Reed Elsevier NV (NYSE:ENL)
Q4 2013 Results Earnings Conference Call
February 27, 2014 04:01 PM ET
Tony Habgood - Chairman
Erik Engstrom - Chief Executive Officer
Duncan Palmer - Chief Financial Officer
Sami Kassab - Exane BNP Paribas
Nick Dempsey - Barclays
Mark Braley - Deutsche Bank
Matthew Walker - Nomura
Vighnesh Padi - Goldman Sachs
Andrea Beneventi - Kepler Cheuvreux
Giasone Salati - Redburn
Margo Joris - KBC Securities
Alex DeGroote - Panmure Gordon
Tom Singlehurst - Citigroup
So ladies and gentlemen, welcome to Reed Elsevier's 2013 Results Presentation. And for those of you who've made it in on this busy morning thank you for coming. And for those of you who are listening on our website thank you for joining us.
I hope you’ll agree with me these were good set of results as we have continued to deliver on the longer term strategic and financial priorities. We had underlying revenue growth across all our business areas with acceleration of growth in both risk and business information. Underlying operating profit and earnings per share were well up on 2012 with the former benefiting from organic development and portfolio reshaping while the latter also benefited from lower interest charges and from our share buyback program.
These buybacks have been achieved as a result of the strength of both our cash flow and our balance sheet and you would have seen from our announcement the specifics of the further buybacks that we are planning in 2014. You would also have seen that we are recommending full year dividend increases broadly in line with our earnings per share increases across the 2 parent companies.
As you all know we announced in September that Duncan Palmer regrettably has given us notice because he had to return to the U.S. for personal reasons. In early January we announced that Nick Luff would be joining us as CFO later this year when he is released from Centrica. We will obviously update you when we have further news on Nick’s joining date. Meanwhile, Duncan continues in post and he will now present our results and then Erik will elaborate on the business developments in more detail. Duncan?
Thank you Tony and good morning everybody. I would like to start this morning with the financial highlights for 2013. Our primary measures of revenue and operating profit growth are on an underlying basis which exclude the effects of currency movements and all of the acquisitions and disposals which took place in the past two years.
In 2013 we maintained the trends and financial performance delivered in 2012. Underlying revenue growth was 3%, excluding the effects of biannual events cycling in our exhibitions business or 2% including the impact of cycling. Underlying adjusted operating profit grew 5%.
Adjusted earnings per share growth was 7% in constant currency terms with the sterling denominated PLC adjusted EPS up 9% and the euro denominated NV adjusted EPS up 5%, reflecting a stronger euro during the year. Reported earnings per share were up 9% for PLC and 5% for NV. Dividends for the full year were up 7% to 24.6 [points] for PLC and up 8% to €0.506 for NV. Return on invested capital increased by 0.4 percentage point to 12.1%. Our financial position remains strong.
Net debt to EBITDA after adjusting for the net pension deficit and capitalizing leases was 2.1 time compared to 2.2 times at the end of last year. This ratio and other credit metrics are comfortably within the range of our credit rating and offer us ample financial flexibility. Operating cash conversion was 97%, consistent with our long-term target of over 90%.
I will now go through the profit and loss statement in a little more detail. I’ll present the results in sterling and in the appendix you can find the equivalent euro results.
As we have discussed previously, the revised IAS 19, relating to pension accounting came into effect from the 1st of January 2013. Accordingly 2012 numbers have been restated on the new basis throughout the presentation. This accounting change has no impact on Reed Elsevier's balance sheet or on cash flows.
Revenues was £6 billion and adjusted operating profit was £1.7 billion with adjusted operating margin increasing from 27.6% to 29%. The net interest expense was £39 million lower at £177 million reflecting the impact of term debt refinancings of lower rates, a reduction in average gross debt and favorable rates on short-term debt.
The adjusted effective tax rate was 23.5%, unchanged from the prior year. Adjusted net profit increased by 7% to £1.2 billion with reported net profit up 6% to £1.1 billion.
Now I'll show a reconciliation of reported net profit to adjusted net profit. We present adjusted financial performance metrics to aid the understanding of underlying operational performance and to facilitate period-over-period comparability. We consistently adjust for the amortization of intangible assets, which results from acquisitions, such as brands, customer lists and content. Other tax credits in 2013 of £300 million include a deferred tax credit of £221 million from the realignment of certain global business assets. 2012 included an exceptional tax credit of £96 million.
Turning to earnings per share and dividends; adjusted earnings per share increased by 9% for PLC and 5% for NV, the higher growth for PLC reflecting sterling’s year-on-year decline versus the euro. Our policy is to grow dividends subject to currency considerations, broadly in line with earnings per share while maintaining earnings dividend cover of at least 2 times over the longer term. Consistent with that policy we are proposing equalized final dividends that deliver a 7% increase in the PLC at full year dividend and 8% for NV, resulting in cover of 2.2 times and 2 times, respectively.
I'd now like to focus on the financial results of our major business areas. All five business areas grew underlying revenue in 2013. The differences between underlying and constant currency growth rates reflect the impact of acquisitions and disposals in 2012 and 2013. There were disposals in each of our businesses during the course of 2013 but the effect was most significant in risk solutions where we completed the sale of the pre-employment screening business in the first half; in business information, where we made a number of disposals during the year; and in legal, where we spun out the Martindale Hubbell US lawyer directory into a joint venture in the second half of the year.
