Pearson 2014 half-year results


Included in this release:


Pearson 2014 Interim results (unaudited)

FINANCIAL HIGHLIGHTS

  • Sales up 2% at CER to £2.0bn reflecting good growth in digital, services and emerging markets, offset as expected, by the impact of school curriculum change in the US and the UK; also, this year, seasonal changes in phasing have helped first half sales in North America and hurt those in Core markets, especially the UK.
  • Adjusted operating profit, excluding Mergermarket, of £73m down from £124m last year, due to increased net restructuring charges (£43m in 2014; £29m in 2013), currency movements and the impact on margins of the phasing of revenues into the second half of 2014.
  • Adjusted EPS of 4.7p (2013: 9.9p) after restructuring charges.
  • Dividend raised 6% to 17p reflecting our confidence in our prospects.

2014 FULL YEAR OUTLOOK UNCHANGED

  • We reiterate the guidance we gave on 28 February 2014.
  • 2014 profits to reflect portfolio changes (Penguin Random House associate accounting; Mergermarket sale; Grupo Multi acquisition) and significant strengthening of Sterling against key currencies.
  • Cyclical and policy-related pressures in our largest markets expected to persist, impacting revenues and margins.
  • Still expect approximately £50m net restructuring to continue to reshape our publishing businesses; £50m organic investment in structural growth opportunities in digital, services and emerging markets.
  • Based on 28 February 2014 exchange rates, we still expect to report adjusted earnings per share of between 62p and 67p in 2014.

2015 AND LONGER TERM

  • Pearson’s strategy centres on a significant and exciting long-term opportunity: the sustained and growing global demand for greater access, achievement and affordability in education.
  • We can meet this demand by accelerating our shift to digital, services and to fast-growing economies, and committing to deliver measurably improved learning outcomes (efficacy).
  • We are investing in learning services, inside services, direct delivery and assessments and qualifications, and in school, higher education and English language learning. We are organising around a smaller number of global products and platforms, built around a single, world-class infrastructure and common systems and processes.
  • In 2013 and 2014, we are executing a significant restructuring programme designed to reduce our exposure to structural pressures and to shift resources towards these growth opportunities. Our restructuring expenditure will return to more normal levels in 2015.
  • In addition, we believe cyclical pressures will begin to ease from 2015 as curriculum change is implemented in the US and UK and US college enrolments stabilise and, in due course, return to growth.
  • This strategy will enable us to help more people make progress in their lives through learning. It also provides Pearson with a larger market opportunity, a sharper focus on the fastest-growing markets and stronger financial returns in 2015 and beyond.

John Fallon, chief executive said:

"Overall, we are sustaining a good competitive performance through a period of change and are powering ahead in digital, services and emerging markets which enable us to reiterate our guidance for 2014. It also positions Pearson as a global learning services company, making better learning outcomes more accessible for far more people around the world. This will drive a leaner, more cash generative, faster growing business from 2015."

FINANCIAL SUMMARY

£ millions Half year
2014
Half year
2013
Headline
growth
CER
growth
Underlying
growth
Business performance          
Sales 2,047 2,190 (7)% 2% 0%
Adjusted operating profit 75 137 (45)% (36)% (40)%
Adjusted earnings per share 4.7p 9.9p (53)%    
Operating cash flow (254) (247) (3)%    
Net debt 2,028 1,837 (10)%    
Statutory results          
Sales 2,047 2,190 (7)%    
Operating (loss)/profit (37) 8 n/a    
Loss before tax (36) (16) (125)%    
Basic earnings per share 28.0p (1.0)p n/a    
Cash used in operations (212) (161) (32)%    
Dividend per share 17.0p 16.0p 6%    


Throughout this announcement:

a) Growth rates are stated on a constant exchange rate (CER) basis unless otherwise stated. Where quoted, underlying growth rates exclude both currency movements and portfolio changes. Unless otherwise stated, sales exclude Penguin and Mergermarket while adjusted operating profits include Penguin, Penguin Random House and Mergermarket. Continuing operations exclude both Penguin and Mergermarket.

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 and 17.

DIVISIONAL ANALYSIS - GEOGRAPHY

£ millions 2014 2013 Headline
growth
CER
growth
Underlying
growth
Sales          
North America 1,164 1,243 (6)% 2% 2%
Core 540 616 (12)% (8)% (8)%
Growth 343 331 4% 18% 7%
Total excluding Penguin and Mergermarket 2,047 2,190 (7)% 2% 0%
Penguin - 513 n/a n/a n/a
Mergermarket 9 53 n/a n/a n/a
Total sales 2,056 2,756 n/a n/a n/a
Adjusted operating profit (1)          
North America 36 29 24% 52% 52%
Core 13 55 (76)% (76)% (76)%
Growth 6 12 (50)% (25)% n/a
Penguin Random House/Penguin 18 28 (36)% (29)% (7)%
Total excluding Mergermarket 73 124 (41)% (31)% (40)%
Mergermarket 2 13 n/a n/a n/a
Adjusted operating profit 75 137 (45)% (36)% (40)%

(1) 2013 includes £29m net restructuring charges as follows: North America, £8m; Core, £16m; Growth, £5m. 2014 includes £43m net restructuring charges as follows: North America, £24m; Core, £8m; Growth, £4m and PRH, £7m.

