Interim Results
Reed International PLC
9 August 2001
PART 1
FINANCIAL HIGHLIGHTS
FOR THE SIX MONTHS ENDED 30 JUNE 2001
REED ELSEVIER COMBINED BUSINESSES
Year ended Six months Six months
31 December ended ended
30 June 30 June Change at
2000 2000 2001 2000 2001 2000 constant
£m Eurom £m £m Eurom Eurom currencies
%
3,768 6,180 Turnover 2,036 1,795 3,258 2,926 +8%
793 1,301 Adjusted 438 394 701 642 +7%
operating
profit
690 1,132 Adjusted 410 351 656 572 +13%
profit
before tax
511 838 Adjusted 303 260 485 424 +13%
profit
attributable
775 1,271 Adjusted 278 306 445 499 -13%
operating
cash flow
433 697 Net 530 1,481 880 2,340
borrowings
21% 21% Operating 22% 22% 22% 22%
margin
98% 98% Operating 63% 78% 63% 78%
cash flow
conversion
8 8 Interest 16 9 16 9
cover
(times)
The Reed Elsevier combined businesses encompass the businesses of Reed
Elsevier plc and Elsevier Reed Finance BV, together with their two parent
companies, Reed International and Elsevier.
The financial highlights presented refer to 'adjusted' profit and cash flow
figures. These figures are used by the Reed Elsevier businesses as additional
performance measures and are stated before the amortisation of goodwill and
intangible assets, exceptional items and related tax effects.
The percentage change at constant currencies refers to the movements at
constant exchange rates, using 2000 full year average rates.
PARENT COMPANIES
REED INTERNATIONAL
Year ended Six months ended
31 December 30 June
2000 2001 2000 Change
£m £m £m %
Adjusted profit
attributable
270 - at reported rates 160 138 +16%
270 - at constant rates 157 139 +13%
Adjusted earnings per
share
23.3p - at reported rates 12.7p 12.0p +6%
23.3p - at constant rates 12.4p 12.1p +3%
10.0p Dividend per share 3.1p 3.1p -
ELSEVIER
Year ended 31 Six months ended
December 30 June
2000 2001 2000 Change
Eurom Eurom Eurom %
Adjusted profit
attributable
419 - at reported 243 212 +15%
rates
419 - at constant 244 216 +13%
rates
Adjusted earnings
per share
Euro0.59 - at reported Euro0.31 Euro0.30 +3%
rates
Euro0.59 - at constant Euro0.31 Euro0.30 +3%
rates
Euro0.28 Dividend per share Euro0.09 Euro0.09 -
The results of Reed International reflect its shareholders' 52.9% economic
interest in the Reed Elsevier combined businesses. The results of Elsevier
reflect its shareholders' 50% economic interest in the Reed Elsevier combined
businesses. The respective economic interests of the Reed International and
Elsevier shareholders take account of Reed International's interest in
Elsevier.
REPORT OF THE CHAIRMAN AND THE CHIEF EXECUTIVE OFFICER
The first half of 2001 has seen improving growth trends and continued good
progress in the execution of our strategy for growth. Our investment
programme is building revenue momentum and we remain on track to deliver on
our financial goals of above market revenue growth and double digit earnings
growth for 2002 and beyond. The $4.5 billion acquisition in July of the
Harcourt businesses is a major step forward in the development of our
strategy and will further accelerate our financial progress.
FINANCIAL RESULTS
The first half results are encouraging and reflect strong performances in
Science & Medical, Legal and Education, partly offset by the impact of the
economic slowdown on Business to Business. Revenues were up 13% to £2,036
million/11% to Euro3,258 million whilst adjusted pre-tax profits were up 17%
to £410 million/15% to Euro656 million. At constant exchange rates revenues
were up 8% and adjusted pre-tax profits up 13%.
Underlying revenue growth, excluding acquisitions and disposals and currency
translation, was 5%. This compares favourably with 4% growth in the first
half 2000 and 1% in first half 1999. Underlying operating profits were 6%
higher, with the impact on the prior year comparison of the higher investment
mitigated by the cost savings achieved. Overall operating margins were
broadly flat at 21.5%. Adjusted pre-tax profits included the benefit of last
year's share placing proceeds ahead of the Harcourt acquisition less dilution
from portfolio changes.
