Pearson PLC (PSO) 2011 Q2 法說會逐字稿

We do thank you for coming here. I know you've got a lot of interesting media companies to think about. I don't know why you'd pick anybody but us, but I appreciate you're doing it.

The goal today is just like it always is. It is to let you know what we've been doing in the first half and to try to give you our best view of what our full year is going to be about.

The headline, pretty simple; you can all see it. The headline is that we're encouraged by the start that we've had this year. We are keenly aware that there's still a whole lot more to do. There always is for us, at this time of the year. And the market environment is kind of messy. But we're sufficiently optimistic about our prospects to raise both our guidance and our dividend this year.

As you know, we weren't expecting a big first half this year, but the one that we've had gives us a pretty solid basis for meeting our full-year goals. Sales up 6% to GBP2.4b, profits up 20%, GBP208m. Even without Interactive Data, which was 3.5p of earnings, if you remember, adjusted EPS is a little bit above that first-half record high last year. Our cash outflow is similar to what it was last year. Our debt is down significantly. And as I said, we're increasing our dividend; we're going to increase it 8%. That maintains our very reliable dividend record.

So, confident start. Lots more business to bring home in the second half. But I'm going to let Robin come and tell you the details.

Thanks very much, Marjorie. Good morning, everyone.

As Marjorie said, sales were up 6% at CER, helped by recent acquisitions which added GBP148m in the first half. FX was negative, due to the weaker first-half dollar, which took 3% out of our top line.

Turning to the detail, revenues in North American Education are 3% lower against an extremely strong first half last year, which was up 10%, you may recall. Assessment and Higher Education both showed steady growth, but we have seen the expected first-half decline in US school publishing.

There are two factors here. First, our participation rate in new adoptions is significantly reduced, as we're not bidding on some lower-margin opportunities with high deferral risk. Second, last year, we benefited from major school publishing shipments to Texas and Florida in June, which then detracted, you may recall, from our quarter three. This year, we have again performed strongly in new adoptions, with a 37% win rate compared to 29% last year, and the resultant revenues will be booked in the second half.

International Education is up 26%. We have produced strong underlying growth in emerging markets, boosted by acquisitions, and solid growth in the UK.

In Professional Education, sales were a little ahead in underlying terms, with strength in testing more than offsetting declines in professional publishing. The first-time contribution from our training business, Melorio, now called Pearson in Practice, pushes CER growth up to 35%.

At the FT Group we are up 7%, helped by continued strength in subscriptions at both the FT and Mergermarket. We also benefited from a modest improvement in advertising.

At Penguin, sales are a little lower at constant exchange rates, due to organizational changes we made last year. The details are again set out in the press release. Underlying sales are level, with a strong publishing performance and robust digital sales offsetting challenging conditions in physical retail.

Profits are up 20% in CER and 3% on an underlying basis. Our sales mix, efficiency gains and acquisitions are all contributing to the profit improvement, offset a little by GBP6m of negative FX.

North American Education contributed profits of GBP46m, with improvements in higher education and assessment offset by those phasing impacts in US school publishing.

Profit in International Education was GBP27m higher. Here again, the fastest growth is in emerging markets. We also made progress in the UK and gained a further GBP16m of profit from acquisitions.

In Professional Education, we achieved further margin improvements in both publishing and testing, with a strong contribution for the first time from Pearson in Practice.

Profits are up 10% at the FT Group. This is after charging the development expense of a series of a new products and services at both the FT and at Mergermarket.

Penguin profits were up 13% in underlying terms, benefiting from an improved product and channel mix and ongoing digital efficiencies. They are flat in CER only because of those organizational changes we made last year.

Adjusted EPS is a little ahead of last year, at 16.8p. Our adjusted operating profit increase to GBP208m was the major contributor. However, interest costs were, as expected, slightly down due to a lower average net debt level and a credit from our pension scheme, which as you can see from your appendices is now in surplus in the UK. Our tax rate in the first half was 25%.

I think it's particularly encouraging that through both organic growth and acquisitions we covered the loss of six months' earnings from Interactive Data, which contributed about 3.5p, as Marjorie said in the first half of 2010, but nothing in the first half this year.

Statutory earnings are GBP32m lower than last year. There are three factors here -- the absence of Interactive Data earnings, exchange losses on the residual Interactive Data cash, which affects our finance costs, and higher intangible amortization on recent acquisitions. Our statutory earnings are reconciled to adjusted earnings in the back of your packs.

Our free cash outflow was similar to last year, although our traditional first-half working capital build-up was again a little less pronounced, reflecting our reduced reliance on physical books. Our deferred revenue, which you'll remember is a good indicator of our shift into digital businesses, is up 20% compared with the same time last year. That helped our average working capital to sales trend. We're continuing to achieve significant gains in working capital efficiency.

