Pearson 2014 results

Pearson 2014 Preliminary Results (unaudited)

2014 FINANCIAL HIGHLIGHTS

  • Sales up 2% at CER to £4.9bn reflecting good growth in digital and services and the acquisition of Grupo Multi partly offset, as expected, by the impact of school curriculum change in the US and the UK, our two largest markets, and a smaller school textbook adoption in South Africa.
  • Deferred revenue excluding Mergermarket up 10% at CER to more than £800m as a result of further good progress in our digital and services businesses.
  • Adjusted operating profit (excluding Mergermarket) up 8% at CER to £720m (2013: £710m) with lower net restructuring charges (£44m in 2014; £135m in 2013) and the contribution from Grupo Multi partly offset by increased investment levels and revenue mix.
  • Adjusted EPS of 66.7p (2013: 70.1p) reflecting exchange rate movements and a higher tax rate of 17.9% (2013: 14.6%).
  • Operating cash flow £649m (2013: £588m) benefiting from improved working capital from deferred revenue growth and an increased dividend from Penguin Random House, partly offset by increased investment levels.
  • Dividend raised 6% to 51p, our 23rd straight year of increasing our dividend above the rate of inflation.

2015 FULL YEAR OUTLOOK

  • Based on exchange rates at the time of our 21 January 2015 trading update, we expect to report adjusted earnings per share of between 75p and 80p in 2015.
  • 2015 profits to reflect: stabilisation of cyclical and policy-related factors in our largest markets; currency movement impact on revenues, operating income and interest charge (with Sterling weakness against the US Dollar partly offset by strengthening against the Euro, Australian Dollar and key emerging markets currencies); the benefits of 2014 restructuring partly offset by normal levels of net restructuring of approximately £30m to continue to reshape our business; and shared services costs remaining with Pearson following withdrawal of Penguin.
  • Process to explore the possible sale of PowerSchool initiated.

STRATEGIC OUTLOOK

  • 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.
  • We believe cyclical pressures will ease 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 empower more people to 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 2016 and longer term.

John Fallon, chief executive said:

"We've completed our intense two year restructuring and reinvestment programme and performed well competitively despite some challenging market conditions. We enter 2015 better placed to have a bigger impact on student learning through the combination of new technology and best teaching practice. This will enable us to empower more people to progress in their lives through learning and grow our market opportunity."

FINANCIAL SUMMARY

£ millions 2014 2013 Headline
growth
CER
growth
Underlying
growth
Business performance
Sales 4,874 5,069 (4)% 2% 0%
Adjusted operating profit* 720 710 1% 8% 5%
Adjusted earnings per share 66.7p 70.1p (5)%    
Operating cash flow 649 588 10%    
Free cash flow 413 269 54%    
Free cash flow per share 50.9p 33.3p 53%    
Return on invested capital 5.6% 5.4% 0.2% pts    
Net debt 1,639 1,379 (19)%    
Statutory results
Sales 4,874 5,069 (4)%    
Operating profit 398 458 (13)%    
Profit before tax 305 382 (20)%    
Basic earnings per share 58.1p 66.6p (13)%    
Cash generated in operations 704 684 3%    
Dividend per share 51.0p 48.0p 6%    

* Excluding Mergermarket
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 total 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 2,974 3,073 (3)% 2% 2%
Core 1,154 1,258 (8)% (5)% (5)%
Growth 746 738 1% 11% (1)%
Total excluding Penguin and Mergermarket 4,874 5,069 (4)% 2% 0%
Penguin -- 513 -- -- --
Mergermarket 9 108 -- -- --
Total sales 4,883 5,690 -- -- --
Adjusted operating profit (1)
North America 464 474 (2)% 5% 5%
Core 152 120 27% 30% 31%
Growth 35 38 (8)% 16% (68)%
Penguin Random House/Penguin 69 78 (12)% (6)% 2%
Adjusted operating profit (excluding Mergermarket) 720 710 1% 8% 5%
Mergermarket 2 26 -- -- --
Total ddjusted operating profit 722 736 (2)% 5% 5%

(1) 2013 includes £135m net restructuring charges as follows: North America, £53m; Core, £50m; Growth, £32m. 2014 includes £44m net restructuring charges as follows: North America, £16m; Core, £12m; Growth, £4m and PRH, £12m. 