The Science & Medical business had a strong first half. Revenues and
operating profits increased by 7% and 12% respectively at constant exchange
rates, or 9% and 12% excluding acquisitions and disposals. This good revenue
growth reflects the continuing improvement in subscription renewal trends and
expansion of the ScienceDirect customer base.
The Legal business continued to make good progress against strategic
milestones, with the turnaround in the US business starting to show through
in the results. Revenue growth is building and margins stabilising after the
major step up in investment last year. Revenues and operating profits
increased by 8% and 4% at constant exchange rates, or 5% and 4% excluding
acquisitions and disposals. Online revenue growth in US Legal Markets was 9%
and in US Corporate and Federal Markets was 7%. This is in marked contrast to
the zero growth seen in the first half of 2000. This online growth more than
compensates for attrition of print/CD-Rom revenues as business migrates
online. Outside the US, in International Markets, the businesses gave a solid
performance.
The Education business continued to perform strongly. Revenues and operating
profits increased by 13% and 18% respectively at constant exchange rates, or
11% and 12% on an underlying basis. With gains in market share driven by
strong publishing programmes, the US schools supplemental business, Rigby,
saw revenues up 19% and the UK schools business increased revenues by 12%.
The Business division saw revenue and operating profit growth held back by
the impact of the US economic slowdown on advertising markets in part offset
by cost actions and a strong performance in the Exhibitions business.
Revenues and operating profits were up 8% and 3% respectively at constant
exchange rates, or 3% and 2% excluding acquisitions and disposals. The
economic slowdown is expected to have a broader and deeper impact in the
second half although cost actions taken, including headcount reductions and a
cutback in development spending, are expected to mitigate to a significant
extent the effect on profits of lower underlying revenues. The business is
performing better than the B2B market overall, reflecting the actions taken
and the quality and balance of the portfolio.
ACQUISITION OF HARCOURT
On 12 July, we completed the acquisition of Harcourt General, following a
lengthy regulatory review process, and immediately sold on to The Thomson
Corporation those Harcourt businesses we did not wish to retain. We have
therefore now acquired the Harcourt Science, Technical and Medical (STM)
business and the US Education and Testing businesses at a total cost of
approximately US$4.5 billion after taking into account the on-sale, debt
assumed and other liabilities.
Financing has principally been from the US$1.8 billion proceeds of the shares
issued in December 2000, US$0.9 billion of Harcourt public debt assumed on
acquisition, and the successful issue in July 2001 of US$1.5 billion of
global bonds to refinance short term borrowings incurred.
The Harcourt STM business will be rapidly integrated within Elsevier Science,
with the enlarged business managed through two divisions: Science &
Technology and Health Sciences. The US Education and Testing businesses will
be managed within their existing, and successful, management organisations,
and will report in due course to a new Global CEO of Education.
We have been encouraged by the good progress made over recent months by the
acquired Harcourt businesses whilst we awaited regulatory approval. The STM
business saw proforma sales growth of 4% in the first six months of 2001 with
stronger growth expected in the more important second half which sees the
main publishing programme in Health Sciences. The priority now is to refocus
the organisation and accelerate growth momentum, particularly in Health
Sciences. The Education and Testing businesses are having another successful
year. Proforma first half sales growth was 13% with a strong outlook for the
more significant second half. The K-12 business is firmly on track to win the
highest overall market share in 2001 state adoptions in both the elementary
and secondary school markets and to achieve above market revenue growth on
top of a very successful year in 2000.
Plans for the integration of the businesses are well developed and we fully
expect to achieve over the next eighteen months the US$45 million of annual
operational cost savings initially targeted. These savings will fund the
additional US$40 million investment, over and above Harcourt's existing
planned spending levels, that is targeted to further accelerate growth. The
US$25 million annual costs of the Harcourt General head office will have been
eliminated before the end of the year.
PROGRESS ON STRATEGY
Throughout the year, in each of our businesses, we have been executing
against the detailed strategic priorities laid down last year. Although
revenue development within the Business division has been hampered by the
economic slowdown, we are pleased to report a high level of achievement
against our objectives.
Significantly upgrade management and organisation effectiveness
The management structure introduced last year - focused on the four divisions
with new senior management appointments - now has real traction with quicker
more market focused decision making and accountability. Confidence is growing
across the business; there is a clear momentum for new initiatives and
propensity for action. A culture change programme to embed core values across
the organisation is being rolled out, and a comprehensive organisation and
talent review is being pushed further into the business.
