Preliminary Results Announcement – Euromoney Institutional Investor PLC

Thursday 12 November 2009

FOR YEAR TO SEPTEMBER 30 2009

Chairman's Statement

A detailed reconciliation of the group's underlying results is set out in the appendix to this statement and in note 7 of this report.

Highlights

• Revenues down 4% to £317.6m
• Adjusted operating margin up from 24.5% to 25.0%
• Adjusted profit before tax down 6% to £63.0m
• Statutory loss before tax of £17.4m after exceptional items, intangible amortisation and other non-recurring finance charges (most reported in first half)
• Subscription revenues up 24%, now 47% of total
• Focus on cost and margin management - annualised cost savings of £17m
• Net debt reduced by £49.6m since half year peak, driven by strong operating cash flows
• Dividend cover increased to three times as indicated at half year
• Revenue trends unchanged since second quarter
• Trading in line with board's expectations: revenue trends will remain weak for first quarter, but positive market feedback for 2010

Commenting on the results, chairman Padraic Fallon, said:

"We're looking ahead again, beyond a tough start to 2010, to opportunities emerging in a changed landscape. We concentrated on quality, focused on subscriptions, cash flows and costs, and our people responded magnificently. That gives us confidence in our strategy whatever the conditions."

Highlights

Euromoney Institutional Investor PLC, the international publishing, events and electronic information group, achieved an adjusted profit before tax of £63.0 million for the year to September 30 2009, against £67.3 million in 2008. Adjusted diluted earnings a share were 40.4p (2008: 44.4p). The directors recommend a final dividend of 7.75p giving a total for the year of 14.00p (2008: 19.25p).

Group revenue fell by 4% to £317.6 million (2008: £332.1 million). After a strong first quarter when revenues increased by 15%, the group experienced a sharp fall in sales from January 2009 as customers imposed tight cost controls from the start of their new budget year in response to the global credit crisis. This immediately translated into falling revenues, although the year-on-year rates of decline in advertising, sponsorship and delegate revenues in the second half were no worse than those experienced in the second quarter. Subscription revenues proved more resilient, increasing by 24%, but the rate of growth has declined in the second half as the lag effect of customer cuts in headcount and information buying gradually work their way through into revenues.

The group acted quickly and early to restructure the business, cut costs and protect margins, and the adjusted operating margin improved from 24.5% to 25% despite the fall in revenues.

The adjusted profit before tax of £63.0 million compares to a loss before tax of £17.4 million in the statutory results. The statutory loss is stated after charging: exceptional restructuring costs of £10.7 million, most of which was charged in the first half, which generated annualised cost savings of approximately £17 million; an exceptional impairment charge of £23.2 million, again most of which arose in the first half; acquired intangible amortisation of £15.9 million; a foreign exchange loss on tax equalisation contracts of £19.9 million which is matched by a tax credit and has no effect on earnings a share; and a foreign exchange loss of £7.9 million on restructured hedging arrangements included in net finance costs.

Foreign currency movements have had a significant impact on both revenues and net debt. The group is exposed to foreign exchange risk on the US dollar revenues in its UK businesses, which are hedged, and on the translation of the revenues and profits of its US dollar-denominated businesses, which are not hedged. The reported 4% decrease in group revenues would have been a 16% decrease at constant exchange rates, while the net benefit to adjusted profit before tax from foreign currency movements, after hedging, was approximately £6 million.

The board announced its decision to increase its dividend cover at the time of its half year results. The proposed reduction in the final dividend reflects this decision, which arose after reviewing possible debt and cash flow outcomes in the light of events in world financial and commodities markets from 2007 onwards. This review suggested that volatility in these markets had increased sharply, particularly in the wake of the Lehman collapse. The board concluded that such volatility may persist for some time, in spite of the recovery in parts of the financial markets, and that the dividend cover should be rebased to a sustainable level for the longer term. In future, the board intends to maintain a policy of distributing one third of its after-tax earnings to shareholders while delivering long-term dividend growth in real terms.

Net debt at September 30 was £165.1 million compared to £214.7 million at March 31 and £172.0 million the previous year end. Approximately 80% of the group's debt is US dollar-denominated and the increase in the sterling-US dollar rate since March 31, combined with the group's traditionally strong operating cash flows in the second half, helped reduce net debt by nearly £50 million. The group's net debt to EBITDA ratio, which is calculated on an average exchange rate basis, was little changed at just under two times.

The group continues to trade in line with the board's expectations. It has a clear, well established strategy which it is executing successfully to build a more robust, high quality earnings flow. This strategy, combined with the strength of its brands and the diversity of its sectors, customers, and geographic markets, means the group is well positioned to return to growth as soon as markets improve.

