Pearson, Plc (PSO)

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Pearson (PSO)

2012 Earnings Call

February 25, 2013 4:00 am ET


John Fallon - Chief Executive Officer, Chief Executive of International Education Businesses and Director

Robin Freestone - Chief Financial Officer and Executive Director

William T. Ethridge - Executive Director and Chief Executive Officer of Pearson Education North America

John Ridding - Chief Executive Officer of FT &


Sami Kassab - Exane BNP Paribas, Research Division

Mark Braley - Deutsche Bank AG, Research Division

Vighnesh Padiachy - Goldman Sachs Group Inc., Research Division

Ian Whittaker - Liberum Capital Limited, Research Division

Matthew Walker - Nomura Securities Co. Ltd., Research Division

Alexander Christian DeGroote - Panmure Gordon & Co. plc, Research Division

Sarah Simon - Berenberg Bank, Research Division

Giasone Salati - Espirito Santo Investment Bank, Research Division

Patrick Wellington - Morgan Stanley, Research Division


John Fallon

Okay. Well, good morning, everybody. Last October, when Marjorie announced that she was stepping down, I said I was going to use the transition to talk to a wide range of people both inside Pearson and outside about the company. And what I've heard is consistent with my own view and my experiences of the company over the past 16 years.

The Pearson strategy is settled and sound, and what we now need to do is to accelerate the implementation of it significantly and urgently. So we are reshaping the organization to take advantage of what we believe is a once-in-a-generation opportunity, and one that will lead Pearson into its next phase of vigorous and sustainable growth.

And this next phase is really all about accelerating the digital transformation, accelerating our move into services and building our presence in emerging markets. And we're going to do that by shifting some resources more quickly from our textbook publishing businesses to fund the faster-growing opportunities, and that, in essence, is what the restructuring we've announced this morning is all about.

So my key point for today is this: We are concentrating on being a global education services company for these intensely local in our focus on the biggest market opportunities. And some of those opportunities are very, very big indeed. And so we're going to have to be very highly disciplined about how we allocate capital to them. And that means freeing up resources currently tied up in other parts of the company.

It also means that we're going to be absolutely focused on what we call the educational efficacy of what we do on measuring everything in terms of improved learning outcomes. And the prize, we think, from doing all this will be clearly to shift in a very important and very exciting global growth industry. It will give us an expanded market opportunity. It will give us faster growth potential. It will give us more attractive financial characteristics. And it also means we can make a greater impact on student achievement.

So let's have Robin talk us through the 2012 results, and then I'll be back to talk about what it actually is we're going to do. Thanks, Robin.

Robin Freestone

Thanks, John. Good morning, everyone. So relative to what we hoped at the start of the year, I reckon that I've characterized 2012 as one of the toughest that I can remember since I've been with Pearson.

I'll give you the key numbers. Sales were up 5% at CER; and profits up 1%, recognizing, of course, that the FTSE disposal reduced profits by GBP 20 million compared to 2011. Operating cash was down on 2011, mainly due to a mismatch between accruals and cash payments due to FX and lower cash collections in the second half of the year.

Our net debt was GBP 419 million higher at GBP 918 million, mainly as a result of acquisition spend of GBP 759 million in the year. And we increased our dividend again by 7% despite the difficulties of the year, reflecting our confidence in the future.

Our largest markets, particularly for traditional textbook and testing services remained under budgetary pressure throughout the year. Against that backdrop, it was heartening that all our businesses made progress on sales at CER in 2012. And overall, we finished the year 5% ahead of 2011, helped by contribution from acquisitions.

Of particular note were the following: one, the contribution to our U.S. School business from new digital products, such as iLit and the new services from Connections Education; two; the continuing growth in MyLab registrations and at eCollege in United States Higher Education despite enrollment contraction of around 2%; three, in international, the 25% growth in our emerging market businesses, which means these now represents 45% of our international segment; four, growth at CER achieved in Professional despite the well-documented problems at Pearson in Practice where sales declined by GBP 50 million to just GBP 32 million. This alone knocked off more than 1 percentage point off group organic growth.

Pearson VUE had another strong year, helped by its Certiport acquisition; fifth, the resilience of the FT Group, which continues to deliver digital subscriber growth, ahead of physical newspaper contraction and passed an important milestone, having more than half its circulation online; and sixth, after a tough first half, the second half bounced back by Penguin to end the year with a higher number of bestsellers than last year.

In the face of profits, excluding FTSE, up 3%, it was heartening to see significant profit rises in both North America and International Education, which together, contributed a profit increase of GBP 70 million at constant exchange rates. A particular feature was the North American margin increment of 1.1%, helped by lower returns of physical product. As expected, margins in International remained level with last year, reflecting ongoing investments to drive emerging-market growth.

On the downside, the drop-through on sales at Pearson in Practice resulted in a GBP 38 million negative profit swing year-on-year in our Professional division. Restructuring at the FT took out GBP 5 million, and the mix impact in the first half at Penguin in the United States meant a GBP 12 million profit shortfall at CER there for the year.

On an EPS basis, the combination of lower headline operating profit, a more normalized tax rate and slightly higher shares in issue resulted in EPS down 3% to 84.2p. The impact of the changes to IAS 19 on our 2012 results, to be reflected in our 2013 comparatives, is scheduled as an appendix in your packs.

On a statutory basis, the one-off loss on disposal and closure of Pearson in Practice is the main difference to our adjusted numbers. You'll recall that in 2011, our statutory numbers were helped by the GBP 412 million profit on sale of FTSE, which is also excluded from our adjusted numbers. In 2013, we expect to book a significant statutory profit on the formation of Penguin Random House due to Penguin being treated as a disposal under IFRS. That profit, net of associated costs of disposal, will also be excluded from our adjusted earnings. In 2012, we incurred initial joint venture set-up costs, and we made provision through the statutory accounts for settlement of legal action related to Penguin's agency distribution arrangements.

Our operating cash flow was down in 2012 after a good performance in 2011. This was affected by: one, marginally higher debtor days at year-end in our education businesses; two, increased investment in international to both the growth and in new digital programs for North America, ahead of launch of Common Core, as ever the analysis of pre-pub is in your packs; three, a lower reserve for returns provision as our analogue business contracts; and four, foreign exchange, which swung from a positive in 2011 to a negative in 2012 due to strengthening sterling during quarter 4.

Cash tax paid in 2012 was artificially reduced by the deferred payment of U.S. corporation tax from December 2012 to February 2013 as a result of a federal government dispensation, following Hurricane Sandy. Clearly, this means cash tax in 2013 will be significantly higher.

On our balance sheet, deferred revenue was up again, bolstered by recent digital and services acquisitions, and I'll come back to this shortly.

Our net debt remains low at GBP 918 million, meaning we currently have around GBP 500 million of available acquisition headroom. That low net debt position means our interest cover and net-debt-to-EBITDA ratios remain very robust.

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