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Pearson, the world’s learning company, is today providing an update on Q1 trading and announcing further initiatives to simplify our company, improve profitability and focus on the largest opportunities in global education. Building on our recent simplication actions and the strategic acceleration of our digital transition, and following an extensive benchmarking exercise, we plan to reduce Pearson’s cost base exiting 2019 by £300m on an annualised basis. We are also announcing a strategic review of our K12 courseware publishing business. These actions will create a more scaleable, more digital business capable of growth and margin improvement. Key headlines include:
Q1 Trading in line with guidance provided at our Full Year 2016 results Sales in the first three months increased 6% in underlying terms led by growth in revenues in North American higher education courseware, professional certification, Online Program Management (OPM), US K12 courseware, South African school textbooks and UK student assessment, offset by expected declines in US student assessment and in Learning Studio, a higher education learning management system which is being retired; and declines in Middle East and India due to business exits.
Pearson’s sales are always significantly weighted towards the second half of the calendar year. As expected, the phasing in our North American higher education courseware business in 2017 is positive in the first quarter, due to higher gross sales and lower returns than prior year. The underlying market pressures we have previously described in this business are still expected to impact gross sales primarily in the second half. Our UK student assessment and South African businesses have also both benefited from positive phasing in Q1, which we expect to unwind over the rest of the year.
Net Debt: At the end of 2016, Pearson’s net debt was £1.1bn. Our net debt at the end of the first quarter was unchanged, reflecting strong working capital management and favourable exchange rate movements offset by a part payment of the previously announced pension fund liability related to the creation of PRH in 2013. As announced in February we have completed the early repayment option on our $550m 6.25% Global Dollar bonds 2018.
2017 Outlook unchanged Our guidance range remains for operating profit in 2017 of £570m to £630m, adjusted earnings per share of 48.5p to 55.5p and cash conversion in excess of 90%. This is based on our existing portfolio, a 2017 net interest charge of £74m, a tax rate of approximately 20%, and exchange rates on 31 December 2016. We will give more detail on the timing and costs of further restructuring plans at our Interim results.
Outlook for H1: Q1 revenues benefited from positive phasing, as predicted, although we expect the majority of this will unwind in Q2. This is in line with our expectations and consistent with our unchanged full year operating profit guidance.
Exchange rate sensitivity: Our guidance for 2017 is based on exchange rates prevailing at 31 December 2016. In 2016 we calculated that a 5c movement in the US Dollar exchange rate to Sterling would impact Adjusted EPS by around 2p.
Continuing the simplification of Pearson Restructuring: We have removed more than £650m of cost from Pearson in two significant restructuring programs over the last four years and simplified the company considerably. Whilst this has made us a leaner organisation, it has also helped to create a significant incremental opportunity to reshape further our entire cost base around our increasingly digital business.
We have engaged in a further rigorous cost benchmarking process across our business and have identified a further significant additional cost saving opportunity, the largest parts of which are in general and administrative expenses and in North America. We are currently undertaking the detailed planning to enable us to deliver annualised cost savings of £300m by the end of 2019. We will give more detail on the timing and costs of these plans at our Interim results.
Strategic review of US K12 courseware publishing: In US schools we address the biggest opportunities with products and services which combine content and assessment powered by technology, via our digital virtual school business Connections Education, our increasingly digital school assessment business and the use of our higher education courseware in High School. In contrast, our US K12 courseware publishing business has seen a slow pace of digital adoption in basal courseware, high capital intensity and a challenging competitive and market environment and as a result we are today announcing that we have initiated a strategic review of this business.
Penguin Random House: as previously announced, we have issued an exit notice regarding our 47% stake in Penguin Random House and are in active negotiations with our JV partner Bertelsmann with a view to selling our stake or recapitalising the business and extracting a dividend.
Direct Delivery: We have begun the previously announced processes to explore a potential partnership for our English language learning business Wall Street English (WSE) and the possible sale of our English test preparation business Global Education (GEDU).
Digital transformation and tactical actions on track Our Global Learning Platform development and Digital Roadmap are on track to deliver new digital products with greater personalisation, enhanced engagement and cognitive tutoring. In Fall 2017 we will launch new digital courseware products in Business & Economics from leading authors including Professor Glen Hubbard and will pilot new innovative courseware in Developmental Math.
We have signed 29 new institution-wide Direct Digital Access deals in Q1 with a strong and growing pipeline of new deals.
In OPM, we announced a new UK partner in the University of Leeds, a member of the UK’s Russell Group of 24 leading universities.
Implementation of our partner print rental program is progressing well ahead of launch in Fall 2017. We have signed partnership agreements with Chegg and IndiCo and continue to negotiate with other key channel partners.
We have reduced prices for eBook rental across 2,000 titles and have seen positive early indications on the impact on demand, though the majority of our selling season is still ahead of us.
more detail at: https://www.pearson.com/corporate/news/media/news-announcements/2017/05/pearson-2017-q1-trading-update–unaudited-.html