Wolters Kluwer's (WOLTF) CEO Nancy McKinstry on Q4 2016 Results - Earnings Call Transcript

| About: Wolters Kluwer (WOLTF)

Wolters Kluwer N.V. (OTC:WOLTF) Q4 2016 Earnings Conference Call February 22, 2017 3:30 AM ET

Executives

Meg Geldens – Vice President, Investor Relations

Nancy McKinstry – Chairman and Chief Executive Officer

Kevin Entricken – Chief Financial Officer

Analysts

Sami Kassab – Exane

Nick Dempsey – Barclays

Konrad Zomer – ABN AMRO Bank

Katherine Tait – Goldman Sachs

Matthew Walker – Credit Suisse

Ruchi Malaiya – Bank of America Merrill Lynch

Chris Collett – Deutsche

Giasone Salati – Macquarie

Patrick Wellington – Morgan Stanley

Ian Whittaker – Liberum

Operator

Good day and welcome to Wolters Kluwer 2016 full result.

Meg Geldens

Well, thank you all for coming. It sounds like it was difficult to get here. Apologies to those of you on the webcast for the delay but we're going to try and – we think we can catch up during the process so you'll be able to get away on time.

So good morning, welcome to Wolters Kluwer 2016 full-year results. Hopefully you've read the release. All the materials are available on our website and as usual we will have this morning a presentation by Nancy McKinstry, our CEO and Kevin Entricken, our CFO. After their presentation there will be an opportunity for you to ask questions.

As a reminder, just some of the statements made during today's presentations may be considered forward-looking. We caution that actual results may differ materially from what is contemplated in these statements due to risks and uncertainties, which you can find detailed in our annual report.

Throughout the presentation we refer mainly to organic growth and growth at constant currency, which excludes the currency effect, and we refer to adjusted figures. And you can find a reconciliation to IFRS in our release today.

I'd now like to hand it over to Nancy McKinstry.

Nancy McKinstry

Thanks, Meg. Good morning, everyone, welcome to our 2016 presentation of our results. The usual format is I will give you some highlights and turn it over to Kevin to talk about our financial results in more details; then I will come back and give you an overview of the developments by division, a little bit of progress – talk a little bit about the progress against our strategic goals and then finish up with the outlook.

So I'm pleased to report that we sustained 3% organic growth last year following strong fourth quarter performance for the Group. Digital and service revenues were up 5% organically. Recurring revenue, which now accounts for 77% of our total revenues, grew 4% organically.

We delivered significant improvement in margins and cash flow. The adjusted operating margin increased 70 basis points. Adjusted free cash flow increased 9% at constant currencies. And adjusted earnings per share increased 6% at constant currencies and in line with our guidance.

So as we look ahead we expect another year of margin improvement and mid-single-digit EPS growth in constant currencies as we continue to execute against our strategy.

So now I want to talk a little bit about how we are progressing against our strategic plan. As many of you know, we updated our strategic plan at the beginning of last year for the 2016 to 2018 timeframe.

Our first priority is to expand our market coverage by allocating our capital towards leading, growing, digital businesses in order to extend these positions of strength into attractive market adjacencies and into new geographies. During the past year, we have been redirecting some of our sales and marketing resources to support global products, such as up-to-date CCH iFirm and TeamMate.

We've also made a significant investment to extend our businesses into two attractive adjacent markets, strengthening our legal and regulatory Group's position in the environmental health and safety software market with the acquisition of Enablon in July, and extending our Clinical Solutions Group into the patient engagement market with the acquisition of Emmi last November.

Our second strategic priority is to deliver expert solutions; by expert solutions we mean workflow tools that combine our deep domain knowledge with technology and services to deliver insights, analytics and productivity benefits to our customers.

Across the Group we've been investing in next generation tools and platforms with some of these brought to market in the last year. While it's still early days we are receiving positive customer reaction to products such as CCH iQ in Australia, Addison OneClick in Germany and the Kleos product line in Europe.

And finally, our third priority is to drive efficiencies and engagements. We've had a busy year on this front as well. We are working to deliver a more efficient and effective organization, not just in the back office but throughout the entire supply chain: how we collect and deliver content, how we build and maintain our technology platforms and how we ultimately serve our customers.

So with those highlights I now would like to turn it over to Kevin who is going to talk about our financial details, and then I'll come back and talk about each of the divisions.

Kevin Entricken

Thank you, Nancy, and welcome, everyone. I'm very happy to be here to present our 2016 financial results. So let's start with our highlights. I'm pleased to report that we sustained 3% organic growth in 2016, reflecting a good fourth quarter performance. Constant currency growth was 2% and was below our organic growth of 3%. The divestments we completed in 2015 and 2016 more than offset the impact of acquisitions.

Adjusted operating profit reached EUR950 million, up 5% organically. The adjusted operating profit margin improved to 22.1%, up 70 basis points. The adjusted earnings per share improved to EUR2.10; this is an increase of 6% in constant currencies, and is in line with the guidance that we gave you at the beginning of the year.

Adjusted free cash flow rose to EUR708 million, up 9% in constant currencies. Our net debt-to-EBIT ratio remained at 1.7 times. And finally our return on invested capital improved to 9.8%; all-in-all a solid set of results, meeting or exceeding our 2016 guidance.

Now let's take a look at revenues. Three of our divisions delivered good organic growth of 3% or more. Health, and tax & accounting both accelerated somewhat, which offset the deceleration we expected in the governance, risk & compliance division.

Health grew 6% organically, up 5% in the prior year following a strong fourth quarter performance. Tax & accounting also improved organic growth to 4%; here too we had a strong fourth quarter.

Governance, risk & compliance achieved a 3% organic growth; as expected, this was slower than the prior year as we had faced challenging comparables in non-recurring revenues, partly related to the 2015 TILA-RESPA legislation. Recurring revenues, which now make up 57% of total GRC, grew 4% organically. And finally, legal & regulatory declined 2% organically as expected, and in line with the prior period.

Now let's take a look at revenues by geography. Each of our geographic regions achieved positive organic growth. North America remains the key driver and grew 4%, slowing from last year due to reduced non-recurring revenues in governance, risk & compliance.

