Pearson 2006 Interim results

Pearson announced its Interim Results on Monday 31st July, 2006.

Download the full press release and financials in PDF format here.

UK Presentation

Marjorie Scardino, CEO and Robin Freestone, CFO, hosted a presentation of the results for analysts and investors today at 09:00 (BST).

A transcript for this event is available here.

Click here for a PDF of the presentation slides


Press Release (HTML)

  • Good start to the year. Sales up 8%; adjusted operating profit up 57% to £73m.
  • Sustained organic growth and market share gains. Pearson Education sales up 11% with leading position in US School new adoption market and 4% growth in US Higher Education; FT Group sales up 6% with FT advertising revenues up 11%; Penguin sales up 2%.
  • Strong profit growth in all businesses. Pearson Education, traditionally loss-making in the first half, breaks even (loss of £21m in 2005). FT Group profits up 23% to £55m and Penguin profits up 38% to £18m.
  • Full-year outlook maintained. Pearson's profits are always heavily weighted to the second half of the year. With this first-half performance, we continue to expect strong earnings growth and cash generation and a further significant rise in our return on invested capital in 2006.

Marjorie Scardino, chief executive, said: "These results provide further evidence of the quality and potential of our business. All parts of Pearson are making strong progress, and our steady investment in new content and services is paying off with sustained organic growth, market share gains and margin improvement. We remain confident that 2006 will be another good year for Pearson both in competitive and financial terms."

Summary
£ millions Half year
2006
Half year
2005
Headline
growth
Underlying
growth
Full year
2005
Business performance
Sales 1,878 1,613 16% 8% 4,096
Adjusted operating profit 73 33 -- 57% 506
Adjusted profit/ (loss) before tax 31 (6) -- -- 422
Adjusted earnings/ (loss) 9 (14) -- -- 272
Adjusted earnings/ (loss) per share 1.1p (1.8)p -- -- 34.1p
Operating cash flow (183) (196) 7% -- 570
Free cash flow (250) (265) 6% -- 431
Net debt 1,611 1,298 (24)% -- 996
Statutory results
Operating profit 65 73 (11)% -- 536
Profit before tax 25 48 (48)% -- 466
Basic earnings 7 337 -- -- 624
Basic earnings per share 0.9p 42.3p -- -- 78.2p
Dividend per share 10.5p 10.0p 5% -- 27.0p

 

Note: Statutory operating profit for 2005 included a £40m profit on the sale of our investment in CBSMarketWatch. Statutory basic earnings for 2005 included CBSMarketWatch and a £302m profit on the sale of Recoletos.

Throughout this statement, we refer to business performance measures for total operations and growth rates on an underlying basis unless otherwise stated. 'Underlying' means growth excluding currency impact and businesses acquired or sold. The 'business performance' measures are non-GAAP measures and reconciliations to the equivalent statutory heading under IFRS are included in notes to the accounts 2, 5, 7, 12 and 14. Profit measures within business performance are presented on an adjusted basis to exclude: i) other net gains and losses arising in connection with the sale of subsidiaries, investments and associates; ii) amortisation of acquired intangible assets; and iii) short-term fluctuations in the market value of financial instruments (under IAS39) and other currency movements (under IAS21).

2006 OUTLOOK

Due to the seasonal bias of our book publishing businesses, Pearson makes most of its sales and almost all of its profits in the second half.

However, based on our trading performance in the first half, we remain confident that 2006 will be another good year for Pearson as we continue to increase margins and grow faster than our markets. We expect to achieve strong underlying earnings growth, good cash generation and a further significant improvement in return on invested capital. Our outlook for the full year remains:

  • Pearson Education (65% of 2005 sales; 68% of operating profit) expected to achieve underlying sales growth in the 3-5% range, with similar rates of growth in each of its three worldwide businesses (School, Higher Education and Professional). School and Professional, which achieved very strong growth in the first half, will face tougher comparables in the second half of the year. We expect margins to improve in School and Professional and to be stable in Higher Education.
  • Penguin (20% of 2005 sales; 12% of operating profit) expected to grow at a similar rate to 2005 with margins improving steadily as we benefit from efficiency gains.
  • Financial Times Group (15% of 2005 sales; 20% of operating profit) expected to achieve a further significant profit improvement. The Financial Times continues to show good momentum, with circulation up 5% and advertising revenues up 11% in the first half. IDC expects another good year, benefiting from similar business conditions to 2005, steady organic growth and the contribution of recent acquisitions.

Acquisitions. In the first half we invested a total of £273m in a series of acquisitions in education and the FT Group. For the full year, we expect these acquisitions to have a broadly neutral effect on adjusted earnings per share as a result of integration spend in the second half and the interest charge on our higher level of net debt. We expect these acquisitions to enhance Pearson's adjusted earnings per share and return on invested capital in 2007, their first full year under our ownership.

