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Edited Transcript of PSON.L earnings conference call or presentation 22-Feb-19 9:00am GMT

Full Year 2018 Pearson PLC Earnings Presentation

London Feb 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Pearson PLC earnings conference call or presentation Friday, February 22, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Coram Williams

Pearson plc - CFO & Executive Director

* Giovanni Giovannelli

Pearson plc - President of Growth Markets

* John Joseph Fallon

Pearson plc - CEO & Executive Director

* Kenneth Roderick Bristow

Pearson plc - President of UK & Core Markets

* Kevin Capitani

Pearson plc - President of North America

* Robert Whelan

Pearson plc - President of Pearson Assessments

* Tim Bozik

Pearson plc - President of Global Product

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Conference Call Participants

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* Christopher Anton Giles Collett

Deutsche Bank AG, Research Division - Research Analyst

* Katherine Tait

Goldman Sachs Group Inc., Research Division - Associate

* Matthew John Walker

Crédit Suisse AG, Research Division - Research Analyst

* Nicholas Michael Edward Dempsey

Barclays Bank PLC, Research Division - Research Analyst

* Patrick Thomas Wellington

Morgan Stanley, Research Division - MD and Head of the European Media Equity Research

* Sami Kassab

Exane BNP Paribas, Research Division - Media Research Director, Co-Head of the European Media Team & Analyst of Media

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Presentation

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John Joseph Fallon, Pearson plc - CEO & Executive Director [1]

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Okay, well, good morning, everybody. I'm going to kick 9:00. So let's get going. Thanks to everyone who joined us here at the Strand and all of those who are listening or watching in online. For those of you who are online, I'm John Fallon, Pearson's CEO, and my -- thanks to all of you who've joined us this morning for our 2018 preliminary results presentation. I'm joined by our CFO, Coram Williams, who you'll hear from in a minute; and our Chairman, Sidney Taurel; and our executive team are also with us this morning.

A few headlines just to set the scene. Financial highlights, revenues, adjusted operating profits, earnings per share are all as we reported in our January trading update. Three new points to note today are operating cash flow of GBP 513 million, and a cash conversion rate of 94%. Year-end net debt at GBP 143 million is better than the GBP 200 million that we guided to, and obviously lower again than it was a year ago. And the board is recommending a full year dividend of 18.5p, which is a 9% increase on last year, so we're making progress.

Underlying profits increased for the first time in several years. We stepped up investment again in our shift to digital. Digital and digitally enabled revenues now account for 62% of our total sales. We outperformed on our cost savings plan, and we are now on track to deliver more than the GBP 330 million in annualized cost savings by the end of this year. We made the heaviest lift last year, both in our ERP, in our enterprise resource planning implementation and in all of the related digital platforms that are making Pearson a simpler, more efficient and more innovative and more scalable company. We have a lot still to do. But we are increasingly well placed to help shape the future of education and of lifelong learning for many years to come. So let's have Coram take you through the 2018 results and our guidance for 2019. And then I'll be back to explain why we now feel confident that our revenue should stabilize this year and then start to grow again on a sustainable basis in 2020 and future years beyond. So Coram, over to you.

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Coram Williams, Pearson plc - CFO & Executive Director [2]

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Thanks, John. Good morning, everybody. Let's start with a summary of our financial performance. Operating profit is at the upper end of the preclose view that we shared with you in January. And as John has noted, our cash conversion was in line with our guidance at 94%. Net debt is down to GBP 143 million, principally reflecting that good operating cash flow and the proceeds from disposals, which more than offset currency movements, share buybacks and dividend payments.

I'll now walk you through the detail in each area. Starting with sales. In North America, underlying sales declined 1%. We delivered significant growth in 3 of our strategic growth opportunities. Online Program Management was up 9%, Virtual Schools was up 8% and Professional Certification was up 5%. Although these businesses are becoming more important in our mix, the growth in these areas wasn't quite enough to offset fully declines in 3 other areas. Firstly, ongoing pressure on our U.S. Higher Education Courseware business, which was down 5% due to a continuation of the trends seen all year. Gross sales were lower than expected with continued cautious buying from the channel offset by ongoing improvements in returns. Secondly, modest weakness in school assessments where both PARCC and ACT Aspire contracts declined a little faster than expected. And thirdly, softness in K-12 courseware on weaker Open Territory activity only partially offset by some growth in adoption states. In Core, revenues were flat, a strong growth continued in the Pearson Test of English, OPM Services in Australia and the U.K. and Professional Certification. This was offset by a weaker performance in U.K. Student Assessment and qualifications, driven by declines in AS levels as a result of policy changes and continued disruption in the U.K. apprenticeship market and higher education. And in growth, sales were up 1%, with strong growth in China, modest growth in Brazil and other smaller markets, partially offset by modest declines in South Africa.

We continue to move the business steadily towards digital and digitally enabled markets and business models. As this slide shows, digital and digitally enabled revenues rose to 62% of sales in 2018, versus 59% in 2017. And we saw growth in OPM, Virtual Schools, computer-based assessment and digital courseware as well as continued declines in print courseware.

Let's turn now to profit. Our adjusted operating profit is GBP 546 million, slightly ahead of the GBP 540 million to GBP 545 million preliminary range that we gave you in January. You can see underlying profit growth across all our segments as the benefits of our restructuring program combined with the good performance across our structural growth opportunities more than offset the ongoing pressures from our courseware and school assessment businesses.

This slide shows more detail of the drivers on the year-on-year move in profitability. There was a negative impact from trading of GBP 15 million. This was driven by our U.S. Higher Education Courseware business being at the bottom of its expected range together with a weaker than anticipated performance in U.K. assessment and in U.S. K-12 courseware.

Other operating factors were GBP 22 million and included additional investment in our strategic growth priorities, and we've seen GBP 50 million of inflationary impact on costs.

Finally, our restructuring savings of GBP 130 million are ahead of plan due to an increase and acceleration of savings as a result of our recent ERP implementation. I'll give you a little more detail on that in a moment.

I turn now to the income statement. The interest charge was slightly better than our guidance at GBP 24 million and significantly lower than last year, primarily due to a reduction of gross debt and interest on tax provisions. Our tax rate of positive 5.2% is considerably better than we'd originally expected at the beginning of 2018, but in line with our revised guidance in October. As we said then, the lower tax rate resulted from the expiry of the relevant statutes of limitation and the reassessment of historical tax positions and one-off tax benefits following a review of 2017's U.S. tax reform, the details of which became clearer as 2018 progressed. EPS was 70.3p, up on 2017 in headline terms benefiting from those one-offs. Excluding the one-offs, EPS would've been 50.3p.

Statutory operating profit for the year was GBP 553 million, representing a 23% increase on 2017. This increase is largely due to gains from disposals and reduced intangible charges, which more than offset increased restructuring, loss contribution from disposals and currency impact. Reorganization costs include the net impact of the profit on the sale of One Southwark Bridge completed at the end of last year, and offset by an onerous lease provision relating to our other London properties to allow for further consolidation. Statutory EPS at 75.6p is due to lower interest costs, one-off tax benefits and higher operating profit.

Moving on to our guidance. This slide summarizes the profit and EPS guidance that we gave you in January. We've updated guidance to show the impact of IFRS 16 for leases, which we have adopted for 2019.

