RELX PLC (RELX) 2011 Q4 法說會逐字稿

So, ladies and gentlemen, thank you all very much for coming in and for those of you who are with us on the web, thank you for listening in.

In my mind, there is no doubt that Reed Elsevier has continued its positive momentum through 2011. For the first time in four years, all five business areas contributed to the underlying revenue growth, excluding the effect of biennial cycling in exhibitions.

Underlying operating profits grew well and we delivered a good increase in earnings per share in both PLC and NV. Our cash flow generation has allowed us to invest in our business, while maintaining a strong balance sheet and we're recommending around a 6% increase in final dividend, very slightly below the EPS growth of the two parent companies.

In addition to positive financial progress, Erik has continued to reshape and build his management team. As we explained this time last year, Erik's earlier priority was to renew the leadership of the business areas and four out of five are now under new management.

In the past 12 months, his focus has been on the central functions and he has appointed a new Group General Counsel, dedicated Heads of Investor Relations and Corporate M&A and new Heads of Strategy, Business Analytics and Corporate Communications.

Mark Armour, as you know, our longstanding CFO, announced in October that he will retire at the end of the year. We are conducting a search, both internally and externally, to fill Mark's very substantial shoes.

In addition, we announced today that David Brennan, CEO of AstraZeneca, will be joining our Boards later in the year as a non-executive director and member of the Supervisory Board, subject, of course, to shareholder approval in our AGMs in April.

As a truly international executive with deep knowledge both of medical research and of the world's healthcare markets, David will bring highly relevant experience to our Board discussions and I'm looking forward to him joining us later in the year.

As you can see, we are continuing to evolve both our Boards and our management team.

We will now follow the usual format. Mark will take us through the financial results and then Erik will go into the business areas in more detail and discuss our strategy and outlook for 2012. Thank you very much.

Thank you, Chairman, and good morning. Well, I'm very pleased to report on a year of good financial progress in 2011. Underlying revenue growth was 2% and underlying operating profits were up 5%.

Margins increased by 140 basis to 27.1% and adjusted earnings per share were up 8% for Reed Elsevier PLC at 46.7p and up 6% for Reed Elsevier NV at EUR0.83. At constant currencies, adjusted earnings per share were up 6%.

The growth in reported EPS, that is including amortization of intangible assets, disposal gains and losses and all other items, was 19% for Reed Elsevier PLC and 16% for Reed Elsevier NV.

Cash flow was strong, with a 93% conversion of adjusted operating profits into cash. And the full-year dividends proposed are up 6% for both Reed Elsevier PLC and Reed Elsevier NV at 21.55p and EUR0.436 respectively.

Our balance sheet is in good shape, with net debt to EBIDTA of 2.3 times on a pension and lease-adjusted basis. And our post-tax return on invested capital increased 60 basis points to 11.2%.

I'm presenting the figures today in sterling. The same charts with the euro figures can be found in the appendices to this presentation.

Reported revenues were down 1% in sterling, including acquisitions and disposals and currency translation effects, and flat at constant currencies. Adjusted operating profits were up 5% in sterling and up 4% at constant currencies. Reconciliations of the year-to-year movements in revenues and adjusted operating profits are included in the appendices.

Interest expense was lower, principally reflecting the strong free cash flow, term debt redemptions and expiry of interest rate swaps.

Adjusted pre-tax profits were up 9% in sterling and up 7% at constant currencies. The effective tax rate was up 60 basis points, with proportionately higher profits in the US than in the prior year, giving adjusted net profit up 8% in sterling and up 6% at constant currencies.

Focusing on revenue and adjusted operating profit, underlying revenue growth was 2%, or 3% excluding the impact of biennial exhibition cycling out this year. This reflected an improved market environment in 2011, as well as the impact of new product introduction, expanded sales and marketing and continued portfolio development.

The underlying adjusted operating profit growth was 5%, with costs flat, despite business growth and additional spending on new product development.

Adjusted operating margin increased 140 basis points. This includes a 40 basis point margin pickup between constant currencies and reported currencies, reflecting the impact of our multi-year journal subscription hedging program and other currency translation effects.

The next two charts summarize the constant currency growth rates across our businesses for revenue and adjusted operating profit, both in total and underlying. Elsevier saw underlying growth of 2%, Risk Solutions was up 4%, Legal & Professional up 1%, Reed Exhibitions flat and RBI up 1%, giving the overall 2% revenue growth for Reed Elsevier.

Reed Exhibitions, excluding biennial show cycling, delivered underlying growth of 10%. Erik will go into more detail later on the performance of each business and outlook.

For adjusted operating profit, underlying profit growth was 4% at Elsevier and 12% at Risk Solutions, Legal & Professional was down 2%, with Exhibitions up 2% and RBI up 15%, to give the overall Reed Elsevier underlying profit growth of 5%.

This next chart sets out how the underlying operating profit performance is derived from changes in underlying revenues and cost base. In Elsevier, underlying costs grew 1% against revenues up 2% to deliver the 4% profit growth.

Cost increases from business growth and spending on new product and marketing initiatives were largely offset by ongoing process efficiencies and procurement savings.

At Risk Solutions, underlying costs declined 1%, with business growth and continued investment in new product initiatives more than offset by further cost savings, particularly in technology integration as we completed the ChoicePoint integration.

In Legal & Professional, underlying profits were 2% lower on 1% revenue growth, with underlying cost growth of 1%, reflecting increased spending on new product initiatives and in sales and marketing, mitigated by continuing cost actions.

In Reed Exhibitions, underlying costs were 1% lower, reflecting tight cost control, while funding a record level of new exhibition launches and other initiatives to deliver the 2% profit growth.

