Pearson : 2018 results

Included in this release:

Good progress against strategic priorities, adjusted operating profit in the upper half of the guidance range, efficiency programme ahead of plan.

Highlights

Revenue down 1% in underlying terms

• Total underlying revenue down 1% year on year, with declines in US Higher Education Courseware of 5% and in US K12 Courseware largely offset by the rest of the business growing in aggregate at over 1%.
  
• Strong performance in our structural growth opportunities with revenue up 10% in Global Online Program Management, 8% in Connections Academy, 4% in Professional Certification (VUE) and Pearson Test of English Academic (PTEA) test volume growth of 30%.
  
• Revenue in North America declined 1%, Core was flat and Growth up 1%.

Adjusted operating profit up 8% in underlying terms

• Adjusted operating profit of £546m for 2018, in the in the upper half of the guidance range of £520m to £560m.
• Adjusted earnings per share of 70.3p including a c.20p one-off tax benefit and a lower finance charge as indicated in Pearson's Q3 trading update.

Strong balance sheet

• Closing net debt at 31 December 2018 of £143m (2017: £432m).
  
• Strong operating cash flow with cash conversion at 94% (2017: 116%).
  
• The Board proposes a final dividend of 13p (2017: 12p), an increase of 8%, which equates to a full year dividend of 18.5p (2017: 17p).

Statutory results

• Sales decreased by 9%, £384m, in headline terms primarily due to portfolio changes reducing sales by £216m and currency movements decreasing revenue by £134m.
  
• Statutory operating profit for the year was £553m (2017: £451m) with the increase primarily due to profit on disposals of Wall Street English (WSE) and UTEL.
  
• Statutory EPS of 75.6p (2017: 49.9p) with the increase due to higher profit and one-off tax benefits.

Simplification on track, efficiency programme ahead of plan

• Cost efficiency programme ahead of plan in 2018 with incremental cost savings of £130m and exceptional restructuring costs¹ of £102m.
  
• At 31 December 2018 US K12 Courseware was held for sale. We announced an agreement to sell this business on 18 February 2019.
  

John Fallon, Chief Executive said:

'We made good progress last year. We increased underlying profits, outperformed our cost savings plan and invested in the digital platforms that are making us a simpler, more efficient and innovative company. We are increasingly well placed to guide our customers through a lifetime of learning and help our partners shape the future of education. We have a lot still to do, but we expect company wide sales to stabilise this year, and grow again in 2020 and beyond.'

Financial Summary

£m	2018	2017	HEADLINE GROWTH	CER GROWTH	UNDERLYING GROWTH
BUSINESS PERFORMANCE
Sales	4,129	4,513	(9)%	(6)%	(1)%
Adjusted operating profit	546	576	(5)%	(2)%	8%
Operating cash flow	513	669
Adjusted earnings per share	70.3p	54.1p
Dividend per share	18.5p	17p
Net Debt	(143)	(432)
STATUTORY RESULTS
Sales	4,129	4,513	(9)%	(6)%	(1)%
Operating profit	553	451
Profit for the year	590	408
Cash generated from operations	547	462
Basic earnings share	75.6p	49.9p

Throughout this announcement: a) Growth rates are stated on an underlying basis unless otherwise stated. Underlying growth rates exclude both currency movements, portfolio changes and accounting changes, b) CER refers to Constant Exchange Rates, and c) 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.

Progress on our strategic priorities

During 2018 we made good progress on our strategic priorities as we become a leaner, more agile and more sustainable business.

Digital transformation progressing to plan

• We made further progress with Pearson's digital transformation in 2018 with revenue split 34% digital (2017: 32%), 28% digitally enabled (2017: 27%) and 38% non-digital (2017: 41%).
  
• US Higher Education Courseware digital revenue grew by 2% to become 55% of our revenue in this business, although growth was again more than offset by the anticipated continuation of underlying market pressures on print courseware revenue.
  
• Direct to consumer sales grew 8% to account for 23% of revenue in US Higher Education Courseware.
  
• We continue to focus on Inclusive Access (Direct Digital Access) solutions, signing 192 new institutions in 2018 taking the total to nearly 700. We delivered over 1.4m course enrolments at non-profit and public institutions in this way, accounting for c.8% of US Higher Education Courseware revenue.
  
• US Higher Education Courseware eBook revenue grew at more than 20% for the second year. We continue to expand our partner print rental programme and expect to have c.400 titles in the programme in the second half of 2019.
  
• We have continued to invest in the Global Learning Platform (GLP) and our innovative product and feature pipeline. We have launched pilot versions of new Developmental Math courseware and will launch multiple Revel titles with enhanced assignment options and data analytics on the GLP during 2019.
  
