[Michael:] Good morning, everyone. I think... we have nearly a full house but there may be one or two more people to come. Erm... taking part within the presentation this morning... ah... are Frank who is the fr managing director of Pearsons, and James... er, who's the finance director. Er... we're going to take questions at the end... er... the camera there is for internal use only... and at the end we'll hand out copies of the slides to anyone who wants them. Our profits are disappointingly small in relation to, er... er, the, er... first half of last year... er then, we had buoyant conditions and we made... more money than we ever had before. Recession had already promised a slow start to this year... er, but in January when worry about the Gulf actually gave way to the war itself... erm, the trading climate which was already weak... erm... worsened still further. Er, consumer confidence fell away and U K consumers kept more of their cash in their pockets... er, in fact, erm, they saved over two and a half billion pounds more in the first quarter of ninety one... than they had in the same... er, quarter of last year. One immediate casualty of the change in conditions was advertising. Recruitment adversiding... advertising for example virtually ground to a halt as businesses started to shed... er, people, rather than to look for them. So what happened to our trading profit? In this analysis... er, if you set aside the effect of our sale of Elsivir... er, the variance was forty nine million... seventy percent of which relates to the U K. The drop in profits from our newspapers was the biggest... and probably the... most... widely expected... a substantial proportion of their costs are fixed... and, er, they therefore are particularly sensitive to, er... changes in volume. Fine china and investment banking inevitably... er, er er er er suffered from the economic conditions... so did entertainment... er, which also brought two extra burdens... er, firstly the er marked reduction in tourism... and, er, for the first time, a three and a half million pound... er, bill for Alton Towers' loss-making winter quarter... which I think we, we've flagged... er, quite consistently. After newspapers, books showed... the largest decline... er, and the fifteen million variance is shared roughly one fifth by Addison Wesley... and two fifths apiece by Penguin and Longman. Two of the abiding characteristics of these businesses are first that like newspapers... a high proportion of their costs are fixed... and secondly, unlike newspapers... er, their main selling season is in the second half of the year. Outside AW's erm, specialists books... er, er, markets... er, book sales have been almost universally slow... there were very high returns as book sellers everywhere reacted to reduced... er, demand by replacing or winding down their stock. This particularly affected Penguin... substantially increasing its spec i its expected first half loss. Penguin also incurred losses of two million on Smithmark... its American remainder book businesses... er, before selling it. Longman... the least seasonally biased of the three... struggled to break even in the first half and this removed the normal pattern of Longman's half-year profits helping to offset the first half losses of the other two businesses... but before we get too depressed... er... I... point out that Addison Wesley s sales were up by eleven percent and the size of the first half loss reflects the company's decision to gear up in advance... er, for what we w believe will be a very strong... er, second... er, half performance. Er, overall... I think it's right to say that we're disappointed by these results but we're not downhearted. All of our businesses have maintained or improved their market shares... as managers... we concentrate on the full year rather on either half... and because of our seasonal bias... er, those of you who've been, er, to our interim presentations before... er, will remember that without fail I tell you... our results at the half-way stage are not a clear guide to the outcome of the year as a whole. The major part of our profits are made in the second half... er, and this year... er... will certainly be no exception. To underline the point I thought I'd show you this four year average... one thing that the exercise shows is that between them... our book, entertainment and fine china businesses normally account for about seven percent of Pearson's annual profit in their first half... and for about thirty three percent of our profit in the full year. This year their net first half contribution was negative... which will strongly exaggerate the seasonal bias towards the second half... er, conditions will still be far from ideal... but with the Gulf factor out of the way and some visible improvement in our overseas markets, particularly North America... we think the trading environment will be broadly equivalent to that of the second half of last year. Now, er, before I hand over to Frank... er, a word about the dividend... er, in recent years we've paid an interim dividend which was half the total of the previous year's dividends... and so, er, had a built-in increase. This year we thought it right to reserve our judgment... er, until the end of the year so we matched last year's interim. Frank.
