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Reed Elsevier Group PLC (NYSE:RUK)

2008 Earnings Call

February 19, 2009 10:00 am ET

Executives

Sir Crispin Davis - Chief Executive Officer

Mark H. Armour - Chief Financial Officer

Ian Smith – Chief Executive Officer Designate

Andrew Prozes - Chief Executive Officer of LexisNexis Division

Erik Engstrom – Chief Executive Officer of Elsevier

Analysts

Paul Sullivan - Bank of America Merrill Lynch

Jonathan Helliwell – Cazenove

Alex DeGroote – Panmure

Polo Tang – UBS

John Clarke - Brewin Dolphin

Simon Baker – Credit Suisse

Colin Tennant – Nomura

Sami Kassab – Exane BNP Paribas

Ian Whittaker – Liberum

Meg Geldens – MF Global

Mark Braley – Deutsche Bank

Richard Jones – Goldman Sachs

Mark Braley – Deutsche Bank

Simon Wallis – ING

Paul Gooden – RBS

Sir Crispin Davis

Good morning, welcome, and thank you all for coming along. Actually this morning, we sort of lost one and gained one. We lost the link to Amsterdam, by design I should say. We’ve decided it’s just more efficient and simpler to just have the one meeting, and I would like to say thank you to the Dutch analysts who’ve come over here to join us for this meeting here. We’ve also cleverly gained one in the form of a new chief executive. I’ll introduce Ian a bit later, but I’m delighted that Ian is now here with us.

Turning to the key highlights, I think 2008 was a good year. I think we did well on all of the key financial metrics. Obviously, there was significant development in terms of reshaping the portfolio with the sale of Education, acquisition of ChoicePoint. The restructuring program we took you through a year ago is going well. We’re actually slightly ahead of target and today we’re announcing an expansion of that program also to include RBI. I think that after the recent corporate bond issue and all that activity, we are in a strong financial position helped by very strong cash flow.

As far as the 2008 financial performance, 15% earnings growth and that is our highest for many years, and I think in this market, it is an excellent performance. Good above-market revenue growth we’ve seen for Elsevier, LexisNexis, and Reed Exhibitions, our core businesses. All three of those businesses, I think, did very well in terms of organic revenue growth.

Our focus in the last two or three years on accelerating margin improvement is paying off with 110% basis point margin improvement. We had a record year in terms of cash conversion, 102% of operating profit into free cash flow, that’s just £1 billion, which is an extraordinary number of free cash flow. Return on capital employed rose for the fifth year in a row. It is now about 12% and obviously significantly ahead of our cost for capital, and I think after the 1.5 billion corporate bond issue in January and the renegotiation of the revolving credit facility, we are now financially in a good position and with well-spaced debt maturities going forward.

These results I think are testimony to the strength and consistency of our strategy. This is, as you know the same chart I’ve now put up for many years. These continue to be our four core priorities that we focus on. The whole organization is very much aligned with these priorities, and I think we are making good progress against all of them.

The first two really are the cornerstone of Reed Elsevier in terms of long-term, strong underlying growth. They are the drivers, and we continued in 2008 to significantly add to our content bank. We’ve added for example in legal a wide range of briefs pleadings, notions, expert witnesses. In Europe, we’ve added significant online tax information capability. We’ve acquired the leading content provider in law in India, and right across, all businesses made very good progress in terms of developing high-quality wider range of content.

Similarly on workflow solutions, during the course of 2008, we introduced over 30 new significantly upgraded workflow solution products embedding these in our customers’ workflows and leveraging digital technology to provide higher analytics capability, and I’ll give you a couple of nice examples. We’ve recently introduced or are introducing a research performance visualizer. This basically allows heads of institutions and universities to measure the performance of their researchers and professors and the like in terms of impact factors, citations, and so on. It’s an extension of our Scopus bibliographic capability, but for the first time it allows now institutions to measure the effectiveness of their research and research departments by function, by individual, and so on, and compare it with our key competitors, compare it with norms, and help them allocate funds and so on, and I can tell you that the ten prototype universities that we’ve shared this with got extremely excited about that.

Another one, we just introduced a new product Pinpoint that allows medical institutions to measure the effectiveness of their staff in treating patients, for example in a hospital, they can measure the recovery times of people with pneumonia, they adjust it with the severity of the illness, and they can actually measure recovery times by shift, by doctor, by ward, and so on, so a very effective tool.

I just gave you those as a couple of examples of the kind of things that we are doing across workflow solutions and as we embed these products in our customers’ workflow, we do see enormous advantages in terms of contract lengths, renewal rates, pricing leverage, usage, and so on, and in tough times like this, this is a real advantage, and I’ve gone on a little bit about this because this is important with all the other sort of more immediate things around restructuring and acquisitions and so on, I do want to keep emphasizing that these two elements really are fundamental to the success and long-term growth of Reed Elsevier going forward.

Reshaping and strengthening the portfolio, I’ll come on to talk and similarly improving cost efficiency and margin, but as you can see, we had another strong year in terms of online workflow growth, 14% growth during 2008, and now over 50% of our revenues are online, and in 2009 that will actually increase significantly with the inclusion of ChoicePoint, which of course is a 100% online workflow solutions.

On reshaping the portfolio, the combination of the sale of Harcourt Education, the acquisition of ChoicePoint now does give a different shape, and I think a healthier shape to our portfolio. Now about 80% of Reed Elsevier profits are in Elsevier, LexisNexis, and I think the consistency, quality, and cohesiveness of those businesses bode well for the future. As I said, 50%, rising close to 60% this year now online, advertising down to 12-13%, and subscriptions now becoming increasingly the dominant business model for the company.

ChoicePoint acquisition is going well. As we outlined last year, this is an important strategic initiative. It gives us a very strong leadership position in what I consider to be a very attractive risk analytics market with a billion and a half leadership position there and with real competitive advantage in terms of content data set in terms of technology and in terms of scale. ChoicePoint is going well. Revenues and profit is up 4% each in 2008, and obviously going forward, we are going to see an accelerating and significant margin improvement in ChoicePoint as we implement the integration and synergy program.

Perhaps the most significant and encouraging element is on the key insurance business, which I still believe is the real jewel in the crown here, and that’s 85% of ChoicePoint’s profits. We saw another year of 10% underlying revenue growth, and what we are seeing as the economic environment gets tougher, the consumer end they are looking for more “better deals” and are searching more, and of course that plays straight into our hands as they look to save money on both auto and property insurance, and at the insurance company end, they of course are competing increasingly aggressively to try and get those consumers and gain market share and therefore making increasing use of our suite of analytical tools about the CLUE database. So, a good year for insurance in ’08, and I think we are looking for a broadly comfortable performance again in ’09.

Screening, for obvious reasons saw softness in ’08 and will again in ’09, but countering that the integration program is going extremely well. We closed down the Boca Raton Management Center. Everyone is now based in Atlanta, the management team firmly in place. The whole integration and restructuring program is laid out, being implemented, and is at least on track to the level and I think it might actually do a little bit better than that.

So overall I think that the risk market, the acquisition of ChoicePoint, and where we now stand in this market is very attractive strategically, and we are very much on track to deliver the financial targets we laid out at the time of the acquisition.

Obviously the disappointment, and it is a disappointment in 2008, was the termination of our sale process on RBI. To be honest, it just proved impossible both in terms of the economic environment and credit availability to get this business away at anything like acceptable terms. I would emphasize this is a high-quality business, it’s the global market leader, it has very strong franchises, it has a strong online business that’s now up to over a third of the total and an experienced and actually very motivated management team still in place.

