Informa's (IFPJF) CEO Stephen Carter on Q2 2016 Results - Earnings Call Transcript

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Informa PLC (OTC:IFPJF) Q2 2016 Earnings Conference Call July 28, 2016 5:30 AM ET


Stephen Carter - Group Chief Executive

Gareth Wright - Group Finance Director


Will Packer - Exane BNP Paribas

Chris Collett - Deutsche Bank

Simon Davies - Canaccord Genuity

Steve Liechti - Investec Bank

Tom Singlehurst - Citigroup

Simon Baker - Societe Generale

Nick Dempsey - Barclays

Patrick Wellington - Morgan Stanley


Stephen Carter

Good morning, everybody. Good morning and welcome to our half-year results. I'm very conscious, as ever, that this is a busy time of year, certainly for results presentations and so we're always very appreciative of people who take the time to join us, particularly physically. So, welcome. And also, welcome to those people who are joining us on the webcast.

Usual form today, I'll say a few introductory remarks, hand over to Gareth and then he'll pass the baton back to me and then we'll throw it open to as many questions as people have. I think these are our headlines. I suspect, most people will have seen the press release, had a bit of a chance to have a look at it, even on a busy results posting day. Our sense of where we're is we're in good shape and gaining pace and momentum. We're in a peak year of investment for our growth acceleration plan and we'll talk a bit about that, both in detail and in specifics. But from our perspective, the pleasing thing is inside the business, what it feels like as a business gaining strength, resilience and capability. And we'll try and give folks a bit of a sense of that as we go through the presentation.

These are the headline numbers. The organic growth rate, ticking along nicely, driven, in the main, by strong growth in our exhibitions business which is our newest business. I think this compares with just a notch above 1% this time last year. The reported revenue, a bit higher. That's mainly a function of currency. But that is also a function of the fact that over the last few years we've weighted the business deliberately more and more towards the U.S. market which is something we're purposely continuing to do.

We've also had a strong performance from the acquisitions that joined the business last year, so we feel good about those. Very good profit translation which we're pleased with. A little bit of a drop-off on the earnings line. That's largely to do with debt which Gareth will unpick. It's a mixture of cost of debt, the fact that most of our debt is U.S.-denominated debt. And then, we've done, I think, the prudent thing on a bit of history to do with the old performance improvement business that some long-time watchers of the Company may be aware of. We've confirmed our dividend commitment, as per the growth acceleration plan, for the interim dividend. And the balance sheet is pretty much steady as it goes.

Forward outlook, our guidance remains as is. We're on track for another full year of growth in revenue and adjusted earnings. And I'll give a little bit of guidance on that, as it relates to the individual divisions, towards the end of my section, after Gareth. This is very much the peak year of investment for us in the GAP program, both in absolute terms in cash for this year, in compound terms and in activity. There's nothing here that's particularly new, certainly not for us. Pretty much all of what we planned is happening at a pace and rate across now all four of the businesses, and, indeed, in our global support functions where we're also busy building capability, particularly in reporting and in talent management.

All four operating divisions are on track for their growth targets against the GAP program. So we feel confident not only about the activity, but also about the projected return rates. And these aspects of the GAP program should, hopefully, be now familiar to people. What we're seeking to do is to build capability across the business in all these areas, to get ourselves to a point whereby we have predictability, both in performance and then in returns.

We've done a lot on talent across the business, not just at the management level, but in some very specific areas of the business, particularly in sales, sales renovation, sales inventive structures, and sales programs. Technology has probably been the biggest area of talent change for us as a Company. It was never really previously an area where we had a cadre of skill and capability beyond a certain level.

We're now in to our second year of our graduate training program. Training, more generally, has become quite a big investment area for the Company. And probably most materially in terms of driving behavior and shift in performance has been the shift in the architecture of the incentive structures within the business which has pivoted more towards revenue and long-term performance and away from solely in-year profit.

On the product side, a lot of activity here which starts at the front end with recognizing that the world's gone, essentially, 100% mobile. And if you're in the data and information business, mobility and mobile responsiveness is key for your product format and product presentation. Digital which is a statement of the obvious for most of us, has not always historically been the case at Informa, and now that is pretty much the watch-word through all of our businesses. And I'll bring that to life a little bit later. On the platform side, platforms come in lots of ways for us, whether that's sales management platforms, content management platforms, data capability, or, indeed, the way in which we communicate with our customers.

The operating structure of the business, I think, is now pretty clear. The four divisions operate as is. They operate well. They're coherent. They're well managed. They have integrated management teams and in reporting, tracking, accounting and accountability the business is predictable. On a portfolio level, we're now moving more and more to organizing the business around verticals. So, first shift, renovate the business, simplify it, built some capability, and then, start to pivot the business more around the markets.

On M&A, we remain very disciplined on M&A. We're very focused on what happens internationally. We're now very much an international business. Nearly 60% of our revenues are now in U.S. dollars or U.S. dollar pegged revenues. We're focused on building scale, particularly in global exhibitions, and in developing our position in vertical markets that we feel good about, such as TMT, where you saw us make a small addition today.

This, I suppose, is my version of a Brexit slide. But I don't intend to say much about Brexit. Doesn't materially affect our business. But it gives you a sense of the shape and feature of the Group. Our revenue by geography which shows that whilst we're now firmly domiciled here, we're headquartered here, a significant portion of our cost base is here, actually, a relatively small proportion of our revenues are in sterling or, indeed, in euros.

