Pearson plc (PSON) Earnings Call Transcript & Summary

Hello, and welcome to the Pearson's 2019 Q4 Results Analyst Call. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present John Fallon, CEO; and Coram Williams, CFO. Please go ahead with your meeting.

Good morning, everybody. Thanks for joining us. John Fallon here. As usual, I'm here with Coram Williams, our CFO; and our Chairman, Sidney Taurel. You will have seen from this morning's announcement that Coram will be leaving Pearson later this year to be CFO of a large European company. These have, as you all know, been a challenging few years for Pearson and through it all, Coram has led the finance function with great intelligence, integrity and yes, grit. He has made big strides in improving the clarity and transparency of our financial reporting, he's been fundamental in making Pearson a simpler and more efficient company, in the strengthening of the balance sheet and in enabling us to invest in the future growth of the company. His key partner in that work has been Sally Johnson, our deputy CFO. She knows the company and our markets exceptionally well. She's highly regarded across the company, and she's going to make brilliant a CFO. Some of you know her already. All of you will get the chance to meet her in the coming weeks. As you know, I plan to retire from Pearson later this year once my successor has been appointed and after an appropriate transition. In the meantime, I'm completely committed to leading the company through what is certainly proving to be a challenging digital transformation, but one which I'm more confident than ever will prove in time to be a successful one. So turning to the trading update. We are providing an update on the key elements of our 2019 performance and guidance for the years ahead. We'll have more to say when we present the full financial results later next month, but these are the headlines. For the first time since 2014, underlying sales are stable on prior year. Operating profit is around GBP 590 million, in line with the bottom of our guidance range. We've made good progress in making Pearson a simpler and more efficient company. And we announced the disposal of our remaining 25% stake in Penguin Random House last month and the share back related to that disposal starts today. Structural growth businesses that are such an important part of the future of the company and now represent 39% of revenues, grew 8% last year, with a strong performance across all the main areas, Virtual Schools, English assessment, Professional Certification, partnering with universities to launch online courses. At the same time, the 24% of Pearson that is still in the U.S. Higher Education Courseware declined by -- last year by 12% rather than the 0% to 5% we guided to at the start of the year. The students are now embracing digital over print much more quickly. Digital revenues grew but physical textbook sales fell close to 30%. Just to remind you, our digital-first strategy adopts a much simpler pricing structure. $80 average price for a platform-based course, such as MyLab, a Mastering or a Revel, which combines an online homework tool with an eBook. $40 average price for an eBook, where the course does not require homework to be submitted online, and for $60, students who still want a print textbook are able to rent one. For students, this provides a better experience and outcome at a more affordable price compared to the higher-priced physical textbook. For Pearson, longer term, it means a more sustainable business as we build direct relationships with 10 million-plus learners, who pay us directly to use our products, thus over time, eliminating the currently large secondary market. We're now in the final stages of this analog-to-digital transition with a mix effect that hurt sales last year in 3 ways. First, in our platform-based course adoptions, where students are assigned an online homework platform such as MyLab, Mastering or Revel, they are now mostly relying on the eBook embedded within it rather than buying a more expensive bundle package of the digital homework product with a physical textbook. Sales of these bundled packages have reduced by 65% in 3 years with the fastest decline happening last year, as highlighted in the yellow line on this slide. Second, for courses that don't require an online homework solution, more students are now renting an eBook rather than buying a physical textbook. eBook consumption has grown from 1 of every 5 units sold in these text adoptions in 2016 to 1 of every 2 units sold today with the biggest shift, again, happening last year. Third, as a result of this change in student behavior from print to digital, campus bookstores are carrying less physical inventory than they used to. This mix effect reduced sales last year in Higher Education Courseware by around 6% or $70 million. The other factors we've talked about previously, including declining enrollments and the impact of OER, were as we expected at the start of the year. As we flagged in September, we did lose around 1 percentage point of adoption market share last year. That was on the back of the supply chain challenges we had in 2018 and the major sales force reorganizations that we made in 2018 and the first half of 2019. With that major restructuring now done, we expect our course adoption share to stabilize this year and then grow again as we launch new digital and highly adaptive products on our Global Learning Platform. We're likely to see a similar mix effect at work in 2020, although on a smaller