Pearson plc (LON:PSON) has announced its interim results for the six months to 30th June 2023.
Highlights
| · | Underlying Group sales growth1 of 6%, excluding OPM2 and the Strategic Review3 businesses with particularly strong performances in English Language Learning and Assessment & Qualifications. |
| · | Underlying adjusted operating profit growth of 44% and strong operating cash flow performance of £79m, reflecting strong trading and benefits of the cost efficiency programme in H1, with the remainder to be realised in H2. |
| · | Further portfolio reshaping with completion of the acquisition of Personnel Decisions Research Institutes (PDRI) within our Assessment & Qualifications division and the completion of the disposal of Pearson Online Learning Services (POLS). |
| · | Good strategic progress, including ongoing execution of Artificial Intelligence (AI) strategy. |
Statutory results
| · | Sales increased 5% to £1,879m (H1 2022: £1,788m) reflecting underlying performance, portfolio changes and currency movements. |
| · | Statutory operating profit of £219m (H1 2022: £148m) reflecting underlying performance, portfolio changes and currency movements. |
| · | Net cash generated from operations was £106m (H1 2022: £53m). |
| · | Statutory earnings per share of 26.1p (H1 2022: 18.1p5). |
Underlying sales growth1 of 6%, excluding OPM2 and Strategic Review3 businesses; 4% in aggregate
| · | Assessment & Qualifications sales were up 7% largely driven by a strong performance in Pearson VUE underpinned by good growth in the IT and healthcare segments, alongside the commencement of a number of new contracts. |
| · | Virtual Learning sales decreased 15%, primarily due to an expected 69% decrease in the OPM business given the previously announced ASU contract loss. Virtual Schools declined 2%, driven by enrolment declines for the 2022/23 academic year and lower district partnership renewals, which was offset by good retention rates and the return of a school that had previously left. |
| · | Higher Education sales were down 2%, in line with expectations, driven by a decline in enrolments and loss of adoptions to non-mainstream publishers. Pearson+ momentum continued, increasing c.200% in cumulative paid subscriptions to 938k for the full academic year (2022: 329k). |
| · | English Language Learning sales increased 44% due to increased Pearson Test of English (PTE) volumes, which were up 76%. |
| · | Workforce Skills sales grew 9%, with good growth in both Vocational Qualifications and Workforce Solutions. |
| · | Sales in businesses under Strategic Review3 decreased 50% as expected. |
Adjusted operating profit1 up 44% on an underlying basis to £250m including realisation of just under half of the £120m cost efficiency programme
| · | Performance driven by operating leverage on revenue growth and implementation of the £120m cost efficiency programme for 2023, partially offset by inflation. First half profit margin grew to 13% (H1 2022: 9%). |
| · | Headline growth was 56% reflecting underlying performance, portfolio changes and currency movements. |
| · | Adjusted earnings per share grew to 25.6p (H1 2022: 22.5p) reflecting adjusted operating profitgrowth, tax and interest returning to more normalised levels and the reduction in issued shares given the 2022 share buyback. |
Strong operating cash flow with robust balance sheet enabling continued investment and driving increased shareholder returns
| · | Operating cash flow was £79m (H1 2022: £9m) with the significant growth driven by the drop through of increased trading profits, and in particular the cost efficiency programme, as well as strong collections and portfolio changes. | |
| · | Net debt of £0.9bn (H1 2022: £0.8bn) increased due to dividend payments, tax payments and the 2022 share buyback, more than offsetting operating cash flows. | |
| · | Proposed interim dividend of 7.0p (H1 2022: 6.6p) represents an increase of 6%. | |
| · | Previously announced buyback to repurchase £300m of shares on track to commence in Q3. | |
Andy Bird, Pearson’s Chief Executive, said:
“Our excellent performance in the first half of 2023 means we are confident of achieving our full year expectations. We have continued to execute well operationally and maintained a sharp focus on delivering efficiencies whilst positioning our portfolio for long-term growth. The progress we are making to accelerate our digital journey, increase interconnectivity and leverage our long-standing AI capabilities will enable us to serve an ever-greater number of individuals and enterprises with our trusted, proprietary learning content.”