Strategy

The company's strategy has been to build a more resilient and better focused global information business. This strategy has been executed through increasing the proportion of revenues derived from subscription products; accelerating the online migration of its print products as well as developing new electronic information services; investing in products of the highest quality that customers will value in tough times as well as good; eliminating products with a low margin or too high a dependence on advertising; maintaining tight cost control at all times; retaining and fostering an entrepreneurial culture; and generating strong cash flows to fund selective acquisitions to accelerate that strategy.

The success of this strategy continues to be highlighted by these results.

Subscription revenues increased by 24%, in sharp contrast to the declines in other revenue streams, and now account for 47% of total revenues against 37% in 2008. Similarly, the profits from databases and information services, which include some of the highest margin products in the group and are derived mostly from subscription products, accounted for 36% of the group's adjusted operating profits compared to 21% a year ago.

The tight control of costs and focus on high quality, high margin products was critical to the group's success in 2009. The adjusted operating margin improved to 25% as cost cuts were implemented early in the year, low margin products were eliminated quickly, and continued product investment ensured the growth in higher margin electronic publishing products was maintained.

The group remains keen to acquire small, specialist information businesses that complement its existing activities and provide scope for strong organic growth, although it does not expect to complete any significant transactions in the next six to 12 months and its excess cash flows will be applied to investment in new products and reducing debt.

The group's strategy is robust and suitable for a wide range of trading conditions. While the outlook for economic recovery remains uncertain, the board will continue to focus on managing costs, protecting our margins and reducing debt levels. At the same time, we have stepped up our investment in technology and new subscription-based products and the group is well positioned to take advantage of the recovery when it comes.

Trading Review

Total revenues fell by 4% to £317.6 million: a 4% increase in the first half was offset by an 11% decrease in the second. The impact of the tough trading conditions on revenues would have been much greater but for the favourable movement in exchange rates. The group generates more than two thirds of its revenues in US dollars and the 20% fall in the average sterling-US dollar rate over the year had a significant effect on reported revenues, which at constant exchange rates fell by 16%.

The performance of the group's various revenue streams reflects the timing of the reaction of its customers to the global credit crisis. In 2008 most customers, particularly the global financial institutions, were focused on financial survival and positioning their businesses for tougher trading conditions. Spend on advertising and conference sponsorship, which tends to be both high value and discretionary, was cut and headcount was reduced. The micro-management of costs, however, particularly training, conference attendance and travel, and information buying did not begin until January 2009. As a result, delegate attendance at events and training courses turned down sharply from the second quarter, while advertising and sponsorship revenues have continued to decline more gradually. Similarly, subscription renewal rates and new sales also started to decline from the second quarter.

For the past three quarters, the year-on-year declines in advertising and sponsorship (-20%) and delegate revenues (-30%) have been running at similar rates. In contrast, subscription revenues grew by a third in the first half, and have continued to grow in the second half, although the rate of growth has slowed rapidly due to the lag effect of lower sales and renewal rates earlier in the year, which will continue to be a drag on subscription revenues in the first half of 2010.

Emerging markets, which account for nearly half of the group's revenues, were less exposed to the excess leverage and complex financial products that have characterised the credit problems in North America and Europe, and have come through the credit crisis well. The recovery of China and the consistent strength of Latin American markets have helped offset weakness in Eastern Europe and the Middle East.

The group acted quickly and early to restructure the business, cut costs and protect margins. As part of this restructuring, the group has reduced its world-wide headcount by 17% since the start of the financial year, reduced the amount of office space in London and New York, and closed or merged a number of small or low margin print titles. These actions generated annualised cost savings of approximately £17 million, more than half of which are still to flow through to profits in 2010. Despite a £15 million fall in revenues, adjusted operating profit fell by just £1.9 million to £79.4 million, and the group adjusted operating margin improved from 24.5% to 25%.

The tight management of margins is an integral part of the group's strategy. The group deliberately keeps as much as possible of its cost base variable with revenues, volumes or profits. This includes the direct costs of producing content and running events or training courses, much of which is provided by freelancers and contractors, and the compensation of its employees, much of which is provided through incentives which vary directly with revenues or profits. Fixed overheads, which relate mostly to offices and technology, account for less than 10% of revenue.

Business Division Review

Financial Publishing: adjusted operating profits fell by 17% to £20.3 million, and the adjusted operating margin decreased from 29% to 27%. Revenues, which comprise a mix of advertising and subscriptions, fell by 10% to £75.4 million.

