Pearson 2016 half-year results

Pearson 2016 Interim results (unaudited)

Pearson is trading in-line with the expectations set in February and is reiterating 2016 guidance which remains based on our current portfolio of businesses and exchange rates on 31 December 2015. Our growth and simplification plan is on-track and our 2018 goals are unchanged. If current exchange rates persist until the end of 2016 the earnings per share guidance range will increase by approximately 4p.

  • Trading in-line with our expectations
    • Sales of £1,866m declined 7% in underlying terms primarily due to the expected declines in assessment revenues in the US and UK, which are weighted towards the first half of the year, but also the phasing of both gross sales and returns in North American Higher Education courseware.
    • Revenues declined 11% at constant exchange rates, reflecting underlying revenue declines, the impact of a change in revenue model at Connections Education which now records revenue for services charged at cost on a net basis, and the disposal of PowerSchool. Headline sales decreased 7% with the benefit from the strength of the US Dollar against Sterling partly offset by the weakness of key emerging market currencies.
    • Deferred revenues grew 5% in underlying terms.
    • Adjusted operating profit of £15m is in-line with our expectations and down £39m when compared to H1 2015 reflecting lower revenues, incentive compensation accruals and dual IT running costs, partly offset by initial savings from our simplification programme and phasing of integration benefits at Penguin Random House.
    • Adjusted loss per share of (1.3)p (H1 2015: adjusted earning per share 4.4p) reflected the lower adjusted operating profit and interest charges.
    • Net debt fell by £863m to £1,426m (H1 2015: £2,289m) with the proceeds from disposals partly offset by the impact of the depreciation of Sterling against the US Dollar on the Sterling value of our Dollar denominated debt.
    • Dividend held level at 18p, in-line with previous guidance, reflecting the Board’s confidence in the medium term outlook.
  • Simplification and growth plan on-track: We have made good progress in delivering the simplification and change programmes that we announced on 21 January (http://pear.sn/10EPp5). Approximately 3,450 of the targeted reduction in headcount of 4,000 Full Time Equivalent (FTE) employees have been notified of exit. Key changes include the creation of a global product organisation, further simplification of back office functions such as technology and finance, and the scaling down of some of our direct delivery businesses. Our global ERP implementation is on-track with HR and Finance systems going live in the UK in May and July, respectively. We still expect to incur restructuring costs of approximately £320m in 2016 and to generate annualised savings of approximately £350m, with approximately £250m of these savings in 2016 and a further £100m in 2017. Our investments in new digital products and services, including our New Student Experience for Wall Street English and our first online degree partnership in the UK, are building Pearson's future growth potential.
  • Statutory results reflect the costs of implementing the plan: Our statutory results showed a loss from continuing operations of £286m (£129m loss in 2015) primarily reflecting lower adjusted operating profit and the impact of restructuring charges.
  • 2016 outlook reiterated: Many of the factors outlined in our full year guidance in February have proportionately a much greater impact on our first half results given the heavy weighting of our profits and cash flow to the second half of the year. These factors become proportionately much less significant during the larger second half of the year when, in addition, we will also benefit from most of the savings from the simplification programme. In 2016, we continue to expect to report adjusted operating profit and adjusted earnings per share before the costs of restructuring of between £580m and £620m and between 50p and 55p, respectively, with the in-year benefits from restructuring offset by the loss of operating profit from disposals made in 2015, ongoing challenging conditions in our largest markets, the reinstatement of the employee incentive pool and other operational factors. This guidance remains based on our current portfolio of businesses and exchange rates on 31 December 2015. If current exchange rates persist until the end of 2016 the earnings per share guidance range will increase by approximately 4p.
  • 2018 goals unchanged: With the full benefits of our simplification programme, the launch of new products, and stability returning to US college enrolments and the UK qualifications market by the end of 2017, we expect adjusted operating profit to be at or above £800m in 2018.
  • Our 2015 Sustainability Report was released on 11 July and introduces Pearson’s new five year plan to integrate sustainability into every aspect of its business and to help drive forward the United Nation’s 2030 Sustainable Development Goals (SDGs) by contributing educational expertise, knowledge and resources to address key global sustainability challenges.

Pearson’s chief executive, John Fallon said:

"We are making good progress on the programme of work we began in January to simplify the company and return to growth, and we are performing well against the financial, operational and educational milestones we set out in February.

