Pearson delivers another encouraging financial performance in H1

Growth

Pearson PLC (LON:PSON) has announced its Interim results for the six months to 30th June 2022 (unaudited).

Highlights

· Strong financial performance with underlying sales growth of 6% and adjusted operating profit up 22%. Full year expectations reaffirmed.

· Continued strategic and operational momentum across the business.

· Accelerating our digital journey with the development of Pearson’s lifelong learning ecosystem.

· At least £100m of further efficiencies identified and to be delivered in 2023; accelerates our improved margin expectation to 2023 from 2025.

· We are launching a strategic review of our OPM business.

Andy Bird, Pearson’s Chief Executive, said:

“Pearson has delivered another encouraging financial performance in the first half of the year. We continue to make excellent strategic and operational progress, with momentum across the business. We are already seeing clear benefits from our increasingly diverse learning ecosystem, with Pearson serving more people across their lifelong learning journeys. Our digital strategy is progressing well; Pearson+ grew to 4.5m registered users, increasingly taking us direct to consumers.

“Our focus on delivery and execution remains and full year 2022 expectations are reaffirmed. In addition, the more integrated platform we are building across the company is creating efficiencies, underpinning our new guidance for accelerated margin improvement. We have a robust balance sheet which, together with our cash generation, will support continued investment in growth and create value for our shareholders.”

Underlying sales growth of 6% to £1,788m

· Assessment & Qualifications up 16% driven by US Student Assessment and UK & International Qualifications as exam timetables normalise after COVID-19 disruption. Clinical Assessment delivered better-than-expected performance supported by an ongoing focus on health and wellness as well as government funding.

· Virtual Learning up 3% with robust retention rates in Virtual Schools, offset by weaker than expected Spring enrolments in OPM.

· English Language Learning up 22% as improved global mobility drove excellent growth in the Pearson Test of English (PTE).

· Workforce Skills up 6% with continued growth in BTEC, GED and TalentLens. Recent acquisitions, Faethm and Credly, grew strongly.

· Higher Education down 4%, in line with expectations, as Fall enrolment trends in the US continued into the Spring period.

· Sales in businesses under strategic review declined as expected due to COVID-19 impacting revenue phasing in Canada and South Africa in 2021 as well as ceased businesses.

Adjusted operating profit up £33m to £160m

· Driven by an encouraging trading performance, FX benefit and property savings, partially offset by inflation, portfolio investment and the phasing of costs last year.

· Adjusted earnings per share growth to 22.5p (H1 2021: 10.5p) reflecting adjusted operating profit growth, and the one off tax provision releases resulting in net interest receivable of £18m (net interest charge H1 2021: £(27)m) and an adjusted effective tax rate of 5% (H1 2021: 20%).

Strong balance sheet underpins investment in growth and shareholder returns

· Operating cash flow was £9m (H1 2021: £10m) with the drop through of increased trading profits offset by increased receivables given the strong revenue growth in H1. These receivables will be collected in H2.

· Robust balance sheet, with H1 net debt of £810m (H1 2021 £646m). Operating cash was more than offset by dividends, share buyback and tax. We had available liquidity of approximately £1.2bn (H1 2021: £1.4bn) at the end of H1.

· H1 acquisitions of Credly and Mondly are accelerating the growth strategy in Workforce Skills and English Language Learning divisions respectively.

· Proposed interim dividend of 6.6p (H1 2021: 6.3p) represents an increase of 5%.

· £350m share buyback progressing with over £165m of shares repurchased at the 29th July.

Statutory results

· Sales of £1,788m (H1 2021: £1,597m), reflecting underlying performance, portfolio changes and currency movements.

· Operating profit of £148m (H1 2021: £9m) due to underlying performance, the reduction in costs of major restructuring and the net gain related to acquisitions and disposals compared to a loss in 2021.

· Statutory earnings per share of 17.5p (H1 2021: 2.3p).

· Net cash generated from operations was £53m (H1 2021: £79m).

Strategic progress

· Accelerating our digital journey.

