Pearson : 2020 half-year results

Included in this release:

• Full press release and financials
  
• Details of webcast for analysts and investors
  
• Presentation slides from the analyst and investor webcast (available from 0830 BST)
  
• Speaker photos

Interim results for the six months to 30th June 2020 (Unaudited)

Significant disruption due to COVID-19, June showing improving trends

Highlights Underlying revenue down 17% on prior year largely due to COVID-19

• Group sales decline largely reflects test centre and school closures in Global Assessment and International. After deterioration from March to May we saw improving sales trends in June.
  
• Global Online Learning sales grew 5% due to strong enrolments in new and existing schools in Virtual Schools and slight revenue growth in OPM with good growth in continuing programs offset by discontinued programs.
  
• Global Assessment declined 27% due to the impact of test centre closures in Professional Certification (Pearson VUE), cancellation of spring testing in Student Assessment and school closures impacting Clinical Assessments.
  
• North American Courseware declined 14% with US Higher Education Courseware declining in line with expectations due to the continuation of trends seen in 2019, and a modest impact from the closure of campus-based bookstores. We saw a weaker performance in courseware in Canada largely as a result of school and bookstore closures.
  
• International declined 23% due to the disruption in businesses which rely on physical locations including school and test centre closures.
  

Adjusted operating loss of £(23)m with COVID-19 impact partially offset by cost savings

• Adjusted operating profit declined £167m to a loss of £(23)m (H1 2019: £144m) with a profit impact of c.£140m from COVID-19 trading pressures after cost mitigations. There was an expected trading decline of £20m, with impact from inflation of £15m, other operating factors of £15m, disposals of £14m partially offset by restructuring savings of £35m and FX of £2m.
  

Strong balance sheet with H1 net debt at £982m (H1 2019: £1,376m) including leases of £662m

• Interim dividend 6.0p (H1 2019: 6.0p).
• Available liquidity of approximately £1.6bn at the end of the period.

Statutory results

• Sales decreased by 18% or £337m in headline terms due to trading and disposals partially offset by FX.
  
• Statutory operating profit from continuing operations was £107m in the first half of 2020 (H1 2019: £37m) with adjusted operating profit impact offset by profit on disposal of Penguin Random House and reduced restructuring costs.
  
• Statutory EPS 6.3p (H1 2019: 6.1p).

Strategic progress

• In Virtual Schools we saw a 61% increase in applications for the 2020/2021 academic year compared to the first half last year.
  
• Growth in the VUE Online Proctoring offering, where testing volumes grew to 580,000 compared to 66,000 in H1 2019.
  
• In OPM, in H1 improving learner net promoter scores (NPS) are leading to higher retention rates. We are in discussion with some of our biggest university partners about the integration of Pearson courseware and other assets, to deliver continuing improvements in the learning experience. We are investing in the digitisation of recruitment and enrolment processes which are starting to deliver productivity gains. Applications for continuing courses in OPM are up significantly versus H1 last year.
  
• We are working towards a Fall release of Pearson Pathways, an engine to help learners understand the skills they need for the job they want and recommend the right courses and credentials.
  
• The digital roadmap is on track with the launch of additional Revel titles on the Pearson Learning Platform (PLP) for back to school, enhancing the faculty and student experience. We are also launching a direct to learner storefront offering that will enable learners to easily find, subscribe to, and access their digital texts directly from Pearson.
  
• We have accelerated the shift to digital in Higher Education Courseware with digital registrations including eBooks up by 5% showing signs of secondary market recapture.
  
• Our recently completed simplification programme has enabled the identification of a further c.£50m of cost savings to be realised in 2021 through further cost efficiencies.
  

2020 outlook - anticipate recovery but uncertainty remains

• Global Online Learning - will benefit from higher Virtual Schools revenue following strong growth in applications with OPM in line with expectations.
  
• Global Assessment - Pearson VUE recovery is expected through the delivery of pent-up demand, assuming test centres remain open; potential further modest impact in H2 for US Student Assessment and US Clinical Assessment.
  
• North American Courseware - continuing print declines and modest digital growth, uncertainty on enrolments, and school closures which could impact our Advanced Placement sales.
  
• International - H2 is expected to recover as lockdowns ease and schools, private language schools and test centres reopen. The UK Government has now approved Pearson to open bookings and start delivering Secure English Language Tests (SELT) for UK Visas & Immigration (UKVI).
  
• We now expect our full year net interest charge to be c.£60m after issuing a 10-year Education Bond of £350m in June 2020.
  