base. To put this into context, last year, we sold 3.7 million textbooks, either as part of a bundle or on a stand-alone basis, to students in American universities compared to 7 million, 3 years ago and 21 million textbooks a year a decade ago. Our guidance for 2020, which Coram will talk you through, assumes a further 30% decline in unit sales of print textbooks this year. These 3.7 million textbooks represent some 20% of total U.S. Higher Education Courseware revenue or about 5% of total group revenues. That's because it excludes around $200 million of revenues that come from college textbooks we sell into American high schools as well as our professional publishing arm. These revenues are much more stable and are not subject to the same analog-to-digital transition that I've just described. For example, you remember that when we sold the U.S. K-12 learning services business, we chose to keep the advanced placement business, which is about selling U.S. college textbooks for students taking college courses in high school. So the data trend is clear. We are now in the final stages of the flight from print to digital. The landing is proving harder and bumpier than we expected. But it is now clearly in sight, and that's the point when the digital transformation is effectively complete, enabling this part of Pearson to stabilize, and in time, start to grow again as the benefits of investment in the Global Learning Platform start to bear fruit. The future of learning will be increasingly digital. It will be consumer-defined. Experience, outcomes and affordability will all matter. The building of the Global Learning Platform is truly transformational. We've had to build new core services around identity, digital commerce, registration, subscription and billing, rights and royalties and foundational learning engine capabilities, assignment, assessment, analytics, adaptive AI, course administration and grade book, before we could launch a single new course on it. With all those foundations now built, we're now at a point when we really accelerate the release of new digital products with digital revenue growth also accelerating from later this year. By the end of this year, all Revel -- 300 Revel titles will be live on the platform, enhancing the faculty and students' experience and helped by our recent acquisition of the Smart Sparrow platform, which is a small ed-tech company that specializes in the creation of rich interactive content. We will launch this year our new eText with a much more engaging, interactive and personalized learning experience. Next year, we'll start to launch the next-generation of MyLab and Mastering products on the platform, which we will then scale commercially over the next 3 years. Next-generation means extensive application of the diagnostic and adaptive learning capabilities that we pioneered last year with the launch of our Rio pilot and which we know faculty and learners value greatly. The consumer-grade experience, especially on mobile, the flexibility and speed with which you'll be able to adapt to a diverse range of learning needs. These are all, we believe, the real building blocks of differentiation in the market. We'll also be launching a range of direct-to-student apps, building on initial success of AiDA that help both with homework and with managing their studies and their future careers. All of this, as I say, will enable digital growth to accelerate. The 76% of Pearson that is not U.S. Higher Education Courseware grew 4% last year in aggregate. Our structural growth businesses, Professional Certification, English assessment, Connections, partnering with universities to launch online programs grew by 8%. Investment in OPM meant that was up 10% globally, where we're seeing good enrollment growth. New school openings has driven revenue up 6% in Connections, and the continued ramp-up of new contracts and test volumes have driven revenue up 10% at Pearson VUE. Pearson Test of English Academic grew 17%, and we recently announced the winning of the new U.K. SELTs contract, which is an English language teaching assessment with the U.K. Home Office, which will drive further growth. But we also perform well across our wider assessment and courseware businesses where the majority have stabilized or grown. We will continue to grow in 2020 as we invest in new forms of online education. In better, smarter online assessment, in new AI-inspired direct-to-consumer apps, and in shifting Pearson's focus to link education with employability and the workplace. We're able to invest more organically in our business, 20% more than we were investing 5 years ago because by any benchmark, Pearson is now a much simpler and more efficient company. Over the last 6 years, we've reduced the cost base by around GBP 1 billion, reducing head count by around 20,000. We decommissioned around 2,500 applications, closed 81 data centers and implemented 16 new global scalable cloud-based platforms. 80% of Pearson runs on 1 enterprise resource planning system today, all of it will by the end of next year. This means we now have the platform by which we can innovate organically and sale more quickly. It also means we can use our strong balance sheet to make acquisitions, as you saw us do in Q4 last year, that enable us to advance our growth strategy, confident that we now have the platform by which we can quickly and efficiently integrate these businesses. There's a lot still to do but Pearson is well placed to be a clear winner in digital learning. And with that, I will hand over to Coram.

