RELX PLC (NYSE:RELX) Q4 2023 Earnings Call Transcript

RELX PLC (NYSE:RELX) Q4 2023 Earnings Call Transcript February 15, 2024

RELX PLC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Erik Engstrom : Good morning, everybody. Thank you for taking the time to join us today. As you may have seen from our press release this morning, we delivered strong financial results in 2023, and we make further operational and strategic progress. Underlying revenue growth was 8%. Underlying adjusted operating profit growth was 13%. Adjusted earnings per share growth was 11% at constant currency, and we are proposing an 8% increase in the pound sterling full year dividend. All four business areas performed well in 2023. And on this chart, you can also see the relative sizes of the business segment within each business area. In Risk, strong fundamentals continue to drive underlying revenue growth of 8% with underlying adjusted operating profit growth of 9%.

In Business Services, which represents around 45% divisional revenue, growth continued to be driven by financial crime compliance and digital fraud and identity solutions, and we saw a strengthening in new sales in the second half. In Insurance, which represents just under 40% of divisional revenue, strong growth was driven by further expansion of solution sets across markets supported by positive market factors. Specialized industry data services, which represents just over 10% of divisional revenue, saw strong growth led by the Commodity Intelligence and Aviation segment. Going forward, we expect continued strong underlying revenue growth with underlying adjusted operating profit growth, slightly exceeding underlying revenue growth. In STM, further development of analytics continues to drive the ongoing shift in business mix towards higher growth segments.

Underlying revenue growth was 4% and underlying adjusted operating profit growth was also 4% with a slight increase in adjusted operating margin. In databases, tools and electronic reference and corporate primary research, which together represents around 45% of divisional revenue, strong growth was driven by further development of higher value-add analytics and decision tools. Primary Research, Academic and Government segments, which also represents around 45% of divisional revenue, continued to be driven by strong growth in article submissions with pay to publish open access articles growing particularly strong. Going forward, we expect continued good underlying revenue growth, with underlying adjusted operating profit growth slightly exceeding online revenue growth.

In Legal, we saw a further improvement in underlying revenue growth to 6%, up from 5% last year, driven by the continued shift in business mix towards higher-growth legal analytics. Underlying adjusted operating profit growth was ahead of revenue growth at 8%. We continue to see strong growth in Law Firm and Corporate Markets, which account for over 60% of divisional revenue. Lexis+, our integrated analytics offering, has continued to see strong uptick and usage growth across customer segments. Lexis+ AI, our new platform, leveraging generative AI functionality, was launched commercially in October. The initial customer reaction has been very positive and the rollout has started well. Going forward, we expect continued strong underlying revenue growth with underlying adjusted operating profit growth exceeding underlying revenue growth.

Exhibitions delivered strong revenue growth and an improvement in profitability. Underlying revenue growth was 30%, driven by a significant increase in face-to-face activity with average like-for-like event revenue across the portfolio ahead of pre-pandemic levels for the full year. The improvement in profitability reflects both the higher activity levels and the structurally lower cost base with the adjusted operating margin also above pre-pandemic levels for the full year. Going forward, we expect strong underlying revenue growth with a further improvement in adjusted operating margin. Our strategic direction is unchanged. We leverage deep customer understanding to combine leading content and data sets with powerful technologies in global platforms to build increasingly sophisticated information-based analytics and decision tools that deliver enhanced value to professional and business customers across market segments.

We have been able to develop and deploy these tools across the company by embracing artificial intelligence technologies for well over a decade. We are confident that our ability to leverage AI and other technologies as they evolve will continue to be an important driver of customer value and growth in our business for many years to come. Our growth objectives are: for Risk, to sustain strong long-term growth in the current range; for both STM and Legal, to continue on the improving growth trajectory; and for Exhibitions, to continue on the improved long-term growth profile. When combined with our strategy of driving continuous process innovation to manage cost growth below revenue growth, resulted continued strong earnings growth with improving returns.

I will now hand over to Nick Luff, our CFO, who will talk you through our results in more detail. I will be back afterwards for a quick wrap-up and our usual Q&A.

Nicholas Luff : Thank you, Erik. Good morning, everyone. Let me start by providing more detail on the group financials. As Erik said, underlying revenue growth was 8% with underlying adjusted operating profit growth well ahead of that at 13%. As a result, the adjusted operating margin improved to 33.1%. Improved operating results flowed through to adjusted earnings per share, which increased 11% at constant currency despite higher interest rates. Returns continue to improve with ROIC up 1.5 percentage points to 14%. Cash conversion was strong at 98%, contributing to a slight reduction in leverage to 2.0x at the lower end of our typical range. Given our overall performance, we have been able to increase the proposed full year dividend by 8% to 58.8p per share.

