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Pearson 2019 half-year results

   

Included in this release:

Interim results for the six months to 30th June 2019 (unaudited)

Good progress in the first half of the year, continued momentum in our structural growth opportunities.

Highlights

Underlying revenue up 2% with growth across all three segments

  • North America up 1%, Core up 6% and Growth up 2%.
  • Continued momentum in our structural growth opportunities and stabilisation in other parts of our business more than offsets expected declines in US Higher Education Courseware and US Student Assessment.
  • Strong performance in our structural growth opportunities driven by good enrolment growth in Online Program Management (OPM) and Connections Academy, a continuing ramp-up of contracts in our Professional Certification business (VUE) and strong test volumes in Pearson Test of English Academic.
  • Pearson’s sales decreased by 2% in headline terms largely due to disposals of non core businesses.
  • As in previous years, Pearson’s sales and profits are weighted towards the second half of the year.

Adjusted operating profit up 30% in underlying terms

  • Reflecting sales growth and savings from the 2017-2019 restructuring programme, partially offset by cost inflation and other operational factors.

Strong balance sheet with H1 net debt at £726m (H1 2018: £775m) pre IFRS 161

  • On a post IFRS 16 basis net debt at the end of H1 2019 was £1,376m.
  • Interim dividend 6.0p (H1 2018: 5.5p).

Statutory results

  • Statutory operating profit from continuing operations was £37m in the first half of 2019 (H1 2018: £233m). The decrease in 2019 is largely due to the lower profit on disposal of businesses and higher restructuring charges in 2019, partly offset by improved trading and additional restructuring savings.
  • Statutory EPS 6.1p (H1 2018: 24.1p) reflects lower profit on disposal of businesses.

Simplification on track to deliver over £330m annualised cost savings by end of 2019

  • Incremental cost savings of £60m delivered in the first half.
  • Completed our Enterprise Resource Planning (ERP) implementation in the US with over 75% of the company by revenue now operating on a single ERP system.
  • On track to launch the Global Learning Platform (GLP) and a suite of new digital products over the coming months.

FY 2019 adjusted operating profit guidance unchanged; adjusted EPS upgraded

  • We continue to expect Pearson to deliver underlying profit growth and stabilise revenue in 2019, and for revenue to grow in 2020.
  • For 2019 we are upgrading our adjusted earnings per share guidance to be between 57.5p to 63.0p reflecting improvements in the finance charge and taxation at exchange rates prevailing on 31st December 2018.

John Fallon, Chief Executive said:
“We've had a good first half, with underlying growth across all divisions, as we start to benefit from accelerating our shift to digital. We are on track to at least stabilise revenue this year and return the company to top line growth from 2020. We are excited by the new digital products and platforms we're now launching, and our ability to help millions more people prepare for, develop in, and change careers through a lifetime of learning.” 

Financial Summary

£m H1 2019 H1 2018 HEADLINE GROWTH CER GROWTH UNDERLYING GROWTH
BUSINESS PERFORMANCE
Sales 1,829 1,865 (2)% (6)% 2%
Adjusted operating profit 144 107 35% 26% 30%
Operating cash flow (129) (202)
      
Adjusted earnings per share (basic) 13.2p 8.2p      
Dividend per share 6.0p 5.5p      
Net debt (1,376) (775)      
STATUTORY RESULTS
Sales 1,829 1,865      
Operating profit 37 233
      
Cash generated from operations (117) (131)
      
Basic earnings per share 6.1p 24.1p      

Throughout this announcement: a) Growth rates are stated on an underlying basis unless otherwise stated. Underlying growth rates exclude currency movements, portfolio changes and changes related to the adoption of IFRS16. 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.  

Continuing good progress on our strategic priorities.

During the first half of 2019 we continued to make good progress on our strategic priorities of digital transformation, investing in structural growth and simplification, making us a leaner, more agile and more sustainable business.

