Pearson plc interim results (unaudited)

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Pearson plc interim results (unaudited)

Six months ended 30 June 2001
  Six months to 30 June 2001 Six months to 30 June 2000 % Change




Sales £1,876m £1,545m 21%
Operating profit (pre Internet enterprises)* £174m £148m 18%
Investment in Internet enterprises £(81)m £(84)m  
Pre-tax profit (post Internet enterprises)* £5m £(4)m  
Adjusted earnings per share – pre Internet enterprises 6.8p 8.9p** (24)%
Adjusted earnings per share – post Internet enterprises (2.6)p (0.6)p**  
Dividend per share 8.7p 8.2p** 6%




* Continuing operations before goodwill, integration costs and non-operating items
** Restated to reflect the rights issue

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Pearson performing in tougher times

    • Group underlying sales¹ up 5%
    • Pearson Education underlying sales up 8% driven by strong US School performance
    • Penguin underlying sales up 7% due to frontlist successes

Results hit by advertising slowdown

    • FT Group profits down 19%; costs reduced across business newspapers
    • RTL Group’s contribution of £33m reflects downturn in European advertising markets

Investments making Pearson stronger

    • NCS operating profits up 26% on the back of school testing boom
    • Integrating Dorling Kindersley across Pearson and investing in the frontlist
    • Internet enterprises on track to hit breakeven targets

Marjorie Scardino, Pearson’s chief executive, said: "Our main businesses are all performing strongly in the face of the economic downturn. The depressed advertising market has affected our business newspapers, although each of them is still reporting good profits and a strong competitive position. Our education and consumer publishing businesses are more resistant to the cycle and are performing reliably and ahead of their markets."

¹Note: throughout this statement, underlying growth excludes the impact of acquisitions, disposals and currency movements.

Outlook

Pearson makes approximately two-thirds of its sales and most of its profits in the second half, so interim results are not always a good guide to the full year. At this stage, our guidance for the full year is:

    • Pearson’s education businesses are on track to deliver revenue and profits growth in line with our expectations. We expect both our US School and US College businesses to grow as fast as or ahead of their markets this year.
    • The FT Group’s operating profits will benefit from the steps we have already taken to reduce costs significantly across its newspaper operations. We expect the Financial Times newspaper to end the year with daily sales of approximately 500,000, up from 300,000 five years ago, and, in the face of the sharpest advertising downturn for a decade, to deliver margins of more than 20%. Even so, based on current advertising levels, we would expect FT Group profits to be some 15 per cent lower than in 2000.
    • The Penguin Group will benefit from a strong second half schedule of new titles offset by continued industry-wide softness in back-list sales. This has a particular impact on Dorling Kindersley, ahead of the revitalisation of its frontlist.
    • The earnings contribution from the RTL Group will reflect its announcement today that, due to the weakness in the advertising market, it expects full year EBITA to be 10 to 15 per cent below the 2000 pro forma level of EUR 555 million, before new investments and US restructuring totalling EUR 50 million.
    • The net costs of internet enterprises in the second half are expected to be some £60 million, down 45% on the same period last year.
    • The interest charge in the second half will be broadly in line with the £88 million incurred in the first half and we expect to meet our goal of converting 80% of operating profit into cash.

Overall, all of our businesses are performing strongly in their markets and, in a difficult economic environment, will report good profits for the year.

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For more information:

John Fallon/ Luke Swanson
Pearson plc + 44 (0) 207 411 2310

Operating Performance

Pearson Education
£ millions 2001
half
year
2000
half
year
%
Change
Underlying
growth
2000
full
year






Sales          
US School 451 222 103% 23% 722
US Higher Education & Professional 319 215 48% (5%) 779
International 241 197 22% 4% 540
Discontinued - 2     3
           
Pearson Education 1,011 636 59% 8% 2,044
FT Knowledge 31 11     43
           
  1,042 647 61%   2,087
Internet enterprises 3 -     3
           
Operating profit/(loss)          
Pearson Education 28 (21)     337
FT Knowledge (12) (5)     (17)
           
  16 (26)     320
Internet enterprises (43) (19)     (83)






Sales at Pearson Education, boosted by a full six-month contribution from NCS Pearson, increased by 59% to £1,011 million. Underlying sales increased by 8%. Although the seasonality of the US school and college publishing businesses mean that Pearson Education traditionally makes a first-half loss, this year Pearson Education reported an operating profit of £28 million. This is due to the first-time contribution from NCS which makes its sales and profits more evenly throughout the year.