Continued operational and strategic progress
Advancing future growth drivers across the business
| · | In Assessment & Qualifications, Pearson VUE has launched the delivery of the Next Generation NCLEX Nurse licensure exam in the US and PDRI has launched a full suite of hiring assessment programmes for the Transportation Security Administration (TSA). We also continued to progress in our offering of onscreen exams within our UK & International Qualifications business, with the roll out of GCSE Computer Science and International GCSEs in English Language and Literature. |
| · | In Virtual Learning, we are launching a new Connections Academy Career Pathways programme for middle and high school students from the second half of the year, where we will be offering a tri-credit approach to career-readiness courses in partnership with Coursera and Acadeum, amongst others. |
| · | In Higher Education, the re-organisation of our sales force has helped to increase adoption retention rates and generate new wins. Our work to converge our platforms, to enhance stability and to deliver upgraded, best-in-class features to improve our customer experience is progressing well. These initiatives make the division much more commercial and competitive on a day-to-day basis and we continue to develop new AI features, some of which we will launch as early as this Fall back-to-school. Uptake of our iLab products was also encouraging in the Spring semester, where more than 1,900 virtual labs were assigned across more than 600 courses through Mastering Biology. Momentum continued for Pearson+ with a c.200% increase in cumulative paid subscriptions to 938k for the full academic year. |
| · | In Workforce Skills, our Vocational Qualifications business won three T level contracts in the UK. We also signed a contract with the Jordanian Ministry of Education to partner on the reform of Jordan’s technical and vocational education and training provision in schools with over 50,000 learners expected to take these courses over the next three years. Within our Workforce Solutions business we have built a powerful technology stack that has enabled us to break down core Faethm capabilities into modular application programming interfaces, enabling use across Workforce Skills and other Pearson products. Feedback from our customers has resulted in us making the decision to focus our efforts on delivering a modular, personalisable approach versus a fully integrated platform. |
| · | In English Language Learning, we recently won recognition for the Pearson Test of English for Canadian Student Direct Stream and economic migration visa applications. This grants access to the full potential of the Canadian market at an opportune time, as Immigration, Refugees and Citizenship Canada has recently announced that it plans to welcome a record number of permanent residents in the years ahead. The Canadian market is the largest of the three key markets which Pearson has recognition to operate in. |
Leveraging our AI capabilities alongside trusted, proprietary learning content to drive success for our learners and broader stakeholders
| · | AI has been embedded into how Pearson operates, reflecting the deployment of the technology across our product portfolio for many years. For instance, there are AI-based open response assessments within English Language Learning and large language models within Workforce Skills which develop proprietary predictive algorithms designed to assess trends in demand for skills and occupations globally and recommend career and learning pathways for consumers, enterprises and governments. |
| · | We have recently brought to market a generative AI tool within our Pearson+ service which enables users to automatically summarise the content of Channels videos into simple bullet points. |
| · | Additional generative AI study tools designed to help students better learn and understand challenging subjects will launch in Pearson+ and Mastering for this Fall back-to-school. These study tools combine Pearson’s trusted content and structured pedagogy with conversational AI capabilities to provide personalised real time support for students in a secure Pearson product environment, which is free from the noise and corruption of web-based AI models. Further features are in development for the 2024 Fall back-to-school period and our products will continue to evolve and grow over time to meet the needs of students. |
| · | We are also exploring opportunities to consider how we can continue to leverage innovative AI technology to drive further efficiency and generate additional cost savings. |
Maintaining focus on efficiencies
| · | We remain on track to achieve £120m of cost efficiencies in 2023, having delivered a little under half in the first half of this year. |
| · | We continue to expect margin improvement for the year from 12% in 2022 to mid-teens for 2023. |
Reshaping the portfolio
| · | The disposal of our POLS business is now complete, further focusing Pearson’s portfolio towards future growth opportunities. | |
| · | We completed the acquisition of PDRI, significantly expanding Pearson’s services to the U.S. federal government. | |
| · | The integration of Mondly continues to enhance our credentials in the online language learning self-study space with paid subscriptions standing at 473k at the end of the period, up 41%, with particularly strong growth in our MondlyWorks offering. | |
Outlook reaffirmed4
Group revenue, adjusted operating profit and profit margin outlook remain in line with expectations for 2023.