I think, more interestingly, is our revenue by type. One of the things that we talked about very early days was how did we begin to shift the mix of predictability and future visibility on the revenues. And that is a function of bolstering our subscription business, both in academic journals and BI, improving our subscription renewal and our annual contract values, and growing the scale of our exhibitions business versus our conference business. And the combination of all those is getting us pretty close to a point whereby we have about two-thirds of our forward revenue which we can see with some degree of predictability which gives us quite a lot of comfort on a going-forward basis.

When you wrap that all up, what are we building towards? This is the operational fitness picture we first started talking about in 2014. We're moving to a point, I hope, where we will have a very sustainable, predictable performance program across the business in revenue, in profit and in earnings, underpinned by underlying growth, as well as then, addition on top from acquisitions in markets that we're interested in.

Continuing to grow the predictable and recurring revenues and taking our spot revenues as a proportion of our mix down. And improving the operating leverage in the business to give us scale where we want to add we can add effectively and get the benefit from it. Cash generation is an attractive feature of our business and that remains strong. International scale we're interested in, but we remain interested, in the main, in building that position in the United States. We're moving slowly to becoming more of a digital and data business and that capability is something we will build over time.

And a robust and steady balance sheet which gives us forward strength, but also the ability to weather changes in external markets, is a kind of security feature of the business. And that's the shape and feel of the Group that we're slowly, but surely building over time.

And now, I'll hand over to Gareth. Gareth.

Gareth Wright

Thanks, Stephen. Good morning, everyone. As Stephen said, we acknowledge that it's a busy day in the markets today, so we appreciate you taking the time to come along and hear our half-year results. We've talk consistently about 2016 being a year of disciplined delivery, this remains our core commitment for the year. Our focus is on continued operational progress and ongoing financial deliver, whilst managing our way through 2016, the peak year of investment for the growth acceleration plan.

We have today announced organic revenue growth of 2.5% for the first half of 2016 which represents an acceleration on the growth reported this time last year and an acceleration of the growth reported at year end. This starts to demonstrate the progress on our objective to improve the Group's revenue performance through the period of the growth acceleration plan.

Reported revenue is up 4.7%, to almost £650 million, reflecting a currency tailwind from the stronger U.S. dollar and a positive performance from the businesses added in 2015, along with the improved organic growth that we have delivered. This reported revenue growth has driven a 6.3% increase in adjusted OP to just over £200 million, which, in turn, drives earnings 3% higher after an increase in the interest charge which I'll break out in a minute.

The Group's balance sheet remains robust, healthy and positioned for growth. The ratio of net debt-to-EBITDA is 2.4 times in the half year, well within the 2 times to 2.5 times range that we've communicated previously. The interim dividend has increased by 4% which delivers the increase minimum commitment that we made in February for dividend growth through the period of the growth acceleration plan. And the delivery of strong free cash flow remains a key objective. We've delivered on this in the first half of 2016 on an underlying basis, although there are some one-off factors that I'll talk about on a following slide.

Moving to the income statement, I'll start by talking you through the results by division. Global exhibitions has performed strongly in the first half 2016, delivering organic revenue growth of 11.6%. The portfolio has performed really well, driven by strong performance from the top 20 events.

Significantly, the subsequent growth in operating profit has resulted in global exhibitions now being the largest division in terms of operating profit generation in the first half of the year. And the significance of this fact is that having our highest margin business and our fastest-growing business as the largest drives an expansion in the Group operating margin, despite the incremental year-on-year investments being put in to all four divisions.

Finally, the reported revenue growth for exhibitions of 14% reflects bolt-on acquisitions, plus the benefit of a stronger U.S. dollar.

Turning to academic publishing, we've delivered a solid first-half performance with half-year organic revenue growth of 0.9%. This represents a stronger performance in the journals business and a less strong performance in books. But the result does not change our expectations for full-year growth, broadly in line with last year's results. It does reflect a lower demand in volumes in books, principally U.S. print books, but that is consistent with the trading we saw at the end of 2015.

Finally, the reported revenue growth of 10% year on year primarily reflects the 2015 acquisitions of Maney and Ashgate, and also, the benefit of a stronger U.S. dollar. Business intelligence continues to deliver on its turnaround plan in the first half of 2016. The half-year organic revenue decline was 0.5%. But we believe that the division is positioned to deliver organic revenue growth for the full year, based on the improvements in the renewal rates we've seen in the first half of the year and based on the year-on-year increase in the annualized contract value that the division is currently running.

The reported revenue decline of 3% reflects the 2015 disposal of the consumer information business. Knowledge and networking continues to make progress for the strategic repositioning. The half-year organic revenue decline of 4.7% is driven by two main factors. Phasing of events from the first half of 2015 to the second half of 2016 equates for about one-half of the decline, and there's also a reduction in the number of events operated.

To step back, a key dynamic in both these factors I've just mentioned is the brand consolidation strategy being pursued by the K&N management team to merge smaller events with larger ones, thereby creating stronger community brands. In the first half, this has had the effect to reduce the number of events outright and to reposition the events within the year. Additionally, the division has seen headwinds in Brazil and the Middle East from macro factors in those regions. But we highlight that the performance in the core verticals has been robust and continues to represent a strong base to deliver future growth.

Finally, the reported decline of 9% reflects the 2015 disposals of businesses in The Netherlands, Denmark, Sweden and Russia.

