Pearson announced its Interim Results on Monday 26th July, 2004 please download an electronic (html) version of the press release here
Rona Fairhead, chief financial officer, hosted a presentation of the results for analysts and investors on Monday 26th July, 2004 and was joined for the questions and answers session by Olivier Fleurot, John Makinson, Will Ethridge and George McGuirk
PEARSON PLC INTERIM RESULTS (unaudited)
Six months ended 30 June 2004
|Half year 2004||Half year 2003||Change - underlying||Change - headline||Full year 2003|
|Adjusted operating profit*||£39m||£38m||47%||3%||£490m|
|Adjusted profit/ (loss) before tax*||£2m||£(1)m||--||£410m|
|Adjusted earnings per share*||(1.8)p||(2.3)p||22%||32.0p|
|Operating cash flow||£(195)m||£(338)m||42%||£320m|
|Free cash flow||£(262)m||£(381)m||31%||£192m|
|Operating (loss)/ profit||£(77)m||£(110)m||30%||£226m|
|(Loss)/ profit before tax||£(112)m||£(138)m||19%||£152m|
|(Loss)/ earnings per share||(15.5)p||(20.1)p||23%||6.9p|
|Dividend per share||9.7p||9.4p||3%||24.2p|
*Continuing operations before goodwill and non-operating items.
Throughout this statement, we refer to business performance measures and growth rates on an underlying basis unless otherwise stated. Underlying growth rates exclude the impact of currency movements and portfolio changes. In the first half of 2004, portfolio changes reduced profits by £6m and increased revenues by £39m. This was largely due to the acquisition of London Qualifications.
Strong first-half performance; on track for the full year
- Good progress on adjusted operating profit (up 47%) and operating cash flow (improved 42% as reported).
- Decline in the US dollar reduces headline revenues by £129m and adjusted operating profit by £8m.
- Cost actions paying off: FT reduces first-half losses by £9m; profits increasing at all business newspapers; school digital learning businesses return to first-half profit.
- Gaining share and getting stronger: School business takes number one position in new maths adoptions and extends lead in personalised learning; Higher Education, Penguin US and IDC growing ahead of their markets; business newspapers gaining audience share; $400m worth of new long-term contracts in testing and government services.
Improving market conditions support confidence in 2004 and beyond
- Business advertising revenue growth turns positive for the first time in three years.
- Growing base of long-term contracts, helped by growth trends in school testing, professional certification and government outsourcing.
- Recovery in state budgets and political commitment to education support healthy outlook for US school and higher education businesses.
Marjorie Scardino, chief executive, said:
"These results for the first half are a good sign of our financial and competitive success, though as usual they represent a small part of our annual total. They make us confident that we will meet our goals, both this year and beyond, as our market conditions improve."
Pearson makes most of its sales and almost all of its profits in the second half of the year, due to the seasonal phasing of our book publishing businesses. At this stage we continue to expect underlying progress in earnings, cash and returns. The outlook for our major businesses is:
At Pearson Education, we expect revenues at our School business to be broadly level with 2003, as growth in our testing and supplementary businesses offsets the particularly weak 2004 school adoption opportunity. We expect our US Higher Education business to grow in the 4-6% range, as its leading print and online programmes enable it to grow ahead of its market once again. Our Professional operations are on track to increase revenues and profits, despite our investment in new professional testing centres. We continue to expect that we will receive the full $151m payment for work completed in 2002 on behalf of the US Transportation and Security Administration.
We expect significant revenue and profit growth from Pearson Education in 2005, helped by a rebound in the School adoption cycle, improving state budgets, steady growth in Higher Education and the benefits of our 2003 Professional contract wins.
The FT Group is on track to make good profit progress this year. Although advertising trends at our business newspapers remain erratic from month to month and between categories, advertising revenue growth has turned positive for the first half as a whole and forward bookings continue to run a little ahead of last year. With costs now significantly lower than at any point in the past three years, all of our business newspapers are in good shape to benefit from further improvement in the corporate advertising environment. We expect losses at the Financial Times to be some £20m lower than last year, even without any growth in full-year advertising revenues. The FT Group will also benefit from another strong year from IDC.
The Penguin Group's publishing schedule is once again heavily weighted to the second half of the year. Penguin faces tough comparisons after a record 2003 and reported results will again be affected by the weak US dollar. We expect a good second half as we have a very strong publishing schedule in the US and the UK, and we are now well on the way to restoring fulfilment standards following the move to our new UK warehouse.