"It is still relatively early in the year, and we have two big trading quarters in education ahead of us. Nonetheless we are trading in line with our 2016 expectations, and making progress toward our target of £800m or more of operating profit by 2018."

FINANCIAL SUMMARY

£ millions 2016 2015 Headline
growth
CER
growth
Underlying
growth
Business performance          
Sales 1,866
1,997 (7)% (11)% (7)%
Adjusted operating profit 15 54 (72)% (81)% (80)%
Adjusted (loss)/earnings per share (1.3)p 4.4p n/a    
Operating cash flow (210) (333) 37%    
Free cash flow (408) (424) 4%    
Net debt (1,426) (2,289) 38%    
Statutory results          
Sales 1,866 1,997 (7)%    
Operating loss (286) (129) n/a    
Loss before tax (306) (132) n/a    
Basic loss per share (27.1)p (9.7)p n/a    
Cash used in operations (266) (275) 3%    
Dividend per share 18.0p 18.0p 0%    

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 and adjusted operating profits exclude FT Group while adjusted earnings per share include FT Group. Continuing operations exclude FT Group.
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, 14 and 16.

 

DIVISIONAL ANALYSIS – GEOGRAPHY  

£ millions 2016 2015 Headline
growth
CER
growth
Underlying
growth
Sales          
North America 1,164
1,263 (8)% (15)% (9)%
Core 370
391
(5)%
(8)%
(6)%
Growth 332
343
(3)%
0%
0%
Continuing operations 1,866
1,997 (7)%
(11)%
(7)%
FT Group   160
n/a
n/a n/a
Total sales 1,866
2,157
(13)%
(17)% (7)%
Adjusted operating profit          
North America 2
19
(89)%
n/a
n/a
Core (7)
33
n/a
n/a n/a
Growth (12)
(22)
45%
59% 59%
Penguin Random House 32
24
33%
25%
25%
Adjusted operating profit from
continuing operations
15
54
(72)%
(81)%
(80)%
FT Group   18
n/a n/a n/a
Total adjusted operating profit 15
72
(79)% (86)% (80)%

2015 results have been restated to reflect FT Group in discontinued operations and changes in management responsibilities between the Geographies which were effective from 1 January 2016.

OUR STRATEGY

Pearson is the world’s learning company, with world class capabilities in educational courseware and assessment, based on a strong portfolio of products and services, powered by learning technology. Our strategy of combining these core capabilities with related services that enable our partners to scale online, reaching more people and ensuring better learning outcomes, will provide Pearson with a larger market opportunity, a sharper focus on the fastest-growing education markets and stronger financial returns.

2016 OUTLOOK

Our 2016 outlook is unchanged from that set out at our preliminary results on 26 February. In 2016, we continue to expect to report adjusted operating profit before restructuring costs of between £580m and £620m. This reflects the impact of: the in-year benefits from restructuring offset by the loss of operating profit from disposals made in 2015, ongoing challenging conditions in our largest markets, the reinstatement of the employee incentive pool and other operational factors (including dual running costs as we rationalise our technology infrastructure, cost inflation and increased pre-publication amortisation relating to new product launches).

We expect adjusted earnings per share to be between 50p and 55p, after a normalised interest charge of approximately £60m and a tax rate of approximately 19%. This guidance is based on our current portfolio of businesses and exchange rates on 31 December 2015. If current exchange rates persist until the end of 2016 the earnings per share guidance range will increase by approximately 4p.

The major factors behind this guidance are as follows:

Trading conditions

While we expect to achieve continued good growth in areas such as virtual schools and online programme management, we anticipate trading conditions to remain challenging in our major markets in 2016.

In North America, our largest market, we anticipate US college enrolments will be flat given forecast modest improvements in US employment; a smaller adoption market in K-12 learning services and lower participation rate will be partially offset by growth in Open Territories driven by new products; reduced testing revenues in North America reflecting State and National Assessment contract losses worth approximately £100m announced in 2015; growth in Clinical Assessments and Professional Certification.

In our Core markets (which include the UK, Italy and Australia), we expect modest declines in vocational course registrations in UK schools, ongoing pressure in our various learning services businesses, partially offset by growth in managed services in Australia and the UK.

In our Growth markets (which include Brazil, China, India and South Africa), we expect continued pressure in South Africa on government spending on textbooks and lower enrolments in CTI, macro-economic pressures in emerging markets, specifically China and Brazil, offset by growth from new products such as the New Student Experience.