Advertising revenues are heavily dependent on the marketing spend of global financial institutions and fell by 20%. Many US and European institutions stopped advertising altogether, whereas advertising from emerging markets held up well. In contrast, subscription revenues increased by 7% as the group continued to invest in migrating its print products to a higher value web-first publishing model with an emphasis on subscriptions over advertising.

Business Publishing: the group's activities outside finance are in sectors traditionally less volatile, and which follow different cycles. Adjusted operating profits increased by 21% to £23.4 million, following a 6% increase in revenues to £56.3 million and an improvement in the adjusted operating margin from 36% to 41%. Among the sectors covered, metals, minerals and mining under the Metal Bulletin brand, telecoms under TelCap's Capacity brand, and legal publishing all achieved good growth; only the energy sector was weak.

Training: revenues are derived largely from paying delegates. Training is a discretionary spend for most customers, at least in the short-term, and revenues fell sharply from the start of the second quarter, with an immediate negative effect on margins. Some of the revenue decline was self-inflicted as course volumes were cut deliberately in the second half which, combined with the impact of early cost cuts, helped the margin recover a little. Training revenues for the year fell by 22% to £31.7 million and, after a decline in the adjusted operating margin from 26% to 20%, adjusted operating profits fell by 40% to £6.2 million.

Conferences and Seminars: revenues comprise a roughly equal mix of sponsorship and paying delegates. Like Training, delegate revenues fell sharply from the start of the second quarter as customers cut back on travel and event attendance. Sponsorship revenues tend to follow similar trends to advertising, and have been declining at a more gradual rate but from an earlier starting point. In difficult markets there is inevitably a shift to the bigger, more established events, and the market contracts as many of the smaller events are cut. The group's strategy for its event businesses reflects this experience, and during the year it focused on maintaining the market leading positions of its bigger events, at the same time shrinking volumes by eliminating many of the smaller, low margin events. Revenues fell by 15% to £74.9 million and the adjusted operating margin declined from 26% to 21%, driving a 31% decline in adjusted operating profits to £15.9 million.

Databases and Information Services: this was the best performing division by some way, with adjusted operating profits increasing by 72% to £36.2 million, compared to just £3.4 million five years ago. Revenues grew by 32% to £87.5 million and the adjusted operating margin improved to 41%. Revenues and profits from this division are predominantly subscription-based and US dollar-denominated, and the decrease in the sterling-US dollar rate was a significant factor in this year's growth. Revenues at constant exchange rates increased by 9%.

In volatile and challenging markets the demand for high quality information and data tends to hold up well, particularly for products that are an integral part of companies' information flows and work processes, and have built up a strong brand loyalty. The main driver of growth from Databases and Information Services in 2009 was BCA: demand for its high quality, independent macro-economic research has proved robust despite the shrinking of the asset management industry. ISI, the emerging markets information business, has experienced a more difficult time as many financial institutions have cut investment and resources in this area, although CEIC, its emerging market data subsidiary, has continued to grow as it expands its data coverage from Asia to other markets. Revenues from the group's capital market databases, a venture undertaken with Dealogic plc, also increased after significant investment by Dealogic to upgrade its products and delivery platform.

Impact of Foreign Currency on Results

The group generates approximately two thirds of its revenues in US dollars, including approximately 30% of the revenues in its UK-based businesses, and approximately 60% of its operating profits are US dollar-denominated. The group is therefore exposed to foreign exchange risk on the US dollar revenues in its UK businesses, and on the translation of the results of its US dollar-denominated businesses. The average sterling-US dollar exchange rate applied for the year was $1.58 against $1.97 in 2008.

In order to hedge its exposure to US dollar revenues in its UK businesses, forward contracts are put in place to sell forward surplus US dollars, with a view to being 80% hedged for the coming 12 months and partially for the following six months. As a result of this hedging strategy, some of the profit benefit from the movement in the sterling-US dollar rate has been delayed until 2010 and beyond. In 2009, foreign exchange losses on forward currency contracts of £8.1 million, which are reported as a reduction in revenues, were matched by a similar improvement in the sterling value of US dollar revenues in the UK businesses.

At the end of the first half, the group recognised losses of £9.0 million on forward currency contracts rendered ineffective by the sharp downturn in US dollar revenues in the group's UK businesses. The closing of these contracts was completed at more favourable rates early in the second half, and the realised loss was reduced to £7.9 million. This loss is reported as an expense in net finance costs and excluded from the underlying results.

The group does not hedge the foreign exchange risk on the translation of overseas profits, although it does endeavour to match foreign currency borrowings with investments and the related foreign currency finance costs provide a partial hedge against the translation of overseas profits. The significant increase in profits from its US dollar-denominated businesses, particularly BCA and ISI/CEIC, means that the impact of exchange rate movements on the translation of overseas profits has also increased. In 2009, the translation benefit from favourable movements in the sterling-US dollar rate was approximately £6 million.

