Pearson plc (PSO) Q2 2019 Earnings Report, Transcript and Summary

Hello, and welcome to the Pearson Interim Results Presentation Analyst Call. [Operator Instructions] Just to remind you, this conference is being recorded. I'll now hand to our hosts, John Fallon, CEO; and Coram Williams, CFO. Gentlemen, please begin.

Well, hi, good morning, everybody. Thanks for joining us. As you heard, it's John Fallon here and I've got Coram Williams with me. These, as you can see, are a strong set of half-year figures. Underlying sales were up 2%, profits up 30%, operating cash flow is also stronger with a further reduction in net debt underpinning our continued investment in building a better more digitally powered business. A 9% increase in the interim dividend is in line with our commitment to sustainable and progressive dividend policy. The results reflect the ongoing shift in the dynamics of the business. Through digital transformation, we're seeing the ongoing recovery in our courseware and assessment businesses, down only 1% on prior year and sales from our structural growth opportunities are up 6% against a strong comparative last year. And with major milestones reached, the simplification program now shifts from recovery of renewal to providing a powerful platform for future growth. We're on track to at least stabilize revenues this year and return the business to sustainable top line growth from 2020. So let’s have Coram talk you through the numbers, and then I'll be back to talk a little more about the future growth potential efficient. Coram?

Thank you, John, and good morning, everyone. John has already taken you through the headlines. So I'm going to look at each of the geographies in a little more detail. Starting with revenue. North America was up 1%. We saw good revenue growth in our structural growth opportunities. Online Program Management and Connections Academy benefited from continued strong enrollment growth and Professional Certification benefited from strength in key segments on the ramp-up of new contracts. This was partially offset by expected modest declines in U.S. Higher Education Courseware and Student Assessment. As we explained in Q1, U.S. Higher Education Courseware faced tougher comparison in the first half of 2019 than indeed in H1 2018, which was helped by the absence of the additional returns provision that we took in the first half of 2017. As a result, first half revenues declined at the rate in line with the middle of our guidance range for the year of flat to down minus 5%. Digital revenues in Higher Education Courseware grew modestly on a like-for-like basis. We benefited from good growth in Revel. This was partially offset by continued declines in developmental mathematics and the planned retirement and de-prioritization of a longer tail of older, lower value titles in advance of our launch of the products on the global learning platform. With some help from phasing, Co [ph] had a strong first half with grades in school and Higher Education Courseware, U.K. Student Assessment and Qualifications, OPM, PG Academic and Professional Certification. In U.K. Student Assessment and Qualifications, we saw good growth in GCSE, A level, BTEC Firsts and Higher Nationals and the new digital assessment contract in Egypt, which shows the exciting global opportunities that exist in assessment. This was partially offset by continued declines in U.K. Apprenticeships, which will continue to impact the business in the second half of the year. In growth, revenue increased 2% with good growth in the Pearson Test of English and Professional Certification and timing of Orders within School Courseware in the Middle East. So now let's turn to operating profit. We've had a good performance across the business that is consistent with our expectations and full year guidance. As you can see from this bridge, improved trading due to higher revenues and restructuring savings have more than offset other operational factors and inflation. As a result, operating profit grew 30% in underlying terms. Other operational factors, which is predominantly investment in APM was weighted to the first half. All of this is consistent with the full year bridge that we gave you in February. Our guidance for 2019 operating profit after adjusting for IFRS 16 and the disposal of U.S. K-12 Courseware remains unchanged. We expect Pearson to deliver underlying profit growth in 2019 and for revenues to stabilize in 2019 and grow in 2020. Whilst operating profit in H1 was in line with our expectations, you will have noticed in this morning's release that interest and tax in H1 is a bit better than that implied by the full year guidance that we gave in February, as we benefited from favorable interest outcomes on the settlement of historical tax positions. As a result, we've updated our guidance and now expect our 2019 finance charge to be around £45 million for the full year. Our tax charge is expected to be in the range of 17% to 19% reflecting the implementation of new tax rules of the U.S. have been modestly more favorable for us than we anticipated. Taken together, this means we're upgrading our guidance at an EPS level by 4 pence to a range of 57.5p to 63p based on 31st of December 2018 exchange rates. Our longer term expectation remains that tax rate will be between 20% and 22% and the finance charge around £55 million per year. I thought it might also be helpful to give an update with regards to State Aid. As you will be aware, the European commission has recently announced its decision that certain parts of U.K.'s tax code gave raise to State Aid. By many other international companies and the U.K. government, we have launched an appeal against the EC decision because we believe the merits of our case warranted. Despite the U.K. government's they are nonetheless sublinged [ph] on the EU law to recover the tax in line with the commission's decision. Our maximum liability as we told you before is £160 million of cash, but we're still waiting guidance from HMRC [ph] on the amount and when it might be due. As a result, this is not included in our net debt guidance, which remains unchanged. We remain on a track to complete our restructuring this year, reducing our 2020 cost base by £330 million or more. In line with this plan, we delivered incremental cost savings of £60 million in the first half and expect to deliver another £70 million of incremental savings in H2. In H1, we achieved a major milestone in the plan with the successful completion of our ERP implementation in North America. As a result, more than 75% of the company by revenue is now operating on our single ERP system, enabling us to progress further in H2 on our cost-reduction plans in areas by finance and HR. We continue to rationalize costs in other areas too, closing two offices and achieving 80% of our headcount reduction. As a result of these actions, Pearson is leaner, more agile and more sustainable than it's ever been before. We typically see a cash outflow in the first half. In 2019, this outflow was smaller than the prior year driven by two key factors. Firstly, we benefited from the disposable of the K-12 business, which would have seen a seasonal cash out flow in the first half. Secondly, the adoption of IFRS 16 means that we're seeing the benefits in our cash flow of the property rationalization that we've undertaken as a part of our certification drive. Excluding these two factors, our underlying cash performance is in line with last year and we continue to expect an operating cash conversion rate for the full year in excess of 90%. Headline net debt is impacted by the adoption of IFRS 16 this year, which as we told you at prelims, at just under £700 million of debt to the balance sheet. On a like-for-like basis, however, H1 net debt is positive compared to prior year and declined by £49 million over the course of the last 12 months. This reflects the inflows from operating cash flow and disposal proceeds, which more than offset the outflows from the dividend repayments, treasury share purchases, additional capital invested in PRH and the K-12 disposal. And with that, I will hand back to John.