Revenues in Europe improved from a 1% decline in 2015 to 1% organic growth in 2016; all four divisions recorded increased momentum in Europe, most notably tax & accounting, and health.

Finally Asia-Pacific and the Rest of the World grew 3% organically, slowing slightly from last year's 4% organic growth. Now let's take a look at revenues by media type. Our digital products delivered 5% organic growth, and now make up 73% of total revenues.

Health, and tax & accounting saw a steady organic growth increase in digital products, while governance, risk & compliance reported slower growth, due to the expected declines in software licenses and implementation fees. Legal & regulatory delivered a significant improvement in digital growth, both in Europe and the United States.

Service revenues which include legal representation, consulting, training, events, and other services increased 3% organically, in line with the prior year. Print formats declined 8% organically, in line with our expectations, and now account for only 15% of total revenues. Within print, book revenues fell by 9%, and other print formats declined by 8%.

Now let's turn to profits. Adjusted operating profit of EUR950 million increased 6% in constant currencies, and 5% on an organic basis with resulting margin of 22.1%, up 70 basis points compared to the prior year. This was driven in part by lower restructuring costs, the results of operational excellence programs, and the benefit of revenue mix shift, and operational gearing.

The improved margin was driven by three divisions. Health increased its margin by 40 basis points. Here, higher investments in sales and marketing were more than offset by lower restructuring costs, cost savings, and the ongoing shift toward the clinical solutions business. Governance, risk & compliance achieved a 40 basis point margin improvement, reflecting strong operational efficiencies.

Legal & regulatory improved their margin 230 basis points; this was largely due to lower restructuring costs. Cost savings were reinvested in wage inflation, and product development.

The margin performance of these three divisions more than offset the decline in tax & accounting. This was the result of accelerated investment in product development in cloud-based tax and audit software, and higher restructuring costs.

Now let's turn to our benchmark adjusted income. Here we see adjusted net financing costs declined to EUR107 million. The decline was due to a reduced impact from currency hedging and the revaluation of inter-Company balances.

Our benchmark tax rate increased 26.8%, slightly favorable to our guidance range. I'll remind you that in 2015, the benchmark rate included a one-time favorable adjustment related to deferred tax assets. For 2017 we're guiding to an increase in the benchmark tax rate, to approximately 27.5%.

Adjusted net operating profit increased 5% in constant currencies to EUR618 million. Diluted adjusted earnings per share increased 6%, to EUR2.10. And now let's take a look at IFRS figures. Reported operating profit increased 15% to EUR766 million, reflecting the increase in adjusted operating profit, a decline in amortization of acquired intangibles, and net gain on disposals.

Reported finance results amounted to EUR113 million, and includes EUR6 million in financing components of employee benefits. The reported effective tax rate increased to 25.2%; as a result, the reported profit for the period increased 16%, and reported EPS increased 17%.

And now I would like to talk about free cash flow. We had another year of 100% cash conversion. Capital expenditures increased to EUR224 million, or 5.2% of revenues. This was offset by strong working capital inflows.

As a result adjusted operating cash flow increased 5% in constant currencies to EUR948 million. The increase in CapEx relates to higher capitalization of product development costs in tax and accounting, governance, risk and compliance. We expect CapEx to be between 5% and 6% of revenues, again, in 2017.

Cash taxes paid decreased by EUR33 million, as a result of favorable timing of cash tax payments. The very strong cash flow performance allowed us to make a voluntary injection to our U.S. pension plan of EUR22 million. All in all, we delivered an adjusted free cash flow of EUR708 million, up 9% in constant currencies.

And now let's take a look at the uses of our free cash flow. We paid dividends of EUR223 million in cash. The reason for the year-on-year decline in the dividend is that in 2015 we absorbed the cash impact of introducing our interim dividend. Acquisition spending, net of our cash acquired, including costs, amounted to EUR461 million. The majority of this relates to two acquisitions: Enablon in July, and Emmi Solutions in November.

Divestiture cash proceeds were EUR11 million and were mainly associated with divestments of indirect lending solution, AppOne. We completed a share buyback of EUR200 million in 2016, of which EUR2 million was settled in January of 2017. In 2016, we returned approximately 60% of our cash flow to our shareholders.

All in all, we had a net cash outflow of EUR139 million, increasing our net-debt-to-EBITDA position – or our net debt position from EUR1.8 billion to EUR1.9 billion. With EBITDA up 5%, this left our net-debt-to-EBITDA ratio stable at 1.7 times; favorable to our target of 2.5 times.

Now, a few words on returns to shareholders. And let's start with dividends. We remain committed to our progressive dividend policy, under which we intend to increase the absolute dividend per share each year.

As you saw in the release this morning, we are proposing a total full-year dividend of EUR0.79 per share. This is an increase of EUR0.04, or 5%, compared to the dividend last year. This, of course, is subject to approval at the Annual General Meeting in April.

I would like to update you now on our current share buyback program. As you recall, last year, this time, we announced a three-year, up to EUR600 million share buyback program. In 2016, we repurchased 5.8 million ordinary shares at an average price of EUR34.28, for a total of EUR200 million. So far in 2017, we have bought back another 1.4 million shares, for a total of EUR50 million.

Now, before I hand it back to Nancy, let's summarize. We sustained a 3% organic growth and increased our adjusted operating profit margin by 70 basis points to 22.1%. Adjusted free cash flow increased 9% in constant currencies to EUR708 million. We returned approximately 60% of our free cash flow to our shareholders in the form of dividends or share buybacks. Our return on invested capital increased to 9.8%, and we end the year with a strong balance sheet position.

With that, I'd like to turn it back to Nancy. And thank you, all.

Nancy McKinstry

Thanks, Kevin. As I indicated, I'm going to take you through each of the divisions, beginning with health. Health finished the year strongly, accelerating organic growth to 6%. The adjusted operating margin also improved, benefitting from the shift towards clinical solutions, as well as lower restructuring costs.