On our balance sheet, despite acquisitions in the last six months amounting to GBP462m, our net debt is GBP471m lower than this time last year, reflecting strong organic cash generation and the remainder of Interactive Data proceeds awaiting investment. We've now invested approximately half of those proceeds.

We're very encouraged by the progress of our bolt-on acquisitions, which are ahead of our acquisition models. We are being selective and disciplined in making acquisitions, and we have a significant pipeline of new opportunities which we are evaluating against our usual criteria.

Let me finish with a few words on our guidance. Phasing is important here. Last year, our first half benefited particularly from significant US school publishing orders. Now, those phasing issues will unwind and our comparables will ease as we go through the second half. In North America, in the Education business we expect to report growth for the year as a whole. The market is tough, but our competitive performance remains very strong and we have those less challenging comparables in the second half.

International Education has made a good start to the year, especially in developing economies, and with a strong contribution from recent acquisitions. It has good momentum going into the second half.

In Professional Education, we expect to sustain the first-half trend of growth in testing and training, partially offset by muted conditions in publishing.

At the FT Group, we expect digital subscriptions to continue to build steadily. The changes we've made to the business model and the mix mean we're well placed to grow even in tough markets.

Now, Penguin has led the market in innovation and in working through a period of dramatic industry change. And following last year's significant share gains, we expect it to perform in line with the overall consumer publishing industry this year.

Now, behind the divisional guidance, there are two key themes I want to leave you with. Outside Pearson, our markets are still challenging. The macroeconomic environment is clearly very uncertain; public funding pressures remain high; corporate confidence is thin and structural industry change is gathering pace, as Marjorie's going to describe in a minute.

But inside Pearson, we're continuing to benefit from the opportunities we've been investing behind for many years. Now, back in February, I set out in some detail how the moves we are making into digital, into services, into subscription businesses and into faster-growing markets are all helping to make Pearson a higher-quality, higher-margin and more cash-generative business.

Those changes and the way they are improving our numbers are the source of both our earnings upgrade to around 80p and our confidence in the continued strength of our performance.

Back to Marjorie.

Thanks, Robin. I hope that gives you all a bit of a feel for how our year started and what we see it turning out to be, which is another good one for Pearson. But I would (technical difficulty) not on Pearson but on what's happening, as Robin said, outside the Company this far, and how we see the impact of that on what we're doing. Because it is clear that the changes in our industries are both accelerating and becoming more fundamental.

For instance, in the first half, these are the things that we saw. First of all, disruption in book retailing. Borders in America, REDGroup in Australia filed for bankruptcy; you all know that. Waterstones in the UK found a new owner, Barnes & Noble in the US possibly in the process of finding one. Then we've seen changes in public policy, new regulations and policies taking shape around vocational and academic qualifications in the UK, higher education in the US, intellectual property rights in many, many markets.

In addition, there are new players in the field, education technology startups, rental programs for physical and digital books, an emerging group of non-profits in the field and the odd ambitious mogul floating around here and there.

And there are new changes from our friends on the West Coast. I don't mean Cardiff; I mean that real West Coast. Device manufacturers, mainly Apple, have changed the game with their mobile devices and they have sought to change the terms of trade for newspapers and magazines. Amazon's working pretty hard to become a book publisher as well as a bookseller.

We've been talking to you about all of these cultural -- structural changes for many, many years now. We've been out there ahead of them strategically, ahead of them operationally, but they are a reality and they are gathering speed and strength. That gives us a few risks along the way, but it also gives us a lot of room and a lot of opportunity, we think.

So, inside Pearson now, though we can't afford to be complacent, we do believe we know how to succeed in that kind of a transforming environment. We use four main elements, I think, to think about that.

First, our strategy. It covers all of Pearson. It's clear and it's well understood. It's based on shifting our businesses toward digital, toward services, toward fast-growing markets, and it's driven by a goal that is larger than one year's profits.

Scale. We have clear industry leadership in global education, clear leadership. And our depth and our breadth give us efficiencies and they give us some protection against risk.

Investment. We've been investing heavily, adventurously, consistently in our businesses through good times and bad, and we guard our financial strength to be able to carry on doing that.

Innovation. We have a proven record as the innovator in our industries, both in technology and integrated services. And that's part of a result of our investment.

All of those strengths are built on talented people, and we really focus on them, and on a coherent culture that is well understood and constructive.

To give you confidence I'm not just saying all those things, I've picked out a few examples of what I think is new around Pearson, not just business as usual but things that have happened in the first half. These things may not be financially material today, but they are emblematic of the path that we're taking for the future.

So, first example. In June, we launched the FT's new web app. Our original iPad app was very popular, but we needed to be able to sustain the priorities that have made the FT a digital success -- charging a premium for premium content, being agnostic (technical difficulty) relationship with our readers. So, using HTML5 technology, we switched to delivering an app-like experience to mobile subscribers in a web browser. We are the first major news organization to do this.