At RBI, underlying costs were 2% lower, reflecting the cost actions taken in 2010 and 2011 to reposition the business and improve its profitability, with underlying profit growth of 15%.

In total, underlying costs were flat, to deliver the 5% operating profit growth.

This next chart shows how the Reed Elsevier net profit is divided between Reed Elsevier PLC and Reed Elsevier NV.

While the average number of shares in issue is largely unchanged, the 8% increase in adjusted net profit expressed in sterling, and the 6% increase expressed in euro, flow through to the respective growth rates in adjusted earnings per share.

This next chart sets out the adjustments we've made to the reported IFRS pre-tax figures in arriving at the adjusted figures, which are used as key performance measures.

Of particular note is that there are no exceptional restructuring costs in 2011. The 2010 costs related to RBI restructuring.

The acquisition integration costs principally relate to the final year of the three-year ChoicePoint integration process. They also include costs of integrating other acquisitions, including CBI China and Ascend and Accuity.

Adjusted operating cash flow for the year represented 93% of operating profit, after high levels of capital spending. This conversion rate is 5 percentage points lower than in the prior year, due to the higher CapEx and lower depreciation than in 2010, which follows disposals, particularly in RBI, and accelerated depreciation in 2010.

The increase in capital expenditure in 2011 to GBP350 million reflects increased CapEx in most of our businesses, supporting our electronic information solutions strategy.

CapEx in the Legal & Professional business is particularly high, at 12% of revenue, as we build out the next generation legal offerings and modernize the business system's infrastructure.

Overall, CapEx averaged 6% of Reed Elsevier revenues and is likely to remain at 6% this year, as the Legal business moves through its peak investment period.

Free cash flow before dividends was GBP46 million lower at GBP977 million, principally due to the resumption in 2011 of more normal tax payments, although the tax paid in the year did benefit from the accelerated tax deprecation that's been available under the US stimulus package.

In 2010, we benefited from significant tax repayments from prior years related to crystallized tax losses on the retained US assets of RBI.

I've included here movement in net debt in both sterling and US dollars, as most of our debt is denominated in dollars, reflecting acquisition financing and also acting as a natural translation hedge for the operating profits and cash flow we generate in the US.

The net debt is largely unchanged year on year, with free cash flow and disposal proceeds used to finance acquisitions, most particularly CBI China, Ascend and the GBP343 million acquisition of Accuity, which we completed in November.

Net debt to EBITDA was 2.3 times on a pensions and lease-adjusted basis, down from 2.5 times in 2011 (sic - see slide 16), reflecting the growth in EBITDA and US dollars.

Turning to the balance sheet, there are no major changes in the shape. Goodwill and intangible assets increased with the acquisitions made in the year, partly offset by amortization.

The net pension obligations increased by GBP72 million, principally due to lower discount rates on liabilities. And negative working capital increased further to GBP1.1 billion.

The 60 basis point improvement in post-tax return on invested capital largely reflects the solid underlying profit growth, good cash generation and continued capital efficiency. Portfolio change had little impact on returns in the year.

Lastly, dividends. The equalized dividends, as the Chairman said, are up 6% -- sorry, the final dividend is up 6%, at 15.9p for Reed Elsevier PLC and up 8% to EUR0.326 for Reed Elsevier NV. This gives full-year dividend growth of 6% for both Reed Elsevier PLC and Reed Elsevier NV, at 21.55p and EUR0.436 respectively.

The difference in the growth rates in the final dividend reflects the slight weakening of the euro against sterling since February 2011, when last year's final dividends were proposed.

This offsets an opposite effect in respect of the interim dividend, so that for the full-year dividend, the growth rates are, unusually, the same for both Reed Elsevier PLC and Reed Elsevier NV. The equalization calculation for the dividends are set out in the appendix.

On that note, I will hand over to Erik.

Good morning. Thank you for coming and for taking the time to be here today.

Now I stood up here for the first time as the brand new CEO of Reed Elsevier almost exactly two years ago. And, at that time, we reported on the results from what was a difficult 2009. And we expected to see late-cycle effects continuing in the near term.

But we also said that we had fundamentally high-quality assets, with strong positions in long-term global growth markets and that we would focus on a set of clear priorities to drive value and improve our operating performance in each business and across Reed Elsevier.

And, even though the macroeconomic environment is still uncertain today, I am pleased to say that we have, indeed, improved our operating performance since then and we have made significant strategic progress.

In terms of operating performance, you've already heard that the underlying revenue growth in 2011 was 2%. But if you exclude the effects of biennial exhibition cycling from each of the past five years, the like-for-like underlying revenue growth trajectory looks like this, recovering to 3% in 2011.

And, without adjusting for exhibition cycling, underlying operating profit growth recovered to 5%.

And despite increasing the organic investment in our business and completing a few acquisitions, we've improved our return on invested capital; up 60 basis points to 11.2% for the year.

And we've taken our net debt to EBITDA ratio back into a range that we're very comfortable with, ending the year at 2.3 times on a pension and lease-adjusted basis.

In addition, we've continued to migrate our business online, to the extent that only just over 20% was still in print during 2011, down from over 50% five years earlier.

And we're evolving our geographic footprint, with revenues outside North America and Europe having gone from 12% to 17% of our revenues over the past five years, and with Continental Europe now representing only about 20% of our total revenues.

Now going forward, in an environment where global professional employment will grow across industries, information sources and data volumes are multiplying and the use of the technology is evolving, we want to be a company that sells improved outcomes to professional customers.