Interest and tax. We expect our interest charge to be a little higher than in 2005, as a result of our higher level of net debt. We expect our effective tax rate to be in the 32-34% range.

Cash. We expect another good cash performance, well ahead of our 80% target conversion threshold.

Exchange rates. Pearson generates around two-thirds of its sales in the US and each five cent change in the average £:$ exchange rate for the full year (which in 2005 was £1:$1.81) would have a translation impact of approximately 1p on adjusted earnings per share. The average rate during the first half of 2006 was £1:$1.79 and the closing rate at the end of June was £1:$1.85.

For more information:

Luke Swanson / Simon Mays-Smith/ Deborah Lincoln + 44 (0) 20 7010 2310

Pearson's results presentation for investors and analysts will be webcast live today from 09.00 (BST) and available for replay from 12.00 (BST) via www.pearson.com. We are holding a conference call for US investors today at 15.00 (BST) / 10.00 (EDT). To participate please dial in on +1 718 354 1175 (inside the US) or +44 208 974 7900 (outside the US), participant code c348483. Video interviews with Marjorie Scardino and Robin Freestone are also available at www.pearson.com. High resolution photographs are available for the media at www.newscast.co.uk.

OVERVIEW

Pearson's sales increased 8% in the first half of the year and adjusted operating profits increased by 57% to £73m. Adjusted earnings per share improved to 1.1p, from a loss of (1.8)p in 2005.

Operating cash flow improved by £13m to £(183)m and our average working capital to sales ratio improved to 27.3% (from 28.7% in the first half of 2005).

Our statutory results show a reduction in operating profit to £65m (£73m in 2005, including a £40m profit on the sale of our stake in CBSMarketWatch). Statutory earnings for the period were £7m, compared with £337m in the first half of 2005 which included a £302m profit on the sale of Recoletos, our Spanish media group. Excluding those one-off gains on disposals, our statutory profit was £12m higher than in 2005.

Our net borrowings, which peak at the half-year stage, increased to £1,611m (£1,298m in 2005), largely as a result of a series of bolt-on acquisitions in education (including Promissor, PBM, National Evaluation Systems, PowerSchool and Chancery) and financial information (Quote.com). Our total investment in all acquisitions in the first half was £273m.

The board has declared an interim dividend of 10.5p per share, a 5% increase on 2005, reflecting this strong financial performance and its confidence in the outlook for the full year.

Financial Performance
£ millions Half year
2006
Half year
2005
Headline
growth
Underlying
growth
Full year
2005
Sales
School 625 518 21% 10% 1,295
Higher Education 206 192 7% 3% 779
Professional 316 243 30% 20% 589
Pearson Education 1,147 953 20% 11% 2,663
FT Publishing 179 164 9% 9% 332
IDC 165 143 15% 3% 297
FT Group 344 307 12% 6% 629
Penguin 387 353 10% 2% 804
Total continuing 1,878 1,613 16% 8% 4,096
Adjusted operating profit
School 36 16 -- 46% 147
Higher Education (53) (45) (18)% (13)% 156
Professional 17 8 -- 60% 45
Pearson Education 0 (21) -- -- 348
FT Publishing 13 6 -- -- 21
IDC 42 38 11% 8% 80
FT Group 55 44 25% 23% 101
Penguin 18 13 38% 38% 60
Total continuing 73 36 -- 57% 509
Discontinued (Recoletos) -- (3)     (3)
Total 73 33 -- 57% 506

 

SCHOOL

School
£ millions Half year
2006
Half year
2005
Headline
growth
Underlying
growth
Full year
2005
Sales 625 518 21% 10% 1,295
Adjusted operating profit 36 16 -- 46% 147

 

Further share gains in the US

  • Market-leading performance in US school publishing. Strong first-half sales growth, benefiting from earlier phasing of our major state adoption wins compared with 2005.
  • Pearson takes an estimated 30% market share of total new adoptions (and 33% where we competed), and makes a strong start in open territories. Pearson takes the #1 or #2 market share of new adoptions in reading, maths, science and social studies.
  • #1 position in Elementary Social Studies in California with an innovative new digital programme. It has so far taken a 41% share, reaching more than 1.5m students.
  • Testing business, benefiting from excellent record of contract wins in 2005, continues to gain share with new long-term contracts in Illinois, Maryland, Mississippi and New York. Rapid growth in online assessment, with pilots underway in nine states and 1.4 million secure online tests delivered in the first half.
  • Curriculum software continues to show good growth with increasing adoption of technology in schools and new version releases for some of our major programmes including Waterford and NovaNet.