DIVISIONAL ANALYSIS - LINES OF BUSINESS

£ millions 2014 2013 Headline
growth
CER
growth
Underlying
growth
Sales          
School 939 1,098 (14)% (7)% (6)%
Higher Education 589 575 2% 13% 12%
Professional 519 517 0% 8% 1%
Total excluding Penguin and Mergermarket 2,047 2,190 (7)% 2% 0%
Penguin - 513 n/a n/a n/a
Mergermarket 9 53 n/a n/a n/a
Total sales 2,056 2,756 n/a n/a n/a
Adjusted operating profit (2)          
School 36 95 (62)% (58)% (57)%
Higher Education (10) (19) (46)% (51)% (51)%
Professional 29 20 46% 76% (13)%
Penguin Random House/Penguin 18 28 (36)% (29)% (7)%
Total excluding Mergermarket 73 124 (41)% (31)% (40)%
Mergermarket 2 13 n/a n/a n/a
Adjusted operating profit 75 137 (45%) (36%) (40%)

(2) 2013 includes £29m net restructuring charges as follows: School, £9m; Higher Education, £8m; Professional, £12m. 2014 includes £43m net restructuring charges as follows: School, £22m; Higher Education, £10m; Professional, £4m and PRH £7m.

OUTLOOK

The outlook we gave at our full year results on 28 February 2014 is unchanged. We are continuing the major restructuring and product investment programme, initiated in 2013, designed to accelerate Pearson’s shift towards significant growth opportunities in digital, services and fast-growing economies. We believe this will provide Pearson with a significantly larger market opportunity, a sharper focus on the fastest-growing markets and stronger financial returns.

This restructuring coincides with continued structural, cyclical and policy-related pressures in some of our largest markets.  At this early stage of trading in the year, we expect to report adjusted earnings per share of between 62p and 67p in 2014.  This guidance incorporates our expected trading environment, restructuring activity and product investment and continues to assume 28 February 2014 sterling exchange rates against the dollar and key emerging market currencies. If current exchange rates persist until the end of 2014 it would reduce this guidance earnings per share range by approximately 1p.

The major factors behind our guidance are as follows:

PORTFOLIO CHANGES

The sale of Mergermarket to BC Partners was completed on 4 February 2014 and will reduce 2014 adjusted operating profit before central costs by £26m. This will be partly offset by a part-year contribution from Grupo Multi, which will be diluted by integration costs and the weakness of the Real against Sterling.

We expect the contribution to adjusted operating profit from Penguin Random House to be approximately £20m lower in 2014 compared to the £78m contribution in 2013. That reflects currency movements, integration charges (which are weighted in the first half of 2014) and an additional half-year of associate accounting.

CURRENCY MOVEMENTS

Pearson generates approximately 60% of its sales in the US. A five cent move in the average £:$ exchange rate for the full year (which in 2013 was £1:$1.57) has an impact of approximately 1.2p on adjusted earnings per share. The move from an average £/$ exchange rate of 1.57 in 2013 to the 28 February 2014 rate of 1.67 will reduce operating income by approximately £30m if it continues for the full year. Similarly, when compared to 2013 average exchange rates, Sterling has significantly appreciated against a range of non-dollar currencies, primarily in emerging markets.

RESTRUCTURING AND INVESTMENT PROGRAMME

We will benefit from the absence of £176m of gross restructuring charges expensed in 2013, which we expect to generate £60m of incremental cost savings in 2014.

These benefits will be partly offset by an additional net restructuring charge of approximately £50m in 2014, primarily in North America and weighted towards the first half of the year. Our goal is to complete our restructuring programme by the end of 2014, returning to more normal annual levels of restructuring expenditure from 2015.

As previously announced, we expect additional product investment of approximately £50m in 2014 in digital, services and emerging markets to accelerate growth.

TRADING CONDITIONS

Trading conditions remain challenging this year, reflecting:

In North America, our largest market, college enrolments continue to decline and some states are deferring assessment programmes as they transition to the Common Core State Standards. Though the School publishing market is showing some improvement, the benefits are largely offset by higher revenue deferrals and pre-publication amortisation. We expect margins to be lower in 2014 when compared to 2013 reflecting this outlook, revenue mix, launch costs for major multi-year service-based contracts, higher amortisation and new product development expenditure.

In our Core markets (which include the UK, Italy and Australia), trading conditions are tough in the UK as curriculum change affects the school and vocational assessments markets, while Australia is stabilising and there is a new adoption year in Italy.

In our Growth markets (which include Brazil, China, India and South Africa), we continue to grow in China, with Brazil benefitting from a better year in public sistemas and a part-year contribution from Grupo Multi. We expect a slower year in South Africa after strong gains in 2013.

Looking at our global lines of business, we expect School and Higher Education to remain challenging, especially in our two largest markets, North America and the UK. In Professional, we expect continued good growth in Pearson VUE and English with the Financial Times continuing to benefit from its digital transition.

INTEREST AND TAX

We expect our interest charge to be similar to 2013 reflecting higher floating rates broadly offset by a weaker dollar against sterling. We expect a tax rate of between 19% and 21% on our total profit before tax (which includes the post-tax contribution from Penguin Random House).

FOR MORE INFORMATION

Kate James / Simon Mays-Smith / Brendan O’Grady + 44 (0)20 7010 2310

Pearson’s results presentation for investors and analysts will be audiocast live today from 0900 (BST) and available for replay from 1200 (BST) via www.pearson.com. High resolution photographs for the media are available from our website www.pearson.com.

GLOBAL EDUCATION STRATEGY

Our strategy centres on a significant and exciting long-term opportunity: the sustained and growing global demand for greater access, achievement and affordability in education.

We can meet this demand by accelerating our shift to digital, services and to fast-growing economies, and committing to deliver measurably improved learning outcomes, through our efficacy framework.

In 2013 and 2014, we are executing a significant restructuring and reinvestment programme designed to reduce our exposure to structural pressures and to shift resources towards these growth opportunities. Our goal is to complete our restructuring programme by the end of 2014, returning to more normal annual levels of restructuring expenditure from 2015.

