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Executives

Erik Engstrom – CEO

Duncan Palmer – CFO

Analysts

Vighnesh Padiachy – Goldman Sachs

Nick Dempsey – Barclays

Matthew Walker – Nomura

Sami Kassab – Exane

Patrick Wellington – Morgan Stanley

Giasone Salati – Redburn

Steve Liechti – Investec

Andrea Beneventi – Kepler

Mark Braley – Deutsche Bank

Reed Elsevier NV (ENL) Q3 2013 Interim Management Statement Call November 7, 2013 4:00 AM ET

Operator

Good-day and welcome to the Reed Elsevier IMS Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Erik Engstrom, CEO. Please go ahead, sir.

Erik Engstrom

Good morning and thank you for joining us today. I’m Erik Engstrom, CEO of Reed Elsevier and with me is Duncan Palmer, our CFO. I’ll make a brief introduction and then hand the call over to questions.

As you may have seen this morning, positive online revenue growth trends were maintained across all major business areas in the first nine months of 2013. And underlying revenue growth for the group was 3% both including and excluding the effects of biannual exhibition cycling.

We continue to revolve our portfolio and since the interim results we have announced a number of small content and data acquisitions and completed several additional disposals across business areas. Our financial position remains strong with good cash generation. We’ve completed ₤550 million of share buybacks so far this year and intend to complete a further ₤50 million by the end of 2013 to reach the previously announced full year total of ₤600 million.

The full-year outlook remains unchanged with underlying revenue, operating profit and earnings growth on track for the full year. Now turning to the business areas, scientific, technical and medical grew 2% with our primary Reed subscriptions, scientific databases and tools and clinical solutions, all growing well.

Risk solutions grew 8% with good growth across all business segments. Strong growth in major data services drove 3% growth in business information. Legal, grew 1% in subdued markets with online growth largely offset by print declines. The roll-out of new platforms and applications is progressing well.

Reed exhibitions grew 5% or 10% excluding biannual cycling with growth across all major geographies. The strong online growth rate in the first nine months benefited from around 3 percentage points of positive timing and mix effect, which are expected to unwind in the full year.

And now operator, we’re ready to take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Thank you. We will take our first question today from Vighnesh Padiachy from Goldman Sachs. Please go ahead. Your line is now open.

Vighnesh Padiachy – Goldman Sachs

Yes, hi, good morning, Erik and Duncan. Just a very quick question on the risk solutions, you’ve had a similar performance to H1, you had cautioned in the H1 results that it may moderate the growth in the second half. Can you just talk to the different moving parts and how you see the full-year outlook there for that division?

Erik Engstrom

Yes, I mean, the trends that we saw in the first half have basically continued for the nine months year-to-date. What we have seen which I think we mentioned is at the half year what the question about mortgage refinancing activity slowing down a little bit in the U.S. market in general and that has actually happened and continues to have a slight negative effect. But on the other hand, we have other new solutions that would have been selling well and we have had good demand for other solutions which means that the growth rate year-to-date is still 8% on an underlying basis.

But we do highlight here that there is some uncertainty in the smaller parts of this business that relates to financial services or mortgage refinancing as well as some of the issues that relate to U.S. government that may still fluctuate a little bit for the remainder of the year. But in general, that business is doing very well and we’re very pleased with it.

Vighnesh Padiachy – Goldman Sachs

Well, it’s a sort of 7% to 8% for the full year is achievable what you mean?

Erik Engstrom

Well, I mean, as you know, we don’t focus on these costs to give any forward specific numbers. But I think it’s fair to say that a room for fluctuation, at less than a year, is now limited even though there are a couple of these trends coming through that we talked about.

Erik Engstrom

Okay. Thank you very much.

Operator

Thank you. We will take our next question today from Nick Dempsey from Barclays. Please go ahead, sir. Your line is now open.

