Pearson Annual report and accounts 2017 The future of learning Pearson Annual report and accounts 2017 In this report Strategic report 01 Overview 22 Efficacy 02 Our KPIs 24 Sustainability 04 About Pearson 06 Chairman’s introduction 34 Our performance 08 CEO’s strategic overview 34 Financial review 42 Operating performance 12 Our strategy in action 48 Risk management 12 Market trends 50 Principal risks and uncertainties 13 Our strategy Governance Financial statements 62 Governance overview 112 Independent auditor’s report to the members 64 Leadership and effectiveness of Pearson plc 76 Accountability 118 Group accounts 86 Engagement 178 Parent company accounts 90 Remuneration 190 Five-year summary 106 Additional disclosures 192 Financial key performance indicators 110 Statement of Directors’ responsibilities 196 Shareholder information BC Principal offices worldwide Helping create the future of learning In this report we have included employee interviews from around our business to showcase how Pearson’s people are helping create the future of learning. CC Cedrick Collomb 19 IS Indika Senadhira 33 Senior Vice President for Senior Manager, Software Global Product Technology Engineering, Pearson Technology Delivery Centre KE Kate Edwards 23 AC Alvaro Castro 41 Senior Vice President Product Management Analyst, Efficacy & Research Pearson Test of English Strategy and performance reporting The was approved for issue by the Board on strategic report up to and including p60 is 14 March 2018 and signed on its behalf by: formed of three sections: ‘Overview’, ‘Our strategy in action’ and ‘Our performance’, and Coram Williams Chief Financial Officer Section 1 Overview 01 At Pearson we have a clear mission: to help people make progress in their lives through learning. We are focusing on the changing needs of the world’s education markets, and our strategy is to combine content and assessment, powered by services and technology, leading to more effective teaching and personalised learning at scale. That is at the heart of what we do and is reflected through our three strategic priorities: We are growing market share through our digital transformation, focusing on structural growth markets and becoming a simpler and more efficient business. See Our strategy, p13 This will enable us to drive innovation by providing more authentic learning and assessment experiences, helping more learners around the globe build their skills and be better prepared for the future world of work. Pearson products provide: 1 Better learning SIGN IN “I can’t imagine a better way to learn. 2 “The digital experience that students get can really shape their understanding of the Anywhere, subject – it gives them a real world feel, with anytime technology first class pedagogy and assessment built in.” See case study on p15 Pearson author Glenn Hubbard on why he and partner Anthony P O’Brien are transforming their classic textbook from print format into a digital education experience. 3 Real-time feedback See case study on p43 See case study on p15 02 Pearson plc Annual report and accounts 2017 Our KPIs Financial measures We measure our progress Maintain long-term growth Indicator 2017 Underlying change Reference against three broad categories R Sales £4,513m -2% p35 of KPIs: financial, business and 1 Adjusted operating £576m -9% p35 non-financial measures. profit R Operating profit £451m 2 n/a These two pages summarise performance against all of Deliver sustainable returns Indicator 2017 Headline change Reference these KPIs. More details on Adjusted earnings 54.1p1 -8% p36 the performance, trends and per share R Basic earnings 49.9p 2 n/a factors influencing select per share Return on invested 4.3% -0.7 p36 KPIs are described within the capital (gross basis) R percentage points relevant sections throughout One year total -4.5% 3 shareholder return R this report. Dividend per share 17p -67% p7 R See how we link strategy to how management is rewarded on p90. Manage our cash and balance sheet Indicator 2017 Headline change Reference 1 Operating cash flow R £669m +1% p37 Net cash generated 2 -11% from operations £462m Net debt £432m +60% p37 1 See p36–38 for an explanation of these alternative performance measures and p192–195 for full reconciliation of the numbers to the equivalent statutory measure and definitions of headline and underlying variances. 2 Equivalent statutory measure. 