And by that we mean that we want to serve professional customers in information-intensive industries; the individuals as well as the institutions or businesses that they work for. We want to deliver demonstrably improved outcomes to those customers; i.e., help them make better decisions, get better results and be more productive.

We want to do this with tools that leverage deep customer understanding, combine high quality content and data with analytics and technology to build solutions that typically cost less than 1% of our customers' total cost base but can have a significant positive impact on the remaining 99%.

We want to build leading positions in long-term global growth markets, primarily through organic investment. And we want to move in this direction to this type of business across all of Reed Elsevier. And, in doing so, leverage our institutional skills, assets and resources across the Company, both to build solutions for our customers and to pursue cost efficiencies within the Company.

And the institutional skills of Reed Elsevier are the skills needed to serve information-intensive professional customers, namely professional customer analytics, data collection, content management and product and platform development, pricing and distribution.

Now we leverage these skills by sharing methods, tools, data, software, infrastructure and people and sometimes by building out central groups to drive them forward. But let me walk through each one of our five major business areas to illustrate what we're doing in each one.

In Elsevier, our priorities are to improve research outcomes and productivity for researchers and their managers through expanded content and integrated analytics and technology platforms; to drive remaining P to E migration in health, leveraging global platforms; and to relentlessly pursue process innovation and efficiency through global shared services.

We made good progress on those priorities in 2011. Our author/editor/reviewer satisfaction and loyalty scores reached an all-time high. And this is not something we say lightly or take lightly.

Just to give you one illustration, we just received our 1 millionth survey response in one of our programs, the journal feedback program, where we measure and track what people in different communities around the world think of us at different times.

And this was reflected in the double-digit growth in article submissions we saw during the year and continued growth in citation share, the primary measure of quality, to an all- time high. We also expanded our global platforms for both science and health content.

And the results in a year were that S&T grew 4%, with good growth in researches and databases; Health Sciences was flat with double-digit growth in electronic revenues across all segments; offset by declines in print book sales to individuals and pharma promotion.

Going forward we expect continued modest underlying revenue growth in 2012.

In Risk, our priorities are to drive growth in insurance through an active new product pipeline that improves carrier economics across their workflows and to leverage our leading database and technology platform to expand into adjacent risk markets and new geographies.

In 2011, our new insurance products were driving good growth. We launched new products, for example in fraud, waste and abuse, and we rolled out international anti-money laundering. And we just brought on our first commercial UK insurance customer as a live commercial customer.

As a result, we saw good growth in Insurance and Business services. Screening slowed down in the second half, but grew 3% for the year. And we saw some declines in the US Federal Government revenue with some contract wind downs that we talked about earlier in the year.

Going forward we expect continued good underlying revenue growth in insurance and business services, while Government and Screening markets remain uncertain.

In Legal & Professional, our priorities are to progressively introduce the next generation legal products, to leverage the new platform globally to drive P to E migration and long-term international growth, and to upgrade our operational infrastructure and gradually rebuild margins.

In 2011, we launched the second release of Lexis Advance in the US, we expanded our international solutions and we divested one of our standalone discovery service businesses.

We returned to slight growth, both in the US and in International, in research and litigation tools and in practice management. And we saw moderating declines in News & Business to corporate customers and in electronic listings. And we stabilized the margin.

Now, we will continue on this path in 2011, but, at this point, the legal markets remain stable but subdued, limiting revenue growth and margin growth potential in the short term.

In Reed Exhibitions, our priorities are to drive organic growth by leveraging global sector groups and technology platforms and to prioritize faster growing geographies and sectors through launches and small acquisitions.

In 2011, we rolled out our Nova web platform to the vast majority of our shows. We launched 43 new shows. And, in 2012, in January, we have now completed the buyout of the leading Brazilian organizer Alcantara Machado, a former joint venture of ours, which will significantly increase our emerging markets presence and, as a side effect, slightly reduce the biennial cycling effects in exhibition.

For the year, we achieved good underlying revenue growth in all markets and you can see here that North America did particularly well in new show launches. In 2012 we will have a positive impact from biennial cycling and we're currently seeing good momentum in annual shows but with some signs of market softness in Europe.

In Reed Business Information, our priorities are to drive expansion in global data services organically and through acquisition, to reshape the portfolio through organic transformation and selective disposals, and to continue to realign the cost base.

In 2011, we built out data services organically and acquired Accuity and CBI China, we transformed one of our leading brands with the combination of Flight with Ascend, and we divested some magazines and services.

For the year we saw continued strong growth in data services, stabilizing leading brands and our margins were up 3.4 percentage points to a record 15.8%.

Going forward, we expect continued good growth in our core data services business offset by softness in print advertising.

Now, as you can see here, we're migrating towards a type of business across Reed Elsevier and within all five business areas. A business type that, as I said earlier, will deliver demonstrably improved outcomes to professional customers by combining content and data with technology in global platforms and by leveraging our institutional skills, assets and resources within Reed Elsevier across platforms and across markets.

Now, we will continue to migrate our business mix towards this type of business across Reed Elsevier and we will do this within all five umbrella business areas through organic investment in transforming our current core businesses; through organic build out on new products and solutions in adjacent markets and adjacent geographies; through selective acquisitions, where we are the natural owner and we can accelerate our strategy with good returns; and through continued divestments, where we're not able to migrate an asset in this direction or we do not see significant future value creation.

Now, in this situation we'll manage an asset for value or exit pragmatically. In 2011 we completed 10 sale transactions for a combined annual revenue of over GBP100 million; very similar to what we did in 2010. And we've sold businesses from within every one of our five umbrella divisions.

