Pearson plc

Good morning everyone and welcome to Pearson's 2023 preliminary results. Today we'll host a presentation followed by a Q&A session. There will be two ways to submit your questions. If you'd like to ask your question personally, please use the numbers that are displayed on screen. These lines will be open following the main presentation. Alternatively, please type your questions into the questions tab at the top right of the screen and we'll address them in turn at the end. And with that, I'll hand over to Omar.

Good morning, everyone. I'm Omar Abosh. It's good to be here with you today for my inaugural results presentation. I'm proud to be here representing Pearson and its people who are so committed to helping learners around the world. First off, I'll make some introductory comments, sharing my early impressions of Pearson. Next, Sally Johnson, who's here with me in London, will take us through our business unit financials for 23. Then I'll conclude the presentation part with our 2024 strategic priorities. And after that, we'll open up for questions, where we're joined by Art Valentine, Giorgio Vanelli, and Tom App-Simon from our leadership team. Let me begin with our financials. It has been yet another year of strong operational and financial performance for Pearson. Once again, we've surpassed initial expectations with underlying sales growth of 5% and operating profit up 31% to £573 million. 2023 also saw significant margin expansion from 12% in 2022 to 16% this year. This is the strongest margin Pearson has seen since 2013. Our cash position is excellent, with a 74% increase in free cash flow and 102% operating cash conversion. As a sign of our continued confidence in the cash flow growth of Pearson, I'm pleased to announce an extension of our share buyback by an incremental £200 million. These results reflect exciting progress across our whole business, and I want to call out the especially strong financial contributions from assessments and qualifications and English language learning. Overall, this outturn puts us in good stead moving forward and helps us invest in further growth opportunities that will ensure we drive continued shareholder value expansion in the coming years. As you know, I joined Pearson eight weeks ago. Let me tell you what I've been up to. I spent over 90 hours with leaders from across the businesses and corporate functions in hourly one-on-one sessions. I've also had in-depth conversations with over two dozen customers and spent time with each of my leadership teams' own management teams to hear their perspectives on many aspects of our business and also so that I can dig into our operations. I spent time with several of our investors as well as other participants in our markets, such as private equity owners of educational and learning assets. The simple reason for this work is to establish priorities and their associated actions. These growth-oriented priorities address strategic, operational, product, people-related and cultural topics. I'd like to share a handful of observations from my first weeks at Pearson. The headline is that I believe Pearson is a rare type of company with the ability to deliver long-term sustainable growth while also pursuing a purpose that genuinely helps the lives of millions of people around the world. How do we do this? Well, at Pearson, we do three things. We create and curate world-class learning and assessment content. We distribute that content digitally and through physical materials to millions of users globally. and we help individuals, employers, and institutions build and verify skills. So underpinning these three activities is the trust that the Pearson brand carries. I found that customers around the world, often in high-stakes settings, rely on the products and services that we provide and really place a great deal of trust in what we do. This is the trust in the quality of the content and assessments, trust in the efficacy of the learning, and trust in the reliability of the outcomes. This leads to deep and long-lasting relationships with many of them, giving us unrivaled competitive advantage in the market. We have incredibly mission-driven people at Pearson, and they fuel our purpose and culture. For sure, our employees are experts in their various fields, But what really stood out to me in my many conversations is how deeply they truly care about helping other human beings make progress in their lives. Those of you who've studied culture will understand how hard that is to manufacture. I'm pleased to see that we're well on the way to embedding digital and technology capabilities into the DNA of our company. More than 80% of our products and services are now digital or include digital components. And this is true of our Pearson Test of English, delivery view assessments, our higher ed courseware, and most recently, and the first for the UK, in our GCSE qualifications. We have about 3,000 technologists working across the business to continually improve and customer experiences with the application of digital and AI in our products and services. Finally, we're sitting on vast data sets that have tremendous value in the development of next generation AI models. In 2023, these included 230,000 tutoring sessions, 347 billion total user engagement points across higher ed, 1.2 billion student interactions at our Connections Academy, 1.4 billion exam item interactions at Vue, where we delivered 20.7 million exams, 366 million unique data points across Q-interactive in our clinical platform, and around 260 billion data points for Mondly. On top of this, in workforce skills, We analyze 8 to 12 million job ads per month across the US, UK, Australia, and Canada and map each job ad to an occupation and the skills found in our skills ontology. In summary, our brand trust, customer relationships, trusted IP, mission-driven people and culture, technology assets and products, plus these huge data sets provide the foundation for our continued momentum to drive profit growth into the future. To close off this introduction, my early time here has increased my conviction in the three reasons that I chose to join Pearson as CEO. Firstly, Pearson is a strong company, one that is performing consistently well and has good growth optionality for the future. Today's results are a continuation of our recent growth track record and our consistent performance, which underpin my confidence. Second, I was drawn to Pearson by its unique and compelling purpose. Our ability to help people on their learning journey quite literally changes their lives. We have countless examples of this, which we will share more of. We truly help people and live the life they imagine. Precious few other companies can claim this. Thirdly, our world is at an inflection point with AI. The next decade will be all about the application of AI in business, in our communities, and in our individual lives. The opportunities to use AI as a tool for better learning while driving growth in our business are immense. We're well positioned to take advantage of this future. So in summary, Pearson is strong, has an incredible mission in the world that our people are utterly committed to, and is positioned to be a winner in AI. Let me hand over to Sally here.