Our primary segments for management reporting are Geographies as this is how we drive annual business performance. Our goal is to serve the growing global demand for access to high quality education and better learning outcomes. We reach learners through content and digital services in individual classrooms; through broad partnerships with public and private education institutions and, in certain markets, by directly expanding capacity through our own schools and colleges.

To enable this, we are focusing on a smaller number of global products which are built on the same core technology platform and are interoperable. This will simplify Pearson, improve the learner experience and allow us to use real-time data and insights to enhance the efficacy of our products.

Our product investment strategy is focusing on modular assets and capabilities that work together and are demonstrably able to improve outcomes.   Our next generation products are mobile first and device-neutral. They connect content with assessment and feedback.  They use learning analytics and big data to personalise learning.  They all draw on world class research into the science of teaching and learning.  They are designed to scale up and be deployed globally. And they can be deployed by schools, colleges and corporates on a stand-alone basis or as part of a wider partnership with Pearson; they will also form the backbone of our Pearson owned or franchised operations.  All this helps us to build Pearson’s brand as the world’s leading learning company.

This strategy will enable us to help more people make progress in their lives through learning. It also provides Pearson with a larger market opportunity, a sharper focus on the fastest-growing markets and stronger financial returns in 2015 and beyond.

FINANCIAL OVERVIEW

REVENUE AND OPERATING INCOME

In the first half of 2014, Pearson’s sales declined by £143m in headline terms to £2.0bn primarily due to the appreciation of sterling against the dollar and key emerging market currencies.

Adjusted headline operating profit, excluding Mergermarket, declined by £51m to £73m reflecting revenue and cost phasing, currency, portfolio changes and higher restructuring charges.

The headline growth rates include the impact from currency movements and acquisitions.

At constant exchange rates (ie stripping out the impact of currency movements), our sales grew by 2% and operating profit declined by 36%. Currency movements – primarily the strengthening of sterling against the US dollar and key emerging markets currencies – reduced sales by £182m and operating profit by £13m.

Acquisitions and disposals added a net of £37m to sales and £11m to operating profit excluding Mergermarket. This includes a negative impact of £6m from associate accounting at Penguin Random House and the benefit from the acquisition of Grupo Multi, where integration costs are weighted towards the second half of 2014.

In underlying terms (ie stripping out the impact of both portfolio changes and currency movements), sales were level with last year, with operating profit down 40% due to a £14m year on year increase in net restructuring charge (giving a total during the first half of 2014 of £43m compared to £29m in the first half of 2013), the impact from the H2 phasing of revenue in the UK and the impact of school curriculum change in the US and the UK.

STATUTORY RESULTS

Our statutory results showed an operating loss of £(37)m (£8m profit in 2013). Statutory loss before tax was £(36)m (£(16)m in 2013). Statutory earnings for the period show a £235m increase in profit to a profit of £227m (£(8)m loss in 2013) due to a net profit of £196m on the sale of Mergermarket and the benefit of a £56m adjustment to the Penguin disposal primarily relating to pensions.

NET DEBT

Our net debt, which reaches a seasonal peak around the half-year and is mainly dollar-denominated, was £2,028m (£1,837m in 2013) at 30 June. The year-on-year increase reflects the acquisition of Grupo Multi less the proceeds from the disposal of Mergermarket as well as our seasonal peak in working capital.

DIVIDEND

The board has declared an interim dividend of 17p per share, a 6% increase on 2013.

GEOGRAPHIC COMMENTARY

From 1 January 2014, the group has reorganised and is reporting for the first time new segmental analyses to reflect the new structure and operating model. The primary segments for management reporting are Geographies (North America, Core and Growth) and we also provide supplementary analysis by Line of Business (School, Higher Education and Professional). In addition, the Group separately discloses the results from the Penguin Random House associate (PRH). The results of the Penguin segment (to 1 July 2013) and Mergermarket (to 4 February 2014) are shown as discontinued in the relevant periods.

NORTH AMERICA

In North America, our strategy is to provide services and products that deliver measurably better outcomes and help solve the major educational issues of affordability, access and achievement. We serve learners through content and digital services in individual classrooms and through broad partnerships with education institutions and governments.

In the first half of 2014, revenues declined 6% in headline terms, due to currency, but increased by 2% at both constant exchange rates and in underlying terms. In School, growth in Schoolnet and Connections Education was offset by declines in learning services, primarily due to a smaller market for reading and literature in the first half when compared to 2013, and in our State Assessments business due to the impact of legislative changes in Texas and California. In Higher Education, learning services grew modestly, and again benefited from later second semester purchasing; and Pearson Online Services achieved good growth.  In Professional, VUE grew modestly. Operating profit increased £7m to £36m, helped by revenue mix, lower returns provision and reduced US pension costs, partly offset by restructuring charges.

CORE

In Core, our strategy is to meet the growing demand for access to higher quality and standards of education in every country in which we operate, through our world class qualifications and learning services, by partnering with governments, schools, colleges and universities and by proving out our capabilities in a small number of owned schools and universities.

In the first half of 2014, revenues declined by 12% in headline terms and by 8% at both constant exchange rates and in underlying terms, due to the impact of policy change on our UK school qualifications business, later phasing of assessment revenues and reduction in Partner market revenues due to divestments, and a move to distributor models implemented in 2013. FT revenues are broadly level year on year, with digital content growth offset by declines in print advertising. Operating profit declined £42m to £13m, due to the impact of the revenue shortfalls.

GROWTH

In Growth, our strategy is to serve the rapidly growing demand from the emerging middle classes for high quality education and improved learning outcomes through partnerships with public and private institutions and by directly expanding capacity through owned and operated schools and universities.

