PSON Pearson Plc

Pearson Interim Results for the six months to 30^th June 2024 (Unaudited)

Financial Highlights

Highlights

Omar Abbosh, Pearson's Chief Executive, said:

"Since joining Pearson at the start of the year, I have led a comprehensive review of our business and the markets in which we operate. This process has only reinforced my conviction in the potential of Pearson and the vital role we play in helping people realise the life they imagine through learning. Significant demographic shifts and rapid advances in AI will be important drivers of growth in education and work over the coming years, and this plays to Pearson's strengths as a trusted provider of learning and assessment services.

We are implementing plans across all of our businesses that will see us deliver better products & services with greater efficiency. We're also focusing on opportunities to progressively build our presence in materially larger and higher growth markets in which we are well positioned to succeed, with a particular focus on early careers and enterprise skilling.

"Our good strategic and financial performance in the first half of the year sets us up to achieve our guidance for the current year and for 2025, and we expect thereafter to continue to deliver attractive growth with progressive improvements in our margins alongside consistently strong cash generation."

Underlying sales growth¹ of 2%, excluding OPM² and Strategic Review³ businesses; 1% in aggregate

Adjusted operating profit¹ up 4% on an underlying basis to £250m

Strong free cash flow with robust balance sheet enabling continued investment and driving increased shareholder returns

Continued operational progress

Operational progress continued across each of our businesses

Positioning Pearson for sustained growth with continued higher margins

Through an extensive examination of the business and the markets in which we operate, we have identified a targeted market expansion opportunity for Pearson and have updated our strategy to drive higher performance in the core business and unlock new synergies

Outlook

2024 Outlook reaffirmed⁴

Group underlying sales growth, adjusted operating profit and tax outlook for 2024 remain in line with market expectations. As guided, interest will be c.£45m and free cash flow conversion 95-100%.

In terms of divisional guidance and phasing:

2025 Outlook

We continue to expect the Group to achieve mid-single digit underlying sales 3-year CAGR from 2022 to 2025, excluding OPM and Strategic Review businesses, and remain on track to achieve our 16-17% adjusted operating profit margin guidance.

Medium Term Outlook

Our future growth and investment focus will lead to mid-single digit underlying sales CAGR. Through continued operational improvements, we also expect to deliver sustained margin improvement that will equate to an average increase of 40 basis points per annum beyond 2025. We will maintain free cash flow conversion in the region of 90-100% on average across the period.

Contacts

Notes

Forward looking statements: Except for the historical information contained herein, the matters discussed in this statement include forward-looking statements. In particular, all statements that express forecasts, expectations and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the availability of financing, anticipated cost savings and synergies and the execution of Pearson's strategy, are forward-looking statements. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will occur in future. They are based on numerous assumptions regarding Pearson's present and future business strategies and the environment in which it will operate in the future. There are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements, including a number of factors outside Pearson's control. These include international, national and local conditions, as well as competition. They also include other risks detailed from time to time in Pearson's publicly-filed documents and you are advised to read, in particular, the risk factors set out in Pearson's latest annual report and accounts, which can be found on its website (www.pearsonplc.com). Any forward-looking statements speak only as of the date they are made, and Pearson gives no undertaking to update forward-looking statements to reflect any changes in its expectations with regard thereto or any changes to events, conditions or circumstances on which any such statement is based. Readers are cautioned not to place undue reliance on such forward-looking statements.

KPIs

*H1 2023 figures have been restated for adjustments made in H2 2023.

⁺H1 2023 US digital subscriptions restated from 4.5m to 4.4m due to removal of non-paying subscribers.

The above table is a subset of our full list of strategic KPIs, which will be reported on alongside full year results.