• US Student Assessment saw testing volume declines, but continues to shift towards digital tests, which now account for 56% of all tests administered and provide a better, more effective customer experience leveraging the efficiency of Pearson's digital platform.

Continuing strong performance in structural growth opportunities

• Online Program Management (OPM), Connections Academy virtual schools, Professional Certification (VUE) and English are significant growth opportunities. We continue to invest in these structurally growing markets which drive recurring revenue streams, and account for c.35% of Pearson's 2018 revenue (excluding WSE and US K12 Courseware).
  
• OPM saw 14% growth in global course registrations and global revenue growth of 10%.
  
• Connections Academy grew revenue 8%.
  
• In English, Pearson Test of English Academic grew test volumes by 30%.
  
• In Professional Certification revenue grew 4%, with over 70 new contracts signed during the year.
  
• Revenue in Global English Courseware grew 3%, with strong growth in China.

Simplification on track, cost savings ahead of plan

• Cost efficiency programme ahead of plan in 2018 with incremental cost savings of £130m and exceptional restructuring costs1 of £102m.
  
• We now expect to deliver increased annualised cost savings1 in excess of £330m by the end of 2019. One-off restructuring costs will rise with this to c.£330m. This is ahead of the original plan of £300m in savings and costs.
  
• We expect to achieve a further £130m of incremental cost savings in 2019 taking the cumulative savings to £275m by the end of 2019 leaving £55m or more of further savings in 2020 as the annualised benefit of the programme flows through. Restructuring costs in 2019 are expected to be £150m as the programme is completed.
  
• We completed the sale of Wall Street English (WSE).
  
• During 2018 we sold our property at One Southwark Bridge for £115m. The profits on disposal were offset by a charge for onerous leases relating to Pearson's property footprint in London.
  
• At 31 December 2018 US K12 Courseware was held for sale. We announced the agreement to sell this business on 18 February 2019.

2019 Outlook

In 2019, Pearson expects to report adjusted operating profit of between £590m and £640m and adjusted earnings per share of 56.5p to 62.0p (including our US K12 Courseware business).

This guidance is pre-IFRS 16² based on existing portfolio and exchange rates as at 31 December 2018. Expect a net interest charge of c.£30m and a tax rate of 21%.

Including IFRS 16 Pearson expects to report adjusted operating profit of between £610m and £660m, a net interest charge of c.£60m and adjusted earnings per share of 55.5p to 61.0p for 2019.

Contacts

Investor Relations

Jo Russell, Tom Waldron, Anjali Kotak
[phone]

Media

Tom Steiner
[phone]

Brunswick

Charles Pretzlik, Nick Cosgrove, Simone Selzer
[phone]

Webcast details

Pearson's results presentation for investors and analysts will be webcast live today from 0900 (GMT) via www.pearson.com/corporate.

Notes

¹ 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.

² IFRS 16 - Leases is the new accounting standard which will replace IAS 17 and is applicable for financial years commencing on or after 1 January 2019, and hence will first apply to the Group for its financial year ending 31 December 2019.

The standard will result 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.

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. In 2018, sales decreased by £384m in headline terms to £4,129m (2017: £4,513m) with portfolio changes reducing sales by £216m and currency movements decreasing revenue by £134m. Stripping out the impact of portfolio (including the adoption of new accounting standards) and currency movements, revenue was down 1% in underlying terms. Revenue in North America declined 1%, Core was flat and Growth up 1%.

The 2018 adjusted operating profit of £546m (2017: £576m) reflects a £130m year on year benefit from restructuring, offset by £50m of cost inflation, £22m of other operational factors, £15m negative contribution from trading and a £73m negative impact from FX and portfolio changes. Excluding the impact of FX and portfolio changes, underlying adjusted operating profit grew 8%.

Net interest payable was £24m, compared to £79m in 2017. The decrease was primarily due to a reduction in gross debt achieved through the early redemption of bonds in 2017. Charges relating to early redemptions increased finance charges in 2017 but were not as significant in 2018. Additionally, there was a reduction in interest on tax provisions following reassessment of those provisions in 2018.

The effective tax rate on adjusted earnings in 2018 was a credit of 5.2% compared to an effective rate charge of 11.1% in 2017. The decrease in tax rate reflects several one-off benefits in 2018 including provision releases due to the expiry of relevant statutes of limitation and due to the reassessment of historical positions, as well as a one-off benefit from a reassessment of the tax treatment of certain items of income and expenditure.

Adjusted earnings per share of 70.3p (2017: 54.1p) (including a c.20p one-off tax benefit and a lower finance charge as indicated in Pearson's Q3 trading update).

