Pearson PLC (PSO) 2012 Q2 法說會逐字稿

Good morning, the 12 of you who came out; it's really great. I am very, very appreciative of your turning out; very appreciative of all the people who are tuning in, because, more than usual, we have a lot of [ruction] in London, and very hard to get around.

All this Olympic fun does mean that we've probably got more people -- gosh, this is ricocheting -- more people in the room -- out of the room than in the room. So when it comes time for questions we're going to have them ask their questions as well, just to warn you.

But, this is our mid-year results, so let's get started.

When we talked to you last February I said that we were expecting a 2012 that was another year of turbulence, and it is. The economic turbulence is pretty obvious to everybody. We continue to see weak conditions in our large developed markets, especially those that are exposed to public spending and to traditional print business.

The policy turbulence probably a little less obvious to most of you, but it's having an impact in a few places too; the transition to Common Core standards in American schools; changes to vocational qualifications in GCSEs in the UK; and changes in funding criteria for skills and apprenticeships in the UK. These particular changes all present big opportunities for us, even though one of them, the skills funding, has given us a little hole to fill.

And then there is the turbulence of industry upheaval. That has a lot of dimensions. We've talked about it a lot, but its central themes are clearly physical and online retail; fast-moving competitive environment; changing customer expectations and tastes. All of those we are grappling with, and enjoying too.

So in that context, a pretty solid first half I think. Our sales are up 6% at constant exchange rates. Our EPS a little lower reflecting, as all of you know, the FTSE sale. Our net debt is lower, meaning we have significant investment capacity. And we're raising our dividend by 7% to 15p for the first half.

As always, we've got a lot of business to bring in, in our big trading part -- the second half. However, supported by really good trading in almost all our businesses, we're able to maintain our guidance. And you'll remember that that guidance was that we would grow our sales and our profits for the year as a whole.

While we do that though, I want to remind you we are still going to be making the long-term moves that we need to make; changes and investments that are going to sustain us well beyond this year. So I'll talk about those in a few minutes.

But first, to get us in the spirit, our resident Olympic bean counter (laughter) is going to go through the numbers for you. Sorry, Robin.

Looks to me to be more than 12 of them; it's a good job somebody's counting.

Okay, good morning everybody. Before we get into Olympic beans, I thought just what I'd do is show you last year's numbers on a pro-forma basis, broken down by segment and business, which is probably a helpful backdrop to this first half.

Clearly, it shows the diverse mix of revenues; for example, only 3% of our sales now come from Advertising, and a similar amount from US School adoptions.

So turning to the first half, which as you know only represents a small proportion of what we'd hoped to do this year, starting with the Pearson-wide numbers, sales are up 6% at CER, helped by acquisitions over the past 12 months which contributed GBP142 million in the half. Foreign exchange was mildly positive due to the stronger first-half dollar, which averaged $1.58 to GBP1 compared to $1.61 in the first half last year. And our underlying sales are up GBP15 million, or 1%.

Profits are down GBP20 million, or 10% at CER, to GBP188 million. FX was neutral at the profit level with small dollar-related gains and offset by losses on other currencies. The net profit contribution from acquisitions, after the FTSE International disposal, the impact there was GBP10 million in the first half, and after integration costs of new acquisitions was GBP3 million.

Now, within these profit numbers there are some reasonably large movements in both directions, so what I'm going to do is spend a few minutes describing what's going on in each of our businesses.

In North American Education we increased revenues by 7% at CER, helped by the Connections and Schoolnet acquisitions which we completed last year. Connections helped our School business grow 34%, and while the US Schools [group in] market as a whole was down 14% in the first half, reflecting a much slower adoption market, our underlying contraction in Schools was much more modest at just 3%.

Our Assessment and Information business was resilient as expected; this is an off-year for the biennial [NATE] contract, and growth elsewhere was muted with State budgets remaining tight, and as States prepare for the transition to the Common Core standards. That policy initiative is however now starting to provide some opportunity, and we're working with both Common Core consortia to assess States' readiness to move to online testing.

Our Higher Education business was broadly level as enrolment levels remained weak during the first half, particular at career colleges. We still had good growth in our digital programs, and our virtual education programs at e-college, and we expect that these will enable us to show growth for the full year.

The business made profits of GBP62 million with notable improvements in Higher Education and School. Both were helped by the margin mix associated where they're growing digital and services revenue, including deferred revenue credits, as software sales invoiced last year were recognized in the P&L account. That margin benefit, however, won't be quite so pronounced by the end of the year.

In International Education we grew 15% with emerging markets up 22%, helped by acquisitions completed in the second half of 2011. Underlying growth in emerging markets remained strong at 15% with particularly healthy contributions from China, Mexico, India and Brazil. This was supplemented by good growth, both in the UK and the rest of the world. But some UK revenue recognition gains in testing will reverse in the second half.

Emerging markets represented 43% of this business during the first half and will be higher by the end of this year. Profits were GBP10 million higher. This was despite ongoing investments and integration costs on new acquisitions.

Our Professional Education business was up 1%. It was helped by strong growth at Pearson VUE and improvement at Professional Publishing, up 3%. However, at Pearson in Practice, our UK Training business, sales were GBP24 million lower than in the first half 2011.

A change in funding requirements, relating to the UK Government's apprenticeship program, meant that we had to stop recruiting new students while we restructured our model. The reduced turnover at Pearson in Practice dropped through the profit at an 85% level, reflecting the high fixed cost base of this business. That resulted in a loss of around GBP10 million in the first half.