So, in summary, over the past two years, and in particular in 2011, we've improved our operating performance and made significant strategic progress.

Going forward, the macroeconomic outlook remains uncertain but, by delivering highly valued products and services to our professional customers and a relentless focus on process efficiency, we expect to deliver another year of underlying revenue and profit growth in 2012.

And now I think we're ready to move to questions.

It's Sami at Exane BNP Paribas. If I may ask a first question on the Legal division, you reported slight growth in the US research business in '11, your main competitor a slight decline. Should we think of relatively very strong competitive performance or of diverging product mixes explaining that difference?

Secondly, could you elaborate more on the sources of cost efficiency gains? How and where would these come from?

And, lastly, if you could comment a little bit more on the UK market for the Risk Solutions division. You've just said you won your first customers. Can you talk about the contribution you expect from the UK to that division performance in '12, please, Erik?

First question, yes, we did describe a return to slight growth in US legal markets and in research. We, of course, try to understand what happens in our marketplace, and with our competitors as well. But I think we have competed head to head with some of the other large competitors for a very long period of time and you very rarely see significant differences in like-for-like growth rates.

And I would not read anything into any one interpretation of a certain short time period in any one year; whether it swings one way or the other. And I think I said something similar over the past two years, when, maybe, it might have looked slightly different. So I would not read anything particular into that. We had very similar growth rates over a long period of time.

You said sources of cost efficiency. The main driver of cost efficiency within Reed Elsevier, in all our areas, is, basically, process redesign. Process redesign; redefining the internal operating procedures for our own professional employees.

We consider Elsevier to be experts in understanding our professional customers, how they use the information, how they operate, and how to make them more productive. We try to apply that same philosophy and approach to our own processes, to our own people, and constantly rebuild our own internal information tools to drive efficiency.

UK Risk -- sorry?

Sorry, can I come back on that? You insisted particularly often today on the professionals, the word professionals. Does it mean that education publishing assets have no longer their place in the Group?

What we look at as a professional -- the definition of professional is a professional employee in businesses, in industries, in academia. It's about professional type of employee within all industries, across industries and across employment environments. So it may be an interpretation of what you mean by the word.

Sorry, UK Risk. Yes, we are just launching our first initial data service in the UK. These are businesses that -- the Risk business [obviously] take a very long time to build; that are there for very good businesses, when you've built them correctly, with the right datasets and the right technology.

So we're very excited that we're starting to do some of these. And, in particular, this one that's just gone live in the UK. But in terms of actual business revenue in the near term, this is negligible in the scale of Reed Elsevier, as well as in the scale of Risk Solutions for 2012.

Thank you very much.

It's Matthew Walker from Nomura. Just two or three questions, please. The first one is on CapEx. You mentioned potentially peaking in 2012, particularly in the Legal side. What do you think your CapEx to sales will be from 2013 onwards?

The second question is, you mentioned also in the slides, volume similar growth in Science, or in Elsevier. Could you give us a feel for what's happening in terms of pricing?

And the last question is on emerging markets. You revealed 17% Rest of World, or outside North America, Europe. What is the actual EM definition? Because obviously, Rest of the World includes some developed markets, like Japan, etc.

Let me start by this. Maybe I'll answer the last two and then, let Mark come back to the CapEx question. But I'll start with the other two.

Volume growth, we talked about in research. And, as you know, we had this at the seminar that volume growth is the main driver of growth within the research business, and will continue to be so going forward.

When you look at pricing, to me, it's something that's a little unusual to think of at this point, because most of our business there is, of course, long-term contracts that are renegotiated with long-term different components of content, different components of usage, different technology and tools included. And their contractual growth rates are built into those. There's really no such thing, any more, as an effective price, other than the effective price per article, per user and so on, that we look at.

So if you look at how that is developing today, the overall contract environment, where we are today, looking into 2012 and forward, is, actually, very similar to where we were a year ago. There's not much of a change in the overall average environment.

Of course, there are lots of changes within a customer, within a region, by type of customer and so on. But if you average out across Elsevier, it's, actually, very similar to a year ago. So, therefore, the outlook is currently similar.

You said on emerging markets. Yes, the 17% does include what we call more mature economies, outside North America and Europe, of course; in particular, Japan, for example. And I think there's always a question of how you define emerging market versus what is not an emerging market, in some of those areas. But I think, broadly speaking, if you think of it as half of that being what you might define as emerging, I think you're probably not far.

And now, let's get back to CapEx, with Mark.

Yes. In 2013, we should see the Legal & Professional CapEx beginning to subside. The exact pacing of that, I think, is a little bit premature to call.

Certainly, in 2012, part of the reason for the continued high CapEx is the international development of the Lexis Advance product we've introduced into the US market.

And longer term, I think I mentioned before that we expect about 5% of CapEx to sales; although that is, of course, slightly dependent upon the portfolio mix. We've been selling businesses, print magazines and things of that ilk, which, of course, don't have such a high CapEx to sales component. So I think, as we get through '12, we should start to see that come down.

It's Vighnesh Padiachy from Goldman Sachs. Just a couple of questions, the first one on the Elsevier margin. The margin has gone up again, and I understand there's FX hedging benefits. Mark, can you perhaps talk about those benefits into '12? Do they unwind a bit? Or can we expect ongoing progress in that margin?

The second question is, could we just have a little bit more color on Exhibitions, and the comment on Europe, a bit of softness? Where is it geographically? Any particular segments? How should we think about that?