The overall net effect of acquisitions and disposals was to reduce 2013 revenues by £293 million. Total pro forma revenues for the businesses disposed off in the last four years has been over £800 million. Risk Solutions demonstrated strong underlying growth of 8%, up from 6% in 2012 and business information improved underlying growth to 4%, up from 2% in 2012.
Looking at adjusted operated profit performance, we can see that underlying profit grew at or ahead of the rate of underlying revenue growth in all five business areas. As with revenues, the differences between underlying and constant currency growth rates reflect the impact of acquisition and disposal activity most significantly within business information.
We have conducted a thorough review across Reed Elsevier of our central costs and assets share across our businesses in order to reflect the way our businesses now operate and to give us clear line of sight into their performance. As a result of this we will be making some changes to the reporting of adjusted operating profit by business segment. These changes are effective from January 2014.
Reed Elsevier has previously maintained unallocated net central costs of about £40 million to £50 million per annum, representing the unallocated portions of head office costs, technology management costs and other centrally managed items. Going forward, we will allocate the significant majority of these costs to the business areas on the basis of their usage and benefit derived.
In addition Reed Elsevier businesses share some significant resources and assets, especially in areas such as technology and infrastructure. We have reviewed these shared costs and assets across all the businesses. And as a result we have adjusted the allocation to reflect again the usage and benefits derived by each business area. Overtime, much of our shared technology and infrastructure assets have been developed within the legal business but used across Reed Elsevier. And the revised allocations of shared assets and costs reflect this. As a result the legal business shows a slight increase in operating margin on the new basis of allocation. STM and risk solutions show an offsetting decrease in their margins, reflecting the benefits and usage they derive from these shared costs and assets. Going forward we will show margins consistent with the new basis of allocation.
Our EBITDA in 2013 was £2 billion, up 4% from the prior year. In 2013 we converted adjusted operating profit into operating cash flow of £1.7 billion an increase of 6% over 2012. Our cash conversion increased from 95% to 97%, reflecting the lower CapEx and a £22 million increase in depreciation.
The increase in depreciation principally related to higher amortization within the legal business as a result of the investments that we have made to-date to build the new Lexis platform.
Turning to capital expenditure in more detail, overall capital investment was 5.1% of revenues. Legal CapEx was 10% of revenues, in line with the prior year but lower than the peak of 12% reported in 2011. The declines in STM and exhibitions reflect normal fluctuations arising from the completion of certain investment programs. We would expect overall CapEx as a percentage of revenues in 2014 to be broadly in line with recent levels. Depreciation as a percentage of sales increased to 4.1% of revenues in 2013, a breakdown of depreciation by business is shown in the appendix.
Moving to free cash flow. Cash interest paid was £29 million than in 2012, consistent with the reduction in net interest expense. Cash taxes increased a result of higher taxable profit predominantly in the U.S. Acquisition integration and related costs after-tax were £30 million, an increase of £7 million over the prior year. Free cash flow before dividends was up 5% over the prior year to £1.1 billion, half of which was paid out in dividends.
Turning now to the uses of our free cash flow after dividends. In 2013, we completed asset disposals with total consideration of £331 million and we spent £230 million in acquisitions and we deployed £600 million in buying back shares. Taxes payable on acquisitions and disposals were £25 million in 2013. Other items primarily relate to timing effects and transaction costs on disposals offset by cash receipts from employee share auction exercises.
Net debt at £3.1 billion was broadly unchanged compared to the prior year. Our adjusted net debt to EBITDA declined 2.1 times, reflecting an increase in EBITDA with a broadly similar amount of net debt at the year end. Our unadjusted net debt to EBITDA declined to 1.6 times.
Our debt is denominated in a number of currencies, reflecting the global nature of our businesses. About 60% of our gross debt at the end of 2013 was denominated in U.S. dollars with the balance in euros and pound sterling. For the purposes of this slide, I will talk in dollar terms. At the end of December, we had net debt of $5.1 billion with gross debt of $5.4 billion, the difference representing cash and financial instruments. And we have reduced our cash balances from $1.2 billion in 2012 to $300 million at the end of 2013, improving the efficiency of our balance sheet.
During 2013 we took further actions to address upcoming maturities, reduce our cost of debt and retain access to long term liquidity. As a result of these actions and lower market interest rates, the interest rate on gross debt was 4.8% in 2013, down from 5.6% in 2012. Net interest expense was £177 million in 2013 compared to £216 million in 2012. As a result of further refinancing in the interest rate environment, we would expect the interest rate on gross debt to pull further in 2014.
This slide shows the impact of our actions on the overall debt maturity profile. You will note that our maturities are well spread over future years with the relatively modest amounts coming due each year. We are well positioned to address upcoming debt maturities and we’ll likely finance the remaining 2014 maturities and other funding requirements through a combination of commercial paper and new bond issues during the year.
Turning to the balance sheet, the majority of our capital employed is goodwill and intangible assets associated with historical acquisition activity. Net capital employed at the end of the year was £6.6 billion compared to £6.9 billion at the end of 2012. Most of our goodwill and acquired intangible assets are U.S. dollar based. The £200 million increase -- decrease was driven by currency translation and the impact of amortization and disposals which more than offset acquisitions. Internally developed intangibles increased resulting from organic investment in the business.