We still see a pressing need for high quality apprenticeships, given high levels of youth unemployment, especially in the IT sector where we're strong. We have now changed our program, finding each trainee a job before they begin a government-funded scheme. Student recruitment recommenced during June and will ramp up further during the second half.

At the FT Group FT revenues were up 5% (sic - see presentation slides "7%"). This was helped by increased digital subscriptions and print content revenues, and was achieved despite a contraction in advertising. [Motor] markets increased its revenues 14%, felt by the continued rollout of established products into new markets. Excluding the impact FTSE, profits of the FT Group were GBP1 million higher despite a restructuring charge booked at the FT during the half.

At Penguin revenues were down 4%, all of which arose in the United States. This relates in part to our publishing schedule, which is much more second half weighted this year and, in part, to continued structural change in the industry.

The absence of Borders from the US market was the most visible example of that. The sales shortfall and unfavorable mix reduced profits by GBP20 million. The US market has been driven by one or two huge bestsellers in the first half, notably the Hunger Games series and 50 Shades of Grey, incidentally written by a self-published author. It's now surpassed Harry Potter as the fastest selling book of all time.

We saw -- we see three factors having an impact on Penguin's second half. Our publishing schedule is strong. We'll be expensing the cost of integrating Author Solutions and we'll be continuing to adjust the business, and its cost base, to a fast changing industry environment. And when we put those three factors together, we expect Penguin's performance in the second half to be similar to its second half performance last year.

Adjusted EPS is a little behind last year at 15.6p. The absence of FTSE, which contributed around 1p in the first half last year, effectively accounts for the decline. Interest costs were, as expected, slightly down due to a lower interest rate on a similar level of average net debt, as well as a higher credit from our pension schemes.

Our May bond issue will contribute to a slightly higher second half interest charge. Our tax rate in the first half was the same as the first half last year at 25%.

On a statutory basis the EPS shortfall compared to last year was a little more marked, largely due to increased intangible amortization charges arising from acquisitions and from Pearson in Practice. This was offset partly by significant lower -- significantly lower finance costs arising from FX on our dollar-denominated cash deposits, which yielded a gain this year against a loss last year.

Our free cash outflow was a little higher during the first half, mainly reflecting lower 2012 collections from debtors, which arose from sales in the second half of 2011 as we managed to get this cash in last year. Fixed capital spend was GBP13 million higher in the first half this year, reflecting our larger revenue base and investment in new facilities in Wall Street English and at Connections Education in the United States. As expected, we also had a slightly higher cash tax paid than last year.

Our average working capital position over the last 12 months continued to improve, largely as a result of the ongoing transition to digital and services revenues with lower capital intensity. Our deferred revenue was up again by 14%, as a result of growth in digital and services-based sales, which were invoiced during the period but which will be recognized in future accounting periods.

On our balance sheet our net debt is GBP100 million lower than this time last year, reflecting FTSE proceeds received in December and lower acquisition spend during the first half. Our acquisition spend during the first half was relatively modest, at GBP159 million, and after Author Solutions we currently have around GBP800 million available for acquisitions.

We continue to be highly selective and disciplined in making those acquisitions. We have a very strong pipeline of opportunity, which we're evaluating against our normal acquisition criteria.

Let me finish with a few words on our outlook. At the start of this year we said that we were expecting 2012 to be tough without much help from the external environment. Clearly, in the first half we've had some ups, in North America, International Education, at Pearson VUE and the FT Group; and some downs, notably at Pearson in Practice and at Penguin in the United States. Overall, however, we're on track. Our guidance is unchanged and we continue to expect sales and profit growth in 2012.

In North American Education we expect to grow again. The market is tough, but our competitive performance remains strong with good momentum in digital products and services.

International Education has made a particularly good start to the year, especially in developing economies. It is benefiting from strong organic growth and we're continuing to invest.

In Professional Education we expect Pearson in Practice to begin to recover, and we expect to sustain good growth elsewhere.

At the FT Group we expect digital subscriptions to build steadily as they continue to replace print revenues. The challenge has been -- the changes we have made to the model here and mix mean that we're well placed to grow, even in tough advertising markets.

And at Penguin we'll be publishing a stronger front list in the second half, taking further cost action and expensing the cost of Author Solutions' integration. We expect our second half performance to be similar to last year's.

Other elements of our guidance on tax and interest remain unchanged.

And I'll hand back to Marjorie.

Thanks, Robin. So, a decent first half. I just want to add one comment to what Robin said though, clearly, he said we had some ups and downs and we did; a couple of issues to fix. But even as we've done that, we've been able to cover them through our financial power. They don't have a financial impact for us. That's because the big engines of Pearson, the big engines of our growth, the centerpiece of our strategy, our Education businesses around the world, especially in emerging markets, those are really, really motoring.

In North America the market is moving towards a future that we've been preparing for, for a long time; personalized learning powered by adaptive data-driven digital services.

In emerging markets we're seeing the evidence that our big bet, which was that there's a once in a generation opportunity to build a leader in global -- in the global education market, which is the growth market of this generation. It's not a vision, it's a reality now.

So, I thought I'd spend a little bit time today reminding you of how we're fueling those and the other engines of our growth around Pearson.

Just a few themes; the first theme is pretty familiar to you. It's -- I'm sorry, we're going to have some Olympic analogies.

The first theme is sustained investment. In recent years, we've gained a lot of market share. Partly that's because, compared to our traditional competitors, we've been more digital, we've been more international. But we've also had another advantage, and that is that we've had greater investment capacity and a single-minded focus and discipline about how we deploy our capacity.

In terms of organic investment, in 2005 we invested about $350 million just in developing new education programs. Back then, our three major traditional competitors collectively invested about double that. This past year, we invested more than $450 million, much of it in digital programs, and that was more than all three of those competitors invested combined.