Digital transformation

  • We recently announced that all future releases of Pearson’s 1,500 active US Higher Education Courseware titles will be “digital first” and updated on an ongoing basis. This drives benefits in content delivery, speed and cost, and further facilitates our move from ownership to subscription based access models. It also allows the communication of a simpler and more transparent marketing strategy for pricing.
  • We continue to make good progress with our strategy of shifting from ownership to subscription based access models, signing 84 new institutions in Inclusive Access in the first half of the year. This takes the total number of institutions that have signed to 781 representing c.16% of US Higher Education Courseware revenue, up over 40% from H1 2018. We will continue to expand our access based models adding a further 200 titles in our Partner Print Rental programme resulting in over 330 titles this Fall with a further 80 titles available in digital format only.
  • US Higher Education Courseware digital revenue grew moderately on a like for like basis, while registrations, including ebooks, declined 1%. Good registration growth in Revel, up 22% was offset by continued market pressure in Developmental Mathematics and the planned retirement and deprioritisation of long tail products in advance of our launch of GLP and the digital first model. We expect this to continue during the transition to the digital first and GLP enabled model, before growth in registrations resumes in 2021.
  • US Student Assessment declined 5% in online tests to K12 students, due to contract exits and reductions in scope. TestNav8, our digital testing platform, operated with 100% up-time across all customers with a peak load of 1.3m students in a single day.
    • Our Core Assessment business benefited from the delivery of a new contract in Egypt to run the national high school assessment programme. This will deliver 125m digital tests over a four year lifecycle making it Pearson’s biggest assessment contract by volume. 

Invest in structural growth markets

  • In Online Program Management (OPM) revenue grew well with enrolment growth of 13% on a global basis and the launch of new programs.
  • In Connections Academy, our K12 virtual school business, enrolment growth of 11% across existing schools and new schools led to strong revenue growth.
  • Both OPM and Connections continue to benefit from strong pipelines underpinning revenue growth going forward.
  • In Professional Certification, revenue grew well as we continued to benefit from the ramp-up of new contracts and the renewal of existing contracts. Pearson’s Professional Certification business partners with more than 450 credential owners across the globe.
  • Pearson Test of English Academic grew global test volumes by 18% with a strong performance in Australia, India and China.

Simpler and more efficient

  • We completed the sale of our US K12 Courseware business in March 2019.
  • We are on track to deliver incremental cost savings under our transformation plan of more than £330m per annum, with the full benefits accruing from the end of 2019 onwards2.
  • In the first half of the year, we achieved incremental cost savings of £60m, closing two offices and completing 80% of our headcount reduction as well as the implementation of our new ERP system in the US.
  • During the second half of the year we expect to deliver further incremental savings of £70m and an additional £55m or more in 2020. Restructuring costs in the first half were £64m.

2019 outlook

Our guidance for 2019 adjusted operating profit remains unchanged and we continue to expect to deliver adjusted operating profit of between £590m to £640m.

We continue to expect to stabilise revenue in 2019 and to return to top line growth in 2020. Our guidance for US Higher Education Courseware remains unchanged with net sales expected to be flat to down 5% for the full year, driven by ongoing underlying market pressures.

For the full year, we are updating our guidance for improvements in the finance charge and taxation. We now expect our finance charge to be £45m for the full year due to favourable interest outcomes from settlements of historical tax positions. We expect our tax rate to be in the range of 17% - 19% following further review of detailed regulations published regarding US tax reform.

The impact of these changes increases our adjusted earnings per share to be between 57.5p to 63.0p at exchange rates prevailing on 31st December 2018.

We calculate that a 5c move in the US Dollar exchange rate to Sterling would impact adjusted EPS by around 2.0p to 2.5p. 

Contacts

Investor Relations

Jo Russell, Tom Waldron, Anjali Kotak +44 (0) 207 010 2310

Media

Tom Steiner, Gemma Terry +44 (0) 207 010 2310

Brunswick

Charles Pretzlik, Nick Cosgrove, Simone Selzer +44 (0) 207 404 5959

Webcast details

Pearson’s results presentation for investors and analysts will be audiocast live today from 0830 (BST) via www.pearson.com/corporate.

Dial in details:
United Kingdom Toll-Free: 08003589473
United Kingdom Toll: +44 3333000804
PIN: 45472957#
Audience URL: http://pear.sn/Y1aL30pdcvV

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/corporate/investors.html). 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.

Financial overview

Profit & loss statement. Pearson’s sales decreased by 2% in headline terms to £1,829m (H1 2018: £1,865m) with portfolio adjustments reducing sales by £141m, and currency movements increasing revenue by £69m. Stripping out the impact of portfolio changes and currency movements, revenue was up 2% in underlying terms due to 1% growth in our North America segment, a 6% increase in our Core segment and a 2% increase in our Growth segment.

The 2019 adjusted operating profit of £144m (H1 2018: £107m) reflects sales growth and savings from the ongoing transformation plan, the impact of FX and a modest benefit from the adoption of IFRS 16, partially offset by cost inflation, other operational factors and disposals. Excluding the impact of FX, IFRS 16 and portfolio items, underlying adjusted operating profit grew 30%.