For a full list of KPI measure definitions, please refer to: https://plc.pearson.com/en-GB/purpose/our-targets-kpis

Operational review

¹Throughout this announcement: a) Growth rates are stated on an underlying basis unless otherwise stated. Underlying growth rates exclude currency movements, and portfolio changes. b) The 'business performance' measures are non-GAAP measures and reconciliations to the equivalent statutory heading under IFRS are included in notes to the attached condensed consolidated financial statements 2, 3, 4, 6, 7 and 14. c) Constant exchange rates are calculated by assuming the average FX in the prior period prevailed through the current period.

²In 2023, we completed the sale of the POLS business and as such have removed from underlying measures throughout. Within this specific measure we exclude our entire OPM business (POLS and ASU) to aid comparison to guidance. As expected, there are no sales in the OPM business in 2024.

³Strategic Review is sales in international courseware local publishing businesses which have been wound down. As expected, there are no sales in these businesses in 2024.

⁴2024 consensus on the Pearson website as at 22nd November 2023; organic CER sales growth of 3.7%, median adjusted operating profit of £621m at £:$ 1.22, tax rate 24%.

Assessment & Qualifications

In Assessment & Qualifications, sales increased 2% on an underlying basis and 2% on a headline basis. Adjusted operating profit increased 7% in underlying terms due to operating leverage on sales growth, and cost phasing and savings partially offset by inflation and 7% in headline terms due to this, PDRI profit and currency movements.

Pearson VUE sales were up 4% in underlying terms driven by favorable mix and value-added services. Test volumes increased versus the same period last year to 10.9m. PDRI also saw good growth with strong volumes.

In US Student Assessment, sales decreased 3% in underlying terms due to reduced scope and phasing of some contracts which will normalise in the second half.

In Clinical Assessment, sales increased 1% in underlying terms supported by pricing, digital product growth and a new product release.

In UK and International Qualifications, sales increased 7% in underlying terms driven by volume, pricing and strong International growth.

Virtual Learning

Virtual Schools sales were down 1% on an underlying basis, given the previously cited loss of a larger partner school in the 2023/24 academic year. In Virtual Learning, sales decreased 8% on an underlying basis mostly attributable to the final portion of the OPM ASU contract in the first half of 2023 and 32% on a headline basis due to currency movements and the disposal of the OPM business. Adjusted operating profit declined 32% in underlying terms, as the prior year comparator benefited from the ASU contract, and decreased 34% in headline terms due to this and currency movements.

Higher Education

In Higher Education, sales declined 2% on an underlying basis, in line with our phasing guidance, and decreased 6% on a headline basis due to this, currency movements and portfolio changes. Adjusted operating profit increased in underlying terms driven by cost savings partially offset by restructuring costs and trading and was flat in headline terms due to this offset by currency movements and portfolio changes.

We also saw a strong performance in K-12 with sales growth of 12%, given strong adoption cycle fundamentals in this market this year.

English Language Learning

In English Language Learning, sales were up 11% on an underlying basis due to strong growth in Institutional (including hyperinflationary pricing in Argentina) as well as growth in Mondly, and 2% on a headline basis due to this offset by currency movements.  Adjusted operating profit increased by 38% in underlying terms due to increased operating leverage on sales partially offset by increased investment and decreased 50% in headline terms due to this and currency movements. 

PTE volumes were down 10%, due to declines in the English High Stakes testing market due to tightening of policies around international study and migration. PTE has continued to see market share gains, particularly in India and China, while it also continues to benefit in the ramp up for Canada.

Within Institutional, performance was strong, with particularly good growth in Latin America and the Middle East.  

Our Online Self-Study business, Mondly, performed well with paid subscriptions increasing 12% versus the prior period driven by new enterprise contracts and DTC users.

Workforce Skills

In Workforce Skills, sales were up 6% on an underlying basis and 2% on a headline basis. Adjusted operating profit increased by 27% in underlying terms due to trading and cost savings and increased 38% in headline terms due to this, currency movements and portfolio changes.

Both the Vocational Qualifications and the Workforce Solutions businesses grew by 6% in underlying terms.