Close to 360,000 people have used the app in just the six weeks since we launched and more than half have bookmarked it, meaning they're going to begin to use it. In fact, overall, there's a strong demand for FT subscriptions through mobile channels, both phones and tablets. Almost a quarter of the whole total of ft.com page views are now coming from mobile services.

The significance of the web app here you see is twofold. First, it ensures that the FT has a direct and a persistent relationship with its customers. It takes only one log-in and one subscription payment to get the FT's journalism on any device. And the relationship that creates gives us a deeper insight into categories of consumer behavior that we need to know about, so we can improve our products and services.

Secondly, it gives us much more efficient product development process. Developing separately for our various technology platforms is really unwieldy and it's completely unsustainable. The web app fixes that issue and we're going to push it out to multiple platforms this year, Android, Playbook, Web OS and all kinds of others.

Second example. This is Book Country, a new business from Penguin. It's an online community that offers budding authors the chance to submit their books for peer review and to build up their audiences. What you see here is called a genre map. It organizes new authors by category. You'll really want to study it, because you'll be able to find that special genre that you need. Like space opera and steam punk and hard-boiled noir, one of my personal favorites, and just plain old weird fiction, which will suit most of you pretty well, I think. I'm really not making these things up. They are on there.

Since its launch in April, more than 3,000 people have signed up on the site and authors have offered more than 450 manuscripts for review, and they've all received constructive feedback from one of their peers. And as we gather an audience here, we'll begin to offer fee-based self-publishing and distribution and marketing services as well.

The benefits of Book Country are really powerful for us. It helps us discover exciting new talent. Obviously it helps that talent develop. Like the FT's app, it strengthens our direct relationship with readers. It opens new revenue opportunities for Penguin from self-publishing and other author services, as I said. Most fundamental of all, it is one of a series of investments and innovations that are making Penguin a winner in the era of digital publishing.

Third example, Schoolnet. Schoolnet is a company that we acquired in April. It's technically called an instructional improvement system, but we also describe it as a Bloomberg for teachers and that probably gives you a better idea of what it does and how it's used. It represents the next step in our strategy for using technology to help schoolteachers personalize learning for students.

There is, by the way, plenty of evidence of that successful strategy through our first-half results. Our market share in new adoptions is very high. It's driven largely by our print and digital programs, like Writing Coach and enVisionMATH, which we can talk more about. Our student registrations for those digital programs grew about 10% in the first half. Our PowerSchool student information system registrations are up 11% and our progress monitoring system AIMSweb is up 20%.

So, Schoolnet is a modular service which pulls together many of those things and the information from many other school systems, including our own. It aggregates the data, it puts it up on the teacher's classroom desktop and it helps her use it to assign lessons to students, to help in her own professional development, take courses online, help students figure out why they're not learning. It's really important to our school businesses, and it's important because all the student data we collect in that way is more actionable and therefore a lot more valuable.

It also builds a learning record for each student that will move him through school to university, ensuring the continuity of his learning and making sure he's ready for every stage he's moving to. And its business model is software as a service, and that certainly improves the financial characteristics of our school business.

Fourth example, a new public-private partnership that's a model we can apply elsewhere. For Arizona State University in America, we're building and operating virtual university, ASU online. Arizona State is a publicly funded university of 70,000 students. It has a very good pedigree for quality and innovation. But in common with a lot of universities, it faces a lot of constraints around funding and physical expansion. So online learning is the logical way to make its curriculum more accessible, more effective, more efficient.

And we're not just building this for them. We are also sharing in its success. So the university provides academic direction, faculty, university administrative services. It ensures that the online program is equivalent to the traditional learning experience and that it meets the school's high standards. We provide technology, operations, infrastructure through the e-college, digital learning applications, curriculum content and marketing support and growth funding.

And in practice, we are doing much, much more in being their partner in that, and this is a practice we think will be the future. We're paid not according to the services or the products that we sell; we're paid according to the number of students that join ASU online and that complete their courses. So we're paid for success; we're paid for the student graduating. And we really like it that way.

So we're doing something similar in other parts of the US, in Australia, in Canada, and that will be something you'll see us do going forward.

Final example, Wall Street English. We've talked to you before about the vital role of the Wall Street centers in our strategy for China. We now have 50 adult schools there. We opened seven new ones in the first half. And student enrolments are up 25%. But this is not just a China venture; it's now a global business for us. We now have around 450 schools and 190,000 students in 27 countries. This model is obviously very scalable, in part because only 30% of the instruction takes place in a center; 70% of it takes place online or in private study.

These schools give our students a big boost in their career and in their earnings, and they add up to a great business for us. But they're important to us in much wider ways. They are central to two of our biggest growth opportunities, the global markets in English language skills and the global market for adult learning or workplace learning.

Secondly, we're learning a lot from Wall Street English that will support new ventures for Pearson. How to teach and train directly, how to use our content and technology to add to that process, and how to run a global education business on an asset-light franchise model, which we have not done before but which is working well for us.

