Pearson PLC (PSO) 2004 Q2 法說會逐字稿

Good day ladies and gentlemen, Rona Fairhead, Chief Financial Officer of Pearson will make a short presentation and then will be happy to take questions. Question guidelines are as follows

[OPERATOR INSTRUCTIONS].

Please proceed.

Hello everybody and thanks for listening in today. All right Marjorie won't be with us today and she wants you all to know that she is sorry that she can't be here. Unfortunately she is at her father-in-laws funeral today and she wants me just to say how grateful she has been for the understanding.

And turning to Pearson's results at the half year, as you all know, our first half numbers by themselves don't tell you too much because of the phasing of our business and that is why as you have seen from our announcement this morning, we have decided to give an additional trading out phase around the end of October after our key trading period ahead of the new school year.

I think today what we want to do is to tell you about the strong start we have made to the year and give you a little color on that and give you a little bit more on all things here on the outlook for 2005. So, here are the main numbers in underlying terms.

Sales are up 1%, operating profit; pre-tax profits and earnings are all ahead. Pre-cash out flow was better by over 100 million pounds and once again we have demonstrated our confidence in our businesses and we have increased our dividends ahead of the rated inflation from 9.7 p.

If we take our businesses in turns, firstly we are turning to the FT. Of the FT group, IDC once again makes up the lions share of the profit. It sales and profits are ahead 2% underlying. Its fundamentals remain strong as institutional renewal rates continue to run about 95% and its markets are showing early signs of recovery. So, IDC has provided that solid counter cyclical base while our business newspapers have laid the ground for a profit recovery, which is now underway.

The FT's first half log improved by 9 million pounds over last year and we are on track for profits to be ahead 20 million pounds for the full year even without any pick up in advertising. Les Echos and FT business increased their contribution by more than 50% and good performance at the economic and continued progress of FT Deutschland moved our associates and joint ventures back into profit.

We achieved this profit uplift, even as we continue to invest in the quality of our newspapers in order to increase that circulation and readership. So, let me just update you a little on that.

In terms of advertising, FT's ad revenues were up 3% for the first half. The technology and business-to-business capitals are still weak, but recruitment advertising, which traditionally has been a leading indicator, is up over 20%.

In France, Les Echos is up 7% helped by the advertising related to M&A activity under French government privatization program. Expansion (ph) is up 5% for the first half and 11% for the second quarter and FT Deutschland more than 30% still growing strongly of a small base.

The profile of this advertising movement is still rustic and forward visibility remains poor, but after three years of double-digit decline, this is the first half of positive advertising revenue growth across all our major business newspapers.

And now looking at Penguin's performance in the first half. Underlying sales were flat and profits down 15%. Looking at the headlined numbers, our profits are down 11 million pounds with a currency impact accounting to 7 million pounds of that variance.

The full year in changed activity for Penguin, however, remained as we have guided, every 5-cent change in the average full-year rate has a 3 to 4 million pound impact and as we have always said for Pearson as a whole a 5-cent move in the average rate for the dollar for the full year has an effect on our earnings of about a penny a share.

Then back to Penguin, the remaining 4 million pound variance is made up of a number of factors, firstly we had some supply disruption in the U.K. as we moved into our new distribution center in Rugby. We are now close to restoring fulfillment levels to that previous level I had of our busy second half selling season.

We have differed the chancellor of our education business into this warehouse until next year and we are offsetting June running costs and savings elsewhere. We may have lost some sales in Penguin, for example, books that are time critical such as particular travel book, but we also believe that many of the sales will simply have been differed into the second half.

The second factor was that as we said, we invested in new channels to market, reaching new readers and bad investment was weighted to the first half and thirdly along with a number of other publishers Penguin was affected by the month's bankruptcy of a major distributor to the map market in the U.K.

On the positive side, we have had another very strong front list performance in the both the U.S. and the U.K and we believe that will continue into the second half. And turning now to education and starting with schools. Sales were down 2% with operating profit up 29%.

The reported numbers include the impact of London qualification or at Excel, which we acquired last year and which is loss making in the first five months. Because of the second half weighting, as you will see small absolute changes have quite a large percentage impact.

The key point of our growth performance is that we have been strong across the board and around the world. Firstly, outside the U.S. we are having a good year, especially in testing and English language teaching and in software and schools from Spain to South Africa.

