Moving the Dial: Q&A with Wolters Kluwer CFO Kevin Entricken

Kevin Entricken has been CFO of Wolters Kluwer since 2013, having joined the global information services company in 2003. Before that, he spent five years at information publisher Reed Elsevier and, prior to that, spent eight years at EMI Music Publishing.

In one way, deciding on how to spend your organisation’s cash could be compared to moving the dials in a recording studio: do you want to invest more in this sector or dial down dividends to shareholders. 

As Kevin explains, capital allocation is really the most important duty of the C-suite.  

Q. How do you personally define capital allocation? What does it actually mean?

Capital allocation is the primary job of the senior management team as a company, that’s probably where we add the most value. At Wolters Kluwer, we have, I would say, three priorities for capital allocation: investing in the business, both organically and through smaller bolt-on acquisitions, paying down debt and rewarding our shareholders. So we try to strike the right balance between those. 

Q. Going back to your music business career, it’s like you’re at a recording desk with three dials, one being investment, another paying down debt and then paying dividends to shareholders. So is it a question of deciding which dial you’re going to move up and down?

I do think it's a balancing act. Right now, we invest about 11% of our revenues in innovation, new products or product enhancements. And that really is quite critical to the success of the business because the things that I'm investing in today will probably not come out to the market until two, three years from now. At 11% of our revenues, I think we’re striking the right balance between making sure we are being innovative and building the business stronger going forward.

Q. How do you decide what to invest in? 

Our preferred method is investing organically, but sometimes there is an acquisition out there that really helps your speed to market in a way which would take much longer doing it organically.

We certainly look to buy businesses that are EPS accretive in the first year, which means we usually don’t buy loss-making businesses, and then we look to make sure we get an attractive return. So with that sort of financial discipline and the strategic component of what we're doing, I think we do try to strike the right balance.

Q. So on the acquisition side, you’re looking for businesses that are already profitable?

Sometimes we do buy businesses that are just about breakeven, so they’re not a drag on your EPS. They may not be contributing to your EPS in the early stages, but typically once we integrate them and bring them as part of the portfolio, we do get a return on invested capital which is attractive.

Q. Can you give some examples of acquisitions involving artificial intelligence (AI) technologies?

We've been investing in AI technologies for a decade now. In fact, about half of our digital products do have some form of our AI. We recently bought accounting software products from the Isabel Group in Belgium.  

Q. If 11% of revenue is spent on internal investment or acquisition, what percentage is spent on paying down debt or giving returns to shareholders?

Right now we reward our shareholders in two ways. We have a progressive dividend policy, which means our shareholders should expect their dividend to increase every year — good year, bad year, good economy, bad economy, strong dollar, weak dollar. Their euro dividend will increase every year. Over the last several years, our dividend has been increasing about 15% a year, a little bit ahead of our EPS growth. 

We've also been doing a share buyback programme to the tune of a billion euros. So this year, my free cash flow will be somewhere around €1.2bn (US$1.3bn). I’ll actually be returning more than my free cash flow to our shareholders due to the strength of our balance sheet.

Q. What would your advice be to other CFOs wrestling with capital allocation? What should they have in front of mind when making these crucial strategic decisions?

Striking the right balance is important. I don’t think that you can use a cookie cutter approach because different businesses are in different phases of their investment cycle.

With a business such as ours, where customers are buying year in, year out, our cash flows are fairly predictable. Which means that with the strong balance sheet we have, we can invest but also reward our shareholders. 

I do think that's one of the things many of our owners appreciate about Wolters Kluwer, that consistency.

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