Cash generation. Operating cashflow declined by £156m from £669m in 2017 to £513m in 2018 in headline terms. The decrease reflects lower dividends from Penguin Random House, following our divestment of a 22% stake in the business in 2017, higher incentive payments in 2018 relating to 2017 performance and movements in working capital. The equivalent statutory measure, net cash generated from operations, was £547m in 2018 compared to £462m in 2017. The main reason for the improvement in cash generated from operations was the absence of special pension contributions in 2018 which were £227m in 2017.

Return on invested capital. On a gross basis ROIC increased from 4.3% in 2017 to 4.7% in 2018 and from 6.2% in 2017 to 6.7% in 2018 on a net basis. The movement largely reflects lower invested capital following disposals and decreased tax payments which were more than enough to offset the effect of lower reported profits primarily due to the disposal of a 22% stake in Penguin Random House and currency movements.

Statutory results. Our statutory profit was £553m in 2018 compared to a profit of £451m in 2017. The increase in 2018 is largely due to the increase in gains on disposal and reduced intangible charges which more than offset increased restructuring, the lost contribution from businesses disposed of and the impact of currency movements.

Capital allocation. Our capital allocation policy remains unchanged: to maintain a strong balance sheet and a solid investment grade rating, to continue to invest in the business, to have a sustainable and progressive dividend policy, and to return surplus cash to our shareholders.

Balance sheet. Net debt to EBITDA was 0.2x (or c.1.1x on an IFRS 16 lease adjusted basis). Net debt decreased to £143m (2017: £432m) reflecting disposal proceeds and operating cash flow, partially offset by the strengthening of the US Dollar relative to Sterling, dividend payments and the share buyback.

In January 2018, the Group repurchased €250m of its €500m Euro 1.875% notes due May 2021 and €200m of its €500m Euro 1.375% notes due May 2025. Borrowings at 31 December 2018 include drawings on the Group's revolving credit facility (RCF) of £nil (2017: £nil).

Pension plan. In 2018 our UK Pension Plan completed a new triennial valuation as at 1 January 2018 and re-confirmed the Plan as being well funded. The Plan has recently used this funding position to purchase a further insurance buy-in policy with Legal & General, amounting to approximately £500m. Together with the two policies purchased in 2017, around 50% of the Plan's total liabilities are now insured. This has put the Plan in an even stronger position and further reduced Pearson's future pension funding risk, at no additional cost to Pearson.

Dividend. In line with our policy, the Board is proposing a final dividend of 13p (2017: 12p), an increase of 8%, which results in an overall dividend of 18.5p (2017: 17p) subject to shareholder approval.

Share buyback. We launched a £300m share buyback, beginning on 18 October 2017 utilising part of the proceeds from the disposal of a 22% stake in Penguin Random House. We completed the programme on 16 February 2018.

Businesses held for sale. Following the decision to sell our US K12 Courseware business, the assets and liabilities of that business were classified as held for sale on the balance sheet at 31 December 2018. We announced the agreement to sell this business on 18 February 2019.

2019 Outlook

2018 has been a year of progress for Pearson, delivering adjusted operating profit within our guidance range and continuing to invest in the digital transformation and simplification of the company. We expect to make further progress in 2019, with underlying adjusted operating profit between £590m2 and £640m and adjusted earnings per share of 56.5p to 62.0p. This reflects our portfolio and exchange rates as at 31 December 2018 and the following factors:

Currency movement and portfolio changes. Adjusting for currency movement improves profit by £26m. We completed the sale of WSE in March 2018. WSE contributed £42m to 2018 revenue and £4m to 2018 adjusted operating profit. US K12 Courseware contributed £364m to 2018 sales and around £20m to 2018 operating profit.

Inflation and other operational factors. Our 2019 guidance incorporates cost inflation of c.£50m together with other operational factors of £33m due to increased investment in our strategic growth areas and the expectation of a lower contribution from Penguin Random House.

Restructuring benefits. We expect incremental in-year benefits from the 2017-2019 restructuring programme of £130m in 2019. Exceptional restructuring costs of £150m will continue to be excluded from adjusted operating profit.

Interest & tax. We expect a 2019 net interest charge of c.£30m and a tax rate of 21%.

Currency. In 2018, Pearson generated approximately 64% of its sales in the US, 3% in Greater China, 5% in the Eurozone, 3% in Brazil, 3% in Canada, 3% in Australia, 2% in South Africa and 1% in India and our guidance is based on exchange rates at 31 December 2018.

We calculate that a 5c move in the US Dollar exchange rate to Sterling would impact adjusted EPS by around 2p to 2.5p.