Exchange rates and interest. A five cent change in the average exchange rate for the full year (which in 2003 was £1:$1.63) will have an impact of approximately 1p on adjusted earnings per share. We expect our interest charge in the second half to be marginally higher than the first-half level of £37m, as better cash flow is offset by the expected rise in interest rates.
Trading updates. From this year, Pearson will issue an additional trading statement to the market around the end of October. This will provide investors and analysts with an update on trading in the third quarter, which is an important selling period for our book publishing businesses. Our pre-close trading update will now be published early in January, after our busy end of year trading period.
For more information: Luke Swanson / Charlotte Elston + 44 (0) 20 7010 2310
Pearson's interim results presentation for investors and analysts will be webcast live today from 0900 (BST) and available for replay from 12 noon (BST) via www.pearson.com. We are holding a conference call for US investors at 1500 (BST) / 1000 (EDT). To participate in the conference call or to listen to the audiocast, please register at www.pearson.com.
Notes.Throughout this statement (unless otherwise stated):
1. Growth rates are stated on an underlying basis, excluding the impact of currency movements and portfolio changes. Pearson generates approximately 70% of its revenues in the US. The average exchange rate for the first half of 2004 was £1:$1.82 (£1:$1.61 in the first half of 2003). The full year exchange rate in 2003 was £1:$1.63;
2. Adjusted figures are presented as additional measures of business performance. They are stated before goodwill and non-operating items. Goodwill is amortised over no more than 20 years.
3. The ?business performance? measures, which Pearson uses alongside other measures to track performance, are included to provide additional detail on business performance. They are non-GAAP measures for both US and UK reporting. Reconciliations of adjusted operating profit, adjusted profit/ (loss) before tax, adjusted earnings per share and operating cash flow to the equivalent statutory heading under UK GAAP are included in notes 2, 5, 6 and 10 respectively.
Due to the seasonal phasing of our book publishing businesses, we generate most of our sales and profits in the second half of the year. We make approximately two-thirds of our revenues in the US and our reported results continue to be affected by the weakness of the US dollar. The weakening of the dollar to £1:$1.82 in the first half of 2004 (from £1:$1.61 in the first half of 2003) reduced our headline sales by £129m and our adjusted operating profit by £8m.
Sales in the first half were £1,594m, 1% ahead of the first half of 2003 in underlying terms. Growth in Higher Education and the FT Group was largely offset by lower sales in US School publishing as a result of the expected weak adoption cycle.
Adjusted operating profit was up 47% to £39m, helped by cost actions - particularly at the FT Group, where profits were up 36% on 5% revenue growth. Adjusted loss per share improved from (2.3)p to (1.8)p.
Operating cash flow improved by £143m to £(195)m and free cash flow by £119m to £(262)m. Our cash flow benefited from Penguin's very strong publishing schedule in the fourth quarter of 2003, which pushed collections into the early part of this year, cost reductions at the FT Group, and an improved cash performance from Pearson Education. Excluding the impact of TSA, the average working capital to sales ratio improved from 31.0% to 30.7% even as we increased investment in our businesses.
On a statutory basis, our loss before tax improved 19% to £(112)m, helped by a lower (non-cash) goodwill amortisation charge of £116m (£148m in 2003). We make a statutory loss in the first half because we make most of our operating profits in the second half but spread our goodwill amortisation evenly through the year.
Pearson's net borrowings, which peak at the half-year stage, were 9% lower than last year at £1,734m.
During the first half, we successfully refinanced Pearson's debt facilities maturing in 2004 and 2005. In May we issued $750m of 5-year and 10-year bonds into the US market, refinancing bonds due in the second half of 2004. In July we signed a $1,350m revolving credit facility arrangement with a group of 18 banks to support our working capital borrowings and to refinance a similar agreement due in July 2005. These refinancings have extended the average maturity of Pearson's debt by about two years.
The board has declared a 3% increase in the interim dividend to 9.7p, payable on 24 September 2004 to shareholders who are on the register at the close of business on 27 August 2004.
|£ millions||Half year 2004||Half year 2003||Change - underlying||Change - headline||Full year 2003|
|Adjusted operating profit|
Pearson Education generates most of its sales in the second half of the year and is typically loss-making in the first half.
Sales at our School business were 2% lower. 2004 is as expected a weak year for the US School publishing industry, driven by the low new adoption opportunity. (In the US, 20 ?adoption? states buy textbooks and related programmes on a planned contract schedule or ?adoption cycle?. The level of spending varies from year to year with this schedule, depending on the number of adoptions in the largest states and subjects. In ?open territory? states, school districts or individual schools buy textbooks according to their own individual schedules rather than on a statewide basis.)
