 million, excluding the impact of exchange rate movements on currency hedging and intercompany balances. We expect the benchmark effective tax rate to increase to approximately 27.5%. Capital expenditure is expected to be in the range of 5%-6% of total revenues (2016: 5.2%) with the cash conversion ratio likely to be approximately 95%.
Our guidance assumes no significant change to the scope of operations. We may make further disposals which can be dilutive to margins and earnings in the near term.
2017 outlook by division
- Health: We expect good organic growth, comparable to 2016, and improved margins due to the ongoing mix shift towards Clinical Solutions. First quarter growth will be muted due to phasing and a challenging comparable.
- Tax & Accounting: We expect solid organic growth, in line with 2016 and reflecting normal seasonal selling patterns. Margins are expected to increase slightly.
- Governance, Risk & Compliance: We expect full-year organic growth to be similar to 2016, with growth to be second-half-weighted due to expected timing of larger contracts and a challenging first-half comparable for transactional and other non-recurring revenues. Full-year margins are expected to increase due to operating efficiencies.
- Legal & Regulatory: We expect organic revenue decline, in line with 2016 trend, due to more moderate growth in digital products following a large customer migration in 2016. Margins are expected to improve in the second half.
Strategic priorities 2016-2018
On February 24, 2016, we announced our strategic priorities for 2016-2018. This strategic plan (“Growing our Value”) prioritizes expanding our market coverage, increasing our focus on expert solutions, and driving further operating efficiencies and employee engagement. Our strategy aims to sustain and, in the long run, further improve our organic growth rate, margins and returns as we continue to focus on growing value for customers, employees and shareholders. Our priorities are:
- Expand market coverage: We will continue to allocate the majority of our capital towards leading growth businesses and digital products, and extend into market adjacencies and new geographies where we see the best potential for growth and competitive advantage. Expanding our market reach will also entail allocating funds to broaden our sales and marketing coverage in certain global markets. We intend to support this organic growth strategy with value-enhancing acquisitions whilst continuing our program of small non-core disposals.
- Deliver expert solutions: Our plan calls for increased focus on expert solutions that combine deep domain knowledge with specialized technology and services to deliver expert answers, analytics and productivity for our customers. To support digital growth across all divisions, we intend to accelerate our ongoing shift to global platforms and to cloud-based integrated solutions that offer mobile access. Our plan is to also expand our use of new media channels and to create an all-round, rich digital experience for our customers. Investment in new and enhanced products will be sustained in the range of 8-10% of total revenues in coming years.
- Drive efficiencies and engagement: We intend to continue driving scale economies while improving the quality of our offerings and agility of our organization. These operating efficiencies will help fund investment and wage inflation, and support a rising operating margin over the long term. Through increased standardization of processes and technology planning, and by focusing on fewer, global platforms and software applications, we expect to free up capital to reinvest in product innovation. Supporting this effort are several initiatives to foster employee engagement.
Leverage target and financial policy
Wolters Kluwer uses its cash flow to invest in the business organically or through acquisitions, to maintain optimal leverage, and 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 at times, 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 flow.
At December 31, 2016, our net-debt-to-EBITDA ratio was 1.7x.
Dividend policy and 2016 dividends
Wolters Kluwer has a progressive dividend policy under which the company aims to increase the dividend per share each year.
In light of our current below-target leverage and our solid 2016 operating performance, we are proposing a final dividend of €0.60 per share. This will bring the total dividend over the 2016 financial year to €0.79 per share, an increase of 4 euro cents or 5% on the prior year dividend (2015: €0.75). If approved, the 2016 dividend will mark the 11th consecutive year of increase in dividend per share.
Under our progressive dividend policy, we remain committed to increasing the total dividend per share each year, with the annual increase dependent on our financial performance, market conditions, and our need for financial flexibility.
For 2017, we intend to set the interim dividend at 25% of prior year total dividend.
Dividend dates for 2017 are provided on page 34. Shareholders can 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 NV.
Anti-dilution policy and share buyback program 2016-2018
Wolters Kluwer has a policy to offset the dilution caused by our annual performance share issuance with share repurchases.
On February 24, 2016, we announced our intention to repurchase up to €600 million in shares over the three-year period 2016-2018. This buyback includes repurchases made under our anti-dilution policy. Assuming global economic conditions do not deteriorate substantially, we believe this level of cash return will leave us ample headroom for investment in the business, including acquisitions.
During 2016, we repurchased 5.8 million shares for a total consideration of €200 million under this program. The repurchased shares are added to and held as treasury shares.
In 2017, we intend to repurchase a similar amount. As of February 21, 2017, we have repurchased a further 1.4 million shares for a total consideration of €50 million in the year to date.
Part of the shares held in treasury will be retained and used to meet future obligations under share-based incentive plans. At the 2017 Annual General Meeting of Shareholders Wolters Kluwer will propose cancelling any or all of the other shares held in treasury or to be acquired under the share buyback program 2016-2018.
Full-year 2016 results
Group revenues rose 2% overall and 2% in constant currencies to €4,297 million. Currency had a slightly negative impact on revenues as the benefit of a stronger U.S. dollar was more than offset by the depreciation of the British pound and other currencies. The effect of disposals on revenues outweighed the effect of acquisitions.