In summary, this half-year performance leaves us on track to deliver our targets we've set ourselves for 2016.

So, our strategy is the 2014 to 2017 growth acceleration plan. And this slide will look very familiar to long-term Informa watchers, but that's with good reason, because we're reconfirming our expectations remain unchanged with respect to the profile of investments and the profile of returns that we forecast from the program. In the first-half 2016, we invested around £25 million through the program, leaving us on target to complete the majority of the investments by the end of 2016.

We also reconfirm that the governance we have put in place around the project is functioning as planned. The financials are certainly difficult to track externally and it's difficult to separate the BAU from the GAP, but additionally, internally, I can guarantee that we're tracking the returns on a project-by-project basis. In terms of the delivery phase, what's really exciting about the growth acceleration plan in 2016 is we're starting to move in to the delivery phase, where the projects go live. This is a phase where our customers, in all four divisions, start to see the benefits in the investment program kicked off in 2015. This visibility of launches also builds our confidence in the ability of the growth acceleration plan to deliver the returns targeted.

At this stage, it's certainly early in the timeline, as we've only seen the first couple of projects go live. But the frequency of launches is on track and will gain momentum across the second half of 2016 and right across the next year.

Turning to the income statement as a whole, we can see the Group has generated over £200 million of adjusted OP, with a 40 basis points increase in the operating margin to just over 31%, driven by the strong margin and the strong growth in global exhibitions.

The P&L costs to the growth acceleration plan impact the margin by almost 1 percentage point in the first half of 2016, so the overall expansion in the margin is despite the headwind from that investment. The 6% increase in operating profit delivers a 3% increase in earnings. The slide notes a number of factors between OP and EPS, but by far the largest factor is the increased interest charge, resulting from three things, from a $250 million U.S. private placement loan notes taken out in the third quarter of last year, securing long-term seven-year and 10-year financing for the business, but increasing the Group's interest cost, from an increase in the Group interest charge in 2016 because of the stronger U.S. dollar and from the prudent treatment of interest on a long-term loan receivable.

This loan receivable results from the 2013 disposal of five corporate training businesses for a mixture of cash and interest-bearing loan notes. Following a period of underperformance in the business, we've taken the prudent view not to accrue interest in 2016 on these loan notes which has a £2 million year-on-year impact on the half-year interest charge.

So, in summary, this performance delivers a 3% increase in earnings in the first half of 2016. As I said at the top of my piece, generating free cash flow is a key area of focus. In the first half of 2016, there have been four specific one-off factors that have impacted free cash flow generation, the £14 million year-on-year increase in CapEx as part of the growth acceleration plan investment program, the timing of cash flows in academic publishing, principally, the £15 million timing shift in the receipting Swets, a £14 million one-off benefit in the first half of 2015 for tax, and incremental interest payments because of the U.S.PP borrowings and stronger U.S. dollar that I mentioned earlier.

We're confident about a stronger free cash flow performance in the second half of the year. There will be further cash outflows, supporting the CapEx investment in the growth acceleration plan and the investment payments in the second half, but the Swets dynamic and the tax dynamic are all in the first half. Additionally, we take confidence from the subscription, recurring and forward-booked revenue streams that make up two-thirds of the Group revenue, where the cash inflows are weighted towards the second half of the year.

Reported net debt has increased to £1,055 million with two key factors, the effect of the strengthening U.S. dollar at the half year on our dollar borrowings and the payment of the Group's final dividend for 2015. In terms of leverage, the half-year position is strong with net debt-to-EBITDA at 2.4 times, calculated per our bank agreement, using average exchange rates to translate closing debt and including a full year of EBITDA in respect of acquisitions completed to date. This leaves us within the 2 times to 2.5 times gearing range that you have been expecting.

Finally, the headroom with our facilities of over £400 million at the half year provides real funding flexibility, going forward. The Group's funding strategy is unchanged, despite the volatility in foreign exchange post-Brexit, because having circa 80% of our borrowings U.S. dollar-denominated is consistent with the Group's EBITDA generation in U.S. dollars.

Our debt maturity is secure, with the first repayments due in December 2017 and the RCF extendable to 2021. Another key feature of our balance sheet that we're keen to highlight, as we often feel it gets lost, is our very low pension exposure. The Group's defined benefit pension schemes closed to new accrual a number of years ago. No cash contributions have to be made under the current funding scheme and the current funding scheme will not be reviewed until 2018 and finally, despite the weakening gilt yields in the run up to half year, the liability is only £15.6 million.

Our strategy to position the Group for growth is about maintaining financial performance, whilst making investments and focusing on the delivery of future returns. Whilst the 2014 to 2017 growth acceleration plan is only entering the delivery phase, our focus on returns has already been demonstrated in the Group's return on capital employed metrics. Since the end of 2013, we've added 80 basis points to the Group's ROCE, driven by elements of our strategy focusing on operating structure, management model and portfolio management, despite, at the same time, making the investments that substantially improved the Group's capability for future performance.

So, if that slide summarizes progress, let's finish by recapping on a couple of areas of performance, delivered in the first half 2016. Delivery of progressive improvement in organic revenue is a key objective at a portfolio level for the management team. We've delivered growth in adjusted operating profit and a growth in adjusted operating profit margin, despite this being the peak year of investment in the growth acceleration plan.

We're focused on driving free cash flow generation and making progress, despite specific one-off year-on-year factors. And we have a robust balance sheet characterized by leverage within our long-term target range and a very small pension liability relative to the Group's overall balance sheet.

