17th Feb 2005 07:01
Reed Elsevier PLC17 February 2005 Reed Elsevier ISSUED ON BEHALF OF REED ELSEVIER PLC AND REED ELSEVIER NV 17 FEBRUARY 2005 REED ELSEVIER: HIGHLIGHTS OF 2004 PRELIMINARY RESULTS CONTINUED POSITIVE PROGRESS AND INCREASING BENEFIT FROM STRATEGIC INITIATIVES • Revenues up 5%, adjusted pre-tax profits up 8%, adjusted earnings per share up 8% at constant exchange rates • Continued good progress and outperformance across most businesses, with revenue momentum building • Markets showing encouraging initial signs of recovery and growth • Reported results reflect adverse currency translation effects from weaker US dollar • Organic revenue growth of at least 5% targeted for 2005 and beyond and double digit adjusted earnings per share growth at constant currencies • More progressive dividend policy adopted REED ELSEVIER 2004 2003 2004 2003 Change at £m £m •m •m constant currencies %__________________________________________________________________________________________________________________Turnover 4,812 4,925 7,074 7,141 +5%Reported profit before taxation 562 519 826 752 +12%Adjusted profit before taxation 1,027 1,010 1,510 1,465 +8%__________________________________________________________________________________________________________________Adjusted figures are presented as additional performance measures and are statedbefore amortisation of goodwill and intangible assets and exceptional items. PARENT COMPANIES Reed Elsevier PLC Reed Elsevier NV _________________________ ____________________________________________ 2004 2003 Change 2004 2003 Change Change at % % constant currencies %_________________________________________________________________________________________________________________Reported earnings per share 12.0p 13.4p -10% €0.28 €0.31 -10%Adjusted earnings per share 31.8p 31.2p +2% €0.71 €0.69 +3% +8%Dividend per share 13.0p 12.0p +8% €0.33 €0.30 +10%_________________________________________________________________________________________________________________ Sir Crispin Davis, Chief Executive Officer of Reed Elsevier, commented: "In recent years we have made enormous strides in executing against our strategyfor growth. Our markets have not been easy over that period but are now clearlyon the turn. Reed Elsevier is very well placed to capitalise on this improvingenvironment, through the quality of our portfolio, the consistent strategicfocus, and our investment behind growth initiatives. Strong revenue growth andcost efficiency, with growing returns on recent investments and acquisitions,are targeted to deliver in 2005 and beyond organic revenue growth of at least 5%and double digit adjusted earnings per share growth at constant currencies." ENQUIRIES Sybella Stanley (Investors) Catherine May (Media) +44 20 7166 5630 +44 20 7166 5657 REED ELSEVIER COMBINED BUSINESSES 2004 2003 2004 2003 Change at £m £m •m •m constant currencies %__________________________________________________________________________________________________________________Reported figuresTurnover 4,812 4,925 7,074 7,141 +5%Operating profit 697 661 1,024 958 +10%Profit before taxation 562 519 826 752 +12%Net borrowings 2,532 2,372 3,570 3,368__________________________________________________________________________________________________________________Adjusted figuresOperating profit 1,159 1,178 1,704 1,708 +5%Profit before taxation 1,027 1,010 1,510 1,465 +8%Operating cash flow 1,050 1,028 1,544 1,491 +9%__________________________________________________________________________________________________________________Operating margin 24% 24% 24% 24%Operating cash flow conversion 91% 87% 91% 87%Interest cover (times) 8.8 7.0 8.8 7.0__________________________________________________________________________________________________________________ The Reed Elsevier combined businesses encompass the businesses of Reed ElsevierGroup plc and Elsevier Reed Finance BV, together with their two parentcompanies, Reed Elsevier PLC and Reed Elsevier NV (the 'Reed Elsevier combinedbusinesses'). The financial highlights presented refer to 'adjusted' profit and cash flowfigures. These figures are used by the Reed Elsevier businesses as additionalperformance measures and are stated before the amortisation of goodwill andintangible assets, exceptional items and related tax effects. A reconciliationbetween the reported and adjusted figures is provided in Note 5 to thePreliminary Statement. The percentage change at constant currencies refers to the movements at constantexchange rates, using 2003 full year average rates. PARENT COMPANIES Reed Elsevier PLC Reed Elsevier NV _________________________ ____________________________________________ 2004 2003 Change 2004 2003 Change Change at £m £m % •m •m % constant currencies %_________________________________________________________________________________________________________________Reported profit 152 169 -10% 223 242 -8%attributableAdjusted profit 402 394 +2% 559 540 +4% +8%attributableAverage US$:£/• exchange 1.83 1.63 1.24 1.12rateReported earnings per 12.0p 13.4p -10% €0.28 €0.31 -10%shareAdjusted earnings per 31.8p 31.2p +2% €0.71 €0.69 +3% +8%shareDividend per share 13.0p 12.0p +8% €0.33 €0.30 +10%_________________________________________________________________________________________________________________ The results of Reed Elsevier PLC reflect its shareholders' 52.9% economicinterest in the Reed Elsevier combined businesses. The results of Reed ElsevierNV reflect its shareholders' 50% economic interest in the Reed Elsevier combinedbusinesses. The respective economic interests of the Reed Elsevier PLC and ReedElsevier NV shareholders take account of Reed Elsevier PLC's 5.8% interest inReed Elsevier NV. REPORT OF THE CHAIRMAN AND THE CHIEF EXECUTIVE OFFICER We are pleased to report on a year of further good progress at Reed Elsevier. The continued positive progress reflects the underlying strengths of thebusiness: leadership positions in attractive sectors, strong brands, and goodportfolio/geographic spread. The business is also increasingly benefiting fromthe strategic initiatives put in place in recent years: product innovation andsuperiority, strengthened sales and marketing, consistent programme ofinvestment, and tight control of costs and working capital. We are now