• At this stage, it remains difficult to predict the ultimate disruptive impact of the COVID-19 pandemic on Pearson's performance for the full year. However, the second quarter performed in line with our expectations and, while risks remain, particularly around enrolments in the back to school period and local lockdowns impacting schools reopenings, based on our current assessment of these trends we are on track to deliver adjusted operating profit broadly consistent with market expectations.
  

John Fallon, Chief Executive said:
'Covid-19 has had a major impact on trading, but we are encouraged by the improving trends and pick up in sales in June. Uncertainty remains, but the purpose, grit, speed and ingenuity shown by Pearson colleagues is helping educators and learners around the world to adapt to the pandemic and will ensure that the company itself emerges stronger from it. The long-term shift to online learning is accelerating. The lead indicators of digital take up of our products are encouraging, and signals that our focus on experience, outcomes and affordability will prove a winning combination'

Sidney Taurel, Chairman said:
'I would like to acknowledge the leadership of the Executive team and all employees for their hard work and achievements to support our stakeholders during the pandemic.

'We have a strong balance sheet and have reacted rapidly to manage cash and cut costs to preserve maximum liquidity. As a result of our strong financial position, I am pleased to confirm we are declaring an interim dividend of 6.0p for our shareholders.

'The search for a new Chief Executive has seen the Board engage with a wide range of highly qualified candidates. The process is well advanced.'

Financial summary

£m	H1 2020	H1 2019	HEADLINE GROWTH	CER GROWTH	UNDERLYING GROWTH
BUSINESS PERFORMANCE
Sales	1,492	1,829	(18)%	(20)%	(17)%
Adjusted operating (loss)/profit	(23)	144	(116)%	(117)%	(119)%
Operating cash flow	(214)	(129)
Adjusted (loss)/earnings per share (basic)	(5.1)p	13.2p
Dividend per share	6.0p	6.0p
Net debt	(982)	(1,376)
STATUTORY RESULTS
Sales	1,492	1,829
Operating profit	107	37
Cash used in operations	(117)	(117)
Basic earnings per share	6.3p	6.1p

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]

Media

Tom Steiner [phone]

Gemma Terry [phone]

Brunswick

Charles Pretzlik, Nick Cosgrove, Simone Selzer [phone]

Webcast details

Pearson's results presentation for investors and analysts will be audiocast live today from 0830 (BST) via www.pearson.com

Audience URL: https://www.speakservecloud.com/register-for-call/778920eb-312b-458a-b95e-9fa068d64e3d

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 (https://www.pearson.com/investors/financial-results-and-annual-reports-and-accounts.html). 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.

Financial overview

Profit & loss statement. Pearson's sales decreased by 18% in headline terms to £1,492m (H1 2019: £1,829m) with portfolio adjustments reducing sales by £53m, and currency movements increasing revenue by £25m. Stripping out the impact of portfolio changes and currency movements, revenue was down 17% in underlying terms due to 5% growth in Global Online Learning, more than offset by a 27% decline in Global Assessment, a 23% decline in our International segment and a 14% decline in North American Courseware. COVID-19 impacted sales by c.£260m in the period. After deterioration from March to May we saw improving sales trends in June. Underlying sales for the month of April declined 35% versus April 2019, with a decline of 32% in May and 19% in June.

Adjusted operating profit declined to a loss of £(23)m (H1 2019: £144m) with a profit impact of c.£140m from COVID-19 trading pressures after cost mitigations. There was an expected trading decline of £20m, with impact from inflation of £15m, other operating factors of £15m, disposals of £14m partially offset by restructuring savings of £35m and FX of £2m.

Net interest payable to 30 June 2020 was £27m (H1 2019: £18m). The increase is mainly due to interest on tax, with credits recorded in 2019 not being repeated in 2020.
Our adjusted tax benefit was £11m (H1 2019: charge of £23m).

Adjusted losses for the period were £(39)m (H1 2019: earnings of £102m) and adjusted losses per share were (5.1)p (H1 2019: earnings of 13.2p).

Cash generation. Net cash used in operations was £117m in both 2019 and 2020, with higher operating cash outflow offsetting lower restructuring costs paid. Operating cash outflow increased by £85m from £129m in 2019 to £214m. This increase is largely due to lower adjusted operating profit partly offset by reduced bonus payments.

Statutory results. Our statutory operating profit of £107m in H1 2020 compares to a profit of £37m in H1 2019, the increase was largely due to the gain on sale of Penguin Random House.

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.

Balance sheet. H1 net debt at £982m (H1 2019: £1,376m) including leases of £662m.

Dividend. In line with our policy, the Board is declaring an interim dividend of 6.0p (2019: 6.0p) payable on 21 September 2020.

