Pearson nine-month Interim Management Statement
October 29, 2012
- Sales are up 5% and operating profit down 5%*.
- In spite of tough market conditions, Pearson reiterates its full year outlook of growth in sales and operating profits with margins reflecting acquisition integration costs and the FTSE sale.
- Pearson and Bertelsmann agree to combine Penguin and Random House, creating the world's leading trade publisher.
Pearson, the world’s leading learning company, is today providing its regular nine-month interim management statement.
Pearson increased sales by 5% in the first nine months of 2012, with good growth at International Education and the FT Group and a resilient performance in North American Education. Operating profit was 5% lower, reflecting the sale of FTSE in 2011, acquisition integration costs and continued weakness in UK professional training.
The fourth quarter is always a key selling season in education and consumer publishing. We expect markets conditions to remain tough but we believe we can sustain our solid Q3 trading momentum. So, we are reiterating our previous full-year outlook of growth in sales and profits at constant exchange rates, with margins reflecting acquisition integration costs, weakness in Pearson in Practice and the sale of FTSE. We expect to report adjusted earnings per share broadly in line with the consensus of current market expectations of 84.9p, according to Bloomberg and Reuters. This guidance remains struck at £1:$1.59 average exchange rate for the year.
Pearson’s chief executive Marjorie Scardino said: “We have confidently reiterated our guidance because many of our businesses are going strong in this complicated trading environment. But the dynamics of the markets we’re in could make that achievement more about resilience than flamboyance. As always, all the people in Pearson have their shoulders to the wheels that turn in our important fourth quarter.”
Revenue growth analysis: first nine months of 2012
|North American Education||6%||4%||(3)%|
Highlights for the first nine months of 2012
In education, our long-term investment in technology and services is enabling us to achieve sustained growth, even in difficult markets for education materials. For our education company as a whole, sales are up 7% in the first nine months of the year.
In North America, textbook publishing markets have been weak in 2012, affected by slower college enrolments, state budget pressures, the transition to Common Core standards and a smaller new adoption opportunity. For the first nine months of the year, total sales for the US School and College textbook publishing industries declined by 17.9% and 4.5% respectively, with the total market down 10.7%, according to preliminary estimates from the Association of American Publishers.
Even so, Pearson’s sales in North American Education were up 4% as our leadership in digital learning continued to produce significant market share gains in both School and Higher Education. Our Higher Education business continues to achieve good growth in online learning platforms, digital homework and assessment programmes (with MyLab registrations up 12% to more than nine million), and custom publishing. In October, we announced the acquisition of EmbanetCompass (subject to a Hart-Scott-Rodino review), which partners with leading non-profit colleges and universities in North America to provide fully online courses and learning tools for more than 100 university programmes.
Our Assessment and Information business remained resilient with good growth in State testing, boosted by market share gains, outweighing weaker clinical and diagnostic assessment revenues. Our School Curriculum business continued to face state budget pressures, a smaller new adoption opportunity (of approximately $400m) and uncertainty caused by the pending transition to Common Core standards. But it still took market share with a good performance in new adoptions and made more strides in online learning, particularly at Connections Education.
Sales in International Education were up 13% after nine months. Our digital and services businesses continue to grow, with sustained momentum in English language schools in China, school services in India, higher education in South Africa and school learning systems in Brazil. Textbook publishing has remained generally weak, particularly in markets where purchases are publicly-funded.
In Professional Education, sales were level. We continued to grow in Professional Testing, which administered seven million tests in the first nine months of the year, benefiting from sales of additional services to existing customers, our partnership with American Council on Education for General Educational Development (GED) tests and the acquisition of Certiport.
As previously stated, we reshaped Pearson in Practice in the first half of 2012 in response to changing government funding criteria for apprenticeships. Market conditions remained challenging in the third quarter and take-up of new training programmes has been slower than expected. As a result we continue to expect full-year profits in Professional Education to be significantly lower than in 2011, and we have initiated a comprehensive review of this business given the radically different external environment.
Sales were up 7% at the FT Group. Across print and online, the FT reaches an average daily audience of nearly 2.1 million, with a combined circulation of over 600,000 and digital subscriptions growing strongly, up 17% to 313,000 for the nine months. Advertising remains weak and short-term, but we continue to take market share. Mergermarket continued to grow despite volatile markets, with strong performances from Debtwire and mergermarket, which launched several new products in growth markets such as China and the Middle East.
At Penguin, sales were down 1% compared to 2011 with the third quarter benefiting from ebooks revenue up 35% on 2011, and, as expected, a stronger publishing schedule. Key titles included Mark Owen’s No Easy Day, Ken Follett’s Winter of the World, Junot Diaz’s This Is How You Lose Her, Zadie Smith’s NW and Jamie Oliver’s 15 Minute Meals. Penguin has a strong fourth quarter publishing schedule including bestselling authors Patricia Cornwell, Nora Roberts, Tom Clancy and Jared Diamond in the US and Jeff Kinney, David Walliams, Pippa Middleton and Dawn French in the UK. In a separate statement, Pearson and Bertelsmann have today announced an agreement to create the world’s leading consumer publishing organisation by combining Penguin and Random House in a newly-created joint venture.
Balance sheet. At the start of 2012, Pearson had net debt of £499m. Our 2011 net debt/EBITDA ratio was 0.5x and interest cover was 18.1x. Our 2012 net debt peaked in July at £1.3bn, following the normal seasonal build-up of working capital in the first half of the year. Cash generation in the first nine months was partially offset by acquisitions (totalling approximately £0.3bn, including the acquisitions of Certiport, GlobalEnglish and ASI) resulted in net debt at the end of September 2012 of £1.1bn (September 2011: £1.1bn).
Interest and tax. In 2012, our net interest charge will be broadly level with 2011, reflecting the impact of a $500m, 10-year bond issued in May 2012 with a coupon of 3.75%, which further extends our debt maturity profile. We anticipate our P&L tax charge against adjusted earnings to be in the 24-26% range with a modestly lower cash tax rate.
Exchange rates. Pearson generates approximately 60% of its sales in the US. A five cent move in the average £:$ exchange rate for the full year (which in 2011 was £1:$1.60) has an impact of approximately 1.3p on adjusted earnings per share. The average rate during the first nine months of 2012 was £1:$1.58 (compared to £1:$1.61 in the first nine months of 2011), and the closing rate at the end of September was £1:$1.62).
* Throughout this statement, growth rates are given at constant exchange rates (unless otherwise stated). They are based on continuing operations and exclude the impact of currency movements. Underlying growth rates exclude the impact of both currency movements and portfolio changes.
For more information
Luke Swanson/ Simon Mays-Smith/ Charles Goldsmith + 44 (0)20 7010 2310
Forward looking statements
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