starting to see definite improvements in our market environment, withmost sectors showing positive growth trends. With the benefits from ourstrategic programme also coming through, momentum is building behind our revenueand profit growth. We are positive about the outlook for 2005 and beyond. Financial Performance At constant exchange rates, the overall revenue growth, including acquisitions,was 5%. Underlying revenue growth, excludingacquisitions and disposals, improved to 3%, up from 0% in the prior year, withproduct innovation and market initiatives contributing in an otherwise lowoverall market growth environment. Adjusted operating margins improved despitehigher levels of investment in the business, and there was strong cashconversion with 91% of adjusted operating profits turning into cash. Adjustedpre tax profits and earnings per share at constant currencies were up 8%, at theupper end of the target range that we announced at the beginning of the year.(Adjusted figures exclude amortisation of goodwill and intangible assets andexceptional items.) The results for the year, at reported exchange rates, are significantlyinfluenced by the currency translation effects of a weaker US dollar, which,whilst not impacting the underlying business, has lowered the reported resultsof our US businesses when translated into sterling and euros. At reported exchange rates, total revenues were £4,812m/€7,074m, 2% lower thanin the prior year when expressed in sterling and 1% lower when expressed ineuros, reflecting this adverse impact of currency translation on our USbusinesses. The adjusted pre-tax profits at £1,027m/€1,510m were however up 2%when reported in sterling and up 3% in euros, including a countervailingfavourable effect when translating the predominantly US dollar interest expenseon our debt. Adjusted earnings per share were up 2% for Reed Elsevier PLC at31.8p, and up 3% for Reed Elsevier NV at €0.71. The Elsevier science and medical business has seen strong subscription renewals,growing online sales, and a successful medical book publishing programme.Underlying revenue growth at 4% was however a little disappointing, held back bybudgetary constraints in academic institutions and some new product delay.Growth should now improve with new products launched and widening distribution,and some initial signs of easing of budgetary pressures. LexisNexis had a good year, with revenue growth building as the investmentprogramme pays back, delivering new publishing, better product functionalitiesand more powerful online services, as well as improved marketing and saleseffectiveness. Underlying revenue growth was 4%, up from 3% in the prior year.Demand for products linked to workflow applications and in risk management isalso accelerating growth, with recent acquisitions in these areas performingwell. The International business outside the US grew particularly strongly. The Harcourt Education business has performed well against a weak US schoolsmarket which has seen the last year of a three year trough in the state textbookadoption cycle. Underlying revenue growth was 2%. New textbook programmes haveperformed well, with Harcourt gaining the no. 1 position in available statetextbook adoptions, and good growth was seen in the assessment business and ininternational markets. The business is very well placed for the strong reboundin market growth in 2005 as the adoption cycle turns. Reed Business saw clear signs of recovery in its markets for the first time infour years, and revenues moved ahead with 2% growth compared to a 5% decline in2003. An increasing number of sectors and geographies are seeing positivegrowth momentum, and online services and exhibitions are performing well.Faster growth is expected in 2005 as markets continue to strengthen and wecontinue to focus on market share, yield and new product introduction. Overall, across the business, for 2005 we are targeting underlying revenuegrowth of at least 5% and to return to our long term target of double digitgrowth in adjusted earnings per share at constant currencies. With the evidentmomentum in the business, we believe that, given a reasonable marketenvironment, these are sustainable targets for growth beyond 2005. In 2000, as part of our investment led strategy for growth, we established apolicy of modest growth in dividends. Given the strengthening performance ofthe business, the strong cash generation and positive outlook, we intend now topursue a more progressive dividend policy. Accordingly, equalised finaldividends of 9.6p for Reed Elsevier PLC and €0.24 for Reed Elsevier NV areproposed, representing increases of 10% and 9% respectively on the prior year.Together with the interim dividends, these give total dividends of 13.0p and€0.33 respectively, up 8% for Reed Elsevier PLC and 10% for Reed Elsevier NV onthe prior year dividends. (The difference in dividend growth rates reflects theimpact of currency movements since the prior year dividend declaration dates.) The Operating and Financial Review describes the performances of our businessesin greater detail. It also explains the effects of moving to InternationalFinancial Reporting Standards for the 2005 financial year. Business Progress 2004 has seen many exciting new developments across the Reed Elsevier business,with innovative new products and services, widening distribution and geographicreach, and the impact of our investment programme showing through inaccelerating revenue growth. In November, Elsevier launched the Scopus scientific abstract navigation serviceto significant market acclaim. With abstracts of nearly 30 million scientificresearch articles, from 14,000 peer reviewed publications, Scopus is the mostcomprehensive and intuitive tool for scientists to navigate their way throughthe world's accumulated scientific research. The service was developed in closecollaboration with 20 library partners. LexisNexis, in February, launched its new global online delivery platform inFrance, followed later in the year by Germany, Australia and the UK, and theresponse of customers has been overwhelmingly positive. The new platformprovides a step change in functionality and utility for our legal and corporatecustomers and the take up in new contracts is exceeding expectations. Theplatform will be rolled out across the