In Penguin Random House, we anticipate that additional benefits from the ongoing integration of the business will be broadly offset by reduced demand for ebooks, following industry-wide terms changes in 2015.

Portfolio changes

We completed the sale of PowerSchool on 31 July 2015 for £222m; the sale of The Financial Times on 30 November 2015 for £858m; substantially completed the sale of our 50% stake in The Economist Group on 16 October 2015, with final completion on 23 March 2016, for £469m. In addition we disposed of Fronter and a number of print textbook lists in the US. Total disposals contributed approximately £90m to 2015 operating profit which will not recur in 2016.

Other operational factors

Dual running costs from technology implementations, increased investment amortisation from new product launches and cost inflation will increase costs by approximately £90m in 2016 when compared to 2015.

Incentive compensation

Group incentive compensation was zero in 2015 reflecting the weakness of performance versus budget. The incentive pool will be reinstated to £110m in 2016 to ensure our work force is incentivised to sustain its strong competitive performance and to implement a significant programme of change within the company.

Restructuring

Building on the work we have done over the last three years, we are taking further action to simplify our business and reduce our costs and position us for growth in our major markets. We will: create a single courseware product organisation; integrate our North American assessment operations; reduce our exposure to large scale direct delivery and focus on more scalable online, virtual, and blended services; implement major efficiency improvements across all our enabling functions - technology, finance, HR; and rationalise our property portfolio and renegotiate and consolidate major supplier agreements.

To implement this programme, we will incur costs of approximately £320m in 2016 and expect to generate annualised savings of approximately £350m, with approximately £250m of savings in 2016 and a further £100m of savings in 2017. Approximately 3,450 of the targeted reduction in headcount of 4,000 FTEs have been notified of exit.

Currency movements

In 2015, Pearson generated approximately 63% of its sales in the US, 6% in Greater China, 5% in the Euro zone, 3% in Brazil, 2% in Canada, 2% in Australia, 2% in South Africa and 1% in India and our guidance is based on exchange rates at 31 December 2015. If current exchange rates persist until the end of 2016 the earnings per share guidance range will increase by approximately 4p.

Interest and tax

We expect our interest charge to be approximately £60m with lower average net debt levels offset by the absence of released accrued interest payments on tax provisions following settlements. We expect a tax rate of approximately 19% 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 0830 (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.

Analyst and investor conference call details

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Participant Pin Code

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Audience URL

http://event.onlineseminarsolutions.com/r.htm?e=1224032&s=1&k=55F67263CE01E326AE306358355E0795

Throughout this statement, growth rates are given based on continuing operations, excluding FT Group (unless otherwise stated). Underlying growth rates exclude the impact of both currency movements and portfolio changes.

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 cost 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. Readers are cautioned not to place undue reliance on such forward-looking statements.

NORTH AMERICA

Revenues fell 9% in underlying terms, primarily due to anticipated assessment revenue declines. In School, strong growth in Connections Education and Clinical Assessments and market share gains in Open Territories in K-12 courseware offset expected weakness in assessments revenues, which is weighted towards the first half of the year, and the impact of a planned lower participation rate in a smaller new adoption market in K-12 courseware. In Higher Education, strong growth in Higher Education Online Program Management and integrated digital courseware was more than offset by the impact of our decision to retire Learning Studio, a higher education learning management system (LMS), and the phasing of courseware gross sales and returns. In VUE, higher volumes of Professional Certification assessments resulted in good growth.

Revenues declined by 15% at CER reflecting underlying trends, a change in revenue model for services charged at cost from gross to net at Connections Education, and the disposal of PowerSchool. Revenues were 8% lower in headline terms reflecting the strength of the US Dollar against Sterling.

Adjusted operating profits fell £17m to £2m reflecting revenue declines and the absence of list sales partially offset by cost savings from our simplification programme.

Kevin Capitani has been appointed President of Pearson North America, bringing over 20 years of high level sales and strategic leadership at SAP, to continue our ongoing transition from analogue to digital, and from products to services. Don Kilburn will move into a senior business development role.