Major upgrade of products, leveraging internet technology, to deliver
superior services to customers
We continue to build on last year's major upgrade in products. We are adding
high value added and differentiated content, in services with greater ease of
use and functionality, and with increasing customisation. The ScienceDirect
service is recognised in its market for online product superiority and is
continuing to expand in content, navigation tools and data linkage. Usage is
growing strongly. The lexisnexis.com products for US legal, corporate and
federal markets have continued to add content and functionality. They are now
clearly very competitive, evidenced by the significant progress in online
revenue growth. Enterprise solutions are being embedded in major customers.
In Business, internet services have continued to develop around key brands
with subscriptions and advertising revenues building.
More effective marketing and sales programmes
The significant upgrade in sales and marketing programmes, particularly in
Science & Medical and Legal where the sales forces have been dramatically
expanded, is having a direct impact in winning important new clients and in
penetrating key markets such as small law firms. Our programmes, underpinned
by constant market research, are getting our upgraded product message across.
Significant increase in investment to drive revenue growth
The investment in new and upgraded products, largely electronic, and in
marketing and sales has now become part of the natural rhythm of the
business. Spending in the first half increased £15 million/Euro24 million
compared to the prior first half reflecting the build up in investment over
the past twelve months particularly in Science & Medical and Legal. Within
the Business division spending was lower, particularly on internet portals,
as investment activities were reappraised to reflect changes in the perceived
market opportunity. Overall investment for the year is expected to be similar
to last year's level of around £270 million, some £20 million less than
initially planned and reflecting the lower spending in Business.
Aggressive cost savings programmes
The cost savings programmes implemented last year are on track to deliver the
additional £27 million of annual savings to give a total of £170 million. The
savings from these programmes in the first half were approximately £85
million, half the expected annual total, which is £25 million more than in
the prior year first half.
The cost savings programmes initiated last year represented a major
reallocation of resources from production/infrastructure to revenue facing
areas. Although we do not expect further programmes as fundamental as this,
the tight management of costs remains a high priority. Further cost
reductions, over and above the savings referred to above, have been made
particularly in the Business division in response to the weak advertising
environment.
Expand geographically to build global capability and leadership positions
Within each business we continue to develop our positions in global markets
through organic growth, acquisition and launch. The acquisition of Harcourt
accelerates this progress dramatically in Science & Medical and in Education.
Within Legal, in addition to pursuing acquisition and alliance opportunities,
the business has been rolling out the LexisNexis brand globally as well as
implementing global content and technology strategies. In Business we
continue to evaluate acquisition and launch opportunities that may meet our
growth and financial criteria.
Continue to target acquisitions/alliances to accelerate achievement of
strategic goals
Our primary focus this half year has been on closing the acquisition of
Harcourt and on preparing for the integration and development of the
businesses acquired. A number of minor acquisitions were made, at a total
cost of £47 million/Euro75 million, following the more significant
rebalancing of the portfolios last year. The disposals programme is nearing
completion with the sale of OAG Worldwide completed in July and the sale of
Cahners Travel Group very advanced. The acquisitions and disposals over the
last 18 months have given our portfolio much greater clarity and focus around
higher growth sectors.
PARENT COMPANY EARNINGS AND DIVIDENDS
For the parent companies, Reed International and Elsevier, the adjusted
earnings per share were up 6% at 12.7p and up 3% at Euro0.31 respectively. At
constant exchange rates this represents an increase of 3%. The reported
earnings per share, including exceptional items and the amortisation of
goodwill and intangible assets, was for Reed International shareholders 2.9p
(2000: 4.5p) and for Elsevier shareholders Euro0.07 (2000: Euro0.12).
The Reed International interim dividend is unchanged at 3.1p. The Elsevier
interim dividend under the equalisation arrangements is also unchanged at
Euro0.09.
OUTLOOK
In February, we stated that this year would be focused on execution and
delivery of our strategy, and that Reed Elsevier, even before taking into
account the acquisition of Harcourt, should move very significantly towards
our stated goal of above market revenue growth and double digit earnings
growth in 2002 and beyond. We also said that although our Business to
Business operations will be impacted by the slowdown in the US economy, we
believed this to be manageable, and that our Science & Medical, Legal and
Education businesses should be largely unaffected.
