Pearson Reports Record Profits - Preliminary Results

Preliminary Results (Audited) for the Year Ended 31 December 1998

Pearson reports record profits

 

  • Earnings up 20%
  • Ahead on key performance measures:
    • Underlying sales up 6.7%
    • Trading margin up from 11.5% to 13.1%
    • Strong cash flow
  • Pearson Education integration going well
Financial highlights
  Year to
31 Dec 1998
Year to
31 Dec 1997
%
change




Sales £2,395m £2,293m +4%




Operating profit* £389m £328m +19%




Operating cash flow*

Adjusted earnings per share

£392m 42.0p £159m 34.9p +147% +20%




Dividends per share 21.0p 19.5p +8%




* before goodwill and exceptional items

Commenting on the results, Marjorie Scardino, chief executive said:

"This is a good set of results, and we’re proud of them. But what’s behind them is more important. We are reshaping Pearson into a smaller group of bigger businesses and investing more in them. We’re doing this so that we can generate double digit earnings growth every year and continue to create a more durable and valuable company."

Enquiries: 0171 411 2310

Marjorie Scardino, chief executive

John Makinson, finance director

John Fallon, communications director

Overview

In 1998, operating profits, before goodwill and exceptional items, increased by 19% to £389 million and we generated related operating cash flow of £392 million, more than double that of 1997. Underlying sales growth, which represents the year-on-year increase in sales, after portfolio changes and movements in exchange rates, was 6.7%. The group’s trading margin, which is the proportion of operating profit to sales (excluding profits from associates and passive investments) increased to 13.1% from 11.5% in 1997. With adjusted earnings per share up 20%, Pearson made good progress on its financial measures.

The financial results reflect good operating performances across Pearson’s businesses. The strong growth achieved by our school publishing operations in the United States more than offset the impact of difficult trading conditions in international markets. The Financial Times group posted record profits while stepping up the level of revenue investment in its international and electronic expansion. The financial benefits of the successful integration of Penguin Putnam in the United States were offset by increased revenue investment in building its future front-list of best-selling authors and one-off restructuring costs to make the UK children’s business stronger. Pearson Television capitalised on the successful integration of All American Communications to deliver strong profits growth. And Lazard turned in good profits, sustaining a strong deal flow across all three houses and coming close to matching the exceptional performance of 1997. A much healthier cash performance was principally due to the priority given to improving cash flow across the company. It was also helped by a number of exceptional items and variances in timing that we would not expect to see repeated in 1999.

We completed the acquisition of the Simon & Schuster education, reference and business & professional companies on November 27. In December, these businesses contributed profits of £22m. Although we completed the acquisition some months later than originally planned, the integration of the AWL and Simon & Schuster businesses is going well and is on track to deliver the annual $130m of annual cost savings by the end of the year 2000, as planned. The process of selling a number of the reference and business & professional businesses, which we announced on January 25, is attracting a lot of interest from a wide range of potential purchasers.

In 1998 Pearson introduced a new group profit sharing plan, which gives all employees the chance to receive an annual bonus linked to the Group’s profitability. The strength of our financial performance last year means that 13,000 eligible Pearson employees will receive a performance bonus of 3% of their salary and be awarded 15 Pearson shares. The cost of the plan in 1998 is £14 million and has been included in these results.

Pearson Education

Financial highlights: Pearson Education
£m Year to
31 Dec 1998
Year to
31 Dec 1997
% change




Sales      
AWL 582 563 +3%
S&S 120 - -




  702    




Operating profit      
AWL 77 60 +28%
S&S 22 - -




  99    




Addison Wesley Longman performed well in 1998. Underlying sales increased by 8.5%, with the growth in operating profits boosted by lower restructuring costs and tighter cost control. AWL’s cash flow was also much better than in previous years.