Courseware

In School, revenues were level with the previous year, with a smaller new Adoption Market and our lower participation rate offset by strong growth and market share gains in Open Territories resulting from new product launches. Our new adoption participation rate fell from 93% in 2015 to 64% in 2016 due to our decision not to compete for the California Grades K-8 English Language Arts (ELA) adoption with a core basal programme. We won an estimated 30% share of adoptions competed for (31% in 2015) and 21% of total new adoption expenditure of $470m (29% of $730m in 2015). We performed strongly in new adoptions in Grades K-5 Science in South Carolina and Alabama and Grades 6-12 ELA in Oklahoma. In the Open Territories, we grew strongly benefiting from our new MyPerspectives programme in Grades 6-12 ELA, ReadyGen in elementary reading, Investigations 3.0 in K-5 Math and the extension of enVisionMATH to cover Grades 6-8. iLit continued to grow strongly and shows compelling efficacy over the academic year with students using the programme who took the beginning and end of year assessments achieving an average of two years of reading growth. Students in classes in which teachers have been using the programme for multiple years fared even better, typically achieving three or even four years of growth.

In Higher Education, total US College Spring enrolments fell 1.4%, with combined two-year public and four-year for-profit enrolments declining 4%, affected by rising employment rates and regulatory change impacting the for-profit and developmental learning sectors, partially offset by modest growth in enrolments at four year public and private not for profit institutions. Gross revenues in our Higher Education courseware business declined, despite market share gains, which reflected spring enrolments and the later phasing of loose leaf sales. Net revenues also declined, in part reflecting the gross sales decline and in part the earlier phasing of retailer returns in the first half of 2016. We performed strongly in Science and Business & Economics with key titles including Appling Biochemistry: Concepts & Connections 1e and Amerman Human Anatomy & Physiology 1e. Marieb Human Anatomy & Physiology 10e, Young, Freedman University Physics 14e and Parkin Economics 12e. Global digital registrations of MyLab and related products grew 2%. In North America, digital registrations grew 1% with good growth in Science, Business & Economics and REVEL partly offset by continued softness in Developmental Mathematics. Skill Builder Adaptive Practice, our in-house adaptive homework solution launched in six titles in Spring 2016 and will expand to 50 additional titles by Fall 2016. Faculty generated studies indicate that the use of MyLab, Mastering and REVEL programmes, as part of a broader course redesign, can support improvements in student test scores and lower institutional cost (http://pear.sn/IZxLE). Preliminary findings from an efficacy study suggest that students in Developmental Mathematics courses who complete on average 50 of the learning objectives in MyMathLab-Developmental double their odds of passing the course and that users of MyWritingLab who complete seven topics increase their final Exam Scores by around 14%. In institutional courseware solutions, Pearson signed more than 30 significant large-scale, enterprise adoptions of cross-discipline digital content, where content is purchased via an upfront course fee and integrated with university IT systems, including University of Tennessee – Knoxville (UTK) and Kentucky State University (KYSU).

Assessment

In School Assessment (State and National Assessments), revenues declined significantly due to previously announced contract losses. The states of Arkansas, Mississippi and Ohio discontinued PARCC assessments and we ceased to administer the majority of the current Texas STAAR contract. Paper based standardised test volumes fell 46% to 12.4 million. Standardised online test volumes fell 16% to 20.4 million, with online tests on the TestNav platform now accounting for over 62% of our testing volumes. Pearson successfully delivered English Language Arts and Math PARCC assessments to 3.3 million students across seven states and the District of Columbia. We were awarded a one-year emergency contract in Tennessee to score and report 2016 state assessments; in Florida we were awarded a new contract to administer Science and Social Studies components of the Florida Standards Assessment (FSA); and in Arizona we extended our contract to administer English language learner assessments.

In Professional Certification, VUE global test volume grew to over 8 million, up 4% year on year, boosted by continued growth in IT, Professional, GED and US teacher certification programmes. We renewed our contract with the Computing Technology Industry Association (CompTIA) for three years and the Florida Department of Business & Professional Regulation for five years.

Clinical Assessment grew strongly benefiting from continued growth of the fifth edition of the Wechsler Intelligence Scale for Children (WISC-V) and strong growth in Behavior Assessment for Children 3e (BASC). Q-Interactive, Pearson's digital solution for Clinical Assessment administration also grew rapidly with continued strong growth in license sales and with sub test administrations more than doubling over the same period last year.

Services

Connections Education, our virtual school business served over 68,000 FTE students through full-time virtual and blended school programmes during June 2016, up 9% from 2015, boosted by good organic growth and a new statewide school in North Carolina. Five new Connections partner schools have been approved to open in the 2016-17 school year. The 2016 Connections Education Parent Satisfaction Survey showed strong results with 92% of families with students enrolled in full-time online partner schools stating they would recommend Connections Academy schools to others.