Thank you, Omar. And hello, everybody. I'm going to come on and talk about guidance in a moment. But first, I want to reflect on the strength of our 2023 results. We exceeded the profit expectations that we had at the beginning of the year by £30 million, increasing profit by 31%. we secured £120 million of cost savings, which, alongside the margin from sales growth, increased our margin from 12% to 16%. And we've generated an operating cash conversion of 102%, increasing free cash flow by 74%, despite one-time reorganisation costs, which will fall away in 2024. It's this continued financial progress that underpins our confidence that we'll be able to deliver another good year in 2024 and that we're on track to meet our 2025 guidance. Adjusted earnings per share increased 12% to 58.2p, reflecting the strong increase in operating profit and reduced share count from our share buyback. This was partially offset by interest and tax, given the one-off provision benefits we had last year. Net debt increased slightly, with strong operating cash utilised by the acquisition of PDRI and dividends alongside the share buyback. Our balance sheet remains strong, providing us with a firm platform from which to invest for future growth, whilst continuing to distribute cash to shareholders through our dividend policy and, where appropriate, through ad hoc buybacks. Given our strong 2023 results and our confidence in the future, the Board are proposing a 6% increase in the final dividend for a full-year dividend of 22.7p. In 2023, we delivered underlying group sales growth of 5%, excluding OPM. By division, assessments and qualifications grew 7%, driven by a 10% growth in view, particularly in the IT and healthcare sectors. We saw good growth across US student assessments, clinical, and UK and international qualifications due to new contract wins, government funding, and price increases. Virtual learning decreased 20% for the full year, primarily due to the expected decrease in OPM. Virtual schools declined 2% for the full year with lower enrolments due to COVID normalisation in the 22-23 academic year and the loss of a larger public school in the 23-24 academic year. This was partially offset by an improvement in funding. Higher education was down 3% for the year, in line with our expectations. In the US, sales declines were driven by a loss of adoptions to non-mainstream publishers in the first half of the year, as well as pricing mix. There was strong growth in inclusive access, with 22% sales growth, and we also delivered 2% growth in platform units. English language learning delivered outstanding growth of 30%. All three segments delivered with PTE the standout contributor. Test volumes were up 49% against the backdrop of favourable migration policy in Australia and market share gains in India. Workforce skills grew 11% for the full year with solid performances in both vocational qualifications and workforce solutions. Strategically, we won several contracts in view, aided by our acquisition of PDRI. We extended our on-screen exams and we drove growth in our digital platform and clinical. Our renewal rate in view remains strong at 94%, down slightly from last year due to one particular factor. In virtual schools, we launched our Careers Pathway programme in five schools, with more to come in 2024. This important initiative builds synergies with our workforce-focused businesses and supports future enrolment growth. It will also enhance the consumer's experience in a business where we already have a really high NPS score of 67%. And we're also pleased to have recently secured new schools in the states impacted in the 23-24 and 24-25 academic years, providing us with a strong base for future growth. In higher education, we improved our technology support, leading to better NTS scores amongst faculty. Our new go-to-market strategy has led to higher retention rates and new adoptions. We launched generative AI study tools with select titles for Pearson Plus and Mastering, and we'll extend this for Fall 24 to more than 40 titles. And Pearson Plus subscriptions passed the one million milestone, and we monetized channels for the first time. In English language learning, we won recognition for PTE in Canada for both student direct stream and immigration purposes. In workforce, we won a contract to provide BTECs to the Jordanian Ministry of Education, and we're seeing success across digital credentialing and strategic workforce planning solutions, where we have several new contract wins, including Cleveland's Clinic and ServiceNow. So, in summary, we're winning contracts and investing in our range of products to drive sustainable, profitable growth. Group profit grew 31% on an underlying basis to £573 million, with significant margin progression increasing 4% to 16%. This was driven by delivery of that £120 million of cost efficiencies and operating leverage on sales growth, partially offset by increased inflation and investment. At a divisional level, assessments and qualifications grew its margin to 22% through operating leverage on sales and margin and OPEX efficiencies, partially offset by inflation. Virtual learning margins increased to 12%. due to cost efficiencies and the disposal of polls. Higher education margins increased to 13%, with the 2023 cost efficiencies weighted towards this division and offsetting the decline in sales and inflation. English language learning margins grew to 11% through operating leverage on sales, partially offset by increased investment and inflation. And workforce skills was loss-making as we continued to invest in the business with a focus on delivering modular, personalised offerings to our pipeline of clients, leveraging our powerful technology stack. Our free cash flow generation is one of the key strengths of our business model. We've maintained a sharp focus on increasing free cash flow as we continue to invest behind opportunities to drive future growth that will support returns for shareholders. we had a strong cash performance with cash conversion of 102% and operating cash flow of £587 million. This was driven by the trading performance, great cash collections and reduced prod def spend in higher education connected to the cost efficiency programme. As previously discussed, the capital investment