English schools were our first move into a new segment of the education market, direct ownership and management of learning institutions, but they haven't been the last. Since we started, we have now also moved on to run colleges in South Africa, adult learning centers in the UK and K-12 schools in India. And we're carrying on that pace.

So that's a quick rundown of some highlights in innovations, just to give you a taste of what happened to us in the first half and what we did about it. The examples are new, but the strategic direction certainly is not new.

We have become now, through this direction, more digital. We expect about a third of all of Pearson's sales to be digital this year. We have become more active in fast-growing economies. We're expecting to generate about $1b in emerging markets for the first time this year. And we've become ever more focused on our goal of helping people of all ages make progress in their lives through learning, but increasingly we're doing that in many different ways for many different purposes.

And gratifyingly, as a result of all this rolling change, we're also a more reliable, faster-growing company. We've produced consistently strong financial results and we are set to do that again this year.

So that's my story and I'm sticking to it. Thank you very much for listening to us. We have all of the usual suspects over here to answer your questions -- Will Ethridge from our North American Education business, John Fallon from International, John Makinson from Penguin, Rona Fairhead from the FT Group, John Ridding from the FT, and our Chairman Glen Moreno. So they will all answer any question you have that is hard. Yes.

Good morning. It's Ruchi Malaiya from Citigroup. I was just wondering if you could give us a bit more color around the high share you took in the adoptions market this year. Particularly, McGraw-Hill yesterday were talking about the fact that they weren't participating in things like the Florida science adoption. I was just wondering if that's been helping you or if it's particularly the strength in your maths, as you talked about.

And secondly, we saw some press reports that you'd bought some online ebook retail channels in Australia. Was that just opportunistic or is that something you'd look to get more involved with? Thanks.

Okay. I'll let Will talk about the adoptions. We did do very well in adoptions this year, but we participated in only about 70% of them because we were pretty forensic about whether they were going to make us money or not. But, Will, do you want to talk about why you did so well? Or would you like to -- never mind.

Actually, we participated (technical difficulty) the lowest participation rate, only 74%. We didn't go after, for example, handwriting and spelling in Texas.

Is that because you don't think you can teach Texans to spell?

If they get all the handwriting, it doesn't help. We're doing well because of our leadership in digital. So in Texas we really swept the market with Writing Coach. We're doing very well because of our leadership in digital. So we did very well in Texas, for example, with Writing Coach, where we have really personalized scoring and -- around essays gives personalized feedback to the teacher and the student. We did well in high school science; again, we're using digital. We did well on early learning reading. So I think really just our investments and our focus on personalized education in digital is really helping us.

And that's the reason we didn't go after the spelling and handwriting. It really didn't play to our strengths. And we had 37% share, which is an extremely high share.

John, do you want to talk about the Australia online retail?

Yes, by all means. There were three reasons that we -- and when I say we, I mean Pearson rather than --

Do you want to say what it was that you bought?

Yes, if I have to. We acquired the online platform of the REDGroup, which was the leading Australian book retailer, essentially the Borders business and the Angus & Robertson business in Australia. And the physical stores went under and the administrator made the online platform and all of the customer databases that went with that available.

And we looked at it for three reasons. Firstly, there were really two competitors besides REDGroup in the market in Australia. One was Amazon, which doesn't have a business in Australia but supplies into Australia, and the other was the Book Depository, which Amazon is attempting to buy at the moment. So if REDGroup had gone under completely and Amazon had bought Book Depository, there would have been only one platform, and we didn't think that was a particularly healthy situation.

The second reason that we were interested in it is that Australia is a very different market from the UK or the US, in that there are no wholesalers in the market. And we, as Penguin and as Pearson, already act as the supplier, distributor for a great many other book publishers. So we were really taking a model which we had running already in the physical world and extending it to the digital world.

And the third reason we were interested was that we haven't disclosed the price but it was fantastically cheap.

Do you have a question, Mark?

Mark Braley at Deutsche Bank. Marjorie, you've kind of talked quite a lot about the various types of school/college operation that you're now doing around the world and across the various businesses. Is there a step change in your thinking about how much you might move in that direction?

And maybe if I could get you to yes or no on something, would you consider, to get scale, buying what we might characterize as a legacy for profit college operation or do you just think the business model there is something you don't even want to start with?

What country would that be in?

I.e. in the US.

Right. We are more interested in that, because of all the dynamics that I talked about. We can use technology. We can have digital learning, learning online. We can use data to customize programs. All of those things that we've been doing in school for a long time. And we like the ability to control a lot of the chain.

Would we buy one giant organization like that? That has not been our practice. Our practice has been to try to get bolt-ons that we have synergies with and that we can add something to. So that would be careful -- that would be important. And then those colleges that you talk about have a few ethical issues, I'm afraid, and our culture is a pretty important thing to us so we would be quite careful about looking at that.

