We currently expect recurring revenues for digital information, software and services subscriptions to show resilience, but we note that new sales of subscription products have been more difficult in current market conditions. Recurring revenues from print subscriptions have seen accelerated decline, which we expect will continue in the coming quarters. Of our non-recurring revenues (FY 2019: 22% of total revenues), sales of new software licenses and implementation services are seeing delays, while transactional volumes, training, books, and other ad hoc revenue products are likely to remain weak in current conditions. A freeze on travel, a hold on non-critical hiring, and other temporary cost reductions initiated in the second quarter benefitted margins in the first half. These measures and additional programs and restructuring planned for the second half are aimed at protecting the full-year 2020 adjusted operating profit margin while sustaining investment in key products and strategic infrastructure.
If current exchange rates persist, the U.S. dollar rate will have a negative effect on results reported in euros. In 2019, Wolters Kluwer generated more than 60% of its revenues and adjusted operating profit in North America. As a rule of thumb, based on our 2019 currency profile, each 1 U.S. cent move in the average €/$ exchange rate for the year causes an opposite change of approximately 2 euro cents in diluted adjusted EPS.
Restructuring costs are included in adjusted operating profit. We now anticipate that restructuring costs will be in the range of €25-€35 million in 2020 (FY 2019: €26 million), higher than anticipated at the start of the year. We currently expect adjusted net financing costs of approximately €70 million in constant currencies, including approximately €10 million in lease interest charges. We currently expect the benchmark tax rate on adjusted pre-tax profits to be in the range of 23%-24% for 2020.
Capital expenditure is expected to be at the upper end of our normal range of 5%-6% of total revenues (FY 2019: 4.9%). Cash repayments of lease liabilities are expected to be in line with depreciation of right-of-use assets (FY 2019: €80 million). We currently expect the full-year cash conversion ratio to be around 95% (FY 2019: 96%). See Note 5 for the calculation of our cash conversion ratio.
Any guidance we provide 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.
2020 outlook by division
- Health: We currently expect full-year organic growth to be positive but slower than 2019 levels.
- Tax & Accounting: We currently expect full-year revenues to be broadly flat on an organic basis compared to prior year due to a challenging comparable (FY 2019: organic growth of 6%) and a more difficult new sales environment.
- Governance, Risk & Compliance: Excluding revenues associated with the PPP, we expect revenues to see organic decline for the full year, due to declines in non-recurring revenues.
- Legal & Regulatory: We currently expect organic decline in revenues in 2020 due to accelerated declines in print products and lower license fees, training and other non-recurring revenues.
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: health; tax & accounting; governance, risk & compliance; and legal & 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. Since 2003, 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 continue to be 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 (81% of total revenues in HY 2020), augmented by implementation services revenues as well as volume-based transactional 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
While COVID-19 is impacting our near-term financial performance, we remain committed to the strategic priorities we set out at the start of 2019. These strategic priorities are to:
- 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 technology to support our efforts to attract and nurture talent.
In the 2019-2021 timeframe, we expect 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 return on invested capital above our weighted average cost of capital (8%) within three to five years.
Despite the COVID-19 disruption, we are making progress on this plan. In the first half of 2020, our expert solutions accounted for over 50% of total revenues and continued to deliver faster organic growth than the group as a whole. Our global expert solutions, which include products such as UpToDate in Health, TeamMate and CCH Tagetik in Tax & Accounting, OneSumX in Governance, Risk & Compliance, and Enablon in Legal & Regulatory, in aggregate achieved high single-digit organic growth. In the first half, we divested several small businesses that no longer fit our long-term strategic direction, contributing to a more focused portfolio. We increased investment in our digital information products, such as our European legal research solutions and our tax research platform CCH Answer Connect, to enhance their content, functionality and user interfaces, and to add capabilities that leverage artificial intelligence. We also advanced our operational agility, making further progress in the first half in moving towards standardized technology platforms and components and transitioning products to the cloud. In the first half of 2020, cloud software revenues grew 19% organically reaching just over a quarter of our total software revenues.
Financial policy, Capital Allocation, Net Debt and Liquidity
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.
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.