Net interest payable to 30 June 2019 was £18m, (H1 2018: £26m). The decrease is primarily due to lower levels of net debt together with favourable movements in interest on tax and the absence of one off costs relating to the redemption of bonds in the first half of 2018 which were more than enough to offset the impact of net interest payable on leases. The increase in interest on leases is due to the adoption of IFRS 16 which resulted in an additional £16m of net interest payable in H1 2019.

Our adjusted tax charge was £23m (H1 2018: £16m).

Adjusted earnings for the period were £102m (H1 2018: £64m) and adjusted earnings per share were 13.2p (H1 2018: 8.2p).

Cash generation. Net cash used in operations was £117m compared to £131m in 2018 reflecting an increase in restructuring spend of £27m to £60m in the first half of 2019. Operating cash outflow decreased by £73m from £202m in 2018 to £129m. This decrease includes the impact of the adoption of IFRS 16 and the divestment of our US K12 Courseware business in March 2019 which would have seen a seasonal cash outflow in the first half.

Statutory results. Our statutory operating profit of £37m in H1 2019 compares to a profit of £233m in H1 2018 which included the profit on disposals of WSE and Utel.

Capital allocation. Our disciplined approach to capital allocation and to maintaining a strong balance sheet will play a major part in driving long-term growth. We will create further value through investing in the business, delivering a sustainable and progressive dividend and will return any surplus cash to our shareholders.

Balance sheet. H1 net debt of £726m (H1 2018: £775m) on a pre IFRS 16 basis. Post IFRS 16, net debt at the end of H1 2019 was £1,376m.

Dividend. In line with our policy, the Board is proposing an interim dividend of 6.0p (2018: 5.5p) payable on 13 September 2019.

Notes

1 IFRS 16 – Leases is the new accounting standard which has replaced IAS 17 and is applicable for financial years commencing on or after 1 January 2019, and which the Group adopted on the 1 January 2019. The standard results in the operating lease expense being replaced by finance costs and depreciation which will reflect the corresponding lease liabilities and right of use assets which will now be recognised on the balance sheet.

2 Based on December 2018 exchange rates, a significant part of costs and savings from the restructuring programme are US Dollar denominated and in other non-Sterling currencies and are therefore subject to exchange rate movements over the implementation timeframe.  

Operational review – Geography  

£ millions H1 2019 H1 2018 HEADLINE GROWTH CER GROWTH UNDERLYING GROWTH
SALES
North America 1,209 1,223 (1)% (7)% 1%
Core 403 383 5% 5% 6%
Growth 217 259 (16)% (15)% 2%
Total sales 1,829 1,865 (2)% (6)% 2%
ADJUSTED OPERATING PROFIT
North America 79 64 23% 13% 11%
Core 31 10 210% 200% 190%
Growth 9 11 (18)% (18)% 50%
Penguin Random House 25 22 14% 9% 9%
Total adjusted operating profit 144 107 35% 26% 30%

See note 2 in the consolidated financial statements for the reconciliation to the equivalent statutory measures.  

North America (66% of revenue)

Underlying revenue rose 1% reflecting good growth in OPM, Connections Academy and Professional Certification, more than offsetting expected modest declines in US Higher Education Courseware and Student Assessment. In headline terms, revenue declined 1% as the factors above and currency benefits were more than offset by a reduction in revenue related to the US K12 Courseware disposal.

Adjusted operating profit grew 11% in underlying terms due primarily to the benefits of the restructuring programme. In headline terms adjusted operating profit rose 23% due to the benefits of the restructuring programme, currency benefits and a positive impact from changes related to the adoption of IFRS 16.

Courseware

In School Courseware, the US K12 Courseware business contributed £53m of revenue in the first quarter before it was sold at the end of March.

In Higher Education Courseware, we continue to reshape the business, breaking away from the traditional education publishing model built around three year edition cycles towards a “digital first” product model, allowing us to accelerate the shift from ownership to access. This will enable simpler and more affordable pricing for students and allow us to regain share from the secondary market and drive up our average revenue per course enrolment over time.

During the first half of the year, Higher Education Courseware net revenue was down in line with the middle of our full year guidance range, against a strong comparative in H1 2018, which benefited from the absence of the additional returns provision we took in H1 2017. This performance was consistent with our expectations and we continue to expect revenue in this segment in 2019 to be in line with our previous forecast of flat to down 5%.