In Pearson Online Services, our Higher Education Online Program Management (OPM) business, course enrolments grew strongly, up 23% to over 165,000, boosted by strong growth in Arizona State University Online. We extended our collaboration with Maryville University to launch Bachelor’s and Master’s degrees in Accounting; our partnership with University of Nevada Reno will launch a second programme, a Master’s in Public Health; and University of Alabama at Birmingham will launch a new online MBA programme. Regis College of Weston, Massachusetts signed a new partnership with Pearson to launch a Master’s in Nursing and Health Administration.

CORE

Revenues declined by 6% in underlying terms, primarily due to expected declines in vocational course registrations in UK schools, the impact of which is more heavily weighted towards the first half of the year. Strong growth in English assessments and OPM services in Australia was more than offset by the closure of Wall Street English Germany and declines in courseware revenues.

Revenues declined by 8% at CER and by 5% in headline terms due to underlying movements, the disposal of Fronter and currency movements.

Adjusted operating profit declined £40m to a loss of £7m reflecting revenue declines in higher margin businesses and costs related to the introduction of new qualifications.

Courseware

Revenues declined primarily due to phasing in small markets in Europe and Africa, but also due to modest declines in the UK and Australia. Moderate growth in UK secondary, due to the successful delivery of “The Crunch” food project in partnership with the Wellcome Trust, was offset by declines in primary due to a smaller adoption cycle and increased deferred revenue associated with digital products and a smaller textbook market in higher education. 1.9 million pupils are now using a service on ActiveLearn Primary, including Bug Club, up from 1.4 million a year ago. We launched a number of print and digital courseware series to support the teaching of Pearson qualifications aligned to the new UK curriculum including Edexcel GCSE Science and Edexcel GCSE History. In Higher Education, we are piloting REVEL in the UK and Australia.

Assessment

In Assessment, UK qualifications have been impacted by government policy, where changes to accountability measures have led to lower BTEC registrations in the 2015-16 school year. GCSE and GCE entries for summer 2016 declined modestly compared with 2015, primarily due to lower AS level entries. We successfully delivered the National Curriculum Test for 2016, marking 3.5 million scripts from 1.8 million students and successfully supported the transition from levels to scaled scores.

Clinical Assessment grew well in Australia benefiting from strong growth in the Wechsler Intelligence Scale for Children (WISC-V).

At VUE, we were awarded contracts to continue to administer the UK Driving Theory test for the DVSA for four years from September 2016, to continue to provide testing services to the Construction Industry Training Board for four years from April 2017 and to administer the UK Clinical Aptitude Test for five years from January 2017.

The Pearson Test of English Academic (PTEA) saw continued strong growth in global test volumes with the Australian Department of Immigration and Border Protection accepting the test for proof of English ability for a range of student visas. The test can be taken in 50 countries and thousands of higher education institutions worldwide now accept PTE Academic as proof of English proficiency including Harvard Business School, INSEAD, Yale and Wharton Business School.

Services

In Higher Education Online Services, our Online Program Management business grew strongly in Australia with combined course enrolments up nearly 200% from 2015. The growth of our partnership with Monash University was led by the Graduate Diploma in Psychology, which is now one of Monash's largest postgraduate courses. At Griffith University continued growth was driven by consistent demand for the MBA programme and recent launch of Master’s courses in Marketing and Global Law. In the UK, Kings College London partnered with Pearson to launch online postgraduate degree programmes in Psychology and Law.

Wall Street English revenues grew strongly in Italy as we rolled out the New Student Experience (NSE) in 27 centres in the country. The NSE delivers a next generation Wall Street English service with adaptive, personalised learning incorporating Pearson’s Global Scale of English. We announced the closure of our unprofitable Wall Street English schools in Germany.

GROWTH

Revenues were level in underlying terms. In China, growth in adult English language learning and English courseware was partly offset by declines in English test preparation. In Brazil, revenues declined due to enrolment declines in our English language learning business, related to macroeconomic pressures, but profits were stable. In South Africa, revenues grew modestly with growth in school textbooks, which benefited from phasing, offset by enrolment declines at CTI, in part due to the impact of campus rationalisation. In the Middle East revenues fell significantly due to our previously announced withdrawal from an agreement to run three Saudi Colleges of Excellence, with the colleges transitioning to new providers from 30 June 2015. Excluding the impact of the exit from this agreement, underlying revenues in Growth were up 3%.