Interim Dividend 2020
As announced on February 26, 2020, the interim dividend for 2020 was set at 40% of the prior year total dividend, or €0.47 per share. The interim dividend will be distributed on September 24, 2020, to holders of ordinary shares, or October 1, 2020, to 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.
Share buyback 2020
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.
On February 26, 2020, we announced our intention to repurchase shares for up to €350 million during 2020. On May 6, 2020, we re-affirmed this intention with the stipulation that we would temporarily slow the pace of share repurchases. In the year to August 4, 2020, we have spent €175 million on share buybacks, of which €154 million was settled in the first half of 2020.
Assuming global economic conditions do not deteriorate substantially, we believe current levels of cash returns leave 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 August 6, 2020, up to and including October 28, 2020, we have engaged a third party to execute €100 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 future obligations arising from share-based incentive plans.
Net Debt and Liquidity Position
Net debt at June 30, 2020, was €2,247 million, compared to €2,318 million at June 30, 2019 and €2,199 million at December 31, 2019. The rolling twelve months’ net-debt-to-EBITDA ratio was 1.5x at June 30, 2020.
Our liquidity position remains strong with, as of June 30, 2020, net cash available of €502 million (cash and cash equivalents of €978 million less bank overdrafts used for cash management purposes of €476 million), partly offset by outstanding Euro commercial paper of €305 million.
On July 3, 2020, we issued a new €500 million 10-year senior unsecured Eurobond with an attractive coupon of 0.75%. The proceeds will be used for general corporate purposes.
On July 10, 2020, we signed a new €600 million 3-year multi-currency credit facility. This new facility will mature in 2023 and includes two one-year extension options, replacing an existing facility which was due to expire in July 2021. This facility is currently undrawn. We remain comfortably below the debt covenant on our credit facility.
Apart from a €250 million private loan agreement maturing in December 2020, we currently have no long-term debt maturing between 2020 and 2022.
Share Cancellation 2020
At the 2020 Annual General Meeting of April 23, 2020, 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. As authorized by shareholders, the Executive Board has determined the number of ordinary shares to be cancelled this year is 5.5 million. Wolters Kluwer intends to cancel these shares in the second half of 2020. As of August 4, 2020, Wolters Kluwer held 8.1 million shares in treasury. A portion of these treasury shares will be retained in order to meet future obligations under share-based incentive plans.
Half-year 2020 results
Group revenues rose 4% overall to €2,294 million, including a 1% positive impact from currency, mainly the U.S. dollar which averaged €/$ 1.10 in the period (HY 2019: €/$ 1.13). In constant currencies, revenues increased by 3%. The net effect of divestments and acquisitions on revenues was slightly negative. Excluding both the impact of currency and the effect of acquisitions and disposals, organic growth was 3% (HY 2019: 4%). Excluding revenues associated with the PPP1, organic growth would have been 2%.
Revenues from North America, which accounted for 63% of group revenues, grew 4% organically (HY 2019: 3%). Revenues from Europe, 30% of total revenues, saw organic growth decelerate to 2% (HY 2019: 6%), with all divisions experiencing slower growth. Revenues from Asia Pacific and Rest of World, 7% of total revenues, were broadly stable on an organic basis (compared to growth of 3% a year ago), with robust performance in Tax & Accounting offset by weakened trends in other divisions.
Adjusted operating profit was €577 million, an increase of 14% in constant currencies. The adjusted operating profit margin increased 270 basis points to 25.2% (HY 2019: 22.5%), as a result of temporary cost reductions, including a freeze on travel, a hold on non-critical hiring, a reduction in promotional spending, and other short-term actions initiated in mid-March. In addition, the margin reflects a €10 million reduction in restructuring charges, a one-time insurance reimbursement, and a benefit from revenues associated with the PPP.
Our share of profits from associates, net of tax, was €5 million (HY 2019: €0 million), mainly due to a one-time higher result related to the stake in Logical Images that was divested in May 15, 2020, for €10 million.
Adjusted net financing costs reduced to €25 million (HY 2019: €31 million), reflecting exchange rate movements.
Adjusted profit before tax was €557 million (HY 2019: €466 million), up 15% in constant currencies. The benchmark tax rate on adjusted profit before tax reduced to 23.5% (HY 2019: 24.7%) due to lower interest charges and limitations in The Netherlands and the favorable impact of tax losses in 2020.