I'll now take you through all of the guidance in a little bit more detail. This slide shows the operating profit bridge from 2018 to 2019. The base for 2018 is GBP 568 million after adjusting for FX and the incremental impact of the 2018 disposal of Wall Street English. We expect the contribution from trading to be between plus or minus GBP 25 million. This incorporates the expectation of ongoing challenges in U.S. Higher Education Courseware, but also continued growth in the rest of Pearson. At the midpoint of that guidance revenues stabilized. Other operational factors reduced profit by GBP 33 million with increased investment in our strategic opportunities to further accelerate growth, particularly in OPM, and the expectation of a slightly lower contribution from Penguin Random House after a strong end to 2018. Inflation will be a GBP 50 million drag in line with what we've told you in previous years. The restructuring program that we started in 2017 will generate an additional GBP 130 million of savings in 2019 as we told you in January. Taken together, this leads to underlying profit growth and a guidance range of GBP 590 million to GBP 640 million, excluding IFRS 16 and GBP 610 million to GBP 660 million with IFRS 16. As always, this is based on exchange rates at the end of last year. You should note that this bridge includes the contribution of K-12 courseware. We announced on Monday of this week the agreed sale of our U.S. K-12 courseware business for a consideration of $250 million. As a reminder, we've previously said that K-12 generates approximately GBP 11 million of operating profit, but with the adoption of IFRS 15 for the first time this year, that increased K-12's operating profit to GBP 20 million for 2018.

We will update our guidance for 2019 once we close the sale of the business, but you should note that there is seasonality in this business in line with the rest of Pearson with sales and profits weighted towards the second half of the year. Underpinning our guidance and our confidence that we're on a path to return Pearson to growth in 2020, we're expecting a good performance in our strategic growth opportunities, which together account for around 35% of revenues in 2018.

Breaking our guidance down by the geographic segments, here are our key assumptions. In North America, we expect revenues in Higher Education Courseware to decline 0 to minus 5%, and I'll walk you through our usual bridge for this business in a moment. U.S. Student Assessment is taking a little longer to stabilize than we'd hoped as we continue to see reductions in volumes driven by changes in the PARCC contract. As a result, our guidance incorporates further modest declines in revenue in 2019, although underlying momentum in contract wins is encouraging and there are a number of opportunities in the pipeline for 2020. Offsetting those 2 elements, we expect good growth in our North American OPM Virtual School and Professional Certification businesses.

In Core, we expect stable revenues, we anticipate continued growth in OPM and Pearson Test of English, stable revenue in our qualifications business, but continued pressure in our Courseware business. In growth, we were pleased to the performance in 2018, and we expect further growth in 2019 on the back of new products.

And here is how we see our prospects for the U.S. Higher Education Courseware business in 2019. This year, we expect to see a continuation of the pressures we saw on end demand in 2018. We anticipate ongoing declines in enrollment impacting our sales by around 2% and modest growth in OER adoptions impacting our sales by up to 1.5%. On print, we see scope for further declines in gross sales and improvements in returns. Print continues to be impacted by the ongoing rise of secondary channels, such as rental, but channel inventory has now returned to more normalized levels following the 2016 inventory correction and its after effects. The channel is now optimizing the stock it holds, both through reducing purchases and returns, and we expect that to continue in 2019 with a net effect in the range of 0 to minus 5%. Growth in digital and direct sales provide some offset to the continuing pressures on print. Taken together, this all results in an expected range of 0 to minus 5% overall for U.S. Higher Education Courseware in 2019.

Returning to our simplification program. This slide shows our expectations for the remainder of the year -- the remainder of the program, sorry. Updated for the good progress we made in 2018, and the fact that we now expect to deliver more than GBP 330 million in total savings across the program. As I said in January, having done the heavy lifting on the ERP in the summer of last year, we've been able to use those new systems to take costs out of our back office more quickly, and are on track to deliver future additional savings in areas such as technology, HR and finance.

Let's turn now to cash flow and the balance sheet. Our cash conversion at 94% was in line with guidance, although it was lower than the exceptional conversion of 116% in 2017, which benefited from strong Penguin Random House dividends in advance of the transaction and the timing of cash incentive payments. We continue to expect cash conversion to be around 90% in 2019. Restructuring cash outflows will be higher than 2018 as we drive the last major wave of back-office changes. As a result, we expect net debt to be a little lower in 2019 than in 2018.

We're pleased with the significant progress we have made this year in further strengthening our balance sheet, with net debt down by over GBP 250 million to GBP 143 million, reflecting good cash conversion and the proceeds of the disposals of Wall Street English, GEDU and One Southwark Bridge. The adoption of IFRS 16 in 2019 will impact the presentation of our net debt, however, as it brings net lease liabilities onto our balance sheet for the first time. This doesn't reflect any fundamental change in economics or overall cash flow, but it does bring the reported balance sheet more closely in line with the way that the credit agencies look at it. This table shows that impact by bridging between net debt before lease liabilities and net debt on an IFRS 16 basis. Under IFRS 16, our adjusted net debt to EBITDA is around 1.1x at year-end. You should remember, however, that our working capital outflows peak in the middle of the year, so that raise year would be around 2x at the half year. As you know, we're managing our balance sheet in a conservative way right now, reflecting the ongoing transformation in our business and our need to maintain the flexibility to continue to invest for future growth. Clearly, as we complete the transformation we will keep this under constant review and ensure that we have the appropriate capital structure at that time. Finally, our disciplined capital allocation policy remains unchanged. To remind you, our priorities are: firstly, maintaining a strong balance sheet with a solid investment grade credit rating; secondly, continuing to invest in the business organically; thirdly, maintaining a sustainable and progressive dividend; and fourth, returning surplus cash to shareholders where appropriate. And with that, I'll hand back to John.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [3]

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Thanks, Coram. Stabilizing revenues, which is what we expect to do this year as you heard in the guidance Coram gave, is an important step in the Pearson recovery, but it's really delivering sustainable topline growth, which is what we expect to start to achieve next year, which, of course, what this is really about. And that growth is driven by a vision of Pearson's future, a clear understanding of the capabilities, the competitive edge that will get us there and what we need to be focusing on today to secure that growth. So let me start by walking you through, very briefly, a single slide that we use internally with our teams to talk about this. We're the world's learning company, our purpose is to empower people to progress in their lives through learning. We aim to do that by having a direct relationship with tens of millions of learners who we support through a lifetime of learning, helping them link their education to better employment. And as that link becomes both more important and more explicit, we'll be at the heart of a wider ecosystem of partners that are shaping the future of learning. We'll be able to play that role because of the world-class capabilities we bring to bear and the ways in which we achieve them to -- combine them to achieve better learning outcomes. Our success is of course achieved by highly motivated and talented colleagues all around the world who are inspired by our mission and our purpose and are committed to driving and sustaining the company through what is a major transformation. And we'll get there by focusing on the 3 things that will enable us to sustain revenues this year and then sustain profitable topline growth thereafter.