rest of our geographies over the next twoyears. LexisNexis has also been focusing on expanding its electronic services to itslegal and other customers who are increasingly looking to integrated electronicsolutions to improve workflow productivity. This demand is evidenced by theexceptional sales growth in Applied Discovery, providing applications for thelegal discovery market. We acquired Applied Discovery in July 2003 and, byleveraging our marketing and sales platform and operating infrastructure, wehave seen sales growth in the first year of over 100% and achieved a post-taxreturn on capital invested of well over 10%. In September, we significantly expanded our fast growing risk managementbusiness with the $775m acquisition of Seisint. The combination of LexisNexis'content, scoring and market reach with Seisint's industry leading technology andproducts significantly enhances LexisNexis' ability to capitalise on thesubstantial opportunities in the risk management sector. With sales up over 40%in the 2004 calendar year, the acquisition is performing ahead of ourexpectations and is on track to deliver good returns. Harcourt Education continued to expand its curriculum and assessment productrange, both through internal development and acquisition. Substantialinvestment is being made in Stanford Learning First, a classroom based interimassessment series, that will ultimately link individual assessment to selectiveintervention and other instructional materials. The market response to theinitial first phase launch has been very encouraging. In June, we acquired thesuccessful supplemental math publisher Saxon, which complements our own strongposition in supplemental literacy programmes, to provide a more significantposition in the fast growing supplemental market. The business is performingwell, running ahead of expectations, and on track to deliver a good return. Reed Business has invested continuously in its internet services which saw over30% growth in 2004. The Kellysearch online industrial directory was launched inthe US, new recruitment sites were launched in The Netherlands, and across theportfolio webzines, recruitment sites, search and subscription information anddata services have been expanded or launched. Reed Business has also extendedits reach with the launch of 12 print titles into China and Japan, and thelaunch of new exhibitions. Outlook Over the last five years we have made enormous strides in executing against ourstrategy for growth: refocusing the business around the four core businesses,upgrading the management and organisational effectiveness, developing innovativeand demonstrably superior products, maintaining high levels of investment,driving cost efficiencies, and expanding our business through selectiveacquisition and alliance. Our markets have not been easy over that period asthe late cycle effects of the post boom economic slowdown impacted businessinvestment and governmental funding. This is however clearly on the turn and2005 will see further encouraging recovery in our markets. In education, the US adoption cycle is in an upswing and significant marketpriority is being given to improving individual academic outcomes; in businessto business, business investment is strengthening and feeding through intoadvertising, search and exhibition demand; in science and medical, there is astrong appetite for new electronic product and new publishing, onlinedistribution is expanding our addressable markets, and there are initial signsof budgetary pressures easing; in legal, there is increasing demand intraditional and developing markets for online information and integratedworkflow applications that boost productivity and customer effectiveness. Reed Elsevier is very well placed to capitalise on this improving environment,through the quality of our portfolio, the consistent strategic focus, and ourinvestment behind growth initiatives. Strong revenue growth and costefficiency, with growing returns on recent investments and acquisitions, aretargeted to deliver in 2005 and beyond Reed Elsevier's financial targets ofabove market revenue growth and double digit adjusted earnings per share growthat constant currencies. Morris Tabaksblat Sir Crispin DavisChairman Chief Executive Officer REVIEW OF OPERATIONS AND FINANCIAL PERFORMANCE REVIEW OF OPERATIONS 2004 2003 2004 2003 % change at constant £m £m •m •m currencies__________________________________________________________________________________________________________________TurnoverElsevier 1,363 1,381 2,004 2,002 +4%LexisNexis 1,292 1,318 1,899 1,911 +7%Harcourt Education 868 898 1,276 1,302 +7%Reed Business 1,289 1,328 1,895 1,926 +2%__________________________________________________________________________________________________________________Total 4,812 4,925 7,074 7,141 +5%__________________________________________________________________________________________________________________ Adjusted operating profitElsevier 460 467 676 677 +3%LexisNexis 308 301 453 437 +11%Harcourt Education 164 174 241 252 +5%Reed Business 227 236 334 342 -__________________________________________________________________________________________________________________Total 1,159 1,178 1,704 1,708 +5%__________________________________________________________________________________________________________________ The Review of Operations refers to adjusted operating profit performance.Adjusted profit figures are used by Reed Elsevier businesses as additionalperformance measures and are stated before amortisation of goodwill andintangible assets and exceptional items, and are reconciled to the reportedamounts in Note 5 to this Preliminary Statement. Unless otherwise indicated, allpercentage movements in the following commentary refer to constant currencyrates, using 2003 full year average rates. ELSEVIER 2004 2003 2004 2003 % change £m £m •m •m at constant currencies__________________________________________________________________________________________________________________TurnoverScience & Technology 779 789 1,145 1,144 +3%Health Sciences 584 592 859 858 +6%__________________________________________________________________________________________________________________ 1,363 1,381 2,004 2,002 +4%__________________________________________________________________________________________________________________Adjusted