Pearson(PSO) - 2024 Q2 - Quarterly Report

Interim Results Highlights Financial Highlights The company reported solid H1 2024 financial performance, marked by underlying sales growth, stable adjusted operating profit, and improved free cash flow, alongside capital returns H1 2024 Financial Highlights (£m) | Measure | H1 2024 | H1 2023 | | :--- | :--- | :--- | | Business Performance | | | | Sales | 1,754 | 1,879 | | Adjusted operating profit | 250 | 250 | | Operating cash flow | 129 | 79 | | Free cash flow | 27 | (50) | | Adjusted earnings per share | 25.6p | 25.6p | | Statutory Results | | | | Sales | 1,754 | 1,879 | | Operating profit | 219 | 219 | | Profit for the period | 158 | 187 | | Net cash generated from operations | 185 | 106 | | Basic earnings per share | 23.1p | 26.1p | - Underlying Group sales grew 2% when excluding the OPM and Strategic Review businesses, with aggregate growth at 1%[163][170] - Adjusted operating profit grew 4% on an underlying basis to £250m, with the adjusted profit margin increasing to 14% from 13% in H1 2023[164][186] - A £500m share buyback is substantially complete, and the interim dividend was raised by 6% to 7.4p per share[166][190] Strategic & Operational Highlights Pearson made operational progress with key contract wins and user growth, while updating its strategy to focus on core business performance and expansion into early careers and enterprise skilling - Pearson VUE renewed key contracts and won new ones, including university entrance tests in the UK and a teacher license contract in Georgia[191] - In Higher Education, Pearson+ reached 5.0m cumulative registered users, and the company is launching AI tools for instructors in 25 best-selling titles for the Fall 2024 semester[193] - The company has identified a larger addressable market of c.$80bn (up from c.$15bn) and is focusing on enterprise skills and early careers to capture this opportunity[198][202] - New executive appointments include Vishaal Gupta as head of Workforce Skills, Dave Treat as Chief Technology Officer, and Ginny Cartwright Ziegler as Chief Marketing Officer[195][196] Outlook The company reaffirms its 2024 and 2025 guidance, anticipating continued underlying sales growth and margin improvement into the medium term - 2024 Outlook: Group underlying sales growth, adjusted operating profit, and tax outlook are reaffirmed; interest is expected to be c.£45m and free cash flow conversion 95-100%[204] - 2025 Outlook: The company expects to achieve mid-single digit underlying sales 3-year CAGR from 2022 to 2025 and an adjusted operating profit margin of 16-17%[210] - Medium Term Outlook (Post-2025): The company anticipates mid-single digit underlying sales CAGR and sustained margin improvement averaging 40 basis points per annum, with free cash flow conversion of 90-100%[211] Operational and Financial Review Operational Review by Segment The operational review details varied performance across segments, with growth in Assessment & Qualifications, English Language Learning, and Workforce Skills, offset by declines in Virtual Learning and Higher Education H1 2024 Sales Growth by Segment | £m | H1 2024 | H1 2023 | Headline growth | Underlying growth | | :--- | :--- | :--- | :--- | :--- | | Assessment & Qualifications | 811 | 796 | 2% | 2% | | Virtual Learning | 254 | 373 | (32%) | (8%) | | Higher Education | 358 | 379 | (6%) | (2%) | | English Language Learning | 188 | 184 | 2% | 11% | | Workforce Skills | 143 | 140 | 2% | 6% | | Total | 1,754 | 1,879 | (7%) | 1% | H1 2024 Adjusted Operating Profit/Loss by Segment | £m | H1 2024 | H1 2023 | Headline growth | Underlying growth | | :--- | :--- | :--- | :--- | :--- | | Assessment & Qualifications | 187 | 174 | 7% | 7% | | Virtual Learning | 31 | 47 | (34%) | (32%) | | Higher Education | (1) | (1) | 0% | 100% | | English Language Learning | 4 | 8 | (50%) | 38% | | Workforce Skills | 29 | 21 | 38% | 27% | | Total | 250 | 250 | 0% | 4% | - In Assessment & Qualifications, Pearson VUE sales grew 4% and Clinical Assessment sales grew 1%[175][176] - In English Language Learning, PTE volumes declined 10% due to tightening