Clinical solutions achieved 9% organic growth, driven by UpToDate, our leading clinical decision support tool, which delivered another year of double-digit growth. New customer wins and upgrades to UpToDate AnyWhere were key drivers of this growth. We are supporting UpToDate with increased investments in sales and marketing in selected international markets to expand our global market coverage.

Our clinical drug information group achieved robust organic growth. This group is now closely aligned to UpToDate; and here now, we've taken an additional step forward with the acquisition of Emmi, entering the adjacent market for patient engagement. With Emmi now in the fold, we can bring a more comprehensive range of solutions to support hospitals in their mission of providing the best care with improved outcomes.

Our health learning, research and practice group contributed to the accelerated growth we saw in the division, ending the year with 2% organic growth, which is the best performance we've seen in this unit in several years.

Digital revenues in health learning, research and practice grew 8% organically. Our medical journals benefitted from new journal wins, and our e-Learning solutions for nurses saw double-digit growth.

In continuing medical education, Learner's Digest drove strong growth with the launch of a new offering, called Comprehensive Reviews. Digital now accounts for 64% of the unit's revenues, and is comfortably starting to outweigh the decline in print.

Now let's turn to tax and accounting. Tax and accounting also improved its organic growth rate, achieving 4% organic growth, following strong performance in the fourth quarter. Growth was driven by tax, accounting and audit software products, which grew 6% globally. The margin declined as we accelerated some product development costs, and we incurred some additional restructuring costs.

Our North America business performed well; here we've brought together the team that serves professional software customers under one organization that serves small, medium, and large firms. This group grew 6% organically with both on-premise and cloud-based solutions performing well. This more than offset weakness in our U.S. publishing group.

The real highlight for the year however in tax and accounting was our European tax and accounting group, which saw another year of improving organic growth accelerating to 5%. The clear focus on software and the sustained investment in product including cloud and collaborative solutions are paying off.

Asia-Pacific and the Rest of the World was broadly stable on an organic basis. We saw double-digit growth in China and India, which was a bit offset by weakness in the more developed markets of Asia-Pacific and in Brazil.

Finally, TeamMate, our global audit solution for corporations and government, had another good year, delivering 10% organic growth supported by strong new license sales in the fourth quarter.

Now let's turn to governance, risk & compliance. GRC achieved 3% organic growth slowing, as we expected, as we faced some challenge comparables. Recurring revenues, which account for about 60% of the division's revenues, sustained 4% organic growth. However, as we expected, overall non-recurring revenue saw organic growth slow to 1% compared to 8% growth in the prior year. Despite the slower growth, we drove a margin increase for the full year.

Legal services delivered 3% organic growth. CT, which is our registered agent service business, grew 5% organically. Here we saw stronger growth in subscriptions and this helped to offset a sharp slowdown in M&A-related filing activity. Enterprise legal management declined due to lower license and implementation fees as fewer new large contracts were signed.

Our GRC solutions for financial services also experienced a tough comparable from 2016; organic growth was 2% compared to 7% in the prior year. Recurring revenue saw steady good growth; however non-recurring revenues fell sharply. As you may recall, in 2015 we benefited from new legislation called TILA-RESPA, and therefore in 2015, this non-recurring line had increased strongly on the back of that new regulation.

Financial services transactional revenues advanced up 12%. In mortgage compliance solution, we captured some additional transaction revenues related to a new lending requirement that came out in 2016. Lien Solutions performed well delivering robust single-digit organic growth. Finally, finance, risk and compliance achieved 3% organic growth.

Now let's talk about legal and regulatory. Legal and regulatory constant currency revenues declined 6% due to the effect of several non-core disposals, which outweighed the positive effect from the Enablon acquisition. On an organic basis, revenues declined 2% in line with prior year and our expectations.

Digital revenues now account for 56% of the division's total revenues, still not sufficient to offset the ongoing decline in print, but certainly moving in the right direction.

The division margin increased 230 basis points, reflecting lower restructuring costs. Cost savings were used to fund wage inflation and investments in product development.

In Europe we were pleased to see growth in digital products accelerate from 1% in 2015 to 6% in 2016. In part this was due to a one-time migration of a major customer, but even without that migration, digital revenues would have accelerated to 4%.

Digital revenues benefited from the product investments that we've been making over the last couple of years in our online platforms. In addition our legal software product line, Kleos, continued to grow rapidly, albeit on a small base.

In July we acquired Enablon, a global provider of environmental health and safety compliance software to large corporations. On a pro forma basis, Enablon achieved 21% growth in annual recurring revenues. This represents the cloud-based software and services, which are sold on a recurring subscription basis. Perpetual license and service revenues were below prior year, with market demand shifting more rapidly to cloud and subscription solutions.

Our U.S. legal unit saw 2% organic revenue decline as print decline continued to more than offset the growth that was seen in digital products. As in Europe, digital products also saw an acceleration of organic growth to 5%, in large part due to Cheetah, which was the new legal research platform that we introduced a couple of years ago.

With that review of the divisions I now wanted to make a couple of additional comments about the progress we've made against our strategy. One of the core priorities for us in our strategy is to expand our market reach, and we've started to re-direct some of our sales and marketing resources to support and grow key global products. Global products are defined by products that we build once and can market in multiple geographies. So I want to talk about two of them in our health group, our clinical solutions area, as well as our drug information business.

In 2016 we added more than 30 FTE's in sales and marketing globally; most of these were resources added outside the U.S. While usually it takes at least a year to start seeing a return from this type of investment, we're already seeing early success in some countries. So for example in India, this additional investment helped to drive over 20% organic growth in the health business for India.

I mentioned earlier that Enablon and Emmi are two important acquisitions that will help us build on our existing strengths and extend our reach into adjacent segments. We are pleased with the Enablon acquisition; Enablon has a very well-designed and highly scalable technology platform, and serves blue chip corporate customers. The cloud solution's growing rapidly, and is becoming the preferred way for customers to buy this type of product line.

Emmi become part of Wolters Kluwer a few months ago, and brought us a highly respected and established player in the U.S. patient engagement market. We have been looking at this market for several years as we believe it's a natural extension of our existing position in clinical solutions.