Acquisition spend in the year is relatively modest at GBP 130 million, and we deployed GBP 800 million on share buybacks. Looking at revenue, you can see the continued strong growth in Risk, while STM maintained its improved growth rate and Legal with a pickup in its growth. These strong growth, together with the sustained recovery of Exhibitions took underlying revenue growth for the group as a whole to 8%. Electronic revenue, representing 83% of the total, grew GBP 0.07 underlying with the strong growth in face-to-face activity, more than offsetting the print decline, given the overall rate of 8%. It was a 1 percentage point drag on overall growth from the effects of biannual events cycling out in Exhibitions while currency movements were broadly neutral to the group level, resulting in reported revenue growth in sterling was 7%.

Risk and Legal delivered strong underlying growth in adjusted operating profit, both slightly ahead of revenue growth while STM underlying profit growth was in line with revenue growth. Exhibitions profit saw very strong growth, reflecting the increase in activity levels against a structurally lower cost base. Overall, group adjusted operating profit was up 13% underlying, up 12% in total of constant currency and up 13% in sterling to over GBP 3 billion. Margins were up slightly in Risk and STM and up a little more in Legal as we continue to focus on keeping cost growth below revenue growth across the group. Exhibitions margins are now above the levels achieved pre-pandemic. Combined, these movements saw group margins increased to 33.1%, an improvement of 1.7 percentage points.

Here’s the group adjusted income statement showing the underlying growth of 8% in revenue and 13% in operating profit. The interest expense increased with the effect of interest rate and gross debt up to 4.6%, reflecting higher rates for dollars and for euros. The interest expense includes a charge of GBP 26 million for the early redemption of a high coupon bond. Without that, the effective interest rate would have been 4.2%. The tax charge was GBP 553 million with an effective tax rate of 20.4%. The tax rate benefited from nonrecurring tax credits, which resulted in an effective rate below our normal ongoing rate. Net profit was close to GBP 2.2 billion, up 9% at constant currency and up 10% in sterling. All that gave us adjusted earnings per share of 114p, up 11% at constant currency and up 12% in sterling.

Here, you can see how the high earnings flow to cash flow with EBITDA now over GBP 3.5 billion. CapEx was GBP 477 million equating to 5% of revenue, leaving us with adjusted cash flow conversion of 98%, similar to typical levels pre-pandemic. Cash interest paid was GBP 294 million, the increase reflecting higher interest rates. Cash tax paid of GBP 619 million was higher than the income statement charge, which benefited from the nonrecurring tax credits, which were noncash. Total free cash flow was just under GBP 2 billion. Here’s how we deployed that free cash flow. We completed 6 small acquisitions during the year for a total consideration of GBP 130 million, the largest of which was Human API, a health care data platform that joins the life insurance segment within Risk.

Total dividend payments in the year were close to GBP 1.1 billion, and we deployed GBP 800 million on the share buyback. Overall, with an acquisition, dividends and share buybacks broadly utilized the full GBP 2 billion of free cash flow. Year-end net debt decreased slightly as a result of currency translation effects. Our priorities for use of cash are unchanged, although it remains our #1 priority, and we continue to invest in the business with CapEx consistently around 5% of revenues. We augment that [indiscernible] with the level of visions, with the level of spend typically being the most significant variable in our uses of cash, depending on the opportunities that arise. Average acquisition spend over both the last 5 and 10 years has been around GBP 400 million with 2023, a below average year.

We pay out around half of our adjusted earnings in dividends and have been able to increase the dividend every year for well over a decade. Leverage has typically been in the 2.0x to 2.5x range, strong cash generation, improving EBITDA and modest acquisition spend in the year mean leverage was at the lower end range at the end of 2023 at 2.0x net debt to EBITDA. We continue to return our surplus capital through the share buyback with GBP 1 billion of spend announced today for 2024, of which GBP 150 million has already been deployed. Alongside our financial performance, we continue to make progress on our corporate responsibility objectives. Anchored by the purpose of the company, we focus primarily on our unique contributions using our products and skills to benefit society in ways only we can.

We also performed well on those metrics where we can be compared to others. This is a selection of our key CR data showing that 2023 was another year of solid progress. And our commitment to corporate responsibility continues to be recognized by external reporting agencies. We rated AAA with MSCI for an eighth consecutive year and ranked second in our sector globally with Sustainalytics in the top 1% of companies overall. With that, I will hand you back to Erik.