Okay. Well, maybe I'll just, first, comment on the margins, and let Mark continue on the hedging. But it's clear that the margin progression in Elsevier is a combination of the relentless pursuit of process efficiency in the global shared services we talk about; and continuously reinventing how we do things, to absorb the volume growth that exists in research.

This year, the larger part for the margin expansion, clearly, was the FX and hedging, even though both were positive this year. Now, that's not always the case on the hedging side, of course.

Yes. In fact, I've included in the appendix to the presentation an analysis of the Elsevier margin. And what that shows is, of the 160 basis point improvement in margin, 70 basis points came from the constant rate improvements in margin, and 90 basis points came from the hedging program, including a little bit from other currency translation effects.

The main impact in the currency hedging program is reflective of the decline in sterling that took place two or three years ago, and the lower sterling rates, when we were exporting product from the UK into Japan, for instance, and the US. So we were hedging the yen and the dollars that would be coming into the UK. And over time, the systematic hedging program, the lower sterling rate gets into the hedging mix. And so that creates the favorability of having weaker sterling and that coming into our results. But that happens over a period of time.

So in 2011, we had about a 3 percentage point pickup in operating profit growth in Elsevier, because of that impact of the weaker sterling getting into the mix. And that will continue in 2012. Not at the same rate; it'll reduce down, because steadily, that lower sterling rate is getting into the hedge mix, but we will -- we do expect a positive impact in 2012. It just won't be as large as it was in 2011.

Yes. Exhibitions?

Yes, you said -- you saw the organic growth rates, excluding cycling, that I showed on the chart, by the different regions, for 2011, which, as you would expect, Europe was lower than what we saw in the other regions.

And, at this point, we're just into the first six weeks of 2012, so it's too early to say what the European economic turmoil will do to this business in the year. At this point, for the last few months, we've seen a slight softness coming in here.

But I think the real issue isn't what has happened. The real issue there is what is happening to the overall European economy, and will it stabilize, or will it go in a different direction? And I don't think our Exhibitions business is any different from any other European business.

It's Mark Braley at Deutsche. To come back to CapEx, in terms of the gap between CapEx and depreciation, both at the Group and within Legal & Professional, when should we think about that higher CapEx feeding into higher depreciation?

And in Legal & Professional, we were, at the half year, hoping for the CapEx to sales ratio to start coming down this year. We're now looking for that start coming down in 2013. Is the CapEx investment in Legal & Professional proving higher and more difficult to execute than you had expected?

Yes. Let me answer the last one first, and then I'll get back to Mark on how it feeds through the P&L.

The CapEx in Legal is not proving any higher or more difficult than we had laid out. We started to lay out this investment plan -- actually now it's back in the second half of 2008, actually, and both in terms of timeline and spend, we're very much on the plan that was outlined at that time, and, in terms of the launches to the market, that you have seen some come through, also tracking on that plan.

So I think I remember saying something like that we were going to bring up the CapEx spend in Legal, and then keep it fairly high for a longer period of time, as opposed to having the mountains of spend that go up and down every 10 years or so, to keep doing ongoing modular investments.

But clearly there is a little bit of a peak period right now, and I think the fact that the peak period stays for a couple of years, is what we had expected. We may not have communicated clearly enough in that way, but that is that -- it is what we expect and we're continuing on that track. And then, clearly, it will start to gradually come down after that.

Yes, amortization will, or depreciation will start to climb as the -- after high levels of CapEx, what you see over time is a depreciation coming up to that CapEx level, but it does take a number of years, of course, because you're amortizing it over a period of years. But we will see a step up in 2012, and, for that matter, further in 2013.

It's Ian Whittaker from Liberum. Two questions, please. First of all, just in terms of the geographical split of profits, you mentioned Continental Europe was 20% of revenues. Can you just mention what it is of operating profits, please?

And then the second question is, just ask you with regards to Legal publishing. On the assumption that you do regard it as core, the question is, I guess, why you would consider it a core business, given when you actually look at it, it does tend to be a drag on overall Group margins, it's a drag on overall underlying revenue growth. You look at the legal industry at the moment, it does have quite a lot of difficulties and there is a question about longer-term growth from a -- in terms of law firms.

So can you just, perhaps, give a couple of comments as to why you think Legal publishing is still core to your business?

Well the first question, yes, I think operating profits by region, that would imply that we operate a bunch of legal -- local businesses, which, actually, most of our businesses are very global.

We operate global platform, global contents; that's with some local press and some local contents. So I would not, probably, try to push that geographic profit split very far. Is there anything you want to add, Mark? It's not fundamentally how we think of our business but --?

No, I missed the very first part of the question, actually. You said in respect of Reed Elsevier or Legal or --?

The profit distribution by geography as opposed to revenue distribution by geography. I personally don't think of those being materially different.

Yes, certainly in terms of the origin of profits, clearly the biggest component of profits is the US.

In terms of margin across businesses, I think Erik's right, Elsevier's probably the best example of that. It's a truly global shared services function, serving businesses wherever they might reside in the year-- in the world.

So I think in terms of pre-tax profits, I've included in the appendix where the regional split of where the pre-tax profits lie. But in terms of amount -- and the same now in Legal, as we roll out global Legal platforms and shared service centers, again we look at it in terms of effectiveness on a global basis rather than a specific territory by territory.

I think the 35% you've got in the appendices, would that be a good rough estimate of the profit split for Continental Europe?

Well, no. In fact, because the bulk of our interest is in the US, I think the US operating profits will be a slightly higher component of that.

So you said Legal. Does Legal fit the definition of a professional information service -- a special information business where people use our information and tools to drive productivity?