And, in fact, the traditional definition that I think you look to, which is prepublication spending, no longer really captures the full extent of our organic investment, because more and more of our digital investment is expense now.

Our acquisition investment adds up to about GBP3.5 billion in the past 10 years. No single trend action has caused a revolution. But the cumulative effective has really been a transformation. The fire power for that investment has come from a program of disposals that you know about, and strong organic cash generation, and we still continue to build that.

We have clear priorities for how we'll spend what we have, but we won't spend it unless we're sure that it will make Pearson more valuable; Penguin also.

In our second theme, scale in high growth markets. Developing markets now account for more than $1 billion of our sales and more than 20% of our people, which gives you a pretty good idea of what and where our plans are.

So let's look at one of them; Brazil, for instance. It is now our fourth largest education market in the world. We have more than 1,000 people there. Our revenues are growing at around 20% a year. It has clear attractions as a market, a young population, a rapidly growing middle class, and a $30 billion private education sector.

But it's also brought us something unique; a unique education model called a Sistemas. This is a complete asset-light, highly scalable system for running a school. Our Sistemas business in Brazil is now a major importer of lots of Pearson assets, from English language teaching to virtual science labs to Penguin literature.

Because it has a proven record of results, 19 out of the 25 top public schools in Brazil use one. We're now preparing to adapt and export that market out of Brazil. We think this is an excellent example of what we call build one to use many times, which is really our third theme as well, global businesses.

In the book publishing world, Pearson was a kind of a loose federation of national publishing houses in sales teams. In the software and services world we're in we now build global products with world class skills and assets, ready for local customization. I think English might be a good example of this. We have a unique position in English language teaching, built around textbooks, and teacher support, and language schools and test preparation. But we're now looking at our worldwide English opportunity in a different way.

We were in a GBP2 billion-market for ELT materials. We are now in a GBP20 billion-market for materials, teaching and services. We're a leader in that market, but in truth we're just the biggest minnow in the pond, because we have about a 2% market share. So that presents a mouthwatering opportunity, especially given the growth rates in that area.

We think that the number of students learning English is growing at around 7% a year to around 2 billion by 2020, and that spending on digital services is growing at somewhere like twice that rate.

So we're putting new energy and new investment into this market. We're aggressively investing in the growth and its digital capacity of our Wall Street English chain. We're developing a new measure of English skills called the Pearson Scale of English. That's going to help us map and support customers in their progression, in theory, from prekindergarten all the way to retirement in their English language learning. And we're creating a single center of teaching and technology excellence to lead our global product development.

Our fourth theme, results for customers. All these investments are centered on our basic purpose, and that is to help people make progress in their lives through learning. But that means absolutely nothing until we're able to prove that we really can help them make progress.

So we're putting rigorous measurement of educational impact at the heart of our Company. We call it efficacy. I talked about it a little bit last year. In vocational learning, for example, our BTEC qualification is a mark of quality for employers, who are less interested in what a young person knows and more in what he does.

So we're launching the first of a new generation of BTECs later this year, enhanced by our thinking about efficacy. We're now developing data on BTEC students, their university performance, their employment status and social outcomes relative to other qualifications.

If we can produce demonstrably better results for our customers, the students, the teacher, the school, the college, that is surely going to translate into better results for our shareholders.

Fifth theme, faster transformation. I hope you feel that every time we meet our metamorphosis from print publisher to software and services company is gathering momentum. So let me give you three examples of this.

First of all, and maybe surprisingly, the FT; the FT has just passed a historic milestone. We now have more digital buyers than newspaper buyers and we have more readers than we have ever had in our history; that trend will continue. We're steadily improving the profitability of our print business, and though print circulation is lower, circulation revenues for print are at an all-time high.

And we're steadily investing in a new wave of digital products; products including the new new, such as apps for Google Chrome and Windows 8; the digital systems and data analytics that are going to market and support those; and education services, such as MBA Newslines. That's a really interesting new program which is a direct feed into a classroom in a business school. They use that feed for course material. They use that to analyze companies, all sorts of things.

Secondly, that shift to digital and services is changing Penguin too on the digital side. Three years ago, eBooks were 2% of Penguin revenues. In 2010 they were 6%. Last year they were 12%. And in the first half of this year, they're almost 20% of Penguin's revenues. From the beginning, that has provoked fundamental change in our strategy, in our investment plans, in our people, in our infrastructure.

So last week Penguin made its biggest move into services, as Robin said. Author Solutions, which we just acquired, is a company that has changed the traditional publishing model. It doesn't depend on our usual sales channels, our usual customers. It gets paid by authors who want professional help publishing, marketing, distributing their books.

Author Solutions is the leader in self-publishing services, which in turn has become the fastest growing corner of the publishing industry, fuelled by trends like user-generated content, like social marketing and eBooks. On the current list of the top 25 eBooks, four were self-published. If you went to the top 35, it would be eight self-published. This is a really important movement for us. Once again, it puts Penguin firmly in the vanguard of change in the consumer books industry.

Third example, in education, the numbers you see on this chart reflect the fact that digital learning platforms, along with the services that they deliver, are now our core business. More than 43 million students, and that's last year's number, are using them, and we're building the next generation of them.

You see a few examples here. And they're from many different kinds of students, but they have a lot in common. They're available on any device, anytime, anywhere. They integrate instruction and assessment. They capture personal data that guides personalized learning. They will, over time, enlarge on and maybe replace the traditional textbook. And most important of all, they connect with comprehensive platforms that become the vehicles for digital learning.