Total US College Spring enrolments fell 1.4%, similar to the decline in Fall 2018, with combined two-year public and four-year for-profit enrolments declining 5.8%, affected by rising employment rates, regulatory change impacting the for-profit and developmental learning sectors, and by the transfer of a large college from the For Profit sector to Private Not For Profit.

US Higher Education Courseware digital revenue grew moderately on a like for like basis while registrations, including ebooks, declined 1%. Good registration growth in Revel, up 22%, was offset by continued market pressure in Developmental Mathematics and the planned retirement and deprioritisation of long tail products in advance of our launch of GLP and the digital first model. We expect this to continue during the transition to the digital first and GLP enabled model, before growth resumes in 2021.

Our GLP development and digital roadmap are on track to deliver new digital products with greater personalisation and enhanced engagement. We are launching 18 Revel titles on the GLP in the second half of this year with the remaining 300 titles migrating by the end of 2020 underpinning expected registration growth in Revel for the next two years.

We continue to make good progress with our strategy of shifting from ownership to access, signing 84 new institutions in Inclusive Access in the first half of the year. This takes the total number of institutions that have signed to 781 representing c.16% of US Higher Education Courseware revenue, up over 40% from H1 2018. We will continue to expand our access based models adding a further 200 titles in our Partner Print Rental programme resulting in over 330 titles this Fall with a further 80 titles available in digital format only.

Assessment

In Student Assessment, revenue declined as expected due to the contraction in revenue associated with contracts exits, the loss of a contract in Indiana for assessment in grades 3-8 and reductions in scope. In Kentucky, Maryland, and New Jersey, states where we were the existing testing vendor, we won new, competitively bid contracts. In addition, we won a new contract to deliver assessments in Tennessee and were awarded the contract to administer the federal National Center for Educational Statistics (NCES) National Assessment of Educational Progress (NAEP) in 2019.

We delivered 20.7 million standardised online tests to K12 students, a decrease of 5% from the same period in 2018 due to contract exits and reductions in scope. Paper-based standardised test volumes fell 12% to 8.0 million. Digital tests on Pearson’s TestNav platform accounted for 72% of our testing volumes (H1 2018: 70%).

In Professional Certification, revenue grew well benefiting from growth in IT certification and nursing and the continued ramp-up of new contracts in networking, online retail and teaching. In total Pearson VUE signed 17 new agreements in the period and renewed 30 existing contracts. Our renewal rate on existing contracts continues to be over 90%. Global test volumes increased 8% to 8.7m. Pearson VUE partners with more than 450 credential owners across the globe.

Clinical Assessment sales declined on the phasing of new product releases which are weighted to the second half. Q-Interactive, Pearson’s digital solution for Clinical Assessment administration, saw continued strong growth in licence sales with sub-test administrations up over 30% over the same period last year.

Services

Revenue in Connections Academy, our K12 online school business, grew strongly. Connections Academy served 70,000 Full Time Equivalent (FTE) students through 37 continuing full-time virtual partner schools in 28 states, up 11% on last year. Total FTE virtual school students declined 3% to 73,000 as expected due to contract exits at Commonwealth Charter Academy in Pennsylvania and Florida Virtual School in 2018.

Six new full-time online, state-wide partner schools will open in the 2019-20 school year. Combined with a contract exit in North Carolina this will bring the total partner schools to 42 in 28 states. Additionally, the online private school, International Connections Academy continues to serve students across the globe.

The Connections Academy Parent Satisfaction Survey continues to show strong support for the schools with 2019 results showing 94% of families with enrolled students stating they would recommend the virtual schools to others and 95% agreeing that the curriculum is of high quality.

In Pearson Online Services, revenue increased on good growth in OPM enrolment with only a small drag from Learning Studio revenue, a learning management system, which will be fully retired in 2019.

In our OPM business, course enrolments grew 11% to over 216,000. Our programs increased to 335 with 33 new programs launched, and 23 programs discontinued.

We continue to build our pipeline of future program launches and during the first half, we signed 10 new programs and renewed seven programs.

We are continuing to refine our portfolio and focus on programs linked to employability and expect to continue to launch new programs as well as discontinue non-strategic programs over the next 12 months.

Our comprehensive employer-education business, Accelerated Pathways, continues to add more corporate partners offering foundational education, GED and online degree programs to employees across the US.

In July, ManpowerGroup (NYSE: MAN), the leading global workforce solutions company, announced the launch of its MyPath™ General Education Developmental (GED) Program in partnership with Pearson. The GED program is an extension of Manpower’s MyPath™ offering that helps actively assigned US associates earn their high school equivalency diploma and future-proof their careers through accelerated learning programs, on-the-job training and certification.