Thank you for listening. I'm now going to pass you back to Stephen.

Stephen Carter

Thanks, Gareth. It's Gareth's birthday tomorrow, so he's very excited about getting to the end of all this. I'm going to now try and give you a bit of color and then we'll get in to questions. I'll give you a bit of color on each of the businesses, but in each of these categories, so just talk a little bit about each of them, maybe, to bring it to life for people. And the central sense that we have inside the Company which is always difficult if you're looking from the outside, is, as I said earlier, a building of capability for the long term and an improvement in ambition. And I'm just going to pick out some highlights here.

If you start with the product, we're new to this market, as most people know. Our history was not in exhibitions. It gives us two advantages, really, by comparison to most of our peers. The first is we don't have anything else in this business other than exhibitions. And often, when you look at exhibitions business there's a long tail. We don't really have long tail. So, this is a pure pure-play exhibitions business. As a consequence, we have quite a lot of powerful brands in this business, CBE in the beauty market, Monaco Yacht Show in the luxury market, World of Concrete in the construction market, SupplySide West in the food ingredients market, Vitafoods, also in the food and ingredients market, Greenbuild in the sustainability market, Arab Health in the healthcare market.

And one of the truths of this business, it's a migration to scale. The big brands are doing well and the power brands are doing even better. So, our portfolio feels very robust. And for those of you who were with us in Washington last year, who followed it, that's really what drives behind our market-maker strategy which is to build positions in markets, use those brands to then drive an ability to deliver more products and services.

To do that, you need capabilities, that we never previously had which is not surprising, because we didn't really have a business here. And that's what's behind what's going on in the platform area, whether it be on sales management, whether it be on marketing, whether it be on customer management, and whether it be on what you deliver to your customers, either at the event, before the event or after the event. That drives, over time, as the business matures, a shift from individual events to verticals and management of longer-term relationships. And you can begin to see the emergence of our business in different verticals, and that, you should expect to continue to see an expansion of.

And that's really where our M&A focus is, how do we build our platforms in each of those verticals to give us more scale benefits now that we think we've got an operating model that works pretty well? And that's what's behind the desire to move from exhibition organizer to market maker.

As Gareth said, it's quite an interesting junction point for us, that we find ourselves at the half year where this is the biggest profit contributor. Over time, you should expect to see this business grow and grow as a contributor to the Group.

Academic publishing, a long-time part of the Group, the most stable part of the Group, the business with probably the most depth, the most security. And that security is essentially rooted, again, in the middle box, in a very robust product. And that product pivots around content, whether that be hundreds of thousands of books or millions of articles. And the growth of our content library is the fundamental strategy that we have in that business. Then, what you need to do with that content library as you build it is you then need to sell it as effectively as possible, whether you're selling it to corporates, to professionals, to institutions, to individuals, to authors, whether you're selling it in an open-access format, or whether you're selling it in a subscription format, or in a unit-sale format.

Again, that leads you to some changes and some investments in what you need to have on the platform side. Because, increasingly, content discovery and discoverability, in amongst these author and user communities, is what allows you to drive usage. And ultimately in this market, pricing is increasingly predicated upon usage. And so most of the investments you see in this business are in and around our platform capability, because we feel very good about where we're on the product side.

Having said that, it's a great business. The margins are strong, it's well run, we know what we're doing. I would be confident in saying this is a machine. It's an operating machine. It knows what it's doing. Nevertheless, we felt there was more operating efficiency we could drive in to this business. And that's what was behind the creation of a single global books business and a single global journals business which is allowing us to drive greater performance in production, in distribution and sales and in external contract negotiations with intermediaries and the aggregators and the distributors.

Makes us feel very secure about the margin and the profit, as well as using the products and the platforms to drive the revenue. We continue to do M&A here, some bolt-on acquisitions. Haven't done any so far this year, but we continue to look for them, where we see the content. Again, the content needs to fit in subject areas that we feel comfortable in. And we have already got scale benefits that we feel very confident about how we integrate for further scale.

The next two businesses are really the swing vote in Informa, and, as a consequence, you will see, at this year's Investor Day, these will be the two businesses that we'll lift the bonnet for. And for those of you who've got the time, we would encourage you to come along. Make it a bit easier, it'll be in London, not Washington. And both the management teams of this business will be by then, I think, in a very clear view. They will be 18 months to two years in to the execution of their turnaround.

The business intelligence business is improving at a scale and rate and we feel quietly confident that our ambition to deliver a full year of positive growth in 2016 we can do. And fundamentally, what drives that is the core of that business, 86% of the revenue is in subscriptions. And our subscription renewal rates are ticking up month on month. Our average contract values are ticking up month on month. We had our best month ever in one product in agri, we did just over 96% renewal in the month. So, we feel very good about where we're going in the core business.

The ancillary areas of the business, consulting, advertising and one-off activity, is an area where we're now turning our minds to. But, really, the focus of the long-term future of this business is in and around building our customer management, our insight platforms, our intelligence products and then improving our marketing activity to sit on top of what is now, I think, a much more efficient sales machine.

This business is now firmly organized around market verticals, both in terms of sales and editorial. Those are the five markets that we're in. They're not actually written here in order of either strength or performance, but, definitely, pharma is our strongest, and then, there's a mix across the piece. We have about 100 individually priced digital products that we're taking to market. And we're just beginning to scan the market for interesting additions to this portfolio, as we see the business return to growth.