Property, plant and equipment and investments were largely unchanged. Assets held for sale decreased, reflecting the disposals completed in the year. The net pension obligation reduced reflecting improvements in asset values and benefit changes in the U.S.
Reed Elsevier continues to maintain a negative net working capital balance driven by bond receipts in our subscription and exhibition businesses. Invested capital at 2013 average exchange rates adding back, cumulative amortization and adjusting for currency and deferred tax effects was £11 billion, about £200 million lower than 2012.
Finally, I would like to spend a few moments describing how we see Reed Elsevier’s geographic revenue and currency exposure. As you can see only 7% of revenues are generated in the UK with just over half generated in North America, 21% of our revenues come from the rest of Europe, with the remaining 21% of our revenues in the rest of the world, around 30% are denominated in U.S. dollars. We hedge certain of our future revenues to smooth the year-on-year variation in revenues and profits. The hedging contributed £12 million to STM profit growth in 2013 compared to £24 million in 2012. For 2014, we expect this benefit to be positive but at a reduced level.
You will also note that we have quantified the overall sensitivity of adjusted profit before tax to 1% strengthening of the dollar against other currencies. The impact is about £7 million or 9 million euros.
That concludes our overview of the financial performance in 2013. Now, I will hand over to Erik to talk through our strategic and operational progress.
Thank you, Duncan. Good morning everybody. Thank you for coming and for taking the time to be here today.
As you’ve seen this morning, our positive operating and financial momentum continued throughout 2013 and we further transformed our business profile and improved our earnings quality, again primarily through organic development.
In terms of our operating and financial momentum, underlying revenue growth excluding biennial exhibition cycling was again 3%. Underlying operating profit grew 5%. And earnings per share at constant currencies grew 7% and this in a cycling out year.
Return on invested capital reached 12.1%, an increase of 40 basis points over 2012 on a like-for-like basis. All major business areas again delivered underlying revenue growth with risk solutions and business information both growing slightly faster than in 2012. And all business areas again delivered underlying operating profit growth.
Our STM business grew 2% with strong growth in articles submissions and usage across science and medical research and further improvement in journal quality metrics. Revenue growth was driven by solid subscription renewals and new sales. Author pays or author’s funder pays open access article volumes continued to grow strongly from a small base.
We saw continued good growth from product innovation in scientific and clinical databases and tools and we saw good electronic revenue growth across all segments. But declines continued in print book sales and print pharma promotion, together representing close to 20% of Elsevier’s revenues.
In 2014, we expect continued volume growth and strong demand for electronic products and solutions, continued declines in print books and pharma promotion and modest underlying revenue growth overall.
Risk solutions grew 8%, up from 6% in 2012 with strong underlying revenue growth across all segments. Insurance saw solid volume growth achieved good uptake on new products and continued its expansion in new verticals and geographies. Business Services achieved good growth in identity and fraud solutions and as expected saw a slowdown in mortgage refinancing volumes in the second half.
Government achieved strong new product sales, somewhat tempered by a fourth quarter slowdown in federal market. Underlying cost growth was in line with underlying revenue growth. The 2014 outlook is uncertain for the federal government segment and for the mortgage refinancing market, but the fundamental growth drivers remains strong. Overall we expect good underlying revenue growth across market segments.
Business information achieved further acceleration in revenue growth from 2% to 4%, with strong growth in Major Data Services driven by Accuity, ICIS and XpertHR. We saw modest growth in leading brands and other magazines and services despite weak print advertising markets. We continued the portfolio transformation during the year and increased the alignment with Risk Solutions in order to leverage risk solutions' strength in data analytics and technology, in combination with a broader geographic footprint of our business information assets.
The margin improvement in the year resulted entirely from the continued organic transformation of the business. For 2014, we expect continued good underlying growth in major data services and stable leading brands and other business magazines and services.
Taken together, risk solutions and business information represented almost 30% of Reed Elsevier's total operating profits for the year, with underlying revenue growth of 6%, underlying profit growth of 9% and an operating margin of 35%; and with almost 90% of its revenues in electronic and face-to-face format, very little advertising and with over 25% of its revenues outside North America.
Legal again grew 1% in subdued customer markets in the U.S. and in Europe. Across the business, growth in electronic product usage and revenues was largely offset by continued print declines. New platform and product rollouts continued as planned, with over 70% of our U.S. customers activated on the New Lexis platform by year-end.
Margins expanded 0.7 percentage points as cost efficiencies from process innovation and some initial decommissioning of old systems more than offset inflation and higher depreciation.
For 2014, we will continue the rollout of our new technology platforms and products and maintain our focus on process improvement. Our customer markets remain subdued, however, limiting the scope for underlying revenue growth.
Exhibitions maintained strong underlying revenue growth of 7%, excluding biennial cycling. The U.S., Japan, Brazil, China and the emerging markets all grew well. Europe saw modest growth overall, with good growth in international events, offset by softness in some domestic events in Continental Europe.
We launched 37 new events and completed 9 small acquisitions primarily in high growth geographies and sectors. Biennial cycling effects were reduced around 5 percentage points of growth.