Thanks, Coram. So as you can see, we're now on the cusp of the next stage in the Pearson transformation and that's when we transition from a period of renewal and recovery to more sustainable future growth. And that growth is driven by a clear view of where we want the company to be in 5 years time and how we're going to get there. You've seen this slide before, you're familiar with the strategies, I won't run through it in detail, but just to summarize, with the world's learning company, we help over 100 million learners around the world to make progress in their lives through learning. And as we help shape the future of learning, we're all about making quality of education more accessible, affordable to formal people. That means as a part of a wider ecosystem, building platforms that made learning highly engaging, effective and relevant to the changing nature of work. We see a world of talent and a world of opportunity. As we help more and more learners prepare for, develop in and change careers through what will be increasingly a lifetime of learning. This is a strategy for growth based on three key strums. First, as our Courseware and Assessment businesses become even more digital, revenues will first start to stabilize and then grow again. Second, as we invest more in our businesses in structurally growing markets, these businesses grow both more quickly and from a bigger base. And third, a simple more efficient Pearson built on highly scalable global platforms is able to reallocate investment to growth opportunities more adeptly, we're able to innovate quickly and at scale and were able to build a more direct longer term relationship with those 100 million learners who use our products every year. So let's take a quick look of progress over the last six months starting with our first priority, the digital transformation of our Courseware and Assessment businesses. So American and British school students assessment businesses are getting back on an even scale [ph] after some years of regulatory appeal in the U.K we're already seeing, as you heard from Coram, the benefits of the investments we've made in the next generation of qualifications. And in the U.S., we'll start to see the benefits in the second half of the year of the success we've had in migrating part customers to new contracts and a couple of new wins, including Tennessee. In both businesses our customers are seeing the benefits of increased digitalization in the enhanced reliability, accuracy and security of the tests with much greater scope for personal feedback. And we benefit from better margins as the cost of process comes down. Our digital leadership, as you've seen in the press release is also – bring up new international opportunities such as the 4-year contract we’ve signed to run high state tax for all high school students in Egypt. And our BTEC qualifications with their focus on applied learning also have growing international appeal as we see in Thailand and elsewhere. In Higher Education Courseware, you'll have seen that we announced last week that we've now done what I signaled what we would be doing back in February and that shifting all 1,500 of our active higher education titles to a digital first model with frequent releases of content, features and updates no longer tied to an addition cycle. Print will still be available, but increasingly as a rental option. We'll have 410 of our 1,500 titles in a rental or digital access program by the end of this year and will be looking to accelerate the transition of the rest of the titles into that program as quickly as we can. Taken together, which means better customer choice with simple, affordable convenient access to the courseware that enables students to be successful and all giving better insights for instructors to enable better outcomes. It also simplifies price points, making them much more attractive to students and even more so if they studying [ph] with one of the rapidly growing number of inclusive partners, which currently stands at over 780 universities and colleges. We're able to go Digital First now because we're at the point where we now launch our first product commercially on the global learning platform, our adaptive learning engine that enables both us and our partners to innovate and launch personalized learning experiences with custom, with more efficiently, a fantastic user experience and better learning outcomes. All 300 Revel titles will be on the global learning platform next year. We will also begin to deliver MyLabs on the platform, along with Rio, our new fully adapted developmental math product which the market is trying out for. AIDA, spelled A I D A, which is a great to AI-enabled calculus tutor to help students to learn with step-by-step feedback we’ll launch in Q4. As we shift onto the new platform, we are, as you heard from Coram, retiring and de-prioritizing legacy digital products of low usage, impact and value. This means total digital registrations are likely to dip slightly, as they did in the first half of this year for the next year or so before starting to grow, again, as we bring our new high-impact and high-value products to market of scale. We've said that we can stabilize Pearson's overall revenues this year and grow, again, in the future even if Higher