Short-term, clearly it is very challenging. These markets which are tough, and we are now taking very firm actions to address the situation. The combination of an aggressive cost savings program which I’ll come on to talk about, accelerating migration from print to online with a target of getting that to about 50% of the business online, and I think over the next year or two some reshaping of the portfolio itself.

It remains our intention to divest this business. It’s impossible to give any time line on that, but our approach now is to bring it into Reed Elsevier and to maximize its growth, maximize its value, maximize its efficiency, so that when we do come to sell it, we also maximize the sale price.

On the restructuring program, there are really three elements to this. The first is the 2008 plan. It’s going very well. It’s a big program, a challenging program. We actually slightly exceeded our target on savings in 2008. We will hit our target in 2009. I think the consolidation and integration of data hosting services, IT procurement, real estate, HR, finance, back offices, all of those are going well, many of them largely now completed. The outsourcing off-shoring program is also going very well. The individual division programs are going well.

So I’m encouraged that for what really was a major program I think the organization has risen to the challenge there. Partly as a result of the good progress, partly reflecting the tougher economic environment, we have identified further opportunities broadly in the same areas with an additional restructuring cost of $60 million to reflect that, that will deliver $50 million of additional savings by 2011. And now with RBI back with Reed Elsevier, we are implementing a comparable additional program with RBI. We are taking a pretty aggressive stance here in terms of resizing the business to reflect the reality out there. The plans are well developed, nearly finalized, and in fact, we’re already quite well along the way in terms of implementation and that will deliver $100 million of savings by 2011.

Most of these costs are cash. The payback is 2-1/2 years, probably slightly less than that. So, I think these are attractive programs, and I think looking forward as we come out of the present downturn, it will leave the company lean and very well placed.

Turning now to the individual businesses, Elsevier had a good year, good overall results and the internals I think are genuinely encouraging. Renewals went up again to 98%, and if you think about this, this is extraordinary, that among our 6000 customers across over 150 countries in the word that we can get 98% renewal rate in these times.

Usage rose up again well about to 20% in terms of actual downloads, average subscription contract more that 3 years, and the present round of renewals is going very well. For example, one of our more challenging clients, California Digital Library, we signed a five-year contract with them recently.

In the healthcare section, particularly in the U.S, we see that market now is really accelerating in terms of moving online and all the opportunities that offers, but big opportunities for us in terms of point of care, diagnostic, and educationally referenced tools, and we are very well placed now to take advantage of that opportunity in terms of our brands, our content sets, and our technology.

The one black spot in Elsevier is in the pharma market. We estimate that the market was down 10% in 2008. We were down 5%, so we outperformed, but nevertheless it clearly has been a drag. Excluding pharma, our organic revenue growth on health was 6%, which I think was good performance.

As I referred to earlier, I think we are getting better and better in terms of innovation and fast application development, and have introduced quite a wide range of very good products around workflow solutions that have been very well received in the market, and I think we’re starting to get consistent momentum in terms of software application, development, innovation, customer understanding, and embedding these products in customers’ work flows.

Again, underlying this is a lot of encouraging data in terms of the quality of our content and publications. The last two years we’ve seen citation rates rise up. We’ve seen impact factors rise up. For example, Sale this year for the first time overtook Nature and Science in terms of impact factors. Article submissions were up 4% to 5%, usage up over 20%, renewals running at a very high rate. So, as well as the sort of financial performance numbers, I think the underlying performance metrics in Elsevier both on science and health look strong.

I thought it would be interesting to just give you for each of the businesses a sort of historical perspective on how they performed and what has driven that performance, and as you can see here, for Elsevier, it does reinforce the consistency and resilience of the Elsevier business during good and not so good times. Of course, all of these do come with a health warning that what we are facing in 2009 may well be unprecedented, but I think with that health warning nevertheless, I think this gives an underlying message in terms of the resilience of the Elsevier business.

LexisNexis, unquestionably the legal markets are tougher. As you see, legal firms are closing down, laying off partners and researchers, transactional M&A work dropping, so the legal market is challenging, manageable, is not disastrous but it definitely is a more challenging environment we are working against.

Against that background, I think actually LexisNexis in US did well in 2008 despite one or two claims to the country from one or two competitors. I think actually the business in the US has performed quite strongly. We delivered overall 4.5% organic revenue growth in our US legal business. Large law was actually slightly above that, small law was slower, and where we saw small declines was in the corporate government sector for fairly obviously reasons, and those unfortunately are sectors where LexisNexis tends to be somewhat stronger and that’s what hit us a bit more, but overall, I think in the market environment we saw in 2008, 4.5% underlying revenue growth is good performance.

We are now seeing and are moving ahead with what we think is a very attractive opportunity to achieve some real discontinuity on our product offerings, and in particular, in three areas; first in the research arena where we are developing now a transformational product, that in terms of operability, integration, and just basically improving the productivity of our customers it is going to be I think a meaningful step change to give us real competitive advantage there.

We are accelerating progress on our client development business moving away from what to be honest is an outdated Martindale-Hubbell directory business into a suite of web marketing services, and we are starting to see that now having an impact, and lastly and probably a bit overdue, we are re-engineering our fundamental infrastructure back-office services in terms of enhancing our customer facing product and service levels, and I think the combination of these three which will be introduced over the next 18 months will have an important impact in terms of the growth rates of our US legal business.

Risk continues to do well, and here I’m talking about the core LexisNexis risk business excluding ChoicePoint. Going forward, it’s going to be very hard to separate these because we have integrated them now pretty completely, but in 2008, our core risk business grew 8% on revenue and very significant margin enhancement. The leveragability in this business is tremendous, and if you look at our competitors, all of them are either looking at slight revenue declines, flat revenue, or revenue growth at sort of 1% to 2%, so we have significantly outperformed in this sector, and the business I think continues to look strong.

In international, again international was also hit by the economic environment and the tougher legal markets, but 5% organic growth in our international legal business we believe is significantly ahead of our competitors and meaningful market share growth. It’s being driven by online work flow solutions. They were up 12%, and they are now almost 50% of our total international business.

Again, if you look back over the last nine years, you can see pretty resilient, consistent gross story with this stronger or less strong years for reasons that we’ve given here, and again, this year or ’09 is unlike any other year, but nevertheless this does highlight the fundamental resilience of our LexisNexis business, in particularly with risk now an increasing part of the LexisNexis line-up.

Reed Exhibitions had a tremendous year. It had everything going for it, and delivered really good results both on our annual shows, but also the biannual shows, our top 35 shows almost all performed really well. I think the only real disappointment was our property show in Spain, which is no surprise.

There is no question in times like this that having the leading show is a real advantage, with this sort of flight to quality and we’ve seen that, and we’re also getting strong feedback from customers in terms ROI. Customers are getting increasingly sophisticated in terms of measuring.

Emerging markets are becoming increasingly important in our exhibitions business. In the BRIC countries, we’ve made significant progress in 2008. In China and Russia we’re market leader, with Brazil growing strongly and the Middle East.

We have started to see the impact of the economic downturn on our exhibitions business in the last quarter, and we think that that will worsen in 2009. Exhibitor and show space is holding up reasonably well. We are more worried about attendees, and of course the attendees’ flow-through is 100% to the bottomline, so I think that’s where we’re going to face the difficulty in exhibitions.

If you look again over the last 9 to 10 years and certainly the last 5 or 6 years, you’ll see stellar performance from our exhibitions business culminating in 2008, and unfortunately 2009, the biannual shows cycle out, and of course, the sale of the defense shows which normally cycle in in 2009, they go away.