We also re-iterate our guidance of mid-single digit Group revenue growth over 2022 to 2025 and for margins to rise to the upper end of mid-teens in 2025.
In terms of divisional guidance and phasing:
| · | We are raising our revenue growth expectations in English Language Learning from high single digit to c.20% for 2023 following strong growth in the first half which we expect to normalise in H2. We are investing a portion of the operating leverage on this improvement to support future growth opportunities. |
| · | In Workforce Skills, given our focus on delivering modular solutions, our 2023 and 2022 to 2025 growth expectations for this division are likely to be more stretching. |
| · | Continued growth in Pearson+ subscriptions will lead to a shift in Higher Education revenue recognition from Q3 to Q4. |
| · | Contract timing in Assessment & Qualifications will see delivery in earlier quarters meaning Q4 growth will be lower than average. We are confident in achieving our full year revenue growth expectations. |
| · | In Virtual Learning the termination of the ASU contract will continue to impact growth in H2. |
| · | Revenue growth expectations for Virtual Schools remain unchanged with H2 enrolments impacted by the loss of a previously cited large school contract. |
KPIs
| KPI | Objective | KPI Measure | H1 2023 | H1 2022 |
| Digital Growth | Drive digital revenue growth | OnVUE volumes | 1.7m | 1.4m |
| Higher Education US digital registrations | 4.5m | 4.6m* | ||
| PTE volume | 606k | 344k | ||
| Consumer Engagement | Create engaging and personalised consumer experiences | NPS for Connections Academy | +67 | +67 |
| NPS for PTE | +56 | +51 | ||
| Pearson+ registered users | 4.7m | 4.5m | ||
| Mondly paid subscriptions | 473k | 336k | ||
| Workforce Skills registered users | 5.3m | 4.1m | ||
| Product Effectiveness | Improve the effectiveness of our products to deliver better outcomes | PTE speed of score return | 1.1 days | 1.3 days |
| VUE test volumes | 12.2m | 10.0m | ||
| Workforce Skills number of enterprise customers | 1,556 | 1,387 | ||
| Higher Education product usage – text units | 2.0m | 2.1m |
*H1 2022 US digital registrations restated from 4.8m to 4.6m due to recategorizing 0.2m of registrations from US to International.
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
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, 5, 7, 14 and 16. Constant exchange rates are calculated by assuming the average FX in the prior period prevailed through the current period.
2We have completed the sale of the Pearson Online Learning Services (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.
3Strategic Review is revenues in international courseware local publishing businesses being wound down, which will continue to be reported separately until dissipated.
42023 consensus on the Pearson website as at 19th April 2023; median adjusted operating profit of £568m at £:$ 1.20, interest charge £34m, tax rate 24%. Our Group revenue growth expectation for 2023 is low to mid-single digit, excluding OPM2 and the Strategic Review3 businesses.
5Comparative amounts have been revised, see note 1 of the condensed consolidated financial statements for further details.
6Comparative amounts have been restated to reflect the move between operating segments.
Assessment & Qualifications
In Assessment & Qualifications, sales increased 7% on an underlying basis and 12% on a headline basis. Adjusted operating profit increased 20% in underlying terms due to operating leverage on revenue growth and cost efficiencies partially offset by inflation and 28% in headline terms due to this, currency movements and portfolio changes.
Pearson VUE sales were up 12% in underlying terms as test volumes grew 22% versus the same period last year to 12.2m. Volume growth was driven by particularly good performance in the IT and healthcare segments, alongside the commencement of a number of new contracts.