Education Courseware continues to trade in the flat to minus 5% range that has been our guidance for this part of Pearson for the last couple of years. And with the ongoing shift in the dynamic of the business that I described earlier, we will achieve that. But to be clear, in time, we expect to do better and flat to minus 5% in Higher Education Courseware. We're going to get this part of Pearson growing, again, as well. We'll do that through our Digital First model with a great user experience and learning outcomes, which means that overtime, we can gain a share or spend back from the secondary market and gain share of adoption from our competitors. Our average revenue per unit, ARPU, will continue to decline. For the average revenue per enrollment RP, which is the most crucial driver of the business will start to increase, again. It will increase because we'll be able to deliver the most engaging, effective, affordable learning experiences and in doing so, build a direct ongoing relationship with millions of students who will increasingly look to Pearson to guide them from what will increasingly be a lifetime of learning. Let's shift gears now and talk briefly about our structural growth opportunities. Virtual Schools is an underserved market. In several states, nearly one in 50 school students, which is about 10 for 2% [ph] attend a Virtual School where participation is considerably lower than that in most states, including some of the most populous where virtual schools should have big appeal, such as Florida, Texas, California. This is a real and growing unmet need, which we will meet with new schools and the expansion of existing schools. Revenues in our Virtual Schools business grew at a high single-digit rate in first half, reflecting the ramp of the new school enrollments and growth in existing schools. We've announced six new schools for the next academic year starting in August ahead of our target and this will bring the total number of schools to 42. We expect good growth in Virtual Schools for the foreseeable future. Now one of our biggest structural growth opportunities is in Online Program Management. This is where we partner with universities to provide fully online courses. This market is expected to grow to over $5 billion in the U.S. alone over the next 5 years. We’re the only provider, as you know, to partner with universities in the undergraduate market where there are some 40 million adults in America who have some college credits, but have not yet completed a degree. That provides us with a very large opportunity to help those learners with more affordable and flexible access. Revenue in this business increased at net double-digit rate globally, reflecting good growth across our U.S. and international businesses, registrations of 13%, which is reflecting new program launches. And as we partner with companies like Manpower, announcement we made recently, we also see a big opportunity to help employers with the vital rescaling of their workforce and help individuals to gain the skills and credentials to prosper in their career. You can see the size of this employability opportunity from the success of our professional certification business, which is nearly doubled in size over the last decade and continues to grow strongly and profitably. Cash volumes are up 8%. We signed 17 new agreements. We now provide the professional certification for 450 credential owners. These are professional bodies, regulated organizations, major technology companies. And with the pace of change only increasing across all types of jobs, we see plenty of further growth in this market. Our professional certification network is also fundamental to our fourth big growth opportunity, the success of the Pearson Test of English. PTE has grown very quickly in the last 5 years as it should. We believe it is by far the best test of the market, but very still a lot of room for further growth. For example, for all our success, and the study in visa market, we still have less than 10% share. And we see a similar sized opportunity for the Pearson Test of English and the employment over [ph] efficiency markets as well. And linked to that, there's also a significant opportunity in English Courseware, particularly as we exploit our digital capabilities and get better aligned to the assessment goals. So in summary, I think these are a good set of results in their own rights, but they also signal that Pearson as I say is now shifting from that phase of renewal of recovery to a new age of sustainable growth. We're at a point in the digital transformation of our Courseware and Assessment Businesses where the rate of decline slows and then reverses as these businesses collectively start to grow again. Our structural growth businesses are gaining both scale and momentum. And Pearson is now a global scalable platform, a learning outcome engine that can power our growth and the rest of our partners by playing a vital role in society. And that role is to see a world of talent, working with partners give that talent the very best chance of prospering through a life at learning. And with that, Coram and I will be very happy to take your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Sami Kassab of Exane BNP Paribas. Please go ahead. Your line is open,

