Pearson PLC (PSO) 2021 Q2 法說會逐字稿

Good morning, everyone, and welcome to Pearson's Half Year 2021 Results. Today, we will host a presentation followed by Q&A. (Operator Instructions) And with that, we'll start the presentation.

(presentation)

Good morning, everyone, and thank you for joining us today for our 2021 interim results. I hope you enjoyed the video. And as you've 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'll 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're 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'm pleased to say that we're doing exactly that. We're moving quickly, and we're building momentum. We're focused on execution, and we're focused on quality, and we're making progress financially, strategically and operationally.

From a financial perspective, Pearson has delivered a good performance in the first half of 2021. This reflects the ongoing benefits of increased enrollment 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've delivered revenue growth of 17% and an adjusted operating profit of GBP 127 million. Sally will talk in more detail on the numbers later in the presentation, but the key points are that we're on track for 2021, and that going forward, we believe that we're increasingly well positioned for sustainable long-term growth.

Now let's take a closer look at our strategic and operational progress. In March, I outlined my strategy to get Pearson growing again. Five months later, I'm pleased to say that we're making excellent progress in each of the areas I prioritized. We have substantially completed the group's reorganization into 5 focused 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've taken significant steps to reinvigorate our culture with Pearson becoming a more diverse and inclusive organization and a more action-oriented group, one that's focused on execution and delivery.

We're also further strengthening our commitment to transparency and accountability with the introduction of new business and operational KPIs today. More on those shortly. 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're announcing the launch of an exciting new product, Pearson+, an important step in taking Pearson directly to the consumer. I'll come back to this in a little time.

So overall, we're making great progress, driven by an overarching objective to evolve and adopt the 4 key themes that I laid out in March. Those were putting the consumer at the center 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 5 of our business divisions showing good operational and strategic progress in the first half of the year. Some highlights include, within higher education, we've continued to make good progress with initiatives that will make us a more sustainable, predictable digital business, including today's launch of Pearson+. In English Language Learning, we're talking to corporations who require help enabling their workforces to reach professional-grade English. Pearson offers the capabilities to deliver end-to-end solutions, and we're well advanced in creating a model to drive profitable growth and scalability.

In our Workforce division, we're deliberately treating this as a start-up, really creating an entrepreneurial culture so that we can move very quickly. We've 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's 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.

Thanks, Andy, and hi, everyone. We've delivered a good first half performance with sales growing 17%, driven by recovery from last year's COVID impact as well as a strong performance in virtual stores. You'll remember that I said in H1 would be the last time we'd report under this divisional format. Going forward, we'll report under our 5 new global business divisions.

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

Now walking through the details for the first half. Global Online Learning revenue grew 25% with virtual schools up 43%, driven by those strong enrollments for the 2021 academic year as well as growth in U.S. district partnerships. Online Program Management revenue grew modestly with strong underlying growth offset by discontinued programs, the impact of which finishes this year.

Global Assessment revenue grew 34%, with growth across all divisions, following the closure of test centers and schools as well as exam cancellations in Q2 last year. VUE 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 in Canada, which more than offset the 2% decline in U.S. higher education courseware. We're 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.

Moving on to profit. At a group level, the operating leverage from the sales upside cost and margin savings and favorable 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 in OPM more than offsetting continued virtual schools investment and the impact of discontinued programs.

Global Assessment also grew profit 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 in enabling functions, costs reduced due to transformation cost savings as we continue to focus on cost efficiency.

Turning to cash and the balance sheet. Cash performance was strong in the first half with a positive operating cash flow of GBP 10 million. That cash flow 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 GBP 0.6 billion, a GBP 0.3 billion improvement since this time last year, given strong operating cash and disposal proceeds offset by dividends and tax. 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.

Moving to the outlook for the rest of the year, whilst we're 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 enrollments to be broadly flat for the '21/'22 academic year and that discontinued programs in OPM 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 in mix from print and bundles to platform and eText will be somewhat offset by recapturing the secondary market and enrollment recovery. The revenue impact of Pearson+ 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 of Australia, where borders are now expected to remain closed until 2022.

Workforce skills revenue will grow given the strong fundamentals of the business and the investments we've made. And in assessments and qualifications, there'll be growth in the U.S. student assessment with some of those exams shifting from spring to fall, offset by a weaker performance in Professional Certification after a strong H2 2020 performance when we benefited from that pent-up demand.

As mentioned at our full year results, we're planning on investing an additional GBP 50 million to GBP 60 million in the business this year, including spend on Pearson+, 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'll pass back to Andy, who's going to talk a bit more about our strategic progress. Andy?

Thanks, Sally. The strategy that I announced in March was all about ensuring that we're set up to capitalize on the 3 big growth opportunities that I've identified for Pearson. The pandemic has only served to accelerate these opportunities, as highlighted by the adjustments that we've all made to adapt to a more digital and hybrid way of working and learning. These 3 opportunities will not only benefit Pearson but most importantly, will benefit our consumers as we'll 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 nonfinancial KPIs to measure and track our strategic progress. Together with our financial metrics, they will allow us to measure but more importantly, drive and incentivize performance against our new strategy.

The first 3 KPIs you can see are all about tracking the success of our products, how effective they are, and how we engage with consumers. And also, as you'd expect, given our purpose, we're committed to supporting our employees in their development, building an inclusive culture with diverse talent as well as our previously announced goal of being net carbon 0 by 2030. We'll update on progress against all of these metrics as we go through the year.