All of this remains valid and we remain on track to deliver. The slowdown
within Business to Business is deeper and more protracted than had been
envisaged, but is largely compensated by the actions we have taken and the
stronger performance across the rest of the businesses. With the addition of
the Harcourt STM and Education and Testing businesses, we believe that double
digit earnings per share growth is achievable in 2001. The performance and
momentum of the business reaffirms Reed Elsevier's quality and the underlying
strength of its assets.
Morris Tabaksblat
Chairman
Crispin Davis
Chief Executive Officer
REVIEW OF OPERATIONS
Year ended 31 December 6 months ended 30 6 months ended 30
June June Change
2000 2000 2001 2000 2001 2000 at constant
£m Eurom £m £m Eurom Eurom currencies
%
Turnover
693 1,137 Science & 380 345 608 562 +7%
Medical
1,201 1,970 Legal 642 557 1,027 908 +8%
202 331 Education 106 90 170 147 +13%
1,672 2,742 Business 908 803 1,453 1,309 +8%
3,768 6,180 Total 2,036 1,795 3,258 2,926 +8%
Adjusted
operating
profit
252 413 Science & 142 124 227 202 +12%
Medical
237 389 Legal 117 105 187 172 +4%
40 66 Education 18 15 29 24 +18%
264 433 Business 161 150 258 244 +3%
793 1,301 Total 438 394 701 642 +7%
Unless otherwise indicated, all percentage movements in the commentary refer
to constant currency rates, using 2000 full year average rates, and are
stated before the amortisation of goodwill and intangible assets and
exceptional items.
Science & Medical
6 months ended 30 6 months ended 30
June June Change
2001 2000 2001 2000 at constant
£m £m Eurom Eurom currencies
%
Turnover
Elsevier 336 291 538 474 +12%
Science
Medical 44 54 70 88 -21%
Business
Total 380 345 608 562 +7%
Operating 142 124 227 202 +12%
profit
Operating 37.4% 35.9% 37.4% 35.9% +1.5pts
margin
The Science & Medical business had a strong first half, building on the
progress made in 2000. Revenue and profit growth momentum was driven by high
subscription renewals and the continued success of the ScienceDirect service.
The addition of the Harcourt Science, Technical and Medical (STM) business in
July presents substantial opportunities for further development and growth of
the business.
Revenues and operating profits increased by 7% and 12% respectively at
constant exchange rates, or 9% and 12% excluding acquisitions and disposals.
The good sales growth was driven by stronger subscription renewals and the
increasing contribution of ScienceDirect which added 3 percentage points to
sales growth.
Increased investment spending in new product and marketing initiatives was
more than offset by the impact of the cost savings programme initiated last
year. This, combined with the strong revenue growth, improved operating
margins to 37.4%.
ScienceDirect continues to expand with 60% of subscriptions by value now
including the online service and usage is growing rapidly. The year end
target of 65% is likely to be exceeded. Monthly page views reached 25 million
in June 2001, up 67% from the beginning of the year. The ScienceDirect
product line continues to expand with the launch of further customised
information services for specific scientific disciplines.
Also launched were the archive modules for Organic Chemistry and Inorganic
Chemistry, the first in a major three year programme to make all of our
scientific research archive available online on ScienceDirect.
The medical publishing and communications businesses saw revenue growth of
8%, excluding the Springhouse business sold in 2000, and operating profit
growth of 30% reflecting the revenue growth and increased cost efficiency.
In July, Elsevier Science was significantly expanded by the acquisition of
the Harcourt STM business. The business, which is not included in the above
results, saw proforma sales growth of 4% in the first six months of 2001 with
stronger growth expected in the more important second half which sees the
main publishing programme in Health Sciences. The STM business has been more
affected than Education by the uncertainties of the extended regulatory
review process and there is work to be done to refocus the organisation and
accelerate growth momentum.
The enlarged business will be managed through two divisions: Science &
Technology and Health Sciences. The Science & Technology business will
largely be managed within the existing Elsevier Science management structure
with the Harcourt Academic Press scientific journals business quickly
integrated. A new management organisation has been put in place for the
Health Sciences business combining the strengths of both Elsevier Science and
Harcourt's Health Sciences businesses into one cohesive unit. Over the next
few months, the focus will be on integration of the businesses and
development of an accelerated growth strategy for the Health Sciences
businesses exploiting the considerable breadth and depth of content across
clinical disciplines and the fast developing market for internet delivered
information and solutions.