Patient engagement tools are provided by hospitals to patients to encourage them to get actively involved in their own healthcare. Patients who are actively informed and engaged tend to have better outcomes with their treatments.

The second priority, as you know, that we are focused on is to deliver expert solutions, and I wanted to just highlight two examples of both digital investments that we're making in the case of Lien Solutions, and in expert solutions in the case of TeamMate.

So Lien Solutions, which is in our GRC division, helps banks and other lenders reduce their risk by providing comprehensive public records searches and filings to help them protect their collateral as they extend the loan. The offering includes web-based tools, workflow automation, and expert customer service.

While the business model is fully transactional, and of course affected by the commercial lending cycle, we have longstanding customer relationships, which have supported our growth; customers prefer our solutions as they drive automation and accuracy.

Our success also comes from understanding very specific requirements of different types of loans, and different types of industries, and then we adapt our solutions to meet those specific requirements.

So for example in the last two years, our Lien group has successfully extended into a new niche market, the solar industry, helping lenders who finance solar panel installations reduce their risk.

Second example comes from TeamMate, which is in our tax & accounting division. TeamMate is the world's leading internal audit management software, traditionally sold as a license/maintenance model, along with implementation services. TeamMate enjoys a leading position, serving over 100,000 auditors in 120 countries.

TeamMate is an excellent example of an expert solution, designed for a professional niche where we are strategic partner with our customers, and we use our domain knowledge and our technology expertise to improve departmental efficiencies.

In the past year, we've been investing in the next generation product, which is our cloud-based solution called TeamMate Plus. We launched that at the beginning of this year and we are migrating customers, and selling new customers who are ready to operate in the cloud. So a very exciting new offering from us.

The third pillar of our strategy, as I mentioned, is around driving efficiencies and engagement. We are focused on fostering an agile organization with highly-engaged employees. We have a number of programs across the enterprise that focus on this objective. The savings we are generating are helping to fund wage inflation and product investment, and also helping to support a rising operating margin over time.

So the slide highlights a number of the things that we're working on, but I just wanted to talk about two of them. First, in the front office, one of the areas that's receiving a lot of attention from us is around digital marketing and e-commerce.

While today many of our current customers very much appreciate the personal contact, and level of personalized customer service we provide them, in the future we expect millennials and future generations to want a more rich digital experience. So across Wolters Kluwer we're investing, and dedicating resources to improve that overall customer experience.

Second major area of attention is how we are organized in ourselves to deliver content and technology, so that we can better leverage the investments that we make every year in technology platforms, and components.

So in the past 12 months we have been preparing to evolve our organization over the coming years to leverage our technology strengths more effectively, particularly now focused on functions around hosting, and end-user productivity.

So with that I'd now like to move to the outlook, beginning with the health division. We expect again a good year of organic revenue growth, with improved margins due to the mix shift towards clinical solutions. The first quarter will be lower due to phasing and a challenging comparable.

For tax & accounting we expect solid organic revenue growth in line with 2016, and following similar seasonal patterns. We expect margins to increase slightly. For GRC we expect to deliver full-year organic growth similar to 2016. Growth is expected to be second-half weighted, due to the timing of larger contracts and the challenging first-half comparable for transactional and other non-recurring revenues. Full-year margins are expected to increase due to operating efficiencies.

In legal and regulatory we expect organic revenue to decline in line with 2016. Margins, however, are expected to improve slightly. So now let's finish with the specific financial guidance. We expect our adjusted operating profit margin to improve to be between 22.5% and 23%. This includes a more normal level of restructuring between EUR15 million and EUR25 million.

We expect free cash flow between EUR675 million and EUR725 million in constant currencies; ROIC above 9% and EPS growth in mid single digits in constant currencies. So all in all we're well positioned to achieve our 2017 goals and we remain confident in our growth prospects.

So thank you very much. With that we'll now move to Q&A. Sami? Yes.

Question-and-Answer Session

Q - Sami Kassab

Good morning everyone. A few questions, certainly then waiting for the mic.

Nancy McKinstry

Yes, yes, yes. Just give me one minute. And maybe Sami if you could just say where you are from as well, so we get that in the transcript.

Sami Kassab

Thank you. I’m Sami from Exane. I have a few questions to start with, please. Your free cash flow generation has been strong over the last couple of years, perhaps even stronger than expected; cash conversion was 100%.

Can you comment on the sustainability of the working capital contribution? Is that a long-lasting feature of the business or did you benefit from one-off working capital movements that may have pushed up the conversion ratio? Secondly, can you repeat the restructuring charge you expect for 2017 please, Nancy, and compare that to the 2016 numbers?

And lastly, your return on capital employed at 9.8% is, I think, on a 15-year high, so that's good. On the other hand the guidance of more than 9% may look underwhelming and perhaps underwhelming may actually mean disappointing. If we put that in the context of several points you made in the release suggesting that areas where you recently made acquisitions, like medical terminology, like enterprise legal management, perhaps even Enablon, seem to be weak or weaker than expected. So can you comment on these areas of perhaps weakness where you recently put capital at work? And perhaps discuss on the development of return on capital employed over the coming years, please? Thank you.

Nancy McKinstry

Okay. Kevin, why don't you do free cash flow and restructuring and talk a little bit about the ROIC and then I'll talk a little bit about the acquisitions as well.

Kevin Entricken

Sure, absolutely. I think with the free cash flow generation indeed we've seen very strong cash conversion in the last two years at about 100%. I do point to a couple of areas where working capital was even stronger than we had expected. Certainly in our health business they have revamped their collections operations and really performed quite well in 2017.

Moving forward, I don't necessarily think 100% conversion is achievable year on year; that's why we've given you the guidance of approximately 95%. But I do think that will remain a focus for our businesses to generate a good working capital performance year on year, even if it's not at 100%.

With restructuring, our restructuring expenses in 2016 was EUR29 million. We expect that to be more in the range of EUR15 million to EUR25 million in 2017, which I would say is more of a normalized range. So there will be a slight step-down on restructuring in 2017.