Thank you, John, and good morning, everyone. In the next few minutes, I'm going to take you through 3 things. Firstly, the key results for 2019. Secondly, the headlines of our guidance for 2020. And finally, a revised financial reporting structure that we will implement for 2020. So let's start with results for 2019 and look at our sales performance by region. Revenue for the year was flat with prior year, in line with guidance. 5% growth in Core, 4% growth in Growth, offset a 3% decline in North America at a group level. In North America, we saw continued good growth in Connections and OPM driven by increased enrollments, new program launches and/or school openings. We saw a strong performance in Professional Certification driven by contract wins and higher test volumes. U.S. Student Assessment was broadly level. This growth was more than offset by a 12% decline in U.S. Higher Education Courseware driven by the factors that John has already outlined. In Core, revenue was up 5% driven by strong growth in U.K. Student Assessment and Qualifications, PTE Academic, OPM, Professional Certification and the delivery of a new digital assessment contract in Egypt. In Growth, revenue up 4%, with strong performances in China and Brazil and modest growth in India, partially offset by declines in South Africa in both Higher Education Courseware and Higher Education Services. Turning to operating profit. This slide shows the preliminary operating profit bridge from 2018 to 2019. We expect to deliver 2019 adjusted operating profit at the bottom of the range of GBP 590 million to GBP 640 million as per our updated guidance at the Q3 period. That reflects a negative GBP 52 million impact from trading driven by a weaker-than-originally-anticipated performance from U.S. Higher Education Courseware, partially offset by better-than-expected growth in the rest of the business. Our restructuring savings of GBP 130 million are in line with our plan for 2019. Other operating factors were flat as additional investment in our strategic growth priorities, as highlighted in our 2018 full year results, was offset by one-off cost savings announced in our 9 months trading update and a partial release of the accrual to the annual incentive plan. Finally, we've seen GBP 50 million of inflation and a GBP 25 million benefit from the adoption of IFRS 16. Turning now to 2020 guidance. On revenue, we expect the broader 76% of Pearson to grow low single digits in aggregate. We expect to see continued growth in OPM, Virtual Schools, VUE and PTE Academic, although this will be off a tough comparative, given the exceptional performance of these businesses this year. Our Student Assessment business in the U.S. will be stable. And in the U.K., our qualification and Student Assessment business will continue to see modest growth. The wider courseware and assessment businesses will continue to stabilize, and we expect to see continued growth in Growth. In U.S. higher education, we expect the trends we've seen this year to continue, with significant declines in print, partially offset by modest growth in digital as we add more products to the GLP. We plan to accelerate our product release schedule from the end of 2020 onwards and digital growth will also accelerate. Turning now to profit and EPS guidance. In 2019, we delivered adjusted operating profit of around GBP 590 million based on our guidance exchange rate of $1.27 to the pound. On a comparable FX basis, we expect adjusted operating profit of between GBP 500 million and GBP 580 million for 2020. This is based on the current portfolio, including our 25% stake in Penguin Random House, as we have not completed the transaction as yet. Our guidance reflects the increased benefits of our restructuring program, which are now expected to be an incremental GBP 60 million in 2020. This means we will be delivering increased annualized cost savings of GBP 335 million from the end of 2019 as a result of our efficiency program. The specific actions that we've taken to drive these cost savings are complete, but we do expect our streamlined back-office systems and processes to deliver further efficiency benefits in the future. We expect a normalized tax rate of around 19% and a finance charge of approximately GBP 50 million. Finally, I'd like to give you a preview of how we plan to report our financials in 2020. This is driven by the changes in management structure, which we announced at Q3 in 2019 and became effective on January 1, 2020. Revenues will be broken down into 4 key divisions, mirroring management responsibilities. One, global online learning, which incorporates all of our OPM and Virtual Schools businesses; two, Global Assessment, which contains Pearson VUE, U.S. Student Assessment and U.S. Clinical Assessment; three, International, which will combine our former Core and Growth divisions, excluding online learning, and includes our U.K. qualifications and courseware business and English; and four, North American Courseware, which includes U.S. Higher Education Courseware and Canadian courseware. Going forwards, we will show you sales and variable contribution related to these 4 divisions, and we will present back-office costs separately. We will also provide the contribution of print and digital in our U.S. Higher Education Courseware business. We believe this will make the businesses easier to understand and enable you to model more accurately our overall trajectory. We plan to report the 2019 results on the basis that we've used until now but we will also show them on a pro forma basis in the new reporting structure when we report in February. And with that, I'll hand back to you, John.

