Guidance for adjusted free cash flow and diluted adjusted EPS is in constant currencies (€/$ 1.13). Guidance for EPS growth assumes share repurchases for up to €400 million in 2018. Adjusted operating profit margin and ROIC are in reported currencies and assume an average EUR/USD rate around €/$ 1.20.
Our guidance reflects the new IFRS 15 accounting standard, which became effective on January 1, 2018. When applied to 2017, under the method adopted by Wolters Kluwer, the adjusted operating profit margin would be 22.2%, diluted adjusted EPS €2.22, and ROIC 9.8%. IFRS 15 has no impact on free cash flow. Further details are provided in Note 14 of this report.
Our guidance is based on constant exchange rates. In 2017, Wolters Kluwer generated more than 60% of its revenues and adjusted operating profit in North America. As a rule of thumb, based on our 2017 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 currently expect restructuring costs of €15-€25 million in 2018 (2017: €33 million). We expect adjusted net financing costs of approximately €70 million (2017: €109 million), excluding the impact of exchange rate movements on currency hedging and intercompany balances. This reflects the redemption of our Eurobond maturing in April 2018. We expect the benchmark effective tax rate to be approximately 26%, subject to further interpretation and clarification of the changes introduced in the U.S. Tax Cuts and Jobs Act.
Capital expenditure is expected to be in the range of 5%-6% of total revenues (2017: 4.8%, including benefit from real estate dispositions). Under IFRS 15, we anticipate a cash conversion ratio of approximately 100% in 2018. Our guidance assumes no additional significant change to the scope of operations. We may make further disposals which can be dilutive to margins and earnings in the near term.
2018 outlook by division
- Health: We expect good organic growth, similar to prior year levels, and a stable margin for the full year. The first half margin is expected to decline due to the timing of investments.
- Tax & Accounting: We expect improved organic growth and a stable margin for the full year. The first half margin is expected to decline due to the timing of investments.
- Governance, Risk & Compliance: We expect good organic growth and an improved margin for the full year.
- Legal & Regulatory: We expect underlying revenue to be broadly flat in 2018. We expect the full-year margin to be in line with 2017, as cost savings are reinvested in wage increases and product development.
Strategic priorities 2016-2018
Two years ago, we announced our strategic plan for 2016-2018. This 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 focus on growing value for customers, employees, and shareholders. Our priorities are to:
- Expand market coverage: We will continue to allocate most of our capital towards our leading growth businesses and digital products, and will extend into market adjacencies and new geographies where we see the best potential for growth and competitive advantage. Expanding our market reach also entails 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 while continuing our program of 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 also to 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.
- Drive efficiencies and engagement: We intend to continue driving scale economies while improving the quality of our offerings and the 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, 2017, our net-debt-to-EBITDA ratio was 1.7x.
Dividend policy and 2017 dividends
Wolters Kluwer has a progressive dividend policy under which the company aims to increase the dividend per share each year. The annual increase is dependent on our financial performance, market conditions, and our need for financial flexibility. Our dividend policy takes into consideration the nature of our business and our expectations for future cash flow and investment needs.
For 2017, we are proposing a total dividend of €0.85 per share in cash, comprising the interim dividend of €0.20 (paid in September 2017) and the final dividend of €0.65 (to be paid in May 2018). This represents an increase of 6 euro cents or 8% over the prior year total dividend (2016: €0.79). The dividend is subject to approval at the Annual General Meeting of Shareholders to be held on April 19, 2018.
For 2018, we intend to set the interim dividend at 40% of prior year total dividend (previously: 25%). This will result in a 2018 interim dividend of €0.34 (to be paid in September 2018).
Dividend dates for 2018 are provided on page 37. 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 N.V.
Anti-dilution policy and share buyback program 2016-2018
Wolters Kluwer has a policy to offset the dilution caused by our annual incentive share issuance with share repurchases. In 2017, approximately 1.4 million shares were repurchased under this policy.
On February 24, 2016, we announced a three-year share buyback program (2016-2018) which originally envisaged spending up to €200 million in each year on share repurchases, including amounts required to offset incentive share issuance. This buyback program was subsequently expanded to include additional repurchases intended to mitigate dilution caused by divestments made in 2017 and early 2018.
In 2016, we completed €200 million in share buybacks under this program. In 2017, we completed €300 million of repurchases (7.8 million shares at an average price of €38.62), including an additional €100 million to mitigate the EPS dilution related to two divestments completed in 2017 (Transport Services and certain U.K. publishing assets).
Following completion of the divestments of Corsearch and certain Swedish assets in January 2018, we now intend to execute up to €400 million in buybacks in 2018, including the proceeds of these divestments.
In January 2018, Wolters Kluwer signed an agreement to divest ProVation Medical. Assuming completion, Wolters Kluwer intends to deploy the proceeds of this divestment towards additional share repurchases of approximately €150 million in 2018 and 2019 to mitigate the expected earnings dilution.
Repurchased shares are added to and held as treasury shares. Part of the shares held in treasury will be retained and used to meet future obligations under share-based incentive plans. At the 2018 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.
Assuming global economic conditions do not deteriorate substantially, we believe this level of cash return leaves us with ample headroom for investment in the business, including acquisitions.
Full-year 2017 results
Group revenues increased 3% overall to €4,422 million. Excluding the effect of exchange rate movements, primarily the depreciation of the U.S. dollar and British pound, revenues rose 5% in constant currencies. Organic growth was 3% (2016: 3%), with all four divisions achieving similar or better organic growth than in the prior year. Organic growth excludes the impact of exchange rate movements, accounting changes, and the effect of acquisitions and divestitures.