Looking ahead to the second half of the year and beyond, we'll be focusing on 3 main areas where we see the most attractive opportunities for growth. In workforce skills, I mentioned earlier that we're in advanced discussions with several large corporates in the B2B space. We're now looking to convert those into partnerships.

We'll continue to invest in our capabilities in English Language Learning, particularly in the high-growth online area where there's a real tailwind behind the sector as more people realize the possibilities and the benefits of learning online, and we'll continue to scale our direct-to-consumer capabilities, building on the launch of Pearson+. This is a clear priority for Pearson as we aim to be at the vanguard of digital learning, producing the best learning products for more people all over the world.

As we mentioned in March, we've been working on something new that's going to become Pearson's flagship higher-education product. Today, we're launching our new college learning app, Pearson+ into the market in time for return to school. We're delivering this exciting new service through an app, and we're very proud of what we've created.

But it's far more than just an app. It's a new learning service delivery model, and we're confident that it's going to be a major step forward for our consumers and for Pearson. Together with Revel, MyLab and Mastering, Pearson+ is poised to help us drive both consumer and revenue growth for Pearson.

Now I know you're anxious to hear more details about all 3, and I'm excited also to introduce our new fall product line to you. So to do that, I thought I'd take us all back to school. So you can understand these products through the eyes of our consumers, our students and see just how transformational they will be for those students and for Pearson.

(presentation)

I hope that you enjoyed the video, which gives you a real sense of our ambition. We want to build long-term relationships with consumers, accelerate the recapture of sales from the secondary market, create opportunities to expand into international markets and also develop new partnerships.

And all of this is just the beginning. We're going to have that Q&A in a moment, but I thought, first of all, I'd invite Mike Tschudy, our Head of User Experience Design and someone who's helped lead the development of Pearson+ to give us a quick demo of the app. Mike?

Thanks, Andy. I'm really excited to show you all the Pearson+ application. In all my years of working for companies like eBay, WebMD, Intuit and Apple, I've never seen a team work so hard with such focus to deliver such an amazing product in such little time. Let me click in and let's take a tour.

So our user's going to put in their user name and password, and then they're going to go through the first-time experience. We're going to tell them how they can listen to this anywhere. They can study any time, and it's all here. This is our promise all in one place.

We come to the home page, and the first thing they see are the textbooks that brought them here in the first place. So they have the Campbell Biology. They have authors, and this is smart thinking. This is the Pearson tutorial service as well as the bundled eText that comes with Mastering and MyLabs, and then here's our mascot [Mojo] that was the project code name.

I'm going to add another textbook, and we bring up the entire Pearson catalog all in the palm of your hand, type in economics and up comes all the economic textbooks we have, in this case, our user's looking for Economics Today. She clicks on it, adds it to her list. And here it is. It's really that simple.

Let me take you on a tour of the textbook itself. So I'm going to click into the read, and here, I have the ability to navigate back home, bookmark the page, and I have the toolbar. I'm going to hide the toolbar for now, and let's click into the body of the text. Now the student can highlight, add notes and then be able to save those notes and use them for another time. I'm going to click on the toolbar, and here is the scrubber feature. This allows the student to quickly jump to different sections. She might want to bookmark that section and then navigate back, and we remember her position.

I'm now going to move to the table of contents. In the table of contents, I can jump to any of those sections. I can also see all my bookmarks in one place as well as any recently visited sites. Here, I have a very powerful search tool. Many eText products today only search on the body of the text. We search on everything. We search on your notes, your highlights, any media that we've captured, images in the textbook as well as the content in key terms.

Another powerful feature and one most requested by our students in our research is audio. They listen to their textbooks as they commute to school or walking from one class to another. Here, you can minimize it and listen to it while you look at the text, or you can hide it altogether.

Here is our notebook section. We aggregate all the notes you may have taken as you read, all in one place. You can sort and filter by chapters and you can also sort and filter by colors. We know students like to color code their highlighted text. And then you can also export to PDF so you can study in whatever format you'd like.

And then here is our study section. We allow students or enable students to create their own flashcards. We also auto generate practice questions as well as key terms that you can quiz yourself on. I'm going to quickly click in to the practice flashcards. And here, I can just flip, and then I get my results. I can choose to practice again, or I can focus on the ones that I got incorrectly.

We'll navigate back. And then the last piece is the tech settings. This allows us or the user to really change the formatting, increase font size, move from a san serif to a serif. Move to sepia or a dark tone. This provides a lot of powerful accessibility benefit to the students, and we'll be continuing to invest in accessibility over the long term of this product.

Now I'm going to go back to the home page. This is just the beginning. We're really excited. The future is really laid out. We have an amazing road map coming up. I can't tell you about that. But this is going to be a product that we continue to invest in, and we're going to treat it like a proper consumer product that people want to use, not that the people have to use.

So I'm going to hand it back over to you, Andy.

Thanks a lot, Mike. So in summary, we're making great progress. We've rapidly implemented the group's reorganization into 5 focused businesses. Our strong leadership team is now in place and helping me to evolve our culture across Pearson.

We're further strengthening our commitment to transparency and accountability with the introduction of our new business and operational KPIs today. The strategic review of our international courseware local publishing businesses is now largely complete. And finally, we've made strong progress with our direct-to-consumer strategy with the launch of Pearson+ today.

And with all of that, Sally and I will now be very happy to take your questions. Over to you, Jo.