28th Jul 2005 07:04
Reed Elsevier PLC28 July 2005 7/05 ISSUED ON BEHALF OF REED ELSEVIER PLC AND REED ELSEVIER NV 28 JULY 2005 REED ELSEVIER: HIGHLIGHTS OF 2005 INTERIM RESULTS POSITIVE START TO THE YEAR • Revenues up 6%, adjusted pre-tax profits and earnings per share up 5% at constant exchange rates • Good underlying performance across business; momentum in revenue and profit growth building for second half o Strong subscription renewals and growing online sales at Elsevier o Further revenue growth momentum at LexisNexis from product and marketing investment o Good performance in winning state textbook adoptions at Harcourt Education; well placed for strong second half sales season o Continuing improvement at Reed Business; rapid online growth and exhibitions performing well o Good contribution from recent acquisitions • Sustained investment in building online business • Seasonality in Education and Health Sciences accelerates growth in second half • On track to deliver 2005 organic revenue growth of at least 5% and double digit growth in adjusted earnings per share at constant currencies REED ELSEVIER 2005 2004 2005 2004 Change at £m £m •m •m constant currencies %Revenue 2,368 2,263 3,457 3,349 +6%Reported profit before taxation 255 256 372 379 +4%Adjusted profit before taxation 395 387 577 573 +5% Adjusted figures are presented as additional performance measures and are statedbefore amortisation of acquired intangible assets and acquisition integrationcosts. PARENT COMPANIES Reed Elsevier PLC Reed Elsevier NV 2005 2004 Change 2005 2004 Change Change at % % constant currencies %Reported earnings per share 5.1p 7.5p -32% €0.13 €0.18 -28% -26%Adjusted earnings per share 12.3p 12.0p +3% €0.27 €0.27 0% +5%Dividend per share 3.7p 3.4p +9% €0.092 €0.090 +2% Sir Crispin Davis, Chief Executive Officer of Reed Elsevier, commented: "The first half of 2005 sees Reed Elsevier in good health and firmly on track todeliver on our 2005 goals, with momentum building in our revenue and profitgrowth. Our businesses are performing well in their respective markets and thesustained investment programme is now making a real difference. Particularlypleasing has been the acceleration in growth in LexisNexis and the continuingrecovery and rapid growth in online services in Reed Business. HarcourtEducation is well positioned for a strong second half and Elsevier should alsosee an acceleration in growth with the Health Sciences publishing programme. Wecontinue to target above market revenue growth, with at least 5% organic revenuegrowth, and double digit earnings per share growth at constant currencies for2005 and beyond." ENQUIRIES Sybella Stanley (Investors) Catherine May (Media) +44 20 7166 5630 +44 20 7166 5657 FINANCIAL HIGHLIGHTS 01FOR THE SIX MONTHS ENDED 30 JUNE 2005 REED ELSEVIER COMBINED BUSINESSES £ • %Year ended 31 December Six months ended 30 Six months ended 30 June June 2004 2004 2005 2004 2005 2004 Change at £m •m £m £m •m •m constant currencies Reported figures 4,812 7,074 Revenue 2,368 2,263 3,457 3,349 +6% 766 1,126 Operating profit 317 320 463 474 +2% 631 928 Profit before taxation 255 256 372 379 +4% 2,532 3,570 Net borrowings 2,913 2,678 4,340 3,990 Adjusted figures 4,812 7,074 Revenue 2,368 2,263 3,457 3,349 +6% 1,066 1,567 Operating profit 461 451 673 668 +5% 934 1,373 Profit before taxation 395 387 577 573 +5% 1,013 1,490 Operating cash flow 219 213 320 315 +2% 22% 22% Operating margin 19% 20% 19% 20% 95% 95% Operating cash flow 48% 47% 48% 47% conversion 8.1 8.1 Interest cover (times) 7.0 7.0 7.0 7.0 Adjusted figures are presented as additional performance measures and are statedbefore the amortisation of acquired intangible assets, acquisition integrationcosts, gains on disposals and movements on deferred tax balances not expected tocrystallise in the near term. Reconciliations between the reported and adjustedfigures are provided in the notes to the combined financial information. PARENT COMPANIES Reed Elsevier PLC NV Reed Elsevier PLC Reed Elsevier NV £ • %Year ended 31 December Six months ended 30 Six months ended 30 June June 2004 2004 2005 2004 2005 2004 Change at £m •m £m £m •m •m constant currencies 235 338 Reported profit attributable 65 95 98 142 -26% 363 505 Adjusted profit attributable 156 152 215 213 +5% 1.83 1.24 Average exchange rate US$: £/• 1.87 1.82 1.28 1.23 18.6p €0.43 Reported earnings per share 5.1p 7.5p €0.13 €0.18 -26% 28.7p €0.64 Adjusted earnings per share 12.3p 12.0p €0.27 €0.27 +5% 13.0p €0.33 Dividend per share 3.7p 3.4p €0.092 €0.090 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 results of Reed Elsevier PLC reflect its shareholders' 52.9%economic interest in the Reed Elsevier combined businesses. The results of ReedElsevier NV reflect its shareholders' 50% economic interest in the Reed Elseviercombined businesses. The respective economic interests of the Reed Elsevier PLCand Reed Elsevier NV shareholders take account of Reed Elsevier PLC's 5.8%interest in Reed Elsevier NV. Following a regulation adopted by the European Parliament, the Reed Elseviercombined businesses and the two parent companies now prepare their financialstatements in accordance with International Financial Reporting Standards (IFRS)with effect from the 2005 financial year. Comparative amounts in the InterimStatement for the six months ended 30 June 2004 and the year ended 31 December2004 have been restated in accordance with Reed Elsevier's accounting policiesunder IFRS. The percentage change at constant currencies refers to the movements at constantexchange rates, using 2004 full year average rates. REPORT OF THE CHAIRMAN AND THE CHIEF EXECUTIVE OFFICER 02 The first half of 2005 sees Reed Elsevier in good health and firmly on track todeliver on our 2005 goals, with momentum building in our revenue and profitgrowth. The Elsevier science and medical business has seen strong subscription renewalsand growing online sales, and the book publishing programme is well positionedfor the important