In 2014, we expect good underlying growth in the U.S. and Japan and limited growth in Europe. In other markets, we expect strong growth, albeit at a slightly lower rate than in 2013. 2014 is a cycling-in year, but we expect the cycling effects to be reduced further to around 2 percentage points of growth.
During the year, we continued to make progress in our strategic direction, towards a company that delivers improved outcomes to professional customers across industries. We're getting there primarily through organic development supplemented by selective portfolio reshaping, driving an evolution of our business profile and improving the quality of our earnings.
Our number one priority is to continue to invest in the organic transformation of our business. We are investing in new technology platforms and are launching new products and services. Now this process often started with the reformatting of traditional print reference into electronic reference, but we're already very far down the format migration path towards our preferred formats of electronic and face-to-face.
So most of our efforts are now already focused on driving the ongoing transformation from electronic reference to electronic decision tools. And we do this by adding broader datasets, embedding more sophisticated analytics and leveraging more powerful technology to track, measure and improve the results that come from using our information-based decision tools in order to continually make them more and more valuable to our customers.
Our geographic footprint is also evolving. The transformation from electronic reference to more sophisticated outcome-enhancing electronic decision tools is driving growth in the developed markets in the U.S. and in Europe. And by leveraging our institutional skills, assets and resources, we're expanding in adjacent segments in developed markets.
We're also continuing our efforts to build leading positions in long-term high growth markets outside the U.S. and Europe despite their potentially higher near-term volatility. At this point, you might describe about half of our rest of world revenues as coming from developing markets.
In the long term, it's inevitable that these markets will become larger economies with higher information intensity and therefore become larger customer markets for Reed Elsevier.
After organic transformation, our second priority is the reshaping of our portfolio. We're continuing to limit our acquisitions to targeted data, content and analytics assets, and assets in high-growth segment and geographies that support our organic growth strategies. In 2013, we acquired those types of assets across all major business areas, but it's perhaps not surprising that more than half of our total spend was again in risk solutions and business information. We also continued to dispose of assets across business areas, closing 26 transactions during the year for a total consideration of £331 million.
With year-end net debt to EBITDA at 2.1 times on a pension and lease adjusted basis and 1.6 times on an unadjusted basis, we have now spent in the past 4 years in a leverage range that we're very comfortable with in the current economic environment. So with a strong balance sheet and strong cash flow characteristics, and with our average acquisition spend comfortably covered by free cash flow after dividends, we will continue to take a pragmatic approach to ensuring that the value compounding in our business translates into shareholder value.
We plan to continue to keep long-term dividend growth broadly in line with earnings per share growth at constant currencies. And we plan to keep our leverage in a range similar to where it has been over the past 4 years. And therefore in 2014, although we expect disposal proceeds to be lower than in 2013, we again intend to deploy a total of £600 million on share buybacks based on our strong balance sheet and strong cash flow.
So in summary; in 2013, our positive operating and financial momentum continued throughout the year and we saw further transformation of our business profile and improvement in our earnings quality.
Going forward early trends across our business in 2014 remain broadly consistent with full year 2013 with some small variations by market and by geography. We’re confident that by continuing to execute on our strategy we will deliver another year of underlying revenue, profit and earnings growth in 2014.
And with that I think we are ready to go to questions. So let's start over here.
Sami Kassab - Exane BNP Paribas
Thank you very much, Erik. It's Sami Kassab for Exane BNP Paribas. Two questions if I may please. If my memory serves me right, in 2006 your executive board of which you were part of, told the market that Reed Elsevier was a company that year in year out could allocate 40% of its annual free cash flows to a buyback and we had a buyback in ‘06, a buyback in ‘07 the crisis came about, the buyback stops, you took over, things looked up and improved. And this morning, you are telling us that you are again allocating around 40% of your free cash flow to a share buyback. Hence, my question, should we take from this announcement that you’re reverting to the historic capital allocation policy and that going forward Reed Elsevier is a company that year in year out should be able to allocate 40% of its free cash flow to a share buyback?
The second question. Do you think that excluding exhibition cycling we can see an acceleration in organic revenue growth in 2014 without any further disposals? Thank you Erik.
Let me answer both of those. The first one, the way we look at our business at this point, we do not think that setting a fixed percent policy would be appropriate. If you see how it is we articulating our priorities. That is number one, to drive organic growth and allocate capital to organic development, organic investment. That's our number one priority to transform the business. That can fluctuate a bit but we are not a very capital intensive business. So it will fluctuate a bit, but that's our number one priority. After that the portfolio reshaping is our second priority. And in any one year, even though our strategy is clear we're looking to add small acquisitions in the content data sets and asset in high-growth markets and geographies. We might some years find a handful or a dozen of those that are all in the tens of millions. And we could once in a while, as we have over the last five years, I think we found one that was over £100 million we are in the hundreds.
So you could see one of those coming in any one given year and you could even see a scenario within one 12 month period, two might appear. But you see over a longer time period, over several years, you can see that the pattern we have had is not different from the pattern we are looking for going forward. But that has some implications for how the cash is used in any one year.