[Frank:] Well... as Michael says, we're not proud of the results... er, and we're not going to try and dress them up, Michael hasn't tried to do that and I certainly don't intend to. But nevertheless I do want to... er, bring home to you the underlying strength of our businesses... there's no question, we're very wel very well faced for, for an upturn. But before doing that... er, you may reasonably ask what action we've taken... er, during this year when it's been such a difficult year. Do you remember... at the announcement of last year's results we erm... we mentioned that we were concentrating on four themes... one's cost reduction... er... driving for cash... erm, improving our market share... and investing for the future. Starting with cost reduction... any cost reduction programme always involves a lot of redundancy... and, and... this is no exception... and from the slide you'll see that we've er... we've had a staff reduction... er, from the... the plan for this year... of one thousand and thirty three... er... and that's the, that will save us in a full year something like fifteen point nine, sixteen million pounds. This year... er, there's been a negative benefit in the first half of two million... and there'll be a positive benefit... in the second half... of two million. Incidentally, it doesn't include the disposal... of Smithmark We've also... er... we've also gone in for other cost reduction... exercises, for instance at er Dalton... with a review of warehousing and distribution... er, we should save about a million pounds in a full year... and we've been ramming home to our chief executives... the need for annual payroll reviews... to be geared... to the profitability of the company... rather than t rather than to the rate of inflation... er, or even, er... in, even the market place. [cough] Driving for cash... er... well an indication of how strongly we, we've been driving for cash is that er... the reduction i in er operating cash flow... is less than the reduction in profit. We've been telling our chief executives that even though you can't get the sales then at least try to work on your working capital, try and get your working capital... er, ratio down. And there's been quite a bit of success in... in that area... both of the newspaper companies... er, are doing better than last year... and er... Longmans for instance expect er... expect their operating cash flow... erm... their working capital rather to be lower this year than last year by... by year end. Erm... improving market share, well all of our businesses have improved their market share during this recession... and I'll, I'll mention them as I go through the individual companies. Investing for the future... although, although we've been keen to drive for cash... er, we really wanted to, to use the benefit of having a strong balance sheet... and so where investment has seemed sensible and sound, we've made those investments, of course we've put er, cash in the B Sky B... er... and we've also invested further in the er... Spanish group, the Recollectors Group... taking our stake in expansion, adding some cash and getting a stake in the bigger... bigger grouping. If we look at the individual businesses... there we er see the individual profits. If we start with the Financial Times... well by their standards it's not a good result... er, but again... let's get it in context, the newspaper's trading margin is just, just under ten percent, it's er it's about nine point six percent... er, and on the circulation front... they've done well in market share terms... where we've marginally improved our... our market share in the quality market. Er... in Europe we've gone up six percent in circulation... and in Japan we're on target there... and under budget. In advertisement, er... in the advertisement volume area, again we've increased our market share... amongst the qu er, quality dailies... a marginal increase... er... but... it's nationally we've done very well... and for instance in Europe... we're sixteen percent head, ahead of last year in volume and revenue terms. On the cost side, apart from the redundancies I mentioned, well including the redundancies I mentioned... er, the non volume related costs are only three percent ahead of the previous year. East India Dock is now... er, virtually fully utilized... printing the Basildon papers in the daytime and the Financial Times at night and the Observer on Saturday night... and we've got high hopes of getting the contract to print... the Japanese er, European edition of the Japanese daily... and that, that will fill the morning slot so that really will be... er, great utilization of, of that er installation. has been affected on the revenue front... mainly in the medical publishing but to some extent... in the erm... in the financial sector... although we're still absolutely market dominant in that sector... but we've increased the circulation there by ten percent. The F T magazines have all increased their market share... and Profile, our electronic, er... erm, information business has grown in revenue terms by twelve percent. Turning to Westminster Press... the cost Westminster Press in a full year... er, will amount to three point eight million pounds... and er.... all of our paid fors have... er, done very well... this year in circulation terms... all but two of them have increased their circulation in the first half, despite quite high price rises, for instance the York county