Erik Engstrom: Thank you, Nick. Just to summarize what we have covered this morning. In 2023, we delivered strong financial results and we made further operational and strategic progress. The improving long-term growth trajectory is being driven by the ongoing shift in our business mix towards higher growth analytics and decision tools. Going forward, we continue to see positive momentum across the group and we expect another year of strong underlying growth in revenue and adjusted operating profit as well as strong growth in adjusted earnings per share on a constant currency basis. And with that, I think we’re ready to go to questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of George Webb with Morgan Stanley.

George Webb: Thank you, I want to start with 2 areas, please. Firstly, on the Lexis+ AI side, in terms of how customers are reacting around commercial launch, noting that this is a platform upgrade, are you expecting customers to wait until the end of their renewal cycles if they want to make the upgrade? Or are you seeing customers come in to you ahead of renewal? And then also around that [indiscernible] days, can you give any feel for the levels of initial commercial uptick you’ve been seeing as you’ve gone through that rollout? And secondly, when you think about the M&A environment into 2024, you pointed out, Nick, that over the last few years and particularly in 2023, it’s been a — about smaller deals, that spend has been at a lower end. Do you expect that to change this year based on what you’re seeing in terms of your potential acquisition pipeline as well as the valuation levels out there?

Erik Engstrom: Okay. I’ll let Nick answer the second, but let me take the first here that I think when it comes to something as important, I guess, as the deployment of generative AI, I think we’re likely to see a combination of both. Traditionally, platform upgrades have come into play at the renewal cycle, most of the time, which is typically 3-year renewals, which is why deployment or penetration of new platforms come through gradually. But I think in this case, I think we’re going to see a combination of both. I think we’ll see some of that wait renewal, and I think we will see many that also step up as a new sale, as an upgrade whenever they see it available. We will see, of course, over time how that pattern develops. You asked about early signs because we are doing very well in the marketplace, we get very significant positive feedback from our customers.

We track a significant number of internal metrics on that. But because it’s a competitive market, and we have other players also participating, we have not been disclosing and don’t plan to disclose detailed tracking of what those metrics look like. But it’s a very, very positive early launch that I think our customers are very happy with and that we are very happy with.

Nicholas Luff: George, on your question on M&A. And obviously, as you know, our focus is on organic development primarily as a business, and there’s lots of opportunities to continue to grow, continue to adopt new technologies within the business without acquisition. But we do look for where there are things that can enhance, accelerate the organic development. We will look at acquisitions. That typically means they are in what you might call bolt-on size. And obviously, what happens in year-to-year very much varies with the opportunities within that. But there’s nothing different in the pipeline and range of opportunities that we see today than normal. Last year happened to work out to be a relatively low year, but that was just the way it fell.

No change in approach and nothing particularly different in the pipeline valuations. Not the key, really. Obviously, what matters is the value to us, and that’s where we see opportunities that can add value to our business, we’ll go after them, but it does vary from year to year.

Operator: The next question comes from the line of Adam Berlin with UBS.

Adam Berlin: Two from me. Firstly, on STM, can you give us some metrics on the Journals business for this year, submissions, articles published growth in number of pay to publish articles, that would be very helpful, just to understand the dynamics there. And the second thing is, can you give us the impact of the biannual events returning in 2024, the pound impact or percentage impact to help us model Exhibitions revenue for 2024?

Erik Engstrom: Again, I’ll give the second one to — ask Nick to answer the second one here. On STM, in the Journal business, as you know, the main driver of that business is the long-term volume growth in the industry. The long-term driver, of course, has been the increase in number continues to grow. But how that then impacts their research activity and submissions to us is a key driver. And the number of article submissions to us increased significantly last year so that if you now look at an absolute growth rate maybe average two years typically because it was, again, higher this past year than it was the year before, and it came back pretty rapidly. But if you look at the two together, we’re back in the sort of strong growth, high single digits that we’ve averaged over a longer term historically, and you would probably take as a typical increase in the long run.

So back to very strong growth even if you take a 2-year average, not just a strong — the very strong one we had last year. When it comes to submissions to pay to publish, that’s going even faster. I mean we’re talking now at — depending on who define some of the ones where they opt later, we’re talking about submission growth rates in the 30% plus category and we’re talking about number of articles published in pay to publish growing at 20% or 20% to 30% range in the past year. So it’s very — continued very strong growth and that looks very healthy to us. And Nick, on Exhibition.

