PearsonPearson Merrill Lynch TMT ConferenceMerrill Lynch TMT Conference

Rona FairheadRona Fairhead3 June 20033 June 2003

School 27%

Higher Education 18%

Professional 19%FT Group 17%

Penguin 19%

Financial priorities Financial priorities

Deliver steady earnings growthDeliver steady earnings growth

Improve cash generationImprove cash generation

Improve return on invested capitalImprove return on invested capital

Working Capital£0.8bn

Working Capital£0.8bn

Net Fixed Assets£0.5bn

Net Fixed Assets£0.5bn

divided by

Operating Margin

11%

Operating Margin

11%

Net Sales£4.3bn

Net Sales£4.3bn

Cash Tax Effect£0.1bn

15%

Cash Tax Effect£0.1bn

15%

less

Goodwill£5.7bn

Goodwill£5.7bn

Return on invested capitalReturn on invested capital

plus

Returns(NOPLAT)

£0.4bn

Returns(NOPLAT)

£0.4bn

ROIC6.0%ROIC6.0%

Invested Capital

£7bn

Invested Capital

£7bn

Operating Assets£1.3bn

Operating Assets£1.3bn

Operating Profit

£0.5bn

Operating Profit

£0.5bn

Working Capital£0.8bn

Working Capital£0.8bn

Net Fixed Assets£0.5bn

Net Fixed Assets£0.5bn

divided by

Operating Margin

11%

Operating Margin

11%

Net Sales£4.3bn

Net Sales£4.3bn

Cash Tax Effect£0.1bn

15%

Cash Tax Effect£0.1bn

15%

less

plus

Goodwill£5.7bn

Goodwill£5.7bn

Return on invested capitalReturn on invested capital

Returns(NOPLAT)

£0.4bn

Returns(NOPLAT)

£0.4bn

ROIC6.0%ROIC6.0%

Invested Capital

£7bn

Invested Capital

£7bn

Operating Assets£1.3bn£1.3bn

Operating Assets£1.3bn£1.3bn

Operating Profit

£0.5bn£0.5bn

Operating Profit

£0.5bn£0.5bn

Average working capitalAverage working capital20022002

av w/cav w/c20012001

av w/cav w/c20022002

2002 at2002 atconstant constant

salessales

improvementimprovement

£m£m££mm %%

penguin / pearson penguin / pearson eded

% sales% sales

1,0921,092

31.9%31.9%

1,0901,090

30.3%30.3%

1,0391,039 5353 5%5%

ft groupft group

% sales% sales

(35)(35)

(4.4)%(4.4)%

(38)(38)

(5.2)%(5.2)%

(41)(41) 66 17%17%

groupgroup

% sales% sales

1,0571,057

25.0%25.0%

1,0521,052

24.4%24.4%

1,0291,029 2828 3%3%

Return on invested capitalReturn on invested capital

Working Capital£0.8bn

Working Capital£0.8bn

Net Fixed Assets£0.5bn

Net Fixed Assets£0.5bn

divided by

Operating Margin

11%

Operating Margin

11%

Net Sales£4.3bn

Net Sales£4.3bn

Cash Tax Effect£0.1bn

15%

Cash Tax Effect£0.1bn

15%

less

plus

Goodwill£5.7bn

Goodwill£5.7bn

Operating Assets£1.3bn

Operating Assets£1.3bn

Returns(NOPLAT)

£0.4bn

Returns(NOPLAT)

£0.4bn

ROIC6.0%ROIC6.0%

Invested Capital

£7bn

Invested Capital

£7bn

Operating Profit

£0.5bn£0.5bn

Operating Profit

£0.5bn£0.5bn

Cash flow through transformationCash flow through transformation

£m£m 20022002 20012001 20002000 19991999 19981998 19971997

operating free cash operating free cash flowflow 305305 236236 159159 298298 266266 4343

non-operatingnon-operating (46)(46) (27)(27) (79)(79) (93)(93) (11)(11) (21)(21)

acquisitions & acquisitions & disposalsdisposals 806806 (23)(23) (2,017(2,017

))361361 (2,020(2,020

))(182)(182)