Good morning, gentlemen. I have three questions to begin with, please. So can you just put a revenue number on the Egyptian Assessment contract? Secondly, where are you via [ph] accreditation of the PTE in Canada? And lastly, can you come back on the decline in the online registration in Higher Ed Courseware? I understand the move to the global learning platform, but you also referring to market pressure in mass. Can you elaborate on that market pressure, please? Thank you, John.

Thanks, Sami. And good morning. Coram, do you want to pick up on the Egyptian contracts and I'll pick up on the other two?

Yes, thanks, John. Morning. Morning, Sami. Look, it's a very exciting contract for us as we say in the press release because it involves a significant number of tests over the 4 years. And I think it demonstrates the opportunity that we've got for our assessment businesses outside of our traditional strengths of the U.S. and the U.K., but it is in ramp-up phase. So you should work on the basis that it's mid-single-digit millions of pounds of revenue in the first half numbers.

Okay. Thanks, Coram. On your second question Sami,, in both Canada and the U.K. there is an ongoing process with the authorities when there's some news we'll share with you with the ongoing process at this point. And then, just on the digital registration, really to just sort of repeat and expand a little bit on the what Coram and I both said in the presentation. There's sort of two headwinds we've got going on here. One is, college enrollment, particularly in the community college sector as you we’re continuing to decline. And the impact of that in our case is compounded by ongoing very significant changes in the way developmental education courses are taught, particularly around math where historically we have the market share of something in the 70% range. In addition to that, we've identified a long tail of digital products, which as I said, have low-value and low use, where frankly, the cost of transfer in the amounts of global learning platform cost is more than the revenue they generate for us on an annual basis. If we were just sort of seeing those two things flush through numbers and nothing else would - was happening, our digital registrations would be down about 5%. The fact that they're only down 1% tells you that actually in underlying terms, we're continuing to see the analog to digital conversion continue. So good growth in Revel as you heard and good growth in BTECs. I think we should expect that sort of trend to sort of continue. We're going to see continue impacts in developmental education. We've got another sort of 18 months of work to do in retiring that long tail. And then as we start to launch new products on the global learning platform at scale, which is really sort of from this time next year through into 2021, then you'll start to see digital registrations growth. So I think you should assume sort of flat down minus 1 sort of launch for the next year or so in headline terms, but the underlying growth is still there and that’s going to feed into top line growth in registrations thereafter. And in the meantime, of course, we will continue to see revenues from digital grow as they did in the first half.

Thank you, John. This is very, very helpful. Can I come back on the PTE, you gave market share for study and visa at 10%. Can you elaborate a little bit on the competitive landscape, I'm not so familiar with that side of market segment? Is ETS the main player you're facing here where you have 90% of the market or who are the other players in the market?

There's two major incumbents in this place. One is a joint venture between the British Council Cambridge Assessments and an Australian company called IDP, which sound something called Isle [ph] And then as you correctly said, there's a product called Tofo [PH] which is run by ETS. We are the fast-growing third player in the market and then if you, I think, in Canada there's a local player as well and you – there is one or two local players here in the U.K., but that's broadly the competitive landscape.

And the 10% was just for Australia or for the markets where you compete in?

That's our - our share in Australia is significantly higher. That would be our overall share of the study in visa market. So that would really be looking across the major country, major English-speaking country. So really it's the U.S., Canada, Australia and the U.K.

Thank you very much, John.

Thanks, Sami.

Thank you. Our next question comes from the line of Katherine Tait of Goldman Sachs. Please go ahead. Your line is open.

Good morning, everyone. And three questions for me, please. Firstly, on OPM, you talked about 13% enrollment growth. Can you help us understand how that translates into revenue profit growth too? And if its linked to that, I know you talked about strong pipeline going forward. But I'm aware that some of your peers have been seeing slowing growth more than having from their customers and higher student acquisition costs. Is this something you're also seeing or perhaps you can just make a couple of comments on those points? Second question on U.S. Higher Ed Courseware, so I see this one from declining slightly in the first quarter to declining at the midpoint of the zero to minus 5 range for the first half. Can you perhaps talk about whether or not you're losing share within this market? I would say when we talk about the phasing - shifting more to the first half from the second half as you obviously become more digital. So perhaps an update in terms of what you're seeing there? And then finally, you talked quite a bit in the release about the employer education partnership with Manpower opportunity. Can you talk a bit about how big this is today as part of the business and perhaps what makes you the best partner for the players in this market? Thank you.

Okay. Thank you very much Katherine. Coram, do you want to pick up on how OPM sort of the enrollment growth swings into - turns into revenue and profit, and also around phasing of Higher Ed sales and then I'll pick up on the pipeline and market share performance and then I'll pick up on the Manpower point as well.

Yes, absolutely. Hi, Catherine, I think we said in the past when we're talking about OPM that the enrollment growth is really a good leading indicator of revenue growth, but there is a lag to that revenue growth, because you bring those students onboard and then the fees start to come through, but obviously they are deferred at reparative times. So in a good way to think about is that you see the revenue growth comes through sort of 12 to 18 months after you get the enrollment. In terms of profitability, I think we've also run you through the characteristics of these contracts, which is that for the first couple of years, typically the investment in the marketing spend, means that we run them at a loss and then you - that turns and we pick up and make good profitability in the back end. So I think you should assume that the profits relating to the enrollments come through a year or 2 after you see the revenue. So enrollment growth and revenue growth and profit growth. And just to remind you the IRR on these contracts is very strong. So we're talking 35%-plus is a very good return on the investment that we're making. In terms of the timing of the revenue in Higher Ed, it's really important to remember the phasing effect that we have. So in terms of the first half of 2018, it was really helped in comparative terms by the returns top up that we took in H1 and in H2. So you can't infer anything from the comparison because the 2018 comp was an easy one in '17, it's much tougher now for at '19. And so on that basis, the middle of the range that we're in feels like the right place to be and isn't distorted by the returns and 2017. There's one other point I want to pick up on, which is I think you mentioned in your question that digital bring sales forward, it's actually the other way around. Digital moves sales closer to the point at which the student requires them and consumes the content and therefore, you would - all other things being equal except to see a move later in the sales periods.