Our US School business increased underlying sales by 23%. It performed strongly in major adoptions in elementary reading and mathematics and secondary mathematics and literature. Sales in open territory states are strong and the Waterford early reading programme has won a number of major new orders. Although we benefited from the earlier phasing of adoptions in a number of key states, we do expect to do better than market growth of 8%-10% for the year as a whole.

The US Higher Education & Professional business saw underlying sales fall 5%, with growth in US college publishing offset by a difficult trading environment in technology publishing. In the US College business, the successful launch of CourseCompass, our new online course management system, is helping us to increase both adoption and sell-through rates. Underlying sales in the College business are up 3% in the first half. For the full year, we expect to grow faster than the 5%-6% predicted for the market as a whole. In our technology publishing operations, with sales in the first half down over 20% on the same period last year, we have reduced costs and focused on more profitable, higher value segments of the market.

The International business increased underlying sales by 4%. The business continued to grow strongly in English Language Teaching and in Asia, which was partially offset by a more difficult trading environment in Latin America and softness in the IT publishing market in Europe and Canada.

NCS Pearson is now an integral part of Pearson Education and its revenues and earnings are reported within Pearson Education’s US School, US Higher Education & Professional and International businesses. On a standalone basis, the NCS Pearson businesses posted a 4% increase in underlying revenues to £275 million and profits increased 26% to £38 million. The testing and assessment and school enterprise software operations both performed strongly, while revenues were down in government services due to the revenue gap left by the 2000 US Census contract. Stripping out the decennial US Census contract and the benefit from two smaller acquisitions made earlier this year, revenues were up 14% and profits up 41%.

FT Knowledge made losses of £12m on revenues of £31m, as companies cut back their training and development budgets in a more difficult economic environment. The losses include restructuring costs as FT Knowledge focuses on providing specialist training programmes for major corporations, with the aim of breaking even in 2002.

Learning Network, Pearson’s online consumer education business, continues to be the most popular education destination on the web. During the school year, it attracted 130m page views and 10m unique users per month. We are now focusing Learning Network on the K-12 market, reducing operating costs and scaling back investments in other areas. Losses are expected to be significantly lower in the second half of the year.

Financial Times Group
£ millions 2001
half
year
2000
half
year
%
Change
2000
full
year





Sales 403 392 3% 802
Internet enterprises 26 16 63% 42
         
Operating profit / (loss)        
FT Newspaper 32 50 (36)% 81
Les Echos 15 16 (6)% 29
Recoletos 13 19 (32)% 38
Interactive Data Corporation 32 26 23% 59
Associates and joint ventures (6) (5) (20)% (5)
FT Business 2 3 (33)% 10
FT Businesses sold - -   (1)
88 109 (19)% 211
Internet enterprises (38) (64)   (113)





Our business newspapers and online services are facing the toughest advertising market for a decade, with the finance and technology sectors hardest hit.

Average daily sales of the Financial Times newspaper were 490,000 for the month of June, an increase of 6% on the previous year, with international sales up 15%. After a strong start to the year, advertising declined sharply in May and June. As a result, advertising volumes were down 18% and advertising revenues down 6% in the first half. Operating profit fell from £50m to £32m, reflecting the advertising downturn and increased circulation costs that underpin the newspaper’s international growth. A series of measures taken to protect profits will ensure that, by the fourth quarter, the newspaper costs will be some 16% lower than in the same period in 2000.

Les Echos and Recoletos have both suffered from the advertising downturn. At Les Echos, revenues fell by 4%. June circulation at Les Echos declined by 1% to 127,000, while the monthly magazine Enjeux Les Echos was up 10% to 147,000. At Recoletos, underlying revenues were flat. Circulation was down 15% to 57,000 at Expansion, down 3% to 362,000 at Marca and up 7% to 326,000 at El Mundo, in which Recoletos holds a 30% stake. Profits at Recoletos also fell due to start-up costs related to the launch of a series of new ventures.

