Guidance for adjusted free cash flow and diluted adjusted EPS is in constant currencies (€/$ 1.13). Guidance for EPS growth assumes share repurchases of €550 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. Historical 2017 figures have been restated: please see Note 3 and Appendix 4 of this interim report for details on IFRS 15. 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 continue to 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. The decline in net financing costs reflects the redemption of the €750 million, 6.375% senior Eurobond that matured in April 2018. Following further interpretation and clarification of the changes introduced in the U.S. Tax Cuts and Jobs Act, we now expect the benchmark effective tax rate to be in the range of 25%-26% for the full year.
Capital expenditure is expected to be in the range of 5%-6% of total revenues, excluding any real estate disposals (FY 2017: 4.8%, or 5.0% excluding real estate disposals). 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 may be dilutive to margins and earnings in the near term.
2018 Outlook by Division
Health: For the full year, we continue to expect Health to deliver good organic growth, similar to prior year levels, and a stable adjusted operating profit margin.
Tax & Accounting: For the full year, we continue to expect improved organic growth and, including one-time benefits recorded in the first half, we now anticipate a modest increase in the adjusted operating margin for the full year.
Governance, Risk & Compliance: We continue to expect good organic growth and an improved margin for the full year.
Legal & Regulatory: The division faces a challenging comparable in the second half, and as a result, we expect organic revenues to be flat to slightly positive in full year 2018. Including one-time benefits realized in the first half, we continue to expect the full-year margin to be stable for the full year.
Strategic Priorities 2016-2018
We are now in the final year of our current three-year strategic plan 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 June 30, 2018, the net-debt-to-EBITDA ratio, based on rolling twelve-month EBITDA, was 1.7x (HY 2017: 1.9x).
Dividend Policy and 2018 Interim Dividend
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.
As announced on February 21, 2018, the interim dividend for 2018 was set at 40% of the prior year total dividend (versus 25% in previous years). This results in an interim dividend of €0.34 per share, to be distributed on September 19, 2018, to holders of ordinary shares, or September 26, 2018, for holders of Wolters Kluwer ADRs.
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.
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 non-core divestments made in 2017 and early 2018.
In 2016 and 2017, we completed respectively €200 million and €300 million in share buybacks under this program.
As of July 30, 2018, we have completed a further €300 million of buybacks (6.8 million shares at an average price of €44.42). We now intend to execute €250 million of buybacks in the remainder of 2018, bringing the intended full-year 2018 total to €550 million. For the period starting August 2, 2018, up to and including December 27, 2018, we have engaged third parties to execute such 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. 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.
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.
Cancellation of Ordinary Shares
At the 2018 Annual General Meeting, shareholders approved a resolution to cancel for capital reduction purposes any or all ordinary shares held in treasury or to be acquired by the company as authorized by shareholders, up to a maximum of 10% of issued share capital on April 20, 2018. As authorized by shareholders, the Executive Board has determined the number of ordinary shares to be cancelled is 10.6 million. Wolters Kluwer intends to cancel these shares in the second half of 2018. Part of the shares held in treasury will be retained and used to meet future obligations under share-based incentive plans.
Half-Year 2018 Results
Group revenues declined 7% overall to €2,020 million due to the impact of currency movements, most importantly the depreciation of the U.S. dollar against the euro (average EUR/USD 1.21 versus 1.08 in HY 2017). In constant currencies, revenues increased 1%.
Organic growth, which excludes the impact of exchange rate movements and the effect of acquisition and disposals, was 4%. All four divisions delivered positive organic growth in the first half. Had we continued to apply the IAS 18 accounting standard for revenue recognition, organic growth would also have been 4% (an improvement on the 2% recorded in HY 2017 under IAS 18).
Revenues from North America (61% of total revenues) grew 5% organically, with good momentum across all divisions in this region of the world. Revenues from Europe (31% of total revenues) increased 4% organically, mainly benefiting from an improved organic growth rate in Legal & Regulatory. Revenues from Asia Pacific and Rest of World (8% of total revenues) grew 6% organically, principally supported by strong performance in Health.
Adjusted operating profit was €451 million, up 8% in constant currencies, and resulting in a margin of 22.3%. Adjusted operating profit included €16 million (HY 2017: €4 million) of one-time benefits in two divisions and at the Corporate level. Excluding these items, the adjusted operating margin would have increased 40 basis points. The one-time items included a real estate disposal of €6 million in Tax & Accounting, the release of a €6 million provision in Legal & Regulatory, and one-time benefits totaling €4 million at the Corporate level, mainly relating to payroll taxes.