If you actually look at what a lawyer does every day, how they prepare, how they use information, what tools they use and how they do it and how they measure productivity and economics of a legal business, you would say, yes, this fits strategically in that. And you also look at somebody doing legal research at a desk versus somebody doing scientific research, the workflow processes, the tools, the information, the technology that we use, the platforms to build them on, extremely similar and often shared. That's on a strategic perspective.

If you then look at the profitability on the cyclical side, you can say, long-term growth of lawyers compared to total population legal, the number of lawyers in America has grown slightly faster than the population growth for a very long period of time, for decades.

And if you look at long-term growth of the legal profession globally, with legal infrastructure rule of law applying to growing economies, you can definitely see that, as a long-term growth thing, this is not a shrinking industry; also with continuing growth on the litigation, regulation, legislation and growing business activity again.

But there's no question that the legal industry today at an absolute cyclical low, there's no question about that. They've stabilized at that bottom, or near that bottom, and right now it's very subdued in many of our markets, in particular in the US where we have the largest fees.

So today it's a stable subdued business that is not growing that much. So it's at a cyclical low end. And we are, of course, at our peak investment spend and peak investment spend and peak operational spend in that market. So if you look at it, therefore, we had a combination of two cycles that put it where it is today.

Can we move on, please?

Richard Menzies-Gow from Merrill Lynch. Three questions, please. Just following on from Legal, really Mark's point on CapEx and so on, given the flow through to depreciation, can you give us a flavor of what revenue growth you think you need to see in that business to really get that 14% margin moving upwards, with that in mind?

The second question's just on Exhibitions. I wonder if you could give us just a bit more around the numbers on the Brazilian deal you mentioned. It sounds like it's going from a JV to consolidated, so probably revenue up and margins slightly lower. If you could just give us some (inaudible) on that?

And then, third part, I just wonder if you could make a comment on the Cost of Knowledge website, just in terms of any interaction you've had with people on that and general thoughts around that. Thank you.

Maybe I'll take -- let me take the last one first and work my way up. The Elsevier petition boycott that you're referring to was started on January 23 in the mathematics community. And the signatories -- it's based on what the signatories claim are three business practices in pricing and forced bundling and restricting the exchange of information; all three of which are based on either misstatements of facts or misunderstanding of facts.

Now, nevertheless, we take it very seriously. We are very engaged here in making sure we address the communities involved in it, the individual stakeholders involved in it, to understand what their concerns are, and make sure that we can address them.

We also have a proactive communication plan in place with our communities to make sure that they understand what the facts are, where they can find out about the facts. And we've posted things internally as well as externally through our enormous network, of course, of editors and editorial board members.

So that's what we're doing with it and that's where it stands at this point.

Now, let's go over to -- you said -- back to margins in Legal. Margins in Legal, yes, we are now at, as we said, stable at 14%. And, in order for that to start to work its way back up, you need to see some revenue growth returning.

We haven't put in one specific number that we say that at that point it turns, but our objective is to rework the processes there and to install new back-office infrastructure system and gradually work our way there. And, clearly, we need for the material revenue growth to start to come back in for that to make a material difference on the margins of Legal.

I'll just comment on the Brazilian joint venture. You're right, in that bringing in 100% of the revenues and 100% of the profit will have a margin impact, whereas before, of course, there were no revenues; there was just our share of the profits.

In 2012, the impact on margin will be less than 1 percentage point. And in 2013, it'll be something similar, maybe a little bit more, but again, around the 1 percentage point mark.

And the Brazilian company, as Erik mentioned, is cyclical in that it has biennial shows which typically come into the odd years rather than the even years, so it will take a little bit out of the cycling effect, which I think will be helpful all round, but there will be some pullback on margin this year.

Having said that, of course, we expect to see a very strong growth year this year, both with the performance of the underlying business, but also the biennial shows cycling in, in 2012.

It's Nick Dempsey from Barclays Capital. Two questions please, first one on Legal. Just looking at the Bloomberg Law, they signed up a deal with DLA Piper's US business. I think it was last week they announced it.

If Bloomberg's going to win major contracts like that, does that mean some displacement for at least one of Lexis and Westlaw? And should we worry about that as a multi-ear drag factor?

And then the second question on Risk. We heard from Randstad this morning that US hiring's up 13% for them in January. Obviously, US unemployment going down as well.

So are you starting to see any positives from that? You don't mention that in your comments on Screening. When would you expecting to see that come through in Screening?

Okay, first question in the legal dynamics in the marketplace. In terms of the actual current dynamics in the business in the marketplace, we have not seen any real difference in the competitive dynamics in the recent past from what we're not used to. It's always been a very competitive industry.

You mention specific situations about announcements on specific customers. Bloomberg is a very large company, been very successful in financial services over a very long period of time. We have a lot of respect for them and take them very seriously. We look at everything they do, of course.

Having said that, in what I consider the core true legal, broad-based legal research platform in comprehensive services, 10 years into their efforts they still don't really compete in that broad-based comprehensive research-based area and I think that that will be validated by what you hear from the marketplace and from customers as well.

There are always individual customers, large customers and small customers, that rotate in and out of preferred relationships and more of this or less of that.

There's always some churn every year somewhere, right, and, clearly, Bloomberg is in somewhat and then will sometimes announce new agreements and sometimes phase down some that they have previously announced. But I don't think it's worth going into any one of the thousands of law firms specifically.

You said US employment. What we're seeing right now is that markets, screening markets, are actually similar to what they were over the last six months. There's no material difference so far.

US employment levels, unemployment levels, have improved slightly, but because churn or attrition has not increased much, that means that the actual new hirings across industries has not moved materially in terms of growth rate.