FINANCIAL REVIEW

Operating result

Sales for the six months to 30 June 2024 decreased on a headline basis by £125m or 7% from £1,879m for the six months to 30 June 2023 to £1,754m for the same period in 2024 and adjusted operating profit remained at £250m in the first half of 2024 compared to £250m in the first half of 2023 (for a reconciliation of this measure see note 2 to the condensed consolidated financial statements).

The headline basis simply compares the reported results for the six months to 30 June 2024 with those for the equivalent period in the prior year. We also present sales and profits on an underlying basis which excludes the effects of exchange, the effect of portfolio changes arising from acquisitions and disposals and the impact of adopting new accounting standards that are not retrospectively applied, when relevant. Our portfolio change is calculated by excluding sales and profits made by businesses disposed in 2023 or 2024 and by ensuring the contribution from acquisitions is comparable year on year. For prior year acquisitions, the corresponding pre-acquisition period is excluded from the current year. Portfolio changes mainly relate to the disposals of the Group's interest in POLS, Pearson College and our international courseware local publishing business in India and businesses within Higher Education in 2023, and the acquisition of PDRI in 2023.

On an underlying basis, sales increased by 1% in the first six months of 2024 compared to the equivalent period in 2023 and adjusted operating profit increased by 4%. Currency movements decreased sales by £45m and adjusted operating profit by £12m, and portfolio changes decreased sales by £93m and increased adjusted operating profit by £1m. There were no new accounting standards adopted in the first half of 2024 that impacted sales or profits.

Adjusted operating profit includes the results from discontinued operations when relevant but excludes charges for acquired intangible amortisation and impairment, acquisition related costs, gains and losses arising from disposals, the cost of major reorganisation, when relevant, property charges and one off-costs related to the UK pension scheme. A summary of these adjustments is included below and in note 2 to the condensed consolidated financial statements.

Intangible amortisation charges to the end of June 2024 were £20m compared to a charge of £24m in the equivalent period in 2023. This is due to increased amortisation from recent acquisitions which is more than offset by a reduction in amortisation from intangible assets at the end of their useful life and recent disposals. 

UK pension discretionary increases in 2024 relate to one-off pension increases awarded to certain cohorts of pensioners in response to the cost of living crisis.

Other net gains and losses in 2024 relate to costs related to prior year acquisitions and disposals, partially offset by a gain on the partial disposal of our investment in an associate. Other net gains and losses in 2023 relate largely to the gain on disposal of the POLS business and a gain resulting from the release of a provision related to a previous disposal, offset by losses on the disposal of Pearson College and costs related to disposals and acquisitions.

Property charges of £11m in the second half of 2023 relate to impairments of property assets arising from the impact of updates in 2023 to assumptions initially made during the 2022 and 2021 reorganisation programmes. There are no such charges in the first half of 2024.

The reported operating profit of £219m in the first half of 2024 compares to a profit of £219m in the first half of 2023, with the disposal of POLS and other businesses in 2023 reducing sales but having minimal impact on profit, and unfavourable FX movements and inflation costs being offset by operating leverage on sales and cost phasing and savings.

Due to seasonal bias in some of the Group's businesses, Pearson typically makes a higher proportion of its profits and operating cash flows in the second half of the year.

Net finance costs

Net finance income decreased on a headline basis from income of £17m in the first half of 2023 to an expense of £7m in the same period in 2024. The decrease is primarily due to losses on investments held at fair value through profit and loss (FVTPL) compared to gains in 2023, a reduction in foreign exchange gains, increased borrowings and a reduction in returns on cash deposits.

Net interest payable reflected in adjusted earnings to 30 June 2024 was £21m, compared to a payable of £12m in the first half of 2023. The increase is primarily due to increased borrowings and a reduction in returns on cash deposits.