Core (22% of revenue)

Revenue rose 6% in underlying terms and 5% in headline terms, primarily due to growth in OPM, Pearson Test of English Academic (PTEA), Professional Certification and growth helped by phasing in UK Student Assessment and Qualifications, School and Higher Education Courseware and the delivery of a new digital assessment contract in Egypt.

Adjusted operating profit was up £19m in underlying terms and £21m in headline terms primarily due to trading and the benefits of restructuring.

Courseware

Courseware revenue was up moderately with timing of orders helping Higher Education Courseware in the UK and Australia.

Assessment

In Student Assessment and Qualifications, revenue grew, helped by phasing, with good growth in GCSEs, A-levels, BTEC Firsts and Higher Nationals and the delivery of a new digital assessment contract in Egypt. This was partially offset by continued declines in Apprenticeships which will continue to impact the business in the second half of the year.

We successfully delivered the National Curriculum Test for 2019, marking 3.8 million scripts, up slightly from 2018. We will continue to administer the NCT test until September 2019.

In Professional Certification business, revenue was up due to good volume growth in the DVSA test in the UK, higher IT test volumes in Australia and good volume growth in the MOI (French driving test) which launched in late 2017.

PTEA saw continued strong growth in test volumes in Australia during the first half, up 18% from 2018. This was driven primarily by its use to support visa applications to the Australian Department of Home Affairs as well as good growth in New Zealand.

Services

In Higher Education Services, our OPM revenue grew strongly with 41% growth in course enrolments across eight university partners and 29 programs in Australia and the UK.

Growth (12% of revenue)

In Growth, revenue grew 2% in underlying terms primarily due to good performance in School Courseware in the Middle East and growth in PTEA and Professional Certification.

Revenue declined 16% in headline terms primarily due to the disposal of WSE.

Adjusted operating profit grew £2m in underlying terms primarily reflecting the benefits of restructuring and declined 18% in headline terms due to disposals partially offset by a positive impact from changes related to the adoption of IFRS 16.

Courseware

Courseware revenue grew slightly with growth in School Courseware due to timing of orders in the Middle East.

Assessment

PTEA saw strong growth in revenue with over 16% test volume growth in India and China. Professional Certification grew well due to IT infrastructure and accounting certification contracts.

Services

Services revenue was flat with a slight increase in Higher Education Services due to changes in prices at Pearson Institute of Higher Education offset by slight declines in English Services due to later phasing of franchise campaigns in our English Language Schools in Brazil.  

Penguin Random House

Pearson owns 25% of Penguin Random House, the first truly global consumer book publishing company.

Penguin Random House performed in line with our expectations with revenue growth on an underlying basis due to a rise in print and audio sales, which were partially offset by lower ebook sales. The business benefited from bestsellers by Michelle Obama, Delia Owen, Tara Westover, E L James, Jeff Kinney, and Dr. Seuss.

Our stake in Penguin Random House contributed £25m to our adjusted operating profit, up 9% in underlying terms.

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. Operating cash flow at the half year is a cash outflow reflecting the seasonal increase in working capital.

Sales for the six months to 30 June 2019 decreased on a headline basis by £36m or 2% from £1,865m for the six months to 30 June 2018 to £1,829m for the same period in 2019 and adjusted operating profit increased by £37m or 35% from £107m in the first half of 2018 to £144m in the first half of 2019 (for a reconciliation of this measure see note 2 to the condensed consolidated financial statements).

The headline basis simply compares the reported results for the six months to 30 June 2019 with those for the equivalent period in the prior year. We also present sales and profits on an underlying basis which exclude the effects of exchange, the effect of portfolio changes arising from acquisitions and disposals and the impact of adopting new accounting standards that are not retrospectively applied. Our portfolio change is calculated by taking account of the contribution from acquisitions and by excluding sales and profits made by businesses disposed in either 2018 or 2019. Portfolio changes mainly relate to the sale of our K12 school courseware business in the US in 2019 and the sale of our Wall Street English language teaching business in the first half of 2018. Acquisitions were not significant in either 2018 or 2019.

In 2019, our underlying basis excludes the impact on adjusted operating profit of IFRS 16 ‘Leases’. This new standard was adopted on 1 January 2019 but the comparative figures for 2018 have not been restated. The impact in the first six months of 2019 was to increase adjusted operating profit by £13m (see also note 1b to the condensed consolidated financial statements).