Revenues from North America (61% of total revenues) sustained 4% organic growth (2016: 4%), with clear improvement in our U.S. Legal & Regulatory unit compensating for slightly slower growth in Health and Governance, Risk & Compliance in this region. Revenues from Europe (31% of total revenues) grew 2% organically (2016: 1%), with the improvement on prior year driven by Governance, Risk & Compliance. Revenues from Asia Pacific and Rest of World (8% of total revenues) grew 6% organically, accelerating across all divisions (2016: 3%).
Adjusted operating profit grew 6% overall and 8% in constant currencies to €1,009 million. The adjusted operating profit margin advanced by 60 basis points to 22.8% (2016: 22.2%), driven by Health and Governance, Risk & Compliance. Included in adjusted operating profits were €33 million of restructuring costs (2016: €29 million). Restructuring expenses were higher than guided during the year, as we fast-tracked several operational efficiency initiatives in our Legal & Regulatory and Tax & Accounting divisions, taking charges in the fourth quarter of 2017.
Adjusted net financing costs were €109 million (2016: €107 million). Adjusted net financing costs are defined as total financing results excluding the financing component of employee benefits, results of investments available-for-sale, and net book gains or losses on equity-accounted investees.
Income from equity-accounted investees increased to €4 million, mainly due to improvement at our 40%-owned Austrian affiliate.
Adjusted profit before tax was €904 million (2016: €845 million), an increase of 7% overall and 9% in constant currencies.
The benchmark effective tax rate on adjusted profit before tax decreased to 25.9% (2016: 26.8%), reflecting reduced U.S. state tax charges and a one-time release of tax liabilities for closed tax years. As a result, adjusted net profit increased 8% overall and 10% in constant currencies to €668 million.
Diluted adjusted EPS increased 11% overall to €2.32 (2016: €2.10), reflecting the increase in adjusted net profit and a 2% reduction in the weighted average number of shares outstanding. In constant currencies, diluted adjusted EPS increased 13%.
IFRS reported figures
Reported operating profit rose 13% to €869 million (2016: €766 million), reflecting the increase in adjusted operating profit and net capital gains of €60 million on the disposals of Transport Services (July 2017) and certain U.K. publishing assets (September 2017). This gain was partly offset by an increase in amortization of acquired intangibles and higher fair value changes of earn-out liabilities.
Reported financing results amounted to a cost of €108 million (2016: €113 million cost) including the financing component of employee benefits of €5 million (2016: €6 million). We realized a €6 million capital gain on the sale of our 50% interest in Ipsoa Francis Lefebvre, an Italian publishing joint venture.
Reported profit before tax increased 17% to €765 million (2016: €655 million).
At year-end 2017, we recorded a one-time non-cash revaluation to our U.S. deferred tax position due to the lower U.S. corporate tax rate introduced by the U.S. Tax Cuts and Jobs Act. This benefit was partly offset by the mandatory repatriation tax introduced in this U.S. tax reform. Including these year-end adjustments totaling €57 million, the reported effective tax rate was 12.3% (2016: 25.2%). As a result, total profit for the year increased 37% to €671 million (2016: €490 million) and diluted earnings per share increased 40% to €2.33 (2016: €1.66).
Adjusted operating cash flow was €974 million (2016: €948 million), an increase of 3% overall and 5% in constant currencies. The cash conversion ratio declined to 97% (2016: 100%) in line with longer term average. Net capital expenditure was €210 million, and included €13 million in proceeds from the disposition of several real estate assets in the U.S. and Europe. Without that benefit, capital expenditure as a percent of revenues would have reduced slightly to 5.0% compared to the prior year (2016: 5.2%). Depreciation and the amortization of internally developed software and other assets rose to €209 million (2016: €179 million). Net working capital outflows of €34 million (2016: inflows of €43 million) were largely due to a reduction in payables.
Adjusted free cash flow was €746 million (2016: €708 million), up 5% overall and up 7% in constant currencies. Corporate income taxes paid increased by €48 million to €156 million, the prior year having benefitted from favorable timing of tax payments. Paid financing costs declined to €87 million (2016: €100 million) due to higher interest income on deposits and a cash result on currency hedging contracts. The net movement in restructuring provisions of €6 million related to cash spending of €27 million and additions of €21 million excluding non-benchmark items.
Dividends paid to shareholders during the year totaled €232 million, comprising the 2016 final dividend and 2017 interim dividend, and dividends paid to minority interests.
Acquisition spending, net of cash acquired and including acquisition-related costs, was €316 million (2016: €461 million). Most of our acquisition spending reflects the purchase of Tagetik in Tax & Accounting (April 2017). Deferred payments on acquisitions made in prior years, including earnouts, amounted to €12 million.
Divestiture proceeds, net of cash disposed, were €94 million (2016: €14 million) and relate primarily to the sale of Transport Services and certain U.K. publishing assets.
During the year, we completed €300 million of share buybacks. The cash outflow also reflects €2 million of share buybacks made in 2016 but settled in January 2017.
Net debt and leverage
Net debt at December 31, 2017, was €2,069 million, an increase of €142 million since December 31, 2016, as a result of acquisitions, share buybacks, and currency translation of cash and cash equivalents. The net-debt-to-EBITDA ratio at year end 2017 was unchanged at 1.7x.
In the second quarter of 2018, we will use cash and deposits to redeem the principal of our €750 million, 6.375% senior Eurobond which matures on April 10, 2018.