Net finance income relating to retirement benefits has been excluded from our adjusted earnings as we believe the income statement presentation does not reflect the economic substance of the underlying assets and liabilities. Also included in the net finance costs (but not in our adjusted measure) are interest costs relating to acquisition or disposal transactions, fair value movements on investments classified as FVTPL foreign exchange and other gains and losses on derivatives. Interest relating to acquisition or disposal transactions is excluded from adjusted earnings as it is considered part of the acquisition cost or disposal proceeds rather than being reflective of the underlying financing costs of the Group. Foreign exchange, fair value movements and other gains and losses are excluded from adjusted earnings as they represent short-term fluctuations in market value and are subject to significant volatility. Other gains and losses may not be realised in due course as it is normally the intention to hold the related instruments to maturity. Interest on certain tax provisions is excluded from our adjusted measure in order to mirror the treatment of the underlying tax item.

In the period to 30 June 2024, the total of these items excluded from adjusted earnings was net income of £14m compared to net income of £29m in the first half of 2023. Net finance income relating to retirement benefits decreased from £13m in the first half of 2023 to £11m in 2024 reflecting the comparative funding position of the plans at the beginning of each year offset by higher prevailing discount rates. Fair value movements on investments in unlisted securities are a loss of £8m in the first half of 2024 compared to a gain of £5m in 2023. For a reconciliation of the adjusted measure see note 3 to the condensed consolidated financial statements.

Taxation

The reported tax on statutory earnings for the six months to 30 June 2024 was a charge of £54m compared to a charge of £49m in the period to 30 June 2023. This equates to an effective tax rate of 25.5% (2023: 20.8%). The higher effective tax rate compared to the prior period is primarily due to a tax credit being recognised on the disposal of the POLS business in 2023 which is not recurring in 2024.

The total adjusted tax charge for the period was £54m (2023: £54m), corresponding to an effective tax rate on adjusted profit before tax of 23.6% (2023: 22.7%). For a reconciliation of the adjusted measure see note 4 to the condensed consolidated financial statements.

In the first half of 2024, there was a net tax payment of £69m (2023: £59m), principally relating to the US and the UK.

Other comprehensive income

Included in other comprehensive income are the net exchange differences on translation of foreign operations. The loss on translation of £9m at 30 June 2024 compares to a loss at 30 June 2023 of £166m. The loss in 2024 arises from an overall weakening of the majority of currencies to which the Group is exposed, partially offset by a slight strengthening of the US dollar. A significant proportion of the Group's operations are based in the US and the US dollar closing rate at 30 June 2024 was £1:$1.26 compared to the opening rate of £1:$1.27. At the end of June 2023, the US dollar rate was £1:$1.27 compared to the opening rate of £1:$1.21.

Also included in other comprehensive income at 30 June 2024 is an actuarial gain of £1m in relation to retirement benefit obligations. The gain arises largely from losses on assets and experience losses, offset by a decrease in liabilities driven by higher discount rates. The gain in 2024 compares to an actuarial loss at 30 June 2023 of £27m.

Fair value losses of £4m (2023: gains of £2m) have been recognised in other comprehensive income and relate to movements in the value of investments in unlisted securities held at fair value through other comprehensive income (FVOCI).

In 2023, a gain of £122m was recycled from the currency translation reserve to the income statement in relation to the disposal of the POLS business.

Cash flow and working capital

Our operating cash flow measure is used to align cash flows with our adjusted profit measures (see note 14 to the condensed consolidated financial statements). Operating cash flow increased on a headline basis by £50m from an inflow of £79m in the first half of 2023 to an inflow of £129m in the first half of 2024. The increase is largely explained by reduced capital expenditure on product development, property, plant, equipment and software and FX as well as favourable working capital movements, some of which arise from portfolio changes.

The equivalent statutory measure, net cash generated from operations, was an inflow of £185m in 2024 compared to an inflow of £106m in 2023. Compared to operating cash flow, this measure includes reorganisation costs but does not include regular dividends from associates. It also excludes capital expenditure on property, plant, equipment and software, and additions to right of use assets as well as disposal proceeds from the sale of property, plant, equipment and right of use assets (including the impacts of transfers to/from investment in finance lease receivable). In the first half of 2024, reorganisation cash outflow was £5m compared to £46m in the same period in 2023.