And the same thing on the disposals side: I think our strategy with disposals is clear. When we see assets that we cannot transform into the type of asset we want to have across Reed Elsevier, we will sell it. And if we also see an asset that is difficult to transform but we don’t see material future value creation, we will sell it. That can also go up and down in different years and the numbers can be different. So therefore, I don't think it's right to look at a specific fixed percentage, but I think our approach should be clear to you at this point what we're looking to do.
The second question you said revenue growth x cycling underlying revenue growth in 2014. If I look at it where we are today at the beginning of the year and you look at the early trends in the growth rates across our business. There are some small variations here and there, by market, by geography, by segment, as I've talked about. But if you look at it overall, broadly speaking, the growth trends are very similar to what we saw throughout the full year 2013.
Sami Kassab - Exane BNP Paribas
Thank you, Erik.
Let’s go over there.
Nick Dempsey - Barclays
Yes, hi. It's Nick Dempsey from Barclays. Three questions please. First one what is clear we saw flat organic growth in the health books in 2013. And when you look at enrollments in nursing schools and medical schools, they’re going up. So I wondered if you give us some more color on why your books keep going down and is that a sort of business that you can transform into something else to your previous point?
Second question when you look at the print declines that you showed and when you showed the different growth by format, how much of those print declines are going into your electronic growth? In other words, if that print keeps coming down by 2, 3 points a year, should overall growth go up or not?
And the third question, since 2008, I think the margin at Elsevier has gone up by about 100 bps on average a year. I know that some of that has to do with hedging and Duncan made the point on excluding hedging, can you keep that margin going up or are we plateauing?
First, books, you said, [wind] down. I think what I said just, to be precise, I think I said print books continued to decline. And in our book segment, one of the major things that’s going on is the shift from print to electronic. In some of our specific book segments that means that we're going from print to electronic in the overall book revenues in certain sub-segment is actually growing as you're doing that transition. And the migration from print to electronic creates opportunities to actually introduce a different title set and sell them differently, which can have a positive growth in total.
In some other segments, the print to electronic migration is combined with a weak economic environment or specific enrollment numbers in certain sub-segments are where you can actually look and it can add up, like it has done for a couple of years as a negative in negative territory and in some places that's coming back up a little bit; in other places staying down. What exactly I think it's more driven right now, but with the market environment is in the sub-segments than in overall book trend.
I don't think books as an overall business if you think them as being in print and electronic format I mean you think of it as reference or educational materials. I don't think it's inherently a bad segment or a bad business or will have permanent negative trends. But you will see a format migration, right. You continue to see a format migration. If you take our book business overall right now across all of Elsevier, roughly a third might now be in electronic format or something like that that's much higher in certain scientific segments and in certain medical deep referencing then it is in certain non-U.S. or outside Europe and North America in education that is very print oriented. So you can see it by segments, right.
That goes to your second question, which I think is a question of in your print declines and the electronic growth, how much of that are independent businesses growing or shrinking and how much of it is a direct migration. And I think we have a combination of both. I think a large part of what you're seeing is a direct migration that we are trying to drive. When it comes to for example in a traditional starting point of scientific reference materials, scientific research or legal research, legal reference materials that traditionally were print businesses that migrated to electronic. We are trying to drive that electronic migration by offering higher value in an electronic environment than you get in a print environment. And the print declines are directly leading to electronic growth.
In international legal for example you still see that happening at this point, we are sort of roughly around the mid-point of that transition. And you can see that the electronic growth is to a large (inaudible) by the print declines. But overall, it's a business that's just about flat, as you can see, for the overall legal business as you transition.
So you have a bit of both. And if you want to look at you also have some print businesses that are shrinking and that are going away. For example, some of our promotional print advertising, print pharma promotion, they're shrinking structurally and the structural changes in that industry.
The third question was margins now as they are in hedging. Yes, the number you mentioned on margin increases, I can't remember exactly which year you averaged. But the absolute reported margins in Elsevier have been going up to a large extent due to currency and hedging effects and to a smaller extent over the last few years, the low revenue growth years, to a smaller extent, due to organic differences between revenue growth and cost growth. So if you strip that out you will see that the organic development has probably led the margins to go up a very small bit every year, probably sort of few tenths of a percent, right. And the larger piece has been currency effect. But I think that as we continue to drive Elsevier going forward, the number one priority is increasing value for the customer and therefore to support the volume growth that exists in that industry and to provide tools that are more valuable and they can do more to manage research. And as we do that we are again going to continue to try to do, pursue process innovation and global efficiencies to try to keep cost growth in line with or below revenue growth, just the way we have philosophically done for many years. Okay, let’s go, keep going that side.
Mark Braley - Deutsche Bank
Thanks. It’s Mark Braley at Deutsche Bank. Sort of one question and then a couple of technicals. On open access, if I remember so original timetable around the policy changes that were made, we should start to see a bigger volume of open access mandated research coming to publication sort of late ‘15 or into 2016. I suppose my first question is, is that timetable still what you’re expecting? And then the second part of my question is, is your business if you like in open access, is that already scaled to deal with that if that does come through? So, is the change in your business due to open access, do you still expect that to be incremental or is there an element of step change that’s now on the horizon? And then the technical ones were: I wonder if I can just ask on the cycle impact is being rather smaller, is that because of changes in the timing of some of the biennials or is it because acquisitions have kind of filled in the gap, if you will? And then apologies if I missed it, CapEx for 2014, and perhaps sort of pound million number?
