Pearson : Financial Document

2021 Interim Results

Friday, 30th July 2021

2021 Interim Results

Friday, 30th July 2021

Welcome and Introduction

Andy Bird

Chief Executive Officer

[VIDEO]

Andy Bird: Good morning, everyone, and thank you for joining us today for our 2021 interim results. I hope you enjoyed the video. And as you have heard me say before, Pearson is a company with a true purpose.

We exist to help everyone achieve their potential through learning. We want to deliver the world's best learning products to more people than ever before. And as we unlock the value of learning, we will grow our business and at the same time transform lives.

Joining me today are Sally Johnson, our Chief Financial Officer and Mike Tschudy, Head Of User Experience Design. We are going to run you through the highlights of the first half and then spend some time focusing on the first of our direct to consumer learning products, our college learning app, which we are launching today. And then Sally and I will be very happy to take your questions.

Overall, Pearson has made significant progress since my strategy update in March. Back then I spoke of my priorities for the business over the coming year. I outlined the need to move with pace, focus and agility in order to put in place the building blocks for success. And I am pleased to say that we are doing exactly that. We are moving quickly, and we are building momentum. We are focused on execution and we are focused on quality. And we are making progress financially, strategically, and operationally.

Financial Overview

From a financial perspective, Pearson has delivered a good performance in the first half of 2021. This reflects the ongoing benefits of increased enrolment in online learning, together with a strong rebound this year, and encouraging momentum in the underlying business as we start to see the benefits of the revised strategy that we introduced in March.

We have delivered revenue growth of 17% and then adjusted operating profit of £127 million. Sally will talk in more detail on the numbers later in the presentation but the key points are that we are on track for 2021, and that going forward, we believe that we are increasingly well positioned for sustainable long-term growth.

Strategic and Operational Progress

Now, let's take a closer look at our strategic and operational progress. In March, I outlined my strategy to get pierced and growing again, five months later, I am pleased to say that we are making excellent progress in each of the areas I have prioritised. We have substantially completed the Group's reorganisation into five focus businesses, with each carrying full responsibility for its overhead, product development, and operations. Strong leadership teams have also been appointed for all of these businesses to drive them forward and we have taken significant steps to reinvigorate our culture, with Pearson becoming a more diverse and inclusive organisation and a more action-oriented group, one that is focused on execution and delivery.

www.global-lingo.com

2

2021 Interim Results

Friday, 30th July 2021

We are also further strengthening our commitment to transparency and accountability with the introduction of new business and operational KPIs today. More on those shortly.

Strategic Review of International Courseware

The strategic review of our international courseware local publishing businesses is a complex process across some 50 countries, and that is now largely complete. And whilst these are fundamentally good businesses, they do not fit with our vision of being a globally scalable digital company. Our new Direct to Consumer division is already hard at work supporting the rapid creation of digital products. Today, we are announcing the launch of an exciting new product, Pearson Plus, an important step in taking Pearson directly to the consumer. I will come back to this in a little bit.

Building Momentum

So overall, we are making great progress, driven by an overarching objective to evolve and adopt the four key themes that I laid out in March; those were putting the consumer at the centre of everything we do; embracing diversity and inclusion; collaborating across businesses and territories as one global company; and increasing our speed, agility with a focus on quality.

Across Pearson, momentum is building with all five of our business divisions showing good operational and strategic progress in the first half of the year. Some highlights include: within higher education, we have continued to make good progress with initiatives that will make us a more sustainable, predictable digital business, including today's launch of Pearson Plus.

In English language learning, we are talking to corporations who require help enabling their workforces to reach professional grade English. Pearson offers the capabilities to do to deliver end to end solutions and we are well advanced in creating a model to drive profitable growth and scalability.

In our workforce division, we are deliberately treating this as a startup, really creating an entrepreneurial culture so that we can move very quickly. We have been having some very interesting conversations with large corporations about what we can, should and will offer and aim to convert some of these conversations into partnerships later this year.

So in summary, it has been a period of intense activity and progress across all aspects of the business and we go into the second half of the year with real momentum. And now, over to you, Sally.

Financial Results

Sally Johnson

Chief Financial Officer

Thanks, Andy. And Hi everyone. We have delivered a good first half performance, with sales growing 17% driven by a recovery from last year's COVID impact as well as a strong performance in virtual schools.

You will remember that I said an H1 would be the last time we would report under this divisional format. Going forward to a report under our five new global business divisions.

www.global-lingo.com

3

2021 Interim Results

Friday, 30th July 2021

Given each division now has full responsibility for its overhead to ensure impairment and accountability, we will report fully loaded P&Ls, which will also provide you with an improved view of underlying profitability at each of our businesses. We have shared the 20 and 21 half and full year financials on this basis in the appendix.

