Pearson Plc Total Sales decreased by 9%

Pearson Plc (LON:PSON), today announced 2018 Preliminary results.

Highlights

Revenue down 1% in underlying terms

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

· Strong performance in our structural growth opportunities with revenue up 10% in Global Online Program Management, 8% in Connections Academy, 4% in Professional Certification (VUE) and Pearson Test of English Academic (PTEA) test volume growth of 30%.

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

Adjusted operating profit up 8% in underlying terms

· Adjusted operating profit of £546m for 2018, in the in the upper half of the guidance range of £520m to £560m.

· Adjusted earnings per share of 70.3p including a c.20p one-off tax benefit and a lower finance charge as indicated in Pearson’s Q3 trading update.

Strong balance sheet

· Closing net debt at 31 December 2018 of £143m (2017: £432m).

· Strong operating cash flow with cash conversion at 94% (2017: 116%).

· The Board proposes a final dividend of 13p (2017: 12p), an increase of 8%, which equates to a full year dividend of 18.5p (2017: 17p).

Statutory results

· Sales decreased by 9%, £384m, in headline terms primarily due to portfolio changes reducing sales by £216m and currency movements decreasing revenue by £134m.

· Statutory operating profit for the year was £553m (2017: £451m) with the increase primarily due to profit on disposals of Wall Street English (WSE) and UTEL.

· Statutory EPS of 75.6p (2017: 49.9p) with the increase due to higher profit and one-off tax benefits.

Simplification on track, efficiency programme ahead of plan

· Cost efficiency programme ahead of plan in 2018 with incremental cost savings of £130m and exceptional restructuring costs1 of £102m.

· At 31 December 2018 US K12 Courseware was held for sale. We announced an agreement to sell this business on 18 February 2019.

John Fallon, Chief Executive said:

“We made good progress last year. We increased underlying profits, outperformed our cost savings plan and invested in the digital platforms that are making us a simpler, more efficient and innovative company. We are increasingly well placed to guide our customers through a lifetime of learning and help our partners shape the future of education. We have a lot still to do, but we expect company wide sales to stabilise this year, and grow again in 2020 and beyond.”

Financial Summary

Throughout this announcement: a) Growth rates are stated on an underlying basis unless otherwise stated. Underlying growth rates exclude both currency movements, portfolio changes and accounting changes, b) CER refers to Constant Exchange Rates, and c) 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 17.

Progress on our strategic priorities
During 2018 we made good progress on our strategic priorities as we become a leaner, more agile and more sustainable business.

Grow market share through digital transformation
Digital transformation progressing to plan

· We made further progress with Pearson’s digital transformation in 2018 with revenue split 34% digital (2017: 32%), 28% digitally enabled (2017: 27%) and 38% non-digital (2017: 41%).

· US Higher Education Courseware digital revenue grew by 2% to become 55% of our revenue in this business, although growth was again more than offset by the anticipated continuation of underlying market pressures on print courseware revenue.

· Direct to consumer sales grew 8% to account for 23% of revenue in US Higher Education Courseware.

· We continue to focus on Inclusive Access (Direct Digital Access) solutions, signing 192 new institutions in 2018 taking the total to nearly 700. We delivered over 1.4m course enrolments at non-profit and public institutions in this way, accounting for c.8% of US Higher Education Courseware revenue.

· US Higher Education Courseware eBook revenue grew at more than 20% for the second year. We continue to expand our partner print rental programme and expect to have c.400 titles in the programme in the second half of 2019.

· We have continued to invest in the Global Learning Platform (GLP) and our innovative product and feature pipeline. We have launched pilot versions of new Developmental Math courseware and will launch multiple Revel titles with enhanced assignment options and data analytics on the GLP during 2019.

· US Student Assessment saw testing volume declines, but continues to shift towards digital tests, which now account for 56% of all tests administered and provide a better, more effective customer experience leveraging the efficiency of Pearson’s digital platform.

Invest in structural growth markets

+14% Global OPM course registrations

3 New Connections Academy partner schools opened

+4% VUE test
volumes

+30% PTE Academic test

volumes
Continuing strong performance in structural growth opportunities

· Online Program Management (OPM), Connections Academy virtual schools, Professional Certification (VUE) and English are significant growth opportunities. We continue to invest in these structurally growing markets which drive recurring revenue streams, and account for c.35% of Pearson’s 2018 revenue (excluding WSE and US K12 Courseware).

· OPM saw 14% growth in global course registrations and global revenue growth of 10%.

· Connections Academy grew revenue 8%.

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

· In Professional Certification revenue grew 4%, with over 70 new contracts signed during the year.

· Revenue in Global English Courseware grew 3%, with strong growth in China.

Become simpler and more efficient

£330m+

Cost efficiency opportunity

Simplification on track, cost savings ahead of plan

· Cost efficiency programme ahead of plan in 2018 with incremental cost savings of £130m and exceptional restructuring costs1 of £102m.

· We 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 c.£330m. This is ahead of the original plan of £300m in savings and costs.

· We expect to achieve a further £130m of incremental cost savings in 2019 taking the cumulative savings to £275m by the end of 2019 leaving £55m or more of further savings in 2020 as the annualised benefit of the programme flows through. Restructuring costs in 2019 are expected to be £150m as the programme is completed.

· We completed the sale of Wall Street English (WSE).

· During 2018 we sold our property at One Southwark Bridge for £115m. The profits on disposal were offset by a charge for onerous leases relating to Pearson’s property footprint in London.

· At 31 December 2018 US K12 Courseware was held for sale. We announced the agreement to sell this business on 18 February 2019.

2019 Outlook
In 2019, Pearson expects to report adjusted operating profit of between £590m and £640m and adjusted earnings per share of 56.5p to 62.0p (including our US K12 Courseware business).

This guidance is pre-IFRS 162 based on existing portfolio and exchange rates as at 31 December 2018. Expect a net interest charge of c.£30m and a tax rate of 21%.

Including IFRS 16 Pearson expects to report adjusted operating profit of between £610m and £660m, a net interest charge of c.£60m and adjusted earnings per share of 55.5p to 61.0p for 2019.