In the first half of 2014, revenues grew by 4% in headline terms, 18% at constant exchange rates and 7% in underlying terms. Underlying growth benefited from growth in China, South Africa and Saudi Arabia. Constant exchange rate growth benefited from the acquisition of Grupo Multi.  Headline growth was held back by the strength of sterling against key emerging market currencies. School revenues were broadly flat.  Growth in South Africa learning services was offset by lower revenues from sistemas in Brazil, with strong growth in public sistemas more than offset by enrolment declines in private sistemas, and the impact of our partnership with IBM in India, which means we no longer recognised revenues from the hardware associated with our Digiclass multimedia teaching digital solution. In Higher Education, revenues grew strongly as we benefited from good enrolment growth in our South African colleges, and the three vocational colleges we opened in 2013 in Saudi Arabia, as part of the government’s focus on improving vocational education and employability. Operating profit declined £6m to £6m, in part reflecting launch costs associated with our new vocational colleges in Saudi Arabia.

LINE OF BUSINESS COMMENTARY

SCHOOL

In School, our strategy is to improve access to high quality education for children to ensure they graduate ready for college and careers.  This includes providing next generation learning services for schools that demonstrably improve learner outcomes; globally benchmarked standards, qualifications and assessments; and virtual and blended schools and school services that provide parents and students with flexibility and choice.

Our School Line of Business serves students up to secondary school level learning. We provide print textbooks and digital courseware through learning services such as envisionMATH, assessment and qualification services including Edexcel, partnering capabilities through inside services such as virtual schools and, in certain markets such as India, through owned or operated schools.

Key highlights from the first half of 2014 include:

In North America, the State of New Mexico awarded Pearson a contract to deliver the PARCC summative assessments in English and mathematics including test item development and assessment administration services both on paper and online using our cloud-based, mobile-ready TestNav 8 system. The Partnership for Assessment of Readiness for College and Careers (PARCC) is a consortium of 15 states which has developed assessments based on what students need to be ready for college and careers, and will measure and track their progress towards that goal. We successfully delivered the PARCC field test to over one million students, across nearly 16,000 schools, to ensure the assessment items are valid, reliable and fair and give schools the ability to check their readiness in advance of implementation.

ACT Aspire, a college and career readiness assessment based on ACT’s College Ready Benchmarks and aligned to Common Core State Standards, successfully launched.  Customers included the state of Alabama and districts in 35 states. Over 550,000 online assessments were delivered along with over 700,000 paper/pencil assessments.

We were awarded contracts to deliver the Arizona English Language Learner Assessment (AZELLA) and the Florida Kindergarten Readiness Screener (FLKRS) assessments and extended our contract to administer the Maryland High School Assessment. We will continue to administer the Florida Comprehensive Assessment Test (FCAT) until the summer 2016. In the first half of 2014, Pearson delivered 9 million high-stakes online tests and more than 5.6 million practice online tests for a total increase in online testing volume of 38% over same period in 2013.

Connections Education, which operates K-12 managed virtual public schools, manages blended public schools, and a private school, served almost 51,000 students in June 2014, up more than 20% from 2013, and now operates 33 managed public schools in 23 states and an international private virtual school.  Connections Education also provides virtual and blended services to school districts and other schools seeking to incorporate virtual learning into their programmes. Connections Academy Schools consistently outperform their peers on standardized state tests and show positive results for many high-needs students as compared to similar students in traditional public schools, particularly among low income students.  We recently launched three new virtual schools in two new states, Massachusetts and Maine, and an additional regional virtual school in California.

We began to implement the New York City (NYC) Periodic Assessment programme for the NYC Department of Education, installing Schoolnet in all 1,600 NYC public schools to deliver its periodic assessments for English Language Arts, Math, and English Language Learners to 1.1 million students and 75,000 NYC teachers. We partnered with Gwinnett County Public Schools (GCPS) in Georgia to provide reporting and assessment (Schoolnet) and item authoring and workflow approval (Equella) services for 11,000 GCPS teachers and staff and 166,000 students.

We won an estimated 25% of the total new adoptions market (which we expect will be approximately $875m in 2014) with a good performance in K-6 Math in Texas, Grades 6-12 Social Studies in Tennessee and Grades K-6 Math in California. A weaker performance in Grades 6-8 Science and Math in Texas, and Grades 6-12 Literature and Grades 6-8 Math in Florida, mean we expect to underperform the market in 2014. We are collaborating with Microsoft to develop the Pearson System of Courses (PSoC) and iLit for Windows 8 touchscreen environment and are deploying the PSoC version in Shelby County, Tennessee. We continue to pilot PSoC in Los Angeles Unified School District.

In Core, revenue declined significantly in the UK due to the later phasing of UK exams and associated revenue, which will mostly unwind in the second half, and lower qualification registrations due to policy changes which resulted in an 8% decline in GCE and GCSE papers taken and a 10% decline in BTEC Firsts registrations. In examination processing, a combination of the shift to linear exams and the first year of level 6 National Curriculum Test (NCT) scanning has resulted in a 21% increase in papers scanned for summer series, with almost 6.5 million scripts scanned, but with overall papers scanned declining 3% due to the impact of policy changes on earlier exam sittings. We successfully delivered our NCT for 2014, including the marking of 4 million scripts and return of almost 2 million results back to students.

In Australia, school revenue increased modestly, primarily due to the launch of the locally standardised version of the Wechsler Pre and Primary Scales of Intelligence (Fourth edition).

In Italy, we expect a better new adoption year with increased market share in both Primary and Upper Secondary School. In Primary English we adapted the Our Discovery Island and Top Secret programmes and combined them with professional development and online cross curricula support, providing a platform for future programmes.