Operational review - Segment

£ millions	H1 2020	H1 2019	HEADLINE GROWTH	CER GROWTH	UNDERLYING GROWTH
SALES
Global Online Learning	316	288	10%	6%	5%
Global Assessment	397	525	(24)%	(27)%	(27)%
North American Courseware	375	475	(21)%	(24)%	(14)%
International	404	541	(25)%	(23)%	(23)%
Total sales	1,492	1,829	(18)%	(20)%	(17)%
ADJUSTED OPERATING (LOSS)/PROFIT
Global Online Learning	24	41	(41)%	(44)%	(41)%
Global Assessment	71	174	(59)%	(61)%	(61)%
North American Courseware	36	28	29%	21%	(11)%
International	46	120	(62)%	(60)%	(60)%
Enabling Functions	(201)	(244)	18%	19%	19%
Penguin Random House	1	25	(96)%	(96)%	-
Total adjusted operating (loss)/profit	(23)	144	(116)%	(117)%	(119)%

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

Global Online Learning (21% of revenue)

Underlying revenue in Global Online Learning grew 5% due to strong enrolments in new and existing schools in Virtual Schools and slight revenue growth in OPM, with good growth in continuing programs offset by discontinued programs. Headline revenue grew 10% due to FX and the acquisition of Lumerit.

Adjusted underlying and headline operating profit declined 41% due to sales growth more than offset by the investment in our Virtual Schools learning platform and enrolment and customer care support and margin impact in OPM due to discontinued programs, severance as we digitise our recruitment and enrolment processes, and investment in new programs.

Virtual Schools

In Connections Academy, our Virtual Schools business, revenue grew strongly due to growth in enrolments in existing and new schools. We have seen a surge in applications, up 61% in the first half compared to 2019, as many explore full time digital learning for the first time. We expect a portion of these applications to translate into increased enrolments for the 2020/2021 school year. Pearson is well placed to benefit from the increased interest in and appetite for online learning. We are increasing the capacity in our existing schools as well as seeing potential interest from new states which have not previously considered virtual schooling as a choice for students.

Three new full-time online, state-wide partner schools will open in the 2020-21 school year. Combined with two contract exits this will bring the total partner schools to 43 in 29 states. Additionally, the online private school, Pearson Online Academy continues to serve students across the globe.

Online Program Management

In Online Program Management, revenue grew slightly. As detailed in our full year results, we have deliberately slowed the rate of growth in this business in order to transition to a new operating model. Overall course enrolments declined by 12% at the half year with strong enrolment growth in undergraduate and international markets and good enrolment growth in postgraduate more than offset by discontinued programs. Student numbers increased 17% excluding discontinued programs and declined 5% including discontinued programs.

In H1, improving learner net promoter scores (NPS) are leading to higher retention rates. We are in discussion with some of our biggest university partners about the integration of Pearson courseware and other assets, to deliver continuing improvements in the learning experience. We are investing in the digitisation of recruitment and enrolment processes which are starting to deliver productivity gains. Applications for courses in OPM are up significantly versus half year last year.

We continue to refine our portfolio and focus on programs linked to employability. At the half year we have launched 52 new programs and discontinued 20 programs and have a total of 33 partners and 418 programs globally.

With growing demand from universities to support online learning and unemployment rising rapidly, we are launching a range of initiatives that provide learners with high quality, flexible and affordable options to acquire new skills and knowledge that will enhance their employability.

This includes the May launch of UK Learns - an online portal which contains free, digital, skills-based courses to help re-skill and broaden employability prospects for employees who have been impacted by COVID-19. Building on the launch of UK Learns, we are working towards a Fall release of Pearson Pathways, an engine to help learners understand the skills they need for the job they want and recommend the right courses and credentials. It will serve as the umbrella platform for our premier degree and alternative credential offerings, enabling learners to find the right certified learning pathways and degrees for them.

Global Assessment (27% of revenue)

Underlying revenue declined 27% due to COVID-19 with a similar performance across all three divisions. Headline revenue declined slightly less at 24% due to FX.

Adjusted operating profit declined 61% on an underlying basis and 59% in headline terms due to the COVID-19 impact on trading, partially offset by mitigating actions.

US Student Assessment

In Student Assessment, revenue declined with the cancellation of spring 2020 testing, impacting adjusted operating profit by £20m in the first half after mitigating actions.

Student Assessment won new contracts or signed renewals in several key incumbent states including Arizona, Minnesota, New Jersey, Tennessee and Virginia, as well as with the District of Columbia and Puerto Rico which will benefit us in 2021.

Pearson VUE

In Pearson VUE, underlying revenue declined as a result of the COVID-19 outbreak leading to the closure of test centres from March, with most centres being reopened to all customers by the end of May but at reduced capacity to enable social distancing, offering longer hours to recover pent-up demand. The closures impacted H1 adjusted operating profit by £74m after mitigating actions.