Reed Business Information, there we are now increasingly seeing real impact from the downturn. I’m going to put a dimension on it. Across the whole of 2008, organic revenue was down 1%. In the last quarter, organic revenue was down 7%, and we’ve seen that continue in the first quarter of 2009. As you would expect, it’s the print, advertising, and recruitment that are hardest hit. Our online business and particularly data services and the like are actually holding up quite well. During the whole year, we actually saw very good online growth of 12%. Over a third of the business is now online, and as I said earlier, our goal and I think we will deliver on it is to build that to over 50% of the business online and with greater resilience growth capability that goes with that.

As I said earlier, the focus very much now is on maximizing value over the next year or two. I’ve been very impressed with the way the management team has reacted. They’re absolutely focused, committed, and determined to drive this business. The cost savings program they’ve put together is very comprehensive, wide ranging, and detailed, and I think that will get done well, and they’re also accelerating their plans in terms of migrating print to online.

If you look over the last 9 years, as you can see, this is a more cyclical business. You saw the downturn in 1, 2 and 3, then the gradual recovery, and I think 2009 will be a very challenging year for the RBI business.

Let me just finish off with giving you some thoughts on outlook for this year. As you can see, I think the key message is that Elsevier and LexisNexis which are about 80% of our business, these businesses are not immune, definitely not, but they are resilient and they are performing well.

Elsevier has got good visibility on the journal side. We will see subscription yields very comfortable for this year again. We are seeing good growth in online sales, good publishing programs. We think pharma will probably again have a similar performance as ’08. We don’t see any reason why things should get better in the pharma area. And we are seeing at the peripheral businesses the exchange rate hurting some of our book sales now in Asia, one or two other areas like that, but the core businesses I think should perform very similarly to 2008. I think in overall terms you will see a good performance in 2009 from Elsevier, but it will be a tad below 2008 for reasons I’ve outlined.

LexisNexis will see continued growth in online solutions. We will see good growth in risk. We will be upping the investment levels behind the US legal research, customer development, and infrastructure projects, and we think that ’09 will be a challenging year in the markets. It’s manageable, but nevertheless these aren’t going to be easy markets to operate in, but overall LexisNexis will see growth in 2009.

Reed Exhibitions is in a sense the flipside of 2008 when everything came together positively in 2008. It’s the other the way in 2009 with the cycling out of biannual shows, the sale of the defense business and the economic downturn, and as a net result of that, we will see meaningful revenue and profit decline in exhibitions though that will reverse again in 2010.

Reed Business Information, as I said, significant downturn in advertising markets. I think the online paid circulation data services will hold up quite well, but it is obviously again a challenging year for Reed Business Information. So, 80% of our business I think we can look to resilient solid performance from Elsevier and LexisNexis, but a challenging environment for exhibitions and business information. We are going to continue with our investment program through 2009. We’re actually upping it on LexisNexis, and I think that’s important, but we will see positive earnings growth in 2009.

Just to finish up, it is a bit of doom and gloom out there in a challenging economic environment. I think it’s important though to reemphasize what I think are core strengths for Reed Elsevier and I think will stand us in very good stead over the next year or two of difficult markets and actually will enable us to come out of these markets in a very strong position. We do in almost all of our businesses have the leading market positions, the leading brands, and that’s going to be important over the next two to three years. I think a number of our smaller competitors are going to struggle across most of the sectors that we operate in, and I hope the message we got across is that our focus on workflow solutions, proprietary content built into customers’ workflow, long-term contracts is an enormous amount of protection for us during these times.

We are going to continue to invest quite strongly behind our online solutions program, and again, I think that will give us increasing competitive advantage. Implementation of what is a pretty wide ranging cost program I think over the next two to three years will see us become quite a lot leaner as an organization, and as we see revenue growth accelerate when the rebound comes I think you are going to see that has significant impact on margins.

Lastly and I think one of the key strengths of Reed Elsevier is we are generating around £1 billion of free cash flow a year, and I think with the balance sheet now in decent shape and with that kind of cash flow to further reduce debt, I think we are in a strong financial position now going forward.

With that I’ll turn it over to Mark who can take you through things in a bit more detail.

Mark H. Armour

I am very pleased to report on a successful year where we saw good revenue growth and meaningful margin improvement across most of the business, with strong subscription renewals, rapidly growing online sales, and strong growth in the exhibitions business including the favorable show cycling.

Reed Business Information, as Crispin said, which is now included back within continuing operations, held up pretty well throughout most of the year but for significant advertising market decline towards the end of the year.

Operating margin showed good improvement, up 110 basis points, and the conversion of operating profits into cash was a record 102%. Adjusted earnings per share were up 24% for Reed Elsevier PLC and up 9% for Reed Elsevier NV. At constant currencies, adjusted EPS growth was 15%. Currency translation does of course have quite an impact on our results at reported exchange rates. The average exchange rates saw the sterling weaken against both the US dollar and the euro, whilst the euro also strengthened against the US dollar. This gives a favorable impact on translation of our reported results expressed in sterling and an adverse effect on growth rates expressed in euros.

The sale of Harcourt Education contributed approximately 2% to the adjusted EPS growth with a loss of the profit contribution offset by the effect of the share consolidation in January 2008, when the £2 billion special distribution was accompanied by that share consolidation. Particular pleasing also in 2008 was the strong free cash flow that Crispin referred to at £1 billion.

As in previous years, I’ll be presenting the figures in sterling and the same charts with the euro figures are included in the appendices, and in discussing the results I’ll mostly focus on growth at constant currencies. For the continuing businesses that exclude Harcourt Education, reported revenues were up 7% and adjusted operating profits up 12% at constant currencies. Excluding acquisitions and disposals, underlying revenue growth was 4% and adjusted operating profits up 9%. The adjusted operating margin as I said improved by 1.1% driven by the good revenue growth and continuing cost actions.

The net interest expense was higher largely due to currency translation effects with a substantial majority of our net debt denominated in US dollars. As the benefit of our free cash flow and disposal proceeds were in large part offset by the financing cost of ChoicePoint and other acquisitions. Adjusted pre-tax profits for the continuing businesses were up 11%. An analysis of our pre-tax profits by currency is included in the appendices.

The next two charts summarize the total and underlying growth rates across the continuing businesses for revenue and adjusted operating profits. You can see how our underlying revenue growth of 4% is derived from 5% in both Elsevier and LexisNexis, 11% in Reed Exhibitions, and a 1% decline in Reed Business Information. The slightly lower total growth rate in Elsevier reflects the disposal of the MDL Software business in 2007 partly compensated by a number of small acquisitions in health sciences. The higher total growth rate for LexisNexis includes just over 3 months of ChiocePoint together with a number of small acquisitions in the solutions arena.

The lower total growth rate in Reed Exhibitions principally reflects the sale of the defense shows, and the higher total growth rate for RBI reflects the minor acquisitions in data services and lead generation. For adjusted operating profit, our underlying growth is derived 10% at Elsevier and LexisNexis, 20% growth in Reed Exhibitions with RBI 5% lower. The total operating profit includes as with the revenues the effect of the acquisitions and disposals I just mentioned.

Turning to each of the businesses, Elsevier had a good year with strong subscription renewals, successful new publishing, and growing online sales to deliver the 5% underlying revenue growth. This was slightly lower than the 6% in 2007 and reflects the decline seen in pharma promotion markets. Operating margins were 1.7% ahead driven by the good revenue growth and increasing cost efficiency. Journal and book production operations have been increasingly outsourced over the last few years, and 2008 saw a step-up in our offshore production facilities in Chennai.

The year also saw a significant outsourcing of software engineering and financial transaction processing. These programs together with the increasing consolidation across Reed Elsevier of technology operations, procurement, and real estate management are keeping costs under tight control as the business grows. The drag on margin from the three-year rolling currency hedging program for journal subscriptions was offset by the favorable mix effect of the MDL disposal.

