Reed bucks the trend with 17% profits rise

Turnaround at Anglo-Dutch publisher continues as new chief upbeat about US prospects
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The Independent Online

Better than expected interim results yesterday from Reed Elsevier, the Anglo-Dutch publishing giant, reinforced the group's defensive merits and underlined the rapid turnaround engineered by Crispin Davis who took charge as chief executive two years ago.

Pre-tax profit for the six months to June before exceptional charges and amortisation climbed 17 per cent to £410m from last year, a figure that beat analysts' forecasts by around £15m. The outcome helped Reed stock rise 5.8 per cent to 609p, providing investors with some respite from the negative sentiment that has gripped the media sector.

Mr Davis said: "Overall I would view January to June as a positive performance despite a much tougher environment. We feel confident that our growth targets both this year and next will be met."

Indeed, so firm was Mr Davis's optimism that he breezily predicted current year earnings – including an uplift from the £3.1bn acquisition of the US education, science and medical publisher Harcourt – would meet the double-digit percentage growth in earnings target set for 2002. He also indicated that Reed Elsevier's existing businesses, which include legal, scientific and business-to-business publications, would achieve double-digit profits growth next year.

The reason for the group's re-found confidence is the management shake-up pursued by Mr Davis, the former chief executive of Aegis. Those changes seem to have healed the wounds that resulted from the years of heavy infighting that characterised Reed Elsevier since its creation in 1992. Mr Davis said: "I think today we have very good, in-depth management. In the organisation there is a sense of momentum. It is much more dynamic."

He also acknowledged the impact of a three-year, £750m investment programme to shift the group's publishing businesses to internet distribution. "The investment is having an impact on driving growth," he said.

Analysts note that the key to Reed's outperformance of many media rivals lies in the composition of its business. Advertising sales, which are now experiencing a savage cyclical decline after several boom years, account for only 15 per cent of group sales. Though advertising sales at the group's business-to-business titles, which include the bible of the entertainment industry Variety and Electronic News, have fallen, subscription revenue growth in its scientific journals has more than picked up the slack.

Cost cutting has also helped. Around £145m in reductions were made last year with that figure set to rise to £170m in 2001 – about 5 per cent of the company's cost base. Much of those savings are coming from those inherent in electronic distribution using internet protocol technology for information production and distribution.

The impact of cheap internet-based technology to Reed Elsevier's future profit margins and earnings growth is expected to grow steadily. Scientific, medical and legal publishing, which comprised 50 per cent of total first-half sales of £2.04bn, are already gaining more than half of revenue and earnings from electronic products.

With the completion of the Harcourt purchase last month, Reed has added educational publishing – giving the group a fourth leg in the steadily growing US education market. Though Harcourt's college textbook business was sold on to Thomson, Reed has retained the school textbook and testing operations, which Mr Davis said were performing well.

He conceded, however, that Harcourt was likely to be Reed's last big acquisition for some time. "Primarily the focus is going to be on organic growth. We've got strong brands. There will be [a] bolt on acquisitions to complement our four main businesses."

Harcourt trails Pearson and McGraw Hill, the respective leaders in the US primary education publishing sector, but Mr Davis said market share gains, perhaps at the expense of Houghton, the number three player, were occurring. "We are gaining share in the US across the board. I wouldn't say we are taking business from any one competitor, though Houghton is clearly weak."

Leading the overall turnaround at Reed Elsevier is the rebound in form at Lexis/Nexis, the on-line legal and business information publisher. As various company divisions stumbled in the late 1990s, Lexis fell behind arch-rival Thomson West, which had carved out a lead in integrating content with distribution technology and developing an easier to use web-based interface.

As West gained market share, the Lexis contribution to Reed Elsevier eroded. In early 2000, when the scale of the problems at Lexis had become apparent to Mr Davis, he emphasised that a turnaround would take two or three years.

Lexis North America reported a 7 per cent rise in first-half sales, while its smaller international arm gained 10 per cent. With total divisional sales of £642m, up 8 per cent, the unit accounts for almost one-third of group revenue.

"We are seeing a large increase at Lexis. In the last couple of years we've turned the situation around," he said, citing various inducements – including 24-hour help lines and cocktail parties – which have been used to court college legal students and the young lawyers who do much of the profession's research. Technical improvements and a new search engine have also helped.

Mr Davis said that an earlier six-to-one preference among legal students for Thomson West has now been turned around to a slight majority favouring Lexis. "We put an enormous emphasis on our law school performance," he said, noting that law students once won to an on-line research system tend to stick with it during their subsequent careers.

Thomson, for its part, is launching a fightback, but Mr Davis is unbowed. "Turning around law school preference was critical and it does have a significant impact on usage and revenue."

For Reed Elsevier as a whole, he adds: "The four areas we are now in are big global, high margin businesses. If we execute quite well against our strategy we can deliver strong revenue and profit growth."

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