Pearson plc (LON:PSON) has announced its interim results for the six months to 30th June 2024 (Unaudited).
Solid H1 financial performance; No change to 2024 and 2025 guidance; Beyond 2025, expect to grow at mid-single digits with expanding adjusted operating margins
Financial Highlights
| £m | H1 2024 | H1 2023 | £m | H1 2024 | H1 2023 | |
| Business performance | Statutory results | |||||
| Sales | 1,754 | 1,879 | Sales | 1,754 | 1,879 | |
| Adjusted operating profit | 250 | 250 | Operating profit | 219 | 219 | |
| Operating cash flow | 129 | 79 | Profit for the period | 158 | 187 | |
| Free cash flow | 27 | (50) | Net cash generated from operations | 185 | 106 | |
| Adjusted earnings per share | 25.6p | 25.6p | Basic earnings per share | 23.1p | 26.1p |
Highlights
| · | Underlying Group sales growth1 of 2%, excluding OPM2 and the Strategic Review3 businesses with each segment performing broadly in line with our expectations. |
| · | Underlying adjusted operating profit growth1 of 4% to £250m. |
| · | Strong free cash flow performance up £77m to £27m. |
| · | £500m share buyback substantially complete and raised interim dividend by 6%, while balance sheet remains robust. |
| · | Remain on track to deliver on FY24 expectations and reiterate guidance out to 2025. |
| · | Beyond 2025, Pearson is positioned to deliver mid-single digit underlying sales CAGR and sustained margin improvement that will equate to an average increase of 40 basis points per annum by continuing to drive performance in the core business, executing synergies and expanding into adjacent markets. |
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
| · | Assessment & Qualifications sales grew 2%, with growth across Pearson VUE, Clinical, and UK & International Qualifications partially offset by an expected, small decline in US Student Assessments. |
| · | Virtual Schools sales declined 1%, reflecting the previously announced contract losses for the current academic year. Virtual Learning sales declined 8% mostly attributable to the final portion of the OPM ASU contract in the first half of 2023. |
| · | Higher Education sales were down 2%, in line with our phasing guidance. We are seeing encouraging signs of progress in the business with Spring adoption data indicating small market share gains. |
| · | English Language Learning sales increased 11% due to strong growth in Institutional as well as growth in Mondly, partially offset by a sales decline in PTE given market dynamics. The Argentina FX impact discussed at Q1 has reduced as expected, and will be immaterial in a full year context. |
| · | Workforce Skills sales grew 6%, with strong performances in Vocational Qualifications, GED and Credly. |
Adjusted operating profit1 up 4% on an underlying basis to £250m
| · | Performance driven by trading alongside net cost phasing and savings, partially offset by inflation and restructuring charges in Higher Education, which were weighted to the first half. First half adjusted profit margin grew to 14% (H1 2023: 13%). |
| · | Headline growth was flat reflecting underlying performance, portfolio changes and currency movements. |
| · | Adjusted earnings per share was flat at 25.6p (H1 2023: 25.6p) with higher net interest costs offset by the reduction in issued shares, both due to the share buyback. |
Strong free cash flow with robust balance sheet enabling continued investment and driving increased shareholder returns
| · | Operating cash flow was again strong, up £50m to £129m (H1 2023: £79m) with good underlying fundamentals, as well as some phasing and FX benefits. | |
| · | Free cash flow was also strong, up £77m to £27m (H1 2023: (£50)m) given the operating cash performance and no reorganisation costs this year. | |
| · | Our balance sheet remains robust with net debt of £1.2bn (H1 2023: £0.9bn), the year on year increase being due to the £500m share buyback and dividends, partially offset by free cash flow. | |
| · | Proposed interim dividend of 7.4p (H1 2023: 7.0p) represents an increase of 6%. | |
| · | The previously announced buyback extension to repurchase £200m of shares continued. As at 30th June 2024 £163m of shares had been repurchased at an average price of 994p per share, representing 81% of the total programme. | |
Continued operational progress
Operational progress continued across each of our businesses
| · | In Assessment & Qualifications, Pearson VUE renewed and won a number of key contracts, which will support future growth. Pearson VUE wins included university entrance tests in the UK and the teacher licence contract in Georgia, and it renewed key contracts with the National Council of State Boards of Nursing, the Project Management Institute, and the American Registry of Radiologic Technologists. PDRI also saw good growth, with strong volumes across both the TSA and United States Airforce contracts. |
| · | In Virtual Schools, we have already announced the opening of 3 new schools this year and a further 19 career programmes. This brings our total number of schools to 40, with 24 career programmes, across 30 states for the 2024/25 academic year. |
