Note: Guidance for adjusted operating profit margin and ROIC are in reported currencies and assume a 2019 average U.S. dollar rate of approximately €/$ 1.14. Guidance for adjusted free cash flow and earnings per share are in constant currencies (€/$ 1.18). Guidance for adjusted EPS includes the estimated effect of the announced up to €250 million share buyback planned for 2019. 2018 comparatives are in reported currencies and restated for IFRS 16.
Our guidance is based on constant exchange rates. In 2018, Wolters Kluwer generated more than 60% of its revenues and adjusted operating profit in North America. As a rule of thumb, based on our 2018 currency profile, each 1 U.S. cent move in the average €/$ exchange rate for the year causes an opposite change of approximately 1.5 euro cents in diluted adjusted EPS.
Restructuring costs are included in adjusted operating profit. We currently expect to incur restructuring costs of €10-€20 million in 2019 (2018: €30 million). We expect adjusted net financing costs of approximately €65 million in constant currencies including approximately €10 million in IFRS 16 lease interest charges. Following the adoption of new tax legislation in The Netherlands in late 2018, we expect the benchmark effective tax rate to be in the range of 24.5%-25.5% for 2019. Capital expenditure (excluding cash payments on lease contracts) is expected to remain in the range of 5%-6% of total revenues (2018: 5.2%, excluding the sale of real estate). We expect the cash conversion ratio to be between 95%-100% in 2019 (2018: 103% restated for IFRS 16. See Appendix 4). Our guidance assumes no additional significant change to the scope of operations. We may make further acquisitions or disposals which can be dilutive to margins and earnings in the near term.
2019 outlook by division
- Health: We expect organic growth to be in line with 2018. We expect the adjusted operating profit margin to decline, due to the absence of prior year one-time benefits and increased investment in sales & marketing.
- Tax & Accounting: We expect organic growth to moderate from 2018 levels due a challenging comparable. We expect the adjusted operating profit margin to improve on the back of lower restructuring costs and the absence of prior year net one-time charges.
- Governance, Risk & Compliance: We expect transactional revenue trends to moderate and recurring revenues to show improved organic growth. We expect the adjusted operating profit margin to see further improvement due to efficiency initiatives.
- Legal & Regulatory: We expect organic growth to be in line with 2018. We expect the adjusted operating profit margin to decline due to an absence of prior year one-time benefits, higher investments, and a full twelve-month inclusion of eVision.
Our business and strategy
Our mission is to empower our professional customers with the information, software solutions and services they need to make critical decisions, achieve successful outcomes and save time. We support professionals across four customer segments: healthcare; tax and accounting; governance, risk and compliance; and legal and regulatory. All our customers face the challenge of increasing proliferation and complexity of information and the pressure to deliver better outcomes at a lower cost. Many of our customers are looking for mobility, flexibility, intuitive interfaces, and integrated, open architecture technology to support their decision-making. We aim to solve their problems and add value to their workflow with our range of digital solutions and services, which we continuously evolve to meet their changing needs. For more than ten years, we have been re-investing 8%-10% of our revenues in developing new and enhanced products and the supporting technology platforms.
Our fastest growing products are our expert solutions, which combine deep domain knowledge with specialized technology and services to deliver answers, analytics, and improved productivity for our customers. Our business model is primarily based on subscriptions or other recurring revenues (78% of total revenues), augmented by volume-based transactional, ad hoc, or other non-recurring revenues. Renewal rates for our digital information, software and service subscriptions are high and are one of the key indicators by which we measure our success. We have been evolving our technology towards fewer, globally scalable platforms, with reusable components. We are transitioning our solutions to the cloud and leveraging advanced technologies such as artificial intelligence, natural language processing, and predictive analytics to drive further innovation. We are standardizing tools, streamlining our technology infrastructure (including data centers) and improving our development processes using agile methods. It is our 19,000 employees who drive our achievements and we have been working to ensure we are providing engaging and rewarding careers.
Strategic priorities 2019-2021
Every three years, we update our strategic priorities and this year we launched our plan for 2019-2021. This plan aims to deliver continued good organic growth and further incremental improvements to our adjusted operating profit margin and return on invested capital (ROIC). We intend to maintain product development at between 8%-10% of total revenues. We expect to fund the modernization of back-office systems by deriving additional cost savings. The strategy is based on organic growth, although we may make further bolt-on acquisitions or non-core disposals to enhance our value and market positions. Acquisitions must fit our strategic direction, strengthen or extend our existing business, be accretive to diluted adjusted EPS in their first full year and, when integrated, deliver a ROIC above our weighted average cost of capital (8%) within three to five years. Our priorities for the next three years are:
- Grow Expert Solutions: We will focus on scaling our expert solutions by extending these offerings and broadening their distribution through existing and new channels, including strategic partnerships. We will invest to build or acquire positions in adjacent market segments.