Including IFRS 16 we expect to report adjusted operating profit of between £610m and £660m, a net interest charge of c.£60m and adjusted earnings per share of 55.5p to 61.0p for 2019.

Operational review - Geography

£ millions	2018	2017	HEADLINE GROWTH	CER GROWTH	UNDERLYING GROWTH
SALES
North America	2,784	2,929	(5)%	(2)%	(1)%
Core	806	815	(1)%	0%	0%
Growth	539	769	(30)%	(25)%	1%
Total Sales	4,129	4,513	(9)%	(6)%	(1)%
ADJUSTED OPERATING PROFIT
North America	362	394	(8)%	(4)%	1%
Core	57	50	14%	8%	10%
Growth	59	38	55%	74%	97%
Penguin Random House	68	94	(28)%	(29)%	10%
Total adjusted operating profit	546	576	(5)%	(2)%	8%

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

North America (67% of revenue)

Revenue declined 1% in underlying terms, primarily due to North American Higher Education Courseware declining 5%, School Courseware which was down mid-single digit %, impacted by weak Open Territory sales in the second half of the year, the continued decline in Learning Studio as we move towards the retirement of the product in 2019 and Student Assessment which declined moderately. Offsetting that, we saw good growth in Virtual Schools, Online Program Management (OPM) and Professional Certification revenue.

Adjusted operating profit rose 1% in underlying terms, as restructuring savings offset the impact of lower sales, inflation and other operating factors.

Courseware

In School Courseware, revenue declined mid-single digit % primarily due to declines in Open Territory states. This was partially offset by growth in Adoption state revenue on strong performance in Science in Florida, South Carolina and Tennessee, Elementary Math in Oklahoma and Elementary Social Studies in California and South Carolina.

Our new adoption participation rate rose to 80% from 61% in 2017. We won an estimated 33% share of adoptions competed for (38% in 2017) and 26% of total new adoption expenditure of $509m (29% of $365m in 2017).

In Higher Education Courseware, total US college enrolments, as reported by the National Student Clearinghouse, fell 1.4%, with combined two-year public and four-year for-profit enrolments declining 4.8%. Enrolment weakness was particularly focused on part-time students where enrolment declined 2.9% compared to full-time enrolment which declined 1.1%.

Net revenue in our US Higher Education Courseware business declined 5% during the year. We estimate around 2% of this decline was driven by lower enrolment; around 1.5% from the adoption of Open Educational Resources (OER); around 2.5% from the combined impact of shifts in the secondary market, more cautious buying by the channel and lower returns; offset by c.1% benefit from the shift to digital.

In 2018, Pearson's US Higher Education Courseware market share, as reported by MPI, was within the c.40-41.5% range seen over the last five years.

Digital revenue grew 2% benefiting from continued growth in direct sales and favourable mix. Global digital registrations of MyLab and related products were flat. In North America, digital registrations fell 3% with good growth in Science, Business & Economics and Revel offset by lower overall enrolment and continued softness in Developmental Mathematics. Revel registrations grew more than 40%. Including stand-alone eBook registrations, total North American digital registrations rose 1% and global registrations rose 3%.

The actions announced in early 2017 to promote access over ownership met with continued success. Stand-alone eBook volumes grew 34% in the US with revenue up 25% and our partner print rental programme has had a successful start with 130 titles in the programme in 2018. We plan to increase the number of titles in the programme to around 400 by fall 2019.

We continue to make good progress with our Inclusive Access (Direct Digital Access) solutions signing 192 new institutions in 2018, taking the total of not-for-profit and public institutions served to 617. Including 80 longer-standing contracts with for-profit colleges, we now have direct courseware relationships with nearly 700 institutions.

Inclusive Access ensures that students have affordable access to the courseware that they need on day one of the course, whilst further shifting our business model in this segment away from ownership and towards subscription. During the year, we delivered over 1.4m course enrolments with inclusive access revenues from non-profit and public institutions rising to c.8% of our higher education courseware revenue as more colleges and faculties see the benefit of this model.

Assessment

In Student Assessment, revenue declined moderately in 2018 due to the faster than expected contraction in revenue associated with our PARCC and ACT-Aspire multi-state volume-based contracts and our disciplined competitive approach. These factors will extend into 2019, where we expect a modest decline in revenue in this segment. Beyond 2019, we expect the business to benefit from continued good momentum in subcontractor contract wins leveraging our digital leadership and a strong pipeline of opportunities in key states.

During 2018, Pearson successfully renewed contracts in Arizona and Kentucky through competitive procurements and secured business with the District of Columbia, New Jersey, New Mexico, and Maryland under new contracts with these PARCC states. We also won new contracts for Utah's High School Assessments and with the University of Iowa for the delivery of Iowa's new assessment system.