So one, we're leading, as you can see here, the digital transformation of our courseware and assessment businesses. These businesses make up 65% of our sales in 2018, and collectively, they declined by 4% last year. As these businesses become ever more digital, revenues in them will start to stabilize. Second, we're investing more in our businesses in structurally growing markets as you can see here. These businesses make up 35% of our sales today, they grew by 7% last year. And as we invest more these businesses grow more quickly. And three, making Pearson simpler and more efficient doesn't just cut costs, it also provides a really important platform for future growth because it enables us to reallocate investment to our growth areas more quickly to innovate, to scale and to build our all-important, more direct, longer-term relationship with those tens of millions of learners who use our products every day. And it's achieving these goals this year that will enable Pearson as a whole to grow the top line next year and then go on doing that in a sustainable way thereafter.

So first priority, let's talk briefly about how we're leading the digital transformation of our 3 biggest assessment and courseware businesses. American and British school Assessment businesses, both benefit from our digital testing and scoring platforms, which we can deploy at scale, for example, leadership in applying machine learning to high-stake assessment, we already used that to score 1/3 of all essay-type answers from American school students is going to be increasingly important. As you heard from Coram, these businesses have both been through prolonged periods of curriculum change. And yes, it has taken us longer to get these businesses back on an even keel than we thought it would or certainly we would've liked to, but we are now doing so helped by that digital advantage. And we're also helped by a wider trend in lifelong learning, that growing demand for employer certified and applied career-relevant education. So our leadership in BTECs and apprenticeship programs, huge opportunity to grow internationally, so we're working on some very promising initiatives in Thailand, Vietnam and China. So that's another reason to be confident in the future of our assessment businesses.

We're also making U.S. Higher Education Courseware a more digital and more direct, a more subscription-based business, 55% of our sales here are now digital, 23% are direct to consumer, digital rental sales are up 25%, and we're tripling the size of our print rental program this year to over 400 titles. 8% of sales are through now our subscription style Inclusive Access model, and in just 3 years, we've scaled this model to almost 700 partner institutions with 1.4 million course enrollments last year, up 40% on 2017. We benefit from a subscription model with 90% plus sell through, it enables us to gain share from our biggest competitor, the secondary market in our own intellectual property, and it also reduces nonconsumption boosting our average revenue per enrollment. But crucially, students also save money. They gain also from getting immediate access to their course materials and the institutions gain too because they get better data analytics, greater support around learning outcomes and are also seem to be helping to address their students' desire for greater affordability. Crucially here, professor take-up and student sell through lags institutional adoption, but we do -- and that's why we really expect Inclusive Access enrollments to continue to ramp up and grow strongly over the next few years.

Revel, our first fully integrated digital product increased subscribers by over 40% last year. New Revel titles with enhanced assignment options and sophisticated data analytics things that our customers, professors have told us they very much desire means that will be the first product to launch commercially later this year on our new Global Learning platform. We will also launch our first AI-powered math tutor, this is a mobile app that is marketed directly to calculus students around the world. In this addressable market of 2 million learners, it provides step-by-step feedback instantaneously on handwritten attempts to solve a calculus problem. We're also partnered with universities on our first AI-powered essay marker that can adapt to the personal marking style of any professor. And we expect to bring our new adaptive math product, [Rio], which is currently being piloted with our customers to commercial launch early next year. So the growing innovative product pipeline signals we're now ready. We're ready to shift our whole Higher Education product portfolio to a digital-first model, with frequent releases of content, features and updates that are no longer tied to an addition cycle. Print resources will still be available, but there'll be available as a rental or as an add-on service. This means better customer choice, simple, affordable, convenient access to our courseware that enables our students to be successful and also gives better insights for instructors to enable better outcomes and as you all know, a digital-first subscription-based business is also a much more stable and reliable one.

Let's shift gears, priority two, investing more in our businesses in structurally growing markets. Online Program Management where we partner with universities to provide fully online courses, as you know, is one of our biggest growth opportunities. Sales grew 10% last year, 14% increase in course registrations, we're investing more in this business directly. And -- but also then the wider capabilities that come with making all of Pearson digital first also help our OPM businesses to acquire students more efficiently, to improve the learner experience and outcome, to maximize the global reach for our university partners, and it also enables us to work with major employers who want to reskill and retrain their workforce and making this idea of learning and career development an employee benefit, which is becoming increasingly important to global companies.

As an early entrant into the OPM market, we're also becoming now increasingly adept -- at adapting and managing our portfolio of university partners and the courses we offer as contracts come up for renewal, that ensures we get the best possible return on that increased investment that we're putting into this business. And this slide just reminds you of what those returns look like, it shows you what the economic and financial attributes of our OPM business are.

Key point here is we're investing more upfront to scale this business more quickly. The more we invest, the more it dilutes earnings in the first few years and the faster it increases revenue and profit in future years. Virtual Schools is actually a similar business model to OPM. We enroll individual students to learn based on long-term contracts with institutional partners. This is also a structurally growing market expected to double in size over the next few years, so we're investing more here too. We're accelerating the rate at both which we expand our existing Virtual Schools and that we open new ones. And as with OPM, as Pearson as a whole becomes more digital first, the more we help this part of Pearson too, to enroll students more efficiently, to improve learning outcomes and to manage our portfolio of virtual school partnerships more effectively.

We're also investing in our professional certification business, which is nearly doubled in size over the last decade and continues to grow strongly and profitably, for example, the investment we made in our network to support the winning of the U.S. medical colleges test is a good example, and that in turn is then enabling us to grow our existing partnerships and sign new ones providing a good and strong pipeline for the future, and that professional certification network has also been fundamental to the success of the Pearson Test of English. We have what we believe is the best test in the market. We have grown very quickly in the last 5 years, but there's still a lot of room for further growth. So we have recently renewed recognition from the Australian government, and we're pursuing recognition with governments here in the U.K. and in Canada and China as well as well as building our recognition with American and British universities.

As we do so, we're now working with a much wider range of partners, and this is a good example of how in exiting our direct delivery businesses in China, which we did last year, we're now able to go after this big growth opportunity of English as a global language in ways that play better to our digital capabilities that we have Pearson-wide.

And then finally, our third priority, a simpler, more efficient company also creates a platform for growth in 3 important ways. Three is one of the things that is enabling is to do what I've been describing throughout this presentation, which is to reallocate cost more quickly from the areas of Pearson that are stable or declining to our faster growing businesses; secondly, it's what's going enable us to innovate more quickly and then to scale; and three, this is also crucial to ensuring that we have that more direct relationship with learners, that they go from being an anonymous relationship with Pearson to people that we know as individuals.

We understand their individual learning needs and profiles, we understand their development areas, we understand their career aspirations, we understand their learning needs, and with -- through that we build with them a relationship where we become their trusted partner through a life of learning, and that's what's going to be very exciting to the growth of this business over the next 5 to 10 years. And it also enables us to combine the benefits of leading the digital transformation of our courseware and assessment businesses and investing in our structural growing markets in new ways. And it sets Pearson growing again as we accelerate our move to digital in a more sustainably profitable and scalable way with a more reliable and predictable revenue and cash profile.

So that's what we wanted to say by way of introduction. And with that, Coram and myself and my colleagues will be very happy to take your questions.