DIVISIONAL ANALYSIS – LINES OF BUSINESS

£ millions 2014 2013 Headline
growth
CER
growth
Underlying
growth
Sales
School 2,027 2,303 (12)% (7)% (7)%
Higher Education 1,695 1,664 2% 8% 8%
Professional 1,152 1,102 5% 10% 2%
Total excluding Penguin and Mergermarket 4,874 5,069 (4)% 2% 0%
Penguin -- 513 -- -- --
Mergermarket 9 108 -- -- --
Total sales 4,883 5,690 -- -- --
Adjusted operating profit (2)
School 236 268 (12)% (6)% (5)%
Higher Education 309 295 5% 12% 12%
Professional 106 69 54% 65% 17%
Penguin Random House/Penguin 69 78 (12)% (6)% 2%
Adjusted operating profit (excluding Mergermarket) 720 710 1% 8% 5%
Mergermarket 2 26      
Total ddjusted operating profit 722 736 (2)% 5% 5%

(2) 2013 includes £135m net restructuring charges as follows: School, £70m; Higher Education, £24m; Professional, £41m. 2014 includes £44m net restructuring charges as follows: School, £20m; Higher Education, £9m; Professional, £3m and PRH £12m. 

OUTLOOK

In 2014, we completed 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. In 2015, we are returning to more normal levels of restructuring expenditure.

Based on 21 January 2015 exchange rates, we expect to report adjusted earnings per share of between 75p and 80p in 2015. The major factors behind this guidance are as follows:

TRADING CONDITIONS

We continue to expect that cyclical and policy related factors stabilise in 2015.

In North America, our largest market, we expect growth in online higher education services and VUE and, with more stable college enrolments and a slower new edition year, learning services to be broadly level. In school, while the possibility of further policy related disruption remains, we expect greater stability in learning services and assessments with growth in virtual schools.

In our Core markets (which include the UK, Italy and Australia), we expect trading conditions to stabilise in the UK, growth in inside services to broadly offset declines in learning services in Australia, and sustained share in Italy following share gains in 2014. We expect the Financial Times to continue to benefit from, and invest in, its digital transition.

In our Growth markets (which include Brazil, China, India and South Africa), we expect good growth in China in our English Language Learning adult and test preparation businesses and continued stability in learning services; in Brazil, we expect a better year in our sistemas business and good growth in our English Language Learning franchises; and in South Africa we expect a more stable year in learning services with modest growth in higher education direct delivery.

PORTFOLIO CHANGES

We benefited for many years from the synergies created by integrating Penguin into our shared services operations. Following the transition of Penguin from Pearson services during 2014, some shared services costs remain with Pearson without associated revenues. We estimate these shared services costs at approximately £30m. We can reduce this somewhat over time which will be captured in our normal levels of restructuring.

Pearson has initiated a process to explore a possible sale of PowerSchool and our other Student Information Systems businesses including PowerSchool SMS, Gradespeed, and eSIS Forms. This process is at an early stage and there is no certainty that it will lead to a transaction. In 2014, PowerSchool contributed $97m of revenues and $20m of operating income. Our guidance assumes ownership of PowerSchool for all of 2015. Pearson has appointed Evercore to advise on the process.

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 2014 was £1:$1.65) has an impact of approximately 1.3p on adjusted earnings per share. The benefit from the weakening of Sterling against the US Dollar on our reported operating income will be partly offset by the strength of Sterling against a range of non-US Dollar currencies, including: the Euro, Australian Dollar and certain emerging markets currencies; and a higher interest charge as Sterling weakness against the US Dollar increases the Sterling value of our US Dollar denominated debt and interest payments.

RESTRUCTURING

We will benefit from the absence of £44m of exceptional net restructuring charges expensed in 2014 and we still expect to generate £45m of incremental cost savings in 2015.

These benefits will be partly offset by normal levels of net restructuring of approximately £30m in 2015.

INTEREST AND TAX

We expect our interest charge to be higher than 2014, reflecting higher average net debt levels, primarily as a result of the strength of the US Dollar against Sterling. We expect a tax rate of approximately 17% on our total profit before tax (which includes the post-tax contribution from Penguin Random House).

FOR MORE INFORMATION

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 (GMT) and available for replay from 1200 (GMT) via www.pearson.com. High resolution photographs for the media are available from our website www.pearson.com.