And then, finally, K&N, the most difficult business to understand from the outside because there isn't an external market proxy for it and so it's quite hard to get your head around if you're not inside the Company. It's also the business that's going through the most radical restructuring. As Gareth alluded to, we have materially pruned or reduced, in simple terms, the events portfolio to a level of hundreds of events that we have cancelled which were really contributing little or nothing, either to the long-term sustainability of the business, and, in large part, were clogging up the operating machine.

This business is now increasingly, much like the global exhibitions business, developing product around brands, where we have market positions in communities and categories where we can build a long-term point of differentiation and some continuous engagement. We have deployed our own digital platform for those core products, they're called digital platform. We've moved the entire business on to one sales force operation for those major brands. We're shifting the use of our customer database to a point that allows us to do, really, very revealing customer analytics on attendance, repeats, value and participation.

That streamlined structure, now focusing really on three verticals, TMT, finance and life sciences, has made it very easy for us to know where we want to invest to grow. And you saw us today announce the addition of the light reading business, on top of what we'd already done organically in the U.S. in TMT, where we had no business at all, and you'll see us continue to do the same in finance and life sciences.

Our ambition here, given the scale of restructuring, is if we can come out of the year flat we'll be comfortable, and we have a quiet confidence that we might do a bit more than that. If you add that all up, where is the Group shaping for the end of the year? I think the top two businesses which are the main engines of the performance of the Group at the moment which were the things we put under the spotlight externally at last year's Investor Day, we feel good about the strong growth in exhibitions and we see no change to that.

Where we're sitting today, our forward-pacing numbers are good, our advanced booking numbers are strong, and our portfolio mix is pretty resilient, both in market sectors and geographies. Academic publishing feels steady year on year. Business intelligence, this will be the year for it to break for growth. And then, the question is can we get to flat or more in K&N? But, actually, its overall scale and contribution to the Group doesn't leave us with the same sort of exposure that historically was the case when you looked at the portfolio.

What's our ambition as we go in to 2017? Is to get to the point whereby we consistently can do steady growth above 3%, maintain our margins, secure the cash flows, and continue to reward our shareholders with a consistent share of the returns in dividend growth, individually. This is where we're to date. We feel we're on track for full-year expectations. And for those of you who are available, please put this date in your diary, on October 6, in London. We'll confirm the location. I'm not entirely sure who the humor will be from, but I assume that will be Richard.

And now is probably the time for questions. Thank you very much for listening.

Question-and-Answer Session

Q - Will Packer

It's Will Packer from Exane BNP Paribas. Three questions from me, please. Firstly, could we have some commentary around the business intelligence performance in H1 by product by vertical? Is there any particular areas which are stronger or weaker driving the recovery in growth? Secondly, at K&N what portion of the minus 5% organic revenue growth was due to product pruning versus the underlying performance? And could you just talk us through your confidence in a strong rebound in H2, because it sounds quite significant?

Stephen Carter

In K&N?

Will Packer


Stephen Carter

That was two. Did I miss a question? Just the rebound, was your third?

Will Packer


Stephen Carter

Okay, let me have a go, and then, maybe, Gareth can come in. Well, maybe take them in the last order. On K&N, my understanding and correct me if I'm wrong, is if you look at that decline it's essentially 50/50, roughly. About one-half of it is pruning. How many events have we not got in the first half that we had this time last year? I'm carrying 200, 300? It's quite a number, Will.

And then, about 50% of it is phasing, because there are three quite significant events that last year were in the first half that will be in the second half this year. So, if you look at those two, that, pretty much, would give you a flat half-year performance which probably answers your rebound question. This business is always second-half weighted. Most of the big brands in the core are in the second half. We've got pretty good forward visibility in to pacing and booking in there, so I think we feel good about the core for the second half. And I think that gives us, certainly, confidence on flat.

On BI, it depends how you measure it. If you did it by ACV, if you did it by annualized contract value, I think the ordering effect would be - this is slightly invidious because, remember, the people inside the business watch this webcast too, so we don't tend to rank league tables of sector performance, but the range is about 75%, up to about north of 90%. And 75% is TMT and north of 90% is agri and pharma.

So, there's a bit of a range on ACV. That's a slightly unfair metric because, actually, we have a much stronger consulting business in TMT than we do, for example, in pharma. So the downside is when you haven't quite got your consulting engines firing across all sectors it doesn't show. And that's an area we've just hired a new head of consulting as part of the talent addition. We're building up the consulting proposition. We're putting some new products to market, so we're doing some new things on pricing and customer consulting.

So, our first order of business was to resolve the subscription issue. Second order of business was to actually invest in the product. We've got a lot of new products coming off the line, we've got a new agri product, we've got three or four new finance products, we've got half a dozen new pharma products. So that gives you a sense of the difference. But I think the headline I would give you, on the subscription and ACV business there isn't a particular strong winner.

I think the difference between how much growth we do versus the growth we will do will be largely a function of the other revenue streams, rather than outperformance or underperformance on subs in the five verticals. That would be my take. I don't know if you want to add any color, Gareth.

Gareth Wright

No, I think on the BI bit, I'd agree with all that. On the K&N bit, I think you'd think say that it just hooks up slightly later than the exhibition revenue streams. And so at this stage, whilst the booking patterns look good and the visibility is good, it's not as developed as an exhibition would be at this stage. We'll be watching it closely as we go through Q3 in to Q4, because October/November, that is the peak trading period for that business.