Revenues were flat at CER and declined by 3% in headline terms due to currency movements.

Adjusted operating profit increased £10m to a loss of £12m reflecting the benefits of restructuring and the absence of a contract termination charge which impacted the first half of 2015.

Courseware

Courseware revenues grew strongly, due to the impact of new products and phasing. In China, School and English language courseware grew strongly. In South Africa, school textbooks grew sharply, primarily due to phasing. In South America, English language courseware grew strongly in Argentina and Mexico partially offset by weakness in Brazil. The Middle East School courseware declined modestly, mostly due to phasing.

Services

In China, growth in Wall Street English was partly offset by declines at Global Education. Enrolments grew 5% at WSE, to 68,800. We launched the New Student Experience across all 68 WSE China centres, opened two new retail centres in Beijing and Shenzen and a new corporate training centre in Shenzen to support long term customers including Huawei. Global Education revenue declined with lower enrolments partially offset by an ongoing shift to more intensive premium courses with smaller class sizes and new products.

In Brazil, revenues in our sistemas business were level with last year, whilst revenues in English language learning fell due to challenging economic conditions.

In South Africa, student enrolments at CTI universities fell by 25% to 8,500 driven by tightening consumer credit affecting re-enrolment rates, smaller cohorts of qualified students in recent years and the impact of campus rationalisation as part of our simplification plan.

In India, enrolments at our managed schools grew 14% to over 28,000 students. Pearson MyPedia, an inside service ‘sistema’ solution for schools comprising print and digital content, assessments and academic support services, expanded to nearly 200 schools with over 56,000 learners.

In Mexico, our fully accredited online university partnership, UTEL, increased the number of students enrolled by 33% to over 15,500.

PENGUIN RANDOM HOUSE

Penguin Random House had a solid performance in the first half of 2016 with reduced demand for e-books following last year’s industry-wide digital-terms changes offset by the phasing of further integration benefits. Its business benefitted from million-copy sales of several ongoing titles, such as The Girl on the Train, as well as multiple newly published number one bestselling books across its territories.

The U.S. business published 316 New York Times print and e-book bestsellers in H1 2016 (2015 H1: 306). The division achieved tremendous success with two previously published novels by Jojo Moyes: Me Before You, the basis for the hit film, and its sequel After You, which together, in print and digital, sold more than 2.4 million copies. Marie Kondo is another half-year million-copy author, with her 2014 nonfiction The Life-Changing Magic of Tidying Up, and Spark Joy, published in January. Paula Hawkins’s The Girl on the Train sold an additional 800,000 copies in all formats. Other newly published number one Adult titles for the period were When Breath Becomes Air by Paul Kalanithi; Fool Me Once by Harlan Coben; Extreme Prey by John Sandford; and Cravings by Chrissy Teigen. Dr. Seuss’s classic children’s books sold almost three-million copies in H1, and books by Roald Dahl, Jeff Kinney, Rick Yancey, Eric Carle, and R.J. Palacio delivered strong children’s sales.

The UK business published titles which made 570 appearances on the 2016 H1 Sunday Times bestseller lists (2015 H1: 471). Continuing demand for The Girl on the Train resulted in more than 1.1 million print and e-books sold during the six months. Additional key titles are Me Before You and After You by Jojo Moyes, in tandem selling 1.2 million copies; Mary Berry: Foolproof Cooking; The Road to Little Dribbling by Bill Bryson; and the paperback reprint of Lee Child’s Make Me.

In the second half of this year Penguin Random House is expecting success with new books by Jay Asher, Margaret Atwood, Johanna Basford, Dan Brown, Bill Bryson, Johnny Cash, Lee Child, Harlan Coben, Phil Collins, Pat Conroy, Clive Cussler, Janet Evanovich, Carrie Fisher, Ina Garten, John Grisham, Robert Harris, Carl Hiaasen, P.D. James, Jeff Kinney, John le Carré, Ian McEwan, Jojo Moyes, Jamie Oliver, James Patterson, Jodi Picoult, Rick Riordan, Philip Roth, John Sandford, Zadie Smith, Danielle Steel, and Zoe Sugg; as well as such major movie tie-ins as The Girl on the Train; Jack Reacher 2; Dan Brown’s Inferno; and Rogue One, the new Star Wars™ film.

