Pearson, Plc (PSO)

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Pearson PLC (ADR) (PSO)

Q2 2013 Earnings Conference Call

July 26, 2013 4:00 am ET


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

Robin Freestone - Chief Financial Officer and Executive Director

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


Sami Kassab - Exane BNP Paribas, Research Division

Nick Michael Edward Dempsey - Barclays Capital, Research Division

Mark Braley - Deutsche Bank AG, Research Division

Ian Whittaker - Liberum Capital Limited, Research Division

Claudio Aspesi - Sanford C. Bernstein & Co., LLC., Research Division

Ruchi Malaiya - Citigroup Inc, Research Division

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

Rakesh Patel - Goldman Sachs Group Inc., Research Division


John Fallon

Well, hi, everybody, and thanks for joining us. I know what a busy week this is for all of you. And I know also what a tough job it can actually be to interpret what's really going on at Pearson from a first half that usually consists of somewhere around 40% of our sales but only around 20% of our profits. So what Robin and I are going to try and do this morning is talk you through what we've seen so far this year, give you our best take on what that tells us about our prospects for 2013 overall and also take a little bit of time to set out the progress we're making on the strategy, the restructuring and the organizational changes that we outlined to you back in February.

Before Robin talks you through the details of the numbers, I really want to make 3 points about our performance in the first half. They are entirely consistent with what we saw last year, and in fact, they continue some trends that we've been seeing for some years now.

First, we are continuing to win a lot of market share. However, we still face challenges in some markets. For example, in North America, as you all know, college enrollments are down again this year. And the result of that is that we can no longer rely on the old model in which we outperformed our traditional competitors and if we do so, we automatically deliver growth.

Second, we are still growing quite rapidly in some key categories and geographies. The categories are digital products and services, the learning systems, the direct delivery of education and the geographies, including Brazil, China, India, South Africa.

And third, we do face still significant structural change in what are our biggest geographic markets and product categories. We talked about those structural changes in February. As we said then, they bring great opportunities for us, as well as some challenges.

In answer to a question back in February, I think I said something to the effect of that you really didn't need to be a rocket scientist to look at these trends and figure out what we need to do at Pearson. We must accelerate our digital transformation, we must accelerate our move into services, and we must accelerate the building of our presence in emerging markets. And we can only do that if we change the way that we operate as a company, if we shift some resources more quickly from our textbook publishing businesses to fund the fastest-growing opportunities that we see. And I also said back in February that though the Pearson strategy is settled and sound, we really do need to implement -- to accelerate its implementation significantly and urgently. And 5 months on, I think we can report some pretty good progress.

First, we continue to drive good underlying sales growth in digital and services in emerging markets, as you'll see and as you'll hear more from Robin. Two, we have now completed the Penguin Random House merger, which both secures Penguin's commercial and creative future and provides some significant opportunities for economies of scale. Third, the restructuring program is now well underway, and it is enabling us to shift resources to fund those faster-growing opportunities. Four, we have begun to reshape Pearson as a single globally-connected learning services company. Fifth, we have now appointed a new senior team of around 100 people, who will lead and deliver on that agenda. And sixth, and significantly, I think, in spite of all that changed, we have delivered a first half trading performance that both enables us to reiterate our full year guidance for 2013 and to raise our interim dividend a further 7%.

So I think what we'll do now is have Robin talk you through the first half results and the outlook for the rest of the year, and then I'll come back to talk a bit more about the strategy and the organizational changes that we're working on. So Robin?

Robin Freestone

Thank you, John. Good morning, all. So as John says, given the first half represents just a small proportion of our full year, I'm going to start with our guidance this morning, which some would say is the only thing that really matters at Pearson at this time of year. We've tweaked it only to reflect the impact on disclosure of treating Penguin as an associate from July 1, but otherwise, it remains unchanged.

Before net restructuring costs of around GBP 100 million, or about 7p, we continue to expect adjusted EPS to be broadly level for 2012 on a like-for-like basis under revised IAS 19. Overall market conditions remain tough in the developed world and in publishing, but are much better in our digital, our services and our emerging market businesses.

In North America, an improving economy is likely to mean countercyclical enrollment decline in higher education this year again. Common Core uncertainty means that the K-12 market is likely to remain subdued this year too. However, we expect continued good growth from our digital products and services, such as the MyLabs and Connections Education, and good initial contribution from EmbanetCompass to generate modest U.S. growth this year.

International, we expect continued strong growth in emerging markets to drive growth overall despite ongoing austerity measures and a changing qualification environment in the U.K. and tough rest of world markets.

Professional will benefit from continued growth in testing and, of course, the absence of Pearson in Practice.

And overall, we expect education margins as a whole to be level with 2012.

We expect advertising to remain subdued at the FT but continued growth from subscriptions. And Penguin will be deconsolidated from July 1, and we'll consolidate our share of Penguin Random House after-tax profit in the second half. Penguin will, therefore, be excluded from the 9-month and full year revenue commentary.

So looking at the first half and starting with the Pearson-wide numbers, sales were up 5% at CER, helped by acquisitions over the past 12 months, mainly EmbanetCompass, Author Solutions, GlobalEnglish and Certiport, which together contributed GBP 86 million of sales in the first half. FX was positive due to the stronger first half dollar, which averaged $1.53 to the pound compared to $1.58 to the pound in the first half last year. Our underlying sales are up GBP 39 million or 2%, helped by good growth in digital services and emerging markets.

Our deferred revenue was also well up again, mainly as a result of growth in digital and service-based sales, which were invoiced during the period but which will be recognized in future accounting periods.

Now our first half profits are always susceptible to some variation due to investment phasing through the P&L account. And year-to-date, they're down GBP 49 million or 27% to GBP 137 million. Of this, GBP 29 million relates to the net restructuring charges we took in the first half. Acquisitions and the absence of Pearson in Practice added GBP 25 million, and the balance comprised the timing of launch costs ahead of future market opportunity, higher expected incentive compensation accruals for the sales force after a poor year last year, and higher levels of expense investment in testing and in software to drive future growth. FX was broadly neutral. The profit level was small, dollar-related gains offset by losses in other currencies. And within these profit numbers, there are some reasonably large movements in both directions.

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