Thanks, Coram. And then just coming back on the Online Program Management, the broader question you asked for me. The only way to think about it is that really four big roles that we play with our University partners. The first is that we are constantly actively managing our portfolio of University partners in program. So have we got the right regional mix and balance, have we got the courses aligned with where the biggest gaps in GLT [ph] the market? Is it aligned for some of the biggest growth trends around digital on the line, so we are actively managing the portfolio all the time. And you can see that in the number of new programs that we’re launching and the programs that they retire, and we referred to that in the press release. Secondly, then, we're trying to market those programs as effectively as we can to generate a pool of appropriate people for whom this would present the right career opportunity. And then the third element is then to translate those leads or convert those leads into enroll students. And fourth, most critically and more importantly, ensure that we deliver on the promise to those students by helping them to compete their cources and be successful and help to place them into a better job or career. We are investing not just in the marketing, but improving each of that four step in the process. And there's a lot of work that we can do around how we are using AI for example, to get more better and getting you better return on investment. So we actively work in each of those four elements of the process all the time, and you'll start to see the benefits of that work over the next couple of years. So the first point, I think you then were asking about our competitive performance in Higher Education Courseware. Just to remind you our sales and the other five major players in Higher Education Courseware, we all submit our data on a monthly basis to third-party and what we get back is where we’re going to track our performance against the industry as a whole. As you've heard me say previously, it bumps around a little bit from month-to-month, but it's always in that 40% to 41% range. We'll continue to trade in the range. I think on the June 12-month figures we are probably towards the bottom of that range. The National Sales meeting last week, the team feeling very good about our competitive performance as I think you probably expect to see that bump back up towards the middle or top of that range as we work our way through the year. So we continue to perform strongly competitively. As we've been through obviously appeared a very significant change when you think of all the cost savings we make, the supply chain challenges we have, the way we've completed the restructured of reengineering our sales force, I think there is a real opportunity to break out the top of that range, but that will come later next year as we start to bring the new digital products of scale to market. And then, on your third point, the manpower at the moment is relatively small contract, but this is a big opportunity, but one that will play out over the next 3 to 5 years. There is, as you can see, I think – its partly driven by the strength of the U.S. economy, but I think every major employer in the world is increasingly focused on how technology is disrupting its own business and the impact that will have on their employees. Every major American company runs a major tuition assistance program and we have the real opportunity to build a business by helping them to spend those tuition dollars more wisely and get a better return on investment, but for themselves as an employer and as importantly for their employees as well. So relatively small business as today, but a very big growth opportunity for us over the next 3 to 5 years. Thanks, Katherine.

Thank you. Our next question comes from the line of Thomas Singlehurst of Citi. Please go ahead. Your line is open.

Hi. Tom here from Citi. Thanks for taking the questions. Actually, three quick ones. I think you just alluded to John, but just to pen you down on that, hopeful I think the adoption sort of part of the year on a higher cost of that side has come to an end. When you talk about strong competitive position, you're obviously talking about confidence, that you haven't lost any share in the adoption rate. That was the first question. Second question, actually on the English language side, I know that you've got the Slide on English language assessment. I was just wondering whether you could sort of talk about English language learning, is there any sort of particular trend there that we should be aware of? And I'd say - actually I think that I only have three questions.

Okay. Just [indiscernible] Tom on second question, what are the big trends we're seeing in English language learning?

Yes, yes. Its notable and its absent in the presentation, I mean obviously it's very skewed to Latin America now, but is there anything you would call out particularly in the trend?

Well, I think I did say that as well as seeing a big opportunity in the Pearson Test of English and Associated Higher States Assessment, we did see a big opportunity in English Courseware, particularly as we go more digital and as particularly relying into assessment. And actually one of the things that we have done over the last year is on the back of making the strategic decision to exit the direct delivery of the English language teaching with the sales of Wall Street English and Gather [ph] that has actually given us the opportunity to sort of reinvest in our Courseware businesses, building on our competitive advantage, which are in digital and assessment and we actually got some good products coming to market this year that we are excited about one of the next-generation of products, one of the sort of big use cases, if you like, to the global learning platform is also going to be one of our new big blockbuster English Courseware Program. So we are continue to be committed to it and excited by the opportunity. And just to – I don’t know I have said, more then what I said now to question from Katherine, which is, you're right, we are through the major adoption - with the team last week. As in any year, you win some and you lose some, but overall we're feeling good and strong about our competitive performance that we have held our own and as I said, we will see market share held pretty much steady in the range it's been over the last few years.

And 1 quick follow-up on that topic. I mean obviously with [indiscernible] sort of obviously considering combining, how does that impact sort of sales process across the back of the year, does that create any temporary opportunities or disruption from one and the other?

I think, you'll understand from the - I'd rather focus on what we're doing and making sure, that we are doing a brilliant job of meeting the needs of our customers. I mean, clearly I think you probably got a sense from the presentation, one of the things we do feel very good about is the process of completely reengineering the technology platforms of this company, the process of taking over £300 million of the cost of business have the potential to be highly disruptive and very distracting. So the fact that we sustained our competitive performance through all that disruption is great. And what's exciting that's now behind us. And so now was really good is that we're really focused on the future and we're very focused on making the most of the great opportunity that we see ahead of this. So that's what I think as good about the future for us.

Thank you.

