Pearson Management Discusses 2013 Results - Earnings Call Transcript

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 |  About: Pearson plc (PSO)
by: SA Transcripts

Pearson (NYSE:PSO)

2013 Earnings Call

February 28, 2014 4:00 am ET

Executives

John Fallon - Chief Executive Officer, Chief Executive of International Education Businesses, Director and Member of Nomination Committee

Robin Freestone - Chief Financial Officer and Executive Director

Analysts

Sami Kassab - Exane BNP Paribas, Research Division

Mark Braley - Deutsche Bank AG, Research Division

Rakesh Patel - Goldman Sachs Group Inc., Research Division

Matthew Walker - Nomura Securities Co. Ltd., Research Division

Ian Whittaker - Liberum Capital Limited, Research Division

Claudio Aspesi - Sanford C. Bernstein & Co., LLC., Research Division

Patrick Wellington - Morgan Stanley, Research Division

Nick Michael Edward Dempsey - Barclays Capital, Research Division

John Fallon

Okay, well, good morning, everybody. I know you've all got a busy morning and many of you have got to get on to another results meeting at 11:30, so we'll get cracking. And thanks for coming along on what I know is such a very busy reporting day at the end of a very busy week.

So I'm going to start by giving some context to the 2013 results and the 2014 guidance before Robin talks you through both of those issues in more detail, and then I'll be back to explain why, in 2015, we should start to see the benefits of the very intense period of restructuring and change that we are now in the middle of.

We did make significant progress on a number of fronts in 2013, and I'll talk about that in a moment. However, as you all know, we did not make the financial progress that we set out to achieve last year. Excluding restructuring costs, underlying profits were 9% lower. Cash was down 25%. And we missed the operating guidance we gave at this time last year by about GBP 35 million or around 4%. We are determined to return Pearson to sustained earnings growth as quickly as we possibly can.

So before Robin talks you through the details of last year and sets out our guidance for this year, let me explain, with the benefit now of a full year of leading the company, of what's going on.

So let's start with just a little bit of historical context. For 7 years, we drove strong and consistent earnings growth by increasing organic sales at or above the rate of inflation every year, and improving margins each year as well. Some of this growth came from inside Pearson. We delivered significant share gains. We made efficiency improvements. We expanded our addressable market. But we also benefited from 2 external tailwinds, a couple of cyclical and publicly related -- public policy-related factors. And about 2011, both trends began to level off, and they've now turned against us, with the results that our organic revenues have been flat for 3 straight years. And this chart shows the biggest single factor.

Just under half of our North American Education revenues and significantly more of our profits come from higher education. This business, as you know, is highly countercyclical. So through to 2010, with jobs hard to come by, enrollments increased rapidly. College enrollments, the orange line that you see on the chart, have now been flat or declining for 3 successive years, with particular weakness in 2 segments, shown by the red line here, community colleges and career education, in which Pearson is especially strong. Now in previous economic cycles, this trend has been offset by a cyclical recovery in our schools business, driven by recovering tax receipts, although that is a lower-margin business. And as you can see, tax receipts, the blue line, have indeed recovered, but that has not yet fed through to our business because the sector is awaiting a major curriculum change brought about by Common Core. As we expected, it has been implemented slowly as budgets and policy align state by state, but more than that, it has had a much big -- a bigger impact in the shorter term on our much bigger assessment business as well as on our instructional resources business. So for example, last year, we saw large-scale testing contracts canceled or reduced in scope in both California and in Texas.

To complicate matters further, curriculum change is not only affecting the U.S. but also the U.K., our second biggest market. BTEC enrollments, as you can see here, more than doubled through to 2010, and they've declined by over 20% in the last 3 years. And we're now seeing a similar trend in GCSEs and A levels as the U.K. moves from modular to linear exams and limits the use of research. That's ahead of the move to a new world class qualifications program, the U.K.'s equivalent of Common Core. And as with Common Core in the U.S., we are investing now in the new products to be ready for this curriculum change that starts in 2015.

