I am pleased to report on a very successful year for Reed Elsevier with major progress in developing the business, and the strongest constant currency adjusted earnings per share growth in a decade. Good revenue growth was seen across most of the business driven by the growing demand for online information and workflow solutions.
This, together with a strong focus on restructuring and cost management delivered meaningful margin improvement. Operating cash generation was excellent. Whilst the economic environment has become progressively more challenging, our business is more resilient than most and we are in a strong financial position.
Underpinning Reed Elsevier’s progress in recent years has been a consistent focus on three strategic priorities: driving online workflow solutions with our professional customer base; reshaping the portfolio into a faster growing, more cohesive whole; and improving cost efficiency and stronger margin growth.
Driving workflow solutions
As our customers increasingly conduct their business online, this gives Reed Elsevier significant opportunities to leverage technology to provide information driven solutions and embed our online products into their workflows. This enhances customer productivity and effectiveness. In 2008, over 50% of Reed Elsevier’s revenues (ie £2.7 billion/€3.4 billion) were online and these revenues grew at +14% at constant currencies.
The year saw further demonstrable progress across the business from continued investment in online product development, both from the launch of a wide range of new, innovative products, and from customers responding positively to the benefits of these products.
In Elsevier, subscription renewals reached record levels whilst other online solutions for the scientific and healthcare communities grew rapidly. Online legal information solutions have continued to expand, and there is growing demand for information analytics in the risk market. In legal research we see significant opportunities for more intuitive and interoperable offerings to enhance customer productivity and are stepping up our investment to reflect this.
Reed Business Information’s successful organic development over the past few years of innovative products and significant online franchises is now delivering over £330 million/€420 million of revenues.
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Reshaping the portfolio
The year has also seen a major reshaping of our business with completion of the sale of the remaining Harcourt Education businesses and the acquisition of ChoicePoint. ChoicePoint transforms our position in the risk information and analytics sector and the strategic and financial benefits are very attractive. The business has performed well with the insurance data and services business, which accounts for the substantial majority of ChoicePoint’s operating profits, delivering 10% year-on-year organic revenue growth. The integration with our existing risk business is progressing well and we are confident of achieving our savings targets.
We were disappointed not to be able to sell Reed Business Information, but the macroeconomic environment and poor credit market conditions made it too difficult to structure a transaction on acceptable terms. Whilst the short term outlook for RBI is very challenging, RBI is a high quality business, with a strong management team. It remains our intention to divest RBI in the medium term when conditions are more favourable.
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Improving cost efficiency
The US$290 million restructuring programme announced in February 2008 is progressing well and is expected to deliver a 21/2 year cash payback, with the targeted 2008 cost savings of US$30 million delivered and the targeted US$200 million annual savings by 2011 on track. The scope of the programme has now been expanded both to include the RBI business and to add further restructuring and consolidation opportunities which have been identified, reflecting the good progress made and the more challenging economic environment. The additional savings identified represent a 21/2 year payback on a further US$220 million of restructuring costs, and give additional targeted annual savings of US$150 million by 2011; the bulk of this represents the inclusion of RBI in the programme.
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Financial performance
2008 saw a strong financial performance. Revenues from continuing operations were up 7%, adjusted operating profits up 12% and adjusted earnings per share up 15%, all at constant currencies, with good performances seen across almost all the businesses.
Elsevier had a successful year driven by new publishing and continued expansion of our online information and workflow solutions as well as increasing cost efficiency. The year saw good underlying revenue growth, significant underlying margin improvement, and further major progress in the development of the business.
LexisNexis had a good year despite more challenging markets with continued growth in online information solutions in the US large law firm market and internationally, and good growth in risk information and analytics markets. Good revenue growth and the cost actions taken to improve efficiency delivered significant underlying margin improvement.
Reed Exhibitions had an exceptional year with successful major shows and the net cycling in of biennial exhibitions, and demonstrated that, in an increasingly online world, “face to face” exhibitions continue to deliver significant value for exhibitors and visitors alike.