Okay. May be I’ll let Duncan get back in the end to the CapEx question but I will start with the other two. The only open access on -- mandated open access in different geographies, I think the one you probably think about primarily the UK, the UK policy. The volume growth from that I think to some extent has started because many people have started to operate in that direction. And I also think that the implementation will then take -- come through different steps. And I think you will see a gradual evolution. I don’t think there will be a step all of a sudden where on one date it flips. I think you will likely to see different individuals in different research areas sort of move over at different rates, even before they feel like they have to for different reasons, right? And then I think you will follow afterwards. And there always implementation phasing issues on anything like this.
We have started to scale up significantly, I mean we have now, I think we have an author pays option in over 1,600 of our journals. And I think we operate over 70 independent standalone sort of author pays open access journals as well. And those numbers are both growing on an ongoing basis. And the volume we took in last year was significantly higher than the volume before. But they still represent a small share of what we do just like it represents a small share of the global volume of research.
So I don’t see any material impact that you will be able to find from this on our global volumes over the next few years either as a positive volume or revenue effect or is a negative volume or revenue effect; it’s a different payment model for small size. And we are very happy to continue to support it that way.
Let’s see now, exhibition cycling. I think if I am understanding you right, I think you asked why is it reducing? Well, the reason it’s reducing is number one, because we wanted to reduce the cycling and therefore, we are not changing the strategy of running the business differently to do it, we are running it the way we want to for value creation.
But in places where you have a choice on where to introduce a biennial show or in choices where you have a chance on showing -- making some adjustments, you pick the one that actually slightly smooths it out more, but we never do that to the detriment of business itself.
There is one other factor that is in there and that and that is that the historical even year cycling in shows are in our historical markets, which are to a large extent in Europe that are seeing lower growth and then we have some of our odd year cycling in shows are actually in slight higher growth markets and supported that way. So that there is a natural organic growth rate difference between the two that are helping. So it’s some rescheduling, some acquisitions and pure organic growth differential. So that’s why it’s down to 2 percentage points.
And the last question was about CapEx, I am not sure I head exactly what you asked, but I hope Duncan did.
Yes, the question was on what pound number that we have the CapEx in 2014. What we said was or I said was that overall CapEx as a percentage of revenues in ‘14 would be broadly in line with recent levels. In 2012, it was 5.5% of revenues; 2013 it was 5.1% of revenues; and I think in 2011from memory, it was in that sort of range as well. So, I think that answers your question.
Okay. Why don't we now go over here and then…
Matthew Walker - Nomura
Thanks. Its Matthew Walker from Nomura. Just one question really which is going back to open access. Can you update us on the faster legislation in Congress? And can you say I guess for the U.S. market, if that was successful and the embargo period was changed from six months to zero let’s say, what impact would they have on business?
I think there are a lot of different legislative initiatives going on and have being going on for over a decade now in many of our different markets, including many in the U.S. Of course we’re now on 10 years after the initial policy declaration of the largest government funding agency, NIH. And as you know, we’ve now been working with them on a process of voluntary posting since 2005. So, we’re about 9 years into that one with the largest agency. There are many different things going on right now and the one you mentioned is one of them.
But I think the primary focus in the U.S. right now is actually on the White House, OSTP policy right, the Office of Science and Technology Policy that you look -- that issued something about a year ago and looking at different guidelines by different agencies. And that’s where the discussion is happening, the agencies that are looking at it and they are looking at different timelines for manuscript posting policies. And they’re doing that in conjunction with industry associations and with other user groups. And I think that’s probably where you would see a change or some in extension of NIH policy. NIH represents about half the research of that of what’s covered, so that’s -- so over half is already covered.
Your question theoretically is if something went to zero embargo period, well that means then if you want it to be published with zero, then you back to the UK policy (inaudible) which is then the only reason anybody would publish is because it’s an author pays model, which an author pays open access, which we are perfectly fine doing and we’ve demonstrated we can do and scale up.
So there you basically have two choices either you want to have it published with immediate availability without subscription fees than it’s an author or author’s funder paid model, you pay from that side, and that's immediately available for free to the user, but you pay on the author or the generating funding body side, or you have a traditional subscription model, where it’s free to the office, it’s free to the funding body to submit then get published, but the subscribers pay.
And if you say that you want to switch at the point of publication, you pick between the two basically. You say would you want it free to user or do you want it free to authors and a zero that’s the choice you then made. And there is nothing wrong with that choice, it’s an alternative that we’re offering with as I said and growing rapidly. Okay.
Vighnesh Padi - Goldman Sachs
Good morning. Hi it’s Padi from Goldman Sachs. So, I only got one question on the legal business. I note your subdued outlook but you seem to be launching a lot of new products and applications. Do you think you can kind of grow ahead of the subdued markets because of all that activity or is there no pricing benefit to that?
Well, of course, what we are trying to do in legal as in our other markets is to make sure that we continue to improve our content, our data sets, our electronic tools, our analytics, our platforms and embed to make them more valuable, so that our customers see more value, want to use them more and overtime we have more customers who want them from us, so that we can grow our revenues. That’s what we are hoping for, right? And that’s we’re trying to do.