However, we have had another strong year in new adoption sales, taking approximately 27% of the total new adoption market (after competing for some 90% of the total). We have taken the leading share in maths, science and social studies adoptions this year, benefiting from the breadth of our business across subject disciplines and across elementary, middle and high school grades. We have also begun the year strongly in non-adoption states or ?open territories?, which mostly buy textbooks in the second half and will constitute a larger proportion of the overall market this year, given the weak adoption calendar. We are performing well in all major subject areas and particularly in maths and social studies as we customise major programmes for individual states.
Our digital learning and supplementary publishing businesses are well placed to benefit from the recovery in US state budgets which is now under way and the flow of new federal education funds into the market under the No Child Left Behind legislation. Though both businesses make most of their sales in the second half, profits improved significantly as a result of measures taken last year to reduce costs and focus on a smaller number of large-scale, more profitable programmes. Revenues were down a little at our school testing business as a result of the phasing of its major contracts this year. However, we continued to win contracts to help states including Florida and New Jersey meet the No Child Left Behind accountability requirements from 2005.
Our school businesses are also performing well outside the US. We have begun to introduce our testing capabilities in the UK, successfully marking more than one million GCSE and A-level scripts on screen this summer. In addition, the UK's National Assessment Agency has recently awarded Pearson a three-year contract for the National Curriculum or Key Stage Tests. KnowledgeBox, our digital learning programme launched last year, which contains content, assessment and lesson plans, is now installed in more than 500 primary schools. We also launched English Adventure, our new English language teaching programme, in the first half. The series, for ages 4 - 12, uses Disney characters to motivate young learners, and is our first worldwide ELT programme for schools. It is exceeding our expectations in Spain, its first market, where over 100,000 children will be learning with it from September. Seven further editions for other markets are due to be launched next year.
Our Higher Education business makes approximately three-quarters of its revenues in the second half of the year, with major selling seasons in July/ August and December, ahead of the two US college semesters. The business reports losses in the first half as it invests in publishing, sales and marketing to deliver full-year growth. Worldwide, sales were up 6%.
In the US, sales were up 4%. We have had a successful first-half sales campaign, benefiting from new publishing in targeted segments such as health and languages, success in high enrolment basic English and maths skills courses, the rapid roll-out of our online learning services to new subject areas and our fast-growing custom publishing business. The US higher education market is changing rapidly, and we are helping faculty and students to adapt by offering a broad range of choice and value. Our Pearson Choices programme makes our leading educational content available in a wide range of formats: conventional textbooks, low-cost print alternatives, online learning platforms and custom programmes. This summer we are using our Safari joint venture to launch the latest addition to that range: an online service (www.safarix.com) which will provide more than 300 web-based textbooks at 50% of the cost of their print alternatives.
In our Professional business, profits were ahead on flat revenues. Our technology publishing businesses around the world continue to face very tough market conditions, with employment levels and software releases in the IT industry still low. Although technology publishing revenues were 3% lower in the first half, our business is gaining share and expects to benefit from a pick-up in new software and games releases from the second half of 2004. Our Government Solutions business increased revenues by 10%, with good growth from existing contracts, and won more than $100m in new contracted business. Revenues at our Professional Testing business were 14% ahead, with particularly strong growth from our contract with the National Council of State Boards of Nursing. We are investing this year to expand our international network of testing centres to support newly won contracts for customers such as the Graduate Management Admissions Council and the UK's Driving Standards Agency.
Financial Times Group
|£ millions||Half year 2004||Half year 2003||Change - underlying||Change - headline||Full year 2003|
|Other FT publishing||56||54||10%||4%||112|
|Adjusted operating profit|
|Other FT publishing||6||3||58%||100%||6|
|Associates and joint ventures||3||0||--||--||3|
The Financial Times Group grew revenues by 5% and profits by 36% as our business newspapers benefited from cost savings and, for the first time in three years, improvements in advertising revenues.
Losses at the Financial Times improved by £9m as a result of cost measures taken last year including the integration of our UK and European commercial operations. Advertising revenues were 3% higher for the first half of the year, having been 4% lower in the first two months and flat at the end of April. Advertising trends remain erratic from week to week and across categories. We have seen rapid growth in recruitment, luxury goods and business travel advertising, although the technology and business-to-business sectors remain weak. Newspaper circulation was some 5% lower at 427,000, but the FT is performing well on the key business readership surveys and FT.com's paying subscribers increased from 57,000 in June 2003 to 76,000 in June 2004.
Profits at Les Echos were significantly ahead of last year as costs were lower and advertising revenues grew 7%, benefiting from the French government privatisation programme and increased M&A activity including the Sanofi/ Aventis deal. Daily paid circulation was slightly ahead at 118,000 as the relaunch of Les Echos in its new Berliner format helped it to grow as the overall French newspaper market declined. FT Business has seen a broad-based return to advertising growth since the start of the year, and is performing well.