LexisNexis also had a good year with good growth in total solutions and the risk business and in international to deliver 5% underlying revenue growth. The growth was behind the 7% underlying revenue growth seen in 2007. Whilst LexisNexis markets are more resilient than most, law firm activity has slowed with the growing economic pressures and small declines were seen in corporate and government markets. In the risk business, strong growth was seen particularly in the collections market and in government, and I’ll comment on ChoicePint in a moment.

Operating margins were up 1% reflecting the good revenue growth and tight cost control. Major cost actions during the year included the consolidation of the US legal business with the US corporate and public market business, which are now together in one organization that is other than risk which is separate. Additionally the US operations were consolidated with a significant streamlining of management and operational capabilities.

Outsourcing of non-core activities accelerated with the outsourcing of systems engineering and maintenance, data fabrication, software development engineering, and other activities. These programs together with across Reed Elsevier initiatives are keeping costs under tight management and releasing funds for investment in a more challenging economic environment.

ChoicePoint was acquired on the 19th of September, and it added 8% to LexisNexis reported revenue growth and 9% to its profit growth. This chart sets out the 2008 results of ChoicePoint against 2007 on a pro forma basis after taking account of businesses sold and discontinued. The insurance data and services business of ChoicePoint which accounts for most of its operating profits grew its revenue 11% or 10% before small acquisitions.

Although the insurance business is predominantly a transactional business in helping insurance carriers evaluating underwriting risk, it has strong annuity characteristics. As Crispin mentioned, the increase in transaction activity is being driven by insurance policy churn in the auto and property insurance market as consumers seek better value, and by the increasing adoption by insurance carriers a more powerful analytics in the underwriting process.

In the remaining ChoicePoint businesses, total revenues declined 6% reflecting in screening and the downturn in hiring across most US companies and in business the contraction in financial markets. As Crispin indicated earlier, our risk and ChoicePoint businesses are now integrated within one management organization focused on driving revenue growth and developing the product pipeline whilst taking out $150 million of annual costs by 2011, and these costs will be delivered from technology operations, overlapping operations, and corporate costs.

Turning to Reed Exhibitions, it had an exceptional year with underlying revenue growth of 11% and operating profits up 20%. The business saw good growth in annual shows and launches and in the biannual shows. The particularly strong growth reflects the net cycling-in of biannual shows which added 6% to the revenue growth and 11% to the profit growth. The 1.8% increase in operating margin reflects the net cycling-in of the show contribution from the biannual shows over a more fixed and direct overhead base as well as the good revenue growth and tight cost control. The year 2009 would of course see the net cycling-out of the biannual shows, particularly in the first half.

Reed Business Information held up well for most of the year with continuing strong growth in online information services more than compensating for print decline. However, the downturn in global economic conditions hit B2B advertising markets in Q4, pushing RBI underlying revenues down 1% for the year and profits down 5%.

The extent and speed of the downturn can be seen in the comparison of fourth quarter trends against the third quarter with the business down 7% in the fourth quarter compared with flat in the third. Tight cost control was maintained throughout the year, and as the environment became that much more difficult, major restructuring programs are being developed to right size the business against reduced revenue expectations.

Adjusted operating cash flow was up 17% at constant currencies and represented a record 102% conversion of operating profits into cash. Capital expenditures were higher, but this mostly reflects currency translation effects. The favorable movement in share-based payments and pensions reflects higher non-cash charges and the timing of pension contributions. Working capital improved despite the growth in the business through a continued focus on working capital management.

The strong profit growth and the improved cash flow conversion rate delivered free cash flow after interest and tax of £999 million. As Crispin said, couldn’t we have found just one more million? So, we are save you that here in the next year. The other major cash flows for the year included the £2 billion special distribution for shareholders, the £2.1 billion ChoicePoint acquisition, as well as just over £400 million of ordinary dividends. These and other cash flows are set out an appendix which reconciles the movements in our net debt during the course of the year, and I’ll talk further about our balance sheet in a moment.

The growth in adjusted earnings per share expressed in sterling and in euros as I said was clearly significantly influenced last year by currency effects and so are dividends. The boards have proposed equalized final dividends of 15p for Reed Elsevier PLC and 29 euro cents for Reed Elsevier NV, which represents an increase of 10% in PLC but a decline of 7% in NV. This difference reflects that the euro-sterling exchange rate has moved from 1.34 euros to the pound in February 2008 to 1.13 to the pound last week.

At the interim stage, the boards felt it appropriate to boost the interim dividend for Reed Elsevier PLC to achieve an unchanged interim dividend for Reed Elsevier NV. It was considered inappropriate to do likewise for the much larger final dividend, given our focus on cash and the more challenging economic outlook. The total dividends proposed for 2008 year therefore are up 12% for Reed Elsevier PLC and 5% lower for Reed Elsevier NV.

My last chart addresses our balance sheet. As you know, it was our intention to pay down the ChoicePoint acquisition facility through a combination of term debt issuance and the proceeds from the sale of Reed Business Information. The RBI sale did not of course happen, but the structure of the ChoicePoint acquisition financing was designed to accommodate such an eventuality, with maturities for the facility in 2010 and 2011. Because of the protracted sale process, we were unable to tap the bond markets until January, but then did so quite convincingly. The majority of the 2010 maturity is now paid off, and through our strong cash flow and further planned bond issuance, we are confident about refinancing the rest of the facility.

We are a regular issuer of commercial paper. At the year end, we had outstanding some $600 million, and it represents a good source of competitively priced short-term borrowings for us. Our commercial paper programs are backed up by revolving credit facilities, which as we announced this week we’ve extended from 2010 through to 2012. This gives us significant financial flexibilities should commercial paper markets or credit markets cease up.

Our term debt maturities are well spaced, and I’ve included the maturity profile of our term debt in the appendix. You’ll also find in the appendix our debt ratios at the end of 2008 which show our net debt to EBITDA at 3.1 times calculated in dollars on a pension and lease adjusted basis and including ChoicePont on a pro forma basis. Looking forward, we are very focused on debt repayment and restoring our credit ratios to more usual levels.

Now, before I hand back to Crispin, I would like to take this opportunity to mark that this is Crispin’s last results meeting as Chief Executive of Reed Elsevier. Shortly after Crispin first joined, he and I were together in New York being educated by an investment bank on the wonders of internet valuations. At the end of the meeting, the bankers all handed out their business cards, and Crispin apologized that he couldn’t reciprocate as he didn’t yet have one. I remarked that at the rate we got through chief executives, we saved an awful lot of money by not having them printed.

Well, 19 results meetings later, here we still are. So, at his first meeting in February 2000, Crispin laid out his vision for the company, and I quote from his presentation, "to be the indispensable partner of the scientist, lawyer, and business professional, to have demonstrably superior information-driven services and solutions increasingly via the internet, to have global capability and leadership in targeted sectors and an organizational focus on customer innovation and speed.” That vision is as relevant today as it was then.

Our online products are now over 50% of our business, and we’ve added a global leadership position in health and now have a substantial risk business. But most particular, it is Crispin’s focus on the customer honed through 20 years of Proctor & Gamble that was the coat of arms that has defined the development of Reed Elsevier over the last 9 years. Demonstrably superior products, online workflow solutions, above market revenue growth, these are the phrases that reverberate throughout the business and are built into strategic plans and budgets.

Crispin finished his presentation all those years ago with the words “total commitment to execution.” Crispin, you’ve been a great leader of our company and a great colleague and friend, and you’ve timed your retirement to perfection.

Sir Crispin Davis

Those words are appreciated. I’m not going to say very much. It’s been a wonderful 9-1/2 years, it really has. I have enjoyed it. I have worked with wonderful people. I think this is a great business, and I think that together we’ve made real progress. So, it’s really been an honor and a privilege to see this company through that period.