In June, Penguin Random House announced the sale of Fodor’s, its U.S. travel-content division, to Internet Brands, a leading Los Angeles-based online media and technology company.

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 2016 decreased by £131m or 7% from £1,997m for the first six months of 2015 to £1,866m for the equivalent period in 2016. Adjusted operating profit from continuing operations decreased by £39m or 72% from £54m in the first six months of 2015 to £15m in 2016.

Our underlying measures exclude the effects of exchange and portfolio changes arising from acquisitions and disposals. On an underlying basis, sales from continuing operations for the first six months also decreased by 7% in 2016 compared to 2015 and the impact of currency movements and portfolio changes on adjusted operating profit was not material. In 2016, currency movements increased sales by £86m and portfolio changes decreased sales by £88m.

Our portfolio change is calculated by taking account of the additional contribution (at constant exchange rates) from acquisitions, however, in 2015 and in 2016 acquisitions weren’t significant. We also exclude sales and profits made by businesses disposed in either 2015 or 2016. In the second half of 2015, in light of the evolution of our Connections Education business we concluded that it was more appropriate to reflect a greater proportion of revenue on a net basis. At half year 2015 the adjustment had not been made and in our underlying revenue measure we have reflected this change as a portfolio adjustment. There is no corresponding profit adjustment.

Total adjusted operating profit includes the results from discontinued operations but excludes intangible charges for amortisation and impairment, acquisition related costs and other gains and losses arising from acquisitions and disposals. In 2016 we have also amended our definition of adjusted operating profit to exclude the costs of major restructuring. In January 2016, Pearson announced that it was embarking on a restructuring programme to simplify the business, reduce costs and position the company for growth in its major markets. The scope and costs of the 2016 programme are significantly more than normal levels of restructuring that we typically absorb within our adjusted measures.

The statutory operating loss from continuing operations of £286m in the first half of 2016 compares to a loss of £129m in the first half of 2015. The increase in the loss in 2016 reflects the decline in adjusted operating profit together with exceptional restructuring charges of £171m. In 2015 we booked impairment losses of £70m relating to the sale of PowerSchool which completed later in that year. The impairment reflected the reduced market opportunity for software which was to be integrated with PowerSchool and the recognition that adoption of such software in US Schools was unlikely to occur at the rate originally envisaged. Other gains and losses in continuing operations in the first six months of 2016 of £18m mainly relate to the closure of our English language schools in Germany.

Discontinued operations

Discontinued operations in 2015 relate to the sale of the Financial Times and the Group’s 50% interest in the Economist. The Economist sale was substantially completed in October 2015 and realised a gain of £473m before tax. The remaining interest in the Economist was held at fair value and subsequently sold in the first half of 2016 without realising any further gain or loss. The sale of the Financial Times completed on 30 November 2015 and realised a gain of £711m before tax. The gains on these transactions and the results for 2015 to the respective sale dates have been included in discontinued operations.

Net finance costs

Net interest payable to 30 June 2016 was £27m, compared to £29m in the first half of 2015. The decrease in interest payable was mainly due to lower average debt levels partly offset by the impact of a stronger US dollar in the first half of 2016 compared to the first half of 2015.

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 foreign exchange and other gains and losses. 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 2016, the total of these items excluded from adjusted earnings was a gain of £7m compared to a gain of £26m in the period to 30 June 2015. The gains in 2016 and 2015 largely relate to foreign exchange differences on cash and cash equivalents and inter-company loans.

Taxation

Taxes on income in the period are accrued using the tax rates that would be applicable to expected annual earnings. The reported tax benefit on our statutory loss for the six months to 30 June 2016 was an £86m credit compared to a £40m credit in the period to 30 June 2015. The benefit reflects the overall mix of profits and losses projected for the full year and the tax rates expected to apply to those statutory results.

The effective tax rate applied to adjusted earnings for the six months to 30 June 2016 is 19% (2015 half year: 17%). 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 gain on translation of £524m at 30 June 2016 compares to a loss at 30 June 2015 of £220m and has arisen due to the strength of the US Dollar and many other currencies relative to Sterling. In the first half of 2015 Sterling strengthened relative to many of the currencies that Pearson is exposed to. A significant proportion of the group’s operations are based in the US and the US dollar strengthened in 2016 from an opening rate of £1:$1.47 to a closing rate at the end of June 2016 of £1:$1.34. At the end of June 2015 the US dollar had weakened slightly in comparison to the opening rate moving from £1:$1.56 to £1:$1.57.

