2012 results presentation Monday 25 February 2013 Financial review - PowerPoint PPT Presentation

2012 results presentation Monday 25 February 2013

Financial review Financial review

Financial highlights Financial highlights Headline CER 2012 2011 £m growth growth Sales 6,112 5,862 4% 5% Operating profit 936 942 (1)% 1% Adjusted EPS 84.2p 86.5p (3)% Operating cash flow 788 983 (20)% Net debt (918) (499) (84)% Dividend 45.0p 42.0p 7% Total business

Sales Sales CER Underlying £m 2012 2011 growth growth North American Education 2,658 2,584 2% (4)% International Education 1,424 13% 7% 1,568 Professional 390 382 2% (9)% Education 4,616 4,390 6% (1)% FT Group 427 4% 4% 443 Penguin 1,053 1,045 1% (2)% Total 5,862 5% (1)% 6,112 Total business

Operating profit Operating profit CER Underlying 2012 2011 £m growth growth North American Education 493 8% 3% 536 International Education 216 196 16% 11% Professional 66 (44)% (54)% 37 Education 789 755 5% 1% FT Group (ex FTSE) 56 (7)% (7)% 49 Penguin 98 111 (11)% (14)% Total (ex FTSE) 936 922 3% (2)% FTSE 20 -- -- -- Total 936 942 1% (2)% Total business

Adjusted EPS Adjusted EPS Headline £m 2012 2011 growth Operating profit 942 (1)% 936 Interest (52) (52) - Taxation (199) (3)% (204) Tax rate 23.1% 22.4% Profit after tax 680 691 (2)% Minorities 1 - (3) Adjusted earnings 677 692 (2)% Shares in issue 800.2 804.3 Adjusted EPS 84.2p 86.5p (3)% Total business

Statutory P&L Statutory P&L Headline £m 2012 2011 growth Operating profit (54)% 515 1,118 Interest (52) (52) - Finance costs – IAS39 / IAS21 (29) (19) (53)% Profit before tax (59)% 434 1,047 Taxation (9)% (148) (162) Profit after tax 286 885 (68)% Discontinued operations 43 71 (39)% Profit for the year (66)% 329 956 Basic EPS (total) (66)% 40.5p 119.6p

Operating cash flow Operating cash flow £m 2012 2011 var Operating profit 936 942 (6) Working capital (100) 39 (139) Net capital expenditure (156) (140) (16) Depreciation 134 118 16 Dividends from associates and JVs 27 30 (3) Exchange (21) 24 (45) Other movements (32) (30) (2) Operating cash flow 788 983 (195) Cash conversion % 84% 104% Total business

Free cash flow Free cash flow £m 2012 2011 var Operating cash flow 788 983 (195) Tax paid (65) (151) 86 Cash tax % 7% 16% Net interest paid (66) (60) (6) Free cash flow 657 772 (115) Free cash flow / share 81.7p 96.5p Total business

Balance sheet Balance sheet £m 2012 2011 var Goodwill / intangible assets 280 6,622 6,342 Tangible fixed assets (16) 367 383 Pre-publication 32 682 650 Deferred revenue (55) (733) (678) Traditional working capital 59 741 682 Other net liabilities (42) (322) (280) Net trading assets 258 7,357 7,099 Shareholders’ funds (257) 5,686 5,943 Deferred tax 20 354 334 Pensions 57 198 141 Other provisions 14 177 163 Minorities 5 24 19 Net debt 419 918 499 Capital employed 258 7,357 7,099 Year end $/£ 1.63 1.55 Total business

Balance sheet strength Balance sheet strength 20 Interest cover 18.0x 18 16 14 12 10 8 6 4 Net debt / EBITDA 0.9x 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Return on invested capital Return on invested capital 10.3% 9.2% 9.1% 9.1% 8.9% 8.9% 2007 2010 2012 2008 2009 2011 Average capital / actual cash tax – total business

Working capital / sales Working capital / sales 20.4% 20.0% 16.2% 14.2% 13.8% 2008 2009 2010 2011 2012 Total business

Deferred revenue Deferred revenue 12.3* ($m) 11.2 10.0 1,192 9.3 % of Sales 1,054 7.4 875 7.1 7.0 752 604 545 470 2006 2007 2008 2009 2010 2011 2012 *14.4% with Penguin classified as associate

Growing dividend Growing dividend Pence per share 45.0 42.0 38.7 35.5 33.8 31.6 29.3 27.0 25.4 24.2 23.4 22.3 21.4 20.1 18.8 17.4 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

2013 outlook 2013 outlook (before restructuring and associated benefits) • Developed world and print publishing generally tough • Developing economies; digital and services generally strong • Modest growth in North America; good growth in International (outside UK) • Good growth in Professional testing; Pearson in Practice closure • FT Group content/ subscription revenues growing; advertising weak • Penguin trading environment similar to 2012 • Penguin Random House merger expected to complete in H2