second half. The LexisNexis legal business is performingincreasingly well with good growth in online services both in the US andinternationally. Harcourt Education has performed well in school textbookadoptions and is on track to deliver a strong performance in the second halfwhen the majority of school sales take place. Reed Business has seen acontinuing improvement in underlying revenue growth with strong growth in theonline business and a good performance in exhibitions. Throughout the period the focus has been on bringing to market innovative newonline services, expanding our content and information base, winning newcustomers globally, and broadening our product range to meet the growing needsof our customers in an increasingly digital world. Financial Results Revenue momentum in the business has continued to build through a combination ofimproving markets, the success of new product initiatives, sales and marketinginvestment, and good growth in acquired businesses. Total revenues in the sixmonths to 30 June 2005 were up 6% at constant exchange rates. Underlying revenuegrowth, excluding current and prior year acquisitions and disposals, was 3% andthis will accelerate strongly in the second half reflecting the momentum in thebusiness and the seasonal bias in growth. Reed Elsevier remains on track todeliver on 7% overall revenue growth and at least 5% organic revenue growth for2005, up from the 3% achieved in 2004 and the flat performance in 2003. Adjusted operating profits were up 5% at constant currencies reflecting aslightly lower underlying operating margin in the first half due to the timingof revenue growth, particularly in education and health sciences, and ofcontinuing investment. Adjusted pre-tax profits were up 5% after net interestexpense, and adjusted earnings per share were also up 5% at constant currencies.Given the seasonality and growth momentum in the business, Reed Elsevier remainson track to deliver on our goal for the year of double digit growth in adjustedearnings per share at constant currencies. The financial results are reported this year under International FinancialReporting Standards (IFRS) for the first time, with the comparative periodsrestated accordingly. Explanations of the effects of this and the derivation ofour new benchmark adjusted figures are set out in the operating and financialreview and summary financial information. The adoption of IFRS has little impacton growth rates when compared to the UK GAAP previously applied. At reported exchange rates, total revenues were £2,368m/€3,457m, up 5% whenreported in sterling and up 3% in euros, and adjusted earnings per share were up3% for Reed Elsevier PLC at 12.3p and flat for Reed Elsevier NV at €0.27. The equalised interim dividends declared by the respective boards are 3.7p, up9%, for Reed Elsevier PLC and €0.092, up 2%, for Reed Elsevier NV. Thedifference in dividend growth rates reflects movements in the sterling-euroexchange rate since last year's interim dividend declaration. In February, theboards announced a more progressive dividend policy that, subject to the effectsof currency movements on dividend equalisation, is expected to align moreclosely increases in full year dividends with adjusted earnings growth. Business Performance Reed Elsevier has a marked seasonal bias in growth in revenues, profits and cashto the second half of the year reflecting in particular the phasing ofeducational sales and health sciences book publishing, as well as the effectthis year of cycling of non annual trade exhibitions. The good performance inthe first half provides clear momentum for the much stronger second half growth. The Elsevier science and medical business has had a satisfactory first half withstrong subscription renewals, expanded book publishing and good growth in onlinesales. Underlying revenues were up 4% at constant currencies. Stronger growth isexpected in the second half in particular from new book publishing and growingbacklist sales in Health Sciences with its seasonal second half bias. Theorganic revenue growth target for Elsevier for the year is 5% at constantcurrencies. The LexisNexis business has seen good growth in the first half with the paybackcoming through from the sustained investment in new publishing, online productand sales and marketing initiatives worldwide, and the expansion in totalpractice workflow solutions and risk management. Revenues were up 13% atconstant currencies including the contribution of recent acquisitions, with theSeisint risk management business acquired last year performing well. Excludingthese acquisitions, organic revenue growth was 6%, reflecting strongperformances both in the US and internationally. The revenue growth target forLexisNexis for the year is to achieve organic growth of at least 5%. The Harcourt Education business has had a good start to the year with strongwins in US state textbook adoption opportunities, which will come through assales in the second half, and good growth in open territories and testing.Revenue growth at constant currencies of 4%, or flat excluding current and prioryear acquisitions, is unrepresentative of the year as a whole since the vastmajority of sales and profits are generated in the second half. Harcourt'sorganic revenue growth target for the year remains 9-10%, on the assumption thatthe legislative delays in funding Texas adoptions will be resolved. Reed Business has seen a continuing improvement in its underlying revenuegrowth, driven by strong online sales and exhibitions. Overall markets continueto recover, although this varies by geography and sector. The publishing andinformation businesses saw strong growth in online revenues partially offset byadvertising weakness in continental Europe and in US manufacturing. A goodperformance in the exhibitions business was held back in the first half by thecycling out of a number of non annual shows, although there is some reverseeffect in the second half. Revenue growth was 3% at constant