H1 Revenues

Now, walking through the detail for the first half global online learning revenue grew 25% with virtual schools up 43% driven by those strong enrolments for the 2021 academic year, as well as growth in US District partnerships.

Online programme manager and management revenue grew modestly with strong underlying growth offset by discontinued programmes, the impact of which finishes this year. Global assessment revenue grew 34% with growth across all divisions, following the closure of test centres and schools as well as exam cancellations in Q2 last year. New[?] and clinical revenues in H1 21 were up on 2019 with school assessments revenues not yet fully recovered.

North American courseware revenue grew 2% driven by strong recovery and Canada, which more than offset the 2% decline in US higher education courseware. We are all aware that this business is seasonally weighted to H2, but in H1 we saw the trends we expected with a decline in print and package partially offset by digital growth. Total units were up in the first half, indicating recapture of the secondary market.

International revenue increased by 8% driven by COVID recovery. However, recovery here is slower because these markets are still managing some significant pandemic disruptions.

Profit

Moving on to profit at a group level the operating leverage from the sales upside, cost and margin savings, and favourable timing was slightly offset by inflation and FX. And at a divisional level, global online learning profit grew significantly with the margin on the revenue upside and improved profitability and OPM more than offsetting continued virtual schools investment and the impact of discontinued programmes.

Global Assessment also grew profits significantly given the rebound of revenues at a strong margin. North American courseware and international underlying profits grew by 33% and 49% respectively, due to the operating leverage on the revenue growth, as well as some cost savings and enabling functions. Costs reduced due to transformation cost savings, as we continue to co focus on cost efficiency.

Cash

Turning to cash and the balance sheet cash performance was strong in the first half, with a positive operating cash flow of £10 million. That cashflow improvement was due to the higher operating profit, but also tight inventory management, strong collections and lower CAPEX. Net debt at the end of June was £0.6 billion and £0.3 billion improvement system since this time last year, given strong operating cash and disposal proceeds offset by dividends and tax.

Interim Dividend

Given our confidence in the outlook, recovery in earnings, and the strength of our cash flows and balance sheet, the board is declaring an interim dividend of 6.3p, a 5% increase on last year.

www.global-lingo.com

4

2021 Interim Results

Friday, 30th July 2021

H2 Outlook

Moving to the outlet for the rest of the year, whilst we are mindful of the continuing uncertain conditions, our revenue expectations for the second half remain broadly consistent with those I outlined in March. Namely, in virtual learning we expect virtual schools enrolments to be broadly flat for the 2122 academic year, and that discontinued programmes in OPN will offset underlying growth. In higher education we continue to expect a revenue decline but by less than seen in recent years. Pricing pressure from the change and mix from print and bundles to platform and etax[?] will be somewhat offset by recapture the secondary market and enrolment recovery.

The revenue impact of Pearson Plus will be modest this year, as we gain traction and gain consumer interest. International markets are reopening more slowly than previously expected and continued pressure on migration and mobility is impacting recovery in English language learning, and in PT[?] in particular, following further lockdowns in our key market Australia, where borders are now expected to remain closed until 2022.

Workforce skills revenue will grow given the strong fundamentals of business and the investments we have made and in assessments and qualifications there will be growth in US student assessment with some of those exams shifting from spring to fall, offset by a weaker performance and professional certification after a strong h2 2020 performance when we have benefited from that pent up demand.

As mentioned at our full year results, we are planning on investing an additional £50-60 million in the business this year, including spend on Pearson Plus, and that spend is H2 weighted. Bringing all this together, we continue to expect to deliver adjusted operating profit for the year in line with market expectations.

And with that, I will pass back to Andy, who's going to talk a bit more about our strategic progress. Andy.

Strategic Progress

Andy Bird

Chief Executive Officer

Thanks, Sally. The strategy that I announced in March was all about ensuring that we are set up to capitalise on the three big growth opportunities that I have identified for Pearson. The pandemic has only served to accelerate these opportunities, as highlighted by the adjustments that we have all made to adapt to a more digital and hybrid way of working and learning.

These three opportunities will not only benefit Pearson, but most importantly will benefit our consumers as we will be able to build direct relationships with them to help them to unlock their potential throughout a lifetime of learning.

As I said in March, to help drive our transformation, we need a robust set of stretching non-financial KPIs to measure and track our strategic progress. Together with our financial metrics, they will allow us to measure but more importantly drive and incentivise performance against our new strategy.

www.global-lingo.com

5