FORWARD-LOOKING STATEMENTS

Except for the historical information contained herein, the matters discussed in this statement include forward-looking statements. In particular, all statements that express forecasts, expectations and projections with respect to future matters, including trends in results of operations, margins, growth rates, overall market trends, the impact of interest or exchange rates, the availability of financing, anticipated costs savings and synergies and the execution of Pearson's strategy, are forward-looking statements. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that will occur in future. They are based on numerous assumptions regarding Pearson's present and future business strategies and the environment in which it will operate in the future. There are a number of factors which could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements, including a number of factors outside Pearson's control. These include international, national and local conditions, as well as competition. They also include other risks detailed from time to time in Pearson's publicly-filed documents and you are advised to read, in particular, the risk factors set out in Pearson's latest annual report and accounts, which can be found on its website (www.pearson.com/investors). Any forward-looking statements speak only as of the date they are made, and Pearson gives no undertaking to update forward-looking statements to reflect any changes in its expectations with regard thereto or any changes to events, conditions or circumstances on which any such statement is based. No reliance should be placed on forward-looking statements.

GLOBAL EDUCATION STRATEGY

Pearson’s purpose is to empower people to progress in their lives through learning. We put the learner at the heart of everything we do. The bigger Pearson’s social impact – in improving access to good quality education and ensuring that translates into meaningful learning outcomes for far more people – the more we can create a faster growing and more profitable company, and do so in a sustainable manner.

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. To prosper in career and college, all young people need to leave school literate and numerate, with a sound understanding in science, technology and the liberal arts and able to apply that knowledge to solve real world problems. They also need to be proficient in the kinds of less tangible skills that will help them to succeed in the workplace – critical thinking, adaptability, team-working, and digital fluency. They need the grit, resilience and determination to persevere and succeed and, most of all, they need the capacity to carry on learning throughout their lives. These are all things that can be taught.

The challenge of better preparing people for their world is substantial. One in five adults lack basic written communication skills, and 57 million children do not attend school. Many millions more are in education, but not learning effectively. For education to work, it needs to not only provide access, but ensure progress. Against this backdrop there are fragmented, localised and siloed approaches; conflicting opinions on teaching and learning, and education policy continually adapting to changes in political office.

Pearson stands at the intersection of new technology (with its ability to engage, personalise, diagnose and scale) and new, more effective, ways of teaching. This allows us to develop products and services that enable the benefits of richer, deeper learning to be more widely felt. Increasingly, we will be able to demonstrate our impact on learning outcomes and to implement at scale around the world. We still have much to do to be able to play our part in meeting the global demand for education, and in 2015 five priorities will guide our work:

  1. A business model focused on helping more people achieve better learning outcomes: efficacy is now at the centre of our business model and a major part of how we create value.
  2. New digital products: launching new digital products to meet demand for better learning outcomes.
  3. A more focused company: more modular and scalable products, deployed on a smaller number of global platforms.
  4. A more consistently high performing culture: a series of actions, including changing how we recruit, appraise and reward our employees.
  5. A strong and trusted brand: build Pearson as a global education brand, focused on educational impact and learning outcomes, and being open and transparent in holding ourselves to account in achieving these goals. 

Our strategy will enable us to empower more people to 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

Profit & loss statement. In 2014, Pearson sales declined £195m, 4% in headline terms, to £4.9bn. Total adjusted operating profit fell £14m, 2% in headline terms, to £722m after £44m of net restructuring charges (2013: £135m).

Currency movements, primarily from the strength of Sterling relative to the US Dollar during the year, reduced sales by £272m and operating profits by £49m. At constant exchange rates (ie stripping out the impact of those currency movements), our sales and adjusted operating profit grew 2% and 5%, respectively.

Acquisitions and disposals contributed £79m to sales and a net zero to operating profits. This includes integration costs and investments related to our newly-acquired companies, which we expense. Penguin Random House was reported post tax for the full year in 2014, compared to only the second half in 2013 following the combination of Penguin with Random House on 1 July 2013, and resulted in a £7m reduction in the contribution to operating income with an equal benefit to our tax charge.

Stripping out the impact of portfolio changes, Penguin Random House and the impact of currency movements, revenues were level in underlying terms while adjusted operating profit (excluding Mergermarket) grew by 5%.

Net interest payable in 2014 was £64m, compared to £72m in 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 average net debt levels in the period.

Our tax rate in 2014 was 17.9% compared to 14.6% in 2013 reflecting tax settlements in 2013.

Adjusted earnings per share were 66.7p (2013: 70.1p).