In US Student Assessment, sales increased 4% in underlying terms driven by commencement of new contracts following new business wins.
In Clinical Assessment, sales increased 2% in underlying terms supported by good government funding and continued focus on health and wellbeing.
In UK and International Qualifications, sales increased 6% in underlying terms driven by price increases and good International growth.
Virtual Learning
In Virtual Learning, sales decreased 15% on an underlying basis and 4% on a headline basis due to currency movements and portfolio changes. Adjusted operating profit grew 72% in underlying terms due to efficiency improvements and phasing relating to contract closures in OPM and increased 236% in headline terms due to this, currency movements and portfolio changes.
Virtual Schools sales were down 2%, driven by enrolment declines for the 2022/23 academic year and lower district partnership renewals, offset by good retention rates and the return of a school that had previously left. New applications for the 2023/24 academic year are tracking well, but performance will be lower in the second half due to the previously cited loss of a larger partner school. Pearson will operate 45 schools in 29 states for the 2023/24 academic year.
We will be launching a new Connections Academy Career Pathways programme for middle and high school students which will deliver curated learning experiences in the fields of IT, Business, and Healthcare. These initiatives will launch in select Connections Academy schools in the 2023/24 school year, rolling out nationwide in following years. We have seen encouraging application trends in this programme to date.
In OPM, sales were down 69% on an underlying basis as expected.
Higher Education
In Higher Education, sales declined 2% on an underlying basis and increased 2% on a headline basis due to currency movements. Adjusted operating profit increased 25% in underlying terms driven primarily by cost efficiencies partially offset by trading and phasing related to amortisation and increased 75% in headline terms due to this and currency movements.
In the US, as expected, we saw a continuation of the trends observed in the Fall semester of the 2022/23 academic year, with a decline in enrolments and a loss of adoptions to non-mainstream publishers. Pearson+ performed well with 4.7m cumulative registered users and 938k paid subscriptions for the full academic year, the latter representing a c.200% increase compared to the prior year.
English Language Learning
In English Language Learning, sales were up 44% on an underlying basis and 51% on a headline basis due to currency movements and portfolio changes. Adjusted operating profit increased by 275% in underlying terms due to increased revenue partially offset by increased investment and increased 300% in headline terms due to this, currency movements and portfolio changes.
PTE volumes were up 76%. The strength of growth was heightened by comparison to a prior period in which global mobility had not fully resumed and supported by favourable migration policy in Australia. We also saw market share gains in India.
Within Institutional, performance was strong, with particularly good growth in LATAM and Middle East markets.
Our Online Self-Study business, Mondly, performed well, bringing new users to the Pearson ecosystem and demonstrating interconnectivity with other divisions. Paid subscriptions increased 41% versus the prior period driven by particularly strong growth in our MondlyWorks offering.
Workforce Skills
In Workforce Skills, sales were up 9% on an underlying basis and 10% on a headline basis. Adjusted operating profit decreased by 20% in underlying terms due to trading offset by investment in the business and decreased 25% in headline terms due to this and currency movements.
The Vocational Qualifications business grew by 7% in underlying terms. The Workforce Solutions business grew by 14% in underlying terms. Pearson has a broad reach of 1,556 enterprise clients in its Workforce Skills portfolio, up 12% on last year.
Strategic Review
Sales in businesses under strategic review declined 50% on an underlying basis, in line with expectations and were down 89% on a headline basis due to currency movements and portfolio changes.
FINANCIAL REVIEW
Operating result
Sales for the six months to 30 June 2023 increased on a headline basis by £91m or 5% from £1,788m for the six months to 30 June 2022 to £1,879m for the same period in 2023 and adjusted operating profit increased by £90m or 56% from £160m in the first half of 2022 to a profit of £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 2023 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 either 2022 or 2023 and by ensuring the contribution from acquisitions is comparable year on 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 in 2023, the disposal of our international courseware local publishing businesses in Europe, French-speaking Canada, South Africa and Hong Kong in 2022, the acquisition of PDRI in 2023 and the acquisitions of Credly and Mondly in 2022.