We worked with clients who were able to take advantage of our VUE Online Proctoring offering, where testing volumes grew to 580,000 compared to 66,000 in H1 2019. There was particularly strong uptake in our IT segment where total volumes were up 20% on H1 2019.

In H1, Pearson VUE continued to win new business remotely, signing 22 new agreements as well as renewing 38 existing contracts.

US Clinical Assessment

In Clinical Assessment, revenue declined as a result of school closures and disruption in the delivery of routine medical procedures, partially mitigated by an increase in use of our telepractice digital service, supported by a 33% increase in the number of users accessing our Q-interactive digital platform.

North American Courseware (25% of revenue)

Underlying revenue declined 14% with an expected decline in US Higher Education Courseware due to the continuation of trends seen in 2019, and a modest impact from the closure of campus-based bookstores. Revenue also declined in courseware in Canada largely as a result of school and bookstore closures. Headline revenue declined 21% due to this and the disposal of our US K12 courseware business in 2019 partially offset by FX.

Adjusted operating profit declined 11% on an underlying basis due to the impact of trading partly offset by restructuring and discretionary savings. Adjusted operating profit grew 29% on a headline basis mainly due to the disposal of our US K12 courseware business in 2019.

US Higher Education Courseware

US Higher Education Courseware declined in line with expectations in the first half due to the continuation of trends seen in US Higher Education in 2019, including further expected declines in print revenue, and a modest impact from the closure of campus -based bookstores and schools. Product returns are trending lower, in line with our expectations.

The pandemic has accelerated trends in moving to digital and subscription models. Although the first half is a smaller part of the business, we saw a 5% increase in digital registrations including eBooks. Digital sales increased slightly on a net actual basis as demand for higher priced print product shifts to more affordable digital options.

We continue to make good progress with our strategy of shifting from ownership to access, signing 94 new institutions in Inclusive Access in the first half of the year. This takes the total number of not for profit institutions signed to 873 with Inclusive Access sales up by c.28% from H1 2019.

In the seasonally weighted second half of the year, we expect trends seen in 2019 to continue with further unbundling of packages, growth in digital volumes and later purchase of product as we move to a digital first model for back to school 2020. Uncertainty remains around college enrolments, and school closures which could also impact our Advanced Placement sales.

Our PLP development and digital roadmap are on track for a Fall back to school launch of a direct to learner storefront offering that will enable learners to easily find, subscribe to, and access their digital texts directly from Pearson. Additionally, we will launch feature improvements and additional titles to our Revel product that will enable educators to organise their classes and receive insights about students' progress whilst also providing students with an improved learning experience.

International (27% of revenue)

Underlying revenue declined 23% and 25% in headline terms due to school and test centre closures impacting trading across our markets in the UK, APAC, Continental Europe, Latin America, China and India, and Middle East and Africa.

Adjusted operating profit declined 60% in underlying terms and 62% in headline terms due to the impact of trading partially offset by mitigating actions.

School & HE Courseware

School & HE courseware underlying sales were down significantly due to school and bookstore closures impacting purchases across Greater China, APAC and Middle East as well as in the wider markets.

Assessment

In the UK, qualifications revenue was down with a modest impact on operating profit due to the cancellation of GCSE, A level and vocational exams, as well as the end of the NCT contract, partially offset by underlying price and volume growth.

Clinical Assessment declined due to the impact of social distancing and lockdown measures on face-to-face assessments in Europe.

English

Pearson Test of English volumes were down 43% due to the closure of testing centres across key markets from March. In May, centres began reopening with reduced capacity and June bookings showed signs of recovery. The UK Government has now approved Pearson to open bookings and start delivering Secure English Language Tests (SELT) for UK Visas & Immigration (UKVI).

English Courseware declined significantly, largely due to the temporary closure of private language schools in Greater China as well as across other markets. In some markets these schools have started to reopen.

In Brazil, English Services were substantially down as the English Language School franchise premises were closed and enrolments impacted, however the business quickly switched to offering virtual classes.

School & HE Services

School services were down slightly due to our Sistemas business in Brazil, where schools were closed from March through June, with June showing a slight recovery.

In South Africa, HE services revenue declined slightly as the temporary closure of Pearson Institute of Higher Education was mitigated by conversion to online teaching, with students able to continue their studies virtually.

Enabling Functions

Enabling Functions costs are 18% lower in headline terms and 19% in underlying terms due to restructuring and discretionary savings.

Penguin Random House

On 1 April 2020, Pearson completed the sale of its remaining 25% in Penguin Random House for £531m to Bertelsmann SE & Co KGaA.