Restructuring. Net restructuring charges were £44m (2013: £135m) and included: portfolio, title, marketing and technology rationalisation in North America; the consolidation and integration of our operations in certain Growth markets and a move to a distributor model in South Korea; the exit of non-strategic business lines in certain Core and Growth markets; and, across all of our businesses, technology platform and operations simplification and the ongoing transformation of our supply chain and customer contact operations. Gross restructuring costs were £84m in 2014(2013: £176m) offset by estimated net benefits in-year of £40m (2013: £41m).

Cash generation. Headline operating cash flow increased by £61m to £649m benefiting from improved working capital from deferred revenue growth and an increased dividend from Penguin Random House, partly offset by increased investment levels and ongoing restructuring charges. Free cash flow increased by £144m to £413m, additionally reflecting lower tax payments. Our average working capital to sales ratio improved by a further 1.1 percentage points to 12.3% helped by lower inventory levels and the absence of Penguin.

Return on invested capital. Our return on average invested capital was 5.6% (2013: 5.4%). Despite lower reported profit, ROIC benefited from lower cash tax paid. We expect ROIC to start to improve again in 2015.

Statutory results. In 2014, our statutory operating profit was £398m after a £77m write down of the balance sheet value of intangibles in our Indian business, a £38m loss on disposal of our stake in Nook Media and a £40m gain on the disposal of our stake in Safari Books Online and CourseSmart. Our statutory earnings were £470m, including a £198m gain from the disposal of Mergermarket and a £29m adjustment to the Penguin disposal, primarily in relation to pensions. In 2013, our statutory operating profit was £458m. Our statutory earnings were £539m, including a £217m gain from the disposal of Penguin.

Balance sheet. Our net debt increased to £1,639m (£1,379m in 2013) primarily reflecting the strengthening of the US Dollar relative to Sterling and the acquisition of Grupo Multi partly offset by the disposal of Mergermarket, fewer restructuring charges, improved working capital, the growth in deferred revenue and an increased dividend from Penguin Random House. Pearson’s net debt/EBITDA ratio increased from 1.6x in 2013 to 1.9x in 2014 and our interest cover increased from 10.2x to 11.3x.

Dividend. The board is proposing a dividend increase of 6% to 51.0p, subject to shareholder approval. 2014 will be Pearson’s 23rd straight year of increasing our dividend above the rate of inflation. Over the past ten years we have increased our dividend at a compound annual rate of 7%, returning more than £2.9bn to shareholders. We have a progressive dividend policy: we intend to build our dividend cover to around 2.0x over the long term, increasing our dividend more in line with earnings growth from then.

NORTH AMERICA (61% of group revenues)

Revenues declined 3% in headline terms, due to the strengthening of Sterling against the US Dollar, but increased by 2% at both CER and in underlying terms. Revenue growth in Connections Education, VUE, Clinical and Higher Education was partially offset by declines in School learning services and State Assessments. Adjusted operating profits declined 2% in headline terms due to currency movements, but grew 5% at both CER and underlying reflecting revenue mix, lower returns provision, reduced US pension costs and lower restructuring charges.

In our statutory results, we recognised a £38m loss on disposal of our 5% stake in Nook Media and a £40m gain on the disposal of our stakes in Safari Books Online and CourseSmart.

School

In School, good growth in Connections Education, our virtual schools business, was offset by declines in our State Assessments business due to the impact of legislative changes in Texas and California; and in learning services, due to some loss of market share (as reported at the half year), revenue deferral on blended programmes and softness in the Open Territories.

Connections Education served over 62,000 Full Time Equivalent students during 2014 through full-time virtual and blended programs, up more than 15% from 2013. Three new full-time virtual public schools were launched in 2014 and an additional one will launch in 2015. At full-time virtual schools supported by Connections Education, students consistently outperform their virtual school peers on state standardised tests. Students at College Park Academy, a blended school in Maryland using the Connections Education curriculum, scored significantly higher than their in-state peers in reading and math in the Maryland School Assessment (MSA) for 6th and 7th Grades.

In State and National Assessments, high-stakes online test volumes grew strongly, up 40% on 2013 to 11 million, as customers transitioned to computer based testing. Paper based high stakes test volumes declined 17% to 32 million, in part due to the growth of computer based testing, but also the impact of legislative changes in Texas and California. We were awarded contracts to administer Partnership for Assessment of Readiness for College and Careers (PARCC) assessments in 11 states and extended our contracts to administer Virginia Standards of Learning (SOL) Assessments and the Maryland High School Assessment. We will continue to administer the Florida Comprehensive Assessment Test (FCAT) until summer 2016.