Just as we get going, just to remind you who we have with you, I've already mentioned, Sidney Taurel, our Chairman is with us this morning; we also have Tim Bozik, who leads on Global Product; Kevin Capitani, who is President of Pearson North America; Albert Hitchcock, who is our Chief Technology and Operations Officer; Rob Bristow, who leads our core geographies; new colleague, Deirdre Latour, who now leads on Global Corporate Affairs; we have our General Counsel, Bjarne Tellmann with us; Bob Whelan, who leads our Pearson Assessments Business in North America; Anna, who is our Chief HR Officer; we have Jonathan, who leads on Strategy; and Gio who leads on our growth geographies as well. So if we can't answer all your questions with that team, we never will be able to. So let's get going. Let's start here. Sami.

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Questions and Answers

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Sami Kassab, Exane BNP Paribas, Research Division - Media Research Director, Co-Head of the European Media Team & Analyst of Media [1]

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John, I'm Sami Kassab at Exane, and I have the usual 3 questions to start with, please. So a lot has been discussed on the U.S. Higher Ed Courseware division. Can you spend a few words on the Core Higher Ed Courseware division? It's been a perennial drag on the performance of the group. How do you see the outlook there? Why are you sticking in keeping these assets and not dispose of it. And perhaps more generally make a comment as to whether you think there are more selective assets that you could dispose of going forward. Secondly, could you please quantify the drag that the increase in the consignment model, the number of titles in the consignment will have in your guidance for U.S. Higher Ed Courseware in '19? And lastly, would you share with us the revenue contribution from OPM within online degree services and perhaps discuss the mix within online degree services, OPM versus the non-OPM bits?

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John Joseph Fallon, Pearson plc - CEO & Executive Director [2]

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Okay, all right. Thank you, Sami. Rod, do you want to go first? So the first question is how we feel in our Higher Ed Courseware businesses in the core geographies? And how we feel about them and how they're performing?

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Kenneth Roderick Bristow, Pearson plc - President of UK & Core Markets [3]

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I think in terms of our Higher Ed Courseware businesses, in Core, we are benefiting from all of the investments we're making to digital in the United States. It is true that the -- in higher education and in K-12, our courseware businesses are the same kind of challenges that we see everywhere in terms of print and a lot of our revenue is in print. But these businesses make a very strong contribution to Pearson. We saw strong growth in Australia last year, we saw strong growth -- good growth in Italy and in Australia, in K-12 courseware. And these businesses are enabling us to make a contribution to our qualifications business in the case of K-12 courseware in the U.K., and also into -- increasingly into our OPM partnerships. So we see them as integral to our ability to grow in those structural growth opportunities. And we're doing -- we're feeling very confident about the structural growth opportunities in OPM, where we grew strongly last year in core markets, in our English assessment business where we grew very strongly, and also in our international qualifications with BTEC where we're seeing strong international growth. So we're confident about the future and the role that those courseware businesses have to play.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [4]

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You know what I think is fair to say is, you think about the relationship with Kings College, the benefits of some of the global capabilities that we're building out of our North American Higher Education business helped to develop that relationship and also the importance of Pearson College in our future plans as well.

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Kenneth Roderick Bristow, Pearson plc - President of UK & Core Markets [5]

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Absolutely. So in the case of Kings College, and indeed with the University of Sussex, which is another university partner we have here in the U.K., we're working very closely with them to integrate our Higher Education Courseware capabilities, both our content development, our assessment and our technology capabilities. These things are very attractive to our university partners, and give us a distinct advantage over our competitors in these markets, enabling us to sign up new partners, for example, ESSEC Business School in France, which is one of the big -- actually, it's the first big OPM partnership signed up on mainland Europe by anybody. So we're feeling good about that. In terms of Pearson College, we set up a small college in the U.K., just about 4, 5 years ago, we've already attracted 1,000 students. And again, we've based that on our capabilities that we have in Pearson, we're building out new capabilities that we can bring to our partners on the back of the work that we're doing in Pearson College and the degree awarding powers that we are currently applying for.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [6]

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Thanks, Rod. And then in -- I'm asking Coram to pick up on the other 2 questions. Let me just make sure I understand question 3 because if you look on the -- in the appendix Page 35, you can see that North American Higher Education services, including OPM, generated 6% of revenues. And then if you skip on 2 pages to Page 37 you can say -- see that it generated 2% of product contribution. I think that partly answers your -- my point was that the faster we grow it, it's earning's dilutive in the early years. I think your question is, what's -- it's not just OPM in there but there's other things so can we give you a bit more of it because we've still got the legacy of the old eCollege business in there, so can we give you a bit more color on that. So I think that's the question there. It sounds like you and Coram understood that question but help me to clarify it and then pick up on the consignment issue as well.

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Sami Kassab, Exane BNP Paribas, Research Division - Media Research Director, Co-Head of the European Media Team & Analyst of Media [7]

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And on the selective disposal, sorry -- John, any further selective disposals? We were talking about courseware and disposals.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [8]

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Well, I think, as you know, we constantly ask ourselves are we the best owner of this asset, but unless I'm ready -- we're ready to do something, we tend not to sort of talk about it. But I think you can see from where we are and the way we're talking, we're pretty comfortable with the portfolio that we have got at the moment, but it's not something that we rest on our laurels, it's something we keep constantly under review.

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Coram Williams, Pearson plc - CFO & Executive Director [9]

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Just to be clear, I would never have suggested that I understood a question that you didn't. I just want that to be on the record. Picking up on that one. It's just under GBP 250 million of revenue in the United States, which sits in the Higher Ed Online Services division. The point, I think, Sami, that you're getting at is that for a while there has been a business called Learning Studio, which we have been retiring, it's a learning management platform that's coming to the end of its life, and that's been a drag on growth. This year that was probably around GBP 10 million to GBP 12 million of negative impact, but actually that business is now very small at the end of 2018. So going forwards, the majority -- vast majority of that GBP 250 million relates to the Online Program Management business. And as we've said, it grew 9% in 2018. In terms of the drag from rental, the Higher Ed Courseware bridge on Page 16 lays out the moving parts of how we think about Higher Ed, and you can see we are highlighting a total bucket around print declines of 0 to minus 5%, within that is the impact of the ongoing shift and the growth in our rental program. So you're right, as we go from 150 to 400 titles, there is a small drag built into that. But remember in the second year of having the 150 titles that we introduced last year, there's a little bit of an uplift. So it's all built into that guidance and it's covered within that.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [10]

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Okay. Thanks, Sami. We're going next door, you got the microphone from there, thank you.

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Katherine Tait, Goldman Sachs Group Inc., Research Division - Associate [11]

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It's Katherine Tait from Goldman. How's it going to start on the North American margin, I noticed year-on-year that deteriorated? Would it possible just to break out the moving parts within that? Obviously, we're expecting some cost savings, but then also perhaps mix shift towards some of these lower-margin businesses like OPM, and obviously, the other sort of factors involved? And then I suppose linked to that question, as you accelerate the business further towards these higher-growth businesses like OPM, can you talk about how you anticipate the margin profile to follow with that? I understand that the OPM business has become a little bit more competitive with new entrants into the market, so are you seeing signs that the student acquisition cost is increasing, for example?

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John Joseph Fallon, Pearson plc - CEO & Executive Director [12]

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Okay, thanks. Coram, do you want to answer both of those questions from a -- the financial implications? And Kevin, you might want to talk a little bit about the way that we are sort of remaking the business and improving the underlying efficiency in OPM. So Coram?