FINANCIAL REVIEW Operating result

Due to seasonal bias in some of the Group's businesses, Pearson typically makes a higher proportion of its sales and the majority of its profits in the second half of the year. Operating cash flow at the half year is a cash outflow reflecting the seasonal increase in working capital. In addition to this normal seasonality, the impact of COVID-19 has also affected the first half results in 2020 as outlined above.

Sales for the six months to 30 June 2020 decreased on a headline basis by £337m or 18% from £1,829m for the six months to 30 June 2019 to £1,492m for the same period in 2020 and adjusted operating profit decreased by £167m or 116% from £144m in the first half of 2019 to a loss of £23m in the first half of 2020 (for a reconciliation of this measure see note 2 to the condensed consolidated financial statements).

The headline basis simply compares the reported results for the six months to 30 June 2020 with those for the equivalent period in the prior year. We also present sales and profits on an underlying basis which exclude the effects of exchange, the effect of portfolio changes arising from acquisitions and disposals and the impact of adopting new accounting standards that are not retrospectively applied when relevant. Our portfolio change is calculated by taking account of the contribution from acquisitions and by excluding sales and profits made by businesses disposed in either 2019 or 2020. Portfolio changes mainly relate to the sale of our K12 school courseware business in the US in 2019 and the sale of our remaining interest in PRH in the first half of 2020. Acquisitions, including Lumerit in 2019, had only a small impact on reported sales and profits.

On an underlying basis, sales decreased by 17% in the first six months of 2020 compared to the equivalent period in 2019 and adjusted operating profit decreased by 119%. Currency movements increased sales by £25m and adjusted operating profit by £2m and portfolio changes decreased sales by £53m and adjusted operating profit by £14m. There were no new accounting standards adopted in the first half of 2020 that impacted sales.

Adjusted operating profit includes the results from discontinued operations when relevant but excludes intangible charges for amortisation and impairment, acquisition related costs, gains and losses arising from acquisitions and disposals and the cost of major restructuring. A summary of these adjustments is included below and in more detail in note 2 to the condensed consolidated financial statements.

all figures in £ millions	2020 half year	2019 half year	2019 full year
Operating profit	107	37	275
Add back: Cost of major restructuring	-	64	159
Add back: Intangible charges	51	49	163
Add back: Other net gains and losses	(181)	(6)	(16)
Adjusted operating (loss) / profit	(23)	144	581

In May 2017, we announced a restructuring programme, to run between 2017 and 2019, to drive significant cost savings. This programme began in the second half of 2017 and costs incurred relate to delivery of cost efficiencies in our enabling functions and US higher education courseware business together with rationalisation of the property and supplier portfolio. The restructuring costs in 2019 relate predominantly to staff redundancies. The restructuring programme was largely completed at the end of 2019 and there were no significant restructuring costs in the first half of 2020.

Intangible amortisation charges to the end of June 2020 were £51m compared to a charge of £49m in the equivalent period in 2019. Although there has been a reduction in acquisition activity in recent years and the disposal of PRH has eliminated the Group's share of associate intangible amortisation, this has been offset by adjustments to amortisation profiles and impairments recorded mainly relating to content, contract and trade mark intangibles in the Global Assessments and International businesses. In the second half of 2019, there was an additional £65m impairment charge relating to acquired intangibles in the Brazil business following a reassessment of the relative risk in that market. Other net gains in 2020 largely relate to the sale of the remaining interest in PRH and in 2019, largely relate to the sale of the US K12 business.

The statutory operating profit of £107m in the first half of 2020 compares to a profit of £37m in the first half of 2019. The increase in 2020 is mainly due to the gain on sale of PRH and the reduction in restructuring costs which was more than enough to offset the impact of COVID-19 on trading profits.

Net finance costs

Net interest payable to 30 June 2020 was £27m, compared to £18m in the first half of 2019. The increase is mainly due to interest on tax, with credits recorded in 2019 not being repeated in 2020, and higher interest charges on leases.

Finance income relating to retirement benefits has been excluded from our adjusted earnings as we believe the income statement presentation does not reflect the economic substance of the underlying assets and liabilities. Also included in the statutory definition of net finance costs (but not in our adjusted measure) are interest costs relating to acquisition or disposal consideration, foreign exchange and other gains and losses on derivatives. Interest relating to acquisition or disposal consideration is excluded from adjusted earnings as it is considered to be part of the acquisition cost or disposal proceeds rather than being reflective of the underlying financing costs of the Group. Foreign exchange and other gains and losses are excluded from adjusted earnings as they represent short-term fluctuations in market value and are subject to significant volatility. Other gains and losses may not be realised in due course as it is normally the intention to hold the related instruments to maturity (for more information see note 3 to the condensed consolidated financial statements).