Clinical Assessment grew strongly benefiting from the launch of the fifth edition of the Wechsler Intelligence Scale for Children (WISC-V) and strong growth in Q-Interactive, where early studies are showing good improvements in mental health professional productivity and student engagement levels.

PowerSchool supported almost 13 million students (in more than 70 countries), broadly level with 2013, while licensed Schoolnet student counts rose more than 10% to over 10 million. In New Jersey we launched Schoolnet in 27 school districts, with 14 more implementations in progress, and have delivered over 400,000 assessments since launch.

Learning services revenues declined due to the impact of revenue deferrals from blended digital programmes and a loss of market share, with a weaker performance in Grades 6-8 Science and Math in Texas, and Grades 6-12 Literature and Grades 6-8 Math in Florida only partly offset by a stronger performance in K-6 Math in Texas, Grades 6-12 Social Studies in Tennessee and Grades K-6 Math in California. We won an estimated 25% of the total new adoptions market (of $910m in 2014). enVisionMATH, which now has the largest installed base of elementary students in the US, continues to drive significant improvements in student computation and problem solving.

Higher Education

In Higher Education, total college enrolments fell, as expected, by 1.3%. Career enrolments in two-year public (community) and four-year for-profit colleges declined 3%, with rising employment rates and regulatory change affecting the for-profit and developmental learning sectors.

Learning services grew modestly, primarily due to market share gains, continued growth in digital courseware registrations, a stronger new edition cycle and less pronounced seasonality. MyLab registrations in North America grew 3% to almost 11 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 (http://pear.sn/IZxLE). We launched REVEL, which combines trusted content with interactive videos, quizzes, a mobile user interface, study tools, assignment calendar and performance dashboard for 17 humanities and social sciences subjects. The launch of REVEL is the first of numerous product lines taking advantage of our new cloud-based, mobile-ready, and data-analytics capabilities. New editions launched in 2014 included Tro, The Structures and Properties of Chemistry; Acemoglu, Laibson and List, Economics; and Pearson Writer, an application built for mobile devices that helps students in developing writing skills. We published a range of digital titles for The Boy Scouts of America and implemented a new digital curriculum incorporating enhanced Merit Badge programs in subjects including Robotics, Digital Technology and First Aid for the organisation's 2.7 million youth members.

Pearson On Line Services, where we run fully online undergraduate and graduate learning programmes and earn certain revenues based on the success of the students and the institution, grew course enrolments 22% during the year with continued strong growth in programmes at Arizona State University Online and University of Florida Online. We signed new programmes with Bradley University, to create five online graduate degree programmes in nursing and counselling; and University of Texas at Austin, Dana Center where we are partnering for the web delivery of math courses for its New Mathways Project (NMP), which will become part of a state-wide reform initiative in a collaboration between Dana Center and the Texas Association of Community Colleges. 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 hosting 100 courses based on AHIMA content; technical support; a next generation Virtual Lab Product; and are launching a Coding Basics course combining AHIMA and Pearson content.

Professional

At VUE, global test volumes grew 9% year on year to almost 13 million boosted by continued growth in IT, State Regulatory and Professional certifications.

New contracts include a deal to administer the Microsoft Certified Professional (MCP) Program globally, which significantly expands our existing partnership with Microsoft through Certiport’s Microsoft Office Specialist (MOS) and Microsoft Technology Associate (MTA) exams.

CORE (24% of group revenues)

Revenues declined by 8% in headline terms and by 5% at both CER and in underlying terms. Modest growth in Italy and good growth at VUE was offset by declines in UK assessment revenues, due to the impact of policy changes on our UK school qualifications business; and reduction in Partner market revenues, due to divestments and a move to distributor models implemented in 2013. FT revenues were broadly level at CER, with digital content growth offset by declines in print content and advertising. Adjusted operating profit (excluding Mergermarket) increased by £32m to £152m, driven by the benefits of restructuring actions taken over the last two years in all markets and by profit growth at the FT.

School

In the UK, qualifications have been impacted by government policy, where changes to accountability measures and a shift to end of course assessments in GCSE, has led to a 21% decline in BTECs and 11% decline in General Qualifications in the year. We marked almost 4 million National Curriculum Tests, up 24% on 2013. Our contract to administer the National Curriculum Test (NCT) was extended to 2017. More than 4,600 Schools, with almost 850,000 children, now subscribe to at least one of the Bug Club services, our primary school blended reading programme.