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Coram Williams, Pearson plc - CFO & Executive Director [13]

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Remember that in each of our segments we've seen underlying profit growth and that includes North America. The underlying growth is driven by the restructuring benefits plus the sales growth that we're getting in certain parts. But you're right that in North America there is a short-term margin pressure, which John mentioned and I have mentioned, which come through the investment that we're making in our growth opportunities, particularly OPM because OPM is a -- it's typically a P&L investment. The other operating factors on the 2018 bridge were GBP 22 million and the majority of that is the OPM investment that we're making. In terms of the margin profile, and indeed this sort of return on OPM investment, in the short term as we drive enrollments and drive growth, margins do come under pressure because you're having to invest upfront. But the longer-term margin profile of that business is strong, and the kind of returns that we're generating from the dollars that we're putting in are also strong, so typically an IRR 35% or above. So we feel very good about the returns, but obviously, on long-term contracts they take a little while to come through.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [14]

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And Kevin, do you want to talk a little bit about some of the work that we're doing to make sure that we maximize the return and efficiency of the investments that we're making.

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Kevin Capitani, Pearson plc - President of North America [15]

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In -- for a reminder for everybody, for the OPM market the chief competition are 2 things. One, it's a do it yourself or in-house, and then second is student acquisition cost, which have risen quite a bit a lot due to Google and LinkedIn and basically the cost of acquisition are for the leads associated with it. So what we found as being the longest in the market with -- compared to other players is that we are doing a couple of different things, we're concentrating, one, on those student acquisition costs heavily and how to bring those down. With technology investments, efficiency, data and driving ourselves to better what that looks like.

Related to that, we actually are the first in the market to go through what I would call contract reups or renegotiations, and we started that about 18 -- 2 years ago to 18 months ago, and we're coming through the end of that. In that we've done a couple of different things, we've learned what the demands for the programs are, what the skills of those programs are, who the partners are best to work with, and we've rationalized that portfolio quite well about what is most advantageous for what we want to do. That gets into and helps us with student acquisition cost, but it also helps us choose partners and programs a lot better. So we've walked away or moved out of traditional programs that didn't have the qualification or basically the profile that we wanted. And our pipeline related to that is both strong and healthy from the lessons that we have learned there.

So you'll see us move forward with partnerships and programs that are very attractive; one, with student acquisition costs based on our leverage and knowledge; and then two, the partnerships or the schools, the institutions that are progressive that want to work in those areas. One example you'll see is that North Dakota, it sounds kind of strange, but they have just signed up for a nursing program or a couple programs with us, which is a huge advantage in that geography within the U.S. So we're being very precise about that versus, let's say, 5 years ago, we wouldn't have taken a deal like that. So we're getting much better about student acquisition cost, and we're getting much better about the profile of the partners and the programs that we're selecting. And then finally, we have a competitive advantage -- what I would call a first mover with undergraduate. If you look at our work with ASU and Maryville, we're really at scale much more than any of the other players, and actually we proved to a lot of universities that they can't do it their selves with those 2 programs.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [16]

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Okay. And just to translate that was an American quite well, not a British quite well. So what Kevin means is we're doing -- we're really pleased with the progress we've made in reshaping our portfolios we work through. Right, Kevin. So if you can hand the microphone behind, and we'll take the next question. Thank you.

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Nicholas Michael Edward Dempsey, Barclays Bank PLC, Research Division - Research Analyst [17]

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It's Nick Dempsey from Barclays. I've got 3 as well. So first up, Cengage, they're pointing to 69 bps of share gain in 2018, but they're also pointing to the fact that they've pushed their prices out on average quite a lot, and, therefore, gained quite a lot of more share on volume. So how do you grow in a market where your closest competitor is very aggressively pushing down price to push up volume? And according to the M&A it's working in terms that they've still gained some slight revenue share. Second question, I think you said, Coram, that you'd review your balance sheet situation once you're transformation is complete, so are you effectively saying the -- a buyback is off the table until we're sitting here in February '21? And third question. It looks as though the relationship between enrollments and U.S. unemployment, which we used to rely upon has broken down in the last 3 or 4 years. So if there is U.S. economic weakness in 2020, God forbid, do you think the enrollments would spike up like last time?

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John Joseph Fallon, Pearson plc - CEO & Executive Director [18]

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Okay. Let me pick up on the first one and then ask Kevin to chip in, Coram will pick up on the balance sheet, and then Tim, if you could talk about the -- what we -- how we feel about the outlook on enrollments. As we said in the press release our market share last year in MPI data, which we talked about before, it's the sort of returns from the top 6 college publishers in America, was firmly in that 40 to 41-point-something range. Month-by-month, it goes up a bit, it goes down a bit, it stays solidly in that range. So we are pleased with our competitive performance last year, especially when you remember what we did an ERP implementation that we will not have to do again for many years, and that did bring some quite significant supply chain disruption to some of our biggest customers in parts of the country. And that was at the same time that we were also going through a big sales force reorganization. So I think we feel very comfortable and confident in our competitive performance last year. Kevin, do you want then to talk a bit how we're feeling about how we're competing and how we're feeling about the environment for this year. And then, Tim, maybe you could pick up on the enrollments trends and what we're thinking about that.

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Kevin Capitani, Pearson plc - President of North America [19]

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Right, so again, a couple of reminders about the market in Higher Ed. The biggest competition that we have is the secondary market and our use of Pearson products or the use of Pearson products from the secondary market. So that's been generally what we have to combat. We're going after it in a couple of different ways. Digital and what John referred to as digital first that gets us the ability to be paid every time our content is used and it cuts into the secondary market. And I can elaborate on that, but we only have so much time. The second is a business model approach. And that business model approach is Inclusive Access plus pricing that we've done with eText and, let's say, print rental that we're talking about, this is a B2B -- or B2C approach. Let me step back and say that this market is a B2B2C market.

There are 3 customers that you need to satisfy; the student, the instructor and the institution. If you look at our model approach from a B2B, we have the Inclusive Access, John mentioned it earlier 700-plus institutions, and that sell-through will only increase. And we're getting better about how we're segmenting the market as well and how we're going to market to support that. The pricing that Cengage Unlimited represents is really just a B2C, and it's not comprehensive with regards to all 3 customers and what they're looking for. So the confidence level that we have that we're looking at the market, we're looking at the dynamics of the market, we're looking at access affordability and outcomes and the 3 customers that we're serving, we have a far more comprehensive approach and strategy to the market all of that designed to take back from the secondary market where our products being used from there is our biggest competition.

So I think the pricing dilemma we satisfy multiple different ways. I don't see our competition, meaning those other players not the secondary market, have as comprehensive approach as we do.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [20]

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And the beauty of that of course is in having Inclusive Access model, we can actually reduce the cost to students but increase our own revenue per enrollment. So that's a win-win, lower prices for students but a bigger market for Pearson. Tim, do you want to pick up on the enrollment point?