operating profit 460 467 676 677 +3%Adjusted operating margin 33.7% 33.8% 33.7% 33.8% -0.1pts__________________________________________________________________________________________________________________ The Elsevier science and medical business has seen strong subscription renewals,growing online sales, and a successful medical book publishing programme.Underlying revenue growth at 4% was however a little disappointing, held back bybudgetary constraints in academic institutions and some new product delay.Growth should now improve with new products launched and widening distribution,and some initial signs of easing of budgetary pressures. Revenue and adjusted operating profits were ahead by 4% and 3% respectively atconstant exchange rates. Minor acquisitions and disposals had little overalleffect. Underlying operating margins were broadly flat as further costefficiency funded increased development spend on new product and customerservice initiatives. The Science & Technology division saw underlying revenue growth of 3%. Strongjournal subscription renewals at 96% and growing online sales throughScienceDirect were tempered by flat academic book sales and weak software sales,including a delay in a significant new MDL software product, Isentris, that wassuccessfully launched in December. Market growth has also been constrained bypressures on institutional library budgets. The number of research articles published in the year was up 4%. Usage onScienceDirect continues to grow strongly, with article downloads up 41% to over240 million before taking into account usage in locally hosted networks indeveloping markets such as China. New publishing and expansion of the archiveincreased the number of research articles on ScienceDirect by 25% to 6.7million. The increasing migration of academic and corporate library customers toelectronic subscriptions is providing a strong platform for further electronicproduct introduction; those taking e-only contracts now account for some 35% ofjournal subscriptions by value. E-subscriptions are also providing an importantopportunity to widen distribution to smaller and medium sized institutions andexpand in geographies such as China. The Health Sciences division saw underlying growth of 5% with good growth fromnew book publishing, continued strong backlist sales and journal advertising,and growing online sales. Good journal subscription growth was in part heldback by non renewal of some society publishing contracts relating to pastperformance issues. Revenues from titles and electronic product serving thenursing and allied health professions were particularly strong. TheInternational businesses outside the US saw growth of 6% with the UK and AsiaPacific performing well, and strong growth from pharmaceutical industrysponsored projects and conferences. The investments that Elsevier has made in new, innovative products andtechnologies is substantial and ongoing, and is having a significant impact onresearch productivity for customers. In November, Elsevier launched a major newelectronic product, Scopus, which provides scientists with the mostcomprehensive database and intuitive tool to navigate their way quickly throughthe world's accumulated scientific research. The Scopus database has nearly 30million abstracts of scientific research articles, from 14,000 peer reviewedpublications. The navigational service was developed in close collaboration with20 library partners around the world to ensure that the scientific community'semerging needs are well met. The initial demand for Scopus is very encouraging. During the year there has been considerable public debate surrounding thescientific journal publishing model, focusing on whether the currentpredominantly subscription 'user-pays' model or alternative models, such as 'author-pays', would best serve the scientific community. We have engaged inthis debate and been open to new ideas, and we will continue to experiment andadapt. There is, we believe, increasing recognition that the subscription based'user-pays' model does serve science well, by providing high quality peerreviewed research articles across the whole spectrum of scientific disciplines,with quality the determining factor in generating subscription demand. Thismodel has also encouraged and enabled substantial investments to be made inapplying new technologies to the distribution and navigation of research,significantly enhancing the productivity of scientific endeavour. The UKgovernment's response to the parliamentary science and technology committeereview and the recent archiving proposals by the US National Institute of Healthboth acknowledge the importance of these considerable benefits to science. Wefirmly believe that the science business will continue its long record ofdelivering both increasing value to customers and good returns to shareholders. Despite the challenges we faced in 2004, the outlook for Elsevier is positive.In both Science & Technology and Health Sciences, subscription renewals arestrong, book publishing is expanding, new electronic product is developing wellin the market, and distribution is widening. Organic revenue growth of at least5% is targeted for 2005 and beyond. LEXISNEXIS 2004 2003 2004 2003 % change £m £m •m •m at constant currencies__________________________________________________________________________________________________________________TurnoverNorth America 949 992 1,395 1,438 +7%International 343 326 504 473 +6%__________________________________________________________________________________________________________________ 1,292 1,318 1,899 1,911 +7%__________________________________________________________________________________________________________________Adjusted operating profit 308 301 453 437 +11%Adjusted operating margin 23.8% 22.8% 23.8% 22.8% +1.0pts__________________________________________________________________________________________________________________ LexisNexis had a good year, with revenue growth building as the investmentprogramme pays back, delivering new publishing, better product functionalitiesand more powerful online services, as well as improved marketing and saleseffectiveness. Demand for products linked to workflow applications and in riskmanagement is