currencies and ReedBusiness is targeting organic growth of 4-5% for the year. The operating andfinancial review describes the performances of our businesses in greater detail. REPORT OF THE CHAIRMAN AND THE CHIEF EXECUTIVE OFFICER 03 Business Progress The first six months has seen a continued focus on executing well on ourinvestment and market initiatives. In Elsevier, the focus within Science & Technology has been on further addingvalue to our core academic customers through increased output, with articlespublished up 4%, new online services and features to improve customerproductivity, and better customer service and relationships. The Scopus databaseservice, developed in close cooperation with the scientific community, is beingwell received in the market with over 500 trial customers. We are expandingdistribution of our electronic products globally in areas such as China as wellas securing major new contracts and renewals, such as the recently announcedcontract to provide all our scientific content online to every university in theNetherlands. We are also developing more flexible customised offerings to expandfurther into corporate research markets and smaller and mid-sized institutions. Within Health Sciences, we continue to expand our content and new publishing aswell as introducing new online services, such as iConsult for the practitionermarket and new modules for the Evolve online platform for the US medicaleducation market. Outside the US, we continue to grow well with new and betterofferings and through greater focus on sales and marketing execution. We expectto complete shortly the recently announced acquisition of MediMedia MAP whichwill give us leading positions in the French, Spanish and Italian medicalpublishing markets and we expect strong growth from market demand and throughinnovation. Within LexisNexis, the focus has been on building online workflow tools andtotal practice solutions, expanding online services internationally, andintegrating Seisint and our risk management business. The success of ourstrategy is seen in the acceleration of growth in LexisNexis. There is growingdemand for online productivity tools from law firms and businesses: Totalsearchprovides customers with a single interface to combine searches of their datawith our materials and information from the web; Applied Discovery greatlyimproves the speed and efficiency of the legal discovery process; and clientdevelopment tools help law firms identify business development opportunities andmarket more effectively to existing and potential clients. Internationally, theroll out of the global legal platform has brought compelling functionalities tomarket. The integration of Seisint is progressing well with product integrationon the Seisint platform and the combining of product development and sales andmarketing activities within a single management structure. In Harcourt Education, the focus has been on the new publishing for the strongtextbook adoption calendar over the next few years and to build the supplementalfront list, exploiting new editorial processes to customise programmes moreeffectively to specific state requirements. Good progress has also been made inthe development of the Stanford Learning First interim assessment product inwhich there is significant market interest. In the first half, Harcourt expandedits diagnostic assessment portfolio with the integration of Ordinate whichprovides language proficiency assessment through automated speech patternanalysis. Within Reed Business, the focus has been on expanding our online services to thebusiness communities we serve, through webzines, recruitment sites, search andsubscription information and data services. In UK publishing, online revenuesnow account for over one third of revenues with continued development of sectorspecific recruitment sites and expansion of the Kellysearch service for sourcingindustrial components and in providing more specialised search offerings.Additionally, Reed Business has continued to invest in new titles andexhibitions and in upgrading formats, and to accelerate its growth in China andother developing markets through launch and alliance. Board changes At the Annual General Meetings in April, Jan Hommen was appointed to the boardsand succeeded Morris Tabaksblat as Chairman. We want to take this opportunity tothank Morris for his enlightened leadership and wise counsel over his six yearsas Chairman. Reed Elsevier has much to thank him for. At the same time, JohnBrock retired as a non executive director and Strauss Zelnick was appointed. Wethank John for the valuable contribution he made to the boards in a period ofsignificant business change, and welcome Strauss to the boards. Outlook The first half has been encouraging. Our businesses are performing well in theirrespective markets and the sustained investment programme is making a realdifference. Particularly pleasing has been the acceleration in growth inLexisNexis and the continuing recovery and rapid growth in online services inReed Business. Harcourt Education is well positioned for a strong second halfand Elsevier should also see an acceleration in growth with the Health Sciencespublishing programme. The transition of the business from print publishing to online services iscontinuing but by no means complete. Reed Elsevier is however now firmlyestablished in the digital world and the burgeoning demand for high quality,web-delivered, focused information and solutions is very promising for ourfuture. We continue to target above market revenue growth, with 7% revenue growth and atleast 5% organic revenue growth, and double digit adjusted earnings per sharegrowth at constant currencies for 2005 and beyond. Jan Hommen Sir Crispin DavisChairman Chief Executive Officer OPERATING AND FINANCIAL REVIEW 04 OPERATING REVIEW Year ended 31 £ • % December Six months ended 30 Six months ended 30 June June 2004 2004 2005 2004 2005 2004 Change at £m •m £m £m •m •m constant currencies Revenue 