In the first half of 2024, there was an overall increase of £23m in cash and cash equivalents from £309m at the end of 2023 to £332m at 30 June 2024. The increase in 2024 is primarily due to the cash inflow from operations of £185m and proceeds from borrowings of £495m offset by payments for the acquisition of subsidiaries of £38m, share buyback programme of £278m, dividends paid of £107m, own share purchases of £37m, tax paid of £69m, net interest payments of £28m, capital expenditure on property, plant, equipment and software of £58m and payments of lease liabilities of £39m.

The movement on trade and other liabilities is driven by the payment of deferred consideration relating to previous acquisitions, the net movement on the accrual for share buyback programmes as well as movements in working capital balances.

Liquidity and capital resources

The Group's net debt increased from £744m at the end of 2023 to £1,177m at the end of June 2024. The increase is largely due to free cash flow which is more than offset by the share buyback programme and dividend payments.

At 30 June 2024, the Group had drawn £495m on its Revolving Credit Facility.

At 30 June 2024, the Group had approximately £0.5bn in total liquidity immediately available from cash and its Revolving Credit Facility maturing February 2027. In assessing the Group's ability to continue as a going concern for the period until 31 December 2025, the Board analysed a variety of downside scenarios, including a severe but plausible scenario, where the Group is impacted by a combination of all principal risks from H2 2024, as well as reverse stress testing to identify what would be required to either breach covenants or run out of liquidity. The severe but plausible scenario modelled a severe reduction in revenue, profit and operating cash flow from risks continuing throughout 2025. During the period under evaluation, the Group has a €300m bond (converted to c£260m) due for repayment in May 2025 and the model assumes that this is refinanced with a similar sized bond in 2024. In all scenarios, the Group would maintain comfortable liquidity headroom and sufficient headroom against covenant requirements during the period under assessment even before modelling the mitigating effect of actions that management would take in the event that these downside risks were to crystallise.

Post-retirement benefits

Pearson operates a variety of pension and post-retirement plans. The UK Group pension plan has by far the largest defined benefit section. This plan has a strong funding position and a surplus with a very substantially de-risked investment portfolio including approximately 50% of the assets in buy-in contracts. We have some smaller defined benefit sections in the US and Canada but, outside the UK, most of the companies operate defined contribution plans.

The charge to profit in respect of worldwide pensions and retirement benefits amounted to £30m in the period to 30 June 2024 (30 June 2023: £23m) of which a charge of £41m (30 June 2023: £36m) was reported in operating profit and income of £11m (30 June 2023: £13m) was reported against other net finance costs. In the period to 30 June 2024, a charge of £5m (30 June 2023: nil) related to one-off discretionary pension increases has been excluded from adjusted operating profit.

The overall surplus on UK Group pension plans of £491m at the end of 2023 has decreased to a surplus of £485m at the end of June 2024. The decrease has arisen principally due to asset returns being lower than expected, an increase in long-term inflation expectations, and inflation over the period being slightly higher than was expected at the beginning of the year. In total, our worldwide net position in respect of pensions and other post-retirement benefits decreased from a net asset of £455m at the end of 2023 to a net asset of £449m at the end of June 2024.

Businesses acquired

The Group made no acquisitions of subsidiaries in H1 2024. The cash outflow in H1 2024 relating to acquisitions of subsidiaries was £38m, arising from the payment of deferred consideration in respect of prior year acquisitions, mainly Credly and Mondly, which were acquired in 2022. In addition, there was a cash outflow relating to investments of £7m.

The cash outflow in the first half of 2023 relating to acquisitions of subsidiaries was £173m arising primarily from the acquisition of PDRI. In addition, there was a cash outflow relating to the acquisition of associates of £5m and investments of £6m.

Businesses disposed

The Group made no disposals of subsidiaries in H1 2024. In 2024, the cash outflow relating to costs paid in relation to the disposal of businesses in prior years was £6m. The cash outflow in the first half of 2023 relating to the disposal of businesses was £19m mainly relating to the disposal of POLS and Pearson College.