newspaper, the weekly there, we have a daily but the weekly there went up by five P... and the weekly in Bath where again we have a daily... that went up by six P. And every single Westminster Press centre has increased its market share. Turning to er books... and starting with Longman. Well there... as I mentioned a staff reduction of a hundred and ninety two... and significant er staff reduct er cost reduction in other, other areas... we, we analyze every single er publishing unit and where the erm... where they were marginally profitable or less than marginally profitable... er... we've taken appropriate action. And as I mentioned earlier... Longman expect the cash flow this year to be better than last year despite the... the reduction in profits. Last year I told you Alhambra... er, was receiving the treatment. This year it's on profit, on budget at the half-way stage... and I expect it to be on budget by the end of the year. We mentioned a small acquisition in Japan last year,medi on the medical side of Longman, P P S K K... it cost us about four million pounds and we were reckoning on a profit of about half a million a year... pleased to say that its er, its profit looks like getting to a million pounds by the year end. And English Language Teaching at Longman which is of course the biggest er... biggest profit contributor... erm... their blueprint sale is expected to exceed nine hundred thousand this year. Addison Wesley our American college publisher... as Michael mentioned th at the half-way stage their sales were eleven percent ahead of er, last year, and you may remember last year they had record sales and record profits... and er... they're forecasting... er something like fourteen percent a head by the year end in sales terms... and they are expecting to maintain their... their margins... and last year was a very good margin indeed. Once again there's been great emphasis on... cash maintenance. Penguin... the staff reduction there doesn't look particularly er high but then we were reducing staff there last year... and we've er, we've disposed of Smithmark and the travel guides... er, the warehouse and distribution system is working very well and we've been adding distribu distribution clients there... er... the autumn list looks very strong indeed particularly in the U S especially... and er, we've shipped... er, over two million of Stephen King's latest book... and there's another one due in the autumn and we're expecting to ship about two and a half million of er... of, of that one. Er... in the U K we've held our market position and it's been a... a pretty desperate market... we were one of the... few if not the only book seller who refused to er... to yield better discount terms... er, on the threat of er... every, every book seller was every er publisher was threatened with erm not being stocked unless we gave bigger discounts. We held our position against that and I'm pleased to say... er, we will continue, we will continue to be stocked. Er... our distribution system has got great press recently and it's regarded as one of the three best distribution systems in the U K. One of the things we're trying to do is to pay less for our books, it's very easy to pay very very fancy prices for, for... er... mid-range authors and for them not to earn out, so we're looking for much cheaper books. A good example is Dances With Wolves which cost us four thousand... as a and has already sold over a hundred and twenty thousand copies. Penguin continues to try and develop its merchandising... and is quite successful and the latest success is to get the Flower Fairies adopted by Marks and Spencers for their... sleepwear range which will also be marketed in the U S A as well. Federal and Capital is a small... er... but high quality er... new er newsletter business in the States and er... it's done very well indeed to improve its profits. On the entertainments side... er, last year of course we had that one-off benefit with not having to absorb the first quarter's loss... and this year the er... first quarter... was pretty disastrous because we had an er er an er amalgamation of, of A the Gulf War... B the recession... and in London I R A bombing... and that really stopped tourists coming to London... from overseas and from the rest of the U K. But I'm pleased to say that er... we, we're coming back very strongly... and for instance in July... at virtually all of our centres attendances were either up to last year... very nearl very nearly up to last year... or ahead of last year... and er... at Chessington our revenue was thirteen and a half percent up on last year... which I think justifies our investment there. Some of our competitors in the north have been er... really struggling and erm... offering four pounds off on a seven pound fifty entrance fee... so... bearing that in mind we're v v very confident that we've im improved our market share... in that area too. We opened our Amsterdam, our new exhibition in Amsterdam in June... and er, up to now audiences have flocked there... many weeks they've been thirty percent ahead of er... ahead of budget. Moving on to B Sky B... well it's making excellent progress... by the end of July we had over two point three million homes connected... and over half of those are subscribing to one or two movie channels. Costs are well down and will continue to fall... and I'm more confident than