Pearson : Financial Document

Registered address: Pearson Plc, 80 Strand, London WC2R ORL Registered in England 53723

Interim results for the six months to 30th June 2021 (Unaudited)

30 July 2021	Strong rebound, momentum and early strategic progress

Andy Bird, Chief Executive said:

"Pearson has made good strategic, operational and financial progress in the first half of 2021 leading to healthy revenue and profit growth in the period. This reflects a strong rebound from 2020 with encouraging momentum in the underlying business. We are pleased to declare an interim dividend of 6.3p for our shareholders.

"Today we have reached a significant milestone in our direct-to-consumer strategy with the launch of our new college app, Pearson+. This will provide learners with the accessible, flexible and affordable resources they need for success. It also enables us to create direct relationships with learners and to continue to engage with them as they move into their careers."

"Whilst there's still much to do in the second half, with the key back to school selling season ahead of us and notwithstanding ongoing COVID-related uncertainty in some of our major markets, we are moving with pace and purpose and we remain on track to meet current market expectations."

Highlights	Underlying revenue up 17% to £1,597m
	• Global Online Learning up 25% driven by strong growth in US Virtual Schools; modest
	growth in OPM with good underlying growth offset by discontinued programs.
	• Global Assessment grew 34% with growth across all divisions, following the closure of test
	centres and schools and exam cancellations in 2020.
	• North American Courseware up 2%, driven by a recovery in Canada which more than offset
	a 2% decline in US Higher Education Courseware.
	• International grew 8% with growth in courseware, clinical assessment and PTE following
	school, bookstore and test centre closures last year.
	Adjusted operating profit of £127m, following loss of £(23)m in H1 2020

• Recovery with operating leverage from trading, cost savings, and favourable timing partially offset by inflation and FX.
• Adjusted EPS 10.5p (H1 2020: loss of (5.1)p).
• Net interest payable of £27m (H1 2020: £27m). Interest on borrowings increased slightly, offset by favourable timing and a one-off gain following the close out of interest rate swaps.

Strong balance sheet and cash flow with H1 net debt of £646m (H1 2020: £982m)

• Interim dividend of 6.3p declared (H1 2020: 6.0p), an increase of 5%.
• Available liquidity of approximately £1.4bn at the end of the period.

Statutory results

• Sales increased 7% to £1,597m (2020: £1,492m) reflecting underlying performance, partially offset by portfolio changes and currency movements.
• Statutory operating profit £9m in H1 2021 (H1 2020: £107m), with the decrease due to the profit on disposal of Penguin Random House in 2020 and restructuring costs in 2021 partially offset by improved trading and reduced intangible charges.
• Statutory EPS 2.3p (H1 2020: 6.3p).

Early strategic progress

• Implementation of new organisational structure with management team in place for H2.
• Strategic review of international courseware local publishing businesses progressed.
• Pearson+, our new college learning app for US students launched today:

1. Enables direct relationship with millions of students. o Accelerates recapture of secondary market.
   o Flexible and affordable subscription plans.

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2021 outlook

• H2 revenue expectations broadly consistent with assumptions outlined on 8 March 2021*:
  o Virtual Learning revenue flat with enrolments in Virtual Schools broadly flat for
  2021/22, and discontinued programs in OPM offsetting underlying growth. o Higher Education to decline as expected; less than seen in recent years.
  o School Assessment growth to offset performance in Professional Certification after strong H2 2020 due to pent up demand.
  o Ongoing growth in Workforce Skills.
  o English Language Learning impacted by continuing COVID-19 pressure on migration and mobility, with further local lockdowns in key market Australia and borders expected to remain closed until 2022.
  o International markets opening more slowly than hoped given new COVID-19 variants.
• We continue to expect adjusted operating profit for FY21 to be in line with market expectations.**

Financial summary

			Headline		Underlying
£m	H1 2021	H1 2020	growth	CER growth	growth
Business performance
Sales	1,597	1,492	7%	16%	17%
Adjusted operating profit/(loss)	127	(23)	652%	722%	858%
Operating cash flow	10	(214)
Adjusted earnings/(loss) per	10.5p	(5.1)p
share (basic)
Dividend per share	6.3p	6.0p
Net debt	(646)	(982)
Statutory results
Sales	1,597	1,492
Operating profit	9	107
Net cash generated from /	79	(117)
(used in) operations
Basic earnings per share	2.3p	6.3p

*Outlook commentary presented in our new divisions; the group will be managed and reported this way in the second half. ** Pearson VUMA published consensus on 3 March 2021; adjusted operating profit £377m at USD:GBP 1.36.