Thank you. Our next question comes from the line of Nicholas Dempsey of Barclays. Please go ahead. Your line is open.

Good morning, So first question, when you talk about 300 additional titles for Revel in 2020, are we talking about those being available? So how confident are you to high numbers of faculty members will adopt those in the spring of 2020? And therefore, you'll be able to fill them in September or there going to be a slow process to get those products into the market through those adoptions. That's the first question. And then, second question on in terms of digital registration. So as I understand you're saying that digital registrations will be done, digital revenues will be up a bit. And we're talking about through 2020. You still got drags from enrollments. You still got drags from the print side of things. So are we saying that we're looking at another decline for sure in 2020 based on those dynamics in U.S. Higher Ed Courseware?

Okay. Thanks, Nick. I'll pick up on the first question and then Coram might want to pick up on the second around revenues and just remind you with the guidance we've given you on the role of digital revenues play. The 300 revel titles that we're talking about are titles that are already in the market today, but they're on a legacy platform. The one is much more expensive us to serve and to support the growth in those registrations and secondly, limit the new features and functionality that we can offer. So what we're saying is all our revel titles will be on the global learning platform for back to school next year. That will make for an enhanced user experience. Learners already love, if you look at the NPS scores, they always already get a very strong response from students, but we'll be further able to improve the student experience, but crucially the platform that revel is currently on those inhibit our ability to enhance features and functionality for faculty, particularly for example, in areas like authentic assessment where we want to provide faculty with the availability to set for example, their own assessment - the machine can then assess on their behalf. So what this means is all revel titles are on the new platform, as it continues to grow and scale, it costs us less to serve and support those revel products and it enables to continue to enhance and improve the student experience and provide teachers with faculty with much greater functionality, which is going to make them more likely to want to use and adopt revel as a product. So that's on the first point. Secondly, Coram can you just remind our guidance on the contribution from digital revenues in higher education.

Yes. Let me just touch a bit on the sort of framework that we've laid out for higher education. I mean, there are pressures on the enrollments, but as we know, it is linked to the economic cycle. And so that can vary in line with economy. Though we're as we know has a limited impact on our revenues in higher education. It's an area that we track very closely. And then clearly there are ongoing print declines and digital revenue growth and we've seen it in the first half and you expect us to see digital revenue growth in the second half. So I think, despite the registration pressure that John has walked you through, we are seeing revenue growth in digital and we would expect that to continue. We're not going guide to 2020 at this stage for obvious reasons., but I think we are excited about the prospects that we see in higher education as the result of the roadmap, the GLP and products that will come on back to back.

Thank you. Your next question comes from the line of Matthew Walker at Credit Suisse. Please go ahead. Your line is open.

Thanks. Good morning, John. Good morning, Coram.

Hi, Matthew.

Good morning, hi. A few questions please. The first is, can you just expand on your recent announcement about the printed books? Because my understanding is obviously you're cutting the number of printed books that are going to be new additions, but the print books for older editions will still be available if people like Amazon or whatever order them or anyone wants to order them. Can you just give us a feel for, let's say, for 2021, in terms of the actual number of books that are going to be produced as a range, how does it move from the say '19 to '20 to '21 under this system? Just to get an idea of scale because we don't believe how much is – how many old editions will be ordered versus new additions, et cetera. So just to get a feel for that would be helpful. Second thing is on the guidance, on core, I think in end of 2018 you guided for this year, for core to be stable. Barely you've done 6% in the first half. Looking at what you're saying about Egypt, you said mid-single-digit revenues for Egypt that, I guess, implies about 10 million for the full year, that's the least percentage point of growth. Can you update your guidance for core from stable to something else, because otherwise it doesn't really look very realistic? And then, last question is on tax. It seems like every year we started '21 then we edge down a bit in the first half, then we edge down a little bit in the 9 months. By the time we get to the full year the tax rates gone from 21 to 11, how much extra tax savings et cetera is there to go? And like should we just stop putting our tax rates for '21, '22, '23 at an 11% to 15% - trouble of having to reduce that constantly later on?

Okay. Very good questions Matthew. So I'll ask Coram to pick up on tax and guidance on core geographies. And then I'll sort of talk a little bit more about the digital first strategy.

Thank you. Hi, Matt. How are you?

I am brilliant. Well, I with all seasons been a bit…

On core, I mean, it's clear, we've had a good start to the year in core. It's not just Egypt though, there are three phasing facts that I think I mentioned. The first is the Egyptian contract, which is new and which we've quantified. The second is that courseware in both the U.K. and Europe has benefited from some early order patterns and there are very different reasons by in country, but that's coming together and given us a bit of a phasing benefit there. I think the second - the third thing to remember is the various ongoing pressure in our printer ships business and where is the benefits at levels of BTEC and GCSE and this proportion we felt the first half, the drag on apprenticeships is a bit more spread between first and second half. So if we had a good start, we're halfway through the year, I think it's looking promising for core, but you must remember there are some phasing effects in those numbers. In terms of tax, I think couple of points here. Firstly, it is unprecedented tax environment right now. There's a lot going on. U.S. tax reform is once in a generation experience in terms of the changes to the rules and the rates. And you also have a series of other changes going on in the way in which countries think about international transport pricing in the sub line. So it is a more difficult tax environment to forecast. Last year, we benefited from, not just U.S. tax reform, which became clearer as the year progressed because the other aspect of it was that was introduced very quickly with minimum detail, but there were a couple of other one-offs, which were driven by things that we had done in the past and by improving our relationships with tax authorities. So last year was absolutely exceptional. This year, it's been a small adjustment, which is really come from us getting clearer, again, on some of the aspects of U.S. tax reform and that's why we're now guiding to 17% to 19%. I don't believe that fundamentally changes our long-term guidance in tax of '20 to '22. I think if you were to pitch it towards the bottom of that range, you would be modeling in the right way.