In addition, the Group sold part of its investment in its associate, Academy of Pop, for £4m (which has not yet been paid), resulting in a gain of £2m. The remaining stake is now classified as a financial investment.

Dividends

The dividend accounted for in the six months to 30 June 2024 is the final dividend in respect of 2023 of 15.7p. An interim dividend for 2024 of 7.4p was declared by the Board in July 2024 and will be accounted for in the second half of 2024.

The interim dividend will be paid on 16 September 2024 to shareholders who are on the register of members at close of business on 9 August 2024 (the Record Date). Shareholders may elect to reinvest their dividend in the Dividend Reinvestment Plan (DRIP). The last date for receipt of DRIP elections and revocations will be 23 August 2024. A Dividend Reinvestment Plan (DRIP) is provided by our Registrar, Computershare Investor Services. The DRIP enables the Company's shareholders to elect to have their cash dividend payments used to purchase the Company's shares. More information can be found at www.computershare.com/Investor

Share buyback

On 20 September 2023, the Board approved a £300m share buyback programme in order to return capital to shareholders, with a further £200m extension being announced by the Group on 1 March 2024. In the first half of 2024, c28m shares have been bought back at a cash cost of £278m. The £300m programme completed in March 2024 and as at 30 June 2024 the £200m programme was c80% complete. A £40m liability for the remainder of the £200m programme plus related costs has been accrued as at 30 June 2024. At 31 December 2023, a liability of £118m was accrued in relation to the £300m share buyback programme. The nominal value of the cancelled shares of £7m has been transferred to the capital redemption reserve. In the period from 1 to 26 July 2024, an additional c2m of shares have been repurchased.

Principal risks and uncertainties

In the 2023 Annual Report and Accounts, we set out our assessment of the principal risk issues that face the business under the categories: accreditation risk, artificial intelligence, content and channel risks, capability risk, competitive marketplace, customer expectations, portfolio change, and reputation and responsibility.

We also noted in our 2023 Annual Report and Accounts that the Group continues to closely monitor significant near-term and emerging risks which have been identified as climate transition, inflation and interest rates, recession, supply chain, tax and sanctions and geopolitics.

The principal risks and uncertainties are summarised below. The selection of principal risks will be reviewed in the second half of the year alongside the Group's long-term strategic planning process. However, these risks have not changed materially from those detailed in the 2023 Annual Report.

Accreditation Risk

Termination or modification of accreditation due to policy changes or failure to maintain the accreditation of our courses and assessments by states, countries, and professional associations, reducing their eligibility for funding or attractiveness to learners.

Artificial Intelligence, Content and Channel Risk

The risk that Pearson's intellectual property is harder to protect as a result of increased content generation through artificial intelligence and that Pearson's content and method of delivery (channel) is, or is perceived to be, insufficiently differentiated in terms of outcomes or learner experience. 

Capability Risk

Inability to meet our contractual obligations or to transform as required by our strategy due to infrastructure, system or organisational challenges.

Competitive Marketplace

Significant changes in our target markets could make those markets less attractive. This could be due to significant changes in demand or in supply which impact the addressable market, market share and margins (e.g. changes in enrolments, in-sourcing of learning and assessment by customers, open educational resources, a shift from in person to virtual or vice versa or innovations in areas such as generative AI).

Customer Expectations

Rising end-user expectations increase the need to offer differentiated value propositions, risking margin pressure to meet these expectations and potential loss of sales if not successful.

Portfolio Change

Failure to effectively execute desired or required portfolio changes to promote scale or capability and increase focus on key divisional and geographic markets, due to either execution failures or inability to secure transactions at appropriate valuations.

Reputation and Responsibility

The risk of serious reputational harm through failure to meet obligations to key stakeholders. These include legal and regulatory requirements, the possibility of serious unethical behaviour and serious breaches of customer trust.