  • Continued strategic progress in building Pearson’s digital learning ecosystem – already have a large-scale user base.
  • Pearson+ roll out progressing well, 4.5m registered users and 329k cumulative paid subscriptions as at 15 July 2022. Channels & Social launching for back-to-school 2022 to broaden Pearson+ reach and grow total addressable market.

· Maintained focus on driving higher returns through efficiency savings.

  • Re-organisation of Pearson into five divisions with responsibility for their full cost base is now complete, enabling more efficient ways of working and operating as a business in a digital world.

· Further efficiencies identified of at least £100m for 2023, through rightsizing costs as we implement the new strategy and portfolio, product and content rationalisation, further corporate property reductions and other operating productivities. This accelerates our improved margin expectation to 2023 from 2025. One-time costs to deliver these savings, which we will exclude from adjusted operating profit to better highlight underlying performance, are expected to be c.£120m of which approximately half will be cash related.

· Reshaping our portfolio.

  • Integration of Faethm and Credly progressing well with plans to pilot a new suite of workforce services in Q3 2022 ahead of a commercial launch in H1 2023.
  • Acquisition of Mondly enhances our credentials in the language learning direct to consumer space as well as creating synergies across Pearson.
  • Ongoing progress with announcement of sale of Italian and German K12 Courseware businesses for £163m to Sanoma Corporation and the completion of sale of ERPI (Editions du renouveau pedagogique) business in Canada to TC Media.
  • Retaining Australian and English-speaking Canadian K12 Courseware businesses to deliver increased shareholder value as part of the Group.
  • Pearson continues to make progress in the remaining areas of the strategic review.
  • Impact of total strategic review disposals on 2022 adjusted operating profit expected to be c.£15-20m reflecting the second half weighting of their financial contribution. Operating cashflow for these businesses is weighted to Q4 and the timing of completion is also likely to impact operating cash conversion in 2022.
  • Launching strategic review of OPM business.

2022 outlook reaffirmed*

Group revenue and adjusted operating profit expectations remain unchanged based on prevailing FX rates as outlined on 25 February 2022. Pearson sees upside potential in English Language Learning, Virtual Schools and Clinical Assessment given outperformance in the first half and likely increased pressure in enrolments in OPM and Higher Education. Growth in Pearson+ subscriptions will lead to a shift in HE revenue recognition from Q3 to Q4.

This year we expect a net interest charge of £10-15m and an effective tax rate of 15-17% reflecting the statute of limitations on a number of tax provisions which lapsed in April 2022.

Financial summary

£mH1 2022H1 2021Headline growthCERgrowth**Underlying growth
Business performance 
Sales1,7881,59712%6%6%
Adjusted operating profit16012726%19%22%
Operating cash flow910
Adjusted earnings per share 22.5p10.5p
Statutory results 
Sales1,7881,597
Operating profit1489
Net cash generated from operations5379
Basic earnings per share17.5p2.3p
Dividend per share6.6p6.3p
Net debt(810)(646)

Throughout this announcement: a) Growth rates are 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, 5, 7, and 16.

*2022 consensus on the Pearson website as at full year 2021; median adjusted operating profit of £416m at £:$ 1.37.

**Constant exchange rates are calculated by assuming the average FX in the prior period prevailed through the current period.

Tax update

On 8 June 2022 the EU General Court dismissed various applications, including the UK Government’s, to annul the European Commission decision that certain aspects of the UK tax code constituted State Aid. Following this decision, it has been concluded that a provision is now required in relation to this issue. The total exposure is calculated to be £105m (excluding interest) with a provision of £63m now included in the results, outside adjusted earnings, representing our estimate of the exposure. There is no cash impact as a payment on account was made during 2021.

Executive Changes

·           Tim Bozik is retiring after nearly forty years at Pearson. He will remain interim chief product officer and co-president of Direct to Consumer until early 2023.

·           We have expanded Tom ap Simon’s role. He will become President of Higher Education effective September 6, in addition to his current role as president of Virtual Learning.

·           Building on Tim’s work, Tom will look for further opportunities to transform the Higher Education business, accelerate innovation, and unlock growth opportunities.

Pearson’s interim results online presentation today at 0900 (BST). Register to receive log in details: https://pearson.connectid.cloud/register

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