Okay. Thanks, Coram. And then, Matthew, just to pick up on your -- answer your first question, maybe I can sort of break it down into a couple of [indiscernible] related theme. The first thing is really most fundamentally, which is around how do we create and make new products and new revisions as we become the Digital First Courseware company. So, although we've been on a extended analog-to-digital transition in this business over the last 15 years, 55% of the revenues last year were now digital, but the product development cycle has still been analog. So in other words, it was all driven by the 3-year revision cycle, but new physical textbooks, which have been driven the economics of the industry since at least the 1970s. It's time to break that. So from now onwards, product updates are done in a Digital First way. And the types of reasons why you update a product is, changes in the body of knowledge, a new scientific breakthrough, a new compelling business case study, a major development in world history or contemporary politics or whatever it would be. And in there, you don't wait 3 years. You can now do it from 1 semester to another. Secondly, as we really up our investment efficacy research, we're learning a lot more about the user experience about learning design, about cognition and how people learn. We're making big breaks those around artificial intelligence and how we do authentic assessment and the like. Rather than having to wait the 3 years title by title, and do that is the sort of follow-up supplemental to the print, it clearly makes sense to completely flip that. And so as those big developments and insights come through, we have the capacity to make those changes in real time across all 1,500 titles. So think of it as updates to your mobile phone or the way your Netflix or your Spotify account or anything else. So it's just a real time user update as and when it is appropriate to do so. That's the first one. I mean, it's obviously - it's much more aligned with the strategy. It's cheaper and much more efficient way of doing it and it works for a better user experience and better outcomes for teachers and for students. So that's the first point. That's how we create and make products. Related to that is then how overtime we shift all of those 1,500 products from an ownership to an access model. And as you heard me say in the presentation, we're now at a point where 400 of our titles are in access mobile. Either they are print rental or some revel products there is no print version of the revel, it’s just subscribed to revel. I think we've announced today, signaling very clearly today that we will put at least another 110 products into the 1,500 into the access model next year. So that gets us over to 500. And our intention will be to get all 1,500 into that access model as quickly as we can over the next few years, but you'll understand what you just sort of update on that as we go because it's a sort iterative process. The third benefit of doing this and what that means for prices to students. And the prices that we announced last week are not new. There weren't any change to guidance, it's what we're already doing. But it's really enabling us to simplify the message. So really we now have 3 products. So a form digital product, each acts with all the scope and sequence and all the chapters and table of contents that you traditional expect from the physical textbook in an online environment wrapped around a highly adaptive personalized assessment, submitting all your homework online and also feedback. The average price for that there is a little bit from revel to MyLabs [indiscernible] but the average price is about $79. If you just want the eText, so if you just want the textbook in a digital format, the average price there is $40 and if you're still really want a physical textbook because we have to assume for the foreseeable future people will the average price of that to rent will be $60. So $80, $60, $40. That's a much simpler model that people to understand. It's much more aligned with the economics of the business. If you all want one of those Inclusive Access partners that works with Pearson then the price action per student could be between 10% and 25% lower of that. And this just reinforces the point that I was making earlier. That's fantastic value. It's highly competitive with the secondary market. It's highly competitive with OER and it means that we can achieve a lower average revenue per unit with a higher revenue per enrollment and we start to close the gaps if you see there is a slide in the appendix of the presentation that talks about the fact that we have over 30% of use, but we have less than 20% of value. And this strategy is going to enables us I think overtime both to increase our share reviews, but most importantly, close our gap between value and use. So this is generally a win-win. Lower prices to students, more revenue for Pearson. That's how we get this business going, but we will only do it by having fantastic content, brilliant adaptive learning capability, great user experience and that's why we've invested so much in the global learning platform and the transformation of the company, and that's what make this excitement. It's all the hard work and graphically done over the last 5 years but now it enables us to really get on with the next and most exciting phase in the company.

Okay. Thank you very much,

Thank you. Our next question comes from the line of [indiscernible] Bank of America. Please go ahead. Your line now open.

Yes. Good morning, everyone. And thanks for taking the questions. So three of them, please. John and Coram, you gave us in 2018 a split of U.S. higher rent by product model between digital - print digital and print, just wondering if you could update perhaps that revenue split it would be incredibly helpful. Secondly, given the announcement that you've made a couple of weeks ago about decommissioning or stopping to add its new print textbooks, should we assume that print decline should accelerate in the coming years? And then thirdly, as a follow-up question to what was asked about revenue growth in core, what would a drivers of the underlying improvement in profitability in the core business because you've converted 100% of incremental revenues into profits? Thank you very much.

