Wolters Kluwer 2019 Full-Year Report

_{Note: Guidance for adjusted operating profit margin and ROIC are in reported currencies and assume a 2020 average U.S. dollar rate of approximately €/$ 1.11. Guidance for adjusted free cash flow and earnings per share are in constant currencies (€/$ 1.12). Guidance for adjusted EPS includes the estimated effect of the announced up to €350 million share buyback planned for 2020.}

Our guidance is based on constant exchange rates. 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 expect restructuring costs to be in the range of €10-€15 million in 2020 (2019: €26 million). We expect adjusted net financing costs of approximately €60 million in constant currencies , including approximately €10 million in lease interest charges. We expect the benchmark tax rate on adjusted pre-tax profits to be in the range of 24.0%-25.0% for 2020.

Capital expenditure is expected to increase, but stay within our normal range of 5%-6% of total revenues (2019: 4.9%). Cash repayments of lease liabilities are expected to be in line with depreciation of right-of-use assets (2019: €80 million). We expect the cash conversion ratio to be broadly in line with prior year, around 95% (2019: 96%). See Note 4 for the calculation of our cash conversion ratio. 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.

2020 Outlook by Division

Health

We expect organic growth to be broadly in line with 2019, with Clinical Solutions continuing to drive the division’s growth. We expect the full-year adjusted operating profit margin to be broadly stable due to increased investment in sales & marketing and product development. Investment is expected to weigh on the first-half 2020 margin.

Tax & Accounting

We expect organic growth to moderate in 2020 due to a challenging comparable in Europe (following exceptionally strong growth in 2019) and due to some moderation in the U.S. We expect the full-year adjusted operating profit margin to see a further increase.

Governance, Risk & Compliance

We expect modest improvement in the division’s organic growth notwithstanding slight moderation in transactional volumes in 2020. We expect the adjusted operating profit margin to be marginally lower than in 2019 due to increased product investment and the absence of one-time benefits.

Legal & Regulatory

We expect organic growth to moderate slightly from 2019 levels due to a challenging comparable. We expect the adjusted operating profit margin to show improvement.

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 (78% of total revenues in 2019), 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

At the start of 2019, we launched our strategic plan for the three-year period 2019-2021. This plan aims to deliver continued good organic growth and further incremental improvements to our adjusted operating profit margin and our return on invested capital (ROIC). In this 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. Our 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. By 2021, we expect to complete the modernization of our Human Resources technology to support our efforts to attract and nurture talent.

In the first year of this plan, we made progress on several fronts. We sustained investment in our expert solutions, expanding the global reach of products such as UpToDate, TeamMate, CCH Tagetik, OneSumX, and Enablon, and working to strengthen key distribution partnerships. Expert solutions revenues grew 7% organically. We extended into the selected adjacencies of contract lifecycle management and barrier-based risk management with the acquisitions of CLM Matrix in May 2019 and CGE Risk Management in February 2020. We divested several small assets that no longer fit our long-term strategic direction. We stepped up investment in our digital information products, such as Ovid and our European legal research solutions, to enhance their content, functionality and user interfaces and to add capabilities that leverage artificial intelligence. We made significant progress on several key initiatives to drive operational agility: in 2019, we rolled out a new global HR technology platform, accelerated ongoing investments and programs to facilitate our cloud products, and extended the use of standardized technology platforms and components.

During 2019, our decisive response to the detection of ransomware in a portion of our IT environment led to a disruption in certain business activity for a few days, mainly in our Governance, Risk & Compliance and Tax & Accounting divisions. As reported previously, the financial impact on overall group results was not material.

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, 2019, was €2,199 million and the year-end net-debt-to-EBITDA ratio was 1.6x.

Dividend Policy

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.

2019 Dividend

In light of our strong financial position and in view of our expected capital needs for the duration of our current three-year strategic plan (2019-2021), we are proposing to increase the total dividend per share for financial year 2019 by 20%. We will therefore recommend a final dividend of €0.79 per share, bringing the total dividend to €1.18 per share (2018: €0.98). The 2019 final dividend is subject to approval of shareholders at the Annual General Meeting on April 23, 2020.

For 2020, we intend to maintain the interim distribution at 40% of prior year total dividend. Assuming the 2019 dividend is approved, this will result in a 2020 interim dividend of €0.47 per share.