So what we see right now is, clearly, too early to predict what will happen in the spring hiring season, in particular spring retail hiring season, which is important for us, which comes later in the year.

Steve Liechti from Investec. You gave a good run through in terms of the strategic rationale for Legal, going through your criteria that you gave earlier on. I wonder if could do the same of Exhibitions because it doesn't strike me that a lot of the stuff that you're talking about strategically applies to Exhibitions?

Well, I tend to slightly disagree with you, but let's start with the beginning here. Exhibitions, what Exhibitions is to us. Exhibitions, number one, is a business that creates significant shareholder value for Reed Elsevier and to do any form of separation partition would actually be detrimental to shareholder value. That is very clear to us and I think clear to our shareholders.

It is a good business, has good organic growth throughout cycles and it earns good returns on organic investments, new launches and small acquisitions.

Second, we are, and have been, demonstrably a very good owner of Exhibitions. They have gone from a small company to the clear global leader in exhibitions, both in terms of quantity, in terms of quality and in terms of professionalism and use of professional tools and platforms. And you can see that they have developed very well under our ownership.

And part of that is due to the fact that, strategically, it's becoming more and more similar to the rest of our business.

You're targeting professional end users. That's what it is. These are people who are business professionals working in different industries and these are people who go to an exhibition or do something for a very specific reason.

What they do there, the data they need before and after ,and the electronic platforms to communicate with them at the show, as well as before and follow up afterwards and the commerce surrounding it, are looking more and more like other professional information services.

And the reason they have been so successful is because they can build up their global industry groups, they can leverage their global tools and platforms and they have industry data, and they have practices and procedures that they can deploy globally and launch 43 shows in a year.

Now, having said that, is this a business that has the same amount of shared infrastructure or cost structure, relatively speaking, as our other businesses? Not quite, but it is a business that is good for our shareholder, it increases shareholder value and is better to keep it than not. It's a business that we have managed to run well and it's becoming increasingly more like the others rather than less.

It's Tom Singlehurst from Citigroup. I had actually just a couple of questions on overall cost growth. In the slides, you highlighted that overall underlying cost growth for the whole of Reed Elsevier was essentially zero, flat.

I was just wondering whether you can give a rough estimate of what that figure is likely to be for 2012 or whether that figure will naturally be further up or down depending on the revenue outlook. That's the first question.

The second question is on synergies between divisions because, obviously, we're all giving you a hard time about potentially selling LexisNexis, but at the beginning you said there's a shared set of processes and structures in data collection, data delivery, analytics, etc.

Does that mean that incrementally from here you would want to create more shared infrastructure between divisions, rather than less?

Yes, let me address both these. Cost growth, we -- again, our philosophy on cost is that we continue to rework cost growth and that we work on processes and efficiency and procedures to make sure that, through time periods, we can keep our cost growth below revenue growth within the main businesses that we operate. That's a philosophical approach that we have.

Therefore, if revenues fluctuate slightly, we will rework our processes possibly in a slightly different pace, in a slightly different order. It is not like we'll all of a sudden say, let's take a new step in costs, but we'd rather we work that machinery.

And I think it's important for us throughout the economic cycles to have that philosophy and to stick to that philosophy, which means that yes, we will rework it. We will reshape our cost structure at a pace and in a way that will slightly align with the economic cycle of the markets, and, therefore, our growth rates in revenue.

Second question, shared infrastructure; more or less? I think you -- I think we need to take a little bit of a historical perspective in this, and understand some of the ways that this has happened, and it continues to happen.

If you go back 13, 14, 15 years, Elsevier was essentially a print publisher, and LexisNexis existed as an online service. We built all of ScienceDirect on the LexisNexis infrastructure, hardware and software infrastructure, in Dayton, Ohio, and operated from there. And it very quickly became the world's largest leading electronic platform for scientific information. Very, very quickly it was [close to leverage]. And still today we operate ScienceDirect and Scopus from the LexisNexis campus in Dayton, Ohio. That's just one example.

And then, as you saw, in terms of shared infrastructure, you saw when we bought ChoicePoint that it operated by itself at 24% margins as a standalone Company. And 24 months later, in a much worse economic environment, we integrated, and we operate at 38% margins. So there's a lot of sharing of infrastructure knowledge and other things that go on on an ongoing basis. They're not so big and so dramatic, but it happens all the time, where tools and software are shared.

We have actually built out a very shared infrastructure on hardware data center, soft -- communications, security and so on. So there are many of those examples that are being -- that have already been shared, and that are continued to be shared, and will grow in sharing, going forward. 're by no means stopping.

If you look at the approach that we said here, about relentless pursuit of innovation in our own processes, as well as building things for our customers, we continue to leverage them across.

It's Giasone Salati from Espirito Santo. I think it's three questions. First, could you break down exactly what has -- what is -- what are the one-off impacts on margins from 2011 to 2012 and what we should expect just automatically from a currency consolidation of joint ventures and so on? It is my impression that you're suggesting that margins should be lower, just on the mechanical adjustments.

Secondly, really, really top down. Three years ago, two years ago, we were sitting here, all agreeing, I guess, that Reed Elsevier was under-invested. 24 months later, we have actually margins even higher than what they were two years ago. What is your view on that? Is that you found over time that it was under-invested, but it was also badly managed, and there was plenty more cost-cutting to do, and there is more to come? Or vice-versa?

And lastly, great set of results in the P&L, but operating cash flow is flat, and the free cash flow is down. Could you extend your guidance of growth for 2012 to cash flow? If you expect neutral, or going down? Thank you.