Just take OpenClass, for instance. OpenClass is the free learning platform for college students that we launched last fall. It's already been installed by thousands of institutions. It has more than 42,000 users just in the nine months since it came out. The basic platform is free to the students, free to the institution. Service revenues from premium content, data and technology come along with use.

We're also developing similar products and deploying similar strategies for other markets besides US education.

So what does all this transforming add up to? Within our education businesses in total, 55% of revenues last year were digital in services, in both North America and International. At the FT and Penguin, the numbers were 47% and 17% respectively, and moving up. And for Pearson as a whole, we expect these revenues to exceed 50% of total turnover this year; up from 46% last year.

So how has Pearson fared at the midpoint of the year? Well, we faced down a problem or two in the first half. We may not be unscathed, but we have it firmly in our grip. But most everywhere else in the Company, our financial performance has been strong and it has been constant; as it has been through the last five years or so, through severe economic, technological and industry turbulence.

That's because -- and I know I've said it to you a million times, that's because we have a clear strategy for changing Pearson to become a software and services company, but one with a difference; one that's centered on helping people learn. And we've had the investment capacity and the single minded determination to execute that vigorously.

The external turbulence isn't going to stop any time soon. But make no mistake, our transformation of Pearson is gathering force and speed, and impact. And that is what makes us confident that we can continue to produce consistently reliable performance this year, which has become our hallmark. So thank you very much.

We would be delighted to take your questions. Let me just introduce my colleagues, so you know them. John Fallon, who runs International Education; John Makinson -- this is such a John thing -- John Makinson who runs Penguin; John Ridding, who runs the FT; and Will Ethridge, whose mother I'm grateful to, who runs North American Education. Rona can't be here today, and she sent her regards.

So we will take any questions that you have. And again, we have to take the questions from the people who are on the video as well. Okay, start with you, Mark. Why is that funny? Sorry, you can start and then Mark can have the second.

Ian Whittaker, Liberum. A couple of questions. First of all, just in terms of North American Education, the forecast for growth in the full year. What definition is that on? Is that on constant FX, is it like for like, because obviously, there was a big difference in the first?

(inaudible).

All right, Simon, would you like to [answer] that question.

Sorry, I wasn't listening. Anyway --

CER is the answer to that one.

CER, okay. So it is CER, okay. Would you like to make a guess at like for like, or --?

No.

Okay, fair enough.

He's the Finance Director, are you joking?

Second question just in terms of News Corp entering the K-12 market, I just wondered if you could give us some thoughts on that? And obviously, they're coming from the digital angle; they don't have a legacy, so I'd be quite interested in what you think of their entry.

And third of all, just in US higher education. The California Senate passed a bill looking at open source textbooks within the system. That looks as though it's on track to be law by year end. Again, I'd be quite interested in your thoughts on that, particularly given their pricing model as well, $30 for a printed textbook.

Okay. Well, I'll take the News Corp one, and you can take the open resources one.

In News Corp, there is plenty of work to do in schools for everybody to pile in, and I welcome it. I think there is a lot of change that has to happen, particularly in American education. And I'm sure that they will add to the efforts that are made.

We've competed with News Corp in consumer books and in newspapers, and all kinds of things, so we understand that. And, as I say, I just welcome them, I think that will be great.

Do you want to talk about open education?

Yes. Open source is something actually we welcome. We actually benefit in many ways from it. [Equalar] our content management enterprise platform has become the standard for how people bring in open resources.

We actually are a division that, in many ways, open is going to make our franchise more viable. Take a book like Campbell, which is the bestselling biology textbook, once it's digital, we can have people write Apps for it; we can bring in the open educational resources. I think we're in a world where you need both the structured content and you want to create a community, you want people to have their own learning. So if we were only a textbook company, it would be a problem.

At the same time that was announced, it was just announced this week that Pearson won the (inaudible) state online, helping them go online. It was a very competitive procurement, and they liked the fact that we had platforms technology assessments.

So you don't get in front of trains; you take advantage of what's going on. And we're all about making sure that students do well. And open's part of it, but it's only part of it. And we're helping people curate and use open. But you still need high quality content, you still need technology, and that's what we're going to do.

Mark next?

Mark Braley, Deutsche Bank. Two questions. First, on the FT, I wonder if you could share with us your thoughts about why the 300,000 print copies are still in print. Why haven't those people (multiple speakers). Why haven't those affluent technology-aware people moved to digital? And do you face a series of cliff points in the print business, as the circulation drops to unsustainably low levels country by country?

And then the second one, perhaps equally cynical. On Penguin, Author Solutions, effectively this business is about destroying your legacy consumer book business. Do you think this is all the capital that you have to put into the new way of publishing stuff that apparently people want to read?

Two good questions. That's -- he's a kind of a guy like that, sarcastic. So John, do you want to say why people still buy the pink thing?

Sure, is there a microphone? Yes, a lot of pundits have, obviously, been rushing to write the obituaries of print for a while. But what we're seeing is continued strong demand, particularly in financial centers for print. And we think that it's going to be a pretty important part of the portfolio for a long time to come. It's not an either/or. What we're finding actually its readers are taking the FT across a range of channels; BlackBerries in the morning, iPads, Galaxys and the newspapers. So it's not an either, or situation.

What we've seen actually, we've managing the yield and the profitability of print, particularly through price rises, and through losing some of the low yield in bulk circulation for a number of years. So we've seen a steady increase in the profitability. And as Robin said actually, we've seen print circulation revenues continue to rise.

So we're pretty happy with the print business as it is. We're very excited about the digital subscriptions business, which is growing very strongly at double-digit rates. So it's a pretty strong combination, and we see actually that we'll continue to increase the profitability of print circulation for many years to come.