- Advance Domain Expertise: We intend to continue transforming our information products and services by enriching their domain content with advanced technologies to deliver actionable intelligence and deeper integration into customer workflows. We will invest to enhance the user experience of these products through user-centric design and differentiated interfaces.
- Drive Operational Agility: We plan to strengthen our global brand, go-to-market and digital marketing capabilities to support organic growth. We will invest to upgrade our back-office systems and IT infrastructure. In the next three years, we expect to complete the modernization of our Human Resources (HR) technology to support our efforts to attract and nurture talent.
Financial policy, leverage, and capital allocation
Wolters Kluwer uses its cash flow to invest in the business organically and 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.
Net debt at December 31, 2018, stood at €1,994 million, a decrease of €75 million (year-end 2017: €2,069 million). The net-debt-to-EBITDA ratio at year end 2018 was 1.7x (year-end 2017: 1.8x).
For more than 30 years, Wolters Kluwer has increased or maintained its annual dividend per share in euros (or euro equivalent). In 2007, the company established a progressive dividend policy and, since 2011, all dividends are paid in cash. In 2015, we introduced an interim dividend payment, aligning cash distributions closer to our seasonal cash flow pattern.
Wolters Kluwer remains committed to a progressive dividend policy, under which we aim to increase the dividend per share in euros each year, independent of currency fluctuations. The pay-out ratio can vary from year to year. Proposed annual increases in the dividend per share take into account our ﬁnancial performance, market conditions, and our need for ﬁnancial ﬂexibility. The policy takes into consideration the characteristics of our business, our expectations for future cash ﬂows, and our plans for organic investment in innovation and productivity, or for acquisitions. We balance these factors with the objective of maintaining a strong balance sheet.
In view of our strategic priorities and expected capital allocation for the coming three years (2019-2021), we are proposing to increase the total dividend per share for financial year 2018 by 15%. We will therefore recommend a final dividend of €0.64 per share which will bring the total dividend to €0.98 per share (2017: €0.85). The 2018 dividend proposal is subject to approval by the Annual General Meeting of Shareholders in April 2019.
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. We currently intend to maintain the interim distribution at 40% of the prior year total dividend. This would result in a 2019 interim dividend of €0.39. Dividend dates for 2019 are provided in the financial calendar on page 42.
Share buyback programs
As a matter of policy since 2012, Wolters Kluwer will offset the dilution caused by our annual incentive share issuance with share repurchases (Anti-Dilution Policy). In addition, from time to time when appropriate, we return capital to shareholders through further share buyback programs. Shares repurchased by the company are added to and held as treasury shares and are either cancelled or held to meet future obligations arising from share-based incentive plans.
During 2018, we repurchased 11.5 million shares for a total consideration of €550 million, including 1.3 million shares to offset incentive share issuance (2017: 1.4 million). We thereby concluded our 2016 2018 share buyback program which originally envisaged spending up to €200 million in each of the three years, including amounts required to offset incentive share issuance. The program was later expanded to include additional repurchases intended to mitigate dilution caused by disposals made in 2017 and 2018.
In October 2018, we cancelled 10.6 million of the shares held in treasury in consequence of the share buybacks during the year. As of December 31, 2018, we held 8.6 million shares in treasury: at the 2019 Annual General Meeting of Shareholders, we will propose cancelling some or all of the shares held in treasury or to be acquired under the future buyback programs.
Today, we are announcing our intention to repurchase shares for up to €250 million during 2019, including repurchases to offset incentive share issuance. This amount represents a third of our 2018 adjusted free cash flow. We will propose cancelling any or all shares that are not used for share-based incentive plans. Assuming global economic conditions do not deteriorate substantially, we believe this level of cash return leaves us with ample headroom to support our dividend plans, to sustain organic investment in innovation and productivity, and to make selective acquisitions. The share repurchases may be suspended, discontinued, or modified at any time.
For the period starting February 22, 2019, up to and including May 6, 2019, we have engaged a third party to execute €40 million in share buybacks on our behalf, within the limits of relevant laws and regulations (in particular Regulation (EU) 596/2014) and the company’s Articles of Association. The maximum number of shares which may be acquired will not exceed the authorization granted by the General Meeting of Shareholders. Repurchased shares are added to and held as treasury shares, and will be used for capital reduction purposes or to meet obligations arising from share-based incentive plans.
Full-year 2018 results
Group revenues declined 2% overall to €4,260 million due to the impact of currency movements, most importantly the U.S. dollar which averaged €/$ 1.18 in 2018 (2017: €/$ 1.13). In constant currencies, revenues increased by 1%. Excluding both the impact of exchange rate movements and the effect of acquisitions and disposals, organic growth was 4%. Had we continued to apply the IAS 18 accounting standard for revenue recognition, organic growth would have been 3% (2017: 3%)
Revenues from North America (61% of total revenues) grew 4% organically, with good momentum across all divisions in this region of the world. Revenues from Europe (31% of total revenues) also increased 4% organically, led by our Tax & Accounting and Governance, Risk & Compliance (GRC) divisions. Revenues from Asia Pacific and Rest of World (8% of total revenues) grew 7% organically, supported by strong performance by the Health division.