Reed Business Information held up well despite difficult economic conditions throughout most of the year. This was, however, not enough to counter the recent impact on advertising markets of the downturn in global economic conditions.
The quality of the operating profits is underpinned by strong cash flow, with 102% of adjusted operating profits converting into cash. Free cash flow before restructuring, acquisition spend and dividends was £999 million/€1,259 million. The return on average capital employed for the continuing businesses increased further to 12.1% post tax, the fifth successive year of rising returns.
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Earnings per share and dividends
At reported exchange rates, adjusted earnings per share were up 24% for Reed Elsevier PLC to 44.6p and 9% for Reed Elsevier NV to €0.87. The higher growth in sterling than the 15% at constant currencies reflects sterling weakness against the prior year and the lower growth in euros reflects the strengthening of the euro.
Reported earnings per share were down 56% to 22.1p and 60% to €0.44 for Reed Elsevier PLC and Reed Elsevier NV respectively, principally reflecting that 2007 reported earnings included the gain on sale of Harcourt Education businesses and prior year tax credits.
The Boards are recommending an increase in the equalised final dividends for Reed Elsevier PLC of 10% and a decrease for Reed Elsevier NV of 7%, to give total dividends for the year up 12% and down 5% for Reed Elsevier PLC and Reed Elsevier NV respectively. The difference in growth rates in the equalised dividends reflects the significant strengthening of the euro against sterling since the prior year.
Additionally, in January 2008, we returned to shareholders an aggregate £2.0 billion/€2.7 billion from the net proceeds of the Harcourt Education sale via a special distribution of 82.0p per share for Reed Elsevier PLC and €1.767 for Reed Elsevier NV.
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Strong financial position
Following the return to shareholders of £2.0 billion/€2.7 billion of net proceeds from the Harcourt Education sale and the £2.1 billion/€2.7 billion acquisition of ChoicePoint, Reed Elsevier remains in a strong financial position with excellent cash generation. In January 2009 we issued US$1.6 billion of term debt as part of our planned refinancing of the ChoicePoint acquisition facility and Reed Elsevier’s term debt maturities are well spaced over the next few years. In February we extended our revolving credit facilities beyond the 2010 maturity. Over the next 12-18 months our focus is on repayment of debt and to restore Reed Elsevier’s credit ratios to more usual levels.
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Outlook
In the short term, 2009 is clearly going to be a more difficult year with most of the world’s largest economies currently in recession. The key professional markets served by Elsevier and LexisNexis (which account for about 80% of Reed Elsevier’s adjusted operating profits), while not immune to the impact of the economic downturn, are more resilient than most and these businesses benefit from a strong subscription base and the growing demand for online solutions. In our business-to-business markets (accounting for about 20% of Reed Elsevier’s adjusted operating profits) the demand for advertising and marketing services has been much more affected by the tougher economic environment. We therefore expect to show a profit decline this year in these businesses, including the effect on our Exhibitions business of the net cycling out of biennial shows.
Overall, with the cost actions we are taking, while continuing to invest in new and upgraded products, Reed Elsevier should see positive adjusted earnings per share growth at constant currencies in 2009.
In the longer term, I believe Reed Elsevier is well placed to develop and grow strongly. We have leadership positions in large, global growth markets, strong and well established brand franchises, are seeing increasing success from the focus on online products, and financially Reed Elsevier is in a strong position. These are fundamental strengths that, together with the actions we are taking outlined above, will stand Reed Elsevier in good stead for the future.
In March, Ian Smith will succeed me as Chief Executive Officer. Ian joined us at the beginning of the year and has spent most of his time with our businesses and meeting customers. He will make a meaningful impact in the development and success of Reed Elsevier and I wish him well for the future.
It has been a privilege to lead Reed Elsevier for the last nine and a half years. It is a great business, what we do is important to the communities we serve and to society, and our people are remarkably committed and talented. They do an outstanding job, caring greatly about what they do and the customers we serve, and I want to take this opportunity to thank them all.
Sir Crispin Davis
Chief Executive Officer