So in terms of underlying performance for the year is this mix of cyclical and policy-related factors impacting businesses, which together generate around half of our total profits, that really hurt us in 2013. And as I've indicated, some of these factors prove to be worse than we expected in Q3 and then worse again in Q4, as Robin will explain. These factors will be a drag on us again in 2014, but after that, these headwinds start to ease. And in time, as the curriculum change comes through, as the enrollments recover, they start to blow at our backs again rather than in our faces.

Now the temptation in the face of these temporary headwinds is to pull back, wait for them to pass, but we are choosing exactly this moment to push ahead with the largest restructuring in the history of Pearson, as I set out last year. It's designed to take on the big structural changes in education, not least, the transforming power of technology, which is a challenge but is also a much bigger opportunity for Pearson if we can successfully embed ourselves, and as we successfully embed ourselves with our customers. So we are incurring big one-off costs, GBP 135 million net last year, another GBP 50 million net this year, to cut our costs, to derisk the business in the areas that are under threat: print, developed world, educational inputs. And as you'll hear from Robin, we're now very well advanced in that work, and the restructuring program is very much on track. And what that work does is shift us much more quickly and much more irreversibly to where the biggest sources of future demand are. So at the same time as we're undertaking this restructuring, we're also stepping-up our investment in North America, with an extra GBP 60 million in 2013 alone. And as we said before, we are now reinvesting another GBP 50 million this year with the restructuring benefits that we've achieved across the company through the work we did last year. We're doing so to get ahead of the forces reshaping our industry, to realize the significant opportunities that are emerging and to reduce our exposure to the corresponding risks. And so as you'll hear from Robin, these same 4 factors will hurt earnings again this year, and that explains our guidance for 2014.

But as I said earlier, none of that should hide the fact that we actually made really good progress on a number of fronts last year. We completed the Penguin Random House merger, the company is off to a very strong start, and very importantly become ever more confident that, that merger secures Penguin's commercial and creative success. We grew strongly again in digital and services: registrations up 15%, emerging markets underlying revenues up 12%. We are, as I say, on track to implement the largest restructuring program in the company's history. We're executing our first truly Global Education strategy, organizing to deliver it, building the leadership team to enable it to happen. We sold Mergermarket and we reinvested the proceeds in English language learning in Brazil. In the FT, digital content revenues exceeded print content revenues for the first time. And alongside all of that, we did resolve and close down a number of difficult issues, closing down Pearson in Practice, settling the Penguin Department of Justice case, for example.

All of those things are essential to understanding our outlook, and they make us all the more confident that we will emerge from what is a short but undoubtedly painful transition as a stronger company and that you'll start to see that in 2015.

So I'm now going to hand over to Robin. He's going to talk you through the 2013 results, our 2014 guidance. So Mr. Freestone?

Robin Freestone

Thank you very much, John. Good morning, everybody.

Trading in quarter 4 was disappointing, and we didn't finish the year as we would've liked, partly due to foreign exchange. We upped our restructuring activity in the last quarter. And the scale of investment undertaken to take advantage of impending curriculum change in our 2 major markets, the U.S. and the U.K., meant that we were unable to absorb that short-term trading pressure. This pressure, particularly in the fourth quarter where we make much of our profit, came in 3 categories: firstly, further enrollment decline in career colleges, and greater than we anticipated; secondly, the fact that Texas and California cut assessment contracts ahead of Common Core curriculum introduction; and thirdly, a faster-than-expected shift from books to MyLabs and later bookstore purchasing, which meant increased revenue deferral from quarter 4 2013 into the start of 2014.

Now the themes of restructuring and investment are also critical to our 2014 outlook, but in the longer term, they underpin our confidence in sustainable growth in 2015 and beyond.

So looking at 2013 as a whole. In North America, sales in our K-12 school business began to recover, up 3% after recent years of underlying contraction. Our good adoption performance, with a 33% win rate, and continued growth of digital programs such as enVisionMATH, plus help from our new acquisitions such as Connections Education, bolstered the top line. That was achieved despite a tough year in state testing. Our higher education business, excluding Embanet, was down 3%, reflecting the enrollment contraction that I mentioned. Enrollments in community and for-profit colleges, where we're also strongly represented, fell 4% on 2012. But MyLabs continued to grow, up 9%, and we saw a strong demand for our online university offerings from LearningStudio and Embanet.