Nick Dempsey – Barclays

Yes, good morning. I’ve got two questions please. At this time, last year Erik, I think you talked about how the environment for genuine use was going into that November/December renewal season. So, it would be interesting to hear whether there is, any changes to the pattern thinking about next year for Elsevier?

And the second question, in exhibitions you talked about a strong outlook in other markets but slightly below recent high levels. Is that just to comment about the last couple of the months in this year or can we think about those other markets slowing a little into next year versus how they’ve been this year? Thanks.

Erik Engstrom

Okay. Yes, the first question environment for renewals in the – in our scientific business, there are always some fluctuations year-on-year in specific customer types, in specific geographies.

But if take a step back and look at where it is today, just entering the renewal season having started some this year versus what we’ve done over the last year or two years, quite frankly or couple of years, broadly speaking I think net-net, it’s in a very similar place. And we have not detected any material differences in terms of the timing of the profits or how it’s working to it so far. But it’s very early in the season.

The exhibition, if you look at where we are today, the market markets here are mostly what many people call developing markets or the higher growth economies. And while we have there been very strong growth with the past couple of years, often well into double digits, I think it’s clear that general economic environment, some of those markets is growing very well still but a little less maybe than it was before.

And what we’re seeing as you said, over the last couple of months, we are seeing that – this sort of the – the inherent growth rate for us may see a few percentage lower there right now are going forward than it has been over the last couple of years.

But that might mean for them that if they had a country that was operating in the high teens, before maybe it’s now operating more like the low teens or something out to the mid-teens might now operate just at middle double digits or something like that. That’s in general what we’re thinking some of those markets. So, where this goes a year out, I don’t even want to predict, that’s more of a macro-economic environment question.

Nick Dempsey – Barclays

That’s very clear, thank you.

Operator

Thank you. We will take our next question today from Tom Singlehurst from Citi. Please go ahead, your line is now open.

Unidentified Analyst

Good morning Erik, (inaudible) from Citigroup. I had one and half questions I suppose. The first, main one is to with momentum in the second half. Back in the 1H-Q, specifically mentioned in the outlook payment that you closed out positive momentum into the second half.

But if we read the improvement in underlying growth, just as a one-off blip on timing, in exhibition there doesn’t seem to be any sign of increase. I suppose, just wanted to go back and check whether you’re still comfortable with the IPO of better momentum more broadly. And then, specifically on the half special relative exhibition is sort of the same. Is there genuinely no underlying change that spike up the growth in 1H the nine-month periodic ways?

Erik Engstrom

Yes. First, your question around momentum, I think if you’re – if you want to say it very simply, the growth momentum across our business is after nine months, it’s virtual identical to what it was after six months. So it’s not that the momentum have accelerated or slowed the way we see it in our overall business on a like-for-like basis. So the growth trajectory we had after six months is the same growth trajectory we had in our business after nine months.

Then on your second question, in exhibitions, if you say what have we seen so far in the year, there again in nine months, if you strip out mix and timing shifts and other issues like that – again the true like-for-like growth effects in exhibitions are again very similar up to nine months to what they were after 6 months.

And we did already cover in the previous question this around what are we currently seeing right now in some of the emerging markets, right now, some of the people have commented that there have been a slight reduction in the inherent growth rate that possibly coming through but still there is firm growth double-digits or higher for us.

Unidentified Analyst

And just a follow-up, as you’re getting back, you did talk about better momentum back when should we just assume it not happening or is that all – should we just mean, should we just – as you’ve said – but you’ve said better momentum you mean the renovation? Thanks.

Erik Engstrom

Yes, I’m not sure I specifically remember what a better momentum. But if we did mention, if we did use that word, I don’t think that was intentional. We think we have positive momentum this whole year, we said that we have positive momentum in the first quarter and the first half and the first three quarters, we have continued with what we think is a positive revenue momentum in all business areas and the inherent like-for-like growth rates after nine months are very similar to those we saw in the first half. They have not slowed down and really not picked up, the growth rates.