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Tim Bozik, Pearson plc - President of Global Product [21]

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Sure. So the -- I think our enrollment assumption or outlook is reflected in the model Coram had, which is we expect another 2% drag on enrollments, due to what we anticipate are both demographics and adult learners. If there is some improvement opportunity in that, that would be a benefit to us but it's one we're not counting on. What we know from the past is that when the economy tends to turn down and unemployment goes up, the demand for reskilling tends to go up and enrollments likewise tend to follow, that also tends the lag. So we're -- we have a view of what it's likely to be if the economy changes and changes that then that might change a future outlook on that.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [22]

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But to be clear it's not something we're relying on. We're dependent on our own efforts. And Coram, do you want to pick up on the balance sheet question?

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Coram Williams, Pearson plc - CFO & Executive Director [23]

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Capital structure, yes, sure. We've been very clear, we're running our balance sheet in a conservative way, and we're doing that deliberately because we are still working our way through a transformation and that has some degree of operational risk. But we also need the flexibility to be able to invest for future growth, which is what we're partly using our balance sheet for. As we come through that transformation then we'll keep the balance sheet under review and we'll make sure that we got the appropriate capital structure. To be clear, I don't think capital structure is binary, it is something that's dynamic, and therefore, as we come through that transformation we will keep it under review and we'll make sure we have the right balance sheet for the right time.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [24]

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Okay, thanks, Nick. Where we're going next? Further questions, come over here to Chris and then to step back.

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Christopher Anton Giles Collett, Deutsche Bank AG, Research Division - Research Analyst [25]

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It's Chris Collett from Deutsche. I just had a few questions. One was just to perhaps take a little bit of issue with the success of your restructuring program. I'm sure you're doing great things internally, but just where I look at the percentage change in profits and the absolute contribution in profits, it's really come to a huge extent from the Growth division. And I see from the back of the accounts, you didn't spend any money of GBP 100 million of restructuring in growth. So just, partly, what is going on there? Why has that business come back from? It was doing GBP 50 million of profits a few years ago, went to sort of 0, now it's bounced all the way back. So what's happening there? And really, is that the -- what are some of the drivers? Second, just also -- you talked about some of the digital products that you're releasing, which is very, very impressive, but how do we square that with -- you're talking about digital registrations in North America down 3%, and that's including the benefit from Revel? And then lastly, just on Professional Certification, you talk about an impressive number of contract wins for this year coming, is that something that you really need in order to drive that growth? Do you need to keep winning that number of wins? And also within that IT certification has been weak for a couple of years, I think you blame unemployment -- or low unemployment, but actually, isn't this really the environment where IT certification should be doing incredibly well?

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John Joseph Fallon, Pearson plc - CEO & Executive Director [26]

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Okay, thanks, Chris. Coram, do you want to just sort of set the -- what's happening in growth in the context of the overall restructuring program? Because I think like honestly that was the first part of the question. And then Gio, if you can pick up on a lot of the work that we've been doing in growth? And then, Tim, pick up on the digital product story? And then Bob, share with us our confidence in the future of the Pearson VUE business. So Coram, do you want to just pick up on the general picture first?

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Coram Williams, Pearson plc - CFO & Executive Director [27]

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So I don't think you should look at it on a headline because that's misleading given movements in currency and given changes in portfolio. The key piece to focus on is that every division delivered underlying profit growth and the benefits of the restructuring program was spread broadly amongst them. In terms of growth, I'll let Gio talk to the details, but there has been a significant reshaping of the portfolio and there's been a recovery in a couple of our strong markets. So that's what's driving a lot of the profitability. But Gio, would you like to give some more color?

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Giovanni Giovannelli, Pearson plc - President of Growth Markets [28]

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Yes, good morning, thank you for the question. I think we were pleased with the performance in growth, as Coram said. Just to give you a little bit of background of what happened over the last couple of years. First, we changed the management team, we now have a team of people that are local, so a Chinese in China, an Indian in India, a Brazilian in Brazil who deeply understand the market, the regulation, the opportunities are doing a great job at bringing our business forward. And also changing a little bit the culture of the company towards being more entrepreneurial, a little bit more risk taking as it's needed in these markets where things change admittingly faster than in other parts of the business.

The second thing we made some bets in some countries, so although, our growth in the Growth division is the one that you've seen in the numbers, the fact is that the growth is a little bit of -- mirror of the rest of the company. There are pieces of the business that structurally will grow slower because we already have a high market share, such as our business in Hong Kong or in South Africa. But if you strip those out, the growth division is actually underlying basis growing much faster because we have a lot of opportunities in these emerging market. I'll give you an example of that.

In China, we have launched what we call Longman English Plus. We have several decades of presence in China with a very strong brand, Longman by Pearson, and we have created an ecosystem whereby we use our books with a unique QR code to attract at 0 cost new learners. These people get on a WeChat platform, they basically log on, we have -- we can engage with them, and then we have a partnership with Microsoft to do speech recognition to improve their English skills. And through that we upsell to them other things such as eBooks, AI online schools and readers that we have put together in partnership with local partners. And that business is growing actually more than 30% per year.

Similarly, in India, we launched a product called, MyPedia, which is basically a solution for schools, and we have gone from 0 to already 700 schools in just a few years. That business is also growing north of 30%. In Brazil, our franchise, Wizard business is doing very well. It had good growth this year and it's still strong brand market leader. And we have other pockets within the business on which we're really hopeful on. So we're following the rest of the company in the strategy. We have a lot of opportunity I think by continuing to invest and be present in a thoughtful fashion we can do a lot more. So...

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John Joseph Fallon, Pearson plc - CEO & Executive Director [29]

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Thanks, Gio. Thanks, Gio, that's great. Tim, do you just want to unpack what's happening to digital registrations in North America, in Higher Education in North America?

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Tim Bozik, Pearson plc - President of Global Product [30]

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So the digital registration trend is broadly what we expected going into last year. We continue to see some downward pressure particularly in the developmental math area. We -- asked an earlier enrollment question about enrollment upside. That's an area that has continued to see enrollment pressure because that's generally served by adult learners in community colleges, where we previously talked about the product -- the leading product we have there being at the top of an S-curve. So it's one particular segment for which we have a mature product and it is due to -- the declines in that area are due to: enrollments, one; and two, some curriculum changes in which that course is going from a prerequisite to a corequisite. So basically the demand in developmental mathematics is seeing some ongoing pressure, which hasn't yet settled.

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Giovanni Giovannelli, Pearson plc - President of Growth Markets [31]

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And that's an area where we have very a high market share so we...

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Tim Bozik, Pearson plc - President of Global Product [32]

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That's an area where we have high share of mature product demand is -- hasn't yet settled for the enrollments and the curriculum changes. That said, that is offset by the ongoing growth by a product like Revel, which, again, continues to grow at a 40% clip that John mentioned. It's largely in what is still a greenfield area for digital. It's an area where the courses tend to be in social sciences, humanities, courses of 30 to 50 students, not courses of 300 to 1,000. So it's moving that volume with a lot of instructor uptake. We're excited to be launching our first Revel products on the Global Learning platform for fall. Those products, as John mentioned, bring some great new improvements for instructors, make it easier to manage assignments on a drop-and-drag basis, give them actionable insights. So it will increase the depth of usage and the value of usage in that product set, we'll continue to scale products on the Global Learning platform in production throughout this year and next, we're launching some exciting new digital-first programs this fall in STEM areas, programming in Python, other STEM areas of high demand. So I think our outlook from a digital-product perspective becomes increasingly exciting, innovative, responsive and will give us a competitive edge from our market share perspective.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [33]

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Thanks, Tim. And Bob, do you want to pick up on -- both on the IT certification but more generally on prospects of Pearson VUE?

