Good progress in the first half of the year, continued momentum in our structural growth opportunities.
Highlights
Underlying revenue up 2% with growth across all three segments
· North America up 1%, Core up 6% and Growth up 2%.
· Continued momentum in our structural growth opportunities and stabilisation in other parts of our business more than offsets expected declines in US Higher Education Courseware and US Student Assessment.
· Strong performance in our structural growth opportunities driven by good enrolment growth in Online Program Management (OPM) and Connections Academy, a continuing ramp-up of contracts in our Professional Certification business (VUE) and strong test volumes in Pearson Test of English Academic.
· Pearson’s sales decreased by 2% in headline terms largely due to disposals of non core businesses.
· As in previous years, Pearson’s sales and profits are weighted towards the second half of the year.
Adjusted operating profit up 30% in underlying terms
· Reflecting sales growth and savings from the 2017-2019 restructuring programme, partially offset by cost inflation and other operational factors.
Strong balance sheet with H1 net debt at £726m (H1 2018: £775m) pre IFRS 161
· On a post IFRS 16 basis net debt at the end of H1 2019 was £1,376m.
· Interim dividend 6p (H1 2018: 5.5p).
Statutory results
· Statutory operating profit from continuing operations was £37m in the first half of 2019 (H1 2018: £233m). The decrease in 2019 is largely due to the lower profit on disposal of businesses and higher restructuring charges in 2019, partly offset by improved trading and additional restructuring savings.
· Statutory EPS 6.1p (H1 2018: 24.1p) reflects lower profit on disposal of businesses.
Simplification on track to deliver over £330m annualised cost savings by end of 2019
· Incremental cost savings of £60m delivered in the first half.
· Completed our Enterprise Resource Planning (ERP) implementation in the US with over 75% of the company by revenue now operating on a single ERP system.
· On track to launch the Global Learning Platform (GLP) and a suite of new digital products over the coming months.
FY 2019 adjusted operating profit guidance unchanged; adjusted EPS upgraded
· We continue to expect Pearson to deliver underlying profit growth and stabilise revenue in 2019, and for revenue to grow in 2020.
· For 2019 we are upgrading our adjusted earnings per share guidance to be between 57.5p to 63.0p reflecting improvements in the finance charge and taxation at exchange rates prevailing on 31st December 2018.
John Fallon, Chief Executive said:
“We’ve had a good first half, with underlying growth across all divisions, as we start to benefit from accelerating our shift to digital. We are on track to at least stabilise revenue this year and return the company to top line growth from 2020. We are excited by the new digital products and platforms we’re now launching, and our ability to help millions more people prepare for, develop in, and change careers through a lifetime of learning.”
Continuing good progress on our strategic priorities.
During the first half of 2019 we continued to make good progress on our strategic priorities of digital transformation, investing in structural growth and simplification, making us a leaner, more agile and more sustainable business.
Digital transformation
· We recently announced that all future releases of Pearson’s 1,500 active US Higher Education Courseware titles will be “digital first” and updated on an ongoing basis. This drives benefits in content delivery, speed and cost, and further facilitates our move from ownership to subscription based access models. It also allows the communication of a simpler and more transparent marketing strategy for pricing.
· We continue to make good progress with our strategy of shifting from ownership to subscription based access models, signing 84 new institutions in Inclusive Access in the first half of the year. This takes the total number of institutions that have signed to 781 representing c.16% of US Higher Education Courseware revenue, up over 40% from H1 2018. We will continue to expand our access based models adding a further 200 titles in our Partner Print Rental programme resulting in over 330 titles this Fall with a further 80 titles available in digital format only.
· US Higher Education Courseware digital revenue grew moderately on a like for like basis, while registrations, including ebooks, declined 1%. Good registration growth in Revel, up 22% was offset by continued market pressure in Developmental Mathematics and the planned retirement and deprioritisation of long tail products in advance of our launch of GLP and the digital first model. We expect this to continue during the transition to the digital first and GLP enabled model, before growth in registrations resumes in 2021.
· US Student Assessment declined 5% in online tests to K12 students, due to contract exits and reductions in scope. TestNav8, our digital testing platform, operated with 100% up-time across all customers with a peak load of 1.3m students in a single day.
· Our Core Assessment business benefited from the delivery of a new contract in Egypt to run the national high school assessment programme. This will deliver 125m digital tests over a four year lifecycle making it Pearson’s biggest assessment contract by volume.
Invest in structural growth markets
· In Online Program Management (OPM) revenue grew well with enrolment growth of 13% on a global basis and the launch of new programs.
· In Connections Academy, our K12 virtual school business, enrolment growth of 11% across existing schools and new schools led to strong revenue growth.
· Both OPM and Connections continue to benefit from strong pipelines underpinning revenue growth going forward.
· In Professional Certification, revenue grew well as we continued to benefit from the ramp-up of new contracts and the renewal of existing contracts. Pearson’s Professional Certification business partners with more than 450 credential owners across the globe.
· Pearson Test of English Academic grew global test volumes by 18% with a strong performance in Australia, India and China.
Simpler and more efficient
· We completed the sale of our US K12 Courseware business in March 2019.
· We are on track to deliver incremental cost savings under our transformation plan of more than £330m per annum, with the full benefits accruing from the end of 2019 onwards2.
· In the first half of the year, we achieved incremental cost savings of £60m, closing two offices and completing 80% of our headcount reduction as well as the implementation of our new ERP system in the US.
· During the second half of the year we expect to deliver further incremental savings of £70m and an additional £55m or more in 2020. Restructuring costs in the first half were £64m.
2019 outlook
Our guidance for 2019 adjusted operating profit remains unchanged and we continue to expect to deliver adjusted operating profit of between £590m to £640m.
We continue to expect to stabilise revenue in 2019 and to return to top line growth in 2020. Our guidance for US Higher Education Courseware remains unchanged with net sales expected to be flat to down 5% for the full year, driven by ongoing underlying market pressures.
For the full year, we are updating our guidance for improvements in the finance charge and taxation. We now expect our finance charge to be £45m for the full year due to favourable interest outcomes from settlements of historical tax positions. We expect our tax rate to be in the range of 17% – 19% following further review of detailed regulations published regarding US tax reform.
The impact of these changes increases our adjusted earnings per share to be between 57.5p to 63.0p at exchange rates prevailing on 31st December 2018.
We calculate that a 5c move in the US Dollar exchange rate to Sterling would impact adjusted EPS by around 2.0p to 2.5p.