| · | In Higher Education, recent Spring semester market data indicates a small gain in adoption share, while we also saw 3% growth in core text units, 2% growth in US digital subscriptions and Inclusive Access growth of 25%. Pearson+ continued to perform well with 5.0m cumulative registered users and paid subscriptions for the full academic year increasing 18% to 1.1m. We are seeing good engagement with our AI study tools, and are on track to extend to a further c.80 titles for Fall back to school. Pearson will also be launching AI tools for instructors for the Fall 2024 semester in 25 of our best-selling titles across business, math, science, and nursing in the US. |
| · | In English Language Learning, PTE continued to gain market share, despite a market which has declined given tightening of policies around international study and migration across Australia, Canada and the UK. Given these market dynamics, we expect PTE sales to be flat to down for the year. Our market share gains in PTE, and the ramp up for Canada, mean we are well placed for English high stakes testing market growth, which we expect in the medium term given demographic projections. |
| · | In Workforce Skills, Vishaal Gupta joined Pearson on April 15th to lead the division, and play a critical role in executing our enterprise skills strategy. |
| · | Dave Treat joined Pearson as Chief Technology Officer on 2nd July 2024. Dave will report to CEO, Omar Abbosh, and work in close partnership with Pearson’s Chief Product and Chief Information Officers. He will lead technology innovation and architecture across the company. |
| · | Ginny Cartwright Ziegler joined Pearson, today, 29 July 2024 as Chief Marketing Officer. Ginny will report to CEO Omar Abbosh and will lead the next generation of our work in marketing, brand and communications. Ginny is succeeding Lynne Frank, who has stepped down from her dual role as Chief Marketing Officer and Co-President, Direct to Consumer. |
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
| · | Pearson is in a strong position today. We are the world’s lifelong learning company, where we are trusted to help individuals realise the life they imagine through learning. Our five businesses have clear lines of accountability and improving financial performance, with particular strength in assessments and verification. | ||
| · | We are leaders today in a c.$15bn subsegment of the U.S. learning market, and are well positioned to play in a larger, and faster growing c.$80bn addressable market. | ||
| · | The opportunity for Pearson will be supported by two key secular trends foreseen over the coming years: shifts in demographic trends and the rapid growth in the power of AI. The demographic shift will see the baby boomer generation leave the workforce, resulting in heightened pressure on talent sourcing, and the rapid development of increasingly powerful AI models will significantly change the world of work and skills requirements. Employers will need to find new pools of talent and continuously develop and verify the skills of their workforces to keep pace with and benefit from technology and AI advancements. | ||
| · | To realise the growth opportunity for Pearson we will: | ||
| · | Drive further performance from our existing five core businesses to deliver an improved customer proposition, growth and efficiencies. We have identified a number of technology enabled initiatives, which we expect to unlock tens of millions of savings over the medium term. Initially these savings will be offset by restructuring costs, but as these pay back they will enable us to further invest in growth opportunities. | ||
| · | Unlock execution-based synergies across the business units from product & service bundling, a modern approach to software and product development, and a focus on strategic partnerships. | ||
| · | We will allocate our investment where we see the best opportunities for growth and returns: firstly assessments and verifications; then enterprise skills and early careers. | ||
| · | We will maintain net debt to EBITDA of around 2x, on average over time, though in the short term we intend to remain below this level to maintain some investment optionality. Our dividend policy is progressive and sustainable. At present, we do not plan to extend our share buyback programme, but are committed to regularly reviewing this. | ||
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:
| · | Expect improved growth momentum in the second half of 2024 with the growth of Higher Education and normalised comparators for the assessments businesses. |
| · | In Assessment & Qualifications, we continue to expect low to mid-single digit sales growth for the year, with sales growth weighted to H2. |
| · | In Virtual Schools, we continue to expect sales to decline at a similar rate to 2023, given the previously cited loss of a larger partner school for the 2024/25 academic year. We expect Virtual Schools to return to growth in 2025 and beyond. |
| · | In Higher Education, we remain confident we will return to growth in the second half and for the full year. Growth in digital sales will continue to shift revenue recognition from Q3 to Q4. |
| · | In English Language Learning, we continue to expect high single digit sales growth and growth weighted to the second half given the outstanding performance in the first half of 2023. The growth will be driven mainly by Institutional, with PTE being flat to down. |
| · | In Workforce Skills, we expect to achieve high single digit sales growth. |
| · | Every 1c movement in £:$ rate equates to approximately £5m adjusted operating profit impact. |
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.