On an underlying basis, sales increased by 2% in the first six months of 2019 compared to the equivalent period in 2018 and adjusted operating profit increased by 30%. Currency movements increased sales by £69m and adjusted operating profit by £9m. Portfolio changes decreased sales by £141m and, together with the impact of IFRS 16 (as noted above), decreased adjusted operating profit by £2m.

Adjusted operating profit includes the results from discontinued operations when relevant but excludes intangible charges for amortisation and impairment, acquisition related costs, gains and losses arising from acquisitions and disposals and the cost of major restructuring. In 2018, we also excluded the impact of adjustments arising from clarification of guaranteed minimum pension (GMP) equalisation legislation in the UK which impacted the post-retirement benefit charge in the second half of 2018 and is not expected to recur. A summary of these adjustments is included below and in more detail in note 2 to the condensed consolidated financial statements.  

all figures in £ millions 2019 half year 2018 half year 2018 full year
Operating profit 37 233 553
Add back: Cost of major restructuring 64 24 102
Add back: Intangible charges 49 57
 113
Add back: Other net gains and losses (6) (207) (230)
Add back: UK pension GMP equalisation
 - - 8
Adjusted operating profit 144 107 546

In May 2017, we announced a restructuring programme, to run between 2017 and 2019, to drive significant cost savings. This programme began in the second half of 2017 and costs incurred relate to delivery of cost efficiencies in our enabling functions and US higher education courseware business together with further rationalisation of the property and supplier portfolio. The restructuring costs in 2019 relate predominantly to staff redundancies whilst the restructuring costs in 2018 relate predominantly to staff redundancies and the net cost of property rationalisation including the net impact of the consolidation of our property footprint in London.

Intangible amortisation charges to the end of June 2019 were £49m compared to a charge of £57m in the equivalent period in 2018 as acquisition activity has reduced in recent years. Other net gains (before tax) of £6m in 2019 is the profit on sale of the K12 business. Other net gains (before tax) of £207m in 2018 relate to the sale of the Wall Street English language teaching business (WSE), a gain of £184m, the disposal of our equity interest in UTEL, the online University partnership in Mexico, a gain of £19m, and various other smaller disposal items for a net gain of £4m.

The statutory operating profit from continuing operations of £37m in the first half of 2019 compares to a profit of £233m in the first half of 2018. The decrease in 2019 is largely due to the lower profit on disposal of businesses and higher restructuring charges in 2019, partly offset by improved trading, additional restructuring savings and reduced intangible amortisation charges.

Net finance costs

Net interest payable to 30 June 2019 was £18m, compared to £26m in the first half of 2018. The decrease is primarily due to lower levels of net debt together with favourable movements in interest on tax and the absence of one-off costs relating to the redemption of bonds in the first half of 2018 which were more than enough to offset the impact of net interest payable on leases. The increase in interest on leases is due to the adoption of IFRS 16 which resulted in an additional £16m of net interest payable in the first half of 2019.

Finance income relating to retirement benefits has 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 interest costs relating to acquisition consideration, foreign exchange and other gains and losses on derivatives. Interest relating to acquisition consideration is excluded from adjusted earnings as it is considered to be part of the acquisition cost rather than being reflective of the underlying financing costs of the Group. 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 (for more information see note 3 to the condensed consolidated financial statements).

In the period to 30 June 2019, the total of these items excluded from adjusted earnings was a charge of £6m compared to a charge of £5m in the first half of 2018. Finance income relating to retirement benefits increased from £5m in the first half of 2018 to £7m in 2019 reflecting the comparative funding position of the plans at the beginning of each year. This increase was offset by increased losses on derivatives although foreign exchange losses on unhedged cash and cash equivalents reduced in the first half of 2019 compared to the first half of 2018. For a reconciliation of the adjusted measure see note 3 to the condensed consolidated financial statements.

Taxation

Taxes on income in the period are accrued using the expected tax rates that would be applicable to forecast annual earnings. The reported tax on statutory earnings for the six months to 30 June 2019 was a benefit of £35m compared to a charge of £13m in the period to 30 June 2018. The benefit in 2019 includes a £37m credit relating to the sale of the K12 business with the remaining charge reflecting the overall mix of profits projected for the full year and the tax rates expected to apply to those statutory profits.

The effective tax rate on adjusted earnings for the period to June 2019 was 18% compared to an effective rate of 20% in the first half of 2018. 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. This benefit more accurately aligns the adjusted tax charge with the expected rate of cash tax payment. For a reconciliation of the adjusted measure see notes 4 and 5 to the condensed consolidated financial statements.