On an underlying basis, sales increased by 4% in the first six months of 2023 compared to the equivalent period in 2022 and adjusted operating profit increased by 44%. Currency movements increased sales by £62m and adjusted operating profit by £14m, and portfolio changes decreased sales by £29m and increased adjusted operating profit by £4m. There were no new accounting standards adopted in the first half of 2023 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 restructuring and one off-costs related to the UK pension scheme. A summary of these adjustments is included below and in more detail in note 2 to the condensed consolidated financial statements.
| all figures in £ millions | 2023 | 2022 | 2022 | |
| half year | half year | full year | ||
| Operating profit | 219 | 148 | 271 | |
| Add back: Cost of major restructuring | – | – | 150 | |
| Add back: Intangible charges | 24 | 26 | 56 | |
| Add back: UK pension discretionary increase | – | – | 3 | |
| Add back: Other net gains and losses | 7 | (14) | (24) | |
| Adjusted operating profit | 250 | 160 | 456 |
There is no cost of major restructuring in the first half of 2023. In H1 2022, there were no costs of major restructuring. In H2 2022, restructuring costs of £150m mainly related to staff redundancies and impairment of right of use property assets including the impact of updated assumptions related to the recoverability of right-of-use assets made in 2021.
Intangible amortisation charges to the end of June 2023 were £24m compared to a charge of £26m in the equivalent period in 2022. 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.
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 historical disposal, offset by losses on the disposal of Pearson College and costs related to current and prior year disposals and acquisitions. Other net gains and losses in the first half of 2022 largely related to the gain on disposal of the international courseware local publishing business in French-speaking Canada and a gain arising on a decrease in the deferred consideration payable on prior year acquisitions, offset by costs related to disposals and acquisitions.
The reported operating profit of £219m in the first half of 2023 compares to a profit of £148m in the first half of 2022. The increase in 2023 is mainly due to improved trading profits, partially offset by a net loss related to acquisitions and disposals compared to a net gain in the first half of 2022.
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.
Revision of prior year comparative figures
In H2 2022, the Group corrected an error related to the accounting treatment for certain investments in unlisted securities. The related accounting was corrected in the second half of 2022 and the impact of the correction and the prior year restatements are reflected in the 2022 Annual Report and Accounts. In these 2023 interim condensed consolidated financial statements, comparative 2022 half year line items have been corrected to reflect the change in accounting treatment. For the period to half year 2022, the restatement has resulted in an increase in statutory profit of £5m, comprising finance income of £6m and a tax charge of £1m. Other comprehensive income has decreased by £5m but total comprehensive income is unchanged. The impact on statutory earnings per share is an increase of 0.6p and the impact on diluted earnings per share is an increase 0.7p for the period to 30 June 2022. There is no impact to any adjusted measures, net assets, cash flows nor total equity. See note 1 to the Condensed Consolidated Financial Statements for further details.
Net finance costs
Net finance income decreased on a headline basis from £37m in the first half of 2022 to £17m in the same period in 2023. The decrease is primarily due to the release, in 2022, of £35m of interest recorded in respect of provisions for uncertain tax positions, partially offset by additional finance income in respect of retirement benefits.
Net interest payable reflected in adjusted earnings to 30 June 2023 was £12m, compared to a receivable of £18m in the first half of 2022. The difference is primarily due to the release, in 2022, of £35m of interest recorded in respect of provisions for uncertain tax positions.
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 fair value through profit and loss, 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 2023, the total of these items excluded from adjusted earnings was net income of £29m compared to net income of £19m in the first half of 2022. Net finance income relating to retirement benefits increased from £4m in the first half of 2022 to £13m in 2023 reflecting the comparative funding position of the plans at the beginning of each year and higher prevailing discount rates. Fair value gains on investments in unlisted securities are £5m in the first half of 2023 compared to £6m in 2022. In addition, there were similar gains on long-term interest rate hedges and an interest charge on tax provisions of £5m was recognised in 2022 in relation to the State Aid matter. 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 2023 was a charge of £49m compared to a charge of £49m in the period to 30 June 2022. This equates to an effective tax rate of 20.8% (2022: 26.5%). The lower effective tax rate compared to the prior year is primarily due to a tax credit being recognised on the disposal of the POLS business.