Included in adjusted operating profit were €7 million of restructuring costs (HY 2017: €10 million).
Adjusted net financing costs decreased to €49 million (HY 2017: €55 million), reflecting reduced interest costs following the redemption of our €750 million, 6.375% senior Eurobond. This refinancing benefit was partly offset by net foreign exchange losses of €11 million. As a reminder, adjusted net financing costs are defined as total financing results, excluding the financing component of employee benefits, fair value changes in financial assets, and net book gains or losses on any divestments of non-controlled equity-interests.
Adjusted profit before tax was €402 million (HY 2017: €407 million), down 1% overall but up 12% in constant currencies.
The benchmark effective tax rate on adjusted profit before tax was 25.5% (HY 2017: 27.9%), following further interpretation and clarification of the changes introduced by the U.S. Tax Cuts & Jobs Act. As a result, adjusted net profit increased 2% overall and 19% in constant currencies to €299 million.
Diluted adjusted EPS increased 5% overall and 22% in constant currencies to €1.06 (HY 2017: €1.01), reflecting the increase in adjusted net profit and a 3% reduction in the diluted weighted average number of shares outstanding to 281.5 million.
As of June 30, 2018, the number of issued and outstanding shares was 276.6 million (excluding 13.7 million shares held as treasury shares).
IFRS Reported Figures
Reported operating profit rose 28% to €524 million (HY 2017: €408 million), mainly reflecting €159 million of net book gains on the disposal of certain Swedish assets and Corsearch in January 2018 and the sale of ProVation in March 2018. Reported operating profit also reflects lower amortization of acquired intangibles and lower acquisition-related costs.
Reported financing results amounted to a cost of €49 million (HY 2017: €58 million cost). Reported financing costs include the financing component of employee benefits of €2 million (HY 2017: €3 million). In addition, we recorded a €3 million capital gain on the sale of a non-controlled equity investment and a €1 million net fair value loss on non-controlled equity investments.
The reported effective tax rate increased to 24.3% (HY 2017: 22.3%), due to taxable gains on divestments. As a result, total profit for the period increased 32% to €359 million (HY 2017: €272 million) and diluted earnings per share increased 36% to €1.28 (HY 2017: €0.94).
Adjusted operating cash flow was €448 million (HY 2017: €441 million), an increase of 10% in constant currencies. The cash conversion ratio improved to 99% (HY 2017: 95%).
Net capital expenditure was €88 million (HY 2017: €96 million), or 4.4% of revenues. This amount included a €9 million benefit related to real estate disposals. Excluding these disposals, capital expenditure as a percentage of revenues would have been 4.8%.
Depreciation and amortization of internally developed software and other assets was €95 million (HY 2017: €96 million). Net working capital outflows were €10 million (HY 2017: outflow of €21 million).
Adjusted free cash flow was €263 million (HY 2017: €257 million), up 2% overall and up 15% in constant currencies. Paid financing costs increased to €84 million (HY 2017: €81 million) and included the final coupon on the €750 million senior Eurobond which matured in April 2018. Corporate income taxes paid increased 15% to €124 million, due to taxable gains on divestments and the full utilization of remaining U.S. deferred tax assets during the first half of 2018, as expected.
The net movement in restructuring provisions of €9 million related to cash spending of €12 million and additions of €3 million excluding non-benchmark items.
Dividends paid to shareholders during the first half of 2018 totaled €182 million relating to the 2017 final dividend.
Acquisition spending, net of cash acquired and including acquisition-related costs, was €21 million (HY 2017: €303 million) relating to the acquisition of Firecracker in April 2018 and deferred payments and earnouts on acquisitions made in prior years of €10 million.
Divestiture proceeds, net of cash disposed, were €305 million (HY 2017: €77 million), relating to the disposals of certain Swedish assets, Corsearch, ProVation, and a 10%-equity interest in Medicom.
During the first six months, we settled €260 million of share buybacks.
Net Debt and Leverage
Net debt at June 30, 2018, was €1,957 million, a reduction of €112 million since December 31, 2017, as a result of free cash flow and disposal proceeds, partly offset by share buybacks and dividends.
The leverage ratio, based on rolling twelve months reported EBITDA, was 1.7x at June 30, 2018 (HY 2017: 1.9x).