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Pearson : 2014 half-year results

07/25/2014 | 10:11am US/Eastern
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Pearson 2014 Interim results (unaudited) FINANCIAL HIGHLIGHTS
  • Sales up 2% at CER to £2.0bn reflecting good growth in digital, services and emerging markets, offset as expected, by the impact of school curriculum change in the US and the UK; also, this year, seasonal changes in phasing have helped first half sales in North America and hurt those in Core markets, especially the UK.
  • Adjusted operating profit, excluding Mergermarket, of £73m down from £124m last year, due to increased net restructuring charges (£43m in 2014; £29m in 2013), currency movements and the impact on margins of the phasing of revenues into the second half of 2014.
  • Adjusted EPS of 4.7p (2013: 9.9p) after restructuring charges.
  • Dividend raised 6% to 17p reflecting our confidence in our prospects.
2014 FULL YEAR OUTLOOK UNCHANGED
  • We reiterate the guidance we gave on 28 February 2014.
  • 2014 profits to reflect portfolio changes (Penguin Random House associate accounting; Mergermarket sale; Grupo Multi acquisition) and significant strengthening of Sterling against key currencies.
  • Cyclical and policy-related pressures in our largest markets expected to persist, impacting revenues and margins.
  • Still expect approximately £50m net restructuring to continue to reshape our publishing businesses; £50m organic investment in structural growth opportunities in digital, services and emerging markets.
  • Based on 28 February 2014 exchange rates, we still expect to report adjusted earnings per share of between 62p and 67p in 2014.
2015 AND LONGER TERM
  • Pearson's strategy centres on a significant and exciting long-term opportunity: the sustained and growing global demand for greater access, achievement and affordability in education.
  • We can meet this demand by accelerating our shift to digital, services and to fast-growing economies, and committing to deliver measurably improved learning outcomes (efficacy).
  • We are investing in learning services, inside services, direct delivery and assessments and qualifications, and in school, higher education and English language learning. We are organising around a smaller number of global products and platforms, built around a single, world-class infrastructure and common systems and processes.
  • In 2013 and 2014, we are executing a significant restructuring programme designed to reduce our exposure to structural pressures and to shift resources towards these growth opportunities. Our restructuring expenditure will return to more normal levels in 2015.
  • In addition, we believe cyclical pressures will begin to ease from 2015 as curriculum change is implemented in the US and UK and US college enrolments stabilise and, in due course, return to growth.
  • This strategy will enable us to help more people make progress in their lives through learning. It also provides Pearson with a larger market opportunity, a sharper focus on the fastest-growing markets and stronger financial returns in 2015 and beyond.

John Fallon, chief executive said:

"Overall, we are sustaining a good competitive performance through a period of change and are powering ahead in digital, services and emerging markets which enable us to reiterate our guidance for 2014. It also positions Pearson as a global learning services company, making better learning outcomes more accessible for far more people around the world. This will drive a leaner, more cash generative, faster growing business from 2015."

FINANCIAL SUMMARY
£ millions Half year 2014 Half year 2013 Headline growth CER growth Underlying growth
Business performance
Sales 2,047 2,190 (7)% 2% 0%
Adjusted operating profit 75 137 (45)% (36)% (40)%
Adjusted earnings per share 4.7p 9.9p (53)%
Operating cash flow (254) (247) (3)%
Net debt 2,028 1,837 (10)%
Statutory results
Sales 2,047 2,190 (7)%
Operating (loss)/profit (37) 8 n/a
Loss before tax (36) (16) (125)%
Basic earnings per share 28.0p (1.0)p n/a
Cash used in operations (212) (161) (32)%
Dividend per share 17.0p 16.0p 6%

Throughout this announcement:

a) Growth rates are stated on a constant exchange rate (CER) basis unless otherwise stated. Where quoted, underlying growth rates exclude both currency movements and portfolio changes. Unless otherwise stated, sales exclude Penguin and Mergermarket while adjusted operating profits include Penguin, Penguin Random House and Mergermarket. Continuing operations exclude both Penguin and Mergermarket.

b) The 'business performance' measures are non-GAAP measures and reconciliations to the equivalent statutory heading under IFRS are included in notes to the attached condensed consolidated financial statements 2, 3, 4, 5, 7 and 17.

DIVISIONAL ANALYSIS - GEOGRAPHY
£ millions 2014 2013 Headline growth CER growth Underlying growth
Sales
North America 1,164 1,243 (6)% 2% 2%
Core 540 616 (12)% (8)% (8)%
Growth 343 331 4% 18% 7%
Total excluding Penguin and Mergermarket 2,047 2,190 (7)% 2% 0%
Penguin - 513 n/a n/a n/a
Mergermarket 9 53 n/a n/a n/a
Total sales 2,056 2,756 n/a n/a n/a
Adjusted operating profit (1)
North America 36 29 24% 52% 52%
Core 13 55 (76)% (76)% (76)%
Growth 6 12 (50)% (25)% n/a
Penguin Random House/Penguin 18 28 (36)% (29)% (7)%
Total excluding Mergermarket 73 124 (41)% (31)% (40)%
Mergermarket 2 13 n/a n/a n/a
Adjusted operating profit 75 137 (45)% (36)% (40)%

(1) 2013 includes £29m net restructuring charges as follows: North America, £8m; Core, £16m; Growth, £5m. 2014 includes £43m net restructuring charges as follows: North America, £24m; Core, £8m; Growth, £4m and PRH, £7m.