Legal
6 months ended 30 6 months ended 30 Change
June June at constant
2001 2000 2001 2000 currencies
£m £m Eurom Eurom %
Turnover
LexisNexis North 507 440 811 717 +7%
America
LexisNexis 135 117 216 191 +10%
International
Total 642 557 1,027 908 +8%
Operating profit 117 105 187 172 +4%
Operating margin 18.2% 18.9% 18.2% 18.9% -0.7pts
The Legal business has continued to make good progress against its key
strategic milestones. The impact of the substantial investment programme in
significantly upgraded products, sales and marketing, is starting to show in
the results. Revenue growth is building and underlying margins are
stabilising.
Revenues and operating profits increased by 8% and 4% respectively at
constant exchange rates, or 5% and 4% excluding acquisitions made last year.
Operating margins are slightly lower as a result of acquisitions not included
in the prior year first half figures and which are in development phase.
Increased investment spending was offset by the further planned cost savings.
At LexisNexis North America, revenue growth excluding acquisitions was 5%, up
from 2% in the prior year first half and 1% in 1999, whilst operating profits
grew 6%.
In US Legal Markets, online revenues grew strongly by 9% in part offset by
lower print and CD-ROM sales as the business migrates online. The online
sales growth continues the progress made last year and includes a very strong
performance in the small law firm market where the tailored web product and
marketing and sales campaigns are having significant impact.
Migration from the proprietary online systems to the easier to use and more
functional web products is continuing, with usage growing strongly. The
success of our web products has been reaffirmed by the most recent
independent market research for the Spring 2001 term showing lexis.com to be
preferred over competing products in US law schools.
The Martindale Hubbell legal directories business had another good
performance with strong renewals and growing lawyer home page sales in the
lawyers.com website.
In US Corporate and Federal Markets, nexis.com online revenues grew by 7%, up
from 4% growth in 2000 and a decline of 4% in 1999. Growth is driven by the
continuing take up of the upgraded nexis.com product and expanding usage.
Enterprise sales are being won in major companies which embed our research
products within corporate intranets. The successful turnaround of this
business has been grounded on getting the fundamentals right in management,
product, marketing and sales.
LexisNexis International businesses outside the US reported revenues and
operating profits up 10% and 4% respectively, or 5% for both excluding
acquisitions, with a solid sales performance and further investment in online
services. Strong sales growth in France, South Africa and Asia/Pacific was in
part held back by phasing in the UK where the second half is more important
in the print market. UK online services continue to grow rapidly with new
internet launches and revenues have more than doubled over the last six
months. Further good progress has been made in expanding online services in
France and Australia.
Education
6 months ended 30 6 months ended 30 Change
June June at constant
2001 2000 2001 2000 currencies
£m £m Eurom Eurom %
Turnover
Reed Educational
& Professional 106 90 170 147 +13%
Publishing
Operating profit 18 15 29 24 +18%
Operating margin 17.0% 16.7% 17.0% 16.7% +0.3pts
The Education business continues to perform strongly in markets growing well.
The acquisition of the Harcourt US K-12 (kindergarten - 12th grade) Education
and Testing businesses in July establishes, with Reed Educational &
Professional Publishing, a leading position in the schools markets in the
English speaking world and presents significant opportunities for further
growth.
Reed Educational & Professional Publishing reported revenues and operating
profit ahead by 13% and 18% at constant exchange rates. Excluding
acquisitions, the figures were 11% and 12%, with gains in market share driven
by strong publishing programmes in Education.
The US supplemental publisher Rigby saw sales up 19% with continued momentum
in K-3 literacy. In UK Schools, sales were up 12% with good performances in
both primary and secondary schools markets. Sales growth in Australia was 5%
in the absence of curriculum change.
The Harcourt Education and Testing businesses, which are not included in the
above results, are having another successful year. Proforma first half sales
growth was 13% with a strong outlook for the more significant second half.
The K-12 business is firmly on track to win the highest overall market share
in 2001 state adoptions in both the elementary and secondary school markets
and to achieve above market revenue growth on top of a very successful year
in 2000.
The Harcourt businesses will be managed within their existing, and
successful, management organisations, reporting initially to Crispin Davis. A
Global CEO of Education for Reed Elsevier will be appointed in due course to
whom these businesses will report together with the Reed Educational &
Professional Publishing business. Much work has been carried out over the
last few months on developing plans for the strongly growing US Schools
business to take full advantage of the growing market for electronic and
online learning materials, capitalising on Harcourt's leadership in launching
successful educational programmes.