We delivered 24m standardised online tests to K12 students, down 5% from 2017. TestNav 8, Pearson's next-generation online test platform, supported a peak load of 825,000 tests in a single day and provided 99.99% up time. Our AI scoring systems scored 36m responses to open-ended test items, around 33% of the total. Paper based standardised test volumes fell 9% to 18.5m.

In Professional Certification, VUE global test volume rose 4% to over 15m. Revenue in North America was up mid-single digit %, due to growth in medical college admissions testing and certification for professional bodies, offset by continued declines in volumes in the GED High School Equivalency Test and higher-level IT certifications in an environment of low unemployment.

We signed over 70 new contracts in 2018 and our renewal rate on existing contracts continues to be over 95%. During the year we renewed over 80 contracts including the National Council of State Boards of Nursing (NCLEX exam), Microsoft and Adobe.

Clinical Assessment sales declined slightly on an absence of new major product introductions impacting 2018. Late in Q4 we launched a refresh of the Peabody Picture Vocabulary Test and Expressive Vocabulary Test (PPVT/EVT). Q-interactive, Pearson's digital solution for Clinical Assessment administration, saw continued strong growth in license sales with sub-test administrations up more than 37% over the same period last year.

Services

Connections Academy, our K12 online school business grew revenue 8%. Connections Academy served 73,000 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 75,400 as expected due to contract exits at Commonwealth Charter Academy in Pennsylvania and Florida Virtual School.

Three new full-time online, state-wide partner schools opened in the 2018-19 school year in Florida, Michigan, and Ohio. We anticipate the opening of between two and five new partner schools in the 2019-20 school year.

The 2018 Connections Academy Parent Satisfaction Survey continues to show solid endorsement for the schools with 93% of families with enrolled students stating they would recommend our virtual schools to others and 95% agreeing that the curriculum is of high quality.

In Pearson Online Services, revenue grew 3%, primarily due to growth in OPM, partially offset by a decline in Learning Studio revenue as we retire the product and as we restructured smaller non-OPM contracts.
In OPM, we grew revenue 9% as course registration grew strongly, up 14% to more than 388,000 on strong growth in programs at key partners including Arizona State University Online, Maryville University, Regis College, Bradley University, Ohio University and the University of Southern California.

Our overall active program count grew by 33 to 325. The launch of 46 new programs were offset by 13 discontinued programs. During 2018 we signed 27 multi-year programs, including programs at new partners the University of North Dakota and Rider University. We closed nine out of 15 renewal opportunities and as part of broader efforts around portfolio optimisation agreed with our partners to terminate 23 programs that were not mutually viable.

2019 Outlook

In US Higher Education Courseware, we expect revenue to be flat to down 5% on the continuation of the pressures we saw on end demand in 2018 with ongoing declines in enrolment and modest growth in OER adoptions. For print revenue in this segment, we see scope for further declines in gross sales and improvements in returns. Print continues to be impacted by the ongoing rise of secondary channels, such as rental, but channel inventory has now returned to more normalised levels following the 2016 inventory correction and its after effects. The channel is now optimising the stock it holds, both through reducing purchases and returns, and we expect that to continue in 2019. Growth in digital and direct sales provides some offset to the continuing pressures on print.

In Assessment, we expect good growth in Professional Certification and stable revenue in our Clinical Assessment business in the US. We expect a modest decline in revenue in North America Student Assessment on continued contraction in revenue associated with our PARCC and ACT Aspire contracts.

We expect good growth in revenue and enrolment at Connections Academy and in North America Online Program Management.

Core (20% of revenue)

Revenue was flat in underlying terms with growth in Pearson Test of English Academic, OPM in the UK and Australia and Professional Certification offset by declines in Higher Education and Student Assessment and Qualifications.

Adjusted operating profit increased 10% in underlying terms, due to restructuring savings partially offset by inflation.

Courseware

Courseware revenue declined moderately. Slight growth in School Courseware was offset by declines in Higher Education Courseware. In Higher Education Courseware, revenue was down due to market declines in Europe and Asia, partially offset by growth in digital sales to institutional partners in the UK and Australia.

Assessment

In Student Assessment and Qualifications, revenue fell as modest growth in BTEC Firsts and GCE A-Level was more than offset by declines in AS levels, international GCSEs in the UK and UK Apprenticeships due to policy changes in the schools qualifications and the apprenticeships market. We successfully delivered the National Curriculum Test (NCT) for 2018, marking 3.6m scripts, up slightly from 2017. We will deliver the NCT again in 2019 before the test transitions to another provider in 2020.