John, destroying your business?

Yes, thanks for the cynical question, Mark. No, I don't think it is destroying the business. I think self-publishing is, net, going to be incremental for the business. Some of those titles that Marjorie mentioned that are sitting on the New York Times best seller list that are self-published titles, sure, are going to be taking share away from what you might call the traditional publishing industry.

But of those 190,000 titles that were on the slide you saw, very, very few, clearly. are going to make it to the New York Time best seller list. And the overwhelming majority is just lengthening the tail of publishing. And the tail is now getting very, very long because digital technology, printing technology, as well as publishing technology makes it possible to publish a book very, very inexpensively.

And as you increase the supply and give consumers more choice, you will sell more books. Now, you need to be present in the self-publishing sector obviously to take advantage of that. And strategically, that was the thinking behind the acquisition of Author Solutions.

I think I'm going to take one from the webcast first. The first one that was in was -- sorry. Could you expand on your strategy around degree programs [a la] business at Royal Holloway? John?

Yes. One of the things that we're seeing in the UK and around the world is growing demand for higher education, but higher education that is much more flexible, career relevant, affordable; that meets much more the career needs of a whole range of people.

And, therefore, what we are doing is starting to develop our own degree programs and our own taught degrees. Through the work we're doing Edexcel. We already award qualifications right through from GCSEs up to High National Diplomas, which are one year short of a degree. And now we're topping that up. It's a very small initiative at this point in revenue terms. It's literally a start-up. But it's a business that we're investing in and are confident will grow and is, actually, part of a much wider move.

So we now have our own higher education direct delivery business in South Africa. We have a start-up similar to the UK that we've just done in Mexico, which will purely distance learning. And this is a phenomenon that we see elsewhere, places like India, China as well; real demand for high quality, career relevant, affordable and a more flexible higher education.

And we think that we've got all the credentials and all the pedigree to play a role in that, as well as continuing to work with other private sector universities, in providing a whole range of services to support them and, indeed, with the more traditional higher education sector as well.

Okay, one more from there, because I've got a ton of them. Could you please remind us of the change in pension accounting that has taken place and the impact on P&L and cash flow?

Are you planning more accelerated write-downs on intangibles? Two different questions.

Yes, we love to plan for those.

So IAS 19 has been revised. That will come into force at the end of this year. At the moment, we have a credit going through our interest line, which I talked about related to the assets we've got in our pension scheme and the returns we expect on that.

The new legislation that comes into force effectively reduces the amount of credit we can take to the P&L account related to those assets in our pension scheme, which are about GBP2 billion. So, we will have to revise not just next year's accounts, but all our accounts going back for the last five years, for the increased charge that comes from the reduced credits we're allowed to take associated with the new IAS 19 legislation.

That's going to be about GBP20 million a year. One of the decisions we'll have to take is whether we take that to adjusted earnings or not. And I know that some will and some won't. So we'll watch the industry practice and just see how that pans out. But a lot of companies are going to find that their stated earnings are going reduce, because they're not allowed to take as much credit for the return on the assets of their pension scheme associated with this change. And we're similar to that.

Impairments and accelerated write-downs, you never plan for that, obviously. But when you have a problem, as we had in Pearson in Practice in the first half, you have to assess the assets on your balance sheet.

Goodwill, there's no goodwill impairments in the case of Pearson in Practice. But we have looked at our relationship with the Skills Funding Agency. When we bought Melorio, we had to put a value on that customer relationship. Because the revenue streams that came in in the first half have been that bit much lower, we anticipated, we've had to take an accelerated write-down of the customer relationship. And so GBP21 million has gone through the P&L accounts. It affects the stats. It hasn't affected the adjusted earnings.

Sami, your turn.

Sami Kassab, Exane, two questions if I may. The first one, could you tell us if you've seen underlying growth in your deferred revenues in H1 please? And maybe comment on that growth or decline.

And secondly, one of your competitors in China has warned of a pending or upcoming slowdown in discretionary spending on education services there. Do you see that as well? Or are you gaining share on them?

Okay, John, do you want to start?

On China, we haven't seen a slowdown. I think we've shared with you the figures on growth in student numbers at Wall Street English. Wall Street English, obviously, is in probably a slightly separate segment from the company that you're referring to, which I assume is New Oriental.

Global Education, which is a company that we acquired in the fourth quarter of last year, is in the test prep market, which is probably more similar. Again, we're very happy first six months -- sorry, you want to ask a --?

Their one was more in Q3, so upcoming quarters.

No, we are --

June to August.

Yes. Whether it's Q2 or Q3, we're comfortable with the growth that we're seeing. As I was just saying Global Education, we spent the first six months of this year really getting that business fully integrated into Pearson. And we've lots of plan now to grow and expand it.

And I think that, to my mind, is the bigger point, because I think take any medium-term view of China, the rapid urbanization, rapidly growing middle class, it's much less about whether is GDP in China this month or 7% or 8%. It's much more about that rapidly growing middle class, who after housing and food, their biggest item of personal spending is on education.

So the thing I'm much more worried about is -- rather less about is there a slowdown from one month to the next, than the fact that the demand for really high quality education actually is outstripping our supply to deliver it.

So that's why, as I said in March and again today, we're really up-scaling our level of organic investment, driving Wall Street English as far and as fast as we can, bringing all the great benefits that we've got from the Global English strategy that Marjorie talked there on Global Education, because this really is a once in a generation opportunity and were going to drive it as hard and as fast as we can.

Deferred revenues --

Underlying growth in deferred revenue, can you tackle it?