Will Packer

Great. Thanks.

Stephen Carter

Any other questions? I thought we were going to get away with one question there or maybe three.

Chris Collett

It's Chris Collett from Deutsche Bank. Can I just follow up on BI with could you tell us about the annualized contract value? Where you currently stand today, are you running ahead of where you were this time last year? If so, would you like to tell us how much you're running ahead?

And then secondly was just on the academic business. I know that the GAP investment was never particularly skewed to academic. It looks like there are just a few projects that are coming through. Given the continued subdued growth there, is that an area where you think you would actually like to spend a little bit more, where you have some more projects in mind that you could invest in?

Stephen Carter

Good spot on the second question. Why don't I start with the second and then maybe you come in on the BI, ACV trend? The short answer is, yes, Chris. The way I would describe it is when we started on this program we, I think for good reason, prioritized what I would describe, what I described at the beginning of the presentation, as a renovation, both of the portfolio and the product, in our events and in our intelligence businesses. Because, candidly, they were, how shall I put it, well, they were the areas that needed it most.

And we felt good about the fundamental sustainability of where we were in academic. But no market stands still and the knowledge and learning market in academic, similarly, is moving at a pace. That looks like a very steady-Eddie business, but underneath those big numbers there's a lot of moving parts, as you and I have discussed.

And so, definitely, we do believe there's some investment needed, and we're, in fact, up-ticking the level of investment in academic. And I think, a, that's the right thing to do to preserve the long-term position in that market, and, n, I think it's the right time for us to do it as we grow in confidence in the fundamental resilience of the overall portfolio. I think we didn't have the confidence we had in the other - growing improvement in the other businesses we might be a little bit more cautious on that, but now that we do, it feels to us about the right time to do it.

So, where are we investing which is probably your supplementary question? We're investing in a single-content management system across the entirety of our books and journals business. Currently, they're formatted completely separately, so you can't search across a format. You can't actually search beyond actually subject matter category. So, we're investing quite heavily in discoverability.

We're investing in our author management services, because, ultimately, whether the format ends up in a book or a journal, if you're a content business and we're a content business, your single biggest strength is your relationship with your authors. One of the great strengths of this business is cost of goods sold relative to the return. But you need to invest in your authors and the way in which you manage those relationships, so we're investing there. We're investing in international sales capability, in editorial capability in other markets because we see that as growth, as humanity and social science grows.

And then, finally, we're investing in and around what you might call the professional knowledge markets. If you look at our book categories, where we tend to do best by subject matter is in those categories which are closest to professional activities and professional accreditation. And that's an area, both in books and journals which historically we hadn't nurtured as much as we could do and so we're investing there, actually organically and inorganically.

So when you see us add content in inorganic acquisitions, bolt-on acquisitions, they tend to be in those subject areas as well. But, yes, the temperature's being turned up, in a good way, I think, there. On BI?

Gareth Wright

Yes, on BI, we track the annualized contract value on a regular basis. It just gives us a good run rate feel for how the business is going to trade going forward, rather than how it's traded historically. We've talked about this business being in growth for the full year and the annualized contract position supports that view. It's not up wildly. But in terms of growth year on year, the position does support that.

We haven't talked about movements in ACV specifically period on period in the past, because it's a metric that we've developed recently. But, as I say, it does support and it's consistent with, the idea of growth over the full year.

Simon Davies

It's Simon Davies from Canaccord. Two from me. Firstly, on academic books, you alluded to softness in physical book sales, to what degree is that being offset by digital? And how do you see that playing out for the full year? Secondly, in terms of events, what percentage of revenues now come from the Middle East? And how do you see prospects for that over the next 12 to 18 months?

Stephen Carter

What percentage comes from the Middle East, do you know that number?

Gareth Wright

Shall I pick up the second?

Stephen Carter

A lot less than it was three years ago. I'll answer the forward forecast. We feel okay about the forward forecast. Actually, we've had most of our major events. We've got two major brands in the Middle East at the back end of the year, and, actually, the forward pacing bookings on those are okay, so we're not flagging any question mark there. As a percentage?

Gareth Wright

Obviously, in terms of the exhibition division, that's a key part of the revenue stream. But, as Stephen said, it's a revenue stream and exhibitions' weighted very much towards H1, even Q1, actually, so the exposure in the second half of the year is relatively small.

In terms of K&N, their Middle Eastern revenues are a bit more discretionary in terms of attendance at courses. And also, they've previously had quite a lot of government-funded either courses or training schemes, etc. and, with the oil price, that has been a bit of a drag on their performance in the first half of this year, actually, second half of last year. But overall, in terms of the business, you're looking at 3%, 4% of the business in terms of revenue stream across the whole of the Group, and, therefore, are not individually significant, but certainly an issue for K&N as a division.

Stephen Carter

It's part of why we deliberately moved in to the U.S. two or three years ago, to try and balance out that overdependence in the Middle East, notwithstanding the fact they remain a strong business in exhibitions. On your books question, digital books are growing high single, low double-digit growth.

Physical books, the trouble with these - I noticed yesterday, actually, some analysis on the trade book market that physical books were in growth. It's not our sense of where the academic book market is on physical. It's sort of nominal decline year on year. But, again, that's at a headline level. It depends what category and subject you're in. It really does vary. But the short answer to your question is the net of the two is probably marginal. That would be my read of where we're at the half year.