And the market is slow right now. You can see that from us, you can see that from any other provider into legal markets, you can see from legal industry studies, it's basically a flat market. So therefore, we are focusing all our time not on predicting the market, but on doing exactly what we just talked about, which is to improve our own products and roll them out and roll out platforms and then streamline our operations behind it as we modernize.
So that's what we're focusing our efforts on. And that should then overtime put us in a better position to get improved revenue growth even if the markets are not improving. But it's very, very difficult because you're dealing with the market that's currently not growing and you're dealing with other service providers that are not really growing and you're dealing with people who like the tools they use, the tools that we provide them and other people are providing them.
They're good tools. They're used by professionals that are very busy and they see good value in them. And therefore, the base case is that it's difficult to break out of the broad market growth when you have a business of this scale, but that's of course what we're trying to do.
Andrea Beneventi - Kepler Cheuvreux
Thank you, Erik. Good morning, Andrea Beneventi from Kepler Cheuvreux. I had two questions on legal from me please. First, could you quantify the savings you expect from the decommissioning of the old Lexis and maybe also the timing of the process? And secondly, what share of legal revenues comes from duplicated content that are sold to the same customer in both print and online format and will each format bill separately please?
Yes. On the savings and decommissioning of old systems, we do not think of the decommissioning as a separate cost bucket. We see what we're doing as a multi-year process where we're overtime replacing hundreds of old systems with a modern infrastructure from front to back from the front-end customer interface to the content database to the back office. And we're going through that slice-by-slice, module-by-module, customer segment-by-segment, continent-by-continent, geography-by-geography.
So therefore -- and at the same time as we're doing that we're then streamlining our own operations, our organizational structure, our systems, our content processes and so on. And while we are currently operating with the duplication in some geographies and we operate both on the old and the new in the U.S., our largest market right now. We see this as a never ending process that are driving profit efficiencies out of it as we gradually decommission one or two of the old systems at a time.
So the way I see it is it's going to take many years and it will be gradual process and we have not tried to separately quantify what would be the decommissioning part of it. What you're seeing in our margins though is that every single year now since we hit our peak spend point a couple of years ago is that we're now trying to drive our cost growth below revenue growth despite the fact that we have increasing depreciation coming through and that is because of these efforts in combination. So that's the way we view it and it will take several years and it will be a gradual process.
The second question was the duplication where people are buying both. We have as you probably know in our legal business -- I think our total print share is something like 23% give or take I think it's 23% this year. And in that print we have mostly print that is migrating over to electronic. We do not have what I think of as a massive business that is being double-billed and billed separately and effectively charging twice for the same content because our history is not coming from that part of the business.
We are not in our largest market an old large scale traditional print book publisher or print document publisher that is migrating over, we actually -- LexisNexis has a slightly different history from that.
So in the U.S. we started off as effectively an electronic platform service that acquired inputting, plugged-in content so we have slightly different history from that. And as you look at most of our European businesses, it is not duplication, it is a migration, the way I think of it. So as you migrate, we're going to get back to the thing we talked about before when we talked about the print growth. The print decline is offset by electronic increase, but it's basically migration. And net-net in legal you're potentially just about flat in that migration.
Giasone Salati - Redburn
Thank you. It's Giasone Salati from Redburn. A couple of questions please both I think a bit technical. Based on the currency hedging you have in place now, can you give us a very precise outlook, just a broad outlook of what impact on margins we could have depending on currency movements or on the currency rates you have now in the market?
And secondly, the increase in the (inaudible) is that going to continue to any sizable amount? And is that hiding an actually better underlying EBITDA trend compared to adjusted operating profit?
I understood the first one I'm going to ask Duncan to answer that one. The second one I didn't understand what you said exactly. So I will definitely ask Duncan to answer that one.
Giasone Salati - Redburn
It's going to be my accent. Depreciation as a percentage of sales was up I think this year. Do you expect that to be up again in 2014? And is that hiding actually a better underlying EBITDA trend in terms of OpEx?
Okay, I got it now.
I understand the question now. On the currency, what we quantified and I think what quantified quite specifically was that we think the sensitivity of our overall profit before tax to sort of currency movement particularly a 1% move in the dollar against all other currencies. So if you look at that sensitivity what we quantified was that would have an impact of about £7 million which is also about EUR 9 million on our overall profit before tax, that's kind of the sensitivity of that.
And you can [ripple] that into our overall margin or you could even make an estimate of that because you've got interest deducted in that, but you could probably estimate out the interest impact as well. And so that will probably give you the ability to look at overall margin.
We do quantify I think in the appendix the impact -- I haven't got the number exactly in front of me now, but it is in the appendix, the impact on Elsevier margin at the hedging program. Exactly how much impact that was, from memory I think it was about double in 2012 of what it was in 2013. I think in '13 it was about 0.3% from memory. I haven't got the chart right in front of me, but it's in the appendix.
And we would expect it in '14 to be still positive, but a little bit less maybe it was £24 million I think in '12; £12 million in '13 and it would be less, but still positive in '14.
Giasone Salati - Redburn
And on depreciation?