In the period to 30 June 2020, the total of these items excluded from adjusted earnings was a charge of £45m compared to a charge of £6m in the first half of 2019. Finance income relating to retirement benefits decreased from £7m in the first half of 2019 to £3m in 2020 reflecting the comparative funding position of the plans at the beginning of each year and lower prevailing discount rates. In 2020, finance charges relating to the revaluation of the K12 disposal proceeds of £14m were recorded (see note 16 to the condensed consolidated financial statements) and there were increases in losses on long-term interest rate hedges and increases in foreign exchange losses on unhedged inter-company loans and cash and cash equivalents in the first half of 2020 compared to the first half of 2019. For a reconciliation of the adjusted measure see note 3 to the condensed consolidated financial statements.

Taxation

Taxes on income in the period are accrued using the expected tax rates that would be applicable to forecast annual earnings. The reported tax on statutory earnings for the six months to 30 June 20 was a benefit of £13m compared to a benefit of £35m in the period to 30 June 2019. The benefit in the first half of 2019 included a £37m credit relating to the sale of the K12 business. In 2020 there was no tax payable relating to the PRH profit on sale. The tax on other items reflects the overall mix of profits projected for the full year and the tax rates expected to apply to those statutory profits.

The effective tax rate on adjusted earnings for the period to June 2020 was 21% compared to an effective rate of 18% in the first half of 2019. This rate is lower than the average statutory rate applicable to the countries we operate in as it includes the benefit of tax deductions attributable to amortisation of goodwill and other intangibles. This benefit more accurately aligns the adjusted tax charge with the expected rate of cash tax payment. For a reconciliation of the adjusted measure see notes 4 and 5 to the condensed consolidated financial statements.

In the six months to 30 June 2020 there were net tax repayments received of £20m, principally a result of repayments in respect of prior year items in the US and UK. In the first half of 2019, there was a net payment of £8m.

Other comprehensive income

Included in other comprehensive income are the net exchange differences on translation of foreign operations. The gain on translation of £154m at 30 June 2020 compares to a gain at 30 June 2019 of £25m. The gain in 2020 arises from an overall strengthening of the currencies to which the Group is exposed and in particular the relative strength of the US dollar. A significant proportion of the Group's operations are based in the US and the US dollar closing rate at 30 June 2020 was £1:$1.23 compared to the opening rate of £1:$1.32. At the end of June 2019, the US dollar rate was the same as the opening rate of £1:$1.27 and the gain related to the relative strength of other currencies.

Also included in other comprehensive income at 30 June 2020 is an actuarial gain of £4m in relation to retirement benefit obligations. The gain arises largely from increased asset values with gains in matching assets slightly outweighing liability losses that were mainly driven by the fall in discount rates. The gain in 2020 compares to an actuarial loss at 30 June 2019 of £141m.

Cash flow and working capital

Our operating cash flow measure is used to align cash flows with our adjusted profit measures (see note 17 to the condensed consolidated financial statements). Operating cash outflow increased on a headline basis by £85m from £129m in the first half of 2019 to £214m in the first half of 2020. The increase is largely explained by the drop-through of reduced profit offset by reduced bonus payments.

The equivalent statutory measure, net cash used in operations, was £117m in both 2019 and 2020. Compared to operating cash flow, this measure includes restructuring costs but does not include regular dividends from associates or capital expenditure on property, plant, equipment and software. The increase in the operating cash outflow was partly offset by a reduction in restructuring costs paid from £60m in the first half of 2019 to £24m in the first half of 2020.

Working capital movements in the first six months of 2020 reflect the normal seasonal cash flows at this time of year with a reduction in receivables also being due to lower sales, proceeds received from the K12 disposal and the repayment of loans to PRH. In addition to the cash flows, the balance sheet values have increased due to exchange, with the US dollar strengthening over the course of 2020.

Working capital provisions were reviewed in the light of the impact of COVID-19 on trading with the main areas of focus being adequacy of inventory and bad debt provisions. For inventory, the impact of sales reductions has been applied in inventory obsolescence calculations and has resulted in increases in provisions around the Group. Bad debts have been assessed in the light of additional credit risk. The Group has no significant concentrations of credit risk with most customers including Government funded and private educational institutions and online. However, the use of the expected credit loss model has resulted in revised credit risks for customers in our distributor and retail businesses with a consequent increase in bad debt provision.

Liquidity and capital resources

The Group's net debt reduced from £1,016m at the end of 2019 to £982m at the end of June 2020. The decrease is largely due to the receipt of proceeds from the PRH sale and the receipt of deferred proceeds from the K12 sale which offset the increase in cash used in operations, interest and dividend payments and the cash outflow from the Group's share buy-back programme.