Unidentified Analyst

That’s clear. Thank you.

Erik Engstrom

Yes.

Operator

Thank you. We will take our next question today from Matthew Walker from Nomura. Please go ahead, sir. Your line is now open.

Matthew Walker – Nomura

Thank you very much. Two questions please. The first thing is on legal. Do you see any big changes in the legal, I noticed that Thompson had slightly negative growth in legal. Could you explain the difference between your positive growth and there slightly more muted growth and explain where do you think legal is actually going to get back next year or not?

And my second question is on around, the health to core, and the big acquisition that Experian made yesterday possible. Can you say whether you intend to compete with those in the area on the payment side? And whether you, I think in the past you’ve talked about small bolts on in any vertical do you feel the need to change that and start making larger acquisitions or are you still very happy with just doing small bolts on acquisitions?

Erik Engstrom

Okay. The first question on legal, we have not really seen any change in trends in the marketplace or in our business this year. It think we’re all looking for signs that the legal market at some point will pick-up to return to we think is a long-term growth trajectory again. But if you look at what we see or any market indicators, there has not been anything that signals that market trend is really picking up in a sustained basis, it seems like up that quarter and then down a little bit the next quarter.

So, when it comes to the question around Thompson Reuters, I really don’t know what exactly is underneath their numbers, but I have commented before that I think between a large – the large competitors in this business, we have different strengths that we emphasize in the marketplace. And over many years, our growth rates have been very, very similar. And any fluctuation that you might see on any six-month period or even a 12-month period of a point or two or so, I don’t think really is material or signals anything specific.

When it comes to the outlook for next year, again, we have not seen any signs at this point that the environment is changing, either market environment or the competitive environment. You asked about the health side specifically, you said experience acquisition.

Again, I’m not an expert on everything they do but I do experience focus primarily into the consumer credit and the revenue cycle, the provider, providers, health providers revenue cycle is really where they’re heading with it. That is not a side of healthcare that we have focused on in our risk or fraud solution. We have been focusing on their area. So this is not an area where I immediately see it having any impact or there is also something that we would engage in the near term.

You asked the question around, also around acquisition scale. We see our strategy is continuing the way we have articulated, which is primary focus as to drive organic revenue growth by increasing consumer value and transforming our own businesses and supporting that with small acquisitions where we are the natural owner.

It’s very possible that as we do that we continue to buy companies that are in the tens of millions, the way we have over the last few years. But I’ve also said that we might once in a while find a business that’s in hundreds of millions. Over the last four years, the only company we have bought that have been in that scale was of course Acuity that we merged our banks ourselves in that. Even though the opportunities might come and go, I see the patterns remaining the same as what you’ve seen over the last few years.

Matthew Walker – Nomura

Thank you very much.

Operator

Thank you. We will take our next question today from Sami Kassab from Exane. Please go ahead. Your line is now open.

Sami Kassab – Exane

Good morning everybody. First of all, can I ask you whether you have seen signs of improvement in the European exhibition markets, especially in France? Secondly, can you remind me of the contribution of prints within legal and regulatory and more specifically the contribution of print in North America?

And lastly, it looks like you’ve made some good progress in integrating risk and RBI. Can you quantify the cost savings you think can be achieved by combining both platforms? Thank you, Erik.

Erik Engstrom

Okay. Let’s see, European exhibitions, we have not seen any sign coming through in our business metrics of a pick-up. And you asked continental Europe as in particular France, which is of course a large market for us. We are not seeing a pick-up. And I think it’s important to remember that typically exhibitions is not a leading indicator, it more follows business sentiment and business activity little bit heading in both down into economic downturns and out of them. And therefore I’m not surprised that we haven’t seen anything that goes in that direction.

The second question you asked was on legal, right, French components?

Sami Kassab – Exane

Yes, exactly.