In Australia, we benefited from a stronger adoption year and the launch of the locally standardised version of the Wechsler Pre and Primary Scales of Intelligence (fourth edition).

In Italy, we gained share in both primary and secondary with new titles combined with professional development and online cross curricula support. In primary, we developed Top Secret and adapted Our Discovery Island English Language Learning programmes. In secondary, we extended our market leadership in the Humanities.

Revenues declined significantly in our Partner markets due to challenging market conditions in Africa and Scandinavia and the move to a distributor model in certain markets. We disposed of our local schools lists in the Caribbean as we continue to focus on our largest global geographic opportunities.

Higher Education

In the UK, our Learning Services revenues declined, primarily due to enrolment contraction following policy changes in the vocational markets. We continue to invest to build Pearson College and graduated our first 32 students during the year. Pearson College was one of only four Private Colleges to pass Quality Assurance Agency (QAA) review first time.

In Australia, Learning Services revenues grew modestly benefiting from growth in core subjects, such as Biology, and direct-to-institution sales of digital learning products offset by our exit from vocational publishing. Monash Online, our collaboration with Monash University, continues to show good growth and will launch additional courses in the second half of 2015. In addition we collaborated with another leading university in Australia to provide course development, recruitment, enrolment, and student support services for post-graduate courses.

Professional

At the Financial Times Group, the FT grew its total circulation by 10% year on year to a record high of nearly 720,000 across print and online. Digital subscriptions increased 21% year on year to almost 504,000 and now represent 70% of the FT’s total paying audience. The strong digital circulation growth offset continued structural declines in print content and advertising, where the FT continues to take market share.

Product innovation and launches, including an FT Weekend app, daily FirstFT briefing with editors' selection of essential news and comment from across the web, 'follow the author’ alerts and a new FT Android App continue to result in steady growth in mobile usage and time spent on FT.com. Mobile is the fastest growing channel. We launched the FT | IE Corporate Learning Alliance, a joint venture with IE Business School, which provides premium custom learning to business leaders around the globe. The partnership connects the academic excellence of prominent business schools with the FT’s award-winning journalism and insight into real world and real-time business challenges.

The contribution from The Economist Group was lower due to a decline in advertising revenue, a weaker US Dollar and lower profits at CQ Roll Call. The circulation of The Economist remains robust at 1.6 million, with an increase of 23% in digital subscriptions. The Economist’s new daily app, Espresso, was downloaded almost 400,000 times. The Group’s content marketing services continue to grow, with revenue increasing by 20% at CER.

At VUE, test volumes grew strongly following the successful launch of a new contract with CPA Australia to deliver Professional level exams and continued good growth in UK Driving Theory test volumes. We will continue to deliver our UK contract to administer the Driving Theory test for the DVSA until September 2016. VUE entered into 10-year partnerships with the Chartered Institute of Management Accountants (CIMA) and the Association of Chartered Certified Accountants (ACCA) in the UK to transform a selection of their exams from pen and paper to computer-based testing.

GROWTH (15% of group revenues)

Revenues grew 1% in headline terms, despite the strength of Sterling against key emerging market currencies; grew by 11% at CER, benefiting from the acquisition of Grupo Multi; and were down 1% in underlying terms, primarily due to the phasing of purchasing and a stronger School textbook adoption in South Africa in 2013. Growing English Language Learning enrolments in China and college enrolments in Saudi Arabia and South Africa were offset by a smaller school textbook market in South Africa, and lower revenues in Brazil from sistemas, and ELT and Higher Education textbooks. Excluding the textbook impact in South Africa, revenues grew 4% in underlying terms. Adjusted operating profit declined £3m to £35m reflecting a benefit from the acquisition of Grupo Multi offset by a slower adoption year in South Africa, launch costs associated with our new vocational colleges and a contract provision in Saudi Arabia, and weaker revenues and restructuring costs in Brazil.

In our statutory results, we wrote down the balance sheet value of our Indian business by £77m largely reflecting the reduced value of online tutoring which was primarily focused on the US market.

School

In South Africa, we performed well competitively maintaining our market share of the school textbook market but volumes declined significantly to more normal levels following a large adoption year, and significant share gains, in 2013.

In Brazil, enrolments in our sistemas were down 3% to 481,000 with growth in our public sistemas (NAME) offset by declines in our private sistemas as we combined our three sales forces into one. 72% of the municipalities that adopted NAME for lower secondary education showed improvement in their IDEB score, Brazil’s federally established measure of educational quality.