migration policies, but the segment saw strong growth in Institutional and Mondly[179][46] Financial Review This section analyzes the Group's financial performance, noting a decrease in headline sales but underlying growth, stable adjusted operating profit, a shift to net finance expense, and increased net debt due to capital returns Sales and Operating Result Headline sales decreased due to portfolio changes and currency, while underlying sales and adjusted operating profit showed growth, with statutory operating profit remaining flat - Headline sales decreased by £125m (7%) to £1,754m, while adjusted operating profit was flat at £250m[50] - On an underlying basis, sales increased 1% and adjusted operating profit increased 4%; currency movements negatively impacted sales by £45m and adjusted operating profit by £12m[51] Reconciliation of Operating Profit to Adjusted Operating Profit (£m) | | 2024 half year | 2023 half year | | :--- | :--- | :--- | | Operating profit | 219 | 219 | | Add back: Intangible charges | 20 | 24 | | Add back: UK pension discretionary increase | 5 | - | | Add back: Other net gains and losses | 6 | 7 | | Add back: Property charges | - | - | | Adjusted operating profit | 250 | 250 | Net Finance Costs Net finance costs shifted from income to expense in H1 2024, driven by investment losses, reduced FX gains, and higher borrowing costs, leading to increased net interest payable - Net finance income decreased from £17m in H1 2023 to a net expense of £7m in H1 2024[59] - Net interest payable (adjusted measure) increased to £21m from £12m in H1 2023, mainly due to increased borrowings and lower returns on cash deposits[60] Taxation The statutory and adjusted effective tax rates increased in H1 2024, primarily due to the absence of a non-recurring tax credit from a prior year disposal - The statutory effective tax rate was 25.5% in H1 2024, compared to 20.8% in H1 2023[63] - The adjusted effective tax rate was 23.6% in H1 2024, compared to 22.7% in H1 2023[64] - Net tax payments in H1 2024 were £69m, up from £59m in H1 2023[65] Cash Flow and Capital Resources Operating cash flow significantly improved due to lower capital expenditure and favorable working capital, though net debt increased primarily from share buybacks and dividends, with ample liquidity maintained - Operating cash flow (an adjusted measure) increased by £50m to £129m in H1 2024[70] - Net cash generated from operations (statutory measure) was £185m in H1 2024, compared to £106m in H1 2023[71] - Net debt increased to £1,177m at the end of June 2024 from £744m at the end of 2023[74] - The Group had available liquidity of c.£0.5bn at 30 June 2024 from cash and its undrawn Revolving Credit Facility[31][76] Capital Management The company actively returns capital to shareholders through an increased interim dividend and substantial progress on its ongoing share buyback program - An interim dividend for 2024 of 7.4p per share was declared, payable on 16 September 2024[4][5] - In H1 2024, approximately 28 million shares were bought back at a cash cost of £278m as part of the ongoing share buyback programme[6] - The £300m share buyback programme completed in March 2024; a £200m extension was c.80% complete as at 30 June 2024[6] Principal Risks and Uncertainties The principal risks remain consistent with the prior year, encompassing categories such as accreditation, AI, competitive landscape, and customer expectations, alongside ongoing monitoring of near-term macroeconomic and geopolitical factors - The principal risks have not changed materially from the 2023 Annual Report[9] - Key risk categories identified are: - Accreditation Risk: Loss or modification of course accreditation - Artificial Intelligence, Content and Channel Risk: Difficulty protecting IP and maintaining differentiation due to AI - Capability Risk: Inability to meet obligations due to infrastructure or organizational challenges - Competitive Marketplace: Changes in market demand or supply, including from generative AI - Customer Expectations: Rising expectations risking margin pressure or loss of sales - Portfolio Change: Failure