In Growth, we started well in South Africa due to ongoing sales from our strong adoption performance in the second half of 2013, with a strong performance in mathematics and science in particular, which we expect to diminish later in the year.

In Brazil, enrolments in our sistemas were down 7% to 500,000 with growth in our public sistemas (NAME) offset by declines in our private sistemas as we combined our three sistema sales forces into one.

In Saudi Arabia, Pearson is delivering a contract for English, maths and science Teacher Development Programmes for Tatweer, the investment organization which supports the Ministry of Education. In Maths, Pearson will train 500 Saudi ‘Master’ trainers to deliver professional development training to over 100,000 maths and science teachers.

In India, our 30 schools enroled more than 28,000 students, up 40% on 2013; and we administered the Central Board of Secondary Education (CBSE) assessments for 3.5 million students, up 46% on 2013, across more than 13,000 schools. Our multimedia teaching solution Digiclass is now installed in approximately 26,000 classrooms, up more than 10% on 2013, and partnered with IBM to further accelerate our deployment across the country.

HIGHER EDUCATION

In Higher Education, our strategy is to develop next-generation data-rich learning services to measurably improve learner outcomes; to scale our inside service partnerships with high quality established institutions around the globe; and to develop a broad suite of blended and virtual products and services which widen access and improve the employability prospects of the growing global middle class.

Our Higher Education Line of Business serves students in undergraduate, post graduate and vocational level learning. We work with faculty, institutions and learners to improve access, completion and retention rates. In addition to print textbooks, we provide digital learning services, such as our MyLab & Mastering homework tools, tutoring and assessment products. We also partner with institutions to provide a range of inside services, including online learning services. In certain markets we deliver higher education directly through our own institutions such as CTI and MGI in South Africa and Pearson College in the UK.

Key highlights from the first half of 2014 include:

In North America, revenues were again boosted by a digital shift and later second semester purchasing in higher education, with December sales deferred into January. We expect to outperform the market in 2014 following a good start relative to the industry so far this year in a publishing market where gross revenues grew marginally compared to H1 2013 (according to the Association of American Publishers). Total US College enrolments were 1% lower in spring 2014 compared to spring 2013, with combined two-year public and four-year for-profit enrolments declining 3%, affected by rising employment rates, state budget pressures and policy change affecting the for-profit sector and developmental education classes.

We launched REVELTM, which combines trusted content with interactive videos, quizzes, a mobile user interface, study tools, assignment calendar and performance dashboard for humanities subjects. The launch of REVELTM is the first of numerous product lines taking advantage of our new cloud-based, mobile-ready, and data-analytics capabilities. Student MyLab registrations in North America grew 4% to 4.8 million. Lecturer generated case studies indicate that the use of MyLab programmes, as part of a broader course redesign, can support improvements in student test scores (bit.ly/1nioLnf).

We helped Indiana Wesleyan University successfully launch its Next Generation Digital Campus with integrated learning analytics, enroling 12,000 students; we partnered with Ivy Tech Community College to help expand the Corporate College's online workforce education offerings serving and improving employment prospects for up to 10,000 students in the state of Indiana; and we partnered with University of Texas El Paso (UTEP) to develop fully online programmes which have the potential to give greater access to education for up to 5,000 students in an under-served region in southwest Texas.  

We published a digital Fieldbook for The Boy Scouts of America, the largest youth organisation in the US with 2.7 million young members and more than 1 million adult volunteers, the start of an extensive programme to create and implement a new digital curriculum and merit badge system. We expanded our collaboration with the American Health Information Management Association (AHIMA) to administer its online education business, which serves AHIMA’s 71,000 members including 10,000 higher education students each year. We now provide our learning management system; technical support; 100 additional courses in AHIMA’s course catalogue and a next generation Virtual Lab Product.

Pearson On Line Services, where we run fully online learning programmes and earn revenues based on the success of the students and the institution, grew strongly. Student registrations for our under-graduate programmes with Arizona State University Online, University of Florida Online, Ocean Community College and Rutgers grew more than 37% to 40,000. Student registrations for our post-graduate programmes were up 7% to more than 23,000, adding new programmes at Adelphi University and George Washington Business School.

In Core, our UK revenues declined, primarily due to enrolment declines following policy changes in the vocational markets. We continue to invest to build Pearson College which enroled 93 students, up from 21 in the same period in 2013, delivering two new courses in business management and Paramedic Science. We also acquired Escape at the end of 2013 which currently has 300 students enroled on design and technical skills courses.

In Australia, revenues grew well, benefiting from the shift of bookstore purchasing from the fourth quarter of 2013 to the first quarter of 2014, partly offset by the impact of our exit from vocational publishing. Our collaboration with Monash University started well. Monash Online provides technology, e-Textbooks, recruitment marketing, enrolment management, student support and retention services initially for four post-graduate courses.

In Growth, student enrolments in South Africa grew by 15% to 13,400 at our 13 higher education campuses across South Africa. Over 10,000 of these students are now learning using tablets with bundled Pearson digital course content.

In the Middle East, we launched three vocational Colleges of Excellence in Mecca, Medina and Buraydah, as part of the national Colleges of Excellence Programme, and enroled more than 1,700 students. The colleges will improve employment prospects for young people in Saudi Arabia.

In Mexico, our fully accredited online university partnership, UTEL, increased the number of students from almost 2,300 students in 2013 to more than 8,000 in 2014 as a result of improved consumer marketing efforts and better student retention.

In India, Pearson IndiaCan won a contract with the Ministry of Rural Development to train more than 15,000 young people with a variety of skills to improve employment prospects including: sales, retail, hospitality, domestic BPO, and electrical and automotive repairs; and ETEN CA, our network of satellite-based virtual Chartered Accountancy (CA) training centres, trained the five top ranking students in the CA Final Examination, announced in January 2014.