In the US, AWL capitalised on strong market growth. It was the first year of major new math adoptions from kindergarten through to grade 8 in a number of Southern states. AWL’s new math programme was a winner, gaining market share. Its competitiveness was enhanced by the launch of the KnowZone, a new Internet based product. And another new electronic product, the Waterford Early Reading programme, contributed to good sales growth. The school business also did well in new Biology and Foreign Language programmes. And by investing both in new authors and new technology, the higher education publishing group also had a good year.

Outside the US, the international business as a whole had to work hard just to mitigate the impact of lower growth rates in Asia and Latin America. There was a strong performance in the UK; the schools publishing business gained market share in Hong Kong; and, although the ELT (English Language Teaching) business did suffer in Asia, the fact that trading held up better than the economy as a whole, is encouraging for future years.

The Simon & Schuster businesses got off to a strong start with Pearson, contributing revenues of £120 million and profits of £22 million in December. Although the integration process started some months later than we had hoped, it is progressing well with a number of key milestones already met. It is on track to deliver $130m of annual costs savings by the end of the year 2000.

The Penguin Group

Financial highlights: Penguin Group
£m Year to
31 Dec 1998
Year to
31 Dec 1997
%
change




Sales 523 525 -




Operating profit 48 58 -17%




Penguin’s operating profits were suppressed by the strength of sterling against other currencies; the one-off costs of closing Penguin UK’s Loughborough operations and integrating Ladybird books into its Children’s division; and the loss of income from the sale, in mid-1997, of Troll, the children’s book publisher. Penguin’s underlying operating profits were up 6 % on 1997.

In the US, Penguin Putnam published titles notched up a record 228 weeks on the New York Times best-seller list. Sales per new title published increased by 13% and it stepped up its investment in building a stronger list of best-selling authors for 1999 and beyond. Penguin Putnam’s Young Readers division is now the largest children’s trade publisher in the United States.

It was a great year for Penguin in the UK, named Publisher of the Year at the annual British Book Awards. It recorded its strongest front list performance for many years, with twice the number of titles in the Sunday Times best-seller lists as in 1997. And its children’s publishing division, turned in a strong trading performance. In Australia, a strong front list, led by a mix of indigenous and international authors, ensured Penguin retained its position as the clear market leader.

Pearson Television

Financial highlights: Pearson Television
£m
Year to
31 Dec 1998
Year to
31 Dec 1997
%
change




Sales 343 247 +39%




Operating profit/(loss)      
Pearson TV 71 46 +54%
Channel 5 (14) (24) +42%
BSkyB 4 4 -




  61 26 +135%




The integration of All American Communications, acquired in November 1997, boosted revenues in 1998 and secured £10m in annual costs savings. Our established shows in our four biggest markets - the UK, the United States, Australia and Germany - all sustained or improved their viewing audience shares. We also enjoyed success in developing new projects. First Wave, a science fiction drama distributed and co-produced by Pearson Television, has been sold to broadcasters in over 30 countries around the world and boasts the first three season contract of any show on US cable television. And we extended our range of popular serial dramas, with new shows in Germany, Hungary, Finland and Sweden.

We are launching new productions from our library of game show formats, such as Match Game, 100% and Family Feud on US television. A number of new shows that we first produced for Channel 5 are winning audiences in new markets. These successes were offset by more difficult trading conditions in a number of important emerging markets in Asia and Latin America. In these markets, demand for new programming has been suppressed by the general economic uncertainty.

By December 1998, Channel 5 had increased its average weekly audience share, which is the key driver of future advertising revenues, to 4.6%. Pearson’s share of Channel 5’s start up losses fell to £14m from £24m in 1997.

Financial Times Group

Financial highlights: Financial Times Group
£m Year to
31 Dec 1998
Year to
31 Dec 1997
%
change




Sales 683 676  




Operating profit/(loss)      
FT Newspaper 42 35 +20%
FT branded businesses* 19 19 -
Les Echos 12 9 +33%
Recoletos 30 30 -
Associates 15 15 -




  118 108 9%




* includes business sold in 1998

It was another record year for the Financial Times newspaper with circulation in December 1998 topping 385,000, up 12.7% on December 1997. In continental Europe, daily sales consistently topped 100,000 and in the US, circulation doubled to 70,000. With advertising revenue up 17% on the previous year, and the benefits of a more resilient cost base flowing through, the Financial Times newspaper was able to post record profits while also sustaining the biggest revenue investment in the newspaper’s history.

