Henry Hayden

Henry Hayden inquired about McGraw Hill's competitive moats against AI disintermediation and what uniquely differentiates its capabilities from GenAI native new entrants. He also asked about the margin outlook as data becomes 'AI-ready' and the increased cost to store and leverage such data.

Answer

Simon Allen, Chairman, President, and CEO, emphasized that AI is a significant tailwind for McGraw Hill, citing products like AI Reader, Sharpen Advantage, Clinical Reasoning, and ALEKS (Adventure and Calculus) as functional, efficacious tools that improve learning outcomes. He highlighted McGraw Hill's 137 years of trusted content, position in the education community, and reliability as key moats. Bob Sallmann, EVP and CFO, stated that AI is expected to lead to margin expansion over time, as tools like Scribe reduce content creation costs by 60% and time to market by 50%, offsetting compute costs.

Henry Hayden followed up on the margin outlook, inquiring about the increased cost to store and leverage 'AI-ready' data as it becomes a more substantial part of McGraw Hill's offering.

Answer

Bob Sallmann, EVP and CFO, stated that McGraw Hill views AI as a driver of margin expansion over time. He explained that while there are compute costs, these are offset by cost reductions in product and platform development, citing Scribe's ability to reduce costs by 60% and time to market by 50% in certain use cases.

Henry Hayden from Rothschild & Co Redburn asked for color on competitor comments regarding LexisNexis 'flexing its scale' in auto insurance, the financial health and sales cycle dynamics within the legal industry, and the company's capital allocation strategy concerning leverage, buybacks, and potential M&A.

Answer

CFO Nick Luff stated that LexisNexis maintains a strong position in auto insurance through continuous innovation and value addition, not just price increases. CEO Erik Engstrom assessed the legal industry as being in relatively good shape, with receptive customers keen on leveraging new tools for competitive advantage. Luff further explained that capital allocation prioritizes organic development, with buybacks used to balance leverage within the target 2-2.5x range, while M&A is considered for accelerating organic growth.

Henry Hayden asked for color on competitor comments about LexisNexis "flexing its scale" in auto insurance within the Risk division, inquiring if it's due to pricing, bundling, or innovation. He also questioned the financial state of the legal industry, the sales cycle, and budget capacity for new solutions. Finally, he asked about capital allocation strategy, specifically if leverage below target means more buybacks or increased appetite for M&A, and if so, in which areas or at what scale.

Answer

CFO Nick Luff stated that RELX has a strong position in auto insurance, continuously innovating and adding value through new products rather than just raising prices, operating in a competitive market. CEO Erik Engstrom assessed the legal industry as being in "relatively good shape," with customers receptive to new tools that offer a competitive edge. CFO Nick Luff explained that while leverage was below target last year, it's now within the target range. He reiterated that the primary focus is organic development, with M&A used to enhance and accelerate organic growth, and buybacks used to balance the capital structure around the target leverage range.

Henry Hayden of Rothschild & Co Redburn asked about client demand trends in the legal industry, the growth and margin contribution from digital tools in Exhibitions, and the company's thinking on leverage and potential for larger M&A.

Answer

CEO Erik Engstrom responded that the value uplift from new AI tools is a more significant driver for its Legal business than macro industry trends. CFO Nick Luff explained that digital tools in Exhibitions are an integrated part of the value proposition driving overall growth, not a separately priced item. Regarding M&A, Luff reiterated that while the focus is organic growth, the balance sheet has flexibility to exceed the 2.5x leverage target for the right acquisitions, with an ability to de-lever quickly.

Henry Hayden of Rothschild & Co Redburn inquired about client demand trends in the legal industry, the growth and margin contribution from digital tools in Exhibitions, and the company's stance on balance sheet leverage for potential M&A.

Answer

CEO Erik Engstrom responded that the value uplift from new tools is a more significant driver for its Legal business than general industry demand trends. CFO Nick Luff explained that digital tools in Exhibitions are an integrated part of the value proposition and not easily separated out. Regarding leverage, Luff reiterated a focus on organic growth but confirmed the company has the capacity to exceed its 2.0-2.5x net debt/EBITDA range for the right acquisitions due to strong cash generation.

Henry Hayden of Rothschild & Co Redburn asked about legal industry demand trends, the growth and margin contribution from digital tools in Exhibitions, and the company's stance on balance sheet leverage for potential M&A.

Answer

CEO Erik Engstrom responded that the value uplift from RELX's new tools is a more significant growth driver than macro trends in the legal industry. CFO Nick Luff explained that digital tools in Exhibitions are an integrated part of the value proposition and not easily separated out. Regarding the balance sheet, Luff reiterated that the primary focus is organic growth but confirmed the company has the flexibility to go above its target leverage range for the right acquisitions.

Henry Hayden of Rothschild & Co Redburn asked about client demand trends in the legal industry, the incremental contribution of digital tools in Exhibitions, and the company's thinking on leverage in relation to potential M&A.

Answer

CEO Erik Engstrom responded that the value uplift from new AI tools is a more significant driver for the Legal division than macro industry trends. CFO Nick Luff explained that digital tools in Exhibitions are an integral part of the value proposition and hard to separate out financially. He also stated that while the focus is organic growth, the company's leverage range could be temporarily exceeded for the right acquisitions.