Organic revenue growth, which excludes both the impact of exchange rate movements and the effect of acquisitions and divestitures, was 3%, in line with the prior year (2015: 3%).
Revenues from North America (61% of total revenues) grew 4% organically (2015: 5%), slowing as a result of reduced growth in non-recurring revenues in Governance, Risk & Compliance. Revenues from Europe (31% of total revenues) saw acceleration in organic growth to 1% (2015: 1% decline), with all four divisions recording improved performance in this region, in particular Tax & Accounting and Health. Revenues from Asia Pacific and Rest of World (8% of total revenues) grew 3% organically (2015: 4%).
Adjusted operating profit increased 5% overall and 6% in constant currencies to €950 million. The adjusted operating profit margin advanced by 70 basis points to 22.1% (2015: 21.4%), driven by lower restructuring costs, results of efficiency programs, the benefits of mix shift, and operational gearing.
Restructuring costs reduced to €29 million compared to €46 million in 2015. Approximately half of this was incurred in Legal & Regulatory and the remainder was spread across our other divisions. The acceleration of a number of efficiency programs in late 2016 led restructuring costs to exceed our guidance (€15-€25 million).
Adjusted net financing costs declined to €107 million (2015: €119 million) and included a €6 million loss on currency hedging and revaluation of intercompany balances (2015: €17 million loss). As a reminder, adjusted net financing costs exclude the financing component of employee benefits, results of investments available-for-sale, and net book gains or losses on equity-accounted investees.
Adjusted profit before tax was €845 million (2015: €783 million), an increase of 8% overall and 7% in constant currencies. The benchmark effective tax rate on adjusted profit before tax increased to 26.8% (2015: 25.5%). In 2015, the benchmark tax rate reflected a one-time favorable adjustment relating to deferred tax assets.
Diluted adjusted EPS increased to €2.10, an increase of 7% overall and 6% in constant currencies.
IFRS reported figures
Reported operating profit increased 15% to €766 million (2015: €667 million), reflecting the increase in adjusted operating profit, a decline in amortization of acquired intangibles, and a net gain on disposals. These factors were partly offset by an increase in acquisition-related costs. The net gain on divestments of €4 million (2015: €14 million loss) consisted mainly of a €15 million loss on the disposal of our French trade media assets and a €17 million gain on the disposal of our indirect lending platform, AppOne.
Reported financing results amounted to a cost of €113 million (2015: €125 million cost) including the financing component of employee benefits of €6 million (2015: €5 million).
Profit before tax increased 21% to €655 million (2015: €542 million). The reported effective tax rate increased to 25.2% (2015: 21.9%) and reflects a negative tax impact on 2016 divestments. In 2015, the tax rate reflected a one-time favorable adjustment relating to deferred tax assets.
Total profit for the year increased 16% to €490 million (2015: €423 million) and diluted earnings per share increased 17% to €1.66 (2015: €1.42).
Adjusted operating cash flow was €948 million (2015: €903 million), an increase of 5% overall and 5% in constant currencies. The cash conversion ratio was 100% (2015: 100%), ahead of our expectation despite an increase in capital expenditures. Capital expenditures increased to €224 million, or 5.2% of revenues (2015: 4.5%). The increase in investment mainly relates to capitalized product development costs in Tax & Accounting and Governance, Risk & Compliance. Depreciation of property, plant & equipment and amortization of other intangible assets was €179 million (4.2% of revenues). Working capital inflows increased to €43 million (2015: €18 million) driven by favorable timing of payments and a reduction in inventory levels.
Adjusted free cash flow was €708 million, up 9% overall and up 9% in constant currencies, reflecting the increase in adjusted operating cash flow and benefitting from a reduction in corporate income taxes paid. Corporate income taxes paid were €108 million (2015: €141 million), as a result of favorable timing of cash tax payments. Paid financing costs were broadly stable at €100 million (2015: €101 million). The net movement of restructuring provisions of €10 million related to cash spending of €31 million on efficiency programs and net additions of €21 million during 2016. In 2016, a €22 million voluntary injection was paid into our North American pension scheme.
Dividends paid to shareholders during 2016 totaled €223 million, comprising the 2015 final dividend and 2016 interim dividend.
Acquisition spending, net of cash acquired and including acquisition-related costs, was €461 million (2015: €183 million). Of this, €5 million related to earn-outs on acquisitions made in prior years. The majority of acquisition spending reflects the purchase of Enablon in Legal & Regulatory (July 2016) and Emmi Solutions in Health (November 2016). Divestiture proceeds, net of cash disposed, were €14 million, representing the net proceeds from the sale of our French trade media assets and our U.S. indirect lending solution, AppOne.
During the year, we completed €200 million of share buybacks, of which €2 million was settled in January 2017.
Net debt and leverage
Net debt at December 31, 2016, was €1,927 million, an increase of €139 million since December 31, 2015, as a result of acquisitions and the share buyback program. The net-debt-to-EBITDA ratio at year end 2016 was 1.7x.