Yes.

Thanks a lot. It's Alastair Reid from UBS. Two questions, if I may. First, is it possible to give any scale of the quantum of the development expenses that you made at the FT and whether they're going to just repeat in the second half or next year at all?

And then, perhaps on the textbook rental, I was wondering, you mentioned it, can you talk a little bit more about how you see it affecting either the industry or your business, or if not why not?

Okay. Well, Rona, you want to talk about it, because this was investment across the piece of the FT Group, not just the newspaper?

Yes, happy to. In terms of -- I think you're talking about profit drop-through, and I think the first half, as you'll see, as Robin said, was a little bit affected by investment but it was also affected by some transactional FX issues.

So if you look ahead to the second half, actually, we're expecting a better drop-through, partly because of the phasing of the second half. Secondly because, as you see, our subscription business carries on building and that's giving us a lot more reliability. And thirdly, because across the Group we're becoming much more operationally efficient. So we are improving our circulation quality, we're improving our distribution capability, and therefore that is making us increasingly operationally efficient. So if you looked at the second half, we would expect a better profit drop-through.

In terms of investment, I think, we don't split it out, but I would say that it was slightly higher at Mergermarket than it has been in previous years because we launched quite a number of new products, as you'll see from the press release.

Book Rental.

Yes. As we said before, textbook rentals is the phenomenon. It's basically a substitute, like a used book substitute. We said that it would probably help the industry last year, as the rental companies stocked up on inventory. Against that comparable, it's slowing down the industry a bit this year. Fundamentally, though, we found that where students and professors were using our MyLabs, using digital, it doesn't really have much of an impact. Where there's the physical book, it's just another substitute like a used book, and it's really more a competition with the used books.

As our business goes more digital, both used books and rental become much less of an issue. And that's been our whole strategy, to go more digital, because we think it's better for our customers to get the data, to get the personalized learning. And we think it's better for our business model, because you get out of this physical book that could either be a used book or it could be a rental book, and you get into really the student having some pro forma purchase every year and getting much better performance. So that's really been our strategy and that strategy has been working.

Could I just follow up?

Sure.

Can you give any sort of color about the relative pricing between the textbook rental and normal purchasing?

Well, the pricing is pretty publicly available. So the rental is -- if the used book can be like half of the new book and the rental's a little bit less than that because it's a rental. Like I said, it's a substitute, so it is a price issue and the students have different dynamics. Sometimes buy a new book, you can sell it; they're getting pretty savvy about this stuff. And the prices change a lot. You can have different prices depending upon the time of year. So a price can change in August versus September; it can change in terms of availability. It's a very dynamic direct-to-consumer market.

Our point is that this is really about results, student results and our results. And if you want to really get away from the physical book, you want to get into interactive learning, you want to get into data that really helps you, it's really not environmentally great to have a lot of physical books. So our whole strategy is to move the market and the students to buying digital, because we think it's just better for their performance and it's better for our business model.

And in a way, we've had a rental business for a long time online in our CourseSmart business, which we share with other publishers and which you -- in which you can buy a subscription to a book, which is pretty much the same as renting the physical book.

Yes, we were actually the first one. The first digital rental was CourseSmart, and CourseSmart is doing very well and it has the highest share. So we think it's a vehicle that should be out there and it should be something that students have choice.

Okay. Claudio. Is this going to be about piracy, Claudio?

Maybe. Claudio Aspesi, Sanford Bernstein. A question on Penguin, but not on piracy. In the past, you've always described synergies in printing and in distribution as one of your main reasons for continuing to own Penguin. Obviously those synergies will fade away as electronic books become more and more important. What will be the reason, then, to own Penguin?

Why will we own Penguin? I see. That's not really a question about Penguin, is it, at all? Those synergies still exist, obviously. And physical books have not gone away and they're going to be hanging around for quite some time. So we have those synergies. But we also have those synergies digitally, because digital is not just about downloading an ebook; it is about how we produce books, how we distribute them. So we have the same processes in education as we have in Penguin. And we get those synergies in our enterprise technology, as well as in our digital technology that is product related. So we have that.

But in addition, Penguin is a huge asset in our education business around the world. As people get more interested in having engaging education for one thing, we find that just putting Penguin on the cover of a book makes a child more interested in reading it. Penguin, in many cases, provides books as school books to students. If you go to Brazil, you'll find that that's happening. So it is an integral part of our education business. And as we begin to be more consumer facing in our businesses, rather than business facing or middleman facing, what we learn from Penguin about being a consumer company is invaluable.

And we learn too. I think all of the arguments about back office synergies and procurement and warehousing, they were all great and they still obtain, as Marjorie said; they are slightly bloodless. The synergies that we are getting from the Pearson companies at the moment are much more dynamic.