Steve Liechti

It's Steve Liechti from Investec. Just on exhibitions, you touched on a bit, but just remind me or can you remind me, within your top 20 events, how many of them are actually in the first half?

Stephen Carter

That's a very specific question, Steve, so I'm looking across the room - 75%, there you go.

Steve Liechti

Yes, I thought it was quite a big number.

Stephen Carter

We're very H1 loaded.

Steve Liechti

Yes. So, is it fair to assume, on that basis, that the organic growth - is it fair to assume the organic growth will tail off in the second half, because if, naturally, your top 20 events are growing disproportionately faster than the rest of the portfolio?

Stephen Carter

I'm not giving the business an easy pass in July. Look, I think tail off, it depends what your definition of tail off is. There's no doubt that the bigger brands are doing better, that's for sure. But we've actually still got some big brands to trade in the second half. Greenbuild's in the second half. Middle East - Cityscape, sorry, is in the second half, Cityscape Global. So, we've still got some big brands to trade versus the first half number, might it be off a bit? Might be. But it sort of depends what your definition of tail off is. Might be off a bit where we're in the first half, but we would still expect a strong performance through the year.

Steve Liechti

And second, on K&N, Gareth, this goes back to what you just said, I think, on energy. I think last year you gave us some figures in terms of what the drag from energy was over a certain period, I can't remember what it was. I just wonder, can you give us an equivalent number in the first half what the drag from energy was in K&N?

Gareth Wright

The good news or bad news is it's a lot less than last year, because, unfortunately, it's a significantly smaller business than it was one year or two years ago in terms of K&N. The Dubai business has been a bit of a drag. It's not been a material drag in terms of the organic decline, I wouldn't say, in terms of the percentage points of decline. The main things are the phasing and the volume events taken out, so that would be maybe 0.5 percentage point or something like that, for K&N. But it's certainly a dynamic.

It doesn't help them when they're trying to get back in to growth. But the business is, as I say, substantially smaller than it was 18 months ago.

Steve Liechti

But the comp gets easier in the second half on that basis?

Gareth Wright

In theory, yes. Again, Dubai is a business that really shuts down across the summer, for obvious reasons, so they're never really a second-half growth engine. But the comp would definitely be easier for the first half of next year.

Tom Singlehurst

It's Tom Singlehurst from Citigroup. I had, actually, just one question on academic publishing and it's a bit of a general question. Given we've got quite a lot of FX volatility, I'm interested in how that impacts, in your perception, budgeting decisions for libraries. Does it impact their ability to make more discretionary purchases?

And then, the second linked question is I was speaking to one industry person and they were saying, actually, you tend to get, at an industry level, more discretionary spend toward the second half when you get budget flushes and things like that. Are we potentially building up to a risk that there is a cyclical downdraft in some of the more discretionary areas of outright sales?

Stephen Carter

I don't think we particularly know, is the answer. We're not seeing it at the moment, to answer your question very directly. And we have, as you would expect, in all of our businesses, both as good practice and also given we were doing our results presentation today, gone through quite a significant level of screening and analysis to see whether or not there is any trading effect as a consequence of the very specific issues in the UK and, more generally, because of the currency knock-ons. We don't see that right now.

So that would be our read of that position here today. But I think worth tracking. It could, to your analysis, however, go the other way as well. It could conceivably be a benefit. We're not baking that in either, but it could be. And, indeed, if you look at our academic business, we have a lot of cost here in the United Kingdom and, actually, we have a pretty significant business in the U.S.. So, it cuts both ways.

Simon Baker

It's Simon Baker from Societe Generale. Three questions, please. One, just going on from that review of the business and where you are post-Brexit and UK risks, currency is the key impact, really, for a resilient business, like yourself. Your net debt-to-EBITDA went up to 2.4 times because of currency restatement, if I've got that right. To what extent has that actually changed your own acquisition pipeline and what you might be looking at and what you're thinking there?

Secondly, a bit more of a definitional question. But when we looked at the ROCE chart and we saw ROCE go up, does that include capital employed getting restated because of currency? If not, what would that have looked like if you hadn't got the benefit of sterling weakness within that net income? Thirdly, as you were talking about, the alternative investment priorities under GAP and the academic business comes up, do you still have enough scope within GAP to cover some of these new targets for investment? Or are you starting to increasingly think that it's almost time to push some stuff back for GAP 2, whenever that might be?

Stephen Carter

Well, why don't I take the last question, then, Gareth, maybe you take the ROCE and the spot question on gearing? I think we feel comfortable with the investment range in GAP. I think there is an open question which still remains which is when we go in to 2018, if we hit our growth ambitious, what will be the right going-forward investment level for the business?

I've always taken the view that the first off-the-bat answer to that is certainly higher than it was historically. And, secondly, you would determine the right answer to that depending upon what the mix of the business is which slightly goes to your M&A question.

If we continue to grow in scale in exhibitions, exhibitions is just a less capital-demanding business than either academic or BI. So the mix of the portfolio, by the time we get to 2018, I think, will have the biggest impact on that. But, hopefully, by then what we'll be talking about is a Group that across the board is in growth, and then, that also gives you a different operational leverage that you can work with, too. Gareth, do you want to--?