Tax paid of £8m in the six months to 30 June 2019 was consistent with the amounts paid in the same period in 2018. In the first half of both 2018 and 2019, there were refunds in respect of prior years.

The Group adopted IFRIC 23 ‘Uncertainty over Income Tax Treatments’ on 1 January 2019 resulting in a reduction of £5m in provisions for uncertain tax positions. The cumulative effect of applying this adjustment has been applied to retained earnings at 1 January 2019 (see also note 1c to the condensed consolidated financial statements). The impact of adopting IFRIC 23 on the income statement for the first half of 2019 was not material.

Other comprehensive income

Included in other comprehensive income are the net exchange differences on translation of foreign operations. The gain on translation of £25m at 30 June 2019 compares to a loss at 30 June 2018 of £15m. The gain in 2019 arises from an overall strengthening of the currencies to which the Group is exposed even though the Sterling to US dollar exchange rate remained fairly constant through the period. A significant proportion of the Group’s operations are based in the US and the US dollar closing rate at 30 June 2019 was the same as the opening rate of £1:$1.27 At the end of June 2018, the US dollar had strengthened slightly from an opening rate of £1:$1.35 to a closing rate of £1:$1.32 and this movement was offset by the weakness in other currencies to which the Group is exposed causing the small loss in the first half of 2018.

Also included in other comprehensive income at 30 June 2019 is an actuarial loss of £141m in relation to retirement benefit obligations. The loss arises from the unfavourable impact of changes in the assumptions used to value the liabilities in the plans and in particular movements in the discount rate. The value of assets was also impacted following the UK plan’s purchase of insurance buy-in policies in the first half of 2019. The loss in 2019 compares to an actuarial gain at 30 June 2018 of £122m.

Cash flows

Our operating cash flow measure is used to align cash flows with our adjusted profit measures (see note 17 to the condensed consolidated financial statements). Operating cash outflow decreased on a headline basis by £73m from £202m in the first half of 2018 to £129m in the first half of 2019. The decrease includes the impact of the adoption of IFRS 16 in conjunction with the property rationalisation programme as part of the Group’s transformation and the absence of the K12 business which would have seen a seasonal cash outflow in the first half.

The equivalent statutory measure, net cash used in operations, was £117m in 2019 compared to £131m in 2018. Compared to operating cash flow, this measure includes restructuring costs but does not include regular dividends from associates or capital expenditure on property, plant, equipment and software. Restructuring costs paid increased from £27m in the first half of 2018 to £60m in the first half of 2019. The adoption of IFRS 16 has resulted in a change in the classification of lease related cash flows in the cash flow statement although there is no impact on the total movement in cash and cash equivalents.

The Group’s net debt increased from £143m at the end of 2018 to £1,376m at the end of June 2019. The adoption of IFRS 16 added £688m of debt on transition with the remainder of the increase principally due to the seasonal operating cash outflow, interest, tax and dividend payments, treasury share purchases, additional capital invested in PRH and outflows from the K12 disposal transaction.

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 amounted to £27m in the period to 30 June 2019 (30 June 2018: £25m) of which a charge of £34m (30 June 2018: £30m) was reported in adjusted operating profit and income of £7m (30 June 2018: £5m) was reported against other net finance costs. The increase in the charge in 2019 is largely explained by the absence of past service credits which in the first half of 2018 amounted to £11m and related to changes in the US post-retirement medical plan.

The overall surplus on UK Group pension plans of £571m at the end of 2018 has decreased to a surplus of £433m at the end of June 2019. The decrease has arisen principally due to the actuarial loss noted above in the other comprehensive income section. In total, our worldwide net position in respect of pensions and other post-retirement benefits decreased from a net asset of £471m at the end of 2018 to a net asset of £337m at the end of June 2019.

Adoption of new accounting standards and interpretations in 2019

The adoption of IFRS 16 ‘Leases’ has impacted both the income statement as described above and has had an impact on certain lines in the balance sheet. The lease liability (classified as financial liabilities - borrowings) brought onto the balance sheet at transition was £904m with the corresponding right-of-use asset (classified within property, plant and equipment) valued at £435m. In addition, certain subleases have been reclassified as finance leases resulting in an additional lease receivable (classified as other receivables) of £216m being brought on balance sheet. The net impact on the balance sheet is a reduction of net assets of £86m after taking into account existing liabilities relating to onerous lease provisions (reducing provisions for other liabilities and charges by £101m), lease incentives, adjustments to tax and the net impact on associates. The full impact of the adoption of this standard is outlined in note 1b to the condensed consolidated financial statements.