also accelerating growth, with recent acquisitions in these areasperforming well. The International business outside the US grew particularlystrongly. Revenues and adjusted operating profits were up by 7% and 11% respectively atconstant exchange rates, or 4% and 6% before acquisitions and disposals.LexisNexis North America saw revenues up 7% and adjusted operating profits up12% at constant exchange rates including good contributions from recentlyacquired companies, notably Applied Discovery (July 2003) and Seisint (September2004). Underlying revenue growth improved to 3%, up from 2% in the prior year,and underlying adjusted operating profits were up 4%. Outside the US, theInternational business grew revenues, before minor disposals, by 7% and adjustedoperating profits by 10%. Adjusted operating margins were 1 percentage pointahead on the higher revenue growth with continued cost actions funding increasedinvestment. Applied Discovery achieved a post tax return on capital well inexcess of 10% in its first full year of ownership. In North American Legal, good online growth was seen in the US small law firmmarket, state and local government, electronic filing and court access services,in Canada, and in electronic discovery tools for large law firms. Underlyingrevenue growth was 3%, or 5% including Applied Discovery on a proforma basis,with online revenues up 10%, and print and CD broadly flat as the marketcontinues to migrate online. The legal directory business again performed wellthrough further penetration of the small law firm market and expansion of onlineservices. In US Corporate and Federal, underlying revenue growth improved to 4%from flat in the prior year. The risk management business has continued to growstrongly with underlying revenue growth before acquisitions of 20%, whilst thecorporate, federal and academic information business was flat, a significantimprovement on the prior year 4% decline, as product improvements and marketinginitiatives countered continuing pressures on customer budgets and industryconsolidation. The rapid growth in the risk management business is driven by the burgeoningdemand for identity authentication, fraud prevention, credit and security risksolutions from legal, commercial, government and law enforcement customers. InSeptember, this business was significantly expanded through the $775macquisition of Seisint, which has developed leading data technologies foracquiring, processing, linking and querying large public record and relateddatasets which deliver both product and cost leadership in this market. Seisintis achieving exceptionally strong growth from low cost transactional servicesdriven by these industry leading technologies and products, with proforma 2004revenues up over 40% on the prior year to $120m, ebitda nearly doubled to $54m,and adjusted operating profits of $45m, all ahead of expectations. The fit withthe LexisNexis risk management business is very strong, to provide anoutstanding technology and product platform and the leverage of the combinedsales forces from which to further expand LexisNexis' fast growing risksolutions business. The LexisNexis International businesses outside North America saw underlyingrevenue growth accelerate to 7%, with strong growth from new publishing and theintroduction of more powerful online services, with online revenues up 28%.Particularly good growth was seen in the UK, South Africa, Netherlands, Poland,Latin America, Hong Kong and Japan. France saw online legal revenues more thandouble, albeit from a low base, with the successful launch of the new globalonline delivery platform. Online news and business services also saw goodgrowth in Europe with significant new content and product improvements and moreeffective marketing. Adjusted operating profits were 10% ahead whilstincreasing investment in Asia Pacific and in the launch of the new onlineplatform. The investments that LexisNexis has been making in new content and onlineservices, and in expanding into related workflow solutions through both organicdevelopment and acquisition, is having a positive impact on revenue momentum.We have added significantly to US case law summaries and annotated state codesand introduced major new content series in a number of jurisdictions; we haveexpanded content licenses in a number of areas such as with CCH for US tax andwith news and business sources; we have acquired an online tax and regulatorypublisher in China. The first phase of the global online delivery platform,with its significantly enhanced product functionality and efficiency, wascompleted and successfully launched in France, Germany, Australia and the UK,with roll out in all our other jurisdictions over the next two years. We builta major new second data centre to safeguard service continuity as our onlineoperations grow. We built new editorial systems and upgraded our infrastructureto support continued growth and improve efficiency. We have also selectivelyacquired a number of businesses that we can leverage with the assets andcustomer relationships we already have to accelerate our strategic progress,particularly in the fast growing areas of workflow productivity and riskmanagement, and to deliver good financial returns. These have included law firmpractice management, billing and client development tools for which there isstrong and sustained growth in demand, and risk management solutions. The outlook for LexisNexis is good. Revenue momentum is building in thebusiness with the cumulative impact of the ongoing investment programme. Newand emerging high growth opportunities in our markets are being successfullytargeted, leveraging the LexisNexis asset platform and customer relationships,to further accelerate growth both in the US and internationally. Organicrevenue growth of at least 5% is targeted for 2005 and beyond. HARCOURT EDUCATION 2004 2003 2004 2003 % change £m £m •m •m at constant currencies_______________________________________________________________________________________________________________TurnoverUS Schools & Testing 774 810 1,138 1,175 +7%International 94 88 138 127 +6%_______________________________________________________________________________________________________________ 868 898 1,276 1,302 +7%_______________________________________________________________________________________________________________Adjusted