Gareth Wright

In terms of the leverage at the half year, 2.4 times, that's consistent with where we were this time last year, 2.2 times at the yearend, but 2.4 times at the half year. So, that reflects the shape of our cash generation. We're generally a much more second-half weighted cash generation business, so our half-year leverage tends to be towards the high point of the year because of the payment of the final dividend for the prior year. So, it's not unduly surprising to see it at that level at the half year.

In terms of the hedging, the EBITDA and - the currency split in EBITDA and in the borrowings are pretty correlated. We specifically manage the borrowings that way, to keep the two broadly in line. And also, in the leverage calculation, as I said in the speech, the way that works for our covenant purposes is that we use the average exchange rates for the period to translate the borrowings. So you not getting a mismatch between an average rate of 1.38, say, for the P&L and 1.32 for closing, you got the two at the same rate. So that exchange range volatility is taken in to account in the calculation.

As I said, we're comfortable with how we're managing the volatility risk through the borrowings and through the balance sheet and we're going to continue doing it the way we've been doing it over the last 18 months or so. In terms of ROCE, the FX effect there, yes, the FX, definitely, benefits returns with a strong U.S. dollar, but also, the capital employed gets rebased in the calculation at a higher level as well. So, the two kind of mirror each other out.

In terms of what's driving it, though, as I say, I don't think it's FX. I think the key thing, if I had to pick one thing out, it would be the portfolio management strategy column from GAP. If you remember the six bubbles we've talked about previously in terms of the growth acceleration Plan, one of them is portfolio management. That's about identifying the businesses, delivering lower returns and doing something about them, either through targeted investment, or, in the second-half 2015 you saw us dispose a number of businesses in BI and in large networking. And that, for me, is the key single driver of the improvement of capital employed on that graph.

Nick Dempsey

It's Nick Dempsey from Barclays. Inside your M&A spend in the first half, there's £31 million of other intangible asset purchases. That was £41 million for last year. How much of that is earnouts? And should we be knocking in £30 million, £40 million every year for earnouts the next few years?

Stephen Carter

Great question. None of it's mine, Nick.

Gareth Wright

A reasonable amount of it is earnout. We would say that we start every year with - it depends on the year, but you start with £10 million, £20 million, maybe more, in terms of deferred and contingent consideration in our cash flow for prior-year deals. So, that is a dynamic that we budget for, it's included in our guidance and it is a factor that - in our numbers. When we talk about our leverage calculation, actually, be clear, we do add that deferred consideration to our leverage when we talk about the numbers.

So we've got a full-year benefit from the earnings from the earnings from the acquisitions, but we also have the full cost of the acquisitions in the borrowing number that we're using for our leverage calculation, so there's no mismatch in terms of the leverage number.

Nick Dempsey

The difference between that £10 million to £20 million and the £41 million last year, was that small bits and pieces?

Gareth Wright

Yes, exactly, it's been the volume of events, volume of acquisitions and the timing of deferred discretionary payments. Some of them were very quickly after the completion date. Some of them we stagger out over a number of years where we feel we've got a development proposition in the business and we're buying it because it's long-term positioning. Therefore, in that situation you have a longer tail on deferred consideration payments, and, effectively, we remunerate the management team for delivering the business case they have sold to us.

Patrick Wellington

It's Patrick Wellington from Morgan Stanley. A couple of questions. You were interested in buying part of the Thomson Reuters IP business, we believe. Can you tell us what sort of assets you were after there and how much you might have spent and, indeed, whether the rise in leverage has put you off the scale of bolt-on acquisitions?

And the second one is I think you said at the end of your presentation that you're looking consistently longer term for about 3% organic revenue growth and a stable margin. Stable margin? A bit surprising. Does that suggest that your exhibitions' margin is vastly higher by the standards of the industry and, probably, doesn't go up and might go down over time?

Stephen Carter

Let me have a go and then Gareth can come in. We don't - I don't think we have - unless Richard's going to correct me, I don't think we commented on the rumor in relation to the asset that you referred to and I don't think we would. To your more specific and general question, really, to Gareth's point about capital employed, we're - through an acquisition lens, our first objective, if it's what you might call a scale acquisition rather than a bolt-on acquisition, is the quality of the asset. And in the main, we have been focused largely looking at the exhibitions market and academic publishing.

And then, if we wanted to drill that down a bit further, we're more focused on particular markets, particular verticals where we think we bring competency and a market position. And then, if we wanted to go a little bit further which maybe leads me in to your margin question, we're - the reason why we've weighted ourselves more to the U.S. is because the U.S. business has very attractive margin features.

Might that tick down a bit over time? It's possible, Patrick, but I don't think materially. I certainly don't think it's going to tick up, because we've got really very, very strong margins in our exhibitions business.

But maybe slightly, to connect your question and Nick's previous question on the earnout, the earnout feature tends to be a function of smaller bolt-on acquisitions, generally. When you're doing the larger institutional they tend to be different deal structures, for obvious reasons. Is there anything else you want to add, Gareth?

Gareth Wright

No. I think, as you say, there's an operating gearing benefit from the exhibitions business growing. But we're also looking to position it for stronger future growth. So things like bringing in a CTO in the second half of last year, bringing in a digital revenue specialist, as we talked about at the Investor Day, these are capabilities that we've added since the first half of last year that, I think, give us better growth prospects going forward, but obviously don't deliver immediately on day one in terms of business.

Stephen Carter

Any other questions? Great. Well, listen, I appreciate everyone's time. It's a busy day. Thank you very much for coming. And, if you're having a summer, have a good one.

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