Erik Engstrom

And basically we have just about 20, below 20% of legal is in print. And clearly that’s slightly lower than that in the U.S. because it’s slightly higher than that in some of the international markets, but it’s not materially higher because North America is still significant part of the business.

The last question was the progress around integrating risk and business information. Yes, it is progressing. We are still operating the way we said at the half year, where we have one global chief executive for that group, we have one global head of technology overseeing that combined group and one global head of Human Resources for example. But we still operate the two separate finance departments and therefore report on them separately.

When it comes to the question around cost savings, they are not material to be honest because the primary driver of this decision was to get the risk solutions together with the business information assets and footprint so we can leverage the technology and the database is in the risk business combined with the international footprint of RBI to create a platform for international growth for risk over time as well as to get the risk technology and skills embedded more in the major data businesses in RBI. So it’s a long-term revenue driving strategy as opposed to cost reduction strategy.

Sami Kassab – Exane

That’s very clear. Thank you. Can I come back on the first question and ask whether you’ve seen any signs of improvement in the North American exhibition markets?

Erik Engstrom

Well, the North American exhibition market have of course been strong for the last two or three years now. I mean, we have seen revenue growth – organic revenue growth in North America that fluctuates between high single digits and low double-digits for two or three years, right.

So, if you look at the strong growth, let’s call it high-single digit growth, we have not seen that fluctuate or change or pick-up in any way over the last six months if that’s what you’re looking at – sort of the more recent update. It’s similar to what it’s been over the last year or two.

Sami Kassab – Exane

Thank you very much, Erik.

Operator

Thank you. We will take our next question today from Patrick Wellington from Morgan Stanley. Please go ahead, your line is now open.

Patrick Wellington – Morgan Stanley

Yes, good morning everybody. Couple of things, firstly Erik, if I read your half year statement, you said the operating momentum in our business remains positive so there wasn’t a sort of better statement in there. So, be reassured your memory is good.

Secondly, could you break down if possible a little bit of the growth between the science and the health business, are we as yet seeing any positive organic growth in health? We observe these days that it’s not as clearly the fastest growth business of 4%. So, as you change the shape of that business is there a possibility of a bit of an improvement in that direction?

And then finally, the buyback is the same size as we saw before. And arguably your pace of disposals, which has been very fast has slowed down a bit over the last couple of months. Are we likely to see more disposals out of the sort of print end of RBI or anywhere else over the next two or three months?

Erik Engstrom

Yes, okay. First question, on science and health, well, if you look at that business as a whole, we – as you know, eliminated the structure and the attempt to even try and attribute the revenue streams between those historic segments now about 18 months ago. And the reason was that it became very hard separate, they were all sharing platforms in many of those businesses. So we’ve stopped doing that.

And therefore, but the way I can describe it is this, that inside health the clinical decision support, the sort of clinical solution segment there that you mentioned was clear for example, they talk about the clinical solutions that solutions that process is growing double-digits for us. And we think that’s similar to the market opportunity into other players and have been doing that. So, that’s doing very well.

The research related side of health for us, is growing very much like the research related side in science, the databases and tools are similar across. There are two issues that are hurting Elsevier’s growth rate and they cut across segment. They relate to print book sales particular to individuals and particular in educational markets, they are declining, they’re continuing to decline at similar rates to before.

So print-book sales are of course – they had a large component in North America and in Europe, declining mid-to-high single digits over the last couple of years. As well as pharma promotions, the print pharma promotion in particular. Those are declining in mid-to-high single digits.

So if you do the math, you can say that those together might represent close to 20% of Elsevier. And with those declines you can see that that was affecting the growth rate.

At this point, if you ask me today are those trends any different from what they were a few months ago, I’d say we have seen no sustained sort of change in those trends or no trend rates over the last six months. Of course we’re all hoping that this will change over time.

When it comes to the disposals, we have continued to sell our businesses, and the number of transactions in the second half is likely to be very similar to the number of transactions in the first half. However, in the first half we had one very large one, that closed in the screening business and we had a couple of others that might look bigger. And therefore sort of the individual sizes of the disposals maybe smaller in the second half.