Now, it is the honor and privilege of Ian Smith, with perhaps less than perfect timing. I would like to introduce Ian and ask Ian to just say a few words to introduce himself. Ian is a very experienced businessman. He has operated in the oil industry. He has operated in the consulting industry, in the logistics world, in the property world, in the healthcare world, so he brings an enormous range of skills and experiences to this job. He joined the company in January, he spent the last 6 to 8 weeks really going around the businesses and starting to meet customers and get a better understanding of what drives this company, and I think Ian is going to be a tremendous CEO for Reed Elsevier taking it forward. So, I do wish Ian every success. You’ve inherited a great company and a great management team, and I know you’d like to say a few words, and then after that, we’ll open up to Q&A.

Ian Smith

I’m delighted to be here. This is a great company. First, I’d like to thank the management team and the organization at large who have been remarkably welcoming and hospitable to my early days. Particularly, I would like to thank Crispin who has been very generous with his time and especially his advice as I arrived, and I’m very grateful for that.

These are tough times. Obviously we’re entering stormy waters, choppy waters in terms of broader world economy. I must say, however, having gone around and met the organization and customers over the last 6 weeks, I’ve been hugely impressed with the underlying strength of this business. The strategy of generating quality content, integrating with our customers into their workflow solutions, their business models, and doing that increasingly in an online and digital form is an absolute winning strategy. All the customers that I have met have really impressed me with the way that they have said Reed Elsevier in the way we’re taking this company is crucial to their competitive advantage and the way that they do things. I think there couldn’t be better position frankly, a better positioning with customers than we have in the company. So I’m really looking forward to expanding this strategy, to deepening this strategy, taking it forward, and I look forward especially to meeting the investment community over the coming weeks and months.

Sir Crispin Davis

Let’s open it up to Q&A.

Question-and-Answer Session

Paul Sullivan - Bank of America Merrill Lynch

Firstly, can you just tell us what underpins your confidence in legal growth this year? Presumably we are talking sort of 1% to 2%, say 3% to 4%, and in terms of the building blocks that underpin that growth, specifically recent renewal compensations and pricing compensations that you’ve had with your customers. Secondly, can you give us a sense of underlying cost inflation in the businesses helping us to determine the level of margin expansion that we should expect in 2009? Thirdly, can you quantify the negative drag from biannuals in terms of revenue growth and margin impact in exhibitions this year?

Andrew Prozes

No one is going to say that the legal market is going to continue as it has over the next 2 or 3 years. There clearly are challenges, and all you have to do is look at the headlines on what law firms are doing and so forth, and those are our challenges. I will say that there is an underlying resilience and strength to the legal markets that are going to carry us through this down cycle as they have in previous down cycles. The reality is that when you’ve got tougher times, you’ve got more litigation, you’ve got more government investigations. Government investigations lead to lawsuits, class action suits, all those kind of things. You’ve got bankruptcies and all the other things that kind of go along with the down cycle. So, the legal markets are reasonably resilient. I would not say that this isn’t more a pronounced down cycle, but as a consequence, the legal industry is looking for productivity improvements and ways in which they can sell their wares, and that does play into our solutions offerings. So, for example, our litigation solutions which help litigators do their jobs more readily and quickly are growing 11%. Our practice management solutions are growing at 6%. We have what we call managed technology services which almost 4 out of the top law firms in United States use where we collect all of the e-mails and documents and so on that are necessary for discovery, that’s growing at 75%. Our web-based marketing tools in Martindale are growing at 15%. That’s search engine optimization of websites and so forth. Our litigation content just to reinforce the point about how litigation is stronger in these down markets, that’s growing at 30%. That’s platings and briefs and expert witnesses and so forth. So, in fact, the market is a resilient market, more resilient than most, and our solutions play into the need for productivity tools and for the need for lawyers to sell their wares.

Sir Crispin Davis

Half our costs are salaries and labor related, and we should see pretty modest salary inflation, which I think you’ll similar across most of the corporate world. About a sixth of our costs are direct spend, and that’s a mixture of paper and printing, but also content royalties and things that amount to content fees. And there, you’ll find actually paper costs are actually rising faster than inflation. This is partly because the mills are being more aggressive in shutting down capacity than they have in previous downturns, and you’ll also find in distribution monopolistic suppliers like the Royal Mail and the US Postal Service have managed to get through increases that will bring tears to most people’s eyes, but clearly royalties would grow in line with revenues, but across our direct cost base, I mentioned what we’ve been doing in outsourcing, production activity, both for journals and for books and for also in online, the data fabrication, and mark-up, and so all of those activities will continue despite some of those inflationary pressures you might otherwise see in some of those areas, a reduction in our costs in those fields. Outside of that, in terms of the indirect costs whether it is technology, SG&A and elsewhere, I think you’ll see the impact of our cost programs that we’ve been outlining continuing to contain our cost growth.

In exhibitions, what I said earlier was that the margin growth that you saw in 2008 was in large part driven by the fact that when these shows cycle in, you get the show contribution coming in over a largely fixed overhead base. So, that has a very high gearing effect, and so that will unwind in ’09. Coupled with that though, and I think what I said was that the contribution from growth from the net cycling was 6% of revenue and 9% of profit. Coming out, this is going to be a bit more than 6% and a bit more than 9%. So, the cycling effect is really quite severe, and the chart that Crispin showed before showed over the last few years a quite even trend in terms of revenue growth for us because we had much more balance with the defense shows which came in every odd year, but without those, that sort of countervailing impact, we do see a one-way trade in terms of what we saw in ’08 and coming out in ’09.

Jonathan Helliwell – Cazenove

Just going back to that legal question first of all, if it’s safe say we can see a 10% cut in headcount in the legal industry, can you help us understand how directly in terms of how much and the timing you might see that filter through into a business like LexisNexis given the multiyear contracts and so on and given the fact they’re enterprise agreement more than directly headcount related, just to get a sense of that? The second thing is on interest costs, it looks like you did £20 million better than we had expected for the year just gone. With a lot of moving parts in 2009, I wonder what you can give us a sensible number for 2009 for overall interest.

Andrew Prozes

There is absolutely no correlation between staffing cuts and reductions in our revenue. That’s just not the way it works. Basically our subscriptions and our subscription increases reflect the additional content and additional functionality that we build into our offerings. So when we sit down with a law firm, it isn’t the case where we look at the number of lawyers that they have relative to where they were three years ago. We talk about what additional tools and functionality and capability we can provide for them. I might also add that internationally we are very strong, and our online solutions are still growing internationally because the international law firms are looking for productivity improvement the same way that US law firms did perhaps 5 to 10 years ago. So we have an inherent growth that takes place in the international market because of the strength of our online platform internationally.

Mark Armour

On interest, I should’ve referred, in fact in the appendices I have included a chart on cost of borrowings. Our average blended cost of debt all in including fees and everything else was 5.7% in 2008 and that will go up, we think, to around about 6.4% in 2009. The reason for the increase is mostly because of the turning out of debt, which is clearly much more expensive than borrowing at short-term floating rates. And so, I think in order to get the interest charge, if you look at the net debt at the end of 2008, clearly we’ll have cash flow in 2009, but if you apply this a higher rate, the blended rate that I’ve been talking about, that will get you in the area.

Alex DeGroote – Panmure

My question relates to B2B. Just trying to marry up the conviction you have of this business being a sale candidate, a divestiture candidate, against what looks like it’s going to be already prolonged and pronounced downturn. Just wondered how you can have such conviction when you are probably looking at 5 or 6 quarters of sharply negative organic revenue growth.