Also included in other comprehensive income in 2016 is an actuarial gain of £1m in relation to post retirement plans of the Group and our share of the post retirement plans of PRH. The gain mainly arises from returns on plan assets which in aggregate exceeded the unfavourable impact of changes in the assumptions used to value the liabilities in the plans. The gain in 2016 compares to an actuarial loss at 30 June 2015 of £45m.

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.

The charge to profit in respect of worldwide pensions and retirement benefits for continuing operations amounted to £36m in the period to 30 June 2016 (30 June 2015: £40m) of which a charge of £41m (30 June 2015: £42m) was reported in adjusted operating profit and an income of £5m (30 June 2015: £2m) was reported against other net finance costs.

The overall surplus on the UK group pension plan of £337m at the end of 2015 has increased to a surplus of £446m at 30 June 2016. The movement has arisen principally due to favourable asset returns and contributions (including £90m as part of an agreement relating to the sale of the FT Group) which more than offset an unfavourable movement in the discount rate used to value the liabilities. In total, our worldwide surplus in respect of pensions and other post-retirement benefits at the end of 2015 increased from £198m to £302m at the end of June 2016.

Dividends

The dividend accounted for in the six months to 30 June 2016 is the final dividend in respect of 2015 of 34.0p. An interim dividend for 2016 of 18.0p was approved by the Board in July 2016 and will be accounted for in the second half of 2016.

Principal risks and uncertainties

The principal risks and uncertainties have not changed from those detailed in the 2015 Annual Report and are summarised below. The vote to leave the European Union has resulted in some uncertainties including a material weakening of Sterling against the Group’s principal trading currencies, of which the most significant is the US dollar. The weakening of Sterling has had a translational impact on the Group’s financial statements with a modest beneficial impact on results and cash flows whilst at the same time increasing the reported values of assets and liabilities on the balance sheet including net debt. If these rates were to persist into the second half of 2016 they would be expected to have a further translational impact on results and cash flows reported in Sterling.

The Group has established an executive committee to monitor the impact of Brexit on its principal risks and remains of the view that it may well add increased complexity across certain of its activities, with the potential for some short-term disruption. The Group will continue to monitor developments carefully. There remains significant uncertainty, but with a significant majority of the Group's activities outside the UK and Europe, Pearson does not currently believe that there will be, overall, a material adverse impact on the Group’s results or financial position.

Business transformation and change

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 our plans, or our level of customer service may not meet expectations.

Digital and services evolution and market forces

Failure to invest successfully in and deliver the right products and services.

Talent

Failure to attract, retain and develop staff, including adapting to new skill sets required to run the business.

Political and regulatory risk

Changes in policy and/or regulations have the potential to impact business model and/or decisions across all markets.

Acquisitions, divestments and joint ventures

Failure to meet financial and operational targets of acquisitions. Failure to successfully manage joint ventures and divestments in line with plans.

Testing failure

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

Safety and security

Risk to safety and security due to increasing local and global threats.

Customer facing systems

Failure to maintain and support customer facing services, systems, and platforms, including addressing quality issues and execution on time of new products and enhancements.

Safeguarding and protection

Failure to adequately protect children and learners, particularly in our direct delivery businesses.

Business continuity

Failure to have plans in place or plans are not properly executed. Crisis management and technology disaster recovery plans may not be comprehensive.

Tax

Risk that changes in tax law or perceptions on tax planning strategies lead to higher effective tax rate or negative reputational impact.

Treasury

Inability to mitigate treasury financial risks, including the failure to secure adequate committed funding, the failure to manage exposures to financial counterparties and the failure to manage exposures to market risk such as interest and foreign exchange rates.

Data privacy and information security

Risk of a data privacy incident or other failure to comply with data privacy regulations and standards; and/or a 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 and financial loss.

Intellectual property

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

Competition law

Failure to comply with anti-trust and competition legislation.

Anti-bribery and corruption (ABC)

Failure to effectively manage risks associated with compliance to global and local ABC legislation.

Data quality and integrity

Unavailability of timely, complete and accurate data limits informed decision-making and increases risk of noncompliance with legal, regulatory and reporting requirements.