Clinical Assessment sales declined primarily in Australia due to an absence of new major product introductions. Q-Interactive, Pearson's digital solution for Clinical Assessment administration, saw continued strong growth.

Pearson Test of English Academic saw continued strong growth in test volumes and we successfully extended our agreement with Department of Home Affairs in Australia for another two years.

In Professional Certification, revenue was up modestly due to the launch of additional computer-based exams for an existing customer in the UK and the MOI, the French Driving Test.

Services

In Higher Education Services, revenue grew strongly. Our OPM revenue was up 34%. In Australia, we saw good growth due to our successful partnership with Monash University, and continued success of the Graduate Diploma in Psychology. We have a total of c.10,200 course registrations across the seven programs in Australia up from c.9,300 in 2017. In the UK, we launched 11 new programs and course registrations grew, reaching c.3,000 compared to c.1,400 in 2017. During the year, we also announced new partnerships with the University of Northumbria in the UK, and ESSEC Business School in France.

2019 Outlook

We expect stable revenue across Core, including student qualifications and assessment, with further revenue growth in OPM and PTEA, offset by continued declines in our courseware businesses.

Growth (13% of revenue)

Revenue grew 1% in underlying terms due to strong growth in China and modest growth in Brazil and Hispano America partially offset by declines in South Africa.

Adjusted operating profit increased 97%, £30m, in underlying terms, reflecting higher revenue in China and Brazil, together with the benefits of restructuring, partially offset by lower revenue in South Africa.

Courseware

Courseware revenue grew slightly, with strong growth in English Language Courseware in China, partially offset by declines in School Courseware in South Africa following a large one-off order in 2017.

Assessment

Professional Certification grew well due to a new ICT infrastructure certification contract. Pearson Test of English Academic saw strong growth in revenue with over 10% growth in the volume of tests taken in India, China and Middle East and moderate price increases.

Services

In English Services, revenue grew slightly in our English language school franchise, Wizard, due to new product launches.

In School Services, revenue was flat, with declines in student enrolment in our public sistemas business in Brazil offset by price increases, improved products and better student retention across our private sistemas. In India, Pearson MyPedia, an inside service 'sistema' solution for schools, expanded to over 700 schools with over 200,000 learners.

In Higher Education services revenue declined slightly due to business exits in India and slight revenue decline at Pearson Institute of Higher Education (formerly CTI), our university in South Africa, due to a change in mix with total enrolment broadly flat and new student enrolment up 18%.

2019 Outlook

In our Growth segment, we expect revenue to continue to increase in 2019 benefiting from new products and services across all divisions.

Penguin Random House

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

Penguin Random House performed solidly with underlying revenue growth on increased audio sales and stable print sales, whilst the business benefitted from international bestseller 'Becoming' by Michelle Obama, the year's top-selling U.S. title, and bestsellers from Bill Clinton & James Patterson, Jordan Peterson, Jamie Oliver, Dr.Seuss, John Grisham, and Lee Child.

2019 Outlook

In Penguin Random House, we anticipate a normalised publishing performance and expect an annual after-tax contribution of around £60-65m to our adjusted operating profit.

FINANCIAL REVIEW

Operating result

Sales decreased on a headline basis by £384m or 9% from £4,513m in 2017 to £4,129m in 2018 and adjusted operating profit decreased by £30m or 5% from £576m in 2017 to £546m in 2018 (for a reconciliation of this measure see note 2 to the condensed consolidated financial statements).

The headline basis simply compares the reported results for 2018 with the reported results for 2017. We also present sales and profits on an underlying basis which excludes 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 2017 or 2018. In 2017, portfolio changes mainly relate to the sale of our test preparation business in China and reduction in our equity interest in PRH. This reduction in equity interest is reflected in the reduction in share of results of joint ventures and associates. In 2018 portfolio changes mainly relate to the sale of our Wall Street English language teaching business. Acquisitions were not significant in either 2017 or 2018.

In 2018, our underlying basis excludes the impact of IFRS 15 'Revenue from Contracts with Customers'. This new standard was adopted on 1 January 2018 but the comparative figures for 2017 have not been restated. On 1 January 2018 we also adopted IFRS 9 'Financial Instruments' but this did not have a material impact on profit in 2018. The impact of adopting these standards is discussed further below and in note 1 to the condensed consolidated financial statements.

On an underlying basis, sales decreased by 1% in 2018 compared to 2017 and adjusted operating profit increased by 8%. Currency movements decreased sales by £134m and adjusted operating profit by £21m. Portfolio changes decreased sales by £225m and adjusted operating profit by £61m. The impact of adopting IFRS 15 on the results for 2018 was to increase sales by £9m and adjusted operating profit by £9m.