As a result of the COVID-19 pandemic the Group took action to increase its liquidity including pausing the share buyback programme as outlined below and on 4 June 2020, the Group completed the issuance of £350m guaranteed notes maturing 4 June 2030.

The notes bear a coupon of 3.75% and have been issued in accordance with the ICMA Social Bond Principles 2018. The proceeds will be primarily used to finance and re-finance delivery of education in our Connections Academy, BTEC and GED businesses to help achieve the United Nations' 4th Sustainable Development Goal (SDG) for a Quality Education. The social bond framework is a natural progression of Pearson's long-standing commitment to integrating social and environmental sustainability into the business.

In assessing the Group's liquidity, the impact of the COVID-19 pandemic has been modelled under several scenarios to ensure that the likelihood of a prolonged period of disruption has been appropriately considered in assessing the availability of funding to the Group and the ability of the Group to comply with its banking covenants. In addition to the impacts on revenue and profit, the Group has modelled downside scenarios with an impact on its operating cash flows including the normal impact from conversion of profits but also modelling an additional deterioration from adverse movements in working capital. The modelling includes a severe reduction in revenue, profit and cash that impacts 2020 and beyond. The Group believes it has significant financial headroom and is projected to comply with its banking covenants even in the severe scenarios that have been modelled and before considering the potential mitigating actions that could be taken in response to a longer and deeper impact.

The Group continues to work to protect its cash flow and pro-actively manage working capital and at the end of June 2020, the Group had approximately £1.6bn in total liquidity immediately available from cash and its Revolving Credit Facility.

Post-retirement benefits

Pearson operates a variety of pension and post-retirement plans. Our UK Group pension plan has by far the largest defined benefit section. This plan has a strong funding position and a surplus with a very substantially de-risked investment portfolio including approximately 50% of the assets in buy-in contracts and no exposure to quoted equities. We have some smaller defined benefit sections in the US and Canada but, outside the UK, most of our companies operate defined contribution plans.

The charge to profit in respect of worldwide pensions and retirement benefits amounted to £30m in the period to 30 June 2020 (30 June 2019: £27m) of which a charge of £33m (30 June 2019: £34m) was reported in adjusted operating profit and income of £3m (30 June 2019: £7m) was reported against other net finance costs. The reduction in the operating charge is consistent with the reduction in staff numbers.

The overall surplus on UK Group pension plans of £429m at the end of 2019 has increased to a surplus of £438m at the end of June 2020. The increase has arisen principally due to the actuarial gain noted above in the other comprehensive income section. In total, our worldwide net position in respect of pensions and other post-retirement benefits decreased from a net asset of £337m at the end of 2019 to a net asset of £335m at the end of June 2020.

Dividends

The dividend accounted for in the six months to 30 June 2020 is the final dividend in respect of 2019 of 13.5p. An interim dividend for 2020 of 6.0p was approved by the Board in July 2020 and will be accounted for in the second half of 2020.

Share buyback

The share buyback programme, announced in December 2019, commenced on 16 January 2020 and was paused until further notice on 23 March 2020 as a prudent measure while the impact of COVID-19 was assessed. The original intention was to buyback approximately £350m of shares and at the date of pausing the programme approximately 30m shares had been bought back and cancelled at a cost of £176m. The nominal value of these shares, £7m was transferred to the capital redemption reserve.

Businesses held for sale and businesses disposed

In December 2019, the Group announced the sale of its remaining 25% interest in PRH. At the end of December, our share of the assets of PRH had been classified as held for sale on the balance sheet. The business was sold at the beginning of April for $675m realising a profit of £180m.

In March 2019, the Group completed the sale of its K12 business. Total gross proceeds were £200m including £180m of deferred proceeds which included the fair value of an unconditional vendor note for $225m and an entitlement to 20% of future cash flows to equity holders and 20% of net proceeds in the event of a subsequent sale. In the first half of 2020, the Group received $75m (£61m) as an early repayment of the vendor note and a payment in respect of half of the equity interest such that the Group is now entitled to 10% of future cash flows to equity holders and 10% of net proceeds in the event of a subsequent sale.

The cash inflow in the first half of 2020 relating to the disposal of businesses was £589m mainly relating to PRH and the deferred proceeds from K12. In the first half of 2019, the cash outflow from disposals of £100m mainly reflected the deferral of proceeds for K12 and the level of working capital held in this business at the disposal date.