Good growth in International, with strong performance in Canada, Europe and Latin America

  • International English Language Teaching business outperforms market, capitalising on growing demand for English language proficiency and local adaptations of new and established global programmes. English Adventure, developed with Disney for the ELT primary market, gains share with new versions for Asia and Latin America building on the success already achieved in Europe.
  • UK school businesses benefit from technology leadership. In school testing, we have marked a total of 8 million GCSE, AS and A-Level scripts onscreen, and we are piloting a programme to provide students and their parents - in addition to schools - with online access to question-level examination performance data. Our new science qualification, textbook, e-learning and teacher support programmes, designed for major changes in science curriculum in 2006, are gaining significant market share.

Bolt-on acquisitions adding breadth, scale and value

  • School testing business gains scale and enters a new growth market through the acquisition of National Evaluation Systems, America's leading provider of certification tests for the teaching profession.
  • School technology business transformed through the acquisitions of Chancery and PowerSchool, the #2 and #3 providers of student information systems to US schools. Pearson now has an installed base of 29,200 schools serving 25 million students - close to half of all school students in America.
  • Pearson gains a leading position in the Italian school publishing market through the acquisition of Paravia Bruno Mondadori.

Healthy outlook 2007-2009

  • US school new adoption market expected to grow strongly from 2007- 2009 (estimated at $660m in 2006; $800m in '07; $900m in '08; $1bn in '09).
  • US state tax receipts - the major source of school funding - remain healthy. According to the Rockefeller Institute, state tax receipts grew by 6.8% in Q1 2006 with all three major categories (personal income tax, sales tax and corporate income tax) showing solid growth.
  • Increasing technology adoption by US schools and shift of No Child Left Behind policies from implementation to remediation creates favourable environment for Pearson's mix of curriculum, assessment and technology services.

HIGHER EDUCATION

Higher Education
£ millions Half year
2006
Half year
2005
Headline
growth
Underlying
growth
Full year
2005
Sales 206 192 7% 3% 779
Adjusted operating profit (53) (45) (18)% (13)% 156

 

Investments generate higher first half losses . . .

  • Pearson's Higher Education business is traditionally loss-making in the first half, as it invests ahead of two major selling seasons in the US: July/ August (ahead of the first college semester) and December (ahead of the second semester).
  • Worldwide Higher Education sales growth of 3%; good growth in the US (up 4%).
  • First half losses increase to £53m (£45m in 2005) as Pearson invests in new content and online services.

. . . and sustainable competitive advantage

  • Pearson's US Higher Education business, the market leader, has grown ahead of the industry for seven straight years.
  • Strong performance from major schedule of 1st editions with major new titles in Economics, Algebra, Accounting, Psychology and Written Composition.
  • Rapid growth from online homework and assessment services including MyMathLab and Mastering Physics. More than 900,000 US college students register for Pearson's online learning programme in the first half, an increase of 29%. Evaluation studies show significant learning gains for students and efficiency improvements for institutions.
  • New online homework and assessment programmes in economics, psychology and developmental writing to be launched in the second half.
  • Continued strong growth from custom publishing as Pearson extends leadership in print custom publishing to custom media and full service curriculum solutions.
  • Further innovation in product models and student channels. Pearson is piloting downloadable audio study guides; digital textbooks; purchasing-by-the-chapter; and an online store for all our higher education materials.
  • International Higher Education business continuing to invest in global and local authors, publishing in new languages, online learning tools and custom publishing, and new markets in Asia and the Middle East.

PROFESSIONAL

Professional
£ millions Half year
2006
Half year
2005
Headline
growth
Underlying
growth
Full year
2005
Sales 316 243 30% 20% 589
Adjusted operating profit 17 8 -- 60% 45

 

Note: At the beginning of 2006 we transferred Brady Games, our video games imprint, out of Professional and into Penguin. This move reduces Professional sales by £6m in the first half. There is no operating profit impact.

Professional Testing

  • Substantial revenue and profit growth, as major contracts continue to build and business emerges from investment phase.
  • Successful execution on major new contracts. Graduate Management Admissions Test now being administered through Pearson's network of more than 4,000 test centres in 145 countries, the world's largest.
  • Promissor, acquired in January 2006, performing well. Acquisition brings additional scale in professional testing and enables Pearson to enter new US state and federal regulatory markets.

Government Solutions

  • Exceptional revenue growth in the first half, benefiting from phasing of US Department of Health Medicaid contract (which is expected to reverse in the second half).
  • New contract wins with the US Defense Information Systems Agency and governments of Argentina and Mexico; strong pipeline of new long-term business opportunities in the second half.

Technology Publishing

  • Worldwide technology publishing business maintaining market share despite weak industry conditions.
  • Further cost actions: continued reduction in publishing list and overheads; consumer technology business transferred to Penguin to gain additional scale in distribution.

