29 October 2012 | Education | Pearson plc

Pearson Sales Up 5% but Profits Down at Q3

Pearson reiterates its full year outlook of growth in sales and operating profits with margins reflecting acquisition integration costs and the FTSE sale.

Pearson increased sales by 5% in the first nine months of 2012, with good growth at International Education and the FT Group and a resilient performance in North American Education. Operating profit was 5% lower, reflecting the sale of FTSE in 2011, acquisition integration costs and continued weakness in UK professional training.

Pearson believe it can sustain its solid Q3 trading performance in the Q4, the key selling season in education and consumer publishing. It expects markets conditions to remain tough but it believes it can sustain its solid Q3 trading momentum. The Company reiterated its previous full-year outlook of growth in sales and profits at constant exchange rates, with margins reflecting acquisition integration costs, weakness in Pearson in Practice and the sale of FTSE. It expects to report adjusted earnings per share broadly in line with the consensus of current market expectations of 84.9p, according to Bloomberg and Reuters. This guidance remains struck at GBP1:$1.59 average exchange rate for the year.

Pearson's chief executive Marjorie Scardino said: "We have confidently reiterated our guidance because many of our businesses are going strong in this complicated trading environment. But the dynamics of the markets we're in could make that achievement more about resilience than flamboyance. As always, all the people in Pearson have their shoulders to the wheels that turn in our important fourth quarter."

Highlights for the first nine months of 2012

In education, Pearson's long-term investment in technology and services is enabling it to achieve sustained growth, even in difficult markets for education materials. For its education company as a whole, sales are up 7% in the first nine months of the year.

In North America, textbook publishing markets have been weak in 2012, affected by slower college enrolments, state budget pressures, the transition to Common Core standards and a smaller new adoption opportunity. For the first nine months of the year, total sales for the US School and College textbook publishing industries declined by 17.9% and 4.5% respectively, with the total market down 10.7%, according to preliminary estimates from the Association of American Publishers.

Even so, Pearson's sales in North American Education were up 4% as its leadership in digital learning continued to produce significant market share gains in both School and Higher Education. Its Higher Education business continues to achieve good growth in online learning platforms, digital homework and assessment programmes (with MyLab registrations up 12% to more than nine million), and custom publishing. In October, it announced the acquisition of EmbanetCompass (subject to a Hart-Scott-Rodino review), which partners with leading non-profit colleges and universities in North America to provide fully online courses and learning tools for more than 100 university programmes.

Its Assessment and Information business remained resilient with good growth in State testing, boosted by market share gains, outweighing weaker clinical and diagnostic assessment revenues. Its School Curriculum business continued to face state budget pressures, a smaller new adoption opportunity (of approximately $400m) and uncertainty caused by the pending transition to Common Core standards. But it still took market share with a good performance in new adoptions and made more strides in online learning, particularly at Connections Education.

Sales in International Education were up 13% after nine months. Its digital and services businesses continue to grow, with sustained momentum in English language schools in China, school services in India, higher education in South Africa and school learning systems in Brazil. Textbook publishing has remained generally weak, particularly in markets where purchases are publicly-funded.

In Professional Education, sales were level. The Company continues to grow in Professional Testing, which administered seven million tests in the first nine months of the year, benefiting from sales of additional services to existing customers, its partnership with American Council on Education for General Educational Development (GED) tests and the acquisition of Certiport.

As previously stated, the Company reshaped Pearson in Practice in the first half of 2012 in response to changing government funding criteria for apprenticeships. Market conditions remained challenging in the third quarter and take-up of new training programmes has been slower than expected. As a result it continues to expect full-year profits in Professional Education to be significantly lower than in 2011, and it has initiated a comprehensive review of this business given the radically different external environment.

Sales were up 7% at the FT Group. Across print and online, the FT reached an average daily audience of nearly 2.1 million, with a combined circulation of over 600,000 and digital subscriptions growing strongly, up 17% to 313,000 for the nine months. Advertising remains weak and short-term, but it continues to take market share. Mergermarket continued to grow despite volatile markets, with strong performances from Debtwire and mergermarket, which launched several new products in growth markets such as China and the Middle East.

At Penguin, sales were down 1% compared to 2011 with the third quarter benefiting from ebooks revenue up 35% on 2011, and, as expected, a stronger publishing schedule.

At the start of 2012, Pearson had net debt of £499m. Its 2011 net debt/EBITDA ratio was 0.5x and interest cover was 18.1x. Peason's 2012 net debt peaked in July at £1.3bn, following the normal seasonal build-up of working capital in the first half of the year. Cash generation in the first nine months was partially offset by acquisitions (totalling approximately £0.3bn, including the acquisitions of Certiport, GlobalEnglish and ASI) which resulted in net debt at the end of September 2012 of £1.1bn (September 2011: £1.1bn).

In 2012, its net interest charge will be broadly level with 2011, reflecting the impact of a $500m, 10-year bond issued in May 2012 with a coupon of 3.75%, which further extends its debt maturity profile. It anticipates its P&L tax charge against adjusted earnings to be in the 24-26% range with a modestly lower cash tax rate.

Exchange rates. 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 2011 was £1:$1.60) has an impact of approximately 1.3p on adjusted earnings per share. The average rate during the first nine months of 2012 was £1:$1.58 (compared to £1:$1.61 in the first nine months of 2011), and the closing rate at the end of September was £1:$1.62).

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