3 Source: Datastream. Section 1 Overview 03 Our KPIs Business measures Non-financial measures Grow market share through digital Talent & employee engagement 1 transformation of our courseware Indicator Performance Reference & assessment businesses R Executive team’s achievement of 100% p27 quarterly employee engagement Indicator Performance Reference milestones 2017 Digital revenues4 p14 % of Senior Leadership Group with 89% p27 Digital: 32% development goals Digitally enabled: 27% Employees taking at least one 83% p27 Non-digital: 41% course on Pearson’s internal training programme, PearsonU US higher education p14 Market position: #1 courseware US assessment p14 Strengthen brand & reputation Market position: #1 Indicator Performance Change Reference UK assessment5 p14 Market position: #1 Awareness of Pearson 59% +2 among teachers, percentage points 4 Excluding GEDU, WSE and US K-12 courseware. learners and parents 5 Includes both vocational and general qualifications. Favourability of those 89% +1 Invest in structural aware of Pearson percentage points 2 growth markets Indicator Performance Reference Deliver gender diversity Virtual schools p16 Indicator Performance Change Reference Market position: #2 (Connections) Female Board 30% no change p29 Global online program p16 members Market position: #1 management Female senior -2% p29 7 30% Global professional p16 managers Market position: #1 testing (Pearson VUE) Female employees 61% +1% p29 English p16 Market position (courseware): #2 7 Two reporting lines from the Chief Executive. Market position (testing): #3 Reduce our carbon footprint Become simpler Indicator Performance Change Reference 3 Global greenhouse -17% p29 & more efficient R 104,384 gas emissions Indicator Performance Reference (Metric Tonnes of CO2e) Expected cost savings c.£300m p18 2017-2020 programme6 Maintain investment in communities Restructuring costs £79m in 2017 & social innovation Planned headcount c.3,000 p18 Indicator Performance Change Reference reduction 2017-2020 Target 1% or £7.2m +1.4% p31 programme more of adjusted pre-tax profits 6 Phased plan first presented on August 4 2017, based on December 2016 FX rates. Note: A significant part of these costs and savings are in US Dollar and other non-Sterling currencies and so subject to FX movements over the implementation timeframe. 04 Pearson plc Annual report and accounts 2017 About Pearson Pearson is the world’s learning company, providing a range of products and services to help people across different learning stages make measurable progress in their lives. Where we operate We operate in 70 markets worldwide, with a focus on those below. We report by geography because this is how we deliver learning: through providing a range of educational products and services to institutions, governments, professional bodies and individual learners in our key markets around the world, helping people everywhere Sales by geography aim higher and fulfil their true potential. North America Core markets Growth markets Sales Sales Sales £2,929m £815m £769m Our largest market including Our international business Our growth markets in all 50 US states and Canada. in established and mature emerging and developing education markets including economies, with investment the UK, Australia, Italy, priorities in Brazil, India, France, Germany, Spain, South Africa, Mexico, Poland, Singapore, Hong Kong & China, Malaysia and Vietnam. and the Middle East. Section 1 Overview 05 What we offer We provide content, assessment and digital services to schools, colleges and universities, as well as professional and vocational education to learners to help increase their skills and employability prospects. Increasingly, we do this through partnership models where we bring investment, expertise and scale to help deliver better learning outcomes. Sales by products and services Courseware Assessment Services Sales Sales Sales 49% 30% 21% We provide world-leading We provide assessment We provide integrated educational content services to measure and services that help educational for use in both traditional validate learner progress, institutions improve and digital learning. and to certify competency. learner outcomes. Courseware Assessment Services Higher Education Schools Online Program Management Our personalised course content and digital We partner with US educators and districts to Pearson helps higher education institutions resources help educators build knowledge and develop new, personalised ways of learning launch or expand online degree programs unlock learners’ potential. We increasingly through effective, scalable assessments that enabling them to increase enrolments, sell direct to consumers and to educational measure 21st century skills and inform instruction support online learning, boost graduation institutions so students can come to class for all learners. In the UK, Pearson is a market- rates and deliver on completely prepared from leading, award winning organisation offering employability. day one. This helps drive academic and vocational qualifications. We’re better learning experiences leading the adoption of AI (Artificial