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 have also excluded the impact of adjustments arising from clarification of guaranteed minimum pension (GMP) equalisation legislation in the UK as outlined in the section on post-retirement benefits. In 2017, we excluded the impact of US tax reform on our associate operating profit as outlined in the section on taxation. 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	2018	2017
Operating profit	553	451
Add back: Cost of major restructuring	102	79
Add back: Intangible charges	113	166
Add back: Other net gains and losses	(230)	(128)
Add back: UK pension GMP equalisation	8	-
Add back: Impact of US tax reform	-	8
Adjusted operating profit	546	576

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 were £79m in 2017 and £102m in 2018 and relate to delivery of cost efficiencies in our US higher education courseware business and enabling functions together with further rationalisation of the property and supplier portfolio. The restructuring costs in 2018 relate predominantly to staff redundancies and the net cost of property rationalisation. Included in the property rationalisation in 2018 is the impact of the consolidation of our property footprint in London which resulted in a charge for onerous leases of £91m partially offset by profit from the sale of property of £81m. The onerous lease provisions are the main driver for the overall increase in provisions on the balance sheet at 31 December 2018.

Intangible amortisation charges in 2018 were £113m compared to a charge of £166m in 2017. Other net gains (before tax) of £230m in 2018 relate to the sale of the Wall Street English language teaching business (WSE), realising a gain of £207m, the disposal of our equity interest in UTEL, the online University partnership in Mexico, realising a gain of £19m, and various other smaller disposal items for a net gain of £4m. Gains of £128m in 2017 largely relate to the sale of our test preparation business in China which resulted in a profit on sale of £44m and the part sale of our share in PRH which resulted in a profit of £96m.

The statutory operating profit from continuing operations of £553m in 2018 compares to a profit of £451m in 2017. The increase in 2018 is largely due to the increase in gains on disposal and reduced intangible charges which more than offset increased restructuring, the lost contribution from businesses disposed and the impact of currency movements.

Net finance costs

Net interest payable was £24m, compared to £79m in 2017. The decrease was primarily due to a reduction in gross debt achieved through the early redemption of bonds in 2017 and in early 2018. Charges relating to early redemptions increased finance charges in 2017 but were not as significant in 2018. Additionally there was a reduction in interest on tax provisions following reassessment of those provisions in 2018.

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 2018, the total of these items excluded from adjusted earnings was a loss of £31m compared to a gain of £49m in 2017. Finance income relating to retirement benefits increased from £3m in 2017 to £11m in 2018 reflecting the comparative funding position of the plans at the beginning of each year. This increase was more than offset by foreign exchange losses on unhedged cash and cash equivalents and other financial instruments that generated profits in 2017. For a reconciliation of the adjusted measure see note 3 to the condensed consolidated financial statements.

Taxation

The effective tax rate on adjusted earnings in 2018 was a credit of 5.2% compared to an effective rate charge of 11.1% in 2017. The decrease in tax rate reflects several one-off benefits in 2018 including provision releases due to the expiry of relevant statutes of limitation and due to the reassessment of historical positions (£86m), as well as a one off benefit from a reassessment of the tax treatment of certain items of income and expenditure (£25m).

The reported tax credit on a statutory basis in 2018 was £92m (18.5%) compared to a charge of £13m (3.1%) in 2017. The statutory tax credit in 2018 was primarily due to the items above, provision releases and credits related to previous business disposals (£31m) and tax credits on restructuring charges.

Operating tax paid in 2018 was £43m compared to £75m paid in 2017 mainly due to refunds received in the US. Tax provision releases were the primary reason for the reduction in current tax liabilities on the balance sheet whilst net deferred tax remained consistent year on year.

Other comprehensive income

Included in other comprehensive income are the net exchange differences on translation of foreign operations. The gain on translation of £90m in 2018 compares to a loss in 2017 of £262m. The gain in 2018 mainly arises from the strength of the US dollar. A significant proportion of the Group's operations are based in the US and the US dollar strengthened in 2018 from an opening rate of £1:$1.35 to a closing rate at the end of 2018 of £1:$1.27. At the end of 2017 the US dollar had weakened from an opening rate of £1:$1.23 to a closing rate of £1:$1.35 and this movement was the main reason for the loss in 2017.

Also included in other comprehensive income in 2018 is an actuarial gain of £25m in relation to the retirement benefit obligations of the Group and our share of the retirement benefit obligations of PRH. The gain arises from the favourable impact of changes in the assumptions used to value the net assets in the plans and in particular movements in the discount rate. The gain in 2018 compares to an actuarial gain in 2017 of £182m.

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 flow decreased on a headline basis by £156m from £669m in 2017 to £513m in 2018. The decrease reflects lower dividends from PRH, higher incentive payments in 2018 relating to 2017 performance and revenue related movements in working capital.