The total adjusted tax charge for the period was £54m (2022: £9m), corresponding to an effective tax rate on adjusted profit before tax of 22.7% (2022: 5.1%). The higher effective rate compared to 2022 is primarily due to the 2022 release of tax risk provisions following the expiry of the statute of limitations in the US not recurring. For a reconciliation of the adjusted measure see notes 4 and 5 to the condensed consolidated financial statements.
In the first half of 2023, there was a net tax payment of £59m, principally relating to the US. In the six months to 30 June 2022 there was a net tax payment of £51m, also principally relating to the US.
UK legislation in relation to Pillar 2 was substantively enacted on 20 June 2023 and will be effective from 1 January 2024. An initial assessment on the impact of this legislation has been completed and this legislation is not expected to materially impact Pearson’s effective tax rate in future periods.
Other comprehensive income
Included in other comprehensive income are the net exchange differences on translation of foreign operations. The loss on translation of £166m at 30 June 2023 compares to a gain at 30 June 2022 of £334m. The loss in 2023 arises from an overall weakening of the currencies to which the Group is exposed and in particular the relative movement in 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 2023 was £1:$1.27 compared to the opening rate of £1:$1.21. At the end of June 2022, the US dollar rate was £1:$1.21 compared to the opening rate of £1:$1.35.
Also included in other comprehensive income at 30 June 2023 is an actuarial loss of £27m in relation to retirement benefit obligations. The loss arises largely from losses on assets and experience losses, partially offset by a decrease in liabilities driven by higher discount rates. The loss in 2023 compares to an actuarial gain at 30 June 2022 of £121m.
Fair value gains of £2m (2022: £19m) have been recognised in other comprehensive income and relate to movements in the value of investments in unlisted securities held at 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. In 2022, a gain of £7m was recycled from the currency translation reserve to the income statement in relation to businesses disposed.
Cash flow and working capital
Our operating cash flow measure is used to align cash flows with our adjusted profit measures (see note 16 to the condensed consolidated financial statements). Operating cash flow increased on a headline basis by £70m from an inflow of £9m in the first half of 2022 to an inflow of £79m in the first half of 2023. The increase is largely explained by the drop-through of increased trading profits, and in particular the cost efficiency programme, as well as strong collections and portfolio changes.
The equivalent statutory measure, net cash generated from operations, was an inflow of £106m in 2023 compared to an inflow of £53m in 2022. Compared to operating cash flow, this measure includes restructuring 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 2023, restructuring cash outflow was £46m compared to £13m in the same period in 2022.
In the first half of 2023, there was an overall decrease of £195m in cash and cash equivalents from £543m at the end of 2022 to £348m at 30 June 2023. The decrease in 2023 is primarily due to payments for the acquisition of subsidiaries of £173m, a net cash outflow on disposal of subsidiaries of £19m, dividends paid of £106m, own share purchases of £25m, tax paid of £59m, interest payments of £34m, capital expenditure on property, plant, equipment and software of £63m and payments of lease liabilities of £42m. These were offset by the cash inflow from operations of £106m and proceeds from borrowings of £220m.
Liquidity and capital resources
The Group’s net debt increased from £557m at the end of 2022 to £911m at the end of June 2023. The increase is largely due to cash outflows on acquisitions and disposals of subsidiaries, tax payments, dividend payments and capital expenditure, partially offset by positive operating cash flow.
At 30 June 2023, the Group had drawn £220m on its Revolving Credit Facility.
At 30 June 2023, the Group had approximately £0.8bn in total liquidity immediately available from cash and its Revolving Credit Facility maturing February 2026. In assessing the Group’s ability to continue as a going concern for the period until 31 December 2024, 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 2023, 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 2024.