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Robert Whelan, Pearson plc - President of Pearson Assessments [34]

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First of all, thank you for your question about VUE, I've been waiting a few years for this one. I will tell you from a financial standpoint, if we did not win a single contract in 2019, our revenue would still be going up because of what you -- exactly what you described. The demand for certifications from our existing clients is way up. There's one exception to it, which is our high school equivalency exam, that's a little slow because the economy is so strong people don't necessarily need that. But in the IT certification, nurses the volumes are up, we expect to win new contracts in 2019, but there is typically a 6-month to 2-year lag from the time we sign a contract until the time we see the revenue. So we expect 2019 to have some kick in from contracts we won in the past couple of years, but our goal is to win a few more contracts in '19 that will set us up for '20 and '21. But if we didn't do anything, revenue would still be up in 2019.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [35]

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Thanks, Bob. Question there -- from there and then if we bring the online through as well, I'll take some questions from people who are listening online as well. You go ahead, please.

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Matthew John Walker, Crédit Suisse AG, Research Division - Research Analyst [36]

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It's Matthew from CS. Three questions please. The first one is on savings. I mean, you did come in the upper end of your guidance range, but you did hugely accelerate the savings. I think you did something like GBP 130 million when you'd budgeted for something like GBP 80 million. So the question is, first of all, how did you do that? What exactly were these savings? And how were you able to get so much in H2 compared to H1? And then does that mean that the GBP 140 million you're budgeting for savings for this year, are you massively underclubbing that again? That's the first question. Second question is on Higher Ed, you got delayed purchasing of digital products, which fall in sort of Q1, Q2, et cetera. So would you expect to see -- because you had a sort of fairly weak fourth quarter, would you expect to see a first half in Higher Ed that was better than the 3% growth you got last year? And then the third one is on OER. Is it a case -- I mean, they're obviously taking some share but it's sort of at the end of probably the sort of a more mass market courses. Most OER providers don't only -- don't really have that many titles, so they just serve the sort of mass market courses. Are those books more profitable or less profitable on average for the main commercial publishers? Or would you say your niche titles or lower print run titles were more profitable?

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John Joseph Fallon, Pearson plc - CEO & Executive Director [37]

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Okay, great, 3 questions. So Coram, do you want to pick up on the first 2 phasing of the savings last year, where the outperformance came from, what we're thinking about this year and then pick up on the H1, H2 phasing? And then, Tim, perhaps you could just talk a little bit about how we see ourselves performing competitively against OER and how we see the outlook there? Okay, all right?

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Coram Williams, Pearson plc - CFO & Executive Director [38]

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Sure. So on the savings, as we both mentioned, we went live with probably the single biggest component of the technology change in 2018 with the U.S. ERP going in, in the middle of the year. That is a -- that's a gating question because it then allows us to make significant headcount reductions across our back offices, so in terms of HR and finance as we move to shared service centers and as we really leverage the benefits of our platform. So having done that we were then able to go further and faster in those areas than we had originally anticipated, and that's why we got the significant additional savings. I don't want you to think that, that means that we are underestimating 2019, however, because the major change has been made, and now it's really about making sure that we bed in and go further in those back office savings. So the 2019 number is a good number. In terms of the phasing of the business, you're right, but as we go into the beginning of the year there is a benefit from digital sales from that phasing delay that we've talked about previously. But you've also got to remember that there are structural pressures in the Higher Ed business, and so you have to take into account both of those. And I'm not going to get into guiding on a quarter-by-quarter or even half-by-half basis, but just remember the 2 sides of the coin.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [39]

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Okay. Just before Tim picks up on it, let me just say something on the savings point because I think I was very clear in the presentation, the next phase now in the long-term recovery of this business is really to get the top line growing, absolutely. But let's not underestimate the long-term qualitative benefit to this business of the restructuring cost -- the restructuring savings we've made. These are not sort of one-off or discretionary. This is a fundamental change in the cost base of the business that will bring margin benefits to Pearson for many years to come. And it's creating a much more agile adaptive flexible business that can reallocate cost, can respond to changes in the market, so it creates a fundamentally higher-quality business and we shouldn't lose sight of that point. Tim, do you want to pick up on the OER question?

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Tim Bozik, Pearson plc - President of Global Product [40]

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Sure. So -- yes, OER is concentrated in the mass market areas, which while there is larger demand, which tends to attract competition of any sort. I'm going to invite Kevin to talk in a minute about the -- his perspective on the market on OER, but we believe we have accounted for the OER's impact in the market model viewed as competitive and again, decision makers, which Kevin can elaborate on are making decisions in the context of affordability quality and outcomes. And we believe we compete effectively on that basis. From the margin characteristic that you talked about, what drives margin from a product perspective is scale opportunities. OER is in the areas which are largely platform delivered or enabled. Our view is that our -- particularly with our move to the Global Learning platform, we're going to gain increasing scale benefits, not unlike this -- the platform benefits we talked about from an enterprise perspective that allow us, a, to be more customer responsive to needs and innovative, but also will bring -- should bring margin opportunities because we should have scale advantages on a single cloud-based efficient reliable platform. But let me turn it over to Kevin to give you a little color on the OER from a marketplace standpoint.

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Kevin Capitani, Pearson plc - President of North America [41]

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So simply this -- if you look at the dynamics of the OER decisions, we know where they're being made. So they're generally at an institution level at minimum and often times they're coming from a pressure for a system. So much like a community college system that is going to go to an OER. The characteristics of that is like an enterprise sale. The discussion is a lot different, so you make it more about price, outcomes, analytics associated with those things. Our investment in one CRM system, our Salesforce system, allows us actually to pinpoint where these things are taking place proactively and put a sales strategy against those things.

And what we're finding is that OER 2 years in, 2.5 years in, we're getting a lot of win backs in our Inclusive Access capability to go and describe why price is not the only thing, they need to look at how the adjuncts, let's say, in a community college system are performing. Why departments are performing better than others? And they're looking at free or let's say relatively free materials, so it's not executable on a sustainable fashion. And they want a more of a -- let's say, our content and capability at a price that's focused on outcomes at a larger scale. Then you look at an enterprise, which I mentioned earlier, that decision maker is at a higher level, it's not at -- in the classroom. So the discussion is differently and it's more well-rounded.

And we can attack it differently based on: one, our data that I mentioned earlier; two, the trends that are going; and three, looking at access, affordability and outcomes comprehensive. What you're going to see is a lot of win backs by us and some of the other partners in the market based on what's really needed at the system level and looking at a comprehensive approach. Our investment, again I'll stress this, and technology gives us the ability to pinpoint and be proactive to these things rather than reactive, which is really exciting, and it's a change in a go-to business model for Pearson.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [42]

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Okay. Thanks, Kevin. Just before I come to Patrick, question online from Sara Simon at Berenberg, what was your assumption for K-12 profits in 2019 group profit guidance, given it was expected to be a strong year for adoptions? Coram, do you want to answer the specifics of that question? And then I might just say something a little bit more about why we think that was a good transaction for us?