operating profit 164 174 241 252 +5%Adjusted operating margin 18.9% 19.4% 18.9% 19.4% -0.5pts_______________________________________________________________________________________________________________ The Harcourt Education business has performed well against a weak US schoolsmarket which has seen the last year of a three year trough in the state textbookadoption cycle. New textbook programmes have performed well and good growth wasseen in the assessment business and in international markets. The business isvery well placed for the strong rebound in market growth in 2005 as the adoptioncycle turns. Revenues and adjusted operating profits increased by 7% and 5% respectively atconstant exchange rates, including a part year contribution from the Saxonsupplemental math publisher acquired on 30 June. Underlying revenue growth was2% with adjusted operating profits 1% lower. Adjusted operating margins were0.5 percentage points lower due to the low revenue growth, additional sales andmarketing expense incurred ahead of the strong 2005 adoption year, andinvestment and a different sales mix in Harcourt Assessment. The Harcourt US K-12 schools business saw continued market success, gaining theleading overall market share of over 30% in state textbook adoptions, goodgrowth in open territories, and significant new Reading First contracts.Revenues, before acquisitions, were however flat against a market down 2-3% dueto the reduction in available adoption opportunities in 2004. Particularsuccesses in the Elementary market adoptions, where Harcourt achieved a clearleadership position, were in Florida math and South Carolina reading. In theSecondary market, strong performances were seen in the science and language artsadoptions but Harcourt's overall position was held back by the lack of a newhigh school math programme which is due next year. The supplemental businessessaw growth from new frontlist publishing which is starting to come through asthe publishing programme is realigned to meet No Child Left Behind Actrequirements. Adjusted operating profits, before acquisitions, were 2% lower,reflecting the sales and marketing spend ahead of the 2005 adoptions. On 30 June, Harcourt Education acquired Saxon Publishers, a leading publisher ofskills-based instructional material for pre-kindergarten through high schoolstudents in math, phonics and early childhood learning. The strength of Saxon'sskills-based math programme fits well with Harcourt's supplemental business withits focus on reading and language arts. Saxon has performed ahead ofexpectations in the half year of our ownership, with proforma 2004 revenues upover 10% to $86m and adjusted operating profit up over 40% to $24m, with Saxonnow fully integrated within the business. With the repositioning of Harcourt'ssupplemental literacy front list and the strength of the Saxon math programme,the business is well placed to take full advantage of the strong market growthexpected in these two key areas. Harcourt Assessment saw underlying revenue growth of 8% driven by new statetesting contracts and good growth on existing contracts. Adjusted operatingprofits were 1% lower due to new product investment and a change in sales mixafter the heavy prior year clinical publishing schedule. Good growth was seenin international markets as local language editions of key titles wereintroduced. Substantial investment is being made in the Stanford Learning Firstclassroom based interim assessment product. The initial early version has beenwell received and strong demand is expected from the release of further moduleslater this year. The Harcourt Education International business saw good growth from newpublishing in the UK and southern Africa with revenues and adjusted operatingprofits up 6% and 8% respectively. Management responsibility for the GreenwoodHeinemann and global library businesses has been brought within Harcourtsupplemental learning with which they are more closely aligned. The prior yearcomparatives for the International and US Schools & Testing segments have beenrestated accordingly. The outlook for Harcourt Education is very positive. The textbook adoptioncycle turns up in 2005 and state budgets are improving. New textbook programmesare expected to perform well and Harcourt is improving its market positioning inopen territories. Continued good growth is also expected in assessment and fromnew publishing in supplemental education. Organic revenue growth of 9-10% istargeted for 2005, and 6-7% over the three years 2005-2007 taking into accountthe adoption cycle. REED BUSINESS 2004 2003 2004 2003 % change £m £m •m •m at constant currencies___________________________________________________________________________________________________________________TurnoverReed Business InformationUS 323 365 475 530 -1%UK 244 234 359 339 +5%Continental Europe 268 277 394 402 -2%Reed Exhibitions 421 420 619 609 +4%Other 33 32 48 46 +5%___________________________________________________________________________________________________________________ 1,289 1,328 1,895 1,926 +2%___________________________________________________________________________________________________________________Adjusted operating profit 227 236 334 342 -Adjusted operating margin 17.6% 17.8% 17.6% 17.8% -0.2pts___________________________________________________________________________________________________________________ Reed Business saw recovery in its markets for the first time in four years, andrevenues moving ahead with 2% growth, compared to a 5% decline in 2003. Anincreasing number of sectors and geographies are seeing positive growthmomentum, and online services and exhibitions are performing well. Fastergrowth is expected in 2005 as markets continue to strengthen and we continue tofocus on market share, yield and new product introduction. Revenues and adjusted operating profits were both up 2% at constant exchangerates before minor acquisitions and disposals. The magazines and informationpublishing businesses were broadly flat whilst the exhibitions business grew 6%. Adjusted operating margins were largely held despite additional new productinvestment through further cost actions. In the US, Reed Business Information saw revenues up 1% for the year forcontinuing