Throughout this announcement: a) Growth rates are stated on an underlying basis unless otherwise stated. Underlying growth rates exclude currency movements, and portfolio

changes. 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.

Contacts

Investor Relations	Jo Russell	[phone]
	Anjali Kotak	[phone]
	Teddy Symington	[phone]
Media	Tom Steiner	[phone]
	Gemma Terry	[phone]
Teneo	Charles Armitstead	[phone]
Virtual event	Pearson's half year results virtual presentation today for investors and analysts
	from 0830 (BST). Register to receive login details:
	https://pearson.connectid.cloud/register/

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

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(www.pearsonplc.com). 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.

Balance sheet and cashflow

Executive changes

Net debt and cashflow. H1 net debt of £646m (H1 2020: £982m) including net lease liability of £530m. Net cash generated from operations was an inflow of £79m in 2021 compared to an outflow of £117m in 2020, with higher operating cash inflow and lower restructuring costs paid. Operating cash flow increased on a headline basis by £224m from an outflow of £214m in the first half of 2020 to an inflow of £10m in the first half of 2021. The increase is largely explained by the drop-through of increased trading profits, improved working capital and a reduction in capital expenditure.

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, whilst being disciplined about returns on investment, delivering a sustainable and progressive dividend and returning any surplus cash to our shareholders.

Dividend. In line with our policy, the Board is declaring an interim dividend of 6.3p (2020: 6.0p) payable on 20 September 2021, an increase of 5%.

Mike Howells, currently Chief Strategy Officer and Interim President of Workforce Skills, is taking on the Workforce Skills role on a permanent basis. We will be looking to appoint a new Chief Strategy Officer in due course.

Anna Vikström Persson is stepping down as Chief Human Resources Officer, having helped deliver significant transformation and led efforts to increase our focus on diversity, equity and inclusion. We will be looking to appoint a new Chief Human Resources Officer in due course.

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Operational review

						Headline	CER	Underlying
	£ millions		H1 2021	H1 2020	growth	growth	growth
	Sales
	Global Online Learning		355	316		12%		25%		25%
	Global Assessment		480	397		21%		34%		34%
	North American Courseware		346	375		(8)%		2%		2%
	International		416	404		3%		6%		8%
	Total sales		1,597	1,492		7%		16%		17%
	Adjusted operating
	profit/(loss)
	Global Online Learning		48	24		100%		129%		129%
	Global Assessment		147	71		107%		131%		131%
	North American Courseware		43	36		19%		33%		33%
	International		72	46		57%		57%		49%
	Enabling Functions		(183)	(201)		9%		2%		2%
	Penguin Random House		-	1		(100)%		(100)%		-
	Total adjusted operating		127	(23)		652%		722%		858%
	profit/(loss)

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

Global Online Learning

Underlying revenue was up 25% with strong growth in Virtual Schools due to enrolment growth in the 2020/21 school year and growth in district partnerships, alongside modest growth in OPM. Headline revenue growth of 12% was lower due to FX.

Adjusted operating profit increased 100% in headline terms and 129% in underlying terms as the margin on sales growth more than offset investment in virtual schools, and improved marketing efficiency in OPM outweighed the impact of discontinued programs.

In Virtual Schools, revenue grew strongly due to growth in enrolments in Partner Schools for the 2020/21 school year as well as growth in US district partnerships. We continue to expect enrolments for the 2021/22 school year to be broadly flat, with fewer new applications (decline of 17%; 2020 - increase of 61%), as expected, following the surge in 2020, offset by good retention.