Inside our U.S, our supplementary business and open territory sale are showing good growth, so it is still early in the year. In testing we have picked add-on contracts for California, for Florida, Minnesota, New Jersey, North Carolina and Virginia and we see the flow of bigger and BLB related opportunity continuing to build and we have once again posted a good performance in new adoption business.

Overall, that gives us 31% of the adoption opportunities we competed for or 27% of the total new adoption market and we believe that means we are tied for new adoptions at first place. So, our business in schools as a whole is on track to meet our expectations for the full year with the revenues broadly level with 03' as a mid-single digit decline in U.S. paper publishing is offset by good growth elsewhere.

Turning now to higher education, we are off to a (inaudible) in revenues we are on track to grow ahead of the market and somewhere in the 46% range as we have said all year three things in particular are helping this year. Our custom publishing business continues to grow at 20% plus, we continue to have a successful sales effort and our investment in publishing areas like health and languages are generating strong growth. We are also gaining say in high enrollment, Basic English and Basic Math courses.

We are producing online systems for more imprints and more subject areas on becoming embedded in day-to-day study and instructions and as a result, we are expecting to have 1.5 million paying online users by the year-end and as some of you know, we are making some new developed product offering this year, which should help to keep us ahead.

And finally, in our professional education business, sales are flat and profits were a little ahead with 2 million pounds. Our Technology publishing business remained in a tough market around but the rate of decline is slowing. We do expect a stronger performance in the second half in part of the result of the new software and particularly new games releases. We have continued to build our market share, which now stands at around 35% in the US and we announced today that we are partnering with IBM as a worldwide publisher of the IBM press.

They are joining a number of leading technology companies such as Cisco and Adobe who have chosen to partner with Pearson. Sales in our government solutions business are up double digits. So far this year, growth is mostly from increased volumes and add-ons to existing contracts with customers including the department of health and the immigration service. Our pipeline of bid remained very strong and our win rate of over 30% means we are very confident about the outlook here.

In professional testing this is a year of investment. As we expand our network of testing centres in support of the major contracts that we won last year. And as we have said profit will be held back by around 15 million pounds this year as we build the business and invest in its infrastructure. Sales are up 14% and we expect that rate to continue to accelerate. And looking ahead to 2005 and again we still believe that we are confident that we will deliver in 2005 that significant uplift in three key financial priorities: earnings, cash and returns. And there are concrete reasons behind that confidence. Education is clearly one theory, which will drive a lot of that growth and looking at that growth first in the short-term, and as you all know that 2005 adoption calendar is very strong.

Our estimate is unchanged at around $900 million of new adoption spend against a little under $500 million in 2004. We know that there are some bigger projections out there and we think that is probably explained by the fact that we have chose not to compete in health. We are therefore not tracking spending plans in that subject so closely. And there a few of the adoption outlook is unchanged; the health of state budget is changing fast.

Those budgets fund the approach of our products not just for adoption but open territory, school testing, software, and supplementary purchasing. A recent survey from the Rockefeller Institute shows seven consecutive quarters of increases in state tax receipts with the growth accelerating. And the National Conference of State Legislatures last week reported on the spending plans of 44 states for fiscal year 2005. The year that just began on July the 1st.

They're budgeting for their spending on K-12 education to grow 5% this year up from 3% last year. So, that recovery and underpins our confidence that our U.S. school publishing business will grow in the double-digit next year.

So, to summarize, we are making good progress financially and competitively in 2004. Though it is early in our trading year, we are on track to meet our financial goal. We have confidence that our progress will accelerate in 2005 and we have concrete reasons for that. Sales at our services businesses are growing in double-digits. Second the outlook for our school business is strong and in our business newspapers cost savings are coming through, our franchises are strong, advertising is showing signs of improvement and profits are on the up. So, thank you for listening and I will now open it up to questions.

[OPERATOR INSTRUCTIONS]

And your first question comes from Drew Boris, please proceed.

Hi, Rona, a couple of questions. Firstly could you provide an update on the TSA receivable and maybe more importantly, could you also comment on how that has impacted your ability to compete for additional governing contracts?

Secondly, I know you guys did some re-financing in the first half of the year. Could you just talk about you know any changes, the benefits of that if you may have some lower interest expense going forward?

And lastly just on Penguin you know you mentioned that there was sort of a 4 million pound impact on profits from a couple of different things. I guess I am just understand your expectation is though is that, in the second half you guys will be able to recoup that? Thanks.