In India, DigiClass, our multimedia teaching solution is now installed in more than 26,000 classrooms, up more than 10% on 2013. We partnered with IBM to further accelerate our deployment across the country.

Higher Education

In South Africa, student enrolments in CTI/MGI, our universities, grew by 15% to 13,400 across 13 campuses.

In Mexico, our fully accredited online university partnership, UTEL, increased the number of students enroled from under 5,000 last year to more than 9,000 in 2014 as a result of improved consumer marketing efforts and better student retention.

In India, higher education revenues declined due to high levels of returns.

Professional

In Pearson English, good growth in direct delivery in China and inside services in Brazil due to the acquisition of Grupo Multi was partly offset by declines in learning services in Brazil and Mexico.

Global student registrations for MyEnglishLab grew 15% to more than 460,000 with strong growth in Latin America.

We launched the Global Scale of English (GSE), a new global standard for scoring English language proficiency on a precise, numeric, universal scale for businesses, governments and academic institutions. The scale is being embedded into all Pearson English products and services.

In China, English direct delivery enrolments grew at both Wall Street English (WSE), up 2% to 66,000, and Global Education, up 7% to 117,000. To support long term growth, we consolidated our ERP systems in China and deployed a Salesforce.com CRM system in WSE. We divested our online vocational training operations.

In Brazil, we completed the acquisition of Grupo Multi, the largest provider of private language schools in Brazil. We successfully integrated the business despite challenging market conditions and disruption caused by the World Cup and Presidential elections.

PENGUIN RANDOM HOUSE

Pearson owns 47% of Penguin Random House, the first truly global consumer book publishing company. Penguin Random House was reported post tax for the full year in 2014, compared to only the second half in 2013 following the combination of Penguin with Random House on 1 July 2013, which resulted in a £7m reduction in the contribution to operating income with an equal benefit to our tax charge.

Penguin Random House performed well in 2014, benefitting particularly from a strong publishing performance in Children’s around the world and multi-million-copy film and television tie-ins.

The US business published 760 New York Times print and ebook bestsellers in 2014 (2013 Full Year pro forma: 790), enjoying exceptional success in children’s publishing with John Green’s The Fault in our Stars (29 weeks at number 1 on the New York Times bestseller list and nearly 8 million copies sold), his backlist titles (4 million), tie-in titles from Disney’s Frozen film (more than 17 million copies sold), Dashner’s The Maze Runner, Forman’s If I Stay and continued strong sales of LEGO® movie tie-in titles. Notable Adult titles included Grisham’s Gray Mountain, Child’s Personal, Monk Kidd’s The Invention of Wings, Follett’s Edge of Eternity, Bush’s 41: A Portrait of My Father, along with strong film and television tie-ins, such as Flynn’s Gone Girl, Hillenbrand’s Unbroken, and Martins’s Song of Fire and Ice novels. The UK business published 206 Sunday Times bestsellers (2013 pro forma: 207), also enjoying outstanding sales of John Green, along with the continued strength of Kinney’s Wimpy Kid franchise. Key Adult titles included Brown’s Inferno, Oliver’s Jamie’s Comfort Food and Girl Online by YouTube sensation Zoella, which became the fastest-selling debut UK novel ever.

Penguin Random House has a strong publishing programme for 2015, including new titles from John Grisham, Jamie Oliver, Toni Morrison, James Patterson, Sylvia Day, Lee Child, Nick Hornby, Harlan Coben, Danielle Steel, John Sandford, Janet Evanovich, Gayle Forman, Emily Giffin and Nora Roberts, as well as film tie-ins for 50 Shades of Grey, John Green’s Paper Towns, the sequel to James Dasher’s The Maze Runner, and Star Wars.

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 well underway and consolidation of North American warehousing will be completed in the first half of 2015. In March 2014, Penguin Random House acquired Santillana Ediciones Generales, a leading trade book publisher in Spain, Portugal and across Latin America, consolidating its leadership in Spanish language publishing.

FINANCIAL REVIEW

Operating result

On a headline basis, sales from continuing operations decreased by £195m or 4% from £5,069m in 2013 to £4,874m in 2014. Total adjusted operating profit decreased by £14m or 2% from £736m in 2013 to £722m in 2014. Included within total adjusted operating profit are restructuring costs of £84m in 2014 compared to £176m in 2013. The costs are offset by benefits which for 2014 restructuring are estimated at £40m compared to benefits of 2013 restructuring in 2013 estimated at £41m.