PROFESSIONAL

In Professional, our strategy is to enable aspirational global professionals to progress in their careers by developing next generation information, assessment and English language learning products and services that are delivered across multiple channels and provide measurable development for our customers.

Our Professional Line of Business serves professional and English language learners of all ages. We provide English language learning through direct delivery, inside services and learning services, ranging from the retail operations of Wall Street English to the digital courseware of MyEnglishlab, as well as blended and customised corporate learning programmes. The Financial Times Group provides authoritative global business news and analysis through print, digital and mobile channels, and an expanding audience in educational services. We also deliver professional assessment and qualification services globally through Pearson VUE.

Key highlights from the first half of 2014 include:

In Pearson English, good growth in direct delivery in China and inside services due to the acquisition of Grupo Multi was partly offset by the impact of a 2013 divestment in Japan and challenging conditions for learning services in some markets.

In May, Pearson English launched the Global Scale of English (GSE), which aims to be the new global standard for scoring English language proficiency on a precise, numeric, universal scale for businesses, governments and academic institutions. The Scale has already been tested on more than 10,000 students in 130 countries and is being embedded into all Pearson English products and services.

Improvements have been made to MyEnglishLab, our digital English language course, to increase the efficacy and scalability of the platform. Registered users for MyEnglishLab digital products grew 10% to almost 300,000.

Student numbers at Wall Street English (WSE), Pearson’s worldwide chain of English language centres for professionals, grew 1% to 193,000 with good growth in emerging markets partly offset by declines in Continental Europe. Student numbers at Pearson-owned centres grew 3%, with good growth in China and Brazil partly offset by a decline in Germany.

In China, Global Education, our test preparation services for English language and vocational qualifications, performed strongly.  Course enrolments in the first half increased 48% to more than 1 million, boosted by good underlying demand and product upgrades, through 80 Pearson-owned and 453 franchised learning centres. Student numbers at Wall Street English increased by 6% to 65,000.  In Guizhou province, we have trained nearly 200 teachers in English Language Teaching, and are providing digital courseware for 8,700 students in the city of Guiyang to improve their English.

In Brazil, we completed the acquisition of Grupo Multi, the largest provider of private language schools in Brazil serving over 800,000 students across more than 2,600 franchised schools.   We began our planning to integrate Multi’s products and expertise with Pearson’s world leading educational technology and pedagogy.

At the Financial Times Group, the FT continued to grow its record paying readership, with the total circulation up 13% year on year to more than 677,000 across print and online. Digital subscriptions now represent more than two-thirds of the FT’s total audience, increasing 33% year-on-year to over 455,000. We have more than 290,000 corporate subscribers, including more than 50 Central Banks. The strong digital circulation growth offset continued weakness in print advertising, though the FT continued to take market share.

Product innovation and launches, including: an FT Weekend app, ‘follow the author’ and commenting tools, an FT app on Samsung Smart TV and a new FT Android App; continue to result in steady growth in mobile usage and time spent on FT.com. Mobile now generates almost 50% of total traffic and 20% of new digital subscriptions. Mobile advertising revenues were up 9% year on year.

FT education products such as FT Newslines which enables annotation and development of case studies by faculty and students, are now used by almost 300 education institutions, including two thirds of the world’s top 50 business schools. The FT Education API offers students and educators free access to FT content, bringing learning to life with real world, real-time case studies and context. New York Institute of Finance, which provides education and training for financial professionals, has moved its traditional classroom exam-prep courses to digital community-based courses for key industry qualifications.

The contribution from The Economist Group (in which Pearson owns a 50% stake) fell slightly, primarily reflecting increased investment in digital development and marketing, and declining print advertising revenue.  Circulation at The Economist was robust at 1.6 million, with digital subscriptions growing 20%. The Economist Intelligence Unit again benefited from the strong performance of its healthcare division.

Pearson VUE continued to see good revenue and profit growth with test volumes up almost 20% year on year to almost 7 million boosted by continued growth in DVSA volumes in the UK; increased volumes in IT, State Regulatory (insurance and real estate), teacher certifications, and Professional certifications (such as National Council State Boards of Nursing); and the new GED computer based test. We will continue to deliver our UK contract to administer the Driving Theory test for the DVSA until September 2016.

New contracts include a deal to administer the Microsoft Certified Professional (MCP) Program which significantly expands our existing partnership with Microsoft through Certiport’s Microsoft Office Specialist (MOS) and Microsoft Technology Associate (MTA) exams. We entered into a 10-year partnership with the Chartered Institute of Management Accountants (CIMA) to transform their portfolio of professional-level exams from pen and paper to computer-based testing (CBT) with a January 2015 launch.

PENGUIN RANDOM HOUSE

The merger of Penguin and Random House was completed on 1 July 2013. Bertelsmann owns 53% and Pearson owns 47% of Penguin Random House, the first truly global consumer book publishing company. Penguin Random House is reported post tax following completion of the merger and associate accounting reduced Penguin Random House’s contribution to profits by £6m.

Penguin Random House performed well in the first half of 2014, benefitting particularly from a strong publishing performance in Children’s around the world.