Post-retirement benefits
Pearson operates a variety of pension and post-retirement plans. Our 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 and no exposure to quoted equities. We have some smaller defined benefit sections in the US and Canada but, outside the UK, most of our companies operate defined contribution plans.
The charge to profit in respect of worldwide pensions and retirement benefits amounted to £23m in the period to 30 June 2023 (30 June 2022: £30m) of which a charge of £36m (30 June 2022: £34m) was reported in adjusted operating profit and income of £13m (30 June 2022: £4m) was reported against other net finance costs.
The overall surplus on UK Group pension plans of £574m at the end of 2022 has decreased to a surplus of £548m at the end of June 2023. The decrease has arisen principally due to the actuarial loss noted above in the other comprehensive income section. In total, our worldwide net position in respect of pensions and other post-retirement benefits decreased from a net asset of £520m at the end of 2022 to a net asset of £500m at the end of June 2023.
Businesses acquired
In March 2023, the Group completed the acquisition of 100% of the share capital of Personnel Decisions Research Institutes, LLC (‘PDRI’) for cash consideration of £152m ($187m). There is no contingent or deferred consideration. Net assets acquired of £91m were recognised on the Group’s balance sheet including £117m of acquired intangible assets. Goodwill of £61m was also recognised in relation to the acquisition.
The cash outflow in 2023 relating to acquisitions of subsidiaries was £173m. In addition, there was a cash outflow relating to the acquisition of associates of £5m and investments of £6m.
The cash outflow in 2022 relating to acquisitions of subsidiaries was £221m arising primarily from the acquisitions of Credly and Mondly. In addition, there was a cash outflow relating to the acquisition of associates of £4m and investments of £4m.
Businesses disposed
In June 2023, the Group disposed of its interests in its POLS businesses in the US, UK, Australia and India. The business disposed excludes Pearson’s contract with ASU. The consideration to be received is deferred and comprises a 27.5% share of positive adjusted EBITDA in each calendar year for 6 years and 27.5% of the proceeds received by the purchaser in relation to any future monetization event. The consideration has been valued at £12m and a pre-tax gain on disposal of £17m has been recognised. In addition, a gain of £9m has been recognised which arises from the release of a provision related to a historical disposal and £24m of losses arose from other immaterial disposals and costs related to previous disposals.
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 2022, the cash inflow from disposals of £108m mainly related to the disposal of ERPI and the receipt of deferred proceeds from the US K12 Courseware sale in 2019.
In addition, proceeds of £3m (2022 FY: £17m) were received in relation to the disposal of investments.
Dividends
The dividend accounted for in the six months to 30 June 2023 is the final dividend in respect of 2022 of 14.9p. An interim dividend for 2023 of 7p was declared by the Board in July 2023 and will be accounted for in the second half of 2023.
Share buyback
On 28 April 2023, the Group announced its intention to commence a £300m share buyback programme in Q3 of 2023 in order to return capital to shareholders. In the period to 30 June 2023, no shares have been bought back, and no formal commitments have been made.
Principal risks and uncertainties
In the 2022 Annual Report and Accounts (and the US Form 20-F for 2022), we set out our assessment of the principal risk issues that face the business under the categories: accreditation risk, capability risk, competitive marketplace, content and channel risk, customer expectations, portfolio change, and reputation and responsibility.
We also noted in our 2022 Annual Report and Accounts that the Group continues to closely monitor significant near-term and emerging risks which have been identified as climate transition, COVID-19, inflation, recession, supply chain, tax and the war in Ukraine.
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 2022 Annual Report (and the US Form 20-F for 2022).
Accreditation Risk
Termination 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.
Capability Risk
Inability to meet our contractual obligations or to transform as required by our strategy due to infrastructure 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, insourcing 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).
Content and Channel Risk
Inability to demonstrate differentiated content compared to freely available alternatives (such as generative AI) and/or failure to select appropriate content and delivery channels to conveniently deliver anticipated learning, resulting in loss of sales.
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.