The impact of adopting IFRIC 23 ‘Uncertainty over Income Tax Treatments’ had a small impact on the current tax balance but has not materially impacted the income statement (see note 1c to the condensed consolidated financial statements).

Dividends

The dividend accounted for in the six months to 30 June 2019 is the final dividend in respect of 2018 of 13.0p. An interim dividend for 2019 of 6.0p was approved by the Board in July 2019 and will be accounted for in the second half of 2019.

Businesses disposed

Following the decision in 2017 to sell the K12 school courseware business in the US, the assets and liabilities of that business were classified as held for sale on the balance sheet at 30 June 2018 and at 31 December 2018. In March 2019, the Group completed the sale of its K12 business resulting in a pre-tax profit on sale of £6m. Total gross proceeds were £192m including £172m of deferred proceeds which include the fair value of an unconditional vendor note for $225m and an entitlement to 20% of future cash flows to equity holders and 20% of net proceeds in the event of a subsequent sale. The cash outflow in the period relating to the disposal was £100m mainly reflecting this deferral of proceeds and the seasonal level of cash held in the business at the disposal date.

Tax on the disposal is estimated to be a benefit of £37m. The benefit arises as the transaction gives rise to a loss for tax purposes mainly due to the differing treatment of deferred revenue disposed in the tax computation.

Further details relating to this transaction can be found in notes 10, 14 and 16 to the condensed consolidated financial statements.

Principal risks and uncertainties

The principal risks and uncertainties have not changed materially from those detailed in the 2018 Annual Report and are summarised below.

Business transformation and change

The accelerated pace and scope of our transformation initiatives increase our risk to execution timelines and to business adoption of change. The risk is that benefits may not be fully realised, costs may increase or that our business as usual activities are adversely impacted.

Products and services

Failure to successfully invest in, develop and deliver (to time and quality) innovative, market leading global products and services that will have the biggest impact on learners and drive growth, ensuring Pearson: Responds to market needs, as well as threats from both traditional competitors as well as disruptive innovation; Offers products to market in line with our strategy, at the right price and with a deal structure that remains competitive.

Talent

Failure to maximise our talent – Risk that we are unable to attract the talent we need and to create the conditions in which our people can perform to the best of their ability.

Political and regulatory risk

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

Testing failure

Failure to deliver tests and assessments and other related contractual requirements because of operational or technology issues, resulting in negative publicity impacting our brand and reputation.

Safety and security

Risk to the safety and security of our people and learners arising from either the risk of injury and illness; our failure to adequately protect children and learners; or due to increasing local and global threats.

Customer experience

Failure of either our current operations, supply chain or customer support to deliver an acceptable service level at any point in the end-to-end journey; or to accelerate Pearson’s lifelong learner strategy and transformation.

Business resilience

Failure to plan for, recover, test or prevent incidents at any of our businesses or locations. Incident management and technology disaster recovery (DR) plans may not be comprehensive across the enterprise.

Harnessing the power of our data

Failure to: 1) Maximise our use of data to enhance the quality and scope of current products and services in order to improve learning outcomes while managing associated risks. 2) Maintain data quality, accuracy and integrity to enable informed decision-making and reduce the risk of non-compliance with legal and regulatory requirements.

Tax

Legislative change caused by the OECD Base Erosion and Profit Shifting (BEPS) initiative, the UK exit from the EU or other domestic government initiatives, including in response to the European Commission State Aid decision regarding the UK CFC exemption, results in a significant change to the effective tax rate, cash tax payments, double taxation and/or negative reputational impact.

Information security and data privacy

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 or confidentiality breach causing damage to the customer experience and our reputational damage, a breach of regulations and financial loss.

Intellectual property (including piracy)

Failure to adequately manage, procure, register or protect intellectual property rights (including trademarks, patents, trade secrets and copyright) in our brands, content and technology may (1) prevent us from enforcing our rights and (2) enable bad actors to illegally access and duplicate our content (print and digital counterfeit, digital piracy), which will reduce our sales and/or erode our revenues.

Compliance including anti-bribery and corruption (ABC) and sanctions

Failure to effectively manage risks associated with compliance (global and local legislation), including failure to vet third-parties, resulting in reputational harm, ABC liability or sanctions violations.

Competition law

Failure to comply with anti-trust and competition legislation could result in costly legal proceedings and/or adversely impact our reputation.