Well, I'm going to ask Mark to take most of those. I just wanted to first comment on the question around many of you saying parts of Reed Elsevier was under-invested, or all of it, whatever some of you said, and that margins are up.

I think these may be two slightly different things. When you look at investment of capital into different pieces of the business, and we said that there was a time period when LexisNexis Legal had ramped up investment, and then took a couple of years to re-think and re-group their future technology strategy, and then started to ramp it back up again; and that's why we're now at a higher level in LexisNexis.

And I think we laid out that pretty clearly, and you could argue that, was it the wrong time to start, was it the right time to start, were they under-invested in a time period, and so on.

Well, clearly, as a new CEO it would have been better if they had started a bit earlier, before I got involved, but that's -- but given where we are, I think we're now doing the right thing on increasing CapEx there.

I think that's slightly different, meaning the investment going up in different parts of the business. I think that's slightly different from, can you operate this business with a focus on cost efficiency, process efficiency, that constantly keeps re-working your main businesses' operating cost structure?

And I believe that, regardless of whether they've been managed well or managed poorly, you can always try to look for further ways to redefine how you operate and run a business. And it's not necessarily at the highest-margin businesses are therefore the hardest.

It may actually be that if you don't think about the margin, but you think of re-inventing your operational cost structure in terms of process innovation, it can be found equally in well-managed companies or poorly-managed companies, or higher-margin or lower-margin businesses.

I'll comment on the one offs in margin. I think the -- maybe it's misunderstood, the comment I made about the hedging benefit. It's a further benefit to margin development.

And, in terms of the comment I made about the Brazilian joint venture becoming a wholly-owned subsidiary, my comment on margin related to the Exhibitions business, not to Reed Elsevier. So, as far as Reed Elsevier overall's concerned, it's a bit lost in the noise.

And I think the comment that Erik made earlier is that the goal is to manage cost growth so that it is lower than revenue growth, which, of itself, has a positive impact in underlying margin as a goal.

And that includes the flow through of higher CapEx and into depreciation?

Yes. Depreciation is just another cost. So the biggest cost base we have is people, and salaries tend to go up. So these are just costs that just need to be managed, and are.

On cash flow, our stated target is for cash flow conversion of 90% plus. We had 93% in 2011, and we've had higher before that.

In 2010 we had high CapEx as well, but we also had -- as we moved through 2010 to '11, we've had the benefit of catching up some of the leakage of working capital during recessionary times. And, of course, we're now getting more into business growth, so it makes improvements in working capital harder, and the CapEx is still high. So -- but we'll -- as I say, the target remains 90% plus, and we think we'll deliver that.

Thank you.

Okay. So we'll take our last question.

It's Andrea Beneventi from Credit Agricole Cheuvreux. Apologies. I still have four questions in my list, and I think they're quite important. The first one is, do you see trading at Elsevier accelerating, in particular at US private non-for-profit institutions, due to higher enrolments, please?

The second one is, what impact do you expect from the liberalization of the ownership of legal firms in the UK, and possibly in the US, which is a big debate at this stage?

The third one is on background screening. How does current trading compare to the cyclical slowdown that you have seen in 2009, or actually at the end of '08, please?

And the fourth one is for Mark. Could you quantify the currency transaction effect on that, at this stage, year to date, please?

Okay. Let me try to take them in the order that you asked them. You said first, trading environment -- Elsevier accelerating. You specifically mention enrolments at, I think, career schools, professional things that feed into our medical environment, is that what you meant?

That's for private, non-for-profit universities in the US.

Non-for-profit, or --

Non-for-profit.

Non-for-profit is what you meant.

Yes.

Okay. No, I mean if you look at not-for-profit enrolment in the US, we haven't seen much movement recently. And it's clearly subdued last year, and it's because they're under pressure in many different ways. But those are small changes, and it's not accelerating; meaning it's not -- we don't see it falling off a cliff any further, and we don't see it picking back up immediately. It's an under-pressure environment. I'd say, probably, broadly speaking, right now it looks not that different from six months ago, or something like that.

On the for-profit it's very different. There was a big cut down last year, because of industry regulation, and changes, and so on. And now they have said, as you may know, that they've predicted probably the decline stabilizing a bit this year. So that's what we see there.

Legal firms. Well, our view is, regardless of how legal firms are regulated in what they can do, our objective is the same. Our objective is to sell information and tools that help them be more productive, and get better results. And regardless of ownership or industry structure, that's our objective. And if there are some changes coming from that, deregulation or different changes, then we will try to adjust our tools to help them in the new environment. That's our philosophy.

You said background screening, is it a fall off compared to '08 or '09? No.

If you look at the background screening business, the way it looks today in the US, we're seeing an environment that's very similar to what you saw a few months ago. We have not seen a fall off at this point. We're seen something that continues to be aligned with what we saw for the last six months.

Last one, refresh my memory?

Yes, that was on the impact of currency transaction effect on --

Right. That's why you said Mark on it.

On the currency hedging program, I think I indicated earlier, this year we had about a 3% benefit to the Elsevier operating profit as the weaker sterling got into the hedging mix. And so that improved Elsevier's operating profit by about GBP20 million to GBP25 million. In 2012 we expect the effect to be less, so I expect it to be probably around half of that; maybe a little bit more, but of that sort of order of magnitude.

Then in terms of other currency translation effects, 1% on $1 or on EUR1 have a broadly similar of effect, of about GBP4 million or GBP5 million on pre-tax profits, moving -- depending which way those currencies -- have weakened or strengthened against sterling.

You're very kind. Thank you.

Okay. Thank you very much for joining us, and I look forward to seeing you again soon.