Reed Elsevier NV (ENL)
Q2 2012 (H1 2012) Results Earnings Call
July 27, 2012 4:00 AM ET
Anthony Habgood – Chairman
Erik Engstrom – Chief Executive Officer
Mark Armour – Chief Financial Officer
Sami Kassab – Exane BNP Paribas
Andrea Beneventi – Cheuvreux
Alastair Reid – UBS
Nick Dempsey – Barclays
Alex DeGroote – Panmure Gordon
Richard James – Goldman Sachs
Ian Whittaker – Liberum
Mark Braley – Deutsche Bank
Jonathan Helliwell – Berenberg
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Ladies and gentlemen, thank you very much for coming, for battling away in this morning and for those of you on the webcast, thank you for listening in. It gives me particular pleasure today that we’re reporting First Half Results which are showing growth in sales and profits for all five of our businesses.
With underlying revenues in constant currency growing on aggregate at 5%, earnings per share for the parent companies grew at 11% for Plc and 18% for NV. These are record results and mark an important step for us and that they really reaffirm our positive momentum.
We’re also reaffirming our commitment to continuing to dispose the businesses that no longer fit our strategy and to do this for the benefit of our shareholders. Our increase in dividends of 6% for Plc and 18% for NV reflect the earnings increases and our confidence in the future.
The evolution of our Boards is continuing with our announcement today that Linda Sanford will be joining us in December. As Senior Vice President of Enterprise Transformation and IT of IBM Corporation, Linda has over 35 years’ experience in technological businesses and in particular in leveraging technology to achieve business transformation. She has also been a Non-Executive Director of ITT for almost 15 years and I’m sure she will bring valuable experience to our Boards.
Mark will now take you through the results and Erik will describe the forward momentum in the businesses in more detail.
Thank you, Chairman, and good morning. I’m pleased to report a very strong set of results. Underlying revenue growth was 5%, excluding a 2% benefit from biennial exhibitions cycling in, that is exhibitions that took place this year, but not last year, underlying revenue growth was 3%.
Underlying operating profit growth was 7%, including acquisitions and disposals overall revenue was up 5% at constant currencies and in sterling. In euros overall revenues were up 12%, reflecting the weakening of the euro first half on first half.
Adjusted operating margin increased 1.1 percentage points to 27.7%. Adjusted earnings per share were up 11% for Reed Elsevier Plc at 24.7% and up 18% for Reed Elsevier NV at €0.47 and it’s good to hear the band chime in.
At constant currencies adjusted earnings per share were up 10%. The growth in reported EPS that is including amortization of acquired intangible assets and disposal gains was 52% for Reed Elsevier Plc and 57% for Reed Elsevier NV.
Cash flow was strong, with a 52% conversion of adjusted operating profits into cash in the first half and 94% on a last 12 months basis.
Our balance sheet is in good shape with net debt to EBITDA of 2.3 times on a pensions and lease-adjusted basis or 1.7 times on an unadjusted basis. The interim dividend is up 6% for Reed Elsevier Plc and up 18% for Reed Elsevier NV. The significantly higher increase for Reed Elsevier NV reflects the weakening of the euro against sterling since last year’s interim dividend announcement.
I’m presenting the figures today as usual in sterling. The same charts with euro figures can be found in the appendices to the presentation. Reported revenues and adjusted operating profits were up 5% and 9%, respectively, in sterling and up 5% and 8%, respectively, at constant currencies.
Interest expense was lower, principally reflecting redemption of debt at the beginning of the year, giving adjusted pre-tax profits up 11% in sterling and at constant currencies. In euros they were up 18%.
The effective tax rate was up 40 basis points, reflecting increased profits and geographic mix.
Adjusted net profit was up 11% in sterling and 10% at constant currencies. The increase in euros was 18%.
Focusing on revenue, profit and margin, as said earlier, underlying revenue growth was 5% and operating profit, underlying operating profit growth was 7% with each of our businesses contributing underlying revenue and profit growth.
The 110 basis points increase in operating margin included 40 basis points from portfolio change, including the effect of low margin disposals in the prior year, as well as this year. The margin increase also included 10 basis points from currency effects with a positive impact from the multi-year subscription currency hedging program in Elsevier, mostly offset by unfavorable currency translation mix effects. The impact of currency hedging and translation effects in Elsevier is set out in appendix.
The underlying margin improvement of 60 basis points reflects the revenue growth and improvement in operating efficiency, while we continue to invest in new product initiatives, sales and marketing and market expansion.
Our 5% underlying revenue growth came from Elsevier up 2%, Risk Solutions up 5%, Legal & Professional up 1%, Reed Exhibitions up 23% and RBI up 1%. The difference between the underlying change and the constant rate changes reflects acquisitions and disposals.
Of note are the reported growth rates in Risk Solutions, which overall was flat following last year’s disposal of the insurance software business and in Legal & Professional, which was 1% lower reflecting some small disposals last year. Reported growth in Reed Exhibitions was boosted by our buyout at the beginning of the year of the Brazilian joint venture, which has now consolidated and other acquisitions.