And our guidance on ROIC is certainly above 9%. As you know, that is the one metric that is the hardest to move year on year. So we are pleased with the results that we delivered in 2016 and we certainly expect that ROIC to be a focus of the business going forward.

Nancy McKinstry

And then on the acquisitions, we're quite pleased with the businesses that we have been buying. But what you'll notice is that because they're largely software businesses and we're buying them before they typically are at scale, and as you know in software, when you get to scale you get quite a jump in the operating margin.

So our whole focus with these businesses is they strategically fit really well and what we bring to the party is the ability to scale them more quickly because we have broader distribution. And together, taking that product line into our overall portfolio, we have a more comprehensive solution for our customers. So what you should expect is that the operating margins of these businesses will scale relatively quickly as we grow the top line, and that the acquisitions that we've made have or will be able to certainly meet the financial criteria that we have, which is to cover our WACC within three to five years.

Sami Kassab

So there's no change in your mid-term view for medical terminology, ELM?

Nancy McKinstry

No. I think if you look at them we're – each of them are in different market segments, of course. But if you look at them we are leaders in those market segments, together bringing those products with the other offerings that we have; we go out to market with a comprehensive solution, and we're scaling down by adding more sales people or in cross-selling more effectively. But it will take time, as you recognize, with a software business.

Sami Kassab

Thank you.

Nancy McKinstry

Yes. Nick?

Nick Dempsey

Yes, its Nick Dempsey from Barclays. I have three questions, please. So first of all, at Enablon, what was the total organic growth, and did you get to the EUR55 million that you hoped that business would achieve when you bought it? Or did that non-recurring stuff slow that a little bit? Second question, Trump; what could his tax changes mean, first of all to your tax and accounting business, and secondly, to your Group tax rate?

And the third question; health learning, research and practice looks to have a pretty good Q4, is there timing in there? Have there been orders pulled forward into Q4 that you got in Q1 last year, or is that going to contribute to the more muted Q1, a timing effect?

Nancy McKinstry

Okay. So I'll let you talk about the tax rate for Wolters Kluwer; I'll cover the others, starting with Enablon.

Enablon did not meet the original revenue goal that we had stated for that EUR54 million, yes, EUR55 million. In part, because what we saw was a more pronounced shift from customers buying perpetual licenses to SAS. As you may recall, when somebody buys a perpetual license, we're able to recognize that revenue at the moment of purchase; when somebody buys a SAS license, we recognize it over the life of the contract – it behaves exactly like a subscription. So, that was the biggest driver of the revenues landing at EUR45 million.

However, I want to let you know that over the long term, this is a better business model. SAS leads to more recurring revenue; you saw that annual recurring revenues were up 21%. So if you look long term, we're clearly expected that in 2017 the organic growth will be stronger because we're carrying these very good booking levels and this recurring growth rate level into 2017.

It is actually something quite interesting; in a lot of our businesses we're now seeing more shift to cloud. You saw that in the tax and accounting business as well, particularly in Europe. So on Trump, I'll start and then you can come in our tax rate. In general, part of our core value proposition is to help our customers navigate change, so that is a big part of what we do, not only in tax but in the other segments. So change tends to have a positive overall effect for us.

Within the tax business per se, we are expecting some level of tax reform; our experts are already covering what's going on on the Hill, but until we know more about exactly what it looks like, it's hard to determine whether it will lead to specific new products or whether it will be more something where it just helps sustain our renewal rates, because customers will need to understand how to navigate those changes. So more to come as we all learn more. Do you want to talk about our tax rate? And then I'll come back on HLRP.

Kevin Entricken

With regard to our effective tax rate and what that means in the current administration in the United States; clearly they've signaled the intention to lower the corporate tax rate, that obviously would be a positive for all corporations. What's unclear is will they broaden the tax base? Will they disallow certain deductions? And as we get more and more information on what the tax changes will mean, it will become clearer what it will be for our effective tax rate.

The guidance we've given you today of the 27.5% assumes right now that we will see a consistent landscape. As things do become more and more transparent, or more and more known to us, we'll have more to say about that.

Nancy McKinstry

And then on HLRP, in fact if you look at what supported the growth rate of 2% organically, it was really three things. One is continued good performance of Ovid, which is our online platform, which has consistently delivered mid-single-digit growth rates.

And then the second thing was a couple of new journal wins, and our open-access platform where we continue to offer open-access journals around the world. So those were more the drivers than any kind of major shift on the book side. Yes, please.

Konrad Zomer

Hi, good morning, it’s Konrad Zomer, ABN AMRO Bank. Two questions, please. The first one on the restructuring charges; your guidance for 2016 throughout the year was also EUR15 million to EUR25 million, and you came in EUR29 million. Is there a decent chance that your 2017 restructuring charges could also be above the guided range at the start of the year? And what's the main reason why 2016 was slightly worse than expected?

And my second question; in the press release you suggest that there may be some near-term disposals that could cause for a slight change in your expected revenues. Is it just a hypothetical statement or are you pointing towards a specific part of your business? Thank you.

Nancy McKinstry

Yes, I'll take the last one, you can take the first; go ahead first.

Kevin Entricken

I would say on the restructuring, indeed we did spend EUR29 million, which was slightly above our guidance range. For 2017, we believe right now, EUR15 million to EUR25 million is the range, based on everything that we see coming in the future; that's an appropriate range to guide you to.

What we did do at the end of the year in 2016 is we did see some opportunities to take on some additional restructuring efforts, largely in the tax and accounting business, and that is the increase that we saw in 2016. But again, I would say 2017, EUR15 million to EUR25 million is the right range.

Nancy McKinstry

Yes, we actually see that. You said slightly negative; we see that as a slightly positive because we're going to see the benefits on the cost savings in 2017 and 2018, so we saw that opportunity.

Then on the disposals, as you probably know, we consistently do dispose of businesses year on year. They tend to be carve-outs. So product lines largely have been focused on the legal and regulatory business. So we're actively working on the portfolios, but until we get to a point where we are making something happen, we don't talk about them specifically. But we're constantly looking at portfolio.

Konrad Zomer

Yes, but because you specifically mention near term in the press release, it suggested that there was something coming in Q1 maybe.