Business
6 months ended 30 6 months ended 30
June June Change
2001 2000 2001 2000 at constant
£m £m Eurom Eurom currencies
%
Turnover
Cahners Business 339 301 542 491 +4%
Information
Reed Business 134 130 214 212 +3%
Information
Elsevier 138 138 221 225 -2%
Business
Information
Reed Exhibition 251 183 402 298 +32%
Companies
OAG Worldwide 33 38 53 62 -16%
Other 13 13 21 21
Total 908 803 1,453 1,309 +8%
Operating profit 161 150 258 244 +3%
Operating margin 17.7% 18.7% 17.7% 18.7% -1.0pts
The Business to Business division has seen sales impacted by the economic
slowdown in the US, with knock on effects developing in other markets. Tight
management of the cost base has mitigated much of the impact of lower sales
in the US. A strong performance from the Exhibitions business in the first
half has also offset some of this weakness.
Revenues and operating profits increased by 8% and 3% respectively at
constant rates. Excluding acquisitions and disposals, the figures were 3% and
2%. Operating margins at 17.7% were 1 percentage point lower than in the
prior first half reflecting the low underlying sales growth and the inclusion
of lower margin acquisitions made last year. Cost actions have been taken to
mitigate the impact of the market slowdown particularly in the US, with
additional headcount reductions over and above the savings made last year.
Internet spend has also been reduced in view of this and the lower size of
the internet commerce opportunity than perceived a year ago.
In the US, Cahners Business Information reported revenues 4% ahead, or 6%
lower before acquisitions and disposals. Revenues were impacted by the
slowdown in the US economy, with ad pages down across almost every sector,
most particularly in Manufacturing, Electronics and TV/Telecommunications.
Underlying operating profits were 2% ahead, with the shortfall in revenues
mitigated by reduced investment spending and cost savings from reductions in
headcount and discretionary spend.
In the UK, Reed Business Information revenues increased by 3%, or 2%
excluding acquisitions and disposals, held back by lower revenues in the
Computing sector and in Agriculture, affected respectively by the global IT
slowdown and the UK foot and mouth crisis. The Property, Air Transport,
Science and HR sectors performed well and good growth was seen in revenues
from internet services. Underlying operating profits were 13% lower, impacted
by the phasing of investment and directory publishing. Totaljobs.com,
launched last year, continued to make good progress in the online recruitment
market.
Continental Europe saw a strong first half performance with Elsevier Business
Information seeing 9% revenue growth, before acquisitions and disposals, led
by the Netherlands and France. Reported revenues were lower due in particular
to the disposal of tuition businesses. Underlying operating profits were 14%
lower reflecting year on year comparison of the investment made in new
product development, sales and marketing. The flagship business portal in the
Netherlands, zibb.nl, continued to make very good progress in the market. In
June, EBI entered into a joint venture with Rabobank to develop zibb.nl's
presence in the financial services sector.
Reed Exhibition Companies revenues grew 32%, or 13% excluding acquisitions
and disposals, driven by growth in annual exhibitions, particularly in Europe
and Asia/Pacific, and the favourable impact of the phasing of non-annual
shows which benefits the first half comparison. Underlying operating profits
were 17% ahead reflecting the strong revenue growth and tight control of
costs. Miller Freeman Europe, acquired in July 2000 and excluded from the
underlying figures, is performing well.
The trading environment will be more difficult for the Business to Business
division in the second half of the year. Advertising demand in the US has
progressively weakened and the impact on European and Asian markets is
broadening, whilst the contribution of the exhibitions business is first half
weighted. The impact of lower revenues in the second half will be
significantly mitigated by the cost actions already taken, with a likely
outcome that, before acquisitions and disposals, overall revenues and profits
for the division for the year will be broadly comparable to last year.
Although this is clearly disappointing, the division is performing better
than the B2B market overall reflecting the strength and balance of the
portfolio, its market leading positions and the firm action being taken in
building share and reducing costs.
During the first half, many disposals of non core titles and businesses have
been completed including Cahners' automotive and metals titles, RBI's retail
and hobby electronics titles, EBI's consumer encyclopedia and some of the
training businesses, and minor exhibitions. In July, the sale of OAG
Worldwide was completed and the sale of the Cahners Travel Group is very
advanced. This will represent the substantial completion of the disposal
programme with the sale of Bowker and other directories expected in the
second half.