Nicholas Luff: Yes, Adam, the cycling events, the biannual cycling events, as you say, and we are now really back to the normal historic pattern and being an even year 2024, it’s like continuously you’ll see a boost to the revenues from that. But that typical — if you look back in history, 5%, 6% plus or minus, depending on which is whether it’s cycling in or cycling out, that’s a good guide.

Adam Berlin: Great. And can I just have one more question. Any comment on Germany, German — I know that you don’t comment on specific deals, but are the uni in Germany, can you tell us if the German universities are signing up to the new project deal and if that — if there’s momentum there?

Erik Engstrom: Well, I mean, as I said, the main driver of growth, growth in volume and growth in revenue in the primary research segment of our STM business is volume growth, volume of article submissions and therefore, over time, what we publish on that. And as you have seen, if you followed us for a long time, as many of you have, you’ve noticed that the exact method with which they pay, whether pay to read or paid to publish or if they put together or separately, how they buy doesn’t seem to have had much of the impact on the growth trade trajectory historically. And I expect that to continue, that the main driver is going to continue to be volume growth and that how they pay and how they buy together or separate, again, it’s not likely to have a very big impact on the growth trajectory going forward either.

Operator: The next question comes from the line of Carl Murdock-Smith with Berenberg.

Carl Murdock-Smith: Two from me. Firstly, just in terms of your comments, you said that you expect both STM and Legal to continue on the improving growth trajectory. I just wanted to kind of ask what you mean by trajectory there. So do you expect further acceleration from the 6% in Legal and 4% in STM? Or do you mean for it to simply continue at that higher growth rates relative to historic? And then secondly, along the same theme, I was wondering if you could just comment on pricing discussions with customers, particularly if inflation comes down or whether you’re finding your pricing discussions kind of not really impacted by inflation as your growth has been in the past?

Erik Engstrom: Yes. So I’ll again cover the first, and I’ll ask Nick to cover the second on pricing. Well, as we say in our press releases, as you’ve seen, is that the improving growth trajectory over the last few years and in this year continues to be driven by the ongoing shift in business mix towards higher growth analytics and decision tools. That’s our strategy, and it continues to be our strategy. And therefore, the growth objective, for both STM and Legal, the growth objectives are to continue on this improving trajectory. That means to continue to drive the business mix shift towards higher growth analytics and decision tools. However, to develop, to deploy and then to sell these tools have a certain cycle and those divisions are 75% to 80% subscription based often with sort of 3-year contracts that roll through.

So therefore, I think you have to continue to assume that the improvement in growth rate is going to come through gradually over the next several years that this is not a 1-year flip and it isn’t what we have had, and it’s probably not what you’re going to see going forward. But when I say the growth objective is to continue on the improving growth trajectory, that’s what I mean.

Nicholas Luff: And on the question on inflation. I mean our pricing has never really been that influenced by inflation, whether it’s high or low. It’s all about the value we can provide to customers. And of course, the growth is being driven by the introduction of new tools, new features, new data sets, new analytics. And of course, if we get greater adoption of that across a range of customers and each and individual a customer taking up more of those tools, you will see increased spend from individual customers. That’s not really an increase in price. And if you look at any kind of unit pricing metrics, actually, it’s always coming — typically will be coming down, and we’re representing that additional value. So it’s — we’ve not seen a change in that. So the inflation rate in the general economy is not particularly relevant to our pricing.

Operator: The next question comes from the line of Nick Dempsey with Barclays.

Nick Dempsey : I have three questions. So first of all, Thomson Reuters last week was talking about price contributing about 3.5 points to their revenue growth, that was on a group basis. Obviously, quite a lot of that is legal. Nick just talked about price not being a very relevant part of what you do. So is there a true difference between how Thompson Reuters and you are thinking about pricing legal? Was there perhaps a definitional difference here between whether we’re talking about customers spending more or a true price increase? That’s the first question. Second one, can you give us an indication of the underlying market trends that you are currently seeing in both insurance and business services within Risk? So are you seeing some tough comps now in insurance after last year’s good start to the year?

Just an understanding of that picture now. And the last question, you’ve already answered a couple of questions on Lexis+ AI. I was just wondering if you can give us a bit more of an indication of this interest. So are we talking about hundreds of law firms? And within firms, are they taking that product, that platform on a widespread basis across the firm, so you’d see a noticeable difference on their spend? Or are we talking about a few units or geographies trialing it?