Sir Crispin Davis

It is our conviction. It is our intent, a firm intent that we will divest the B2B business as we explained a year ago. The reasons we are doing that are for fundamental strategic reasons around cyclicality, online workflow solutions, and the like. The time scale between now and when we sell it is impossible to predict. I’m certainly not going to get drawn on that. In action terms, we are just going to concentrate on maximizing the quality, growth, and value of this business, and we’ve got very detailed plan laid out, and I think it’s a good plan, and whether that plan is executed in 1 or 2 or 3 years, as I said, I don’t think it would be wise to be drawn on it. We’re now focused on execution of that plan. As we execute that plan, I’m confident that whatever happens outside, the business will be a higher quality business with greater potential than it is today.

Polo Tang - UBS

I have a few different questions. The first one is just on ChoicePoint. Can you maybe just give us some color in terms of why you’re optimistic that business will grow its topline in 2009? Is there a risk that for example screening get worse or the insurance part of the business sees a bit of a slowdown? So that’s the first question. The second question is just on the FX impact in terms of the hedges within Elsevier, and could you give us some color in terms of what’s going to happen to that now that the dollar has significantly strengthened? Can give us some quantum in terms of maybe the impact? The third question is just on the LTIP because somehow I remember the minimum trigger for that was 10% EPS growth, so is that going to be reset because of the current market environment?

Andrew Prozes

Let me address the ChoicePoint question. As you know over 50% of the revenue in ChoicePoint is insurance, and insurance over its lifespan has shown that it is amazingly resilient to economic changes. It continues to grow at the 10% range. That is because there are enough factors in insurance that cause the revenues to continue to grow very well when the economy turns down, and Crispin mentioned one of them, where when you have tougher economic times, people look for more quotes on their auto and home insurance, and that causes churn, and for every quote ChoicePoint gets money.

So overall, we’re quite confident about the continued very healthy and strong growth in the insurance area. In the non-insurance area you do have to reflect that we grew because the non-insurance area in many ways reflects the current risk business that we have which grew at 8% this year. So there are a lot of things that we can bring into play including our technology that we are going to apply to the non-insurance business at ChoicePoint. Now, does that mean that we don’t have questions and have appropriate amount of respect for the current economic times? Absolutely. There is nothing that guarantees us against the potential of continued economic downturn, and there clearly will be impact on screening and other businesses, but overall we have, I think, a good healthy perspective and believe that we’re going to continue to grow that business.

Mark Armour

On the Elsevier currency hedging, the nature of the 3-year rolling program is that the violent swings in exchange rates effectively get leaked in over a 3- or 3-1/2-year period. The impact of the currency hedging program was a drag on growth of £12 million in 2008. In 2009, we still have that sort of more of the lower rates that have been getting in as the dollar starts to go back up. So it will still be a drag in 2009, but lesser so than as the stronger dollar gets into the mix, so you will see that reverse in later years.

Sir Crispin Davis

On the LTIP, we are not going to be changing our targets for the next three years, minimum 10%. Clearly for ’09, that’s going to leave us with a lot to do for ’09, ’10, and ’11 in order to hit that. We recognize that, but we think that’s appropriate. We put in place a major restructuring program, significant one-off cost, so it would have to deliver significant additional benefits over that time period. We’ve got the impact of ChoicePoint that will increase it, we’ve got the cycling back of exhibitions, so I don’t pretend it’s going to be easy, but we think it’s absolutely the right thing to do to keep those targets in place.

John Clarke - Brewin Dolphin

Speaking of ChoicePoint, is there a visibility pattern here, in the sense that you have with scientific publications or even RBI where you’ve still got annual subscription renewal rates? Secondly, on the question of scientific publications, I do remember in your relatively early days where we thought that the scientific publishing model was going to change. Do you think that the ’09 and ’10 is going to raise that specter once again as the university budgets and academic institutions’ budgets strengthen? My suspicion is that these are late cycle businesses.

Andrew Prozes

By visibility do you mean that in terms of the number, the percentage of revenue to subscription? Is that what you mean by visibility? Well, the ChoicePoint business tends to be less subscription of course than our Elsevier business. There is no question about that, but there are certain factors that do come in to play. On the insurance side, we are quite confident about the continued revenue growth that we’ve seen. On the non-insurance side, there is screening which clearly in the current economic or employment situation is having an impact, but there are offsets, and one of the more obvious offsets is collections where we are one of the largest providers of information to collection agencies in the US. This is not necessary a pleasant topic, but when you have tough economic times, you handle more collections. So, there are some offsetting factors, but I wouldn’t disagree with you that because we are less subscription based in the businesses that there isn’t going to be as stable revenue as you would find for example in the science business.

Sir Crispin Davis

On science, rather than me reiterating what I said nine years ago why don’t I pass it over to Erik for his perspective?

Erik Engstrom

Yes, there are two inherent parts I think to your question. The first one is there is an economic downturn, which will impact library budgets, right? Historically, that has been an impact that follows the economic cycle, but most of the time it has been slightly moderated and slightly delayed, maybe by one or two years. I think this time around, given the severity of the economic downturn, I think it might be a more severe reduction or even see it earlier than you have in the past, but I think given where we are today, we don’t have a specific prediction or projection to share with you by region or by type of institution, because I think that that has changed recently. So, if you look at what impact does that have on our business, if you first start with 2009, and as I think most of you know, the renewal cycle really happens before the beginning of the year or at the beginning of the year, and we’ve gone through the ’09 cycle already which is basically renewals and payments come at the beginning of the year with rates similar to last year.

John Clarke - Brewin Dolphin

And that’s your 98%?

Erik Engstrom

Yes, that’s where we expect it will be for 2009. Beyond that, I think it’s very hard to predict. I think we will learn more during the year. Now when you come to the question around models, I think many of the things you mentioned before are similar to a few years ago, but also over the last few years, you have to say that the model has evolved. Over the last few years, we have continued to publish 4% more articles each year. We’ve continued to see growth in articles downloaded by over 20% a year continuously. We’re now approaching half a billion full-text article downloads a year, and that means that the effective cost per article downloaded keeps declining in our marketplace. And as you can see our attrition rates have declined. We had our lowest attrition rate ever last year. So, there has been a significant gradual decline in attrition over that period, and that I think that the value delivered therefore to our customer has improved over time and continues to improve, and as our information gets more embedded and more integrated into the scientists’ workflow, I think the value equation has continued to improve. So as we go forward, is this going to reopen discussions about alternative models and things like that, I think that those discussion has not gone away and we will not go away in the future either, and I think they will continue to be there, and I just believe that the inherent quality, integrity, efficiency, and the productivity delivered by the current peer-review publishing models scaled the way we do it globally with global processes is just so integral to delivering value in scientific research that I believe that is the most efficient model you can come up with.

Sir Crispin Davis

I agree with that. I mean there will always be a vocal minority open access, but I think what Erik says is right. The other point I’d add is that the more we move this business to integrated workflow solutions embedded in the customer’s workflow with suites of analytical tools that help their productivity and so on, the harder it becomes to challenge that. So this is not just simply content, but if they can get an open access, maybe they’ll shift. This is actually now from most of our customers they get so many other benefits on top of the pure content in terms of productivity, analytical tools that that provides additional value for money and additional protection from our end.

Simon Baker – Credit Suisse

A couple of questions please. Firstly, just in terms of a bit more color on the additional rationalization savings where you can get the $50 million of additional savings, but also the £100 million from RBI, specifically around the element that refers to consolidation savings, does that refer in anyway to group consolidation, and as such does that make it harder to then sell RBI a couple of years down the line if you have to disintegrate it from the business? Secondly, on LexisNexis, I appreciate the contracts that directly take into account the number of lawyers, but if they do take into account usage and number of products taken, can you let us know how you feel going into those negotiations with the amount of usage and increased products that are being taken this time around versus last time?