Adjusted operating profit was €980 million, up 5% in constant currencies. The adjusted operating profit margin was 23.0% (2017: 22.2%). Adjusted operating profit included €23 million net positive one-time items (2017: €2 million net positive). Excluding such one-time items, the adjusted operating profit margin would have increased by 30 basis points. The one-time items had a net positive impact in Health, Legal & Regulatory, and Corporate, and a negative impact in Tax & Accounting.
Also included in adjusted operating profit were €30 million of restructuring costs (2017: €33 million). These expenses were higher than we had planned at the outset of 2018 as we brought forward several efficiency initiatives in the fourth quarter.
Adjusted net financing costs decreased to €70 million (2017: €109 million). The decrease reflects lower interest costs following the redemption in April 2018 of our €750 million, 6.375% senior Eurobond.
Adjusted profit before tax was €912 million (2017: €865 million), up 6% overall and up 10% in constant currencies. The benchmark effective tax rate on adjusted profit before tax was 25.1% (2017: 25.9%). The tax rate was at the lower end of our expectation for 2018 due to a favorable impact of tax credits and deferred tax movements. As a result, adjusted net profit increased 7% overall and 12% in constant currencies to €683 million (2017: €639 million).
Diluted adjusted EPS increased 10% overall and 16% in constant currencies to €2.45 (2017: €2.22), reflecting the increase in adjusted net profit and a 3% reduction in the diluted weighted average number of shares outstanding to 278.8 million (2017: 287.7 million).
IFRS reported figures
Reported operating profit rose 16% to €961 million (2017: €830 million) and included €159 million in net book gains (2017: €60 million) related to disposals completed in early 2018 (mainly ProVation Medical, Corsearch, and certain Swedish publishing assets). The rise in reported operating profit also reflects an overall €12 million decline in amortization and impairment of acquired intangible assets to €175 million. The net one-time benefits, as explained above, also explain the increase in reported operating profit.
The reported effective tax rate increased to 26.3% (2017: 12.2%), the prior year having benefitted from a one-time, non-cash revaluation of our U.S. deferred tax position in consequence of the lower U.S. corporate tax rate per January 1, 2018. 2018 was impacted by taxable gains on the divestments of Corsearch and ProVation Medical. Total profit for the year increased 3% to €657 million (2017: €637 million) and diluted earnings per share increased 6% to €2.35 (2017: €2.21).
Adjusted operating cash flow was €1,016 million, up 4% overall (2017: €974 million) and up 7% in constant currencies. Cash conversion was 104% (2017: 100%) and reflected stronger than expected working capital inflows in the fourth quarter. Net capital expenditure was €214 million (2017: €210 million) and primarily relates to the development of new and enhanced products and technology platforms. Capital expenditure included a €9 million benefit (2017: €13 million) related to real estate disposals. Excluding this benefit, capital expenditure was 5.2% of revenue (2017: 5.1%). Depreciation, amortization, and impairments of internally developed products and other assets increased to €220 million (2017: €209 million), or 5.2% of total revenue (2017: 4.8%).
Adjusted free cash flow was €762 million (2017: €746 million), up 2% overall and up 6% in constant currencies, better than expected due to the favorable working capital movement. Corporate income tax paid increased to €206 million (2017: €156 million) due to tax payments on 2018 disposals. Adjusted free cash flow excludes a €34 million cash tax payment related to these disposals. Paid financing costs were €96 million, ahead of the prior year (2017: €87 million) and included the final coupon payment on the 6.375% senior Eurobond redeemed in April 2018 as well as the first coupon payment on the 1.5% Eurobond issued in March 2017. Net cash use of restructuring provisions amounted to €5 million, reflecting restructuring additions of €17 million and appropriations of €22 million in relation to ongoing and new efficiency initiatives.
Dividends paid to shareholders during 2018 amounted to €277 million (2017: €232 million) and included the 2017 final dividend and the 2018 interim dividend.
Total acquisition spending, net of cash acquired and including costs, was €170 million (2017: €316 million). The main acquisitions were in the Legal & Regulatory division and included eVision, a world leader in operational risk management software, and Legisway, a contract management tool for corporate law departments. The Health division acquired Firecracker, an adaptive learning and study-planning solution for medical students. Deferred payments on prior year deals, including earnouts, amounted to €12 million (2017: €12 million). Divestment proceeds, net of cash disposed and transaction costs, were €304 million, and relate primarily to the divestments of ProVation Medical, Corsearch, and certain Swedish publishing assets.
A total of €550 million (2017: €302 million) of free cash flow was deployed towards share buybacks during the year.
Net debt and leverage
Net debt at December 31, 2018, amounted to €1,994 million (2017: €2,069 million). The year-end 2018 net-debt-to-EBITDA ratio was 1.7x.