In FT branded businesses, we increased our investment in the electronic expansion of the Financial Times brand, establishing FT.com as the main gateway of all our existing electronic products. FT.com doubled its registered users to more than 1.4 million, generating more advertising revenue than any other website in the UK. And its audience is as international as the newspaper, with more than 60% of its registered users outside the UK. At FT Business, new management set about reducing costs, improving margins and investing in the more dynamic publishing engine that will drive its future growth. FT Asset Management also improved its margins by merging its IDC operations in the US and EXSHARE operations in the UK to create a unified global asset management business. It also notched up a third year of record new sales in the US and retained its competitive edge by investing in a number of new electronic products aimed at the US mutual funds and securities markets.

Strong circulation growth, strict cost control and buoyant advertising powered Les Echos Groupe to record operating profits. Les Echos strengthened its position as France’s leading business daily newspaper, with circulation up 4% to over 114,600 and advertising revenues up 20%. The group continued to invest in editorial and marketing support of the newspaper, lesechos.com, which is the leading media website in France, and the business magazine, Enjeux-Les Echos, which increased its weekly circulation.

Recoletos, our Spanish media business, invested substantially in new products and services and in improving Marca, its sports newspaper. As a result, while revenues were up 16%, profits were virtually unchanged. Expansion, the business newspaper, boosted by editorial improvements and buoyed by a strong Spanish stock market, increased daily circulation to a record 59,400, up 22% on the previous year. Increasing competition saw the circulation of Marca, the sports newspaper, dip by 9% to 419,000. Circulation has picked up again in the first quarter of 1999 and investment in colour printing, improved editorial and enhanced marketing will enhance its strong market leading position. Recoletos is on track to complete the acquisition of up to a 30% stake in Unedisa, which publishes El Mundo, one of Spain’s leading daily business newspapers, and has completed the acquisition of a 50% stake in Economica, which publishes Portugal’s leading daily financial and business newspaper. These moves further strengthen the position of Recoletos as one of the leading media groups in the Iberian Peninsula.

In Associates, The Economist had another good year. Circulation of The Economist newspaper increased to 697,194 from 644,391 in 1997 and, across the group, it continued to move paper-bound publications to electronic formats and to invest in new products and infrastructure. Business Day and Financial Mail, the South African publishing business in which we own a 50% stake, performed well, meeting expectations for copy sales and advertising revenue growth despite the difficult economic climate in the autumn. For the six months to the end of December, both publications grew circulation to record levels.

Lazard

Financial highlights: Lazard
£m
Year to
31 Dec 1998
Year to
31 Dec 1997
%
change




Attributable profit 42 43 -2%




In 1998, income from the three Lazard houses was £42m. In the UK, Lazard Brothers advised on many of the year’s major mergers and acquisitions and, across the three Lazard houses, the deal flow remains very strong. And Lazard Asset Management continues to enjoy strong growth.

Financial highlights: Lazard
£m
Year to
31 Dec 1998
Year to
31 Dec 1997
%
change




Tussauds Group, Mindscape & PNE      
Sales 144 282 -49%




Operating profit 21 33 -36%




In 1998, Pearson continued to rationalise the group’s assets, selling businesses that either lacked critical mass or which we believed were worth more to others than to Pearson. We also continued to dispose of passive investments which bring no strategic value to the group. We sold the Tussauds group; Mindscape; PNE; our specialist Law, Tax and medical publishing operations; our 20% stake in the Canadian Financial Post; our 6.3% stake in SES, the owners of the Astra satellite system; and made a number of smaller disposals. In total, we raised some £1 billion from these disposals.

Outlook

Pearson has made a good start to 1999. All our businesses are pursuing plans to improve revenues and margins and sustain strong cash flow across the group. Our goal remains to deliver earnings growth in double digits.