Interactive Data Corporation, our subscription-based business which accounts for some 25% of FT Group revenues, increased sales by 21% and profits by 23%. It continued to build its institutional business, which provides data and tools for leading financial institutions to value their portfolios, usually on long-term contracts.

FT internet enterprises (which include the online businesses of the FT, Les Echos and Expansion as well as our share of FT Deutschland’s FTD.de, economist.com, CBSMarketWatch, FTMarketWatch and Esignal) continue to build their audiences and have increased revenues by 63% compared with the same period last year. We have reduced costs substantially and continue to do so. FT internet enterprises remain on track to break even by the end of 2002. FT.com continues to grow rapidly and for the six months to June it generated an average of approximately 40 million monthly page views and 1.8 million unique monthly users. In this more difficult market for online advertising, FT.com continued to grow advertising revenues year-on-year and has successfully opened up new revenue sources including content syndication and premium services.

Associates and joint ventures

The Economist Group, in which Pearson owns a 50% interest, continued to grow circulation and advertising revenues at its two global titles, The Economist and CFO. For the last quarter, worldwide circulation of The Economist is up 7% at more than 790,000.

FT Deutschland, our joint venture with Gruner + Jahr, continues to make steady progress in a highly competitive marketplace. Circulation is now more than 74,000, up 34% on a year ago. Advertising revenues are up on a year ago but have been held back by the difficulties of the German advertising market.

Business Day & Financial Mail, the South African titles in which we own a 50% interest, have also been hit by the advertising slowdown. Sales of Business Day and Financial Mail have held firm.

The Penguin Group
£ millions 2001
half
year
2000
half
year
%
Change
2000
full
year





Sales* 402 326 23% 755
         
Operating profit 37 33 12% 79





*Includes £66 million from Dorling Kindersley in first six months of 2001; £32 million in 2000.

Penguin increased both underlying revenues and underlying profits by 7% as investment in its frontlist of established and new authors continued to drive strong revenue and earnings growth. In the US, 59 Penguin Putnam titles reached the New York Times bestseller list, an increase of 26% over the first half of 2000, of which 13 were number one titles and three were first-time authors. Penguin has also had a very strong frontlist performance in the UK, with 31 titles on the Booktrack Top 15 bestseller lists, including five number ones. Penguin’s backlist sales showed slower growth as retailers focused on faster-moving frontlist titles in more uncertain economic conditions. In Australia and Canada, the trading environment is also more difficult.

The integration of Dorling Kindersley is going well. We have combined UK warehousing, centralised publishing operations in one London location and combined DK’s TV production unit with Pearson’s new broadband education business. In the US, DK and Penguin Putnam are working closely to strengthen DK’s US operations including sales and marketing, warehousing and distribution. However, DK’s revenue contribution reflects both the softness in backlist sales and higher returns following last year’s closure of DK Family Learning. We expect DK to break even this year and steadily to grow revenues and margins over the next few years as we invest to revitalise the frontlist.

RTL Group
£ millions 2001
half
year
2000
half
year
2000
full
year




Sales - 164 185
       
Operating profit 33 32 68




Pearson holds a 22% stake in RTL Group, Europe’s leading integrated broadcasting and production company, and Pearson’s share of RTL Group’s profits for the first half was £33 million. In a trading update today, RTL Group has reported that advertising markets have remained tough and showed low or negative growth for the first half of the year. RTL expects full year EBITA to be 10 to 15 per cent below the 2000 pro forma level of EUR 555 million, before new investments and US restructuring totalling EUR 50 million.

RTL Group will announce its interim results on 14 September 2001.

Except for the historical information contained herein, the matters discussed in this press release include forward-looking statements that involve risk and uncertainties that could cause actual results to differ materially from those predicted by such forward-looking statements. These risks and uncertainties include international, national and local conditions, as well as competition. They also include other risks detailed from time to time in the company’s publicly-filed documents, including the company’s Annual Report on form 20-F for the period ended December 31, 2000. The company undertakes no obligation to publicly update any forward looking statement, whether as a result of new information, future events or otherwise.