Financial Review

The statutory loss before tax of £17.4 million is stated after charging, among other items: exceptional restructuring and impairment costs of £33.9 million (see below); acquired intangible amortisation of £15.9 million; foreign exchange losses on tax equalisation contracts of £19.9 million (see below); and finance costs of £7.9 million on restructured hedging arrangements (see below).

The group's actions to restructure its businesses and cut costs incurred exceptional restructuring and other costs of £10.7 million, most of which were incurred in the first half. The group has also reviewed the carrying value of goodwill and intangible assets, which has given rise to an exceptional impairment charge of £23.2 million, mostly in connection with its US-based activities in the structured finance sector, and again mostly charged in the first half.

Net finance costs of £44.5 million (2008: £23.6 million) shown in the statutory results include a charge of £19.9 million (2008: £12.0 million) relating to tax equalisation contracts under a foreign currency financing derivative which was reported in the half year results. The foreign exchange loss on tax equalisation contracts is matched with a corresponding tax credit, so that there is no financial impact on earnings a share. Net finance costs also include £7.9 million of losses on restructured hedging arrangements (see above). Net interest charged on the group's debt was unchanged at £12.3 million.

The £10.4 million tax credit shown in the statutory results is stated after recognising the tax credit of £19.9 million relating to tax on foreign exchange losses hedged by the tax equalisation contracts referred to above, and tax credits of £10.5 million on the exceptional items. The underlying group tax rate for 2009 was 27% (2008: 27%). The group's underlying tax rate has historically been below 30% because of the tax benefit of overseas tax deductible goodwill.

A detailed reconciliation of the group's underlying and statutory results is set out in the appendix to this statement.

Net Debt and Cash Flow

Net debt at September 30 was £165.1 million compared to £214.7 million at March 31 and £172.0 million the previous year end. Approximately 80% of the group's debt is US dollar-denominated. The sterling-US dollar rate increased from $1.43 at March 31 to $1.60 at year end, which helped reduce net debt by £18.0 million, reversing some of the £31.0m increase generated by currency movements in the first half. Cash flows in the second half are traditionally stronger than those in the first due to the timing of payments for annual profit shares, dividends and earn-outs. Cash generated from operations in the second half was £48.1 million, against £24.5 million in the first half. The operating cash conversion rate was 91%. The group also invested a further £6.3 million in the second half in increasing its equity interests in a number of its subsidiaries under acquisition earn-out agreements. Commitments remaining under outstanding acquisition option agreements total £11.9 million, most of which is expected to be paid in 2010.

The group's debt is provided through a $400 million multi-currency committed facility from Daily Mail and General Trust plc. The facility is provided in a mix of sterling and US dollar funds over three and five year terms, and the earliest repayment date is December 31 2011. Interest on the facility is payable at a variable rate between 1.3% and 3% above LIBOR depending on the group's net debt to EBITDA ratio. The average cost of funds in 2009 was 6.0% (2008: 5.9%).

The net debt to EBITDA covenant on the group's committed facility is subject to a limit of four times. However, in light of the global credit crisis, the board decided at the start of the year to apply a more conservative internal covenant of three times EBITDA, and to implement a rigorous debt reduction plan. The net debt to EBITDA ratio at year end was just under two times, a slight reduction on the level at the half year, and has been held at this level for most of the year. The net debt to EBITDA ratio is expected to peak at the end of the second and third quarters of 2010 and the board will continue to manage its net debt to its more conservative internal debt covenant.

Dividend Strategy

At the time of the half year results, the board announced its intention to increase its dividend cover to three times earnings. The proposed reduction in the final dividend reflects this decision, which arose after reviewing possible debt and cash flow outcomes in the light of events in world financial and commodities markets from 2007 onwards. This review suggested that volatility in these markets had increased sharply, particularly in the wake of the Lehman collapse. The board concluded that such volatility may persist for some time, in spite of the recovery in parts of financial markets, and that the dividend cover should be rebased to a sustainable level for the longer term.

The board has approved a final dividend of 7.75p a share (2008: 13.0p), making a total dividend for the year of 14.00p (2008: 19.25p). The final dividend will be paid on February 4 2010 to shareholders on the register at November 20 2009. A scrip dividend alternative will again be available to shareholders. The group's majority shareholder, Daily Mail and General Trust plc, has indicated its intention to accept the scrip alternative when the final dividend is paid.