So, if you look at it going forward, I expect that to continue to do what we have done, which to look at every asset by asset to see if this is something we want to keep or exit. But again, you’re likely to see more of the volume being in the smaller asset category, the ones that literally are assets in the tens of millions. And we don’t have very many left, that could be of the scale of the screening.

Patrick Wellington – Morgan Stanley

Great. Thank you.

Operator

Thank you. We will take our next question today from Giasone Salati from Redburn. Please go ahead. Your line is now open.

Giasone Salati – Redburn

Hi, good morning. I guess I’m following onto Patrick’s question. On, in terms of disposals when we take a step back and look at 3% of incremental growth this year. Surely we could see higher growth rate if we were more aggressive on disposals of some underperforming businesses. At what point do you think you have – in the current economic environment with the organic growth to say 3% are down there. Or at what point do you think you might start another cycle of assets of refining your asset base to achieve the higher revenue growth?

Erik Engstrom

Well, the way we look at it is that the primary decision driver for whether we dispose an asset or not, it’s whether we think that a specific asset can be transformed into the kind of asset we want to be in, a real information solution that delivers the increasing value to customer. And if we can do so in a way that creates value for shareholders.

And in some cases that has a positive effect on near-term organic revenue growth, in other cases, it has a negative effect. We have sold some businesses that had organic revenue growth and some large ones that had organic revenue that was higher than Reed Elsevier’s average.

But we also sold the lots that were lower. We sold total jobs and we sold screening that were above the average and we sold for example, and we sold lots of small print assets that were lower.

So, the near-term impact on underlying revenue growth is not the primary driver. It’s the long-term asset type, the opportunity to transform it, how it delivers value to its customer and if we see that the shareholder enhancing value creation transformation or not.

Giasone Salati – Redburn

Okay. And that’s to say you’re not happy to discuss a long-term organic revenue growth or an organic revenue growth that you think would do, would be appropriate to achieve the shareholder value?

Erik Engstrom

No, if you look at any type – if you take an underlying revenue growth in our business, in any given year or in any given period of years will depend on to one side what we view to drive our business, how did we operate it, the kind of solutions we offer to our customers. And to probably an equal expense what’s going on in the macro-economic environment and what’s going on in our specific customer market at that time.

And therefore, we’re going to focus on the first and that’s what we’re going to do – put all our efforts and energy into it, and not trying to forecast or predict the fact to come up with a total number.

Giasone Salati – Redburn

Okay. That’s very clear. Thank you very much.

Operator

Thank you. We will take our next question today from Steve Liechti from Investec. Please go head. Your line is now open.

Steve Liechti – Investec

Good morning, chaps. Just on, first of all, first question on legal. Can you just educate me here, if we were expecting or if we’re seeing financial markets picking up on quarter activity in terms of M&A picking up? Shouldn’t that work through to the legal market overall or is it offset by other stuff going on overall? That’s the first question.

And then secondly, could you just tell a little bit more deeply into specifically Brazil and China, in the exhibition side to give any feel for specific numbers there, I mean, you mentioned obviously just a lower percentage rise. But just, I’m interested in Brazil and China specifically please? Thank you.

Erik Engstrom

Okay. I’ll just start with the legal question. Over time, if you see the financial markets picking up and the M&A activity picking up, that over time should lead to law firms involving that activity being busier and therefore ultimately having an impact on the activity of law firms, their use of information therefore, the people would supply them with that information like us. So I think that’s absolutely right.

But it’s not a leading indicator, it’s a lagging indicator and it’s almost two steps removed. First, it drives law-firm activity and then the law-firm activity picks up in a sustained way then it comes to us. So it’s not – we are not the leading indicator there. Over time, there will always be some cyclicality in the legal markets that relate to these activities. But there are also other long-term drivers of legal information which has to do with increasing regulation legislation, also increasing litigation over time, which has some cyclicality in it as well.