OK, Drew. Let me just touch on the TSA. The TSA payment had remained unpaid but we are very confident that we will get that money in full and you know there is a funding budget for that level and the discussions they are going are constructive. So, I can't give you time but we are very confident that that $151 million will be paid in full.

In terms of is it effecting our ability to gain government contracts, obsoletely not. As I have said we have been building up add-on contracts from our existing customers and last year we won $200 million of new contracts in government solutions. So, we have absolutely no evidence that kind of caused any problems in bidding in that area.

And if I touch on the re-financing and basically we issued about $750 million worth of bonds five-year and ten-year bonds and also a revolver facility of $1.35 billion. And both of these instruments have replaced similar instruments that were maturing in 2004 and through the middle of 2005.

So, the basic structure stays unchanged and there were some small improvement. But you are talking a full year in pricing and obviously we are not going to have a full year impact of somewhere around a million pounds. It was not really done on the you know just pure some cost saving it was done to refinance facilities that were maturing.

But we are pleased with the way that they went and both were subscribed in this indication and they traded it pretty close to their issue price and looking of Penguin I mean we have got a strong second quarter coming up and as I said we don't think any of the impacts would be that big, which will be huge.

The direct channel investment we have had a first half weighted, so you would expect as we start to see some revenue come through from September that will reduce but we said that we would have small single-digit millions of investment in those new channels to market and there was a small number of single digits on the Thomas Cook bankruptcy and as far as the U.K. warehouse and I think the important thing is that we are now pretty close to our normal level of fulfillment and as I said any joint running cost we think we can cover, and maybe you know a few small additional costs but the bigger mind thrust now is - with the sales that were differed into the second half and the issue that we have now is if we look at our market share.

Our market share on the front list held or in fact improved and although our backlist was a little down. And it was coming after a year where we did the big Penguin Classics re-launch and there was a program on BBC television called the Big Read, which obviously helped the backlist last year.

Our sense is that some time critical books as I said may be travel and we may have lost but we think that the majority of any sales would have been deferred into the second half.

Great. Thanks Rona.

Thank you.

And your next question comes from Ann Dyers (ph) of Eric R. Global (ph). Please proceed.

Yes. Hi, Rona.

Hi.

A few questions. First of all in the transfer of some of the UK conference call, there was a comment made that your margins on textbooks online are equal. Was that on a percentage basis or on a dollar basis?

Well, as a percentage we said that - we said around 20% margin.

And so.

And I think the important thing that we said that - what we do is we basically take a classic textbook. We had, we didn't have a premium brand, which is bundled with online technology, which is absolutely at the heart of - if it's the core subject if you are a major than you know, then you will buy the full premium package.

We also have low cost print alternatives and again there is potentially for people who may not buy and the big textbook may be just need it for a credit and we have custom textbooks which again of about 20% margins because even though the cost produced the specific book and a higher, we have very low I mean much, much lower book return with that will help the margin.

The way of opportunity is of course the SafariX that is making book and quite often reference books available online. It obviously helps in terms of functionality to the reference books you are wanting to search and what we think we are doing here actually is broadening the market and reaching a student who may have not have bought the book at all in the past or who would looked to a used textbook.

So, our attempt is that this is, we are doing exactly what a market leader does in this kind of market, classic market segmentation giving value and giving choice and but with pretty agnostic as to which of the choices the student take because we make similar margins 20% type margins and on all of them.

And the second question is about education revenue growth in 2004? Can you remind us of the factors that account for the fact that you are going to grow much faster than the market in 04' with flat revenues?

For school?

Yes for school.

OK. For school we said we would be broadly flat with last year because the US stable (ph) books, we think will be down in the mid single digits, but that we will get broadly flat because of improvement at our software business and our testing business.

Well, that's I mean - that's a broadly flat picture in Higher Ed we are taking about and being ahead of the market and growing in the 4 to 6% range, which is what we have been saying all the year and we have outgrown the market for the last 5 years.

Great. Thank you very much.

Thanks.

[OPERATOR INSTRUCTIONS]

And we have no further questions at this time.

Well, thank you very much for joining us today and I am still hearing about how we have done in the half year.

If you have any questions please contact Jeff Taylor he is sitting opposite me in London here today but we will be back in the states from tomorrow.

Thanks.

Thank you for your participation in today's conference. This concludes the presentation.

You may now disconnect.

Good day.