Recoletos (Bolsa Madrid: REC) achieved sales growth of 12% and profit growth of 7%, recovering strongly after a weak March following the terrorist attacks in Madrid and the Spanish election. Advertising revenues increased 14% overall and 5% in Recoletos? business and finance division. Circulation at sports newspaper Marca declined by 5% to 360,000 and was up 3% to 48,000 at Expansion, Spain's leading business newspaper. Recoletos has announced plans to invest $16.5m in the second half - with a profit impact of some $13.5m - in the launch of Rumbo, a network of Spanish-language newspapers targeted at the fast-growing Hispanic community in Texas and other southern US states.
Interactive Data Corporation (NYSE:IDC) increased revenues by 2% and adjusted operating profit by 2%. Renewal rates in IDC's institutional data business, which accounts for two-thirds of revenues, remain very high at or above 95%, and IDC has successfully launched several new products. The integration of Comstock is going well and IDC is in the process of consolidating its data centres in the US. After several difficult years for the market data industry, IDC is now seeing a gradual improvement in market conditions.
The FT's associates and joint ventures generated a profit of £3m, against breakeven in the first half of 2003. FT Deutschland, our joint venture with Gruner + Jahr, increased circulation a further 5% to 95,500 and increased advertising revenues in double digits despite the tough market environment. The Economist continued its excellent circulation performance: average worldwide weekly circulation grew to 943,490, a 4% increase for the year, with the strongest growth in North America.
The Penguin Group
|£ millions||Half year 2004||Half year 2003||Change - underlying||Change - headline||Full year 2003|
|Adjusted operating profit||10||21||(15)%||(52)%||91|
At Penguin, sales were level with last year, with our schedule of major frontlist titles once again heavily weighted to the second half. Adjusted operating profit declined by £4m, as a result of our investment in new channel initiatives, the bankruptcy of distributor Thomas Cork and disruption to UK distribution. Reported profit shows a further £7m impact from the weaker dollar.
In the US, Penguin's largest market, sales were ahead, helped by strong performances from Lynne Truss? Eats, Shoots and Leaves, Tom Clancy's Battle Ready with Gen. Tony Zinni (Ret.), Nora Roberts? Key trilogy, Chesapeake Blue and Birthright and Karen Joy Fowler's The Jane Austen Book Club. The Penguin translation of Leo Tolstoy's Anna Karenina, which sells an average of 20,000 copies per year, was selected in May for Oprah Winfrey's book club and now has almost one million copies in print. Penguin US has also benefited from contributions from its new imprints The Penguin Press, Gotham and Portfolio. All three new imprints have published New York Times bestselling titles, including Ron Chernow's Alexander Hamilton and Steve Coll's Ghost Wars. In the first half Penguin had a total of 75 titles on the New York Times list.
In the UK, Penguin had a strong first half bestseller performance, with a total of 34 books in the Nielsen Bookscan top 10. Kevin Lewis? memoir The Kid spent nine weeks at number one, and Marian Keyes? The Other Side of the Story also hit number one. There were strong debuts from a number of new fiction authors, with Jillian Hoffman's Retribution, Plum Sykes? Bergdorf Blondes and PJ Tracy's Want to Play? all making it into the bestseller charts.
We are continuing to integrate back offices, warehousing and distribution for Penguin and Pearson Education in several markets around the world. We have successfully combined our businesses and their supply chains in Australia, Canada and India and are on track to deliver some £20m of annual cost savings from our integration initiatives from 2005, which will be shared with Pearson Education.
In the UK, the move to a new shared distribution centre for Penguin and Pearson Education disrupted supply of Penguin titles to bookstores in the second quarter. We are well on the way to restoring fulfilment standards to normal levels, ahead of Penguin's major selling season in the second half.
In the second half, Penguin will benefit from another strong publishing schedule. In US fiction we have new titles from many of our most reliable repeat best-selling writers, including Patricia Cornwell, Nora Roberts, Sue Grafton, Clive Cussler, GP Taylor and Madonna. In the UK, we have new titles from Jamie Oliver, Jeremy Clarkson and Sue Townsend, as well as a number of TV tie-ins: You are What you Eat, How to Buy a House and Too Posh to Wash. Dorling Kindersley is also set for a strong second half, with Human and Plant in the same series as existing bestsellers Earth and Animal, and a follow up to last year's America 24/7 with The America 24/7 State Book series, with a book for each of the 50 states.
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.