IntegrationIntegration (44)(44) (69)(69) (61)(61) (110)(110) (23)(23) ——

dividendsdividends** (182)(182) (183)(183) (144)(144) (133)(133) (119)(119) (116)(116)

equityequity 66 2020 1,9591,959 1818 347347 2727otherother (5)(5) (7)(7) (6)(6) (8)(8) (6)(6) (6)(6)

net movement of fundsnet movement of funds 840840 (53)(53) (189)(189) 333333 (1,566(1,566))

(255)(255)

*includes dividends to minorities*includes dividends to minorities

Our position Our position

The world’s most The world’s most international business international business newspaper and websitenewspaper and website

Leading national business Leading national business newspapers in France, newspapers in France, Germany, Spain, South Germany, Spain, South AfricaAfrica

50% stake in The Economist50% stake in The Economist

Leading provider of Leading provider of financial datafinancial data

FT and FT.com

31%

Otherpublishing

14%

IDC34%

Recoletos20%

2002 revenues : 2002 revenues : £726m£726m

Industry drivers Industry drivers

Short-term:Short-term:– corporate confidence & earnings corporate confidence & earnings – job losses in financial communityjob losses in financial community

Long-term:Long-term:– appetite for high quality, international business appetite for high quality, international business

informationinformation– connections between political, economic & business connections between political, economic & business

newsnews– value in niche audience of leaders in business, value in niche audience of leaders in business,

finance, politicsfinance, politics

AgendaAgenda

Modest investment in UK, US, AsiaModest investment in UK, US, Asia

Tight cost controls, lower internet lossesTight cost controls, lower internet losses

Further progress at IDC and RecoletosFurther progress at IDC and Recoletos

AgendaAgenda

Modest investment in UK, US, AsiaModest investment in UK, US, Asia

Tight cost controls, lower internet lossesTight cost controls, lower internet losses

Further progress at IDC and RecoletosFurther progress at IDC and Recoletos

Our position Our position

The world’s pre-eminent The world’s pre-eminent English language publisherEnglish language publisher

##11 or # or #22 in the US, UK, in the US, UK, Australia, NZ, India Australia, NZ, India and Canadaand Canada

The leading illustrated The leading illustrated reference publisherreference publisher

With Pearson Education, With Pearson Education, the world’s largest book the world’s largest book publisherpublisher

Penguin US57%

Penguin UK& ROW

24%

Dorling Kindersley

19%

2002 revenues : 2002 revenues : £838m£838m

Industry drivers Industry drivers

Steady growthSteady growth

Bestseller performanceBestseller performance

Faster-growing categoriesFaster-growing categories

Benefits of scale Benefits of scale

The world’s largest book companyThe world’s largest book company

SOURCE: ANNUAL REPORTS, ANALYST REPORTSSOURCE: ANNUAL REPORTS, ANALYST REPORTSNOTE: 2001 MEDIAN GBP / USD EXCHANGE RATE = 1.45NOTE: 2001 MEDIAN GBP / USD EXCHANGE RATE = 1.45

Estimated 2001 book revenues ($m)Estimated 2001 book revenues ($m)

869

959

988

1,000

1,828

1,858

2,322

4,188

Harcourt / Reed

New Corp(HarperCollins)

Holtzbrinck

Scholastic

Bertelsmann

McGraw Hill

Pearson

Houghton Mifflin

AgendaAgenda

Sales growth ahead of the marketSales growth ahead of the market

Margin improvement as DK’s progress continuesMargin improvement as DK’s progress continues

Further scale opportunities with Pearson Further scale opportunities with Pearson EducationEducation

Our position Our position

The world’s leading The world’s leading education companyeducation company

##11 in US School, in US School, US Higher US Higher Education and Education and outside the USoutside the US

Leading in Leading in publishing, testing publishing, testing and technology and technology

School 42%

Professional*

30%

Higher Education 28%

2002 revenues : 2002 revenues : £2,756m£2,756m

* FTK revenues included in Professional* FTK revenues included in Professional

School: industry drivers School: industry drivers

Short-term:Short-term:– the adoption cyclethe adoption cycle– state budgetsstate budgets