Adjusted net profit was €426 million (HY 2019: €351 million), an increase of 16% in constant currencies.
Diluted adjusted EPS was €1.59 (HY 2019: €1.28), up 18% in constant currencies, reflecting the increase in adjusted net profit and a 2% reduction in the diluted weighted number of shares outstanding to 267.6 million (HY 2019: 273.3 million).
IFRS reported figures
Reported operating profit rose 18% to €500 million (HY 2019: €423 million), mainly reflecting the 16% increase in adjusted operating profit. Amortization and impairment of acquired identifiable intangible assets increased to €75 million (HY 2019: €73 million).
Reported financing results amounted to a net cost of €19 million (HY 2019: €24 million), including a €7 million net gain on disposals of associates and financial assets (HY 2019: €9 million). The disposals included our remaining 45% interest in Medicom in China and our 40% interest in Logical Images in the U.S.
The reported effective tax rate was 23.1% (HY 2019: 24.0%) reflecting lower interest charges and limitations in the Netherlands and the favorable impact of tax losses in 2020. Total reported profit for the period increased 23% to €374 million (HY 2019: €303 million) and diluted earnings per share increased 26% to €1.40 (HY 2019: €1.11).
Adjusted operating cash flow was €485 million (HY 2019: €447 million), up 7% in constant currencies. The cash conversion ratio declined to 84% (HY 2019: 90%) due to increased capital expenditures and increased working capital outflows. Net capital expenditure increased to €121 million (HY 2019: €100 million) due to increased expenditure related to investments in critical products and systems. Working capital outflows reflect timing of payments. Cash payments related to leases, including lease interest payments, increased to €41 million (HY 2019: €39 million). Depreciation, including the amortization and impairment of internally developed software and other products, increased 2% at constant currencies to €103 million (HY 2019: €100 million). Depreciation of right-of-use-assets was €36 million (HY 2019: €35 million).
Net interest paid, excluding lease interest paid, was €39 million (HY 2019: €34 million). Corporate income tax paid was €111 million, broadly in line with the prior period (HY 2019: €112 million). Net cash use of restructuring provisions amounted to €4 million (HY 2019: €6 million), relating to net restructuring additions of €3 million and appropriations of €7 million.
Adjusted free cash flow was €336 million (HY 2019: €300 million), up 12% overall and up 10% in constant currencies.
Total acquisition spending, net of cash acquired and including transaction costs, was €26 million (HY 2019: €34 million) and primarily relates to the acquisition of CGE by Legal & Regulatory. Deferred payments on acquisitions completed in prior years, including earnouts, amounted to €3 million (HY 2019: €0 million).
Divestment proceeds, net of cash disposed and transaction costs, were €20 million (HY 2019: €32 million) and relate to the divestment of certain Belgian training assets, the sale of certain German business lines, and the sale of our stakes in Medicom and Logical Images.
Dividends paid to shareholders during the first six months amounted to €210 million (HY 2019: €174 million) in respect of the 2019 final dividend. During the first six months, €156 million of shares were repurchased (HY 2019: €87 million) of which €154 million was settled before June 30 (HY 2019: €84 million).
Net debt and leverage
Net debt at June 30, 2020, was €2,247 million compared to €2,199 million at December 31, 2019. Included in net debt were €370 million of short-term and long-term lease liabilities. The rolling twelve-months’ net-debt-to-EBITDA ratio was 1.5x (Year-end 2019: 1.6x).
We continue to pay close attention to our performance on environmental, social, and governance matters. We are currently launching a new Code of Business Ethics to reinforce a culture of integrity and openness. The new code will form part of our annual mandatory compliance training for all employees globally. During the ongoing COVID-19 pandemic, we have been conducting regular employee surveys to monitor engagement levels and inform managers on what support is needed during this time, when approximately 95% of employees are still working from home and many are experiencing increased workloads.
This year we also strengthened our “Green is Green” program which aims to support our office managers and employees to adopt environmentally sound practices. The recently agreed new credit facility provides us with an option to introduce sustainability or ESG targets.