Deferred revenues, so what you saw on the chart was a 14% increase in deferred revenue this half compared to the same period last year. Connections and Schoolnet have certainly contributed to that increase. But even if you strip those out, we're still showing double-digit growth in deferred revenue year on year.

Thanks, Robin.

Okay, right here.

Matthew Walker, Nomura. You referred, I think, in your opening remarks to the digital margin benefit in North American education being slightly less in the second half than in the first half. Can you say why? And how much was the margin benefit?

The second thing is on -- I think you also mentioned something like minus 3% organic for school, unless I got that wrong. What does that imply for Higher Ed organic in the first half?

And the last question is on college books. I think, from information we've got, college books is still overwhelming print, 90% plus print. Why is that the case? And can you give us an update on piracy, what levels of piracy you're seeing in college books.

Will, why don't you talk about college books and piracy?

Well, I think actually, the majority of learning resources being sold now are a combination of print and the homework applications. So, yes, you have -- but I think it's -- you don't have 90% of just print only. So you have this combination.

And I'll think you'll see the print going down over time. And there's just inefficiencies in the system. I think we're at a real --beginning of a real revolution of how e-reader technology and all that.

So we've already seen the homework applications. That gives us a big protection against piracy, because if people are registering, they're getting their homework and it's tied to real results. So we'd like to move to digital, one, because it helps the students to personalize it. But also enables us, the more it's personalized, the less it's commodity; it's more the student and they're registering.

So, yes, you'll see print come down. But even right now, you have almost all print associated with some kind of digital homework application.

That doesn't mean that we don't sell a huge number of digital textbooks. We certainly do and we offer them. But we are sometimes surprised that the students don't take them up more. They're cheaper and they're easier to use, so to your question.

You want to answer the margin question?

Yes, so, just to remind you how this deferred revenue thing works, because what we're doing, as Will said, is we're selling a lot more software. We're selling a lot more services where you can't recognize the revenue, and that's Sami's question just now.

What tends to happen is that we sold quite a lot of things, access to software, in September/October time. And we have to recognize that over the duration of the software access code, which is often 12 months.

So what you're seeing structurally over time is more revenue being deferred on the balance sheet, we've shown you that endlessly, and then being credited the following accounting period. And in the first half of this year, we've had the highest ever release of deferred revenue into the first half results. That revenue tends to come with a pretty high margin, because there's no cost deferral or very little cost deferral going on.

So I think, over time, what you're starting to see is, Will, first half margins will be that little bit higher. And we've said to you before, digital and services, if you get volume, are good margin business, because clearly the variable cost is pretty low. Another subscriber to MyLab tends to drop through to profit at a pretty high rate. So the nature of the business is a little bit different in digital and services than it was in the old book days. You're deferring more revenue, but if you get volume then your underlying margin improvement is there.

Second question was one about just growth rates. I did say that the underlying number for school in the first half was 3% down for us. The market, as we learned last night, some data that came in with the AP last night, was down 14% in the first half. So you can tell from that that the school curriculum market, the traditional part of it, the textbook market, is a very tough place to be. And you may have seen McGraw's numbers yesterday.

So we are achieving better levels, if you like, than the market because of our ability to access other revenues, which aren't really captured by that AAP data. There's no real implication. What you can't do is read across into Higher Ed. So Higher Ed, we said, was broadly level.

Remember that Higher Ed is much more second half weighted. And in the first half we're selling to career colleges and career colleges are the place where the enrolment contraction has been at its steepest. So that in itself was a pretty good result.

Will, I'm going to let you have one more bite at that, because you didn't mention about piracy, and he asked a question about effects on piracy.

I thought I did.

Did you?

Yes, I did. Yes.

You felt -- were you satisfied with that? Okay.

I don't want to be rude.

That's a good idea. Thank you very much. I'm going to use one of the webcast ones. Because we have several questions about can you tell us in the North American education business how it's going to grow in light of common core. When can we expect to see some spending happen?

And then can you talk about the balance of opportunity and risk and the move to common core in school books and testing. So maybe you can capture both of those?

Well, as we've said for some time that we're in a transition period and this is the most difficult part of the transition period, and yet we've done very well and we've shown good results, because a lot of people have held off spending in anticipation for the common core. And yet, despite it, we've shown very good results in the last several years.

We're now beginning to see some encouraging signs, and it plays to our strength. So the curriculum stuff is still a little bit off, but people are now starting to get ready in terms of digital. So we're starting to get some contracts around preparing teachers. We're doing these one to one initiatives where we really are -- they're sort of outsourcing to us. Help us go digital; we've gotten some nice contracts at Huntsville Alabama, for example, and some others.

Our platform businesses are doing well and we're getting more business there. So we're beginning to see -- the last couple of years there was just so much of a freeze everywhere, we're beginning to see some encouraging signs and it's playing to our strengths in having digital expertise, content technology. But still, having said all that, it's still a very difficult market right now, but we can start to see we're getting closer and closer to when the common core gets there. And we're very well positioned.

We're also investing. And, as Marjorie and Robin said, we have the wherewithal to invest. So we're very focused on making sure we're in a very good position when the common core starts ramping up in more force.

Claudio?

Claudio Aspesi, Sanford Bernstein; three questions. Can you please tell us what are the potential liabilities if you lose your case on the eBook pricing trial that's coming up in New York.

The second question is around how you're managing -- if you're doing anything special at all in Italy and Spain, how you're managing the working capital and the cash in those markets, given the international situation?

And finally, what visibility do you have on the revenues for the UK vocational business in the second half? What gives you confidence that the business will reverse itself?

You want to talk about Spain, Italy, etc., John, first?