REVIEW OF FINANCIAL PERFORMANCE
Adjusted Profit and Loss
Turnover increased by 13% expressed in sterling to £2,036 million, and by 11%
expressed in euros to Euro3,258 million. Underlying revenue growth, excluding
the impact of acquisitions and disposals and currency translation effects,
was 5%.
Adjusted operating profits, excluding exceptional items and the amortisation
of goodwill and intangible assets, were up 11% expressed in sterling to £438
million and up 9% expressed in euros at Euro701 million. Operating margins at
21.5% were 0.4 percentage points lower against the comparative period,
principally reflecting the inclusion of lower margin businesses acquired last
year that are in their development phase. Excluding the impact of
acquisitions and disposals and currency translation effects, underlying
adjusted operating profit growth was 6% representing a small improvement in
underlying margin.
Net interest expense, at £28 million/Euro45 million, was £15 million/Euro25
million lower than in the corresponding first half principally due to lower
average net borrowings following the joint international share offering in
December 2000 less the full financing cost of acquisitions made last year.
Net interest cover was 16 times.
Adjusted profit before tax at £410 million/Euro656 million was 17% higher
than in 2000 first half expressed in sterling, 15% higher expressed in euros,
or 13% higher at constant exchange rates. Approximately 9% of this growth at
constant rates arises from the financial benefit of the share proceeds
received last year ahead of the funding of the Harcourt acquisition. Dilution
from portfolio changes was 4% in the first half due principally to the
investment phase of a number of the businesses acquired and the second half
weighting of revenues at Miller Freeman Europe.
The effective tax rate on adjusted earnings was little changed at 26%.The
adjusted profit attributable to shareholders of £303 million/Euro485 million
compared to £260 million/Euro424 million in the first half of 2000, 13%
higher at constant exchange rates.
Reported Profit and Loss
Exceptional items showed a pre-tax gain of £1 million/Euro2 million (2000:
£33 million/Euro54 million), the major components of which were net gains on
business and fixed asset disposals of £15 million/Euro24 million (2000: £66
million/Euro108 million) less acquisition related costs of £14 million/Euro22
million (2000: £6 million/Euro10 million), and, in 2000, restructuring costs
of £27 million/Euro44 million relating to the cost savings programme started
in 1999.
The amortisation charge for goodwill and intangible assets amounted to £229
million/Euro367 million, up £37 million/Euro54 million on the comparative
period reflecting acquisitions made in 2000 and currency movements.
The reported profit before tax for the Reed Elsevier combined businesses,
including exceptional items and the amortisation of goodwill and intangible
assets, was £182 million/Euro291 million which compares with a reported
profit of £192 million/Euro313 million in the 2000 first half. The reported
attributable profit of £71 million/Euro114 million compares with a reported
attributable profit of £102 million/Euro167 million in the first half of
2000. The movement between the periods principally reflects the larger
exceptional gains in 2000 and higher amortisation charges arising from
acquisitions.
Cash flows, acquisitions, disposals and debt
Adjusted operating cash flow, before exceptional items, was £278
million/Euro445 million (2000: £306 million/Euro499 million). Operating cash
flow was lower than the prior first half, reflecting working capital phasing
and untypically low capital expenditure in the first half of 2000. The
substantial majority of annual operating cash flows normally arises in the
second half of the year due, in particular, to the phasing of subscription
and other advance receipts and working capital.
Free cash flow - after interest, taxation and dividends but before
acquisition spend and exceptional receipts and payments - was £19
million/Euro30 million (2000: £89 million/Euro146 million). Due to the
phasing of operating cash flows and the timing of dividend payments, the
substantial majority of free cash flow normally arises in the second half of
the year. The first half of 2000 included a low final dividend payment in May
2000 when the dividend reduction in respect of 1999 was effected.
Exceptional net inflows totalled £36 million/Euro58 million (2000: £68
million/Euro110 million). Proceeds of disposals were £78 million/Euro125
million. Cash payments on restructuring totalled £25 million/Euro40 million.
Spend on acquisitions was £60 million/Euro96 million, including £30
million/Euro48 million in deferred payments on prior year acquisitions less
£20 million/Euro32 million receipts on currency hedges in respect of the
Harcourt acquisition. An amount of £44 million/Euro70 million was capitalised
as acquired goodwill and intangible assets.