1,363 2,004 Elsevier 644 631 940 934 +5% 1,292 1,899 LexisNexis 683 614 997 909 +13% 868 1,276 Harcourt Education 366 359 534 531 +4% 1,289 1,895 Reed Business 675 659 986 975 +3% 4,812 7,074 Total 2,368 2,263 3,457 3,349 +6% Adjusted operating profit 445 654 Elsevier 189 198 277 293 0% 287 422 LexisNexis 151 122 220 181 +25% 157 231 Harcourt Education 15 23 22 34 -33% 194 285 Reed Business 118 118 172 175 +1% (17 ) (25 ) Unallocated items (12 ) (10 ) (18 ) (15 ) 1,066 1,567 Total 461 451 673 668 +5% Adjusted operating profit figures are stated before amortisation of acquiredintangible assets and acquisition integration costs. The comparative 2004figures have been restated to conform to the IFRS accounting basis now adopted. In reviewing performance, Reed Elsevier refers to adjusted figures. In the pastthese figures have been stated before the amortisation of goodwill andintangible assets, exceptional items and related tax effects. Within the newIFRS environment, the definition of adjusted figures has been amended. Thecommentary in this Operating Review refers to the adjusted figures as nowdefined. The principal difference between our benchmark measure of adjusted operatingprofit as previously defined and now is the inclusion of non cash charges forincremental pensions costs under IFRS and share option expense. Additionally,restructuring costs, other than in respect of acquisition integration, are alsonow included within our adjusted figures. Adjusted figures are thus now stated before amortisation of acquired intangibleassets and acquisition integration costs, and, in respect of earnings, reflect atax rate that excludes the effects of movements in deferred taxation assets andliabilities that are not expected to crystallise in the near term. Profit andloss on disposals are non operating items and, as before, excluded from theadjusted figures. Reported operating results, including amortisation of acquired intangible assetsand acquisition integration costs, are analysed in note 2 to the combinedfinancial information and discussed further below in the Financial Review, andare reconciled to the adjusted figures in note 4 to the combined financialinformation. Unless otherwise indicated, all percentage movements in the following commentaryrefer to performance at constant exchange rates, using 2004 full year averagerates, and are stated before the amortisation of acquired intangible assets andacquisition integration costs. ELSEVIER £ • % Six months ended 30 Six months ended 30 Change June June at 2005 2004 2005 2004 constant £m £m •m •m currencies RevenueScience & Technology 381 391 556 579 +4%Health Sciences 263 240 384 355 +8% 644 631 940 934 +5%Adjusted operating profit 189 198 277 293 0%Adjusted operating margin 29.3% 31.4% 29.3% 31.4% -1.7pts OPERATING AND FINANCIAL REVIEW 05 The Elsevier science and medical business has had a satisfactory first half withstrong subscription renewals, expanded book publishing and good growth in onlinesales. Underlying revenues were up 4% at constant currencies. Stronger growth isexpected in the second half in particular from new book publishing and growingbacklist sales in Health Sciences with its seasonal second half bias. Revenues were 4% higher and adjusted operating profits flat at constant exchangerates in the first half, excluding minor acquisitions and disposals. Revenuegrowth will accelerate in the second half reflecting the seasonal bias of theHealth Sciences book publishing programme. The adjusted operating margins werelower than in the prior first half reflecting revenue and cost phasing, higherrestructuring costs and the higher operating costs from new product and salesinitiatives. For the year as a whole, underlying operating margins should besimilar or slightly ahead of the prior year, with the stronger revenue growthand investment balanced by tight cost management. The Science & Technology division saw underlying revenue growth of 4% atconstant exchange rates. Subscription renewals are strong, and on track to reachthe 96% level targeted, and good growth was seen through widening distributionand in online secondary databases. There has also been continued good take up ofe-only contracts which now account for 40% of journal subscriptions by value.ScienceDirect is performing well with the number of research articles nowexceeding 7 million and usage up over 25% year on year. The Scopus databaseservice has been well received in the market with over 500 customer trials nowin place. The Health Sciences division saw underlying growth of 5%, with good growth in USbook sales, particularly to the expanding nursing and allied healthcare sectors,and in pharmaceutical industry marketing revenues. Growth in online sales isbeing driven by the investment in the Consult series of information tools forthe practitioner market, electronic journals and in the expanding scope of theEvolve medical e-education platform. The recently announced acquisition of MCStrategies will further strengthen our offering in the growing online continuingeducation and training segment. Outside the US, the businesses are continuing toexpand their local book and journal publishing programmes. An acceleration ofgrowth is expected in the second half from the new book publishing programme andcontinuing strong backlist sales. In May we announced the acquisition for €270m (£185m) of MediMedia MAP. Throughhighly respected imprints, including Masson and Doyma, MediMedia MAP providesmedical books, journals and reference information to medical practitionersprincipally in France, Spain, and Italy. It also publishes the US based Nettercollection of medical illustrations which is sold worldwide. The business is aleader in its markets and fits well within the Health Sciences division. Stronggrowth is expected from expanded publishing and marketing programmes, andinvestment in online services. The acquisition is expected to complete shortly. The second half should see an acceleration in revenue growth with