Thanks, Coram. So in summary, we stabilized revenues last year with operating profit in line with revised guidance. This is built on a strong financial footing, which is enabling us to continue to invest in our digital innovation and platform-based products. U.S. Higher Education Courseware is becoming ever closer to being a fully digital business. And the 76% of Pearson outside of this business is now growing at a healthy and sustainable rate. We've made good progress in simplifying the company, reducing the cost base, creating a modern, agile platform-based company that can both innovate more quickly and continually become more efficient. All of this will ensure that Pearson delivers sustainable growth over time. And with that, we are pleased to take your questions.

[Operator Instructions] And the first question is from the line of Sami Kassab from Exane BNP Paribas.

I had a few questions, please. First one, can you give us the Penguin Random House EBIT contribution assumed in the 2020 guidance or at least the Penguin Random House contribution in the 2019 numbers? Secondly, could you provide an EBIT bridge for 2020, highlighting the assumptions you have made in terms of contribution from trading, inflation, other operational factors? And lastly, can you share with us your outlook for U.S. Student Assessment in 2020, please?

Okay. Thank you, Sami. I'll ask Coram to pick up on those questions.

Sure. Sami, in terms of the EBIT contribution of PRH, we typically think of it as between GBP 60 million to GBP 65 million. It's probably a little bit more this year because there's been some strength as a result of the success of Michelle Obama, but I think if you go for GBP 60 million to GBP 65 million, you'll be in the right range. In terms of the EBIT bridge for next year, we'll obviously give you a detailed bridge in February, but let me talk you through the sort of the moving parts so that you've got a sense of how you go from GBP 590 million to, let's say, the middle of our range. There are 2 drags on the P&L. The first is obviously the ongoing decline in higher ed courseware. It's likely to have a similar effect to what we've seen this year, and also inflation, which, as we know, is coming down, but it's still an impact on our cost base. That will be offset by further growth in the 76% of our business that is not U.S. higher education and the GBP 60 million of benefits that come from the incremental benefits on the efficiency program that we've been undertaking over the last couple of years. That gets you roughly flat. Then the 3 things that you need to think about are -- we talked about discretionary cost savings in the last quarter of last year, roughly GBP 20 million. We need to move the bonus back up to an on-target accrual and there'll be modest investment in our structural growth opportunities. And those 3 things get you to roughly the middle of the range. So that's the broad bridge. But obviously, we will show you more detail on that in February. And then in terms of the outlook for U.S. Student Assessment. As I mentioned briefly in my call, that business has stabilized this year, which is very good news. That means we're through the pressures that we've seen as a result of the PARCC contract going away, but we have generated stable revenues in 2019. And we expect a very similar performance in 2020. It feels like that business is back on a solid footing. It's a good high-margin business. It's generating good returns [ from us ] on a stable revenue base.

Next question is from Katherine Tait, Goldman Sachs.

A couple of questions from my side. The first one, in terms of the market share move in higher ed, I know you sort of point to these ERP issues and some of your competitors have sort of pointed to around about 350 basis point of market share gains up to sort of [ October ] time. Can you sort of talk about whether or not you recognize those numbers? And you've obviously talked about ERP, as you were saying, the key driver. Do you expect this to come back in 2020, is that sort of within your guide? Or are you expecting that to sort of continue to -- just I guess a view on what's incorporated currently in your 2020 guide would be really helpful. Secondly, on the GLP, you've talked about the successful launch. Can you perhaps give us a bit more color in terms of what's incorporated in terms of your 2020 guide for GLP specifically? How should we think about that in terms of contributions to the sort of financial outlook for Pearson in 2020 and beyond? And then finally, in the non-U.S. higher ed business, your 4% growth this year, pretty impressive. But you talked about tough comps going into next year. Can you just give us a couple of details as to specifically what those relate to?

Okay. Thanks, Katherine. I'll pick up on the first 2 and then ask Coram to come in on the third one. So I think we've looked at the -- our market share performance any number of ways, particularly being at -- if you look at digital registrations, if you look at our own tracking of adoption wins and losses. And we then verify that with an external third-party survey of college adoptions. We're very confident that we've lost about 1 point of market share. That share loss is largely self-inflicted. It relates partly to the supply chain challenges that we had in the fall of 2018, but it also relates to the fact that we made, as I've signaled in the introduction, very significant changes in our product development, sales, marketing and all the services that we support the business. And as hard as we've worked to retain a very strong customer focus, inevitably there's some disruption and distraction to customer relationships, as you were, at that point. That work was essential. We had to do it to realign the cost base of the business with the economic reality. And we had to do it to get ahead of a digital-first world. The good thing is that is now done, it's behind us. That work was all completed by June, July last year, and we are now completely focused on new organization design, our new way of selling and our new way of doing digital-first product development. The good news from that is we can see that our performance is now much more stable, and our expectation is that our adoption share will stabilize this year. And we will then start to gain back a point of share, and hopefully, significantly more than that because we are now in a position to really accelerate the launch of new digital products and services. And that brings me onto your second point. As I signaled, all 300 Revel books will be live on the platform for back-to-school this year. We will launch a new Pearson eText. This is a significant advance on the sort of e-readers that third-party distributors have in the market because it's a much more interactive and engaging experience. And we will pilot the first of the next-generation of MyLabs and Mastering and then start to roll them out in 2021 and beyond. So the answer is -- to the second question is it's really next year, back end of this year into 2021, that you'll really start to see benefit of the new products that we launch on GLP. And Coram, do you want to pick up on the third point about our guidance for the 76% of Pearson that's not U.S. higher education?

