Following a drop in sales and earnings in the first six months of 2003, both Pearson and McGraw-Hill Education executives said they anticipate a stronger performance in the second half of the year.

At Pearson, a decline in sales at both its education and consumer publishing groups combined to drop total publishing revenue 10.3%, to £1.30 billion ($2.92 billion), for the first six months of 2003. The two units had an operating loss of £5 million compared to operating earnings of £38 million in the first half of 2002. Revenue at Pearson Education fell 11.6%, to £927 million ($1.50 billion), while sales at Penguin Group declined 6.6%, to £368 million ($596 million). The education group had a £26 million operating loss in the period, compared to break-even last year, while Penguin's profit slipped to £21 million from £38 million.

Penguin Group chairman John Makinson said that despite the decline in the first half of the year, he expects Penguin to hit its financial targets for 2003—which include gains in sales and profits. The turnaround will be driven by Penguin USA, which had a 4% decline in sales in the first six months, but which is expecting a strong finish to the year led by major titles in both the fiction and nonfiction categories.

The weak start to 2003 did not come as a surprise to Penguin USA CEO David Shanks, who had warned in March that he expected 2003, and especially the first half of the year, to be "challenging." Penguin USA's first half was hurt by a publication schedule that has most of its major books publishing in the second half of the year and by softer than expected backlist sales, which Shanks attributed in part to the weak economy. Sales were also hurt by the bankruptcy of Sher Distribution, which Shanks estimated cost the company $30 million and dampened mass market paperback sales.

Shanks said that while he is "a little nervous" about so many of Penguin's big books coming out in the second half of the year, results in June and July give him confidence that the company will meet its goal of higher sales and earnings for the full year. Sales in June began to pick up with the selection of East of Eden as the first choice of Oprah Winfrey's revived book club. Penguin has 1.5 million copies of East of Eden's centennial edition in print, and Shanks said the company shipped almost as many copies of Eden in July as it did in June. "It's been spectacular," he said, adding that the new readers "are loving the book." Hepburn bio Kate Remembered has also helped Penguin get off to a good start in the second half of the year, and Penguin expected to have 770,000 copies of the book in print by the end of last week.

Several of Penguin's new imprints began releasing their titles this year, and Portfolio contributed three bestsellers in the first half of the year. Gotham Books is expected to have a strong second half of 2003. Penguin expects its title output in the year to remain about even with 2002.

Commenting on some longer range plans, Shanks said that Penguin will consider getting into the distribution business early next year. He also said that while the publisher hasn't decided if it will exhibit at BEA in 2004, he told PW the mood is "leaning towards going."

Among Penguin's other groups, the U.K. operation posted a 4% sales increase, while Dorling Kindersley had a small loss in the period, but Makinson expects a profitable second six months.

Gains Coming in Education

Similar to the situation at Penguin, sales and earnings are expected to improve in the second half of 2003 at Pearson Education's school and higher education groups. Results in the professional segment are expected to be down significantly.

Sales in the school division fell 6%, to £487 million. Sales have been hurt by state budget problems, although money is flowing in adoption states. Pearsons has had a successful reentry into the social studies market and has also done well with its secondary literature program. Testing sales were up slightly.

Sales in the higher education group were down 12% (up 3% on an underlying basis), and increased investment in new product pushed the loss up to £45 million. In the U.S., higher education sales were up 4%. The increase was helped by sales growth of more than 20% in custom publishing and the extension of Pearson's technology, particularly online course management systems, into new subject areas such as economics, health and physiology.

Continued softness in technology publishing sales plus the absence of a one-time $400 million Transportation and Security Administration contract that Pearson had last year were the main factors in driving down sales in the first half of the year in the professional segment. The same conditions are expected to produce a weak second half.

Commenting on the outlook for the full year, Pearson said it expects its schools division to do better than the low end of the 0% to 3% range it expects the entire industry to grow this year; the college division is projected to top industry growth of 5% to 7%.

MHE Hopeful

At McGraw-Hill Education, revenue fell 2.6% in the second quarter, to $561.7 million, and operating profit declined 15%, to $54.4 million, parent company McGraw-Hill Cos. reported last week. Sales in MHE's school education group fell 3.1%, to $386.2 million, and sales in the higher education, professional and international group declined 1.7%, to $175.5 million.

Company chairman Terry McGraw said the delay by some states in purchasing elementary textbooks dampened sales in the school group, and sales were also hurt by a "lackluster performance" in Texas elementary social studies adoption and lagging sales in the supplementary market. Earlier this year MHE reorganized its supplementary divisions (News, June 30). Bright spots included strong sales in the Texas middle and high school social studies adoption and higher testing sales. McGraw was reluctant to predict how the school group will perform in the third quarter and for the year. He said that while elementary school sales in July had gotten off to a good start, uncertainty on how much money will be available in the open territories "make it too early to tell" how the quarter will turn out. Pressed by analysts, McGraw said the company believes elhi industry growth will be around 2% this year, although he shied away from making a projection on how MHE's school group will perform.

McGraw was confident MHE's higher education division's sales will do better than the 6% to 7% growth rate predicted for the industry, and that the international group will have a solid finish to the year.

The weakest part of the MHE operation in the quarter was once again professional publishing, due to the continuing worldwide slump in computer and technology books plus soft retail sales of professional books.

For the first six months, MHE sales fell 2.3%, to $838.8 million, and the operating loss increased to $18.4 million from $7.8 million.