strong newpublishing and growing online sales. Operational gearing in the business andtight cost management is expected to deliver similar or slightly improvedmargins for the year as a whole. Organic revenue growth of 5% is targeted for2005 and beyond. LEXISNEXIS £ • % Six months ended 30 Six months ended 30 Change June June at 2005 2004 2005 2004 constant £m £m •m •m currencies RevenueLexisNexisNorth America 511 455 746 674 +15%International 172 159 251 235 +6% 683 614 997 909 +13%Adjusted operating profit 151 122 220 181 +25%Adjusted operating margin 22.1% 19.9% 22.1% 19.9% +2.2pts The LexisNexis business has seen good growth in the first half with the paybackcoming through from the sustained investment in new publishing, online productand sales and marketing initiatives worldwide, and the expansion in totalpractice workflow solutions and risk management. Revenues were up 13% atconstant currencies including the contribution of recent acquisitions, with theSeisint risk management business acquired last year performing well. Organicrevenue growth was 6% with strong performances both in the US andinternationally. Revenues and adjusted operating profits were up 13% and 25% respectively atconstant exchange rates, or 6% and 11% before current and prior yearacquisitions and disposals. LexisNexis North America saw revenues up 15% atconstant exchange rates including the contribution of Seisint acquired in thesecond half of last year and other recent acquisitions, or 5% excluding these.This compares with 3% organic revenue growth for the 2004 financial year.Outside the US, the International businesses grew revenues, before minoracquisitions and disposals, by 6%. The adjusted profit growth reflects theoperational gearing in the business, tight cost control and some benefit of costphasing, includinging restructuring. The improvement in adjusted operatingmargin in the first half also reflects the favourable mix effect from recentacquisitions and disposals. OPERATING AND FINANCIAL REVIEW 06 In North American Legal, revenues grew by 8% at constant exchange rates, or 4%before acquisitions, driven by good sales growth in the large law firm marketwith expanded differentiated content and the continuing success of electronicdiscovery and other total practice workflow solutions. The Martindale Hubbelllegal directories business continues to perform well with growing demand for theexpanding series of client development tools for law firms. In US Corporate andFederal, revenues grew 29% at constant exchange rates, or 8% beforeacquisitions, up from 4% organic growth in the prior year. This has been drivenby a strong performance in risk management, continuing improvement in thecorporate, federal and academic information business following new product andmarketing initiatives, and higher volumes for the US patent and trademarkoffice. The Seisint risk management business, acquired in September 2004, isperforming well and on track to deliver the planned 20% sales growth for theyear. Adjusted operating profits for LexisNexis North America were up 27% atconstant exchange rates, or 13% before acquisitions. The LexisNexis International business outside North America saw underlyingrevenue growth of 6%, with strong growth in Europe, southern Africa and LatinAmerica. New publishing in legal, tax and accounting, good growth in online newsand business information, and the continued success from the roll out of theglobal legal platform all contributed well. The utility of the new platform isattracting new subscribers and good growth from existing customers, with onlinerevenues now accounting for over a quarter of International revenues. Underlyingadjusted operating profits were up 7% despite continuing investment due to theoperational gearing of the good revenue growth and tight cost control. The second half should see continuing revenue momentum from LexisNexis with goodprogress from product and marketing initiatives and a strong contribution fromrecent acquisitions. Organic revenue growth of at least 5% is targeted for 2005and beyond. HARCOURT EDUCATION £ • % Six months ended 30 Six months ended 30 June June Change 2005 2004 2005 2004 at constant £m £m •m •m currencies RevenueHarcourt EducationUS Schools & Testing 329 323 480 478 +4%International 37 36 54 53 +3% 366 359 534 531 +4%Adjusted operating profit 15 23 22 34 -33%Adjusted operating margin 4.1% 6.4% 4.1% 6.4% -2.3pts The Harcourt Education business has had a good start to the year with strongwins in US state textbook adoptions opportunities, which will come through assales in the second half, and good growth in open territories and testing.Revenue growth at constant currencies of 4%, or flat excluding current and prioryear acquisitions, is unrepresentative of the year as a whole since the vastmajority of sales and profits are generated in the second half. Revenues increased by 4% at constant exchange rates, or were flat against theprior first half excluding Saxon and other recent acquisitions. The majority ofeducation sales take place in the June to September months ahead of the newacademic year and the flat underlying first half performance reflects earliercall off of product last year, particularly in Florida. The market growth thisyear is expected to be particularly strong given the significant increase instate textbook adoptions, and good growth in revenues is expected in the secondhalf. Adjusted operating profits were 33% lower than in the prior first half atconstant exchange rates reflecting the traditionally very low margin in thefirst half and the higher sales and marketing costs ahead of this year's largeradoption opportunities. The Harcourt US K-12 business has performed well in the 2005 state adoptions,gaining the leading overall market share across the core academic curriculum forthe fifth consecutive year which will come through in second half sales.Underlying first half revenues were 2% lower than in the prior first half due tothe later product call off by individual