Yes, absolutely. Katherine, you're right, the growth in that part of the business was pretty good at 4%. There are a couple of things, particularly in our structural growth opportunities, which I think were really exceptional. So VUE, as we've mentioned, was up 10%. That was driven by a number of new contracts and some volume increases coming through on additional contracts. That helps us going forwards, but it's unlikely to repeat at that kind of growth rate, but VUE is a solid mid-single-digit growth business. And the second piece to note is around [ OBL ], our virtual schools business, where the timing of some school closures and the timing of the opening of new schools means that long term, the enrollments are compensated for, but it doesn't necessarily compensate in 2020. So those are the 2 aspects, I think, of the comparative that are tough to repeat. But to be clear, we're expecting good growth in that 76%. Our structural growth opportunities from a larger base will continue to grow. And the traditional core of Pearson, the assessment businesses in the U.S. and the U.K. are performing well, and we're seeing good momentum in the rest of Core and Growth. So that's why we're guiding to single-digit growth in those businesses. And I wouldn't want you to think that they were coming off because we're pleased with the trajectory and the momentum.

Next question is from Nick Dempsey from Barclays.

I've got 3 questions. So first of all, previously, when you've given a range in your operating profit guidance, there's also been a range in North America higher ed courseware revenues and those 2 things have broadly tallied up. So now, we've got quite a wide range in operating profit guidance, but when you're talking about North America higher ed courseware, you're saying it's something similar to the minus 12% in 2019. Like my question is to hit the bottom end of your profit range, would North America higher ed courseware have to be notably worse than minus 12%. Or where are the flexes inside that quite a wide range. That's my first question. Second one, when I'm comparing the 2019 bridge that you just showed us to the one you showed us in February 2019, one standout is the other operational factors is a positive GBP 15 million now. It was minus GBP 32 million, GBP 33 million negative in the step at the start of the year. So that's a GBP 48 million swing. That looks like you've really turned off the tap on investment in that bucket compared to what you expected to do. But can you give us a bit more detail on what's going on inside that bucket and whether that might affect future growth? Last question, can you talk about the likely size of cash restructuring in 2020?

Okay. Thanks, Nick. I think, Coram, those are all for you. Do you want to pick up on those 3?

Sure. Yes. Nick, in terms of the range, I think you should assume that the way that we've guided on revenue, i.e. higher ed continuing the trends that we've seen and the other 76% growing low single -- low to mid-single digits, I think you should assume that that gets you roughly to the middle of the range. That's usually the way that we think about how we build our guidance. Clearly, within that, there are a number of things that can go better, and there are a number of things that we could find more challenging. And so at the bottom of the range, higher ed would have to be worse than 12% or you would have to see less growth in the other 76%. But equally, importantly, if higher ed were better than minus 12% or if we saw increased momentum in the other 76% of the business, then we'd be in the upper end of the range. And the reason we put a range around the plan is because we believe those outcomes are equally likely and -- but we should focus on the middle. In terms of the 2019 bridge and the other operating factors. You're right, at the start of the year, we showed a negative here because of the investment that was going into the business. That investment is still and has gone into the business this year because we believe it's important to secure further future growth and momentum in the out-years. The things -- the 2 things that have offset that at a bridge level, that doesn't mean we haven't spent the investment, are the discretionary cost savings that we took in the latter part of 2019 and as I mentioned, a small bonus release, which is what you'd expect because we plan on the basis of an on-target performance, and we're coming in at the bottom of the range. And therefore, you would expect there to be some release on that. To be clear, that does not impact the future growth trajectory of the business because the underlying organic investment is going in. And then in terms of cash restructuring, there is a sort of lag to the cash. I think if you were to think of it in terms of tens of millions of pounds rather than hundreds, you'd be in the right ballpark.

Next question is from Adrien de Saint Hilaire from Bank of America.

I just have 1 simple question. So you said your market share in higher ed courseware was flat in '19, and you've given us the reasons why. I'm just curious why you expect it to be flat again in '20. Because obviously, you're going to lap over the comps from this year, Cengage and McGraw-Hill are in the process of merging. So surely, that must be disruptive for them. So is that extra cautiousness? Or are there any other drivers behind this?