The US business published 430 New York Times print and ebook bestsellers in H1 2014 (2013 H1 pro forma: 403), enjoying exceptional success in children’s publishing with John Green’s The Fault in our Stars (22 weeks at number 1 on the New York Times bestseller list and over 4 million copies sold in H1), his backlist titles (1.45 million in H1), tie-in titles from Disney’s Frozen film (more than 3.7 million copies sold in H1), Zusak’s The Book Thief and continued strong sales of the Dr. Seuss franchise.  Notable Adult titles included Gates’ Duty, Kidd’s The Invention of Wings, Coben’s Missing You, and the paperback reprints of Brown’s Inferno and Flynn’s Gone Girl.  The UK business published 480 (without Children’s & Manuals)/524 (with Children’s & Manuals) Sunday Times bestsellers (2013 H1 pro forma: 460), also enjoying exceptional sales of John Green and Markus Zusak, along with the continued strength of Kinney’s Wimpy Kid franchise.  Key Adult titles included Berry’s Mary Berry Cooks, Brown’s Inferno, Pearse’s Survivor, Atkinson’s Life after Life and Patterson’s Unlucky 13. The DK performance was lifted by sales of more than 670,000 copies of LEGO® movie tie-in titles.

Penguin Random House has a strong publishing programme for the second half of 2014, including new titles from John Grisham, Jamie Oliver, Ina Garten, Ken Follett, Haruki Murakami, Lena Dunham, Lee Child, Stephen Fry, Danielle Steel, Jodi Picoult, John Cleese, Janet Evanovich and Jeff Kinney, and movie tie-ins for Gone Girl and Unbroken.  

The integration of the two businesses is progressing well and is on track to deliver net benefits in 2015 and beyond.  Organisational structures have been aligned, systems integration is underway and North American warehousing will be consolidated in the first half of 2015.  The acquisition of the Spanish Speaking business of Santillana’s Brazilian business is expected to complete within H2.

FINANCIAL REVIEW

Operating result

Due to seasonal bias in some of the Group’s businesses, Pearson makes a higher proportion of its sales and the majority of its profits in the second half of the year.

On a headline basis, sales from continuing operations for the six months to 30 June 2014 decreased by £143m or 7% from £2,190m for the first six months of 2013 to £2,047m for the equivalent period in 2014. Total adjusted operating profit decreased by £62m or 45% from £137m in the first six months of 2013 to £75m in 2014. Included within total adjusted operating profit are restructuring costs of £48m in the first half of 2014 compared to £37m in the first half of 2013. The costs are offset by benefits which for 2014 restructuring are estimated at £5m compared to benefits of 2013 restructuring in the first half of 2013 estimated at £8m.

On an underlying basis, sales from continuing operations were flat in 2014 compared to 2013 and total adjusted operating profit declined by 40%. Our underlying measures exclude the effects of exchange and portfolio changes arising from acquisitions and disposals. In 2014, currency movements decreased sales by £182m and adjusted operating profit by £13m. Portfolio changes increased sales by £37m and did not materially affect adjusted operating profit.

Our portfolio change is calculated by taking account of the additional contribution (at constant exchange rates) from acquisitions made in both 2013 and 2014. For acquisitions made in 2013 we calculate the additional contribution as the sales and profits made in the period of 2014 that corresponds to the pre-acquisition period in 2013. We also exclude sales and profits made by businesses disposed in either 2013 or 2014.

Adjusted operating profit excludes intangible amortisation and impairment, acquisition related costs and other gains and losses arising from acquisitions and disposals. The statutory operating loss of £37m in the first half of 2014 compares to a profit of £8m in the first half of 2013. The decrease reflects the fall in adjusted operating profit and an increase in intangible charges. In 2014 intangible charges include amortisation relating to Penguin Random House.

Discontinued operations

In October 2012, Pearson and Bertelsmann announced an agreement to create a new consumer publishing business by combining Penguin and Random House. The transaction completed on 1 July 2013 and from that point, Pearson no longer controls the Penguin Group of companies and has equity accounted for its 47% associate interest in the new Penguin Random House (PRH) venture.

The loss of control resulted in the Penguin business being classified as held for sale on the Pearson balance sheet at 30 June 2013 and a subsequent gain on sale of £202m was reported in the second half of 2013. Included in the gain reported in 2013 was a provision for amounts payable to Bertelsmann upon settlement of the transfer of pension liabilities to PRH. During 2014, it was decided that this transfer would not go ahead as planned and the costs have been credited back in the £56m gain reported against the disposal in 2014.

The results for Penguin in the first half of 2013 and the gains reported in both 2013 and 2014 have been included in discontinued operations. The share of results from the associate interest in the PRH venture arising in the second half of 2013 and in 2014 has been included in operating profit in continuing operations.

Additionally on 29 November 2013 we announced the sale of the Mergermarket Group to BC Partners. The sale was completed on 4 February 2014 and resulted in a gain of £196m after tax. The Mergermarket business was classified as held for sale on the balance sheet at 31 December 2013 and the gain and the results for both 2013 and 2014 to the date of sale have been included in discontinued operations.

Net finance costs

Net interest payable to 30 June 2014 was £28m, compared to £33m in the first half of 2013.  This decrease is mainly due to the impact of foreign exchange translation and additional interest receivable on cash balances held overseas which offset the effect of higher levels of average net debt in the period. A weaker US dollar average exchange rate in 2014 (compared to the first half of 2013) had the effect of reducing US dollar denominated finance charges. 

Finance income and costs relating to retirement benefits have 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 statutory definition of net finance costs (but not in our adjusted measure) are finance costs on put options and deferred consideration associated with acquisitions, foreign exchange and other gains and losses. Finance costs for put options and deferred consideration are excluded from adjusted earnings as they relate to the future potential acquisition of non-controlling interests and don’t reflect cash expended. Foreign exchange 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.

In the period to 30 June 2014, the total of these items excluded from adjusted earnings was a gain of £29m compared to a gain of £9m in the period to 30 June 2013. The gain in 2014 and 2013 largely relates to foreign exchange differences on un-hedged US dollar loans, cash and cash equivalents.