Nancy McKinstry

Yes, we have nothing to comment on that comment per se, but I would say, as you know from our past, we have been working on the portfolio and will continue to do that.

Kevin Entricken

To remind you, in the last two years, we've done smaller disposals and we'll continue to look at the portfolio and look for things that fit our strategic goals, and other things that don't, we will consider for a divestiture.

Konrad Zomer

Thank you.

Nancy McKinstry

Yes, please. Sorry, you have that mic over there I apologize – maybe go ahead and then, yes.

Katherine Tait

Good morning, I will keep it quick. It’s Katherine Tait from Goldman Sachs. And clearly, in 2016, you delivered 70 basis points of margin improvement. If we take the midpoint of your range for 2017, it implies another 60 to 70 basis points. Thinking about the business model beyond 2017, is this sort of level of margin expansion likely to continue? How should we think about that trajectory going forward?

Kevin Entricken

Yes, I will say if you look at our margin improvement, there's a couple of things that have been driving that: the mix shift to faster-growing businesses such as clinical solutions and the health care business, obviously, becoming a larger part of our portfolio; and operational excellence type of initiatives, things where we can be more efficient in how we procure computing power, how we manage our IT infrastructure. Those are the things that clearly are driving our improvement in margins in 2016.

We expect to continue that trend in the mix shift as well as the trend in operational excellence. I would say for the longer term, we do expect to see some ability to improve margins, but for right now, we would say the guidance we've given you for 2017 is what you should be thinking.

Katherine Tait

Great.

Nancy McKinstry

Thank you. Yes?

Matthew Walker

Thanks a lot, it’s Matthew Walker from Credit Suisse. Three questions, please. The first is can you update us on your thoughts on what you're doing with artificial intelligence in the business? There should be quite a lot of opportunities in various of the divisions, so if you could state a little bit about what you're doing with AI right now and any updated thoughts on how you're competing with Watson as well.

The second question is just going back to the cloud. What percentage of your products are sold through the cloud at the moment and what kind of increase in that can we expect? And are there any pricing benefits, apart from a longevity benefit of the customer, are there any actually pricing benefits from moving to the cloud?

And last question is on journals. You mentioned you won a couple of contracts on journals. I know you're not the biggest in journals, but if you could give us your thoughts on how the journal market's developing, what kind of inflators you're getting when you sign new contracts. I think one of your competitors are having some problems in Germany. Are you having any problems in Germany or in any other regions in terms of renewals? Thanks a lot.

Nancy McKinstry

Okay. So let's start with AI. There are many products today that use components of AI. There are many – I think most people know of Watson because that's one that is most marketed in the public domain, but there are many, many players out there that offer machine-learning components and AI capabilities.

So we license those kinds of technologies into Wolters Kluwer. We have a number of products today that are using components of AI and that is an area of focus for us, so you will see more and more of the products that we're launching in 2017 and 2018 have components of AI.

I'll give you one quick example is our CCH iQ product which I think I've talked about in the past. Our focus when we use AI is to solve a specific problem; that's what we think has resonated very much with our customers.

So CCH iQ solves the following product is – one of the biggest challenges an accountant has is new regulation comes out, new legislation is passed, they have to determine which of their customers are affected by that. So today, accountants either do nothing or wait till their customer comes in to see them. But the bigger firms hire people today that go in and actually search the files to figure out who's going to be affected.

So we launched this product called CCH iQ. How does it work? New legislation comes out, the accountant understands what the legislation is. They push a button and we send out this artificial intelligence to the tax filings and the artificial intelligence is able to bring back those customers that are affected by the new legislation, explain to the accountant why those files were selected. Then the accountant can push another button, which sends out an email to those clients to say, look, you may be affected by this new legislation, come on and make an appointment.

So tremendous. Think about that, the tremendous productivity benefit, real hard savings if they, in fact, do have employees doing that today. So that's just one example of AI.

We are embedding AI, but again, very focused not so much on go out and get lots of data and try and determine what it is. It's much more focused on you have a specific problem you are trying to solve. How can we deploy machine learning and AI for that; so more to come on that over the course of 2017.

On cloud, I don't have the specific percentage off the top of my head of what percentage of our products are in cloud. But I can tell you that all of the software that we're offering on-premise that is in our core growth markets, we are either in the cloud or investing to get to the cloud.

On the pricing side, we price so that there's no differential when a client moves from on-premise to cloud, because we want to encourage cloud migration. But once they are in the cloud, we have much more opportunities to upsell that client more effectively. So that is the opportunity for us on the revenue capture side.

And then journals, we, just to remind everybody, we are only in the health market, so we don't do any scientific journals. So we have no specific issues in any geography that – Germany or anywhere else in the world.

Our focus on journals is, again, we offer about – we have about 220 of our journals that we either own or work with our society partners on. The focus for us is always on capturing, not just the print revenues but really the online revenues, and more and more taking some of those journals into an open-access environment.

So I would say it's quite competitive financially. If you look at the journal market, it's quite competitive to win new journals and so the margins on the actual journal may not be so high. But then, when you look at the overall revenues you can generate from all the other ways that we tie things into the journal, that's what can make it an attractive business for us.

So a long answer but hopefully you got everything you needed. Yes, please.

Ruchi Malaiya

Thank you. It’s Ruchi Malaiya from Bank of America Merrill Lynch. Just a question on the GRC division and the visibility that you have over that second-half weighted profile that you talked about. Is it that you have contracts that are coming up that you expect to sign that will start in the second half of the year, or is it your expectation about the type of business that will come through in the second half of the year? Thanks.

Kevin Entricken

Part of the GRC second-half weighting is in the first half a very challenging comparable. We saw transaction revenues very strong in the first half of 2016. We don't necessarily expect that's going to continue in 2017 at that level.

I will say on some of the contracts we're signing, we do see a longer sale cycle with some of these products, so landing those customers is taking a little bit longer. But we do have visibility on our pipeline to give us confidence that we'll have a very successful second half of the year.

Nancy McKinstry

Chris, yes.