to execute portfolio changes effectively - Reputation and Responsibility: Harm from failure to meet obligations to stakeholders[7][10][11] - The Group continues to monitor significant near-term and emerging risks, including climate transition, inflation, interest rates, recession, supply chain, tax, sanctions, and geopolitics[8] Condensed Consolidated Financial Statements Condensed Consolidated Income Statement For H1 2024, the Group reported sales of £1,754 million, operating profit of £219 million, and profit for the period of £158 million, resulting in basic earnings per share of 23.1p Condensed Consolidated Income Statement (for the period ended 30 June 2024) | all figures in £ millions | 2024 half year | 2023 half year | 2023 full year | | :--- | :--- | :--- | :--- | | Continuing operations | | | | | Sales | 1,754 | 1,879 | 3,674 | | Gross profit | 879 | 919 | 1,835 | | Operating profit | 219 | 219 | 498 | | Profit before tax | 212 | 236 | 493 | | Profit for the period | 158 | 187 | 380 | | Earnings per share (in pence) | | | | | Basic | 23.1p | 26.1p | 53.1p | | Diluted | 22.8p | 25.9p | 52.7p | Condensed Consolidated Balance Sheet As of June 30, 2024, the Group's balance sheet reported total assets of £6,709 million and total liabilities of £2,898 million, resulting in net assets of £3,811 million, a decrease from year-end 2023 Condensed Consolidated Balance Sheet (as at 30 June 2024) | all figures in £ millions | 2024 half year | 2023 half year | 2023 full year | | :--- | :--- | :--- | :--- | | Non-current assets | 4,188 | 4,368 | 4,294 | | Current assets | 2,521 | 2,499 | 2,431 | | Total assets | 6,709 | 6,882 | 6,727 | | Current liabilities | (1,418) | (1,164) | (1,404) | | Non-current liabilities | (1,480) | (1,530) | (1,335) | | Total liabilities | (2,898) | (2,694) | (2,739) | | Net assets | 3,811 | 4,188 | 3,988 | | Total equity | 3,811 | 4,188 | 3,988 | Condensed Consolidated Statement of Changes in Equity Total equity decreased from £3,988 million to £3,811 million in H1 2024, primarily due to share buybacks and dividends, partially offset by profit for the period - Total equity decreased by £177m in H1 2024, from £3,988m to £3,811m[23] - Key movements in equity include profit for the period (+£158m), share buybacks (-£204m), and dividends paid (-£107m)[23] Condensed Consolidated Cash Flow Statement For H1 2024, net cash generated from operating activities was £75 million, leading to a net increase in cash and cash equivalents of £23 million after investing and financing activities, including significant share buybacks and new borrowings Condensed Consolidated Cash Flow Statement (for the period ended 30 June 2024) | all figures in £ millions | 2024 half year | 2023 half year | 2023 full year | | :--- | :--- | :--- | :--- | | Net cash generated from operating activities | 75 | 13 | 525 | | Net cash used in investing activities | (81) | (244) | (301) | | Net cash generated from / (used in) financing activities | 36 | 49 | (450) | | Net increase / (decrease) in cash and cash equivalents | 23 | (195) | (234) | - Major financing cash flows in H1 2024 included proceeds from borrowings (£495m), buyback of equity (-£278m), and dividends paid (-£107m)[28] Notes to the Condensed Consolidated Financial Statements Note 2: Segment Information This note details sales and adjusted operating profit by segment, and reconciles adjusted operating profit to statutory operating profit by accounting for specific non-GAAP adjustments H1 2024 Sales and Adjusted Operating Profit by Segment (£m) | Segment | Sales | Adjusted Operating Profit | | :--- | :--- | :--- | | Assessment & Qualifications | 811 | 187 | | Virtual Learning | 254 | 31 | | English Language Learning | 188 | 4 | | Workforce Skills | 143 | 29 | | Higher Education | 358 | (1) | | Total | 1,754 | 250 | Reconciliation of Adjusted Operating Profit to Statutory Operating Profit (£m) | | 2024 half year | | :--- | :--- | | Adjusted operating profit | 250 | | Intangible charges | (20) | | UK pension discretionary increases | (5) | | Other net gains and losses | (6) | | Operating profit | 219 | Note 6: Adjusted