Okay. The question was about how we're managing our cash and working capital specifically, so Robin might want to just take that, I think.

So we have been keeping a pretty close eye on our cash balances in Spain and Italy, not least which banks they're in for a start. But, more importantly, just making sure we haven't got surplus euros in those two countries at the moment. So that's been quite easy in the first half because, of course, what happens in the northern hemisphere markets is the stock builds up in the first half, and by definition, therefore, the cash flows out as the stock comes into the warehouse.

In the second half what we're doing is paying regular dividends out of Italy and Spain and removing cash via loans back into the UK, to make sure we've got hold of it.

I'm trying to give John a chance to say how good his Italian --

We did last week get the latest adoption date and we have for the fourth year in a row gained share in Italy and are now firmly established as the number one player. So it's another year of curriculum reform, and we're expecting to have another good year and continue to do well there.

Can't say the same about Spain exactly. Our case in eBook and the DOJ, John; you can say very little about that; it's something in progress.

Yes, and it's obviously a very hypothetical question, because we think we've got a very good case and we've done nothing wrong, as you know. But I could tell you what the sorts of elements are.

There're are obviously quite large costs associated with filing that. The direct penalties from the DOJ would be in the form of a sort of consent decree rather than a financial penalty. But they would increase liability in the United States to class action law suits, which, I think, the settling publishers are sort of closing off by reaching agreements with individual Attorney Generals and individual states, which then significantly reduces the class action liability.

And we really do believe we did nothing wrong, so that's why we're fighting this.

On the visibility in our skills business, as Robin said, we've had to change our whole model from taking students, training them, and then finding them a job to finding employers who will take students who've never been trained, which is a little bit harder. But we have changed that model. It is ramping up and we will have more visibility about it in the fall.

But we do think it's going to be fine in the end, and we think it's a very, very important business. The unemployment for young people is a big social problem, and we think that we're pretty good at it. We were number one in the quality of our program and so we think we're going to replicate that in the new model, though it's going to take a bit of time.

Simon Baker, Credit Suisse. Two questions. Firstly, on US schools market share gain, which yet again you're demonstrating you can deliver well. Clearly, it's coming from McGraw-Hill to some extent, but what about Houghton Mifflin, Harcourt. And as that comes through the other end of bankruptcy proceedings, as it has, have you seen any difference in the competitive offering from them? What are you looking out for? What should we look out for?

And secondly, I appreciate your point in terms of the pre-pub spend; it's less of a comprehensive indicator. So is there any color you can offer us in terms of the way we can gage total investment that you're putting behind the business, including digital, on a timeline or against competitors, please?

Okay, we'll think about that while Will tells you about market share in the school business and Houghton, etc.

Yes. We have taken share again and we've taken more from McGraw-Hill. And we tend to focus on what we're doing. We take all our competitors seriously, every year you're in a battle. So I don't really want to comment on one company versus another.

What I really want to come on is our strategy and how we think this is a really exciting time and we're going to keep taking share. We're going to keep investing, we're going to keep transforming, and we take all our competitors seriously. And that's, I think, one of the reasons why we have been successful.

Just if I may, just following up on that, so if you, for example, were to strategically decide to invest more in your products, when would we then start to see it in terms of your product? What's the lead time before that then comes through into stronger product offering? Would it be --?

Well, we're always investing, and I think it's the reason we have -- the sustained investment creates sustained performance. Depending upon the product, the service, the amount of time varies.

It's true to say, though, that when we go from the analog to the digital world, in the analog world we would have taken five years to create a reading program. Now it's probably going to be digital and it will take half that time, maybe. And every time Will says it's going to take two years, I say you've got to do it in two months. So we're going down to two weeks. So we have a constant battle about that. But we are getting faster, and digital certainly does help us.

On how you could identify our organic investment aside from pre-pub, as I said, what is not pre-pub is generally technology, and that's more and more being expensed. So it doesn't matter in a way, because you're going to see it through the bottom line. But is there anything else that you might say about that?

I think it's difficult, because you're right, when it's a specific piece of development of a program, whether it's a new MyLab or a new platform. If it's an expenditure related to a specific item like that we can put it into pre-pub, and obviously most of our pre-pub spend is now either digital or looking at programs to launch internationally.

Where it's a more generalized investment then clearly that's going to go straight through the P&L account, and that has moved up over time. And then, of course, some things we're doing, like kitting out new learning centers, where we open learning centers, are actually being capitalized along the fixed capital line too. And you saw a little bit of the movement in that fixed capital line associated with some of the things we've been doing in India to digitalize classrooms, we talk about in the press release, connections, etc.

So I think what you should take some solace from is what we're not looking at is a massive or significant increase in investment in pre-pub, and being expensed, and fixed capital. It's all running at about a nice upward trend, because what we're trying to do here is to move the margin up over time, not in an incremental way every year necessarily, but over time through investment.

And it's those three types of investment which are contributing to that, and the history has been, in the education business of margin improvement every year for the last six years. So there isn't a change in approach coming that will affect that philosophy.

Thanks, Simon. We've got a couple of questions for Penguin and the FT, so let me try to ask those. One part we've already answered. FT, will advertising recover, or does this become a content driven business, and if so how much more lift is left from digital subs?

What we can say about advertising, as Robin said, it's down in the first half as we expected. But what we're really seeing is a really high degree of volatility, and a very low degree of visibility.

But, for us, the whole strategy is based on being less dependent on advertising. I think Robin gave the figure of just 3% or 4% for the overall Pearson numbers. And what we're seeing at the FT is double-digit growth in content revenues in the first half, and we have for the past five years. So we are becoming much more a content business, particularly with the digital subscriptions model, and the corporate subscriptions model too. So we live in a world where advertising is challenged and increasingly volatile, but, for us, it's less of a concern than it was in the past.