Chris Collett

Thanks, good morning. It’s Chris Collett from Deutsche. Just a couple of questions. One was just to follow up on GRC and the transactional revenues with a – going into a rising interest rate environment, just wondering what you're expecting for the CT Lien transactions and also for the mortgage origination transaction volumes?

Second was just the margin within legal. I think you said that the benefit you got this year was from lower restructuring, so now, really what should we expect? Organic revenue declines eating away at the margin in the future, or is there more that you can do there?

And then, lastly, could you just come back on the earlier ROIC question? I think that point that greater than 9% ROIC implies either ROIC goes down flat or not even a 20 basis point increase in the ROIC this year. Why shouldn't the ROIC increase and why aren't you more focused on driving the ROIC higher?

Nancy McKinstry

Kevin, why don’t you?

Kevin Entricken

On the GRC transactions, clearly we had a very strong year in the Lien Solutions business in 2016. A rising interest rate environment will obviously have some impact on that, there's no question about that. So that is one of the reasons why we're giving you the guidance on transactional products in 2017, that we expect the comparables to be a bit more challenging in that area.

With regard to the legal and regulatory margin, indeed, a lot of the 230 basis point improvement in 2016 was reduced restructuring. The restructuring we will do in 2017, we will still do more restructuring in legal and regulatory. In fact, as long as we see a revenue decline, we will continue restructuring in that area to ensure that we protect the margins going forward for the long term.

And on the ROIC query, as I said, the ROIC number is the hardest number to move, going forward, but we are absolutely focused on improving that ROIC as well look forward into the business, short term and long term.

Nancy McKinstry

I think the issue with the ROIC is what's the mix of the basis that you have there, and things obviously come out of the denominator as they get fully amortized. So that's why it is such a hard number to move, it's because you're carrying these, that basis for many, many years.

Then just real quick on margins, I just would add on top of what Kevin said, certainly in legal and regulatory, as the mix shifts more to digital there's an inherent benefit that we get on the margins. So it won't be just about the restructuring as we go forward.

Meg Geldens

I've got some questions from people that are on the webcast. First of all, based on your guidance for share buybacks, it looks like your leverage will remain below the 2.5 target? Why are you not expanding your share buyback or increasing dividends more?

And then second question is, you've been quite successful in clinical solutions. Normally this would attract increased competition and the attention of others. Are you seeing any changes in the competitive landscape there?

Nancy McKinstry

Yes, so why don't I take the second one and you can take the first one. So on clinical solutions, it's always been a competitive market. Health is a very fragmented and competitive industry. We, however, have a very unique solution that's highly respected among physicians and healthcare providers. In addition, we continue to invest in that solution, both in terms of adding new specialty areas, adding mobility, now adding what we call next generation capabilities and UpToDate, in combination with our drug businesses and now Emmi, is really a very unique value proposition for clients.

So we're confident in our ability to continue to drive growth in that business and while it's always competitive, we continue to have, as I say, a very good leg-up against any competitors that are out there.

Kevin Entricken

With regard to the leverage, the leverage is in fact at 1.7 times, favorable to our target, and I'll remind you that we're comfortable at that level, that target level, because of the recurring nature of our business and strong free cash flow. But we've also said that we can deviate from that. So being below it is not really a concern for me at this time.

As far as share buybacks go, we want to make sure we continue on the current program. You've seen us do EUR200 million in share buybacks in 2016. We've done another EUR50 million in the first two months of 2017. So we will continue along that program. And dividends also, we've seen a EUR0.04 increase in the dividend last year, approximately 5% increase in that dividend. I'll remind you about 60% of our free cash flows were returned to our shareholders this year.

Nancy McKinstry

Giasone, wait for the mic for you, yes, yes.

Giasone Salati

It’s Giasone Salati from Macquarie. Just one question. On legal, can you give us a little bit more color? Clearly it's the heaviest on print so the decline there is most explained by that. But could you give us a bit more color on what would it take to turn it to positive organic revenue growth and do you want, do you aspire to take that to positive organic revenue growth in the near term or to wait whilst the market – the way it is in terms of disposals or operational acquisitions will inevitably result in that turning positive over the medium to long term?

Nancy McKinstry

A couple of things going on in the legal market. One is that I would say overall the market growth is relatively subdued. If you look not just at our results but certainly the major competitors, you can see that the legal market has not necessarily recovered in the same way that some of the other businesses. So that's factor number one.

With that said, we still think the legal market is attractive and some pockets are quite attractive. So what is our strategy? Our strategy is one portfolio. We continue to look at the portfolio and exit places that we consider non-core. We will continue that work.

We also are looking for bolt-on acquisitions with Enablon being a good example of buying a leader within a market segment that's growing and then building out from that. So that's strategy number one.

Strategy number two is invest in digital. We were really pleased to see the acceleration of our digital business in Europe. The 6% was, again, partially influenced by this one customer, but even when you back that out, we saw an improvement from 1% to 4%.

So you are seeing digital really take hold. We've made a number of investments in our platforms in the last couple of years and that's really helping us drive digital. So second strategy's all about driving digital. And then the third strategy is really scaling the software businesses, because not only will it drive growth but it also drives profitability. So these three strategies working together, we believe that legal and regulatory will over time continue to improve both top line and bottom line.

Giasone Salati

Put a target on that in terms of timing, is it a two years' time horizon to turn positive in legal or shorter, longer?

Nancy McKinstry

We don't give that forward-looking kind of guidance, so I think we've given you quite clear guidance for 2017. And as we keep going through 2017, we'll give you more as we head into 2018.

Giasone Salati

Thanks.

Patrick Wellington

Good morning, it’s Patrick Wellington of Morgan Stanley. A couple of questions. Firstly on Enablon, that's quite a big revenue miss, given the amount of time you've owned it. So is there something wrong with your investigatory process when you looked at it? And need we be a little bit more concerned about the underlying business there?

Secondly, can I ask about seasonality? You're going to have a tough Q1 comp in health. You've got a tough first-half comp in GRC. And your fourth quarter was very good, so that's a tough comp. So when are the easy comps in 2017?

And back to Trump, do you think Trump has an impact on your healthcare business in terms of hospitals' willingness to buy larger systems? Is there any potential negative there?