In future, the board intends to maintain a policy of distributing one third of its after-tax earnings to shareholders while delivering long-term dividend growth in real terms. From 2010, the interim dividend will be adjusted so that approximately one third of the expected total dividend will be paid as an interim and the balance as a final dividend.

Management

Under the terms of my service contract, I am due to retire as the company's chairman at the annual general meeting in January 2010. Following an independent recommendation from the nominations committee, the board has resolved to extend my retirement date under my service contract by two years to the date of the annual general meeting in 2012.

The board was strengthened in December 2008 by the appointment of another independent non-executive director, David Pritchard, who has extensive experience of the financial services industry and serves on the company's audit committee. Today the company has separately announced the appointment of a new executive director, Bashar AL-Rehany, who is chief executive officer of BCA Research, the group's single largest business.

It was with great sadness in July 2009 that we reported the death of Christopher Brown, one of our longest serving executive directors. Tom Lamont retired from the board in January 2009 after nine years of valuable service as an executive director and editor of Institutional Investor's newsletter division. Michael Carroll, who has served as an executive director since 2002 in his capacity as editor of Institutional Investor, has indicated his intention to step down from the board at the annual general meeting in January 2010.

Capital Appreciation Plan

The Capital Appreciation Plan (CAP 2004) is a highly geared, performance-based equity incentive designed to reward those who drive profit growth. Since its launch in 2004, it has been instrumental in retaining and motivating key individuals across the group, and adjusted profit before tax has increased threefold during the CAP period. In 2009, the profit performance target required under CAP 2004 was again exceeded, and the third and final tranche of up to 2.5 million options under CAP 2004 will vest in February 2010.

Shareholders approved the introduction of a second Capital Appreciation Plan (CAP 2009) at the annual general meeting in January 2009. CAP 2009 will follow on immediately from CAP 2004, and the profits achieved in 2009 will form the base for the profit growth to be achieved by the end of the CAP 2009 vesting period. Profit for CAP purposes is defined as adjusted profit before tax and before the CAP share option expense.

The remuneration committee has approved a CAP 2009 profit target of £100 million, to be achieved by the end of the four year performance period in 2013, against a profit for CAP purposes of £62.3 million achieved in 2009.

The structure, terms and potential cost of CAP 2009 are broadly similar to those of CAP 2004, with the exception that CAP 2009 rewards will be funded by an equal mix of cash and new shares, whereas CAP 2004 was funded entirely by new shares.

The total cost of CAP 2009 will be no more than £30 million and will be amortised over the life of the plan. The maximum number of new shares to be issued under CAP 2009 will depend on the company's share price at the date of grant of CAP 2009 options, which will take place as soon as possible after shareholder approval for the amended rules has been received.

Some minor amendments to the CAP 2009 rules are required. These will be submitted for shareholder approval at the annual general meeting in January 2010 and details of the amended rules will be set out in a circular to shareholders.

Outlook

Generally markets seem to have stabilised after an exceptionally volatile and difficult period and the outlook among our customers is more positive than it has been for some time, although this has not yet translated into improved revenues. The broad sentiment is that global markets will continue to recover in 2010, but slowly: the risks of further banking failures and a correction to the recent recovery in financial markets remain; the prospects for economic growth in Europe and the United States are likely to be weak for the foreseeable future; and the threat of increased regulation of financial markets will continue to restrict capital availability.

The return to profitability of most global financial institutions should be a positive factor for trading in 2010. However, the cuts in headcount and the restrictions on discretionary spend on marketing, training and information buying applied throughout 2009 are not expected to be relaxed quickly, and not before the start of our customers' new budget year in 2010. This means that the board expects that the group's revenues will continue to decline in the first quarter, a view which is supported by current levels of sales and forward bookings.

The group continues to trade in line with the board's expectations. The first quarter of the new financial year is expected to be the toughest: the board expects the decline in year-on-year revenues to continue and profits to fall despite the benefit of cost savings implemented in 2009 and favourable exchange rates. October's revenues fell by 18% compared to a year ago. From the second quarter, the year-on-year revenue comparatives should become easier but the point at which revenues start to grow again is dependent entirely on the timing and scale of any recovery. The focus on maintaining margins and reducing net debt will therefore be maintained, although the group has also stepped up its investment in new products and electronic publishing to take advantage of the recovery when it comes.

The group has a clear, well established strategy which it continues to execute successfully to build a more robust, high quality earnings flow. This strategy, combined with the strength of its brands and the diversity of its sectors, customers, and geographic markets, means the group is well positioned to return to growth as soon as markets improve.

Padraic Fallon, Chairman Euromoney Institutional Investor

Read Euromoney Institutional Investor's Preliminary Results parts one, two and three on the Financial Announcements section of this website.

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