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 Buybacks 2019 and 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.

During 2019, we spent €350 million on share buybacks, comprising 5.5 million shares at an average price of €63.80. Of this, 1.0 million shares were released in respect of share-based incentive plans.

Today, we are announcing our intention to spend up to €350 million on share repurchases during 2020, including repurchases to offset incentive share issuance. Of this, €50 million has already been completed in the period January 2, 2020, up to and including February 24, 2020.

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 February 28, 2020, up to and including April 30, 2020, we have engaged a third party to execute €75 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.

Developments 2020

On January 14, 2020, Wolters Kluwer Health signed an agreement to sell its remaining 45% interest in Chengdu Medicom, China. This interest has therefore been classified as an asset held for sale at December 31, 2019 in the 2019 financial statements.

On January 15, 2020, the Legal & Regulatory division completed the divestment of certain professional training assets in Belgium, with revenues of €13 million in 2019 and approximately 46 employees.

On February 10, 2020, we completed the acquisition of CGE Risk Management Solutions B.V. (CGE), a leading provider of risk management software, including the industry-standard BowTieXP solution. CGE joins the Environmental, Health & Safety and Operational Risk Management (EHS/ORM) software unit within Legal & Regulatory, which includes Enablon and eVision. CGE’s 2018 revenues were €5 million (un-audited).

Full-Year 2019 Results

Benchmark figures

Group revenues rose 8% overall to €4,612 million, benefitting from the stronger U.S. dollar. The dollar averaged $1.12 per euro in 2019 compared to $1.18 per euro in 2018. In constant currencies, revenues increased by 5%. Excluding both the impact of exchange rate movements and the effect of acquisitions and disposals, organic growth was 4% (FY 2018: 4%).

Revenues from North America, which accounted for 61% of group revenues, grew 4% organically. This was in line with the prior year (FY 2018: 4%), with moderation in Tax & Accounting offset by a marked acceleration in Legal & Regulatory in this region. Revenues from Europe, 31% of total revenues, saw accelerated organic growth of 5% (FY 2018: 4%), mainly driven by faster growth in Legal & Regulatory and in Tax & Accounting in this part of the world. Revenues from Asia Pacific and Rest of World, 8% of total revenues, grew 5% organically (FY 2018: 7%), slowing mainly due to Health.

Adjusted operating profit was €1,089 million, an increase of 5% in constant currencies. The adjusted operating profit margin increased to 23.6% (FY 2018: 23.1%), exceeding the top end of our guided range.

Adjusted operating profit included net positive one-time items of €16 million (FY 2018: €23 million), consisting of a fourth-quarter one-time credit related to the modernization of our U.S. employee benefits. Excluding one-time items in both years, the underlying adjusted operating margin increased by 70 basis points, driven by operational efficiencies, mix shift, and currency.

Adjusted operating profit included restructuring costs of €26 million (FY 2018: €30 million), which exceeded the top end of our guided range (€10-€20 million) as we brought forward a number of restructuring initiatives in the fourth quarter. Restructuring relates to ongoing and new efficiency initiatives, including organizational changes, across the group.

Adjusted net financing costs declined to €58 million (FY 2018: €77 million). The decrease reflects the full twelve-month effect of lower borrowing costs after the redemption of our €750 million, 6.375% senior Eurobond in April 2018, and higher interest income on cash balances.

Adjusted profit before tax was €1,034 million (FY 2018: €911 million), up 7% in constant currencies. The benchmark tax rate on adjusted profit before tax was 23.6% (FY 2018: 25.1%) reflecting favorable tax law changes and the conclusion of tax audits.

Adjusted net profit was €790 million (FY 2018: €682 million), an increase of 9% in constant currencies.

Diluted adjusted EPS was €2.90 (FY 2018: €2.45), up 11% in constant currencies. The increase reflects the increase in adjusted net profit combined with a 2% reduction in the diluted weighted average number of shares outstanding to 272.2 million (FY 2018: 278.8 million) as a result of our share buyback program.