Earnings Per Share This note reconciles statutory to adjusted earnings, a non-GAAP measure, showing H1 2024 adjusted earnings of £174 million and a flat basic adjusted EPS of 25.6p after specific adjustments Reconciliation to Adjusted Earnings (H1 2024, £m) | | Statutory | Adjustments | Adjusted | | :--- | :--- | :--- | :--- | | Operating profit | 219 | 31 | 250 | | Net finance income / (costs) | (7) | (14) | (21) | | Profit before tax | 212 | 17 | 229 | | Income tax | (54) | 0 | (54) | | Earnings / (loss) | 157 | 17 | 174 | Adjusted Earnings Per Share | | 2024 half year | 2023 half year | | :--- | :--- | :--- | | Adjusted earnings per share (basic) | 25.6p | 25.6p | | Adjusted earnings per share (diluted) | 25.3p | 25.5p | Note 7: Dividends The directors declared an interim dividend of 7.4p per share for 2024, estimated to cost £49 million, payable on September 16, 2024 - An interim dividend of 7.4p per share has been declared, payable on 16 September 2024[108] - The total estimated cost of the interim dividend is £49m[108] Note 10 & 11: Business Combinations and Disposals No significant acquisitions or disposals occurred in H1 2024, though net cash outflows were recorded for deferred payments on prior year acquisitions and costs related to past disposals - No significant acquisitions or disposals of subsidiaries occurred in H1 2024[117][121] - A net cash outflow of £38m was recorded for acquisitions, relating to deferred payments for prior year acquisitions like Credly and Mondly[119][120] - A net cash outflow of £6m was recorded for disposals, relating to costs paid for businesses disposed of in prior years[2][124] Note 12: Net Debt The Group's net debt increased to £1,177 million as of June 30, 2024, primarily due to a significant drawdown on the revolving credit facility to fund share buybacks and dividends Net Debt Position (£m) | | 2024 half year | 2023 half year | 2023 full year | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | 332 | 355 | 312 | | Borrowings | (1,613) | (1,383) | (1,161) | | Derivative financial instruments (Net) | 12 | (7) | (10) | | Investment in finance lease | 92 | 107 | 100 | | Net debt | (1,177) | (911) | (744) | - The increase in borrowings in 2024 primarily reflects an additional drawdown of £495m on the revolving credit facility[126] Note 14: Cash Flows Reconciliation This note reconciles statutory to adjusted cash flow measures, showing H1 2024 operating cash flow of £129 million and free cash flow of £27 million, with net debt increasing due to acquisitions and equity transactions Reconciliation of Net Cash from Operations to Operating Cash Flow (H1 2024, £m) | | Amount | | :--- | :--- | | Net cash generated from operations (Statutory) | 185 | | Cost of major reorganisation | 5 | | Other net gains and losses | 3 | | Purchase/disposal of PPE and software | (52) | | Net addition of right of use assets | (12) | | Operating cash flow (Adjusted) | 129 | Reconciliation of Operating Cash Flow to Closing Net Debt (H1 2024, £m) | | Amount | | :--- | :--- | | Operating cash flow | 129 | | Tax paid | (69) | | Net finance costs paid | (28) | | Cost paid for major reorganisation | (5) | | Free cash flow | 27 | | Dividends paid | (107) | | Acquisitions and disposals | (54) | | Net equity transactions | (313) | | Other movements | 14 | | Movement in net debt | (433) | | Opening net debt | (744) | | Closing net debt | (1,177) | Note 15: Contingencies The Group faces several contingent liabilities, primarily tax disputes including a European Commission State Aid case, a UK tax assessment, and a significant Brazilian tax challenge, with varying provisions held - The Group has a contingent liability related to the EU Commission's State Aid ruling on the UK's FCPE; total exposure is £105m, with a provision of £63m held[144] - A separate assessment from UK tax authorities for 2019-2021 has a maximum exposure of £43m, with a provision of £21m held[145] - In Brazil, the Group is challenging tax assessments on goodwill amortisation with a potential total exposure of up to BRL 1,345m (£192m); the Group believes no provision is required at this stage[139]