Nancy McKinstry

Maybe you can take the seasonality question. On Enablon, I just would like to first reiterate how pleased we are with the business. In fact, I was in Chicago – the business is based in Paris but the U.S. part is in Chicago and I was with them last week. What we got is a tremendously scalable platform, really high customer satisfaction scores, good brand and in a growing segment, so lots of opportunity there.

What you see is two things in terms of – the gap between where we landed at the end of 2016 on revenues and what we had expected was really driven by two or three factors. The first is that the shift to cloud was much more pronounced than we had expected. Again, in the long term that is a very positive thing because you're moving to highly recurring, highly sticky revenues. But in the short term that had an impact on the business. So that really was the biggest factor in that activity.

Second is that, as all of these businesses, where you're talking about very large customer contracts, you do see lumpiness quarter to quarter. So there were a couple of deals that didn't materialize in 2016 that we would expect some of those to materialize in 2017. So I think there is a lumpiness there that we see in all of these large software contract businesses as well.

Patrick Wellington

Is it something, what kind of growth accelerates in 2017 because you get the benefit of those contracts coming in? Or the cloud effect will offset that again?

Nancy McKinstry

Again, we certainly expect that the organic growth rate will be higher in 2017 than in 2016. But how this gets balanced out between the contracts we sign and the movement towards SAS, we'll give you more color commentary as we come out with our half-year results on Enablon. Healthcare ACA and do you want to do seasonality first on that?

Kevin Entricken

Sure, I think on seasonality, indeed we do see more challenging comps in the first half of the year, particularly the first quarter. But I do think they do get easier in the second half of the year. We also do see some of the acquisitions we've done, such as LDI, will be included in organic growth going forward. Those businesses are doing quite well for us on a growth basis. So we do see improvement in the second half of 2017.

Nancy McKinstry

And then on healthcare reform, the Affordable Care Act, which is known as Obamacare, basically there's no specific product offerings that we have that are tied to the ACA. With that said, our focus is very much on helping physicians and hospitals get better outcomes at a lower cost. That's the Holy Grail in healthcare. Our products do just that. We have very strong return on investment kinds of metrics for the products that we sell into the healthcare market. So we are confident that, even if the ACA gets totally repealed, and there's no replacement, that our products will continue to bode well.

With that said, I would say if hospitals start to feel uncertainty, that's never a positive. So in general we hope that there won't be a period of uncertainty for hospitals; but I think we're well positioned overall, given the value propositions that we sell. And we've seen nothing – as we started the selling cycle in 2017, we've seen nothing that would indicate that hospitals are changing their buying behavior.

Patrick Wellington

Just back on seasonality. Obviously it's difficult to call it quarter by quarter, but I always remember, well, it’s saying that if they ever got to 4% organic revenue growth it would be in a sustainable way. They wouldn't expect it to step down. Would you say the same thing about your 3% organic revenue growth when viewed on an annual basis?

Kevin Entricken

One of the things I'll remind you is that our recurring revenues actually saw an increase in organic growth, going from 3% to 4%. And we would expect – we continue to invest in that recurring revenue stream, as Nancy said. I do think that SAS solutions will be the future in many of our businesses. So we'll move more and more to a recurring model.

Nancy McKinstry

Any other questions? Okay, sorry, yes.

Ian Whittaker

Ian Whittaker from Liberum. Just two questions, more broad-based. One, just coming back on Giasone's question about legal. Playing devil's advocate, 45 years ago, yourselves, Reed, were also talking about legal market longer term being a healthy one. So far we haven't seen any indication of growth coming back, nor indeed anything suggesting it will do in the short-to-medium term.

So could you just outline a couple of factors why you are so confident? Why you think legal remains an attractive market longer term? And I guess the second question, just following on from Patrick's question, in terms of Trump and the potential impact there.

On a wider basis, not just in health but across other divisions as well, so one of Trump's main points has been the need, as it were, to cut regulation and red tape, and make business easier. Is that something that would particularly worry you about certain aspects of your business?

Nancy McKinstry

So legal market, why is it attractive in the long term? It's attractive for a couple reasons. One is that this is a segment around the world that continues to grow, in terms of number of professionals. The U.S. market has had a bit of lower law school enrolments over a period; but if you look again over the longer term, the number of people entering the U.S. market, the number of lawyers, continues – will continue to grow, certainly outside the developed countries.

If you look at those places like India, China, lawyers are just really beginning to be a professional class that's growing rapidly. So number of lawyers over time continue to grow. Second thing that we believe, and you see that in the software businesses that we have either built organically or acquired, is that lawyers are beginning to adopt workflow tools. They've been the latest adopters compared to financial professionals and accountants and physicians; but they are adopting them. So as the profession makes those changes, we will benefit from those changes.

So what you're seeing with us, and I would suspect this is also quite true of our competitors, is that we are putting our capital into the segments of the legal market that are growing, and are ripe for workflow tools to take hold, and really harvesting the more traditional and mature parts of the legal business. And we think that, over time, will be a rewarding strategy from a growth perspective.

And then on the notion of deregulation, in general again we help our clients navigate change. So any change is a positive for Wolters Kluwer. I will tell you we've lived through many cycles of regulation and deregulation, and in every one what's been the most impactful effect is the more change, the more clients really need help. So that's what we benefit from.

The other thing I just would say about regulation is please keep in mind that most of our customers are global in nature; and most of our customers, even if they're only U.S.-based, they operate in multiple states. So it's not just federal regulation that matters; it's also what's going on at the state level, what's going on globally.

And so as I've gone out to talk to customers, they – for example, if you talk to a customer that's adopting an Enablon solution, they're going to – if it's an oil & gas company, they're putting it into multiple plants or multiple rigs around the globe. So they're not just thinking about the U.S., they're thinking about the world. And so therefore there's not such a one-to-one correlation between a specific regulatory change and how that might affect our business. Great. Anything else?

Nancy McKinstry

Other than that, I want to thank you very much for coming; and if you have additional questions, feel free to reach out to Meg. And we wish you a very good rest of your day. Thanks.

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