IFRS reported figures

Reported operating profit declined 6% to €908 million (FY 2018: €967 million) primarily because the prior year included disposal gains of €159 million relating to divestments in Health, Governance Risk & Compliance, and Legal & Regulatory. Amortization and impairment of acquired identifiable intangible assets increased to €182 million (FY 2018: €175 million) due to impairments of €38 million (FY 2018: €9 million), including €36 million related to Emmi, the patient engagement solution we acquired in 2016. Partly offsetting this was the release of a €9 million provision relating to an earnout.

Reported financing results amounted to a total net cost of €53 million, including a €9 million net gain on disposals, mainly related to the sale of a 40% interest in an Austrian information services specialist. Our share of profits from associates and joint ventures, net of tax, increased to €3 million (FY 2018: €2 million)

The reported effective tax rate decreased to 22.0% (FY 2018: 26.3%); the prior year was impacted by taxable gains on the disposals of Corsearch and ProVation Medical.

Total reported profit for the period increased 2% to €669 million (FY 2018: €656 million) and diluted earnings per share increased 4% to €2.46 (FY 2018: €2.35).

Cash flow

Adjusted operating cash flow was €1,049 million (FY 2018: €1,026 million ), up 2% overall due to the stronger U.S. dollar and down 2% in constant currencies. The cash conversion ratio declined, as guided, to 96% (FY 2018: 104%) due mainly to working capital movements related to the timing of payments. Net capital expenditure was €226 million or 4.9% of total revenues (FY 2018: €214 million; 5.0% of revenues). In 2018, capital expenditure included a €9 million positive impact related to the sale of office real estate. Most of our capital expenditure relates to the development of new and enhanced products and technology platforms. Cash repayment of lease liabilities, including lease interest paid, increased to €80 million (FY 2018: €74 million) reflecting a new office facility in New York, NY. Excluding amounts in relation to right-of-use assets, depreciation, amortization and impairments of internally developed software and other products was €220 million (FY 2018: €220 million).

Paid financing costs, excluding lease interest paid, declined substantially to €46 million (FY 2018: €96 million). The prior year included the final coupon payment on the 6.375% senior Eurobond redeemed in April 2018.

Corporate income tax paid reduced to €195 million (FY 2018: €206 million), reflecting favorable timing of tax payments and refunds while 2018 included tax paid on disposal gains. Net cash use of restructuring provisions amounted to €6 million (FY 2018: €5 million cash outflow), relating to restructuring additions of €13 million and appropriations of €19 million during the year.

Adjusted free cash flow was €807 million (FY 2018: €762 million), up 1% in constant currencies and within our guidance range. Lower cash conversion was compensated for by lower interest and tax paid.

Dividends paid to shareholders during 2019 amounted to €280 million (FY 2018: €277 million), including the 2018 final dividend and the 2019 interim dividend.

Total acquisition spending, net of cash acquired and including transaction costs, was €35 million (FY 2018: €170 million) and primarily relates to the acquisition of CLM Matrix for €31 million by Governance, Risk & Compliance. Deferred payments on prior year deals, including earnouts, amounted to €1 million (FY 2018: €12 million). Divestment proceeds, net of cash disposed and transaction costs, were €39 million (FY 2018: €304 million) and relate to the deferred divestment consideration of certain Swedish assets, the divestments of our 40% stake in an Austrian information business, certain Allied Health titles, and other small assets.

During the year, we deployed €350 million (FY 2018: €550 million) of free cash flow towards repurchasing shares.

Net debt and leverage

Net debt at December 31, 2019, was €2,199 million, compared to €2,249 million at December 31, 2018. The reduction in net debt is attributable to strong free cash flow combined with lower spend on acquisitions and share buybacks.

Under IFRS 16, net debt now includes short-term and long-term lease liabilities. Total lease liabilities increased to €368 million (€255 million as of December 31, 2018), largely attributable to our new office facility in New York, NY.

The rolling twelve-month net-debt-to-EBITDA ratio was 1.6x (1.8x at year-end 2018).

Sustainability

During 2019, we made progress on several environmental, social and governance (ESG) ambitions. Employee engagement rose to 77% in 2019, marking the fourth year that it has been above the standard for high-performing companies. In 2019, nearly 100% of employees completed annual compliance training, which includes IT and data security. Progress was made in reducing ESG risk in our supply chain with 260 suppliers screened and committed to the Wolters Kluwer Supplier Code of Conduct (or equivalent) by year-end 2019.