So the conversations that I'm having with Rona and with John about how we understand consumer behavior and thinking about product pricing, for example, those are real conversations that are happening all the time as we, all of us in different parts of the Company, try to understand how digital consumers are responding to new forms of material and new platforms. And that's a very, very active discussion. And everybody is bringing something to that conversation, so we are learning a lot from the FT and from the education companies in how we operate in a digital environment.

And as I said at the end, we are not a portfolio of businesses now. We are a company. And the Company is focused on education. So when the Financial Times newspaper thinks about a new business they might create, they create an education course for non-executive directors. So we are all about trying to educate our various populations in different ways, and that's what 21st century education is going to be about. It's not going to be about kids sitting in a schoolroom with a book. It's going to be about lifelong education. It's going to be about workplace education. It's going to be as consumers. So that's our strategy and that's our attitude.

Colin?

Thanks. Colin Tennant at Nomura. Three things, if I can. Just looking at the shift to digital, particularly in college and I guess a book for a school as well, can you tell what's happening to the actual volume of print books? Is that going down as digital grows? Are you selling less books? Or is it all a combined sale that you're doing?

Second thing was just on visibility into the second half. Obviously, for a college in particular, those sales happen I guess between now and September. So, given your confident outlook statement, what is giving you that confidence on college? Is it that you have good adoptions from the professors that's giving you that confidence? And maybe some insight into where you are with those rental companies. Have they actually stopped buying books and so giving you confidence that maybe that's capped out?

Okay.

And the third thing, one last one, which is on acquisition contribution. You've given us a number for the first half. I think last year, from memory, you spent about 550 or so and you've spent some, I forget the number, this first -- so can you give us an idea of what kind of acquisition contribution we should be expecting for the second half?

Okay. Will, do you want to start by talking about what's happening with print books in college?

Yes. We don't give out the actual number of print books versus digital. It doesn't mean that print's all going away. You generally will still have your digital component, your MyLab and eBook that's in the MyLab, but the selections that are delivered to the students is really personalized. They often will have a print custom book with it. It will be shorter. So it's not that all print goes away, but the nature of print changes. So you have pure just digital, you have a custom book that is highly geared to that course.

What does seem to be really declining is that standalone, one-size-fits-all textbook that could easily be turned into a used book or a rental book. And I [think that], actually, because it's not personalized is not very effective for the student.

In terms of the phasing, the phasing for us is much more about school. We were up in the first half in the US higher ed against very tough comparables. The second half does become better, because the hit from career started to hit in the second half of last year. So the industry was -- had very high enrollment in the first half of career, before you had all the regulations around gainful employment and all of that.

We do expect that the rental companies that bought in the first half of last year and generally didn't buy the first half of this year will start to replenish their stock in the second half. And really we won't -- you never really know in higher ed until December. The single biggest month you have in the year is December. So it really -- it starts picking up in July, August, September, and then you have November, December. So you basically get your fall orders and your second semester orders all in one year, so that's why we're such a second-half weighted business. And you really don't know until you get through.

But we did feel we did very well in the adoptions, and we feel that against the first-half comparables that we were in a good position going into the second half, given our first-half performance.

Do you want to talk about second-half acquisition impact?

Yes. Well, as you saw in the first-half numbers, the acquisitions helped us to the tune of GBP148m of sales and GBP31m of profit.

They can't see your beautiful face.

You don't want to see me, do you?

It's not that they want to see you.

GBP148m of sales, GBP31m of profit. I think what you're going to see in the second half is clearly a full year of SEB, which we bought very late last year. So that's going to be a little bit helpful, although integration costs are still going through the P&L account for that. You'll get clearly a half-year of SchoolNet, half-year of EDI, which we bought quite late in the first half as well. But, as I say, there will be some integration costs going through for those two as well.

Clearly, we are still looking for acquisitions, and whatever we can find that meets the acquisition hurdles may or may not contribute in the second half, depending on what they are, where they are and how much integration costs associated with those, which is largely about when we manage to land those acquisitions. So I think it's really foolish just to try and give a number for what your acquisitions will contribute.

(Multiple speakers) the ones you've made already, obviously.

Well, they're going to be positive, because we've only had SchoolNet for a month in the first half and it will be there for six months in the second half. But there will be some integration costs to set off against the run-rate on the profitability of those.

Okay. Yes.

Hi. William Packer from Exane BNP Paribas. Two questions, please. Firstly, do you expect schools to hold back on their purchases of textbooks because of the future implementation of the Common Core Standards?

And secondly, yesterday McGraw-Hill guided for flat to modest growth in elementary and high school market. Is that your view of the market as well? Thanks.

Which one do you want? Do yYou want me to take -- what about McGraw-Hill's guidance?

We generally don't comment on it. We stand generally by ours (multiple speakers).

This has become kind of a joke. You haven't been around here much, but --

They tend to be higher.

But every year they guide and every year's a fiasco, so we just laugh.