Long-term:Long-term:– standards movement drives spending on:standards movement drives spending on:

• textbookstextbooks• testingtesting• student informationstudent information

Source: National Conference of State Legislatures

Estimates* of FY 2004** budget shortfalls, $m

0-400401-800

801-1,5001,501-3,000

3,000-10,00010,001-20,000

*As of April 2003 **Most state fiscal years end June 30th

School: industry drivers School: industry drivers

Short-term:Short-term:– the adoption cyclethe adoption cycle– state budgetsstate budgets

Long-term:Long-term:– The knowledge economyThe knowledge economy– standards movement drives spending on:standards movement drives spending on:

• curriculumcurriculum• testingtesting• student informationstudent information

100

200

300

400

500

81 83 85 87 89 91 93 95 97 99 01

100

200

300

400

500

81 83 85 87 89 91 93 95 97 99 01

ELHI spendingELHI spending1981 = 1001981 = 100

InstructionalInstructionalmaterialmaterial

GDPGDP

EnrolmentEnrolment

School: our position School: our position

US Publishing 50%

US Testing and Software27%

International

and ELT 23%

2002 revenues : 2002 revenues : £1,151m£1,151m ##11 US school US school

publisherpublisher

The integrated The integrated school company: school company: ##11 in publishing, in publishing, testing and testing and technologytechnology

World’s #World’s #11 publisher in English publisher in English Language Teaching Language Teaching

2002 revenues : 2002 revenues : £1,151m£1,151m

Adoption States

Open Territories

Residual Sales

Residual Sales

New Adoptions

New Adoptions

School: agenda School: agenda

Grow ahead of the market in ’03; Grow ahead of the market in ’03; protect margins in ’04protect margins in ’04

Prepare for rebound in adoption cycle in Prepare for rebound in adoption cycle in ’05/ ’06’05/ ’06

Use testing and software to help states Use testing and software to help states meet NCLB requirementsmeet NCLB requirements

Higher Education: our position Higher Education: our position

34% US market share34% US market share

20%+ US margins20%+ US margins

US Higher Education

80%

International Higher Education 20%

2002 revenues : 2002 revenues : £775m£775m

Higher education: Higher education: industry drivers industry drivers

Short-term:Short-term:– authorsauthors– publication cyclepublication cycle

Long-term:Long-term:– the value of a college educationthe value of a college education– demographicsdemographics– integration of technologyintegration of technology– customisationcustomisation– benefits of scalebenefits of scale

Higher Education: agenda Higher Education: agenda

Further share gainsFurther share gains

Build on lead in technologyBuild on lead in technology

Increase lead in custom publishingIncrease lead in custom publishing

Professional: our position Professional: our position

Technology Publishing 20%

2002 revenues : 2002 revenues : £784m£784m

Government

Solutions44%

Other 22%

ProfessionalAssessment

14%

##11 technology technology publisher worldwidepublisher worldwide

Leading provider of Leading provider of testing and HR testing and HR services to US federal services to US federal governmentgovernment

Developing business Developing business in professional testing in professional testing and certificationand certification

Professional: industry drivers Professional: industry drivers

Short-term:Short-term:– technology downturntechnology downturn– government contracts can be ‘spiky’ (e.g. TSA contract government contracts can be ‘spiky’ (e.g. TSA contract

in ’02)in ’02)– start-up costs in professional testing businessstart-up costs in professional testing business

Long-term:Long-term:– licensing/ accreditation of professionalslicensing/ accreditation of professionals– US federal government outsourcingUS federal government outsourcing– technology recoverytechnology recovery

Professional: agenda Professional: agenda

Develop pipeline of government contractsDevelop pipeline of government contracts

Maintain margins in technology publishingMaintain margins in technology publishing

Build professional testing businessBuild professional testing business

The fundamentalsThe fundamentals

Attractive marketsAttractive markets

Leading positionsLeading positions

Valuable brandsValuable brands

Benefits of scaleBenefits of scale

. . . annual progress in earnings, cash and . . . annual progress in earnings, cash and returnsreturns