So, I think you’re absolutely right but it’s not an early indicator or a leading indicator. Brazil and China in exhibitions, they are two countries that fit exactly with the explanation I used before for developing markets and other markets which is that growth there for us is still strong. And all the indicators we have right now is that it continues to be strong albeit a few percentage points below where they’ve been before.

So the story that we had before around, if a country like one of those has been in the high teens, it might right now look like it’s going to operate more like in the mid, in the low teens right, from the high teens to the low teens or if it’s been in the mid-teens, it looks more like it’s now operating at to the just about double digits.

So, we consider those to be very good long-term growth markets and still having strong growth even though they are going through cycles in terms of growth rates over the last two years as well as right now. And we’d like to do that in the future.

Steve Liechti – Investec

Great. Thanks.

Operator

Thank you. We will take our next question today from Andrea Beneventi from Kepler. Please go ahead. Your line is now open.

Andrea Beneventi – Kepler

Yes, good morning, a question on please. I’ve seen in some industry magazines, that news on a restructuring plan involving Martindale-Hubbell, following the joint venture we need on the plans. And I’m wondering if that information is reliable and if so, if you could develop a little bit on what we should expect on the profitability of the legal business after the change? Please.

Erik Engstrom

Yes. I mean, the Martindale-Hubbell, our web based marketing services’ joint venture has been announced and completed. And we are now, we have now transferred our assets into a joint venture that’s being operated there. And as a part of that combination that joint venture has now done some alignments of cost structures and we’ll continue to evolve it’s operations and transform that business just like we’re transforming our other businesses. This is too small, a part of legal to have any material impact on the business overall, in any metric that we share in terms of total legal business performance.

Erik Engstrom

Thank you Erik.

Operator

Thank you. We will take our next question today from Mark Braley from Deutsche Bank. Please go ahead. Your line is now open.

Mark Braley – Deutsche Bank

Yes, hello. Just a question on sort of how you feel about the balance sheet looking into 2014 potential for further buybacks and to be specific, one for Duncan. How much is the outstanding refinancing need for 2014 or have you now affectively pre-funded all of that?

Erik Engstrom

Okay. I’ll let Duncan answer this, the second piece. But maybe I’ll just first talk about the question around the balance sheet and buyback in general that as you know, we’ve said before that we are comfortable in our current leverage range. We said that when we were at 2.3 times net debt to EBITDA on a pension and lease adjusted basis. We’ve said that at 2.2 and at 2.1. So, we’re clearly comfortable in the range that we’re operating this business.

And therefore, as we said earlier this year, that with a strong balance sheet and strong cash flow characteristics and with our typical average acquisition spend, covered by free cash flow that we will over time take a pragmatic approach to making sure of the value compounding in the business translate into real shareholder value.

This year, we thought that the most pragmatic way to do that was to increase our share buybacks by a certain amount beyond the growth disposal proceeds. We have not yet made any decisions on what that will be or how that looks for next year, what we’ll do for next year at all. But I think that what we have done this year is an approach to thinking about it that I think reflects how it is that we will look at this in the future whether that would mean specifically more buybacks or not that’s something we haven’t decided on and we’ll look at early next year.

Mark Braley – Deutsche Bank

Okay.

Duncan Palmer

Yes, on the debt refinancing, I mean, we have about $900 million of debt that comes due in 2014. We have not pre-funded that, we don’t really see any strong need to do so. We have plenty of capacity both within our existing lines and also to access markets that will mean that we will be able to refinance that amount of money in ‘14 fairly in a fairly straight-forward manner.

Mark Braley – Deutsche Bank

Okay, great. Thank you.

Erik Engstrom

Okay, thank you, operator. I see as there are no further questions. So thank you for joining us today. I look forward to speaking to you again soon.

Operator

That will conclude today’s conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.

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