Yes. They tend -- their guidance tends to be high. And our mix, we expect -- looking for growth in higher ed and A&I. And don't see the same kind of situation for school, but overall for North America growth -- what was the other question?

Well, the question about whether schools are holding back because of the Common (multiple speakers).

Yes. Oh, that's textbook spend. Yes, they have been. That's been the whole issue, is that they have been holding back. That's why school curriculum has been a tough market for people. And what we've been doing through this tough period, this -- these are tough markets, but we've been investing. We've been gaining share and we've been setting ourselves up for the transformation of American education. And it will -- and the spending will happen again. It'll happen around new models.

So we have a resilient portfolio. We're doing well with our clinical business. We're doing well in the technology. But we've been very clear for several years that we're in this transition period and it is tough markets. But what isn't tough is the underlying growth of education, and what's good is our ability to take share and position ourselves for when the spending comes around the Common Core.

There are a couple of exceptions to that. Texas is not going to be part of the Common Core. They haven't signed up for it. So they have had a big adoption year this past year, in which we did very well. So that has not been a hold back. And then we will be on the other side, spending money, adjusting some of our programs to the Common Core. And that's a time when we're really happy that we've got a lot of digital programs, because that's much easier than books. But we're waiting to see what is going to happen.

Other questions? Yes.

Thanks. It's Tim Nollen from Macquarie. Another question, please, on ebooks and Penguin. If you could please explain a bit more what the cost restructuring that you did in 2009, if you could explain how you're addressing the shift to more and more demand in ebooks, which is accelerating. What are you doing on the cost side or what have you done on the cost side there, with regard to warehousing and printing and all those sorts of things? How might we consider margins in the near term to medium term because of that shift?

And just tracking back on your comment that you expect Penguin more in line this year rather than beating the market, why would that be?

Okay.

That would be disappointing for you.

The cost restructure in 2009, do you mean our reorganization?

I meant the reorganization that you did.

Yes. We just -- we have changed the way we managed some of our businesses around the world, so we just changed the pots in which we reported them.

No, it's not (multiple speakers). It's the reorganization of Dorling Kindersley and the move of a substantial part of the --

Is that what you're talking about?

Well, it was two things. One was what was it that you did in 2009, just to understand that. But more importantly, how are you addressing the change in the cost base as you shift to ebooks?

Okay. Great. Okay, John, take it away.

Okay. Well, just to finish on 2009, that was essentially a reorganization that took place in this building, as we felt that the competitive challenges facing DK, particularly from the Internet, were going to force us to restructure the business. And so we took about 190 jobs out of this building and we invested heavily in India, where we now employ about 300 people at Dorling Kindersley. So that was that. And what we are saying is that we are now coming to the end, but within the first half of 2011 there is some continuing benefit from the impact of that restructuring program in 2009.

On the cost base associated with the eBook program, this isn't just a Penguin issue, obviously; this is a Pearson issue. Because when we look at warehousing, costs of the supply chain, costs around the world, those are Penguin --- Pearson issues. We focus particularly on the relationship between fixed and variable cost in the supply chain, and to try to manage to the highest level of variable cost that we can, so that as the reduction in physical volumes comes through, which obviously it is, we can respond to that without an increase in unit costs. And I think we are managing that pretty successfully now.

Can I follow up? Does it involve things like winding out of distribution contracts or printing contracts for these sorts of things, and just managing down your (multiple speakers)?

It involves reviewing all of those contracts. It involves reviewing all of our printing contracts, all of our warehousing contracts. We don't have a single warehousing model around the world, for example. Some warehouses we own, some we outsource, some we are third party proprietors, like in Australia that I was mentioning earlier. But we review all of those on a regular basis.

So we have a -- it's a Pearson-wide program, and in distribution it's our analog to digital distribution program. And we'll be -- you'll see us taking down warehouses and all of that kind of thing, but on a gradual basis as we're able to (multiple speakers).

And digital technology allows us to reduce our cost base by investing in digital processes, so quite a lot of cost is coming out just through that.

Okay. Right.

Hi. It's Giasone Salati from Espirito Santo. I'm going to start with one on piracy, if that's okay.

Somebody has to.

In college, my impression is that eventually Pearson and any other publisher may not even care at all about charging for books, because in college there is always going to be a gateway when you actually submit homework or present your exams. Is that okay for you to comment on potentially a shift of model to not charging for books altogether and just charging for homework, and what seems to be the real move to technology in education?

Secondly, do you have already a view on participation rate for next year? Should we expect a longer-term focus on more profitable adoptions, hence a slightly lower participation overall, but net/net no impact on revenues and profit, given a higher win rate where you participate?

And lastly, I guess, coming back quickly on margins at Penguin, I see two dynamics of better margins in digital and possibly worsening margins in print, as we unravel some of those very large contracts for paper, distribution, warehousing or whatever. In that trend, in that unraveling in your modeling for the next 150 years, do you see a point in which you are going to face a headwind because you might step into much lower margins in print whilst the progression in digital is not enough to compensate that?