Restructuring activity Restructuring activity Global education ­ Print publishing infrastructure ­ Lower priority markets Shared services infrastructure - Warehousing - Distribution - Technology Penguin Random House integration ­ Costs incurred in 2014

P&L impa P&L impact of r ct of restructuring pr estructuring programme* ogramme* Restructuring costs Reinvestment in digital, services, emerging markets Cost savings Net P&L impact £135m £50m (£100m) £150m (£150m) Additional cost savings Reinvestment/ Annualised £50m (full-year restructuring cost savings e ff ect) Restructuring Restructuring Cost charge falls charge savings away (gross P&L cost) (part-year) 2013 2014 2015 Net restructuring/ (£100m) + £100m + c. £85m reinvestment impact *Excludes impact of any underlying change in performance

The future The future

Lessons from 2012 Lessons from 2012 Significant share gains, even in tough markets Strong organic growth in key categories, geographies Continuing structural change

Building blocks Building blocks Rising Unique Unique middle market market class position position Disciplined Digital & capital services allocation High growth markets

Shift to digital & services Shift to digital & services Pearson’s digital & services revenues, £m / % of sales 50%* 45% 40% 37% 34% 31% 29% 2008 2006 2007 2009 2010 2011 2012 *56% with Penguin classified as associate

Strength in high-growth markets Strength in high-growth markets Pearson emerging markets revenues, $m Middle East Central / Latin America 1,241 Africa India 1,036 China / Hong Kong 834 648 513 471 348 2006 2007 2008 2009 2010 2011 2012 5% 6% 6% 8% 10% 11% 13%* *15% with Penguin classified as associate

Disciplined capital allocation Disciplined capital allocation Acquisitions & disposals, 2002-2012 £3.4bn £0.7bn Non-education Education disposals disposals Non-education Education acquisitions acquisitions £0.5bn £2.8bn

Unique market position Unique market position 2011 Education revenues, $bn Pearson 7.0 Apollo Group 4.5 Benesse Education 3.7 Laureate 3.2 Kaplan 2.5 McGraw-Hill 2.3 Career Education Corp 1.8 Corinthian Colleges 1.7 Cengage Learning 1.6 HMH 1.2 Santillana 1.0 ETS 0.9 Anhanguera 0.7 New Oriental 0.7 K12 Inc 0.6 Lagardere Education 0.6 Blackboard 0.5 Scholastic 0.5 Kroton Education 0.4 Infinitas Learning 0.4 Holtzbrinch (Macmillan) 0.4 Sanoma Education 0.4 Educomp 0.3

Structural change Structural change Print to digital Rising middle PISA envy class Funding Consumer pressure demand Industry disruption

Print to digital Print to digital Number of US college students taking at least one online course (m)/% of total enrolments 6.7m 6.1m 5.6m 4.6m 3.9m 3.3m 3.2m 2.3m 2.0m 1.6m 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 9.6% 11.7% 13.5% 18.2% 19.6% 21.6% 24.1% 27.3% 29.2% 32.0% Source: Babson annual online learning survey

Print to digit Print t o digital al License to subscription sale 75 75 62.5 50 37.5 25 12.5 12.5 12.5 12.5 12.5 12.5 12.5 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Content license (textbook) Content subscription Content subscription (cumulative) Note: Illustrative example based on Pearson data showing impact of move from one o ff sale every six years to annual subscription

Retail consolidation Retail consolidation US consumer book volumes by channel, % 100% 100% eBooks and internet physical Internet - eBook purchases = 50%+ of market. 90% 90% Internet - Physical 80% 80% Other Mass Market 70% 70% Independents Chain Booksellers 60% 60% 50% 50% 40% 40% 30% 30% Chain booksellers and independents have declined from over 70% to less than 30%. 20% 20% Key channel for consumer book discovery. 10% 10% 0% 0% 2004 2005 2006 2007 2008 2009 2010 2011 2012est Source: Pearson estimates

The rise of the middle class The rise of the middle class Middle East & North Africa Sub-Saharan Africa Asia Pacific Central & South America Europe $35,045bn North America 3.2bn $21,278bn 1.8bn 2009 2020 2009 2020 Numbers of middle class people Middle class consumption (2005$) Source: The Brookings Institution

Consumer demand for education Consumer demand for education % of household income spent on education China 13.1% Turkey 11.4% India 11.1% Brazil 9.8% Indonesia 9.5% Saudi Arabia 8.6% Russia 6.8% South Africa 5.5% US 2.1% UK 1.6% Source: Bureau of Labour Statistics, O ffi ce of National Statistics, Credit Suisse