Sir Crispin Davis

Well, on the first one, the RBI, we’re obviously being I think intelligent in terms of consolidation. We’re not going to do anything that makes it more difficult to sell RBI in the future. When we talk consolidation, a lot of this is around the consolidation within RBI or back-office functions. As you know this is a business that’s always been pretty decentralized whether it’s US, UK, Netherlands, international, and even within the US. For example, we have 47 different offices and a whole number of verticals. And while at the customer facing end, it’s important that we keep that integrity, I think elsewhere there is a lot of opportunity for consolidation in the same way that we’ve done it across Reed Elsevier.

Secondly in RBI looking pretty hard at the print side of things and in terms of maintaining or increasing investment on the internet, but obviously on the print side we’re taking an even sharper knife to that. And then there is a host of other savings areas across the whole spectrum in RBI that we’re looking at, but the simple answer is no, we’re not doing anything in terms of the savings program that would undermine an eventual sale of the business.

Andrew Prozes

And on the legal, I’m not going to in anyway deny that the market is more challenging, and it is more challenging. Last quarter was more challenging, and heading into 2009 the marketplace is a more difficult marketplace, and the law firms are going to reflect when they sit down and talk to us. It is very important to understand that we have, if you will, two large legal business; one is international and the other one is US Legal. The international legal is about $1 billion business. We have a very strong position there. We’re growing very nicely, very well. We’ve got by far the best online platform. We’re competitive, we’re very strong, and online does provide productivity. So therefore we feel quite good about what’s happening internationally.

In the United States, it is more demanding. I can give you lots of examples of law firms that we have renegotiated contracts very recently where we had 9% annual increases over the next three years, and why would that be? Well, that’s because these law firms need productivity solutions even more than they did in the past, and they need tools in order to get new business more than they did in the past. So it’s a matter of us focusing our negotiating strategy on those areas that we know are going to be most important, most critical to those law firms.

In the case of the 9% example, right now with discovery being as complex and difficult and expensive as it is in the United States, law firms are looking for ways in which to host all the different emails and everything else that they have to host for their clients, and we can do that much less expensively and more efficiently than they can, and by our providing these kinds of services, we’re able to, in some cases, negotiate very attractive increases, and this is going to vary quite frankly from law firm to law firm.

Colin Tennant – Nomura

Just specifically on the legal side, first of all, you talked about a different customer group, the large law, government, corporate, and so forth. I was wondering if you could just scale out for us to give us an idea what the exposure is to large law versus small, medium-sized law versus government and corporate. And also, just picking up on something you say about exhibitions, you said that it was the attendee numbers you were concerned about because of the drop-through. I was wondering again if you could give us an idea of how significant a part of revenue that actually is?

Andrew Prozes

Large law is our largest, small law is our second-largest, corporate and government are about equal, and I hope that answers your question. Many of our corporate customers were names like Lehman, Merrill Lynch, and Bear Stearns. Names you would be familiar with, so the corporate market has been more challenging. We’re quite frankly a little more exposed to corporate than the rest is, but at any rate, I hope the first part of my answer answers your question.

Mark H. Armour

I think the US legal markets broadly break down to about a third as large law, about a third as small law all in, and a third is corporate, government, and academic. A lot of that is not legal information, as such would be the Nexis service, to use old terminologies which is sold to law firms but also into corporate customers like financial service institutions and the marketing departments of major companies.

So it’s that mix where we have got a significant corporate academic in government market that is slightly declining in this environment and so dragging down the overall growth rate from otherwise what it might be?

Sir Crispin Davis

On exhibitions, the revenue stream is broadly split evenly between exhibitors and attendees. On exhibitors, space is actually holding up reasonably well, sort of low single digit decline, which in this environment we think is quite a decent performance. We are more worried about attendees, I think for fairly obvious reasons, and of course attendees, something like a big property show or medium, they can pay you know a thousand euros per person to attend, and so if that drops, it’s a 100% profit drop through to the bottomline. So we think, it’s going to be the attendees where this year we’re likely to see the greatest impact rather than the exhibitor side and particularly in some of the sectors that are most vulnerable, like property, like retail.

Sami Kassab – Exane BNP Paribas

Within legal can I kind of ask you given that the revenue growth is slowing down, that you invest more into the business, how do you see margins developing in ’09 in that segment?

Andrew Prozes

Our expanding margins are allowing the investments that we are making. So I hope that answers your question. We do anticipate that we are going to get improved margins and even with the increased investment that we are making.

Sami Kassab – Exane BNP Paribas

Secondly within Elsevier, could you quantify the exposure to the discretionary purchases? You referred the press release that library budgets are likely to be under pressure especially regarding discretionary purchases.

Andrew Prozes

Specifically when we talked about discretionary purchases for libraries, we are talking about a portion of the science and technology revenue that is a bucket in that one, but if you look at it broadly, let’s put it this way, S&T and health are half each, you know that. Within science and technology, let’s say 80% or a little more is subscription-based journals and databases and other tools that are annual subscriptions, so therefore 20% or a little less in S&T are books and other one-off purchases and transactional revenues that come throughout the year. That’s on the science and technology side and that is to a large extent into the library budgets that we talked about. On the health side, there is a whole different dynamic and whole different set of products. That’s what you were asking, right?

Sami Kassab – Exane BNP Paribas

Yes. Lastly would you share with us the exposure within RBI to online advertising versus online content revenues?

Sir Crispin Davis

I am not sure I can give you specific numbers on that because the online business covers a whole range of different business models from recruitment, advertising, paid search, subscription, the lot, but it depends also how you define advertising. I would say maybe 40% very roughly would be what I could call genuine advertising linked, but a lot of that is measurable in terms of ROI, and therefore we found holds up much better in these times than print advertising which is very hard to measure, and that's really where we are seeing from the customer end, where those measurable ROI returns, performance revenue tends to hold up better. Where it's difficult to measure ROI, you see differently.

In '08 our online revenue was up to 14%, which I think was a good performance. We did see that starting to weaken in the last quarter, so I don’t think you will see that performance again in '09, but nevertheless because of ROI, most of our online service is measurable. I think you’re always going to see much better performance than you will on the print, and I think print in '09 is quite vulnerable, I mean structurally vulnerable as well as economically vulnerable.

Sami Kassab – Exane BNP Paribas

At this stage, would you expect online to grow in '09?

Sir Crispin Davis

I think it’s too early to say. I wouldn’t like to commit to that. I hope so.

Ian Whittaker – Liberum

First of all, Andy, correct me if I am wrong, I think first half results, you mentioned that in terms of the economic downturn shouldn't impact legal revenues by around more than1% to 2% particularly because you had multi-year contract deals that provide some cushioning. Just wondering if you think that's the sort of way that we should still look at things, if that was correct. The second thing just in terms of the EPS earnings growth for 2009, you've got $205 million of cost savings coming through. If you didn't have those cost savings coming through, do you think you could have actually said you would have seen adjusted EPS growth?

Andrew Prozes

Well, first of all I hope you acknowledge that I was right. I think it's just too early, and I think it's too uncertain really to provide any comparable comment on 2009.

Sir Crispin Davis

It takes time with Andy, but he gets there in the end.

Mark H. Armour

Perhaps if I can just comment on the cost savings, clearly there are significant cost savings. The total amount of savings, the step up is less. The good thing about the cost savings is clearly we are in a very difficult economic environment, but because we started early with our cost savings, in a different world for different purposes, we are actually very well placed to move through a lower revenue growth environment. Now, if we didn't have these cost savings already in train, what would we do in this environment? And the answer is we would do other things. So I can't answer really your question as to what would EPS growth be if we weren't having these plans. You should not just take these savings and deduct them because there would be other savings that we'd get out. Some of these savings would come through pretty quickly anyway, particularly in RBI. And also we would look at other cost categories, our investment plans, and other environments.