Depreciation, you're right. Yes the depreciation was higher as a percentage of sales in '13 and '12 largely reflecting the fact that there is I think more depreciation in the legal business. I think it was $22 million increase in depreciation or £13 million increase in depreciation, I think $16 million of that from memory is legal, the vast majority was legal. And again as New Lexis comes on, I think that depreciation is kind of catching up. So probably I would expect depreciation to be a little bit higher in '14 as well. So if that answers your question...
Giasone Salati - Redburn
Yes, in effect.
Right. Therefore because we're having slightly higher depreciation, if you wanted to do an EBITDA calculation excluding that slight increase, you will be slightly better on a trend basis, not a big number, but slightly better. So let's move back there.
Margo Joris - KBC Securities
Hi, Margo Joris from KBC Securities. Your outlook statements for the exhibition business was quite cautious, could you elaborate a little bit on the trends you're seeing on the recent developments in Europe and the sentiments or discussions with customers, but also the geographical breakdown? And then actually the same for the emerging markets, so you expect a slightly slower growth rate? Could you shed a bit of light on that? Is it because of macroeconomic conditions, tougher comps or another specific reason? Thanks.
Yes. If you look at exhibitions, you said first in Europe, what we're seeing right now in our different European markets, both geographically and in terms of segment, it's in Europe very similar to last year. I mean if you look across -- of course there are always some variations here and there if you look, but Europe is very similar to a year ago and you saw where we ended up last year.
But there is no -- there is of course no indication here of what that will look like in 6 or 9 or 12 months as we get towards the end of the year. It's too early for us to tell, but at this point, it's not materially different in Europe. In emerging markets you said, we are doing, currently doing very well in emerging markets. We're continuing to grow strongly, but the macroeconomic environment, economic sort of industry growth cycle there have slowed down a bit in our large market. It is very clear that that’s what’s happening to the industries around us and the industries we serve. We are still growing very well. We are going to continue to grow very well in those markets if the economy stays where it is today.
But where you previously -- in a country for example where you previously have seen a growth rate in the mid-teens you might now be just about double-digits or where you previously saw something in the low double digits, you might now be in the high-single digits, right on some of those markets that we see the slowdown. The economies might have slowed down more than that but because we see growth opportunities we are launching exhibitions into sectors. We're extending our international brands into those markets, we're picking new geography. And so we can grow in exhibitions if the economic situation is the way it is today. We can grow faster than the local GDP growth in the economy. But still if it is slower growth rate overall, we will be a few percentage points lower in those geographies. That's what we're seeing today, okay.
Alex DeGroote - Panmure Gordon
Thank you. Good morning everybody. It's Alex DeGroote from Panmure Gordon. I have a question related to assets for sale in the balance sheet, 21 versus I think short of 300 last year. Is that a proxy for where we are on the disposal program, because I would imagine most of the heavy lifting is now being done in terms of exiting those businesses where you felt the fit was weak?
Yes. I think the anomaly there is probably that last year we were in a process of selling a couple of big things right at the end. And I can't remember exactly where we were on the screening business, but I think that was one of our larger disposals and it happened early in the year, right.
So if you look at where we are now, we're still active. We did close a couple of sales in January this year, but they're much smaller. Last year, we had bigger ones pending right at the turn. So that's the explanation of why the number is what it is right now.
If we then go to your second question is where are we overall in our disposal program. We are going to continue all the time to review our assets and try to transform them. Our transformation strategy is as we have described it. We are going to continue to do that. We will still find assets on an ongoing basis that we see that the transformation is not working out the way we hope to or it's working out the way we hope to but it's changing slightly and we don't see a lot of value creation and we might exit.
So I think you will see a continued process of selling off assets. But I think it's more likely that you see a continued process of small assets. Individually, smaller assets have lower numbers than the 3 or 2, 3, 4 that have been larger that we have spun off or sold in the last few years, a few of that were larger than the typical. I think if you take those 3, 4 out and then go with a lower one, that's probably the type you will see in continued process.
Okay, so back here then again.
Tom Singlehurst - Citigroup
Hi. It's Tom from Citigroup. Just one question. It's on risk solutions and business information. You keep on flirting with the idea of combining them fully I am already certainly showing them on a combined basis. I was just wondering is there any inefficiency from having them separate or is there any efficiency from bringing them together and just having them as one big lump, not separately disclosing the way that…
Yes. I am not sure I would use the headline one big lump. But what we are doing there is strategic to drive future growth opportunities. We have risk solutions with a very high quality manager of very large databases, very powerful analytics, very advanced technology but primarily U.S. oriented and in certain risk markets. When we put that together with the old RBI under larger umbrella with one CEO, you can now leverage those skills, those assets alongside the broader geographic footprint and industry specific databases at in business information. And that enables then a process of getting faster into adjacent markets, both adjacent segments, industry segments as well as faster geographic expansion. We have a footprint you're building on and a skill set and an employment base.
That's why we're doing it. It is not clear to me that this will have any material cost benefits or any integration costs because we're not looking at fundamental cost changes around that. It is more of a growth platform combination that we're looking for.
So hopefully over many years in the future you will actually see that they have built on each other's footprint and on each other's assets to get a higher organic growth over a longer of time than they would have done separately. That's the logic.
Okay. Well, thank you very much for coming and hope to see you again soon.