In our international business, we had double-digit growth in emerging markets, which now account for 48% of our international turnover. China and South Africa were particularly strong. But in the U.K., sales were down 6%. And they were lower, reflecting demand for school resources and fewer examinations marked as a result of curriculum and testing reform. Rest of world markets were subdued, down double digits due to continued weakness in much of Continental Europe, poor contribution from Australia and our move to a distributor model in smaller territories.

Our professional business had a good year, with Pearson VUE up 7%, benefiting from both new contracts and volume growth on existing contracts. Professional publishing was down again by 6%. And growth in the U.S. was offset by exit from our business in Europe.

FT Group was flat overall, including Mergermarket. However, this hid an inexorable trend of the FT towards digital as we saw FT digital content revenues exceed content revenues from print for the first time. Corporate subscribers to FT.com increased by 100,000 or 60% in the year. Penguin sales represents only the first half against the full year in 2012, having moved to associate status at midyear. So I'll pick that up again when I come back to operating profit.

Overall, organic growth in the year was 1%, held back by the factors that we've mentioned.

Acquisitions contributed GBP 70 million net, after small disposals, which reduced turnover in international and professional by GBP 49 million. FX was mildly positive, with beneficial dollar impacts offset partially by GBP 29 million of emerging market currency weakness, notably in quarter 4.

Of course, our reported sales numbers don't tell the full story. And we continue to highlight here the value of our deferred revenue, up 5% in 2012, confirming faster growth of digital and services revenues. This effect reduced our reported sales by about 1% in 2013. More encouragingly, whereas much of the 2012 growth on -- in deferred revenue came from acquisitions, in 2013, most of the growth was organic.

Overall, profits was down 21% on 2012, after charging net restructuring costs of GBP 135 million. I'm going to talk specifically about both North America and restructuring in a minute. In international, net restructuring costs amounted to GBP 69 million. And before this charge, margins were similar to last year despite policy-driven contraction in our higher-margin U.K. business.

Professional benefited from good performance of Pearson VUE and the absence of Pearson in Practice losses. At FT, we saw a sharp recovery in profits at the FT resulting from prior year restructuring and an increased contribution from The Economist. And Penguin Random House reported profits were down due to the GBP 23 million of tax charge for the second half when it changed to associate status. About GBP 23 million is included here as a reduction within portfolio changes. North America accounted for all of the organic profits decline. So let me deal with that before I come back to talk about restructuring.

The most significant cause of U.S. profit decline is a planned increase in investment through the P&L accounts and amortization of pre-pub. In total, this reduced profits by GBP 60 million in 2013, including investment in Common Core, student recruitment costs incurred at Embanet ahead of revenues in 2014, investments to move our digital products to the cloud, as well as rollout of mobile access to both our older and new digital programs to support our next phase of growth. The trading downside of GBP 36 million resulted from contraction in our higher-margin higher education business, notably in career colleges, as well as contract curtailment in our assessment business. In addition, we had higher returns from college bookstores and about GBP 15 million related to higher bonuses to aid retention of key people in our U.S. sales force.

Our EPS, excluding restructuring, was slightly above 2012 at 84p, helped by a lower tax charge. Now that tax charge arose following agreements on a number of historic tax issues with the IRS, for which we were well provided. On a post-restructuring basis, adjusted EPS reduced by 15% to 70.1p.

Our statutory P&L includes the impacts of the Penguin Random House transaction, on which we showed a gain under IFRS of over GBP 200 million. Clearly, we strip that out for adjusted earnings purposes.

Our operating cash conversion of 80% reflected higher investment levels in new digital products and enabling technology that I've mentioned. Our traditional working capital, excluding pre-pub, was down due to lower inventory levels needed to satisfy analog demand. The receipt of the first year dividend from Penguin Random House was lower than the reported profit due to the timing of their second half dividend. In 2014, this shortfall will be less pronounced given Penguin Random House's 95% dividend policy. Foreign exchange losses incurred during quarter 4 on cash receipts amounted to GBP 40 million. Other movements represents the increased cash we're putting into our defined benefit pension schemes, partially offset by share-based payment charges, which don't have a cash impact.