Principal risks and uncertainties

In the 2019 Annual Report, we set out our assessment of the principal risk issues that face the business under the headings: business transformation and change; products and services, talent; political and regulatory risk; testing failure; safety and security; customer experience; harnessing the power of our data; tax; information security and data privacy; intellectual property; compliance; and competition law. We also noted in our 2019 report and accounts that the global COVID-19 pandemic was a risk factor that we were closely monitoring and in subsequent filings, we included further details of how we expect COVID-19 to impact the group's business, results of operations and financial condition. The Group continues to closely monitor developments on a day-by-day basis. The Group's primary focus is on ensuring the safety and well-being of its employees, customers and learners. The Group has invoked its business resilience plans to help support its customers and maintain its business operations.

As local jurisdictions continue to put restrictions in place, the Group's ability to continue to operate its business may be disrupted for an indefinite period of time. If the COVID-19 outbreak continues, the Group may need to continue to limit operations, including due to shutdowns that may be requested or mandated by governmental authorities.

In addition, the spread of COVID-19, which has caused a broad impact globally, may materially affect the Group economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing the Group's ability to access capital, which could in the future negatively affect the Group's liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect the Group's business.

The global outbreak of COVID-19 continues to rapidly evolve. The extent to which COVID-19 may impact the Group's business and operations will depend on future developments, including the duration of the outbreak, travel restrictions and social distancing in the United Kingdom, the United States and other countries where the Group operates, the effectiveness of actions taken by governmental authorities to contain and treat the disease and whether countries where the Group operates are required to move to a tighter lock-down status or return to lock-down where those measures have begun to ease. There is a risk that certain countries or regions where the Group operates may be less effective at containing COVID-19, or it may be more difficult to contain if the outbreak reaches a larger population, in which case the risks described herein could be elevated significantly. The ultimate long-term impact of COVID-19 is highly uncertain and cannot be predicted with confidence.

The principal risks and uncertainties are summarised below and have not changed materially from those detailed in the 2019 Annual Report.

Business transformation and change

The accelerated pace and scope of our transformation initiatives increase our risk to execution timelines and to the business's adoption of change.

Products and services

Failure to successfully invest, develop and deliver innovative, market-leading global products and services that will have the biggest impact on learners and drive growth.

Talent

Failure to attract and retain the talent we need and to create the conditions in which our people can perform to the best of their ability.

Political and regulatory risk

Changes in governments, policy and/or regulations have the potential to impact business models and/or decisions across all markets.

Testing failure

Failure to deliver tests and assessments (e.g. for Pearson UK, Schools and VUE) and other related contractual requirements because of operational or technology issues, resulting in negative publicity impacting our brand and reputation.

Safety and security

A variety of risks that can cause harm to our people, assets and reputation continue to evolve as our company does. While some risk has reduced due to outsourcing and divestiture, the diverse nature of our people's activities require continued focus, resource and improvement to reduce the potential for harm.

Customer experience

Failure of either our current, (or future) operations, supply chain or customer support to deliver an acceptable service level at any point in the end-to-end journey; or to accelerate Pearson's lifelong learner strategy and transformation of our higher education business (direct to consumer business model and online presence).

Business resilience

Failure to plan for, recover, test or prevent incidents involving any of our products, customers and our businesses' locations. Incident management and technology disaster recovery plans may vary in ability/comprehensiveness across the Group.

Data

Inability to utilise our data to achieve market intelligence and increase productivity and efficiency, while managing market risk impacts arising from customer concerns around use of student data, may significantly affect management of our core operations and achievement of our strategy objectives.

Tax

Legislative change caused by the OECD Base Erosion and Profit Shifting initiative, the UK exit from the EU, or other domestic governments' initiatives, including in response to the European Commission State Aid decision regarding the UK CFC exemption, results in a significant change to the effective tax rate, cash tax payments, double taxation and/or negative reputational impact.

Information security and data privacy

We have from time to time experienced, and may continue to experience in the future, security breaches of our systems despite our best efforts to prevent them. We also risk failure to comply with data privacy regulations and standards. The above could result in damage to the customer experience, our reputation, and a breach of regulations and financial loss.

Intellectual property

Failure to adequately manage, procure, protect and/or enforce intellectual property rights (including trademarks, patents, trade secrets and copyright) in our brands, content and technology may impair the value of our core assets, or reduce profits.

Compliance

Failure to effectively manage risks associated with compliance (principally ABC and sanctions risk), including failure to vet third parties, resulting in reputational harm, Anti-Bribery and Corruption (ABC) liability, or sanctions violations.

Competition law

Failure to comply with antitrust and competition legislation could result in costly legal proceedings and fines of up to 10% of global revenue; other financial consequences such as class actions, damages, void contracts; and could adversely impact our reputation.