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Coram Williams, Pearson plc - CFO & Executive Director [43]

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Sure. So we've quantified the 2018 profits of that business at GBP 20 million, you should actually assume that 2019 would be similar. While there is growth in the adoption market there is cost related to that, that has to go in up front in order to drive those adoptions. So no material movement in that GBP 20 million. As I said in my script, it is back-end weighted, so for the moment work on the basis that it's GBP 20 million to adjust for guidance, but obviously, when we close the sale then we will confirm the number.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [44]

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Probably just while we're on the subject, [just] made the broader point as to why I think our deal team have put together a construct of this transaction that I think is really good from a Pearson's point of view. First of all, from a strategic point of view just to remind you American schools remain hugely important customers for Pearson, but in a digital-first strategy we can serve them better through our assessment, digital schools, digital -- Virtual Schools, virtual courseware and through all the products and services that we offer to help the transition from high school into career and into college. So still big, big business for us that fits better with our digital-first strategy.

So strategically, it was the right time for us to exit the business. It was also operationally important that we got out now because otherwise it was going to get in the way of the simplification and efficiency program because if you think if we're doing a company-wide ERP implementation to bring a business onto an ERP that would've been high risk when you knew that strategically you wanted to exit the business would not have made sense at all. But the third challenge we had was that, economically, to Sara's point, we're just about to go through a significant period of adoption. And so we wanted to make sure we captured the economic value of those forthcoming adoptions. So what we've done is come up with a construct that means just exit the business now, which meets our strategic and operational goals, but for taxpayers and shareholders by achieving a valuation of about, what, 9 to 10x operating profit, which I think is a reasonable multiple for business of this type.

But then, if as we all hope it might do the business outperforms because -- well I'm [forced] in the team that lead that, our colleagues are great people that put together a great product that we've invested in then we'll share in the upside of that over the next 3 to 7 years. So I think all around, strategically operationally, financially, whilst at first blush I could understand it looks a little bit complicated, I think it's actually a very clever and a very good deal from a Pearson point of view. Okay, Patrick. Patrick Wellington.

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Patrick Thomas Wellington, Morgan Stanley, Research Division - MD and Head of the European Media Equity Research [45]

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It's Patrick Wellington, Morgan Stanley. I've got about 3 questions actually. If you go back to the original trading profit bridge, you started the year saying GBP 10 million to GBP 15 million up and you ended minus GBP 13 million to minus GBP 18 million. And I seem to remember on the January -- mid-January call, Coram, you said that was down to U.S. K-12 and U.K. Assessment, but actually U.S. K-12, as we've just heard, seemed to have performed exactly as expected. Did GBP 11 million [in 20] -- which is the original amount and the core profit went up. So could we unpick actually what happened in that trading? And then secondly, you give a very nice slide about digitally enabled and print, 62% digitally enabled, 38%, I'm going to call it, print. Do we have a revenue growth rate for those 2 chunks? Very simple question. And the third one is we've talked a lot about OPM. So when do you think the profits benefit? Which year if you had to pick one would we begin to see the upwards curve in the profits benefit from OPM?

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John Joseph Fallon, Pearson plc - CEO & Executive Director [46]

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Okay. Coram, do you want to pick up those starting off with the...

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Coram Williams, Pearson plc - CFO & Executive Director [47]

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So as I mentioned, both in January and also today, the pieces that were worse than expected were primarily the U.K. qualifications business. And that's because of pressure in the apprenticeships market largely, but also because of AS levels declined faster than we were expecting them to. There was a small additional weakness in K-12, although, you're right to highlight that, that wasn't as material in the grand scheme of things. And as we've also flagged a little bit of pressure in the U.S. Assessment business particularly as PARCC declined faster than we anticipated. So you put those pieces together those are the things that meant that the trading bar was under a little more pressure than we had anticipated at the beginning of the year. In terms of the growth rate of the structural growth opportunities. As John mentioned, about 35% of the business is growing at 7%, we've been investing into that part of the business. And we would expect that growth rate to accelerate over time. That's the return on investment that we would like to see on those businesses. And in terms of OPM, I'm not sure it's quite right to think of it in terms of which year does it change because the reality is that the profitability moves over the life of the contract, and therefore, it depends upon the mix of contracts that you have mature versus new. And while we're investment -- while we're in investment phase then you would expect the profitability to come under pressure at the beginning. I think Kevin wants to add.

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Kevin Capitani, Pearson plc - President of North America [48]

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I would just remind a -- or reemphasize a couple of things earlier. We're getting a lot better about the programs via the profitability that we're selecting. And you're seeing our portfolio grow in terms of size but slim down in terms of concentration. And then secondly, the focus on profitability has to be with running the business more efficiently and student acquisition is the best example of that. How are we going to lessen our cost of student acquisition over time with investments in technology plus picking different programs that we know that are in demand. So that also contributes on an operational perspective in addition to the contractual elements that Coram determined.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [49]

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I don't think, inevitably, you have a phase in it where you're -- you've essentially got a trade-off between top line growth and margin contribution. And actually the higher the profit contribution in the short term, it means that you've got a higher proportion of mature contracts and you've not got a bigger pipeline, and that frankly was the problem with the position that we got ourselves in 2 or 3 years ago. And that's the change that we've had to make. And that's why I'm really pleased with the way Kevin and [Evan] and the team that's come in, we've really started to get the growth rate there going again. And we are very deliberately accepting a dilution in earnings short term to drive long-term growth. And that's absolutely the right thing to do for the long-term future of this business and what is one of the biggest growth opportunities we have available to the company. And we're able to do that of course back to where we started because of the strength of the balance sheet and the way that we're running the company. Okay.

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Patrick Thomas Wellington, Morgan Stanley, Research Division - MD and Head of the European Media Equity Research [50]

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I suppose the question actually is, it is quite difficult to get hold of the profit drivers in this business. So do you think when the cost plan runs out in 2021, the profits of the group will go down again because you will still be in that investment phase for the growth businesses? And you're still coming through the pressures in the substantial, the 38% of your business that's in print? And/or will there be another cost plan at that stage?

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Coram Williams, Pearson plc - CFO & Executive Director [51]

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So I mean, I think, the key to this is the growth of the top line. So OPM is investment mode at the moment. We put, as we mentioned, over GBP 20 million in, in 2018, we put north of GBP 30 million in, in 2019, you will see the benefits of that drop through over the next couple of years as those contracts become more mature. The other point to mention is that the other 3 parts of the strategic growth opportunities, so VUE, Pearson Test of English and Virtual Schools have had capital investment in them. And so as they -- as we benefit from the capital that's been invested there, actually you get peer drop-through of profit. So we don't need another cost program in order to sustain underlying profit growth, the acceleration of the top line and the reduction in the size of the courseware and assessment businesses that are under pressure will get us there.

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John Joseph Fallon, Pearson plc - CEO & Executive Director [52]

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Okay. Thank you. Thanks, everybody, for your questions. Thanks for joining us today. Joe, Tom and Anjali are with us, if you have any other comments to follow up on. Thanks for your ongoing interest in the company and look forward to talking to you again soon.