titles, with the first half decline of 3% reversed in the secondhalf. Continued good growth was seen in the media sector and, whilst themanufacturing titles showed some further decline, the electronics sector was upon the prior year. Online revenues grew well with significant websitedevelopment and marketing initiatives. Adjusted operating profits grew 3% asfurther action was taken to improve margins. In the UK, Reed Business Information revenues and adjusted operating profitswere both up 5% with revenue growth of 10% or more in the property, personneland construction sectors, a return to growth in the technology sector, and acontinuing strong performance from online recruitment advertising, with printrecruitment advertising also ahead. Overall display advertising, having beendown in the first half, recovered with good growth in online display to end theyear up 2%. Online revenues now account for 28% of UK revenues and grew 26% inthe year. In Continental Europe, Reed Business Information did well to limit underlyingrevenue and operating profit decline to 3% and 7% respectively, with demandimpacted by continued economic weakness in The Netherlands and Germany inparticular. The focus on market share performance and yield managementmitigated subscription and advertising volume declines. In Asia Pacificunderlying revenue growth was 10% with strong performances in Australia,Singapore and Japan. Reed Exhibitions had a good year, with underlying revenue growth of 6% andadjusted operating profits up 7%. Revenue growth in annual exhibitions and fromnew launches was 4%, with particularly strong performances in the US security,jewellery and gaming shows, in the international travel and property shows, andin France and Asia Pacific. The net cycling in of non-annual shows contributed2 percentage points to revenue growth. Reed Business has continued to expand its investment in further developing itstitles and exhibitions and in building its online services to meet the stronglygrowing demand for internet delivered information and marketing solutions. 2004saw the launch of 10 titles, including Variety and Interior Design, in Chinathrough joint ventures with IDG and Chinese partners, strong growth in therecently launched Design News Japan, and the development of Vlife within theVariety portfolio. Online revenues grew by more than 30% to over $200m withstrongly growing advertising and search demand in our title webzines,recruitment sites, data services, and online search engines and directories,including Kellysearch which was launched in the US and Netherlands building onits UK success. The outlook for Reed Business is good. Markets overall are improving, andinnovation in new show and title launches and in building online services iscapturing growth in faster growing segments. Organic revenue growth of 4-5% istargeted for 2005, with at least 5% revenue growth targeted in later years,given a reasonable market environment. Significant cost actions over the lastfour years have positioned the business well to see good operational gearing asrevenues increase. FINANCIAL REVIEW REED ELSEVIER COMBINED BUSINESSES Profit and loss account The reported profit before tax for the Reed Elsevier combined businesses, afterthe amortisation of goodwill and intangible assets and exceptional items, was£562m/€826m, which compares with a reported profit of £519m/€752m in 2003. Theincrease principally reflects higher underlying operating profits, lowergoodwill and intangible asset amortisation, as well as a reduced net interestexpense. The reported attributable profit of £303m/€445m was £31m/€39m lowerthan in 2003, which included exceptional tax credits of £84m/€122m principallyin respect of prior year disposals. The continued decline of the US dollar since 2003 has had adverse currencytranslation effects on the reported results expressed in sterling and in euros. This translation effect does not however impact the underlying performance ofthe businesses. Turnover decreased by 2% expressed in sterling to £4,812m, and by 1% expressedin euros to €7,074m. At constant exchange rates, turnover was 5% higher, or 3%higher excluding acquisitions and disposals. Adjusted operating profits, excluding the amortisation of goodwill andintangible assets and exceptional items, were down 2% expressed in sterling at£1,159m, and flat expressed in euros at €1,704m. At constant exchange rates,adjusted operating profits were up 5%, or 3% excluding acquisitions anddisposals. Adjusted operating margins improved by 0.2 percentage points to 24.1%reflecting the continued tight management of costs despite increased investment. The amortisation charge for intangible assets and goodwill, including in jointventures, amounted to £406m/€598m, down £39m/€47m on the prior year as a resultof currency translation effects and some past acquisitions becoming fullyamortised. Exceptional items showed a pre-tax charge of £59m/€86m, comprising £38m/€56m ofacquisition integration and related costs, £18m/€26m in respect of restructuringactions, and a £3m/€4m net loss on disposal of businesses, investments and otherfixed assets. After a tax credit of £13m/€18m principally arising on theexceptional costs, exceptional items showed a net post-tax loss of £46m/€68m.This compares with a net post-tax exceptional gain of £38m/€54m in 2003including tax credits in respect of prior year disposals. Net interest expense, at £132m/€194m, was £36m/€49m lower than in the prioryear, reflecting the benefit of the 2003 free cash flow, lower interest ratesand currency translation effects. Net interest cover on an adjusted basisincreased to 8.8 times. Adjusted profits before tax, before the amortisation of goodwill and intangibleassets and exceptional items, at £1,027m/€1,510m, were up 2% expressed insterling and 3% expressed in euros. At constant exchange rates, adjusted profitsbefore tax were up 8%. The effective tax rate on adjusted earnings was little changed at 26%. Theadjusted profit attributable to shareholders of £760m/€1,117m was up 2%expressed in sterling and 4% expressed in euros. At constant exchange rates, theadjusted profit attributable to shareholders was up 8%. Cash flows and debt Adjusted operating cash flow, before exceptional items, was £1,050m/€1,544mrepresenting a 91% conversion rate of adjusted