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Wolters Kluwer 2017 Full-Year Report

February 21, 2018 - Wolters Kluwer, a global leader in professional information, software solutions, and services, today releases its full-year 2017 results.

Highlights

  • Revenues up 5% in constant currencies and up 3% organically.
    • Digital & services revenues up 5% organically (87% of total revenues).
    • Recurring revenues grew 4% organically (76% of total revenues).
  • Adjusted operating profit margin up 60 basis points to 22.8%.
  • Diluted adjusted EPS €2.32, up 13% in constant currencies.
  • Adjusted free cash flow €746 million, up 7% in constant currencies.
  • Return on invested capital improved to 10.2%.
  • Balance sheet remains strong: net-debt-to-EBITDA 1.7x at year-end.
  • Proposed full-year total dividend of €0.85 per share, up 8%.
    • 2018 interim dividend to be set at 40% of prior year total dividend (previously: 25%).
  • Share buyback: current intention is to repurchase up to €400 million in shares in 2018.
    • Includes proceeds from Corsearch and Swedish disposals, closed in January 2018.
    • Pending completion, ProVation disposal proceeds to be used for additional share repurchases.
  • Outlook 2018: expect diluted adjusted EPS to grow 10%-15% in constant currencies.
    • Guidance reflects IFRS15 accounting standard, effective in 2018. (See Note 14).

Full-Year Report of the Executive Board

Nancy McKinstry, CEO and Chairman of the Executive Board, commented: "I am pleased to report further improvement in organic growth, margins, cash flow and ROIC in 2017. Sustained investment is delivering products and services that our customers value. Operational excellence programs are making our organization more efficient and agile. We made significant progress on divesting non-core assets and on integrating acquisitions-improving the quality and growth potential of our business. We look forward to the year ahead and remain focused on executing on our strategic priorities."

Key Figures Full-Year 2017 (Under IAS 18):

Year ended December 31
€ million (unless otherwise stated) 2017 2016* Var. Var. CC Var. OG
Business performance - benchmark figures
Revenues 4,422 4,286 +3% +5% +3%
Adjusted operating profit 1,009 950 +6% +8% +8%
Adjusted operating profit margin 22.8% 22.2%
Adjusted net profit 668 618 +8% +10%
Diluted adjusted EPS (€) 2.32 2.10 +11% +13%
Adjusted free cash flow 746 708 +5% +7%
Net debt 2,069 1,927 +7%
Return on invested capital (ROIC) 10.2% 9.8%
IFRS results
Revenues 4,422 4,286 +3%
Operating profit 869 766 +13%
Profit for the year 671 490 +37%
Diluted EPS (€) 2.33 1.66 +40%
Net cash from operating activities 940 927 +1%
Var.: % Change; Var. CC: % Change constant currencies (€/$ 1.11); Var. OG: % Organic growth. Benchmark (adjusted) figures are performance measures used by management. See Note 5 for a reconciliation from IFRS to benchmark figures. IFRS: International Financial Reporting Standards as adopted by the European Union. *2016 restated to treat customer credits for 'bank product' services as a deduction to revenues and not as a cost of sales.

Full-Year 2018 Outlook (Reflects IFRS 15 Accounting Standard, Effective in 2018)

Our guidance for full-year 2018 is provided in the table below. We expect to deliver solid organic growth and margin improvement. We expect to achieve an increase in diluted adjusted EPS in constant currencies and improvement in return on invested capital (ROIC). The first half operating profit is expected to see modest improvement due to the phasing of investments and savings.

Full-Year 2018 Outlook
Performance indicators 2018 Guidance 2017 (Under IFRS 15)
Adjusted operating profit margin 22.5%-23.0% 22.2%
Adjusted free cash flow €725-€750 million €746 million
ROIC 10.0%-10.5% 9.8%
Diluted adjusted EPS 10%-15% growth €2.22
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

Benchmark Figures

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).

Cash Flow

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.

About Wolters Kluwer

Wolters Kluwer is a global leader in professional information, software solutions, and services for the health, tax & accounting, finance, risk & compliance, and legal sectors. We help our customers make critical decisions every day by providing expert solutions that combine deep domain knowledge with specialized technology and services.

Wolters Kluwer reported 2017 annual revenues of €4.4 billion. The group serves customers in over 180 countries, maintains operations in over 40 countries, and employs approximately 19,000 people worldwide. The company is headquartered in Alphen aan den Rijn, the Netherlands.

Wolters Kluwer shares are listed on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. Wolters Kluwer has a sponsored Level 1 American Depositary Receipt (ADR) program. The ADRs are traded on the over-the-counter market in the U.S. (WTKWY).

For more information about our products and organization, visit www.wolterskluwer.com and follow us on Twitter, Facebook, LinkedIn, and YouTube.

Financial Calendar

March 7, 2018 2017 Annual Report
April 19, 2018 2018 Annual General Meeting of Shareholders
April 23, 2018 Ex-dividend date: 2017 final dividend
April 24, 2018 Record date: 2017 final dividend
May 9, 2018 First-Quarter 2017 Trading Update
May 17, 2018 Payment date: 2017 final dividend ordinary shares
May 24, 2018 Payment date: 2017 final dividend ADRs
August 1, 2018 Half-Year 2018 Results
August 27, 2018 Ex-dividend date: 2018 interim dividend
August 28, 2018 Record date: 2018 interim dividend
September 19, 2018 Payment date: 2018 interim dividend
September 26, 2018 Payment date: 2018 interim dividend ADRs
October 31, 2018 Nine-Month 2018 Trading Update
February 20, 2019 Full-Year 2018 Results


Media Investors/Analysts
Annemarije Dérogée-Pikaar Meg Geldens
Corporate Communications Investor Relations
t + 31 (0)172 641 470 t + 31 (0)172 641 407
info@wolterskluwer.com ir@wolterskluwer.com

Forward-looking Statements and Other Important Legal Information
This report contains forward-looking statements. These statements may be identified by words such as "expect", "should", "could", "shall" and similar expressions. Wolters Kluwer cautions that such forward-looking statements are qualified by certain risks and uncertainties that could cause actual results and events to differ materially from what is contemplated by the forward-looking statements. Factors which could cause actual results to differ from these forward-looking statements may include, without limitation, general economic conditions; conditions in the markets in which Wolters Kluwer is engaged; behavior of customers, suppliers, and competitors; technological developments; the implementation and execution of new ICT systems or outsourcing; and legal, tax, and regulatory rules affecting Wolters Kluwer's businesses, as well as risks related to mergers, acquisitions, and divestments. In addition, financial risks such as currency movements, interest rate fluctuations, liquidity, and credit risks could influence future results. The foregoing list of factors should not be construed as exhaustive. Wolters Kluwer disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Elements of this press release contain or may contain inside information about Wolters Kluwer within the meaning of Article 7(1) of the Market Abuse Regulation (596/2014/EU).

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Source:Wolters Kluwer NV