Net borrowings at 30 June 2001 were £530 million/Euro880 million, an increase
of £97 million/Euro183 million since 31 December 2000, reflecting acquisition
spend and exchange translation effects, less free cash inflow and net
exceptional receipts.
PARENT COMPANIES
For the parent companies, Reed International and Elsevier, adjusted earnings
per share, excluding exceptional items and the amortisation of goodwill and
intangible assets, were up 6% to 12.7p (2000: 12.0p) and up 3% to Euro0.31
(2000: Euro0.30) respectively, representing an increase of 3% at constant
rates of exchange. The reported earnings per share for Reed International
shareholders was 2.9p (2000: 4.5p) and for Elsevier shareholders Euro0.07
(2000: Euro0.12).
The Reed International interim dividend is unchanged at 3.1p per share. The
Elsevier interim dividend under the equalisation arrangements is also
unchanged at Euro0.09 per share.
ACQUISITION OF HARCOURT
On 12 July, Reed Elsevier acquired the entire share capital of Harcourt
General, Inc for US$4.45 billion (£3.2 billion/Euro5.2 billion) following a
successful tender offer of US$59 per share of common stock or share
equivalent. Certain businesses - the Harcourt Higher Education business and
the Corporate and Professional Services businesses other than educational and
clinical testing - were immediately on-sold to The Thomson Corporation for
US$2.06 billion, on which taxes of approximately US$0.5 billion are payable
over the next 12 months. Harcourt General debt on completion was
approximately US$1.5 billion, some US$0.25 billion higher than last October
when the transaction was first announced reflecting principally the
seasonality of cash flow, with cash inflows mainly arising in the second half
of the year, and some settlement of corporate liabilities.
Reed Elsevier has retained Harcourt's Scientific, Technical and Medical (STM)
business and its K-12 (kindergarten - 12th grade) Schools Education and
Testing businesses for an implied total value of approximately US$4.5
billion, including the assumption of certain corporate liabilities and
looking through seasonal cash flow variations.
The acquisition was financed initially from the US$1.8 billion of cash
proceeds of the joint international share offering in December 2000, the
assumption of US$0.9 billion of Harcourt General public debt, and from short
term commercial paper borrowings. In July 2001, US$1.5 billion of short term
borrowings were refinanced through a multi-currency multi-tranche global bond
offering, under which were issued US$550 million 5 year notes, Euro500
million 7 year notes swapped to US dollars, and US$550 million 10 year notes.
Taking into account the funding mix and interest rate hedging undertaken on
signing of the definitive purchase agreement, the average annual funding cost
is approximately 7.2% for the incremental debt.
The Harcourt businesses acquired have seasonality in sales, profits and cash
flows, most particularly in the K-12 Schools business and to a lesser extent
in Health Sciences, which favours the second half of the year. On a calendar
basis, in 2000, approximately 55% of sales, 65% of operating profits and all
of the operating cash flow arose in the July to December period.
The benefits of this second half phasing to Reed Elsevier's reported 2001
figures will be less marked than this since July is by far the most
significant month for sales and profit and the Harcourt businesses will be
accounted for from 12 July.
A full review of the fair value of the assets and liabilities acquired will
be carried out in the second half. A preliminary unaudited estimate of net
tangible assets acquired excluding cash and debt is £0.5 billion. Goodwill
and intangible assets acquired are estimated at approximately £2.6 billion.
A preliminary review of the goodwill and intangible assets of the Harcourt
businesses has indicated that an expected useful life of up to 40 years would
be appropriate for these assets. Accordingly, the maximum estimated useful
life under Reed Elsevier's accounting policy of amortising goodwill and
intangible assets will be increased from 20 years to 40 years.
FORWARD-LOOKING STATEMENTS
The Interim Statement contains forward-looking statements within the meaning
of Section 27A of the Securities Act 1933, as amended, and Section 21E of the
Securities Exchange Act 1934, as amended. These statements are subject to a
number of risks and uncertainties and actual results and events could differ
materially from those currently anticipated, as reflected in such
forward-looking statements. The terms 'expect', 'should be', 'will be', and
similar expressions identify forward-looking statements. Factors which may
cause future outcomes to differ from those foreseen in forward-looking
statements include, but are not limited to, general economic conditions and
business conditions in Reed Elsevier's markets, customers' acceptance of its
products and services, the actions of competitors, changes in law and legal
interpretation affecting Reed Elsevier's intellectual property rights, and
the impact of technological change.
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