On an underlying basis, sales from continuing operations were flat in 2014 compared to 2013 and total adjusted operating profit increased by 5%. Our underlying measures exclude the effects of exchange and portfolio changes arising from acquisitions and disposals. In 2014, currency movements decreased sales by £272m and adjusted operating profit by £49m. Portfolio changes increased sales by £79m and no net impact 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.

Total adjusted operating profit includes the results from discontinued operations but excludes intangible amortisation and impairment, acquisition related costs and other gains and losses arising from acquisitions and disposals. The statutory operating profit of £398m in 2014 compares to a profit of £458m in 2013. The decrease reflects the fall in adjusted operating profit and an increase in intangible charges. In 2014 intangible charges include the impairment of intangible assets in India (£77m) and increased amortisation mainly relating to a full year charge for Penguin Random House and additional amortisation in respect of the acquisition of Grupo Multi.

Other gains and losses in continuing operations include the loss on sale of our investment in Nook Media of £38m offset by profits on the sale of our joint venture interests in Safari Books Online and CourseSmart totalling £40m.

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 £29m 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 £198m 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 in 2014 was £64m, compared to £72m in 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.

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 2014, the total of these items excluded from adjusted earnings was a loss of £29m compared to a loss of £4m in 2013. Both the losses in 2014 and 2013 mainly relate to foreign exchange differences on unhedged cash and cash equivalents and other financial instruments.

Taxation

The effective tax rate on adjusted earnings in 2014 was 17.9% as compared to an effective rate of 14.6% in 2013. Our overseas profits, which arise mainly in the US, are largely subject to tax at higher rates than that in the UK (which had an effective statutory rate of 21.5% in 2014 and 23.25% in 2013). These higher tax rates were largely offset by amortisation-related tax deductions and by adjustments arising from settlements with tax authorities. Both these items were less significant in 2014 than they had been in 2013.

The reported tax charge on a statutory basis in 2014 was £63m (20.7%) compared to a charge of £87m (22.8%) in 2013. The decrease in the statutory rate is mainly due to tax benefits arising on the increase in intangible charges only partly offset by the factors affecting the adjusted rate as described above.

Tax paid in 2014 was £163m compared to £246m in 2013. Tax paid in 2013 was unusually high as a result of the permitted deferral of US tax payments in 2012 following Hurricane Sandy. These payments were subsequently made in 2013 and were accompanied by additional payments arising from settlements with tax authorities including £55m relating to prior year disposals.

Other comprehensive income

Included in other comprehensive income are the net exchange differences on translation of foreign operations. The gain on translation of £175m in 2014 compares to a loss in 2013 of £217m 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 strengthened in 2014 from an opening rate of £1:$1.66 to a closing rate at the end of 2014 of £1:$1.56. At the end of 2013 the US dollar had weakened in comparison to the opening rate moving from £1:$1.63 to £1:$1.66.
Also included in other comprehensive income in 2014 is an actuarial gain of £8m (after offsetting a £15m loss in respect of associates) 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 in 2013 of £79m.

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 in 2014.

Cash flows

Operating cash flow increased by £61m from £588m in 2013 to £649m in 2014. The increase is also reflected in operating cash conversion which rose from 80% in 2013 to 90% in 2014. The Group’s net debt rose from £1,379m at the end of 2013 to £1,639m at the end of 2014. Foreign exchange translation and the net impact from acquisition and disposal activity were the main reasons for the increase.

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 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 £83m in 2014 (2013: £96m) of which a charge of £84m (2013: £93m) was reported in adjusted operating profit and an income of £1m (2013: charge £3m) 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 £190m at the end of 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 asset of £27m at the end of 2014.

Dividends

The dividend accounted for in our 2014 financial statements totalling £397m represents the final dividend in respect of 2013 (32.0p) and the interim dividend for 2014 (17.0p). We are proposing a final dividend for 2014 of 34.0p, bringing the total paid and payable in respect of 2014 to 51.0p, a 6% increase on 2013. This final 2014 dividend which was approved by the Board in February 2015, is subject to approval at the forthcoming AGM and will be charged against 2015 profits. For 2014, the dividend is covered 1.3 times by adjusted earnings.

Return on invested capital (ROIC)

Our ROIC is calculated as total adjusted operating profit less cash tax, expressed as a percentage of average gross invested capital. ROIC increased from 5.4% in 2013 to 5.6% in 2014. Increased profit and reduced tax payments are the main reasons for the movement.