operating profits into cash. Thiscompares with a conversion rate in 2003 of 87% and reflects the continuing focuson working capital management. Capital expenditure in the year amounted to £203m/€298m, up from £168m/€244m in the prior year, and included several major ITplatform and infrastructure projects. Depreciation was broadly similar to theprior year at £126m/€185m. Free cash flow - after interest and taxation but before acquisition spend,exceptional receipts and payments and dividends - was £680m/€1,000m, compared to£669m/€970m in 2003. After dividends, free cash flow was £371m/€546m compared to£377m/€547m in 2003. Net exceptional cash payments of £24m/€34m compriseacquisition related and restructuring payments of £67m/€98m, less net proceedsfrom disposals of businesses, investments and other fixed assets of £12m/€18mand £31m/€46m of reduced tax payments. In 2004, acquisitions were made for a total consideration of £647m/€951m,including £7m/€10m deferred to future years, and after taking account of netcash acquired of £17m/€25m. The amounts capitalised in respect of goodwill andintangible assets were £277m/€407m and £310m/€456m respectively. Deferredconsideration paid in respect of prior year acquisitions totalled £4m/€6m. The2004 acquisitions contributed £18m/€27m to adjusted operating profit in the yearand added £31m/€46m to net cash inflow from operating activities for the partyear under Reed Elsevier ownership. Net borrowings at 31 December 2004 were £2,532m/€3,570m, an increase of £160m insterling and €202m in euros since 31 December 2003, reflecting acquisition spendless free cash flow and favourable exchange translation effects on net debt fromthe weaker US dollar. Gross borrowings at 31 December 2004 amounted to £2,757m/€3,887m, denominatedmostly in US dollars, and were partly offset by cash balances totalling £225m/€317m invested in short term deposits and marketable securities. After takingaccount of interest rate derivatives, a total of 63% of Reed Elsevier's grossborrowings were at fixed rates, including £1,209m/€1,705m of floating rate debtfixed through the use of interest rate derivatives, and had a weighted averageinterest coupon of 5.2% and an average remaining life of 4.1 years. PARENT COMPANIES Profit and loss account Adjusted earnings per share, measured before the effect of amortisation ofgoodwill and intangible assets, exceptional items and related tax effects, forReed Elsevier PLC were 31.8p, up 2% on the previous year, and for Reed ElsevierNV were €0.71, up 3% from 2003. The difference in percentage change isattributable to the impact of currency movements on the translation of reportedresults and rounding effects. At constant rates of exchange, the adjustedearnings per share of both companies would have shown an increase of 8% over theprevious year. After their share of the charge in respect of goodwill and intangible assetamortisation and of the exceptional items, the reported earnings per share ofReed Elsevier PLC after tax credit equalisation and Reed Elsevier NV were 12.0pand €0.28 respectively, compared to 13.4p and €0.31 in 2003. Dividends Dividends to Reed Elsevier PLC and Reed Elsevier NV shareholders are equalisedat the gross level, including the benefit of the UK attributable tax credit of10% received by certain Reed Elsevier PLC shareholders. The exchange rate usedfor each dividend calculation - as defined in the Reed Elsevier merger agreement- is the spot euro/sterling exchange rate, averaged over a period of fivebusiness days commencing with the tenth business day before the announcement ofthe proposed dividend. The Board of Reed Elsevier PLC has proposed a final dividend of 9.6p, giving atotal dividend of 13.0p for the year, up 8% on 2003. The Boards of Reed ElsevierNV, in accordance with the dividend equalisation arrangements, have proposed afinal dividend of €0.24. This results in a total dividend of €0.33 for the year,up 10% on 2003. Dividend cover for Reed Elsevier PLC, based on adjusted earnings before theamortisation of goodwill and intangible assets and exceptional items and relatedtax effects, was 2.4 times, and for Reed Elsevier NV was 2.2 times. Measured forthe combined businesses on a similar basis, dividend cover was 2.3 times. INTERNATIONAL FINANCIAL REPORTING STANDARDS Under a regulation adopted by the European Parliament, the Reed Elseviercombined financial statements and the financial statements of the two parentcompanies, Reed Elsevier PLC and Reed Elsevier NV, will be prepared inaccordance with International Financial Reporting Standards (IFRS) with effectfrom the 2005 financial year. The principal changes to Reed Elsevier'saccounting policies on adoption of IFRS and a restatement of the 2004 financialstatement information under IFRS are set out as additional information in thisPreliminary Statement. A presentation on the results will be audiocast live on the reedelsevier.comwebsite at 09.30 am (London)/10.30 am (Amsterdam) today. FORWARD LOOKING STATEMENTS This Preliminary Statement contains forward looking statements within themeaning of Section 27A of the Securities Act 1933, as amended, and Section 21Eof the Securities Exchange Act 1934, as amended. These statements are subject toa number of risks and uncertainties and actual results and events could differmaterially from those currently being anticipated as reflected in such forwardlooking statements. The terms 'expect', 'should be', 'will be', and similarexpressions identify forward looking statements. Factors which may cause futureoutcomes to differ from those foreseen in forward looking statements include,but are not limited to: general economic conditions and business conditions inReed Elsevier's markets; exchange rate fluctuations; customers' acceptance ofits products and services; the actions of competitors; legislative, fiscal andregulatory developments; changes in law and legal interpretation affecting ReedElsevier's intellectual property rights and internet communications; and theimpact of technological change. COMBINED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2004 Note 2004 2003 2004 2003 £m £m •m •m__________________________________________________________________________________________________________________Related Shares:
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