And just to be clear, I think you meant to say, we were clear that we lost a point of share in 2019. And as I say, if there's -- one hates ever losing share, but the point is, this was self-inflicted, and it was -- we did everything we could to protect the business but you can't do what we did, which was essentially take GBP 200 million of costs that were related to higher education across product, sales, marketing, service support, and be confident that there won't be any short-term competitive impact, and there was. Your point is the right one. We have now made all those changes. We're through that transition, and we're now able to be completely and absolutely customer-focused at the point where other players in the market, as you suggest, may be about to face the challenges that we've just been through. So we are clear that we have good reason, therefore, that we should at least hold our current share. I think it's prudent to think the share gains -- because we will gain that share back over time, but that's more likely to happen next year than this. But clearly, if we can get it back sooner, you can be sure that we'll do it.

And next question is from Adam Berlin from UBS.

Two questions for me on Higher Education Courseware. The first question is can you talk about what happened to digital revenue in Q4 '19 because at the trading statement earlier, you said that digital will be 65% [ by the end of the year anyway] it's at 63%. And the Inclusive Access side, that at the half year, you were up 40%, and then we've gone from -- in the end, the year-on-year gone from 8% to 9% Inclusive Access. So as Inclusive Access slowed, what's happened to digital revenue? That's kind of my first question. The second question, I'm just trying to understand the guidance on courseware for 2020. If I understand what you're saying is you're saying that last year, you had 6% of an impact because of the trends from print, 2% to 3% from OER and from enrollment losses and then you had an impact from market share loss. And then you're saying next year, you're not expecting any market share loss. Then why aren't you guiding for an improvement in courseware performance next year, which would follow from what you've said? Those are my 2 questions.

Okay. Coram, do you want to pick up on the first, and I'll maybe add on the second or you can take the second if you want.

Yes. Look, I think the important thing is to not try to decompose revenues quarter-by-quarter because this is a business where you have to look at it in terms of its entirety, there's some movements in and out of quarters. We're undergoing a fairly significant print-to-digital transition, which makes those quarterly calls difficult. I think the key point on digital revenues is that it's up modestly. And that is a sign of us continuing to see momentum there. And as we've said, we will accelerate that growth rate as the new products come on to the GLP. In terms of the guidance on courseware, I think we've been clear that we expect similar trends. On that basis, you'd expect OER and enrollment impact to be similar to this year, the mix effect around the same. There isn't a precision within 0.5 point here in terms of the guidance. We're just trying to give you a sense of how we expect this business to perform, and it's likely to be similar to what we've seen in 2019.

Yes. I mean just to sort of reinforce that point. I mean as we saw last year, it's hard to predict in any 1 year this pace of the analog decline, but we've gone from 21 million units a decade ago to 7 million in 2016 to just over 3.5 million last year. We're assuming a further 30% decline this year. That means that this year, we will be selling sort of 2.5 million units or thereabouts. At that point, we are very close to the point where this is a fully digital business. And whether that happens this year or next year, I recognize the importance to year-on-year guidance. But for those who -- those are really focused on the long-term future of this business, frankly, the quicker we get to a fully digital business, the better. And the most important thing that we do is now hold and then regain adoption share, and we get our new digital products out to market as fast as we possibly can. And all of the focus of the company is now on doing exactly that.

And just any comment on Inclusive Access trends?

Do you want to pick up on that, Coram?

Yes. I think the trends on Inclusive Access are positive, and again, I wouldn't focus too much on a quarter-by-quarter analysis of it, but you've seen that, with sales, we've got sales growth this year. It's an increased percentage of our revenues, and we're signing up more institutions. So I think we're feeling positive about the direction of travel.

Yes. And I think we'll give a fuller story on the number of new institutions signed up and progress with them in February. And I think when you see that data, you'll be reassured.

Next question is from Matthew Walker from Crédit Suisse.

A few questions, please. The first one is on U.S. higher ed courseware on the margin. Is the margin in higher ed courseware now somewhere between 0% and 5% or is it still, as you said in 2018, is it in line with the whole North American business? And if it is, let's say, 5%, does that mean you need another round of cost cutting?

Matthew, can I just stop -- maybe it helps if I just stop you there because the margins are significantly better than 5%. They're broadly in line with the overall margins for Pearson as a whole, and that comes back to the point I made earlier that major restructuring has hurt a little bit of market share in the short term, but it is ensured the long-term profitability of the business and that it's in future state. And the other good thing here is that the margins in our digital business, even though we're at much lower price points for students, are as good as they were on the print side. And the key thing now with global platform in place is that we get real operational leverage now as we grow and scale our digital businesses, particularly as we will, in time, be able to start to decommission all the legacy platforms that the MyLabs and Mastering still sit on. So they are still healthy double-digit margins in U.S. higher education, even with that huge analog decline. And so I don't think we should underestimate the work that's taken to protect margins when you've seen textbooks go from 20 million -- 21 million to less than 4 million. We completely remade the cost base. And so the margins are in good shape and sustainable from our perspective.