For Penguin, a couple of questions. An idea of the eventual run rate margins after this year, better or worse than in the print world? Can you give a sense of margins for Author Solutions or self-publishing services vis-a-vis traditional publishing? You may not be able to answer either one of those.

No, I don't think I can answer either.

But I've given you a chance to talk.

(Inaudible) but I could give you directionally some indications on it.

The self-publishing industry margins are around the same level actually as the traditional publishing margin, so you're looking at 10%-ish margins in that industry. But as it grows very fast, although a lot of the costs obviously are variable, your fixed overhead recovery improves, there is -- Marjorie was pointing out in the slide, there is like 1,600 people working, so it employs a lot of people.

So if you leverage that workforce, we think there are opportunities to improve margin, and we think there are potentially some synergies also available to Penguin. So that's not a margin forecast, but it's a sort of margin directionally, if you like.

As far as the traditional business is concerned, really what you're looking at is an opportunity to increase a product margin, if you like, the gross margin, on books as you move from a physical economy to a digital economy. And then you have the offsetting effect of having all of this supply chain activity sitting around in a physical world, which is pumping lower volumes. So you have to adjust your supply chain down in order to accommodate the change to manage your margin. So that's a challenge.

Nick Dempsey, Barclays. Just first question, at the half year last year you gave us an EPS forecast for the year, you haven't done this year. Does that represent a difference in terms of your confidence?

The second one, just going back harking on again the US school market, the differences between the minus 3% and the minus 14%, how much is your participation rate going up, contributing to that gap?

And also, McGraw-Hill talked about minus 10% for the year for the market, I know you have a history of not really commenting on that, but do you want to comment on that?

No, I just say that they never get it right. But on the EPS thing, that was an outlier last year, we just did that, we don't normally do that. So -- and we keep with the metric we start the year with, so we started with revenues in profits, and that's what we keep with. And we think it's a better reflection of what the enterprise is doing anyway.

So nothing having to do with anything other than Robin had a rush to the -- of blood to the head last year and said EPS. I don't really remember why we did that; no indication.

So the AP numbers include new adoption in open territory. Actually, our participation rate was 93% new adoption. We had strong performance there, and we had a very strong performance in open territory and, I think, our scale. So those both add up to the figures we've quoted.

Anything else?

Giasone Salati, Espirito Santo. You mentioned on passing a very big opportunity from private spending in Brazil, I guess the same goes for China. But I think the past you've never really been able to quantify how much was the amount of product spending captured in Pearson's revenues. Is that something which becomes a little bit easier in the way you run the accounts, both in North America and International Education, or still very opaque?

Secondly, I'm wondering when we look at this AAP data, and we've always had a very gray area in how we've split the value of print and digital offer; how much we charge for print and how much we charge separately, or bundled for digital. When do you see a point where digital will actually go to a premium, and print will be the add-on, which will not be captured by AAP data, where are we into that?

Is it possible for you at this point to tell us out of the bundle, if I can use this awful word, how much of the price is captured in print and digital? I think I went too long, so I'll stop here.

That's enough, yes, thanks, but very good questions. So John, can you give any sense of the product expenses?

In our emerging markets, so China, Brazil, India, virtually all of our sales are made directly to individual consumers, and so the spending is by individuals spending their own money. As I mentioned, I think that's going to be one of the big phenomenon's over the next 20 years.

I think there was a study out from the European Union the other week saying that the middle class in places like India, China, Brazil, is going to grow hugely, and the middle class will rise, is going to double, over the next 20 years. So that's a great trend to be focusing on. And I think this is a real trend; growing middle class, increasingly dissatisfied with state provision of education, increasingly willing to spend their own money, as well as agitating for improved quality of education. So we're meeting both those demands.

So to quantify it, virtually all in emerging markets, if you took it across International as a whole, over half our revenues now would be spending by individuals rather than tax payer funded, just about. Of that half about a quarter to one-third would be teacher influenced or directed. So, for example, in Italy when parents buy the textbook, they're buying the textbook, because the teacher has recommended it.

The other two-thirds of the half, so in other words about 35%, roughly one-third overall, is direct consumer spending, making their own choices and engaging directly with us. And, clearly, that's a fundamental part of our emerging market strategy, so you'd expect that proportion to grow as the business grows.

Want to talk about print and digital pricing?

Well, first of all, the AAP data is revenues, and includes both print and digital. We don't put in things like Schoolnet, Connections and all that, because we want like for like. But it's, basically, the publishers who are doing curriculum materials, print and digital. So it's not just a print only.

And in terms of when it's going to shift, I think, the trend is clear that we're moving to digital. And I think it's clear that we'll benefit from that trend.

You can catch him afterwards by the neck and see whether you can get that [out of him].

Thomas Singlehurst, Citigroup. I have one question actually on the outlook for 2013. I guess from your comments if we shouldn't trust -- guidance on 2012, we should trust 2013 guidance even less. But McGraw yesterday, obviously, specifically said 2012 within US schools would be a low watermark and we should expect growth. Is that a pattern that you would subscribe to as well?

I think in pattern terms, yes. But we never do talk about or subscribe to probably the numbers that they pick that's all. But I think, directionally, we agree that school is going to be down. But we -- our definition of schools is a little bit different, we've got testing and we've got lots of services, so it's a little bit different for us.

Any other questions? If not, thank you all very, very much. I really, really do appreciate you coming out. I know this was a day when it was very hard to do that, so thank you all very much. We'll be happy to answer your questions, no selective disclosure though.