Five new full-time online, state-wide partner schools will be serving students in the 2021/22 school year. Combined with one contract exit this will bring the total number of partner schools to 47. Our state coverage is also expanding with the launch of a school in Rhode Island, bringing the total number of states to 30.

In OPM revenue grew slightly with good growth in partnerships in the UK and US offset by the ongoing impact of discontinued programs in the US and Australia. Underlying course enrolments (excluding discontinued programs) grew 11% with total course enrolments growing 7%.

Global Assessment

Underlying revenue was up 34% with growth across all divisions, following the closure of test centres and schools and exam cancellations in 2020. Headline revenue growth of 21% was lower due to FX.

Adjusted operating profit increased 107% in headline terms and 131% in underlying terms due to the impact of trading, at a good margin.

US Student Assessment revenue was up moderately on last year as following exam cancellations in 2020, reuse of materials and the shift of some testing to the fall weighed against a full rebound.

In Pearson VUE, sales rebounded strongly following test centre closures in Q2 2020. During H1, loosening restrictions on capacity and pent-up demand supported volume growth in our centres. We continue

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to monitor and adhere to local health guidelines regarding social distancing measures. We saw growth in our OnVUE volumes from 580k at H1 2020 to 1.6m in H1 2021 driven by continuing strong demand from the IT sector. In H1, Pearson VUE signed 23 new agreements and renewed 34 existing contracts.

In US Clinical Assessment sales rebounded strongly with the reopening of schools and delivery of a backlog of special education assessments.

North American Courseware

North American Courseware underlying revenue grew 2%, driven by a recovery in Canada which more than offset a 2% decline in US Higher Education Courseware underlying revenue. Headline revenue declined 8% due to FX.

Adjusted operating profit increased 19% in headline terms and 33% in underlying terms due to sales flow through in Canada and cost savings.

In Canada underlying sales grew strongly following school and bookstore closures in Q2 2020, as well as a school funding increase earlier this year.

In US HE Courseware underlying sales declined 2%, in line with expectations, due to the continuation of trends seen in previous years, including further declines in print revenue. In a seasonally lighter first half, we saw good growth in total units. We continued to see early signs of secondary market recapture, with growth in digital sales as learners opted for more affordable digital options in place of higher priced print products, and unit growth in eBooks and platform products which more than offset declines in print and bundle units. We continue to make good progress with our strategy of shifting from ownership to access, with Inclusive Access sales into non-profit institutions up 23%.

Q3 remains an important quarter and we expect similar trends as seen in recent years with further unbundling of packages and declines in print, albeit with a smaller impact.

We have today launched our new college learning app, Pearson+, for back to school 2021, as part of our strategy to build strong, long-term relationships with millions of students. The app provides a better user experience for students with enhanced functionality and will accelerate our recapture of the secondary market. We have introduced a flexible and affordable subscription plan, pricing access to the app at $9.99/month for a Single eText or $14.99/month for Multi Access eText. Students will need to sign on for an initial minimum period of 4 months.

The majority of our Revel titles have now been enhanced with capabilities from the Pearson Learning Platform and we are starting to upgrade our MyLab and Mastering titles with these capabilities. We have also launched Interactive Labs, a new feature in some of our Mastering titles, a virtual science experience that replicates a lab environment.

International

Underlying revenue increased 8% with growth in courseware, clinical assessment and PTE following school, bookstore and test centre closures last year, with recovery slower in markets where pandemic conditions persist. Headline revenue growth of 3% was lower due to FX and the disposal of Pearson Institution of Higher Education which completed in February 2021.

Adjusted operating profit grew 57% in headline terms and 49% in underlying terms due to sales flow through from trading and cost savings.

School & HE Courseware grew strongly following school and bookstore closures in 2020, and a strong performance in South Africa due to timing of purchases in the first half.

Assessment revenues were up slightly as strong growth in Clinical in Europe was partially offset by a decline in School Assessment, where UK exam cancellations impacted general and vocational qualifications.

English courseware rebounded, driven by recovery in China with the re-opening of private language schools in 2021. PTE revenues grew strongly as test centres largely reopened, but remain under pressure due to reduced global mobility and border closures in our key market of Australia.

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