Ian Whittaker – Liberum

Given the environment that we have at the moment, have you got, as well as the ones you announced today, other cost savings or potential cost savings you have in reserve that you could very quickly switch on?

Mark H. Armour

I think the answer to that is always yes. We have a vast cost base, and you are always matching your cost to the environment in which you are in and the opportunities that you see. So as long as there are costs, there are costs to be take out.

Sir Crispin Davis

I think it's fair to say that in the last 18 months since we put together the first restructuring plan and subsequently, we have found more opportunities and have made more progress, and to be honest I think we are getting better at cost reduction programs and taking costs out of the business. I think if you had asked us 18 months ago could we deliver this range of cost reduction, I think we would have struggled. I think today actually we feel pretty damn confident that we can deliver these costs, and as Mark says we are continuing to look for further cost opportunities.

Meg Geldens – MF Global

I got the impression from your presentation that you might accelerate some of the restructuring on the print side of RBI. Do you mean by that that you might shut down or trim some of the publications, terminate some of the publications or reduce the frequency, and if you are or have already started that, is any of that in the minus 7% that we saw in the fourth quarter? Is part of that self-inflicted or is that just the market?

Sir Crispin Davis

No, the restructuring program and the savings that we are talking about do not include shutting down any titles or equivalent. As of now, we are not looking at shutting down any meaningful titles in 2009. If this environment continues through '10 and beyond, then we might look again, but at this point in time, no.

Shall we have one here?

Mark Braley – Deutsche Bank

Just two questions. The first one is coming back to legal margin, the extra cost, the extra investment going into that business in 2009, is that an '09 issue only or should we think about more investment in that business into 2010? I guess what I am trying to get at here is in the past you've talked about legal as being the division that's probably got the longest, the biggest medium-term margin potential. Is that something you are still comfortable with assuming eventually that the world economy normalizes? The second one is just around CapEx. The cost saving plan, the legal investment, is there anything there that would push the CapEx number for '09 and '10 out of where it's been in the last couple of years?

Andew Prozes

The investment program and the three big initiatives that Crispin mentioned is really a three-year program, so this will continue on, but it is important to say that these particular investments do allow us to look at the entire list of investments that we make, and we've been able to cut back, quite frankly, in certain areas. So the additional investments that we're making are accommodated within the margin expansion that we're seeing in the business.

Mark Armour

Yes, on the CapEx, our CapEx typically runs about 3.5% to 4% of sales, and is a bit below that or at bottom end of that range, or slightly below it in '08. Clearly the program that Andy has been talking about will involve more CapEx, but in a relatively smaller totality.

Richard Jones – Goldman Sachs

I just wondered if you could give us a bit of a view of how you ensure that all of these cost savings don't have any detrimental impact on product quality at all, and how you can reassure us that that won't happen, that we won't see any of that over the next couple of years?

Sir Crispin Davis

Okay, no, it's a good question, and I'd actually broaden it, that the whole organization focusing on cost reduction and we don't take our eye off the ball in other areas, sales, marketing, product development and so on. We are extremely sensitive to that issue. We've made it a rule right upfront that this whole cost reduction program does not impact in any way what I call our customer-facing services. So sales, marketing, product application development, customer service, they are not impacted by this, and we are very, very focused on that, and if you’ve picked all the things that we've been talking about, they are nearly all in areas outside of that.

If you also look at 2008, I think actually we had an exceptionally good year in terms of application development, new products, broadening of our workflow solutions, additional content which I referred to a little bit earlier, but it's probably our strongest year for quite sometime in terms of innovation, and I think both at LexisNexis, Elsevier, and Exhibitions, we've made significant improvements to our sales and marketing program, so it is a good question, but I'm quite confident that we've got the focus right and we're not in any way undermining our products, sales, marketing, customer efforts by this program.

Simon Wallis – ING

I've got two questions. The first is about risk information and analytics. That business has grown very rapidly through acquisition and organic growth. It's now got to a fairly large size, and it looks to me like the growth dynamics are quite different to the rest of the legal division. What commonality is there between the client bases of re-ag, the rest of legal, and at what point do you think that business deserves to be reported differently or perhaps in the way of the science and health business, at least broken down to some extent?

The second question I have is regards to exhibitions, and I take Crispin's point that many of the exhibitions are number one in their respective markets, but if you look across the portfolio, could you give us an idea of how many of the exhibitions might be considered marginal, considered for cutting or postponing for a year? So it’s similar to Meg's question on RBI. How much revenue contraction could you see in exhibitions in order to maintain the margins?

Mark Armour

Yes, on the first question, clearly re-ag is organized under a separate management organization. There is a huge amount of shared infrastructure at the back end. But certainly we will be looking into giving you information on the performance of risk as a whole, certainly in terms of its revenue, as we do in health and science, so with the full year of ChoicePoint coming in, in 2009 you'll begin to see that.

Sir Crispin Davis

We do have four fairly distinct customer groups, science, medical, legal, and risk, which we are managing in terms of customer-facing activities as for individuals and exhibitions as well for that matter, and as Mark says, we'll report those separately. On the exhibitions front, regardless of the economic downturn, every year an integral part of managing our exhibitions business, where you've got 400 odd shows in 48 different sectors, is portfolio management, and partly that is launching new shows. We launch 20 to 30 new shows each year, and every year there are a number of new shows cycling in, and also we will and we do always discontinue a number of shows every year as part of the ongoing management.

In times like this, we are launching less shows for obvious reasons, probably maybe 10 to 12 shows this year rather than the normal 20, and I suspect we will take a rather tougher approach to eliminating the smaller shows, but it's part of what we do every year, and the important thing is the top 35 shows in exhibitions account for over 50% of our revenue. Those are the key ones.

Paul Gooden – RBS

Firstly Mark, can you comment on the tax rate in '09? Is there going to be any discernable move up or down?

Mark Armour

Well, I'm fond of always saying it naturally will go up, but now it keeps on going down. So, no I think the tax rate in '09, we would expect to come off from where it was in '08, and part of that is just the fiscal efficiency of the structure and the financing of ChoicePoint.

Paul Gooden – RBS

When you say come off, you mean come down or be the same as?

Mark Armour

Come down.

Paul Gooden – RBS

There is so much of restructuring costs in '09 in the appendix, $229 million. Can I just check if that is cash and P&L, and it will be the $10 to $15 million of general restructuring that goes on top of that or is that everything?

Mark Armour

To be frank, for '09, it's a bit difficult to say what's general and what's full frontal, so I think that incorporates all the restructuring we'd expect to find. It is mostly cash. There is some stuff that is not paid up front. For instance where we clear properties as we either reduce staff or outsource, so we'll provide against the sublease shortfalls, but the rents actually get paid over a period of time, but mostly this will be paid for by the end of '09.

Paul Gooden – RBS

The final question is on Riverdeep. Can you update us on your investment there and would you ever put more cash in if needed to?

Sir Crispin Davis

You want me to answer that one?

Mark Armour

No, we are very happy with what Riverdeep has paid us over the years for our US education business, and I think we'll hang onto our investment and see what happens to it. Clearly, it's a very successful publishing company. It's got a lot of debt. It's for them to manage their way through all of that, and we retain our stake, and we'll hope to realize value in due course.

Sir Crispin Davis

I think we'll draw it to a close now. If you want to talk to any of us after this, we'll hang around. Thank you for coming. Thank you over the last 9-10 years for your support, your unfailing accurate, balanced coverage of Reed Elsevier. I'll miss you all.

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Source: Reed Elsevier Group PLC, 2008 Earnings Call Transcript
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