The equivalent statutory measure, net cash generated from operations, was £547m in 2018 compared to £462m in 2017. Compared to operating cash flow, this measure includes restructuring costs and special pension contributions but does not include regular dividends from associates or net capital expenditure on property, plant, equipment and software. The main reason for the improvement in cash generated from operations was the absence in 2018 of special pension contributions which in 2017 were £227m and related to the FT Group disposal (£25m) and to agreements relating to the PRH merger in 2013 (£202m).

The Group's net debt decreased from £432m at the end of 2017 to £143m at the end of 2018 principally due to cash generated from operations and the proceeds from disposal of businesses and property in the year which more than offset interest, tax, share buy-back and dividend payments.

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 £56m in 2018 (2017: £72m) of which a charge of £67m (2017: £75m) was reported in statutory operating profit and income of £11m (2017: £3m) was reported against other net finance costs. The decrease in the operating charge in 2018 is partly explained by a past service credit of £11m relating to changes made to the US post-retirement medical plan in the year and reduced administration costs. This credit was partially offset by a past service charge of £8m relating to guaranteed minimum pension (GMP) equalisation.

The GMP equalisation charge arises from the ruling in the Lloyds Bank High Court case in October 2018 that provided clarity on how pension plans should equalise GMP between males and females. The case ruling results in an income statement charge, an additional liability and the potential requirement to make back-payments to pensioners who may have been retired for some years. We have excluded this charge from our adjusted earnings as this relates to historic circumstances. The charge is an estimate based on available data and revisions to these estimates in future years will be treated as assumption changes and recorded in other comprehensive income rather than the income statement.

The overall surplus on UK pension plans of £545m at the end of 2017 has increased to a surplus of £571m at the end of 2018. The increase has arisen principally due to favourable movements in assumptions used to value the liabilities offsetting some decline in asset values.

In total, our worldwide net position in respect of pensions and other post-retirement benefits increased from a net asset of £441m at the end of 2017 to a net asset of £471m at the end of 2018.

Adoption of new accounting standards in 2018

The adoption of IFRS 15 and IFRS 9 has impacted both the income statement as described above and has had an impact on certain lines in the balance sheet. Although the impact of IFRS 9 was not significant, the restatements in relation to IFRS 15 are the main reason for increases in 2018 in balances for inventories, trade and other receivables, trade and other liabilities and held for sale assets and liabilities. The full impact of the adoption of both standards is outlined in note 1 to the condensed consolidated financial statements.

Dividends

The dividend accounted for in our 2018 financial statements totalling £136m represents the final dividend in respect of 2017 (12.0p) and the interim dividend for 2018 (5.5p). We are proposing a final dividend for 2018 of 13.0p bringing the total paid and payable in respect of 2018 to 18.5p. This final 2018 dividend which was approved by the Board in February 2019, is subject to approval at the forthcoming AGM and will be charged against 2019 profits. For 2018, the dividend is covered 3.8 times by adjusted earnings.

Share buyback

The share buyback programme announced in October 2017 was completed on 16 February 2018. In 2017, our brokers purchased 21m shares and in 2018 purchased a further 22m shares. Cash payments for these purchases and related costs were £149m in 2017 and £153m in 2018. The shares bought back were cancelled and the nominal value of these shares were transferred to a capital redemption reserve. The nominal value of shares cancelled under the programme was £11m. A liability for the share buy-back payments due in 2018 was recorded in trade and other liabilities on the 2017 balance sheet.

Return on invested capital (ROIC)

Our ROIC is calculated as adjusted operating profit less cash tax paid, expressed as a percentage of average gross invested capital. We also present an additional ROIC measure showing ROIC on a net basis which removes impaired goodwill from the invested capital balance. The net approach assumes that goodwill which has been impaired is treated in a similar fashion to goodwill disposed as it is no longer being used to generate returns.

On a gross basis, ROIC increased from 4.3% in 2017 to 4.7% in 2018 and from 6.2% in 2017 to 6.7% in 2018 on a net basis. The movement largely reflects lower invested capital following disposals and decreased tax payments which were more than enough to offset the effect of lower reported profits (see note 18 to the condensed consolidated financial statements).

Businesses held for sale

Following the decision in 2017 to sell both our Wall Street English language teaching business and the K12 school courseware business in the US, the assets and liabilities of those businesses were classified as held for sale on the balance sheet at 31 December 2017. During 2018 the Wall Street business was sold and the K12 business remains on the balance sheet as a held for sale asset prior to the disposal announced in February 2019 (see also note 10 to the condensed consolidated financial statements).