Okay. Thank you. Coram, do you want to pick up on those?

Yes. Sure. Let me take each in turn. I mean terms, of the split of the business. I think it's best to do that for the full year, because obviously you do have distortions at the half year because of some of a phasing effects that I've talked about between physical and when digital sales are made. But just to remind you, this is at the full year of 2018 we were 55% digital and 45% print. I think in terms of the dynamics between print and digital, I think you'd expect to continue to see similar dynamics as we were through this transition. Obviously print will continue to decline. And as John has described, we're very much focusing on the digital side of the content, but it's going to become an ever smaller part of the base. And then in terms of core, the thing you have to remember that it's not just the revenue drop through, but it's also the restructuring savings that we have seen come through in the first half of this year and we just read across each of the geographies. So that's why you're getting drop through on that revenue in core, but there is also restructuring benefiting there.

Thank you. And our next question comes from Giasone Salati of Macquarie. Please go ahead. Your line is open.

Hi. Good morning. First question for Coram, please. Can you help us with the - what is your view on H1, H2 balance? We've gone through a couple of years of changing models, different conference and stuff. It looks to me like 2019 should be much more balanced between H1 and H2, but interesting to hear more color on that. Second question and third for John, please. Last year, we had those ERP glitches in the summer, but we understand now most of the technology transition has been completed. Do you see any more technology risk with any of the new products us into the summer we should be wary of? And lastly on Inclusive Access, very strong increase, again, on the number of institutions. They're probably becoming smaller in size. I guess, we're getting into the long tail. Can you give us a feeling for how much of the market is now covered by these Inclusive Access deals? And maybe if you have any indication on the share, clearly I mean, as Sangage [ph] claiming market share for the last few years and that is something that is very, very interesting to monitor because the selling model is exactly the same between you and Sangage? Thank you.

Okay. Coram, do you want to pick up on phasing and then I'll pick up on the other 2?

Yes, sure. So I mean, obviously we had a good start to the year. I think you're right that there will be more balanced in the phasing, particularly for think about some of the descriptions I've given earlier on and on to the specific questions. The 2 things to remember about second half: One, they're always phasing effects in core; and two, Higher Ed continues its trends, it will still have slightly more weight in the second half than it does the first half. But nevertheless, it's a good start to the year.

And Coram, actually do you want to pick up on where we are in the ERP process as well?

Yes. So in terms of the ERP process, we are - and we have it fully implemented in the U.S., and the U.K. That's a big milestone for us. Because, as you know, we started this process with 63 different ERP platforms across Pearson and we now have our 2 biggest markets more than 75% of revenue running at the same core technology backbone. That intern allows us to standard processes, drive working into shared service centers and really reduce our headcount. So I mean, there's a bit more to go, and so far as the remaining 20% of smaller countries. We have a system, which we know can deliver work within all of the business models of Pearson, so you'd expect us to complete that over the next 12 or months.

Yes. And I would say on your third question, on Inclusive Access, we're still in the early stages for our adoption here. And actually you've got a probably reasonable cross-section of universities sort of adopted, but it's by far - by no means the biggest ones and actually, probably the earlier adopters have been sort of community colleges, some smaller universities. And it's actually only really now I think that people can see the real benefits of it, that many of the bigger institutions are coming on board. So there's lots of opportunity and lots of further growth to continue to ramp up Inclusive Access take up by universities. \ And then secondly cut off them where we signed up an Inclusive Access partner, we often start with a one faculty and then the other faculty see the benefits that’s bringing both to the students and to the department in terms of the express of the data analytics and the capabilities and service that they provides and then you build out. So Inclusive Access will grow in 2 ways: one, more institutions and two, greater take-up within institutions. There's a lot of growth runway still there.

And can you help us with the size and that in terms of the market value rather than a number of institutions?

Well I think, we've said it's a sort of around sort of 15% of our revenues about at the moment, and so there's lots of opportunity for further growth. So that's probably good proxy for the level of adoption take up so far there's a lot more opportunity. Coram, anything you want to add anything on that?

The only point I'd add John is absolutely spot on with the revenue number. We've got more than that in terms of institutions because you tend to sign up the institutions and then the revenues lag. I think if you're looking for an assumption sort of north of 20% to be institution base would be about right. And that's a good leading indicator of the revenue shifting into the model.

The reason is the difference between the 2 is just because we've got the institutions signed up. It doesn't yet, I mean, we've got full take up within the institution and that's why the growth comes in 2 ways.

Thank you. And as we come to end of last one, I'll hand back to our speakers for the closing commands.

Okay. Hi, everybody. Thanks, then, again, for joining us today. Thanks for your interest in the company. Joe, Angeli and Tom are on the call. If you have any follow-up questions in the course of today please let us know. If not, look forward to catching up with you in the due course. Thanks, again, for joining us.

This now concludes the conference. Thank you all very much for attending. You may now disconnect your lines.