DIVISIONAL ANALYSIS - LINES OF BUSINESS
£ millions 2014 2013 Headline growth CER growth Underlying growth
Sales
School 939 1,098 (14)% (7)% (6)%
Higher Education 589 575 2% 13% 12%
Professional 519 517 0% 8% 1%
Total excluding Penguin and Mergermarket 2,047 2,190 (7)% 2% 0%
Penguin - 513 n/a n/a n/a
Mergermarket 9 53 n/a n/a n/a
Total sales 2,056 2,756 n/a n/a n/a
Adjusted operating profit (2)
School 36 95 (62)% (58)% (57)%
Higher Education (10) (19) (46)% (51)% (51)%
Professional 29 20 46% 76% (13)%
Penguin Random House/Penguin 18 28 (36)% (29)% (7)%
Total excluding Mergermarket 73 124 (41)% (31)% (40)%
Mergermarket 2 13 n/a n/a n/a
Adjusted operating profit 75 137 (45%) (36%) (40%)

(2) 2013 includes £29m net restructuring charges as follows: School, £9m; Higher Education, £8m; Professional, £12m. 2014 includes £43m net restructuring charges as follows: School, £22m; Higher Education, £10m; Professional, £4m and PRH £7m.

OUTLOOK

The outlook we gave at our full year results on 28 February 2014 is unchanged. We are continuing the major restructuring and product investment programme, initiated in 2013, designed to accelerate Pearson's shift towards significant growth opportunities in digital, services and fast-growing economies. We believe this will provide Pearson with a significantly larger market opportunity, a sharper focus on the fastest-growing markets and stronger financial returns.

This restructuring coincides with continued structural, cyclical and policy-related pressures in some of our largest markets.  At this early stage of trading in the year, we expect to report adjusted earnings per share of between 62p and 67p in 2014.  This guidance incorporates our expected trading environment, restructuring activity and product investment and continues to assume 28 February 2014 sterling exchange rates against the dollar and key emerging market currencies. If current exchange rates persist until the end of 2014 it would reduce this guidance earnings per share range by approximately 1p.

The major factors behind our guidance are as follows:

PORTFOLIO CHANGES

The sale of Mergermarket to BC Partners was completed on 4 February 2014 and will reduce 2014 adjusted operating profit before central costs by £26m. This will be partly offset by a part-year contribution from Grupo Multi, which will be diluted by integration costs and the weakness of the Real against Sterling.

We expect the contribution to adjusted operating profit from Penguin Random House to be approximately £20m lower in 2014 compared to the £78m contribution in 2013. That reflects currency movements, integration charges (which are weighted in the first half of 2014) and an additional half-year of associate accounting.

CURRENCY MOVEMENTS

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 2013 was £1:$1.57) has an impact of approximately 1.2p on adjusted earnings per share. The move from an average £/$ exchange rate of 1.57 in 2013 to the 28 February 2014 rate of 1.67 will reduce operating income by approximately £30m if it continues for the full year. Similarly, when compared to 2013 average exchange rates, Sterling has significantly appreciated against a range of non-dollar currencies, primarily in emerging markets.

RESTRUCTURING AND INVESTMENT PROGRAMME

We will benefit from the absence of £176m of gross restructuring charges expensed in 2013, which we expect to generate £60m of incremental cost savings in 2014.

These benefits will be partly offset by an additional net restructuring charge of approximately £50m in 2014, primarily in North America and weighted towards the first half of the year. Our goal is to complete our restructuring programme by the end of 2014, returning to more normal annual levels of restructuring expenditure from 2015.

As previously announced, we expect additional product investment of approximately £50m in 2014 in digital, services and emerging markets to accelerate growth.

TRADING CONDITIONS

Trading conditions remain challenging this year, reflecting:

In North America, our largest market, college enrolments continue to decline and some states are deferring assessment programmes as they transition to the Common Core State Standards. Though the School publishing market is showing some improvement, the benefits are largely offset by higher revenue deferrals and pre-publication amortisation. We expect margins to be lower in 2014 when compared to 2013 reflecting this outlook, revenue mix, launch costs for major multi-year service-based contracts, higher amortisation and new product development expenditure.

In our Core markets (which include the UK, Italy and Australia), trading conditions are tough in the UK as curriculum change affects the school and vocational assessments markets, while Australia is stabilising and there is a new adoption year in Italy.

In our Growth markets (which include Brazil, China, India and South Africa), we continue to grow in China, with Brazil benefitting from a better year in public sistemas and a part-year contribution from Grupo Multi. We expect a slower year in South Africa after strong gains in 2013.

Looking at our global lines of business, we expect School and Higher Education to remain challenging, especially in our two largest markets, North America and the UK. In Professional, we expect continued good growth in Pearson VUE and English with the Financial Times continuing to benefit from its digital transition.

INTEREST AND TAX

We expect our interest charge to be similar to 2013 reflecting higher floating rates broadly offset by a weaker dollar against sterling. We expect a tax rate of between 19% and 21% on our total profit before tax (which includes the post-tax contribution from Penguin Random House).

FOR MORE INFORMATION

Kate James / Simon Mays-Smith / Brendan O'Grady + 44 (0)20 7010 2310

Pearson's results presentation for investors and analysts will be audiocast live today from 0900 (BST) and available for replay from 1200 (BST) via www.pearson.com

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