states and school districts.Legislative delays in Texas in approving schools funding for the upcomingacademic year has also pushed back product delivery. There are significantefforts within the Texas state leadership to resolve the funding delays and itis presumed that these efforts will be successful. OPERATING AND FINANCIAL REVIEW 07 With nearly all state district adoptions now awarded, Harcourt has a clear no. 1position in the elementary market with particular successes in reading, Floridasocial studies, English as a second language in Texas, and health in Texas andSouth Carolina. In the secondary market, Harcourt is positioned no. 2 in newstate adoptions with good success in literature and language arts and strongpositions in world languages, science and health. The secondary schools businesshas also seen strong growth in open territories with good wins in federallyfunded Reading First programmes. The supplemental business is seeing good growthfrom the new publishing introduced over the last two years to align programmeswith the requirements of the No Child Left Behind Act, although overall growthis expected to be modest this year with the run off of backlist sales of priorproduct. The Saxon supplemental math publisher acquired last year is performingon plan with investment in new programmes for the surge in math adoptions overthe next few years. Adjusted operating profits for the US K-12 business were 34%lower at constant exchange rates reflecting the lower revenues in the first halfand the sales and marketing costs ahead of the strong sales growth to bereflected in the second half. The Harcourt Assessment business saw revenues up 6% at constant exchange rates,or 5% before acquisitions, with good growth from US state testing contracts. Theclinical testing business saw revenues level off in the US after two very strongyears following major product releases, whilst local editions of theseprogrammes drove good growth in international markets. Harcourt Assessment'sperformance in new state contract bids has been mixed with a win in Michiganoffset by losses in Connecticut and Oklahoma. The contract bid pipeline ishowever strong and Harcourt will be seeking to exploit its major productstrengths whilst ensuring adequate financial returns. The Stanford LearningFirst interim assessment product is developing well with continuing investmentin curriculum subject coverage, aligned to specific state standards, and in theonline platform. The modules released to date have been well received in themarket. Adjusted operating profits were 4% lower at constant exchange ratesreflecting investment in the newly acquired Ordinate business, or 6% aheadexcluding acquisitions. The Harcourt Education International business, principally the UK, Australia andsouthern Africa, saw underlying revenues 2% ahead in the less significant firsthalf. The UK schools business was flat whilst good growth was seen in SouthAfrica. Operating margins in the first half were slightly negative compared withslightly positive in the prior first half, and are unrepresentative of the yearwith movements exaggerated by the strong seasonal weighting of revenues andoperating profits to the second half. The Harcourt Education business is well positioned for a strong performance thisyear, with good market growth as the adoption cycle turns up and the success ofnew publishing. Organic revenue growth of 9-10% is targeted for 2005, on theassumption that the legislative delays in funding Texas adoptions will beresolved, and operating margins should improve year on year with the operationalgearing in the business. Organic revenue growth of 6-7% is targeted over thethree years 2005-2007 taking into account the adoption cycle. REED BUSINESS £ • % Six months ended 30 Six months ended 30 June June 2005 2004 2005 2004 Change £m £m •m •m at constant currenciesRevenueReed Business InformationUS 159 163 232 241 0%UK 124 116 181 172 +8%Continental Europe 132 133 193 197 -2%Asia Pacific 18 15 26 22 +13%Reed Exhibitions 242 232 354 343 +4% 675 659 986 975 +3%Adjusted operating profit 118 118 172 175 +1%Adjusted operating margin 17.5% 17.9% 17.5% 17.9% -0.4pts OPERATING AND FINANCIAL REVIEW 08 Reed Business has seen a continuing improvement in its underlying revenuegrowth, driven by strong online sales and exhibitions. Overall markets continueto recover, although this varies by geography and sector. The publishing andinformation businesses saw strong growth in online revenues partially offset byadvertising weakness in continental Europe and in US manufacturing. A goodperformance in the exhibitions business was held back in the first half by thecycling out of a number of non annual shows, although there is some reverseeffect in the second half. Revenue growth was 3% at constant currencies. Revenues and adjusted operating profits increased by 3% and 1% respectively atconstant exchange rates, despite the cycling out of non annual shows in thefirst half. The magazine and information publishing business saw underlyingrevenue growth of 2% with strong growth in online sales, which now account for18% of total revenues, moderated by advertising weakness in continental Europeand in US manufacturing titles. The exhibitions business grew revenues 4%.Underlying operating margins would have been ahead despite increased investmentbut for the cycling out of contribution from joint venture exhibitions. In the US, Reed Business Information saw flat revenues with good growth in mediaand electronics titles offset by a continuing decline in the US manufacturingtitles. Online advertising and search is growing rapidly although themanufacturing sector in particular is seeing print revenues decline as newproduct news migrates to the web. Investment in new online services andmarketing, as well as in geographic extension through launch of highly regardedtitles in China and Japan, is expected to accelerate growth. Adjusted operatingprofits were 6% lower due to additional restructuring costs, or