So that means you're going to hold our shares for 150 years?

That's my aim, yes.

Well, let me say something about the charging model, because it is really an important thing for us. I talked to you about ASU, where we are paid based on the success of the student if he finishes the course. We think that is a model that will have legs. And we are interested very much in becoming what we call to ourselves the effectiveness company. So being able to prove, especially in education, that we can help somebody learn something, pass a course, get a certificate, is something we might find as our charging model in the future. So whether you charge for books or homework or whatever you charge for, it really is about the result and that's where we think the charging ought to go.

As far as the participation rate, do you want to answer that?

Yes. Our participation rate is going up next year. But you're right; we do look at whether various adoption opportunities are profitable and are scalable, so that we can bring in products and services that can have a market outside of that particular State. So that's, for example, why we didn't go after, as I said before, spelling and handwriting.

And it's also true that the adoption market is a smaller part of our business. We have a much stronger services business and much stronger technology business. We've been getting efficiencies and we've been investing in these new areas. We have a very strong international business. So the US adoption market is a very small part of Pearson's portfolio.

And it's much more towards what you're talking about, products and services that really drive results. And when we first did the MyLabs, that was the whole thing. If it's going to be signed homework and the student has to register, that really is the best protection against piracy, where they have to submit their grades. So your comment is very insightful.

John, do you want to talk about the 150-year horizon of books?

Yes. Well, I think probably Gordon Williams, our CFO, has only modeled it out 120 years so far, but we're working obviously on getting a proper 150-year forecast. But I think it is a little bit more complicated than that.

I don't think you should necessarily assume that we are seeing, across the piece, a big pick-up on digital books. So, for example, in the UK, effectively the supply chain savings that we make in digital books, which is manufacturing, shipping and storing books, is almost precisely offset by the VAT that is levied on the digital book but isn't levied on the physical book. So in a sense that's where it goes. It's not quite the same picture in the UK. And a lot of our costs are completely shared, clearly, across -- everything that happens in this building goes to the physical book and the digital book, so it's a question of how you allocate that out.

But I think that the key thing that makes us over the longer term quite optimistic about the margin of the whole enterprise is that those same digital technologies are allowing us to create content, store data, store content, manage, measure it in new and much more cost effective ways, in India, for example. So it's back to the synergies point that Claudio was asking about earlier. A lot of that we are doing on a Pearson-wide basis, and we are able to take quite a lot of cost out of the enterprise in doing that.

Any other questions? There you go. Behind you.

Thank you. It's Richard Menzies-Gow from Merrill Lynch. Just a couple of more quick ones on Penguin, please. Sorry.

What have you done?

I wonder if you could just --

(Multiple speakers).

If you could just comment maybe around your thoughts around the impact of Borders in the second half. I know you're guiding to be in line with the market, but are you anticipating the market to be pretty rough, come the second half?

And then a more general question, I guess, just on -- in terms of authors going direct. We've obviously seen JK Rowling go direct to consumer, seen a few more -- bit more evidence of authors going direct to Amazon, so just thoughts on that. And I know in the past you've said big authors for you don't necessarily make a big margin, but they must be quite important in terms of overhead recovery, so maybe just to comment on that.

Well, on the Borders question, the reason that we have guided in the way that we have in relation to the market is because it is quite difficult to look at it. We have modeled the whole Borders portfolio by format and we've modeled it by geography, so we would expect, for example, to lose a little more in children's out of Borders in terms of share than we would out of adult fiction, because we have a high presence in children's. We would expect to lose more in the mid-west than we would on the east coast because Barnes & Noble doesn't have a big presence for print in the mid-west.

But if experience of Borders going bust in the UK is any guide, the channel substitution is both quite high and quite rapid. So we've picked up about 80% of those lost sales in the UK predominantly through Waterstones and Amazon. And we would expect to pick up quite a high proportion of the Borders lost sales in the US through Barnes & Noble and Amazon. But we are deliberately not guiding to a number.

And as far as self-publishing is concerned, it is going to happen. JK Rowling is a very unusual situation, not just because JK Rowling's very unusual but also because very, very few authors have retained, as she did, the digital rights. So we are almost always buying and, as a matter of policy, we will always buy digital rights together with physical rights. So of course you are going to see some self-publishing.

And what Marjorie was describing earlier on Book Country, it's sort of an example of that, of how the new self-publishing models can work with legacy publishing. We are going to take some of those fiction genres, particularly the steam punk that Marjorie was talking about, and find commercial authors who we can publish in print from that. So we are losing a little revenue, for sure, from self-publishing, but we are gaining revenue that we wouldn't otherwise have captured as well.

Any other questions anywhere? Well, thank you. We'll be around and we'll be happy to talk to you, but not disclose anything selectively to you. But thank you very much for coming on this terrible day for you.