Taxation

Taxes on income in the period are accrued using the tax rates that would be applicable to expected annual earnings. The reported tax charge on statutory earnings for the six months to 30 June 2014 was a £10m credit compared to an £11m credit in the period to 30 June 2013. The charge reflects the overall mix of profits projected for the full year and the tax rates expected to apply to those statutory profits.

The effective tax rate on adjusted earnings for the six months to 30 June 2014 is 20.0% (2013: 24.0%). This rate is lower than the average statutory rate applicable to the countries we operate in as it includes the benefit of tax deductions attributable to amortisation of goodwill and other intangibles. The benefit more accurately aligns the adjusted tax charge with the expected rate of cash tax payment.

Other comprehensive income

Included in other comprehensive income are the net exchange differences on translation of foreign operations. The loss on translation of £119m at 30 June 2014 compares to a gain at 30 June 2013 of £252m and is principally due to movements in the US dollar. A significant proportion of the group’s operations are based in the US and the US dollar weakened in 2014 from an opening rate of £1:$1.66 to a closing rate at the end of June 2014 of £1:$1.71. At the end of June 2013 the US dollar had strengthened in comparison to the opening rate moving from £1:$1.63 to £1:$1.52.

Also included in other comprehensive income in 2014 is an actuarial gain of £4m in relation to post retirement plans. This gain arises from changes in the assumptions used to value the liabilities and from returns on plan assets that are in excess of the discount rate. The gain compares to an actuarial gain at 30 June 2013 of £100m.

Non-controlling interest

There are non-controlling interests in the group’s businesses in South Africa, China and India although none of these are material to the group numbers. During 2013 some of the minorities in South Africa and India were bought out further reducing the impact of these interests.

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. We have some smaller defined benefit sections in the US and Canada but, outside the UK, most of our companies operate defined contribution plans. In addition to pension plans we also operate post-retirement medical benefit plans (PRMBs), the most significant of which is in the US. In the first half of 2014 we amended the eligibility criteria for the US PRMB plan. This amendment resulted in a curtailment gain and a reduction in the on-going service cost of the plan.

The charge to profit in respect of worldwide pensions and retirement benefits for continuing operations amounted to £32m in the period to 30 June 2014 (30 June 2013: £53m) of which a charge of £34m (30 June 2013: £51m) was reported in adjusted operating profit and an income of £2m (30 June 2013: charge £2m) was reported against other net finance costs. The reduced charge in 2014 is in part due to the US PRMB curtailment gain and also to a reduction in costs relating to our defined contribution plans.

The overall surplus on the UK group pension plan of £86m at the end of 2013 has increased to a surplus of £119m at 30 June 2014. The movement has arisen principally due to continuing asset returns and deficit funding which was only partially offset by an unfavourable movement in the discount rate used to value the liabilities. In total, our worldwide deficit in respect of pensions and other post-retirement benefits decreased from a net deficit of £56m at the end of 2013 to a net deficit of £nil at the end of June 2014.

Dividends

The dividend accounted for in the six months to 30 June 2014 is the final dividend in respect of 2013 of 32.0p. An interim dividend for 2014 of 17.0p was approved by the Board in July 2014 and will be accounted for in the second half of 2014.

Principal risks and uncertainties

We conduct regular reviews to identify risk factors which may affect our business or financial performance. Our Group internal audit and compliance function facilitates risk reviews with each business, shared service operation and corporate function, identifying measures and controls to mitigate these risks. The principal risks and uncertainties have not changed from those detailed in the 2013 Annual Report and are summarised below:

Technology changes

Our businesses will be impacted by the rate of and state of technological change, including the digital revolution and other disruptive technologies. We operate in markets which are dependent on Information Technology systems and technological change. The transition of our products and services to digital increases the potential exposure to cyber threats.

Education regulation and funding

Our US and UK educational solutions and assessment businesses may be affected by changes in government funding resulting from either general economic conditions, changes in government educational funding, programmes, policy decisions, legislation and/or changes in the procurement processes.

Economic uncertainties

Global economic conditions may adversely impact our financial performance. A significant deterioration in Group profitability and / or cash flow caused by prolonged economic instability could reduce our liquidity and / or impair our financial ratios, and trigger a need to raise additional funds from the capital markets and / or renegotiate our banking covenants.

We generate a substantial proportion of our revenue in foreign currencies, particularly the US dollar, and foreign exchange rate fluctuation could adversely affect our earnings and the strength of our balance sheet.

Business transformation

The pace and scope of our business transformation initiatives increase the execution risk that benefits may not be fully realised, costs of these changes may increase, or that our business as usual activities do not perform in line with expectations.

If we fail to attract and retain appropriately skilled employees, our business may be harmed.

Brand / reputation management

Our business depends on a strong brand, and any failure to maintain, protect and enhance our brand would hurt our ability to retain or expand our business.

Emerging markets

Our investment into inherently riskier emerging markets is growing and the returns may be lower than anticipated.

Intellectual property rights

If we do not adequately protect our intellectual property and proprietary rights our competitive position and results may be adversely affected and limit our ability to grow.

Acquisitions and mergers

Failure to generate anticipated revenue growth, synergies and/or cost savings from acquisitions, mergers and other business combinations could lead to goodwill and intangible asset impairments.

Data Privacy breach

Failure to comply with data privacy regulations and standards or weakness in information security, including a failure to prevent or detect a malicious attack on our systems, could result in a major data privacy breach causing reputational damage to our brands and financial loss.

Testing failures

A control breakdown or service failure in our school assessment and qualifications businesses could result in financial loss and reputational damage.

Our professional services and school assessment businesses involve complex contractual relationships with both government agencies and commercial customers for the provision of various testing services. Our financial results, growth prospects and/or reputation may be adversely affected if these contracts and relationships are poorly managed.