up 2% beforethis, as continued cost actions funded increased investment. In the UK, Reed Business Information underlying revenues and adjusted operatingprofits were up 10% and 28% respectively, driven by strongly growing onlinerevenues in recruitment and search. Particularly good growth was seen in theaerospace, science, property and construction sectors. Print display marketsremain subdued as growth in marketing budgets moves online. The strong profitgrowth follows the revenue growth and tight cost control, and will in part fundadditional online investment in the second half. In Continental Europe, Reed Business Information saw underlying revenues andoperating profits 4% and 5% lower respectively, reflecting the continuedeconomic weakness in The Netherlands, France and Germany. The developing onlineservices, as well as the focus on market share performance and yield management,has mitigated but not offset declines in advertising volumes and tuition. InAsia Pacific, underlying revenue growth was 9% with strong performances in Japanand Singapore. At Reed Exhibitions, revenues were 4% ahead, or 9% before the effect of the netcycling out of non annual shows in the first half and some rephasing of showsfrom the second half. Good growth was seen in the US, Japan and in theinternational Midem portfolio of shows. Adjusted operating profits were 4% aheadheld back by the adverse cycling, including a number of joint ventures whichcontribute to operating profits but not to revenues. For the year as a whole,the first half impact of cycling on revenues partly reverses as there are anumber of biennial shows, such as Batimat in France, which take place in thesecond half. The second half is expected to see a steady pick up in growth in the magazineand information publishing businesses whilst the exhibitions business will seesome reversal of the show cycling that held back the first half. Organic revenuegrowth of 4-5% is targeted for 2005, with at least 5% revenue growth targeted inlater years, given a reasonable market environment. Operating margins willbenefit from the stronger revenue growth and continued tight cost control. FINANCIAL REVIEW REED ELSEVIER COMBINED BUSINESSES PROFIT AND LOSS Revenues increased by 5% expressed in sterling to £2,368m, and by 3% expressedin euros to €3,457m. At constant exchange rates, revenues were 6% higher, or 3%excluding acquisitions and disposals. Adjusted figures Adjusted operating profits, i.e. before the amortisation of acquired intangibleassets and acquisition integration costs, were up 2% expressed in sterling at£461m, and up 1% expressed in euros at €673m. At constant exchange rates,adjusted operating profits were up 5%, or 1% excluding acquisitions anddisposals. The adjusted operating margin at 19.5 was 0.4 percentage points lowercompared to the prior first half, reflecting the timing of revenues and costswithin Harcourt Education in particular and within Elsevier. These will reversein the second half. Net finance costs, at £66m/€96m, were £2m/€1m higher than in the correspondingfirst half and included a £3m/€4m net credit arising on the mark-to-market ofnon-qualifying hedges and undesignated instruments under IAS39 which appliesfrom 1 January 2005. The financing cost of acquisitions and higher short terminterest rates were balanced by the benefits of free cashflow and favourableexchange translation effects. Adjusted profits before tax, i.e. before amortisation of acquired intangibleassets, acquisition integration costs and gains on disposals, were £395m/€577m,up 2% compared to the prior first half expressed in sterling and 1% expressed ineuros. At constant exchanges, adjusted profits before tax were up 5%. OPERATING AND FINANCIAL REVIEW 09 The effective tax rate on adjusted earnings was unchanged at 25.3%. Theeffective tax rate on adjusted earnings excludes the effect of movements indeferred taxation assets and liabilities that are not expected to crystallise inthe near term, and more closely aligns with cash tax costs. Adjusted operatingprofits and taxation are also grossed up for the equity share of taxes in jointventures. The adjusted profit attributable to shareholders of £294m/€429m was up 2%compared to the prior first half expressed in sterling and up 1% expressed ineuros. At constant exchange rates, adjusted profit attributable to shareholderswas up 5%. Reported figures The amortisation charge in respect of acquired intangible assets amounted to£131m/€191m, up £15m/€19m on the comparative period, principally as a result oflast year's Saxon and Seisint acquisitions. Acquisition integration costs amounted to £8m/€12m (2004: £10m/€15m). Nonoperating items comprised a £4m/€5m net gain (2004: nil) on disposal ofbusinesses, investments and other fixed assets. The reported profit before tax for the Reed Elsevier combined businesses,including amortisation of acquired intangible assets, acquisition integrationcosts and gains on disposals, was £255m/€372m, which compares with £256m/€379m,restated under IFRS, in the 2004 first half. The small movement reflects animproved underlying operating performance offset by higher amortisation fromacquired intangible assets and currency translation effects from a weaker USdollar. The reported tax charge of £120m/€175m, compares with a charge of £64m/€95m inthe prior first half. The increase reflects movements in deferred tax balancesin relation to unrealised exchange differences on long term inter-affiliatelending that is eliminated within the combined financial information. The reported attributable profit of £134m/€196m compares with a reportedattributable profit of £191m/€283m in the first half of 2004, reflecting mostparticularly the swing in non cash deferred tax balances referred to above. Cash flows and debt Adjusted operating cash flow, i.e. before acquisition integration costs, was£219m/€320m, £6m/€5m higher than in the prior first half. The substantialmajority of Reed Elsevier annual operating cash flows arises in the second