Within our free cash flow, our cash tax spiked up significantly as a result of payments to the IRS associated with our settlement of those historic tax matters, as well as delayed taxes form 2012 paid in 2013 arising from Hurricane Sandy. The cash tax will normalize again in 2014 at around the level of our P&L tax charge.

On our balance sheet, our net debt increased to GBP 1.38 billion due to that additional tax paid, restructuring costs and the higher levels of investment ahead of the significant future opportunity offered by curriculum change in our biggest markets. We expect now to sustain this level of debt in 2014 due to further investment plans during the course of the year.

Despite that net debt increase, our net debt-to-EBITDA ratio at 1.6x and the interest cover ratio at over 10x are well within our covenant levels. We remain committed to our current debt ratings over the long term, although while going through this significant restructuring and investment phase in the short term, we are prepared to tolerate a 1-notch downgrade to BBB, Baa2.

Our ROIC percentage inevitably suffered in 2013 from lower profitability post restructuring, higher expense and investment levels and higher cash tax. This, however, is a low point, and we now expect this ratio to improve again in 2014, 2015 and beyond through lower cash taxes and then higher operating profits.

Helped by the demerger of Penguin, our working capital-sales ratio improved again in 2013 despite higher pre-pub, which reflects our investment to deliver future growth. We expect this downward trend to continue, driven by low inventory levels and higher deferred revenues.

In recognition of our confidence in the future, we're proposing to again increase our dividend by 3p, as we've done in recent years. This represents the 22nd straight year of above-inflation dividend growth.

Now in 2014, we'll be changing disclosure to reflect our new reporting structure and we'll be doubling the amount of disclosure as part of that process. We've also consolidated some existing operating metrics that we use internally into tables to allow you to track student volumes more easily, and you'll find these on Page 61 in your appendices. Once the new organization design has settled down, we're also going to consider further KPIs. This chart gives you the indicative splits of new divisional revenues by line of business and geography, and we'll break down sales and profits by geography and line of business ahead of the first half 2014 results.

When it comes to modeling, you might find the following information useful. In North America, our school and higher education businesses are of roughly equal size, with professional accounting for about 10% of revenues. In growth markets, about 1/3 of revenues are in school and about 1/5 in higher education, with the balance in professional. And in core markets, about 45% of revenues are in school, about 20% in higher education, with the balance in professional.

Let's turn to outlook, and firstly the mechanical factors that will influence profits in 2014. Now we completed the acquisition of Grupo Multi and the disposal of Mergermarket during February. The contribution from Multi in 2014 will be affected by integration expenditure, which is not included in our overall restructuring figure, and the weakness of the Brazilian real. Assuming rates stay where they are, the strength of sterling against the U.S. dollar reduces the operating profit base by about GBP 30 million and, against the basket of emerging currencies, by another GBP 20 million. We'll be doing more restructuring and investment in 2014, but we'll also have further benefits from our 2013 activities. Our tax rate on profit before tax, including Penguin Random House, will rise to between 19% and 21%, as the benefit from one-off settlements in 2013 falls away.

Our restructuring accelerated during quarter 4, with limited incremental benefits in the year. Importantly, it included the December announcement of closure of our Indiana warehouse, which will happen at the end of 2014. In total, our gross restructuring spend was GBP 176 million in 2013, and we realized benefits in the year of GBP 41 million. The benefit of this 2013 activity will be an incremental GBP 60 million in 2014 and GBP 10 million more in 2015. John will talk more about our restructuring activity in a minute.

As we said this time last year, during 2014, we will be incurring a further GBP 50 million of net restructuring expenditure, including our share of Penguin Random House, and we'll be upping our investments through the P&L accounts by a further GBP 50 million for investments. This restructuring will deliver GBP 35 million of saving in 2015, meaning the total benefit of the restructuring undertaken in both 2013 and 2014 delivers GBP 146 million of savings in 2015. In 2015, restructuring costs will return to their normal level.

As you can see, we expect market conditions to be similar in 2014 to those in 2013, with cyclical and policy factors remaining challenging in our largest and most profitable markets. Now there's a lot to do in 2014 and higher-than-average uncertainty on a number of fronts, and our guidance reflects that. With continued headwinds from college enrollments, curriculum change and further effects of portfolio change, as well as additional restructuring and investment plans, at this early stage in the year, we expect to report adjusted earnings per share in 2014 of between 20-- 62p and 67p.