ever that we're on to a winner. If we move to oil... well our oil business obviously operates in a cycle different to our publishing businesses... and er, at the end of the first half it had record sales and profits... fifteen percent ahead in dollar terms... ten percent ahead in, in sterling terms which may surprise you slightly, but I think James probably will talk about that later. This is a particularly good performance, specially in the U S A where there's been a very serious downturn in natural gas. We've increased our market shares virtually everywhere... er... two very strong... er... improvements... Venezuela and Nigeria... and the... the initiative we've taken with the Soviets to rework their wells... er... should be onstream by the end of the year... and we're hoping that may lead to other... opportunities... er, both in Russia and er... and there's the possibility from that of some business in Eastern Europe as well. Investment banking... although this year it's a very different difficult environment for investment banking particularly a house that concentrates on, on corporate finance... er... there hasn't been a great deal of M and A activity and if, if there has it hasn't been a very high erm very high ticket. Er but there have been a lot of issues and we've done well in that field but of course it doesn't produce the same kind of... fee income as the M and A activity. Lazzards New York managed to maintain their figures of last year in dollar terms... and if we take the Lazzard houses as a whole... we're second only to Goldman Sachs now in the erm... in the M and A table internationally... and that's on the value of bids on which we've advised. Fine China... we had a very poor first four months... but then in May world sales were nine point nine percent ahead of last year... and in the U S A over the last ten weeks we've actually been ahead of nineteen ninety. One factor in this is our exporting the very successful Bridal Collection that we developed in the U K, we've exported that to Canada and the U S and that's gone down very well indeed. We've also had significant growth in our chain store business... in this country... we've signed a new two-year contract with Air Canada... and we're much more optimistic about the rest of the year... we've got orders, production and sales all nicely in equilibrium... ready for the second half. Now I'll pass you to er... James.
[James:] I'd just like to make... two or three points... first of all the exchange factor which Frank touched upon when, when talking about profits... you probably all totally familiar but I have forgotten quite how much the dollar has strengthened recently... beginning of the year it was nearly two dollars... and the result of that is that for the erm first half as a whole... the impact of er exchange translation was adverse for our profits compared with last year to the tune of about one and a half million pounds. It's not enormous but it's perhaps... er not the way people er were thinking. Now the consequence of the fact that the dollar end of June... er relatively strong at around one sixty of course did impinge on er our... er borrowings since we do have a considerable percentage of our gross in dollar terms... and if we turn to the next slide... er we can see... er the summary of the balance sheet at thirtieth of June. Now... you'll be familiar with the fact since we went through it in April... that there has been a sharp jump in our known assets... brought about by the sale of Elsivir and the fact that it had a very substantially written down value in our books, seventy five million pounds. So you've had a sharp increase in our shareholders' funds during the six months... and a reduction in our net debt which may not be quite as er... substantial as you expected but it is the combination of on the one hand the proceeds of Elsivir less some reinvestment which Frank mentioned, we put a little more money in B S B and the minority interests and... we do have traditionally in the first half an adverse net movement of funds from operation... about ninety five million... and then we had thirty two million odd... er of simply revaluation as a result of translating our dollar debt... at er... the one sixty as opposed to the... year ending rate. So... net debt is two sixty four million... er and therefore the pro forma debt equity ratio's halved from fifty seven percent to twenty eight percent... we do of course expect it to be somewhat lower by the year end as our working capital... which is coming to its peak season, unwinds. I'd like to go into a little more... the composition of the net debt which again is something that er interests some of you... we have er a reduction both on gross debt and equally an increase in cash as you would expect as a result of the Elsivir sale... the increases are not fixed... debt... fixed term fixed rate debt is a function again of the exchange rate we haven't in issued any more... the whole of the reduction of debt therefore is confined to our floating rate or variable debt and that amount's ready to the repayment of the gilder drawings we had under our to hedge... or partially to hedge our holding in Elsivir We have increased our cash holdings and they remain concentrated in sterling as part of our sterling er asset er portfolio which is managed from Millbank and which we regard as our investable funds as and when needed.