profile continues to change with CapEx reducing and focus shifting to investment in product development. The £186 million increase in operating cash has driven a £165 million increase in free cash flow. Free cash flow conversion is 93%, lower than the 102% operating cash conversion given one-time reorganisation costs which will fall away in 2024. I know many of you like to trace the detailed moving parts across the cash flow and so you can find a reconciliation to the various disclosures in the prelims in the appendix of this presentation. Looking at our balance sheet metrics. Net debt increased slightly with strong operating cash utilised by the acquisition of PDRI and dividends alongside the share buyback. Leverage remains comfortable at one times net debt to EBITDA. And as a reminder, when we think about the application of our capital allocation policy, we calculate Hedrum against our most stringent rating agency metric, which is currently equivalent to a leverage ratio of approximately two times. Return on capital was 10.3% compared to 8.7% in 2022. And we continue to be disciplined in our investments and rigorous about securing required returns. Turning to capital allocation, we've got a disciplined capital allocation policy with a focus on maintaining a strong balance sheet, investing both organically and inorganically, paying a progressive and sustainable dividend and returning surplus cash to shareholders. We've almost finished the £300 million share buyback we announced last September, and today we're announcing its extension by £200 million, given the strength of our cash flow in 2023 and expectations for 2024. Administratively, this will commence as soon as possible. Going forward, we will continue to apply our capital allocation policy and through strong cash generation, we'll continue to invest behind opportunities to drive further growth and create value for all our stakeholders. Moving to the 2024 outlook, we expect group underlying sales growth, adjusted operating profit and tax to be in line with current market expectations. Given our share buyback and its extension announced today, our interest charge will increase to circa £45 million. We also continue to expect to achieve group sales growth of mid-single digits, excluding OPM and the strategic review businesses, across the 2022-2025 period, with margins of 16% to 17% expected in 2025. Divisional expectations across that period remain the same, apart from workforce, where we expect double-digit growth, and English, where we expect growth in the teens. Given the changing shape of the group, as you think about the role of FX in our guidance, you should now assume that a one-cent move against the pound equates to around £5 million of adjusted operating profit. I want to turn now to the considerable growth opportunities we have across the business. I'll take each division in turn. We continue to expect assessments and qualifications to grow sales at low to mid single digits for 2024, with opportunities for increased growth beyond that. In Pearson VUE, we will finalise the successful integration of PDRI and expand into adjacent markets, accessing that technology cert prep market. We're going to expand our qualification business internationally and use our technology abilities to launch innovative, future-ready assessments. Clinical offers us several opportunities as the market expands given macro trends. We will continue to invest in our digital intellectual property, which drives our competitive advantage, and in adjacent opportunities such as the application in pharma clinical trials. For virtual schools, we expect enrolments to be lower in the 2024-25 academic year due to the loss of a major school in that period, and for annual sales to be down a similar level to 2023. We've recently secured those new schools in the states impacted by the 2023-24 and 2024-25 academic years, and whilst this won't be material for 2024, it will help the business to return to growth thereafter. The Another factor driving growth will be the career pathways programme with an additional 15 schools in 2024. We expect higher education to return to top line growth in 2024 as we receive a full year benefit from the implementation of our new go-to-market strategy with continued momentum from Papyrus and Plus. We'll also benefit from continued investment in our digital platforms, channels and those AI capabilities. We expect margins to improve further in higher ed, with further cost efficiencies partially offset by above-the-line restructuring charges in 2024. In English language learning, we continue to expect high single-digit growth for 2024. We'll see continued growth in the Pearson Test of English and in the institutional market through selling end-to-end solutions that combine courseware with assessments and certification. And Mondly will grow through platform improvements and the introduction of workplace English. For workforce skills, we will achieve high single-digit growth as we drive further international expansion of our vocational qualifications and continue to make headway with our workforce solutions business. In terms of phasing, you'll remember the weighting of growth to H1 compared to H2 for the assessment businesses last year. This weighting will realign due to the comp, as well as the timing of product releases. There will also be a weighting of growth to Q1 from Q2 in virtual schools due to the timing of funding. And in higher ed, we expect H1-24 to mirror H2-23 and growth in H2-24. Cash will continue to be a focus and we expect to achieve a 95% to 100% free cash flow conversion rate given that high operating cash conversion with no one-time reorganisation costs anticipated this year. We're assuming there's not a material divergence between the FX rate used to translate the P&L and cash flows. So, in summary, we've achieved financial expectations in 2023. We achieved £120 million of cost savings, expanding margin by 4% to 16%. We're on track to meet expectations in 2024 and remain committed to our targets out to 2025. We have a strong balance sheet providing optionality and are extending our share buyback by £200 million. And we've improved our free cash flow and expect 95% to 100% conversion in 2024. And with that, I'll hand back to Omar to bring us to a close.