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Pearson Plc

Pearson Plc Strong performance in structural growth opportunities

Pearson Plc (LON:PSON), the world’s learning company, today provided an update on full year 2018 trading and giving preliminary guidance for 2019. Full year results will be announced on 22 February 2019.

Highlights
Underlying profit growth driven by continued strategic progress in 2018

Expect to deliver adjusted operating profit of £540m-£545m for 2018, in line with guidance of £520m to £560m

· Adjusted earnings per share of 70.0p-71.0p reflecting one-off tax benefits and a lower finance charge as disclosed in Pearson’s Q3 trading update.

· Total underlying revenues were down 1% year on year, with declines in US Higher Education Courseware (US HECW) of 5% and US K12 courseware largely offset by the rest of the business growing in aggregate at over 1%.

· Revenue in North America declined 1%, Core was flat and Growth was up 1%.

· Strong balance sheet with closing net debt at 31 December 2018 expected to be around £200m (2017: £432m).

Digital transformation progressing to plan

· US HECW digital revenue grew 2% to represent 55% of sales (50% in 2017).

· Direct to consumer sales grew 8% to 23% in US HECW.

· Signed a further 192 Inclusive Access institutions in 2018 taking the total to nearly 700.

Continuing strong performance in structural growth opportunities

· Online Program Management (OPM) saw 14% growth in global course registrations and revenue growth of 9%.

· Connections Academy, Pearson’s K12 virtual schools business, grew revenues 8%.

· In English, Pearson Test of English Academic grew test volumes by 30%.

· In Professional Certification revenues grew 4%.

Simplification on course to deliver cost savings slightly ahead of expectations

· Cost efficiency programme ahead of plan in 2018 with incremental cost savings of around £130m and restructuring costs1 of around £100m.

· Now expect to deliver increased annualised cost savings1 in excess of £330m by the end of 2019. One-off restructuring costs will rise with this to around £330m. This is ahead of our original plan of £300m in savings and costs.

· US K12 Courseware continues to be held for sale.

2019 outlook2 – further financial and strategic progress

· Expect to deliver 2019 adjusted operating profit of between £590m to £640m.

· Expect US HECW revenue to be zero to down 5% as underlying pressures continue, and for the rest of the business to show continued growth in aggregate with a good performance in each of the structural growth opportunities: OPM, Virtual Schools, Professional Certification and English.

· This guidance is based on existing portfolio and exchange rates as at 31 December 2018. Expect a net interest charge of c.£30m, a tax rate of 21% and adjusted earnings per share of 56.5p to 62.0p.

John Fallon, Chief Executive said:

“We have made good progress in 2018, returning Pearson to underlying profit growth. We are also building a platform to enable Pearson to achieve its full digital potential, empowering more people around the world to learn the knowledge and skills to flourish in the changing world of work. There is much still to do, but we are increasingly confident in Pearson’s potential to grow and prosper.”

Financial impact

We maintain a strong balance sheet with closing net debt at 31 December 2018 expected to be around £200m. This equates to a net debt to EBITDA ratio of c.0.3x and c.1.5x on a simplified credit agency view adjusting for leases and other items.

Impact of IFRS 16 – Leases

All 2019 guidance provided in this statement is on a pre-IFRS 16 basis.

IFRS 16 is the new lease standard which will replace IAS 17 and is applicable for financial years commencing on or after 1 January 2019, and hence will first apply to the Group for its financial year ending 31 December 2019.

The standard will result in the operating lease expense being replaced by finance costs and depreciation which will reflect the corresponding lease liabilities and right of use assets that will now be recognised on the balance sheet.

Full details will be given at our FY18 results on 22 February.

Notes
Throughout this announcement: growth rates are stated on an underlying basis unless otherwise stated. Underlying growth rates exclude both currency movements, portfolio changes and accounting changes. The latter impact is not material.

1 Based on December 2018 exchange rates versus prior guidance at December 2016 exchange rates. The impact of FX rates would be to slightly reduce savings on a like for like basis. A significant part of costs and savings from the restructuring programme are US Dollar denominated and in other non-Sterling currencies and are therefore subject to exchange rate movements over the implementation timeframe.

2 2019 guidance excludes the impact of our adoption of IFRS 16 Leases for the year ended December 2019. Full details of the impact of IFRS 16 will be presented with our preliminary results on 22 February.