Chief Executive Officer’s report
In 2009, our professional information revenues held up relatively well in what was a difficult year for most of our customers. However businesses dependent on our customers’ marketing budgets were hit hard.
In the near term, some of our customer markets remain under pressure but longer term our prospects are encouraging. We have high quality assets in attractive global growth markets and we are focusing each business on its own top priorities. Across Reed Elsevier we are committed to delivering world class information and tools that enable our customers to make critical decisions, enhance productivity and improve outcomes and this is combined with a relentless pursuit of process innovation and cost efficiency. I am convinced that these goals will deliver increased value for our shareholders.
Financial results
Total revenues were up 14% to £6,071m/up 1% to €6,800m; at constant currencies, revenues were flat. Underlying revenues, i.e. before ChoicePoint and other acquisitions and disposals, were 6% lower. This decline reflects the impact of the global recession, most particularly the significant downturn in advertising and promotion markets in Reed Exhibitions and Reed Business Information.
Adjusted operating profit was up 14% to £1,570m/up 1% to €1,758m, and up 1% at constant currencies. Underlying adjusted operating profits were 9% lower, with reductions of 5% in the underlying cost base mitigating the impact of the underlying revenue decline. This together with the increasing profitability of ChoicePoint as we integrate the business delivered a flat adjusted operating margin at 25.9%. Adjusted operating cash flow was strong at £1,558m/€1,745m, with an excellent 99% conversion of adjusted operating profits into cash.
The post-tax return on capital employed was 1.7 percentage points lower at 10.4% reflecting the initially dilutive addition of ChoicePoint and the lower underlying adjusted operating profits. The ChoicePoint business delivered an encouraging 6% post-tax return on the $4.1 billion investment in our first full year of ownership and returns are set to continue to grow well.
Adjusted pre-tax profits were up 6% to £1,279m/6% lower at €1,432m, and 6% lower at constant currencies, reflecting the higher interest expense on a full year of ChoicePoint financing.
Adjusted earnings per share were up 3% to 45.9p for Reed Elsevier PLC/8% lower at €0.79 for Reed Elsevier NV, and 9% lower at constant currencies. This included a 4% dilutive effect of the July 2009 equity placing.
We use adjusted figures as key performance measures, and these are stated before amortisation and impairment charges on acquired goodwill and intangible assets, exceptional restructuring charges and acquisition related costs, disposal gains and losses, and deferred tax effects that are not expected to crystallise in the near term. Including these items, the reported operating profit and pre-tax profit were 22% and 36% lower respectively at constant currencies principally reflecting impairment charges in Reed Business Information. Reported earnings per share were 22% lower at 17.2p for Reed Elsevier PLC and 27% lower at €0.32 for Reed Elsevier NV.
Business progress and priorities
The Elsevier science and medical business (44% of adjusted operating profits) had a relatively robust year. In a challenging academic budget environment, the journals business entered 2009 with good subscription renewals from 2008. In Health Sciences, growing online sales in medical reference, clinical decision support and nursing and health professional education were partly held back by weak promotion markets. In the near term, academic budgets will remain under pressure and we are working with our academic customers to ensure that their growing information needs and goals for greater research efficiency are met within the confines of their tighter funding environment. The longer term growth drivers are expected to remain strong with growth in scientific discovery and research output and in the global demand for healthcare as well as increasing demand for specialist information and tools that can further enhance scientific and medical outcomes.
The LexisNexis legal and risk solutions business (42% of adjusted operating profit) had a challenging year. The core law firm business was flat in the US and marginally lower internationally reflecting the downturn in the legal industry whilst US directory listings were well behind the prior year as firms cut back on directory spend. Corporate, government and academic markets were lower. ChoicePoint made an excellent contribution in its first year, growing its profits strongly and boosting overall revenues and profits. Whilst in the near term LexisNexis will see continuing late cycle pressures in legal markets, the fundamentals of the business are sound with good longer term growth in the legal industry, from growing legislation, regulatory complexity and litigation, and increasing demand for better integrated solutions to improve customer productivity and legal outcomes. To capture these opportunities, two years ago we initiated a multi-year development effort to create the next generation legal product platform and advanced back office infrastructure. Delivery of these is a priority and we are making good progress. There will be progressive introductions of new products over the next few years which will provide an integrated customer experience across research, litigation tools, practice solutions and client development. This effort will result in a higher level of capital expenditure going forward and lower margin through continuing development spend but over the longer term will drive growth and operational efficiencies.
In LexisNexis risk solutions, the insurance business continues to see good growth from the high transactional activity in the auto and property insurance markets and the increasing penetration of more powerful data and analytics products. In the near term we are focused on completing the integration of the ChoicePoint acquisition and delivering successfully the expected growth, cost savings and financial returns. In addition, we are seeking to capture high growth opportunities in adjacent risk market segments. Over the last few years, the risk solutions business has been very successfully incubated and grown within LexisNexis to become an industry leader in its own right. As a result, during the course of 2010, we intend to separate LexisNexis Legal and LexisNexis Risk Solutions to create two market facing business units reporting directly to me, whilst retaining the benefit of their shared services. This will ensure that they have the greatest possible market and management focus as they pursue their respective strategies going forward.
Reed Exhibitions (10% of adjusted operating profits) had a difficult year with customers cutting back on promotional expenditure and the net cycling out of biennial exhibitions. Bookings going into 2010 remain cautious but the rate of revenue decline in annual shows is expected to moderate and the year will benefit from the net cycling in of biennial shows. The fundamentals of the business remain sound with face to face events an important part of customers’ marketing mix with good growth over economic cycles, high growth in emerging markets, and good returns on new launches and acquisitions.
Reed Business Information (6% of adjusted operating profits) had a very tough year with advertising markets severely impacted by the economic recession. Print subscription revenues declined less. Data services saw good growth delivering high quality industry specific data. The traditional advertising based magazine business model is challenged and significant actions are being taken to restructure the business and realign the cost base with the reduced revenue expectations. We are also focused on further developing and growing the data services businesses.
In delivering against the priorities in each of our businesses, we will adopt a pragmatic approach to driving business unit performance and creating value for our shareholders: differentiating between our businesses; prioritising high growth markets and good returns; focusing on customer value and improved outcomes; and relentlessly pursuing process innovation, customer service quality and cost efficiency.
The business and financial reviews describe in more detail our markets, our businesses, our performance and the outlook by business.
Outlook
Business trends seen in the second half of 2009 are continuing in 2010, particularly with regard to late cycle effects in our relatively resilient professional markets. Advertising and promotion and certain other markets, such as employee screening, remain difficult while the rate of decline is expected to slow as comparatives get easier. A modest reduction in adjusted operating margin is expected due to the weak revenue environment and increased investment in legal markets. While late cycle effects will continue in 2010 and be particularly severe in the first half, Reed Elsevier has high quality assets in attractive global growth markets and we are confident that our longer term prospects are encouraging.
This is my first report as Chief Executive Officer and I would like to take this opportunity to recognise the commitment and contribution of all our employees across the company. I know from my first hand experience in Elsevier what it takes to make progress in the current business environment and to continue to innovate whilst simultaneously improving operating efficiency. Our employees are passionate about what they do and have an exceptional commitment to our customers, to each other and to the communities we serve. We could not ask for more and I thank them all.
Erik Engstrom
Chief Executive Officer