Okay. So you don't feel that another round of restructuring is necessary? Fine.

I think you [indiscernible]

Just on the -- sorry, just on [indiscernible]

Sorry, Matt, this is the -- I mean I think this is what's really important, particularly for '21 and '22. The scale, I mean I gave you a feel for it. The scale of the transformation of the platforms, the number of applications that have been decommissioned. The fact that the whole company now runs on a small number of global platforms. And every other company that you talk to has been through a transition like this. What we find is the initial implementation of those platforms gives them the chance to take some big one-off savings, which have to be financed by one-off restructure costs because it's a lot about taking people out and finding more efficient ways of running. And then you have a 6- to 12-month period where the teams get used to the power and capability of the new platforms. And then there's a second benefit, which doesn't involve any big restructuring or one-off costs but just the huge opportunities to make the company run much more efficiently just because you've got so much more powerful platforms. So that's what you'll see. There is the scope I think for ongoing efficiency and cost savings, but they won't require a further big one-off restructuring program.

Fine. I had 2 further ones, actually, which was I think one of the -- I think Cengage, who talked about the market being down around 13% on the -- based on NPI. You guys obviously at that stage in October were down less than that, even though you'd lost market share. So what is the difference? Because you'd expect Pearson to be doing worse than the market given the market share loss. So is it the returns provision? What have you -- what's been happening there to make you not worse than the market? That's 1 question. And the other one is could you give us a feel for operating cash flow versus last year, including -- and tell us what the working capital movements and any one-offs were on cash flow, please.

Yes. I mean I think -- I'll take the first one. You can take the second. I don't think we can comment on what other people are saying about what's happening to the market because we don't know what's in their numbers and what assumptions we're making. What we can tell you clearly is on the basis of adoptions, which is the best measure of underlying use, we did lose a bit of share, about 1 percentage point last year for the reasons I've already outlined several times, and we're very focused on stabilizing them and regaining that share as quickly as possible. And then the other challenges that we face are very explicit related to this acceleration of the print-to-digital transition. Coram, do you want to pick up on operating cash flow?

Yes, absolutely. I mean Matthew, you're aware that we disclose operating cash flow and a final net debt number in February when we have run all of the balance sheet calculations. Clearly, we've given you a steer that we think that net debt will be modestly higher than it was in 2018 on a post-IFRS 16 basis. I think there are 2 reasons for that. One, we've made a couple of very small acquisitions over the last few months. And secondly, the scale of the shortfall in higher education has put a bit of pressure on operating cash flow and net debt. That's exactly what you'd expect. It's a very precipitous decline in the print business. And that is going to have a small impact on cash. The cash conversion and the cash flow in the rest of the business is strong, though. So I'm not flagging a major concern here, but I do want to highlight that it will flow through slightly as a result of what we've seen in higher ed.

Next question is from Patrick Wellington from Morgan Stanley.

A couple of questions. You probably don't want to do this, but do you want to give us a rough idea of the EBITA split under your new structure, so we can get a better feel for the underlying profitability of the parts of the business? Or if you don't want to do that, how about a split in the EBITDA along the lines of your U.S. higher education and non-U.S. higher education. So the EBITDA equivalent of the 76-24? That's the first question. Second question, prosaic one on tax, your tax charge is 19%. But of course, PRH comes in tax-free. So Coram, if you didn't have PRH in your numbers this year, roughly what would the tax charge be? And then thirdly, I think Sidney Taurel is on the call. So Sidney, I think you've always wanted Pearson to be boring with no surprises. I don't think you've managed Pearson to be boring with no surprises. So what are you looking for from a new Chief Executive? What qualities and characteristics are you looking for in a new Chief Executive? How do you want Pearson to look? And will that new Chief Executive have a free mandate for change in the strategy and structure of Pearson? Or do they -- he or she has to stick to the existing plan?

Thank you, Patrick. So Coram, why don't you pick up on the first 2 questions? And then Sidney will pick up on the third.