FINANCIAL TIMES GROUP

Financial Times Group
£ millions Half year
2006
Half year
2005
Headline
growth
Underlying
growth
Full year
2005
Sales
FT Publishing 179 164 9% 9% 332
IDC 165 143 15% 3% 297
Total 344 307 12% 6% 629
Adjusted operating profit
FT Publishing 13 6 -- -- 21
IDC 42 38 11% 8% 80
Total 55 44 25% 23% 101

 

FT Publishing

  • Financial Times sales up 10% to £119m and profit improved to £5m (loss of £2m in first half of 2005).
  • FT advertising revenues up 11%, continuing steady acceleration in advertising revenue growth. 20%+ growth in financial, luxury goods and online advertising; more than 80% of advertising revenue improvement converted to profit in the first half.
  • FT's average circulation 447,000 for the first six months, up 5%; 86,000 FT.com subscribers in June, up 11% (on the same period last year).
  • Deeper integration of the FT's print and online editorial processes under way. Reinforcement of print and online teams through senior appointments and reorganisation.
  • Circulation up 2% at Les Echos to 120,000, FT Deutschland level at 102,000; The Economist up 9% up to 1,096,000 (for the July-December ABC period).
  • Strong performance of the portfolio of finance titles, websites and events at FT Business, with sales up 15% and improved margins in institutional finance titles.

Interactive Data Corporation

  • Underlying sales growth of 3% with increased business with existing customers and 95%+ renewal rate within its Institutional Services segment.
  • Demand for fixed income evaluations and related reference data drives new sales for FT Interactive Data, which grew over 6% excluding the impact of foreign exchange.
  • Steady international expansion; working with some of largest clients to pursue enterprise-wide opportunities that involve offering multiple Interactive Data businesses.
  • IS. Teledata integration progressing well; re-branded Interactive Data Managed Solutions in July 2006.
  • e-Signal, which provides real time financial market data to financial professionals and active traders, continues to expand its direct subscriber base and online advertising across its family of financial websites, which together rank among the top 10 financial destinations. Quote.com integration progressing well.
  • CMS BondEdge introduction of fixed income analytical data feed service well received by customers.
  • IDC reported second-quarter and first-half 2006 results on 27 July 2006, available at www.interactivedatacorp.com .

PENGUIN

Penguin
£ millions Half year
2006
Half year
2005
Headline
growth
Underlying
growth
Full year
2005
Sales 387 353 10% 2% 804
Adjusted operating profit 18 13 38% 38% 60

 

Note: At the beginning of 2006 we transferred Brady Games, our video games imprint, out of our Professional segment and into Penguin. This move increases Penguin sales by £6m in the first half. There is no operating profit impact.

  • Continued margin improvement, with sales up 2% and profits up 38%.
  • Record bestseller performance with 85 titles on New York Times bestseller lists and 43 top ten bestsellers in UK. Brand name author bestsellers and newly created bestsellers including titles by Patricia Cornwell, Clive Cussler, Nathaniel Philbrick, Anthony Horowitz, Tyler Perry, Kim Edwards, Jeremy Clarkson, Jane Green and Marina Lewycka.
  • Major literary awards. Penguin authors win a Pulitzer Prize for the second year in a row - this year the Pulitzer Prize for Fiction (Geraldine Brooks for March), two Orange Prizes (Zadie Smith for On Beauty and debut writer Naomi Alderman for Disobedience), and two Whitbread Prizes (Ali Smith for Accidental and Hilary Spurling for Matisse: the Master).
  • Strong second half publishing list, including bestselling authors Thomas Pynchon, Nora Roberts, Clive Cussler, Carly Fiorina, John Dean, Jamie Oliver, Jeremy Clarkson, Sue Townsend, Eoin Colfer and Kylie Minogue.
  • Successful innovation with new formats. Penguin authors published in new "Premium Paperback" format achieve higher sales than with their previous traditional mass market titles.
  • Strong backlist performance with innovative publishing and marketing. New editions and lines introduced for the 60th Anniversary of the Penguin Classics, including Red Classics and Penguin Epics in the UK, and Penguin Graphic Classics, and a successful partnership with the National Basketball Association in the US.
  • Further efficiency gains. Continued programme to capitalise on combined scale of Penguin and Pearson Education in book publishing, with shared warehousing, distribution, purchasing and information technology.
  • Investment in new digital channels and formats, including Penguin online bookstores, e-books, digital audio and podcasts, to reach new audiences.
  • Continued investment in India, where Penguin has #1 market share, with expansion of local language publishing programme, and shift of some travel and illustrated reference pre-production processes to Delhi.

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. The company undertakes no obligation to update publicly any forward looking statement, whether as a result of new information, future events or otherwise.