halfof the year due to the timing of subscription and other advance receipts andworking capital movements. The Harcourt Education businesses have a significantcash outflow in the first half of each year as product is produced and expensesincurred ahead of the peak sales period in June through September, and afterwhich there is substantial cash inflow in the second half. The rate ofconversion of adjusted operating profits into cash flow in the first half of 48%(2004: 47%) reflects this. In the twelve months to 30 June 2005, the adjustedoperating cash flow conversion rate was 95% (2004 full year: 95%). Capital expenditure included within adjusted operating cash flow was £80m/ €117m(2004: £91m/€135m) including £42m/€61m in respect of capitalised developmentcosts included within intangible assets. Spend on acquisitions was £62m/€91m. Anamount of £37m/€54m was capitalised as acquired intangible assets and £32m/€47mas goodwill. Acquisition integration spend in respect of these and other recentacquisitions amounted to £12m/€18m. Disposal proceeds amounted to £14m/€20m. Free cash flow - after interest and taxation but before acquisitions anddisposals and dividends - was £64m/€94m (2004: £44m/€65m), reflecting theseasonal working capital requirements of the business. Dividends paid in thefirst half, relating to the 2004 final dividend, amounted to £244m/€356m (2004:£220m/€326m). Due to the phasing of operating cash flows and dividend payments,the free cash flow for the year arises in the second half. Net borrowings at 30 June 2005 were £2,913m/€4,340m, an increase of £381m/€770msince 31 December 2004, reflecting dividends and acquisition spend less freecash flow in the first half, and adverse foreign exchange translation effectsdue to the significant strengthening of the US dollar between the beginning andend of the period. These currency translation effects increased net debt expressed in sterling by£141m and in euros by €421m. Net debt is stated including a fair valueadjustment to increase gross debt by £217m/€323m under IFRS which is largelyoffset by the corresponding fair value of derivatives used to hedge the relateddebt instruments. PARENT COMPANIES For the parent companies, Reed Elsevier PLC and Reed Elsevier NV, adjustedearnings per share, i.e. before the amortisation of acquired intangible assets,acquisition integration costs, gains on disposals and movements in deferred taxbalances not expected to crystallise in the near future, were respectively up 3%at 12.3p (2004: 12.0p) and flat at €0.27 (2004: €0.27). The difference inpercentage change is entirely attributable to the impact of currency movementson the translation of reported results and the effects of rounding. At constantrates of exchange, the adjusted earnings per share of both companies would haveshown an increase of 5% over the prior first half. The reported earnings per share for Reed Elsevier PLC shareholders was 5.1p(2004: 7.5p) and for Reed Elsevier NV shareholders was €0.13 (2004: €0.18). The equalised interim dividends are 3.7p per share for Reed Elsevier PLC, anincrease of 9% compared to the prior first half, and €0.092 per share for ReedElsevier NV, up 2% on the prior first half. The difference in dividend growthrates reflects the impact of the strengthening of the euro against sterlingsince last year's interim dividend declaration. OPERATING AND FINANCIAL REVIEW 10 ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS Reed Elsevier now prepares financial statements under International FinancialReporting Standards (IFRS), with effect from the 2005 financial year. The 2004financial statements have been restated under IFRS, adopting a 1 January 2004transition date, other than in respect of IAS39 - Financial Instruments forwhich the transition date is 1 January 2005. The Annual Reports and FinancialStatements 2004 set out the accounting policies adopted under IFRS, theprincipal differences to the UK GAAP previously applied, and the restatement ofthe 2004 financial statements. The required changes in Reed Elsevier accounting policies in adopting IFRS arein six major areas: • Goodwill and intangible assets - goodwill is no longer amortised and intangible assets are generally amortised over shorter periods • Employee benefits - pension costs and defined benefit scheme assets and liabilities are measured based on market values; the amount of any surplus or deficit is recognised in full in the balance sheet • Share based remuneration - the fair value of share options, determined at date of grant, is expensed over the vesting period • Financial instruments - with effect from 1 January 2005, all derivative financial instruments are measured at fair value; hedge accounting is only permissible where effectiveness criteria are met • Deferred taxation - full provision is made for nearly all differences between the balance sheet amounts of assets and liabilities and their corresponding tax bases • Dividends - accrual is made for dividends only when they have been formally declared by the directors A reconciliation of the results reported for the six months ended 30 June 2005under IFRS with those that would have been reported under the UK GAAP previouslyapplicable is given in note 5 to the combined financial information. FORWARD LOOKING STATEMENTS The Interim Statement contains forward looking statements within the meaning ofSection 27A of the US Securities Act 1933, as amended, and Section 21E of the USSecurities Exchange Act 1934, as amended. These statements are subject to anumber 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 in Reed Elsevier's markets;exchange rate fluctuations; customers' acceptance of our products and services;the actions of competitors; legislative, fiscal and regulatory developments;changes in law and legal interpretations affecting Reed Elsevier's intellectualproperty rights and internet communications; and the impact of technologicalchange.Related Shares:
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