Absolutely. Patrick, you guessed correct, I'm not about to give an EBIT split on the new 4 segments, but obviously in February, we will. So you will have that visibility. And I think what you will see, and this is really important, is that we are -- we have a good balance of profitability across the different segments. I'm aware that in the past, there has been a concern that we've been overly reliant on the profits from higher education. I think you'll see when we have put the pro formas together that that is not the case, and that all parts of Pearson are contributing nicely. On the 76-24 margin split, John said that higher education is very much in line with the margins of the group, that actually means, by definition, the 76-24 has a similar margin profile. So hopefully, that does help a little bit, but obviously in February time, we'll give you the EBIT split. In terms of the tax, yes, Penguin Random House comes in post-tax. That has about a 1 point impact on our tax rate.

Coram, you were consistent with low expectations as ever.

Patrick, this is Sidney. Yes, you are right. We did not quite manage to make Pearson a boring company. I think for a couple of years, there was some success in terms of meeting expectations. I think I also said when I arrived that -- when I made that comment that the company has to do a lot of unglamorous things, such as the enabling program, the restructuring, and of course, at the same time, invest in our GLP. And all of that has been happening during those 3 years. Of course, the market has sort of moved faster than what we expected into the digital future that we've always envisaged, and that's what's causing the short-term issues that we have now, but in a way, as John said earlier, we are moving to the future faster. We are fully engaged at the Board in the process of recruiting a new CEO. Clearly, we're looking for a global executive with relevant experiences. And beyond that, I cannot say anything. When we have more to say we will, but I am fully confident that we will have a very smooth transition. John has graciously offered to stay fully committed through the transition to his successor.

And Sidney, if a new Chief Executive comes in and doesn't fancy the strategy and structure of Pearson, do they have a mandate for substantial change?

The Board is really -- I've been extremely involved in the development of the strategy and is completely supportive of the current strategy. The vision of being the digital player in this future of lifelong learning will remain. Our main strategies and investment areas will continue. But of course, strategies are meant to change over time as circumstances change and certainly a new pair of eyes will also look at different tactics and so forth. You would expect that.

And our final question for today is from Tom Singlehurst from Citi.

It's Tom here from Citigroup. Just a couple of questions, one of which is on the temporary cost saves and the bonus sort of accruals or at least a reversal of bonus accruals. If higher ed is down another 12%, which is the middle of the range, and obviously possibly as much as 15% or 17% towards the bottom end of the range, why would you actually do that? Seems, well, so slightly counterintuitive. So that's the first question. And then the second one, just obviously testing on areas of the non-U.S. higher ed courseware business could sort of have wobbles on and 1 area of focus has been U.K. qualifications in the past. And in particular, this year, we have T levels coming in. I was just wondering whether you could give an update on that process and what the risk factors are around that and whether anything baked into it for guidance.

Thanks, Tom. I'll pick up on U.K. qualifications, and then Coram can pick up on the first issue that you raised. I think one of the things that we are pleased about the progress we've made in the last few years, both with our U.S. school assessment and the U.K. qualifications business, both of which have been through some challenging times of their own and have come through them as better, stronger, certainly more profitable and more sustainable businesses offering both better value to customers and more insights that help students to be successful as well as providing important measures to government, parents and the like of progress. So really pleased with the progress we've made in those businesses. And we are participating in the, T-level process. We are actually -- won a couple of the T-level franchises. And of course, the other thing that we've worked very hard on in the last few years is to really ensure that the BTEC, which is a Pearson-owned qualification, continues to be highly relevant to employers and to schools and universities and I think something like 40% of students actually go to university with BTECs and the large number of students who are going to -- who are first generation of students to go to university are taking the BTEC qualification. So we are very confident that that will continue to have an important part to play. And we're pretty clear that this will continue to be a growing part of the business this year. And Coram, do you want to pick up on the first point that Tom made?

Yes, mate, absolutely. So just 2 points, Tom, in terms of the cost savings, we were very clear in Q3 of last year that we were taking measures, which were discretionary cost savings because we felt it was important that having set guidance, and that that represents commitment to our shareholders and that we met that guidance. Those discretionary costs do have to go back into the P&L largely and I quantified it at sort of GBP 20-ish million in Q3. In terms of the bonus, it reflects the performance for the group as a whole. It's important that it didn't -- that it flexes in line with performance, but that is performance against plan. And therefore, when we reset a target beginning of the year that we need to put that bonus back to a target payout. And that's important because it's a key part of the motivation for our employee base.

Okay. Thanks, Tom. Thanks, everybody, for joining us this morning. Jo and Anjali are on the call, and if you have follow-up questions in the course of today, they're obviously very keen to follow up. Thanks for the ongoing interest in the company, and we will hopefully see you all at the preliminary results presentation later in February. Thanks very much.

Thank you.

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