Those restructuring and investment activities are designed to accelerate top line growth in 2015 and beyond. And John is now going to describe those activities in more detail.

John Fallon

Okay. Thank you, Robin.

So clearly, 2014 is going to be another difficult year. Tough market conditions in our biggest businesses coincide with our continued restructuring in a period of increased organic investment. From 2015 and onwards, we should start to see the benefits of all the work that we did in 2013 and we will do this year. And we should also be helped in kickstarting underlying sales growth again by the implementation of a curriculum change in the U.S. and the U.K. and by some easing of the pressures on U.S. college enrollment.

So I want now to cover 4 points in slightly more detail. First, our ongoing and planned restructuring work; then our investment priorities for 2014 and beyond; third, the way that these efforts combine to transform the nature and shape of the company; and then finally, just to remind you of the scale of that compelling Global Education opportunity which we are organizing for.

First, just to remind you, our restructuring program is driven by 3 principles. First, we now need fewer people engaged in the creating, marketing, selling and distributing of purely print products and we need more data, digital and services capabilities. Second, as we grow into a global company, we need proportionately fewer of our people based in the mature markets of North America and Europe and we need proportionately more of them in the world's growth markets as we scale up. Third, more and more of our people need to be working on products and services that improve learning outcomes and fewer will be involved in providing purely educational inputs. So as a result of all that restructuring last year, 3,300 colleagues left Pearson, all of whom worked either in those mature markets and/or in our textbook-related activities. 900 new colleagues joined Pearson to work in our growth markets and/or to drive our digital services and efficacy strategies.

Cutting jobs in this restructuring work is, of course, very difficult, but I have absolutely no doubt that it is the right and essential thing to do. There is inevitably a greater degree of operational risk within Pearson as we work our way through what is an intense period of restructuring and reorganization, we're aware of that. However, with the further restructuring that we'll do this year, we will, in just 2 years, have very, very significantly altered the profile of our analog business and infrastructure. There are many indicators of that I could give you. For today, I'm going to give you just one.

In just 2 years, it means we will, helped by the Penguin Random House deal, have halved our global warehousing capacity, reducing the fixed costs linked to our textbook publishing ahead of the decline in demand. And this reduction in our warehousing capacity will need to continue over the next decade, but it can now be done at a much more normalized level because we've crunched 6 normal years’ worth of restructuring into just 2. And we're doing something similar across every link of the textbook publishing chain. So I hope that gives you a more tangible sense of what the accelerated restructuring program is really all about, and let's now turn to where we're directing the investment released by those cost savings.

So we are upping our total product development spend last year by about 7%. More importantly, we're radically shifting what we spend that money on, and it's driven by the same 3 principles as the restructuring. It's about growth markets, it's about digital and services and it's about learning outcomes. So for example, China, we now have well over 100,000 learners, a figure that's growing by double digits every year. Our growth in China is constrained not by demand but by our own capacity. So we are investing for a world in which we can cater to millions of English language learners on a single technology platform and with a single English curriculum. That consolidation brings real economies of scale as we integrate the back-office functions of the various businesses we have in China and it helps us to reach more learners digitally and across centers across the country. The same is true across all of Pearson. And we're making similar substantial investments in Brazil, in South Africa and, to a lesser extent, in Saudi Arabia, which will support a major new business project we have going there.

We're also investing worldwide in our digital infrastructure. We now need very quickly to get ahead not just the very significant growth we've seen in our digital registrations over the last 5 years but to support the far greater growth we are going to see over the next 5. So for example, we now have 10 million MyLab users. They are supported across a whole range of platforms that were not designed to cope with such scale and can't be deployed globally in a mainly mobile world. So we're now investing in a cloud-based mobile technology and related infrastructure, which means we're geared up to serve 100 million users on a single platform and anywhere in the world. And we're also, alongside that, investing in the next generation of products and services across our school, higher education and professional businesses that can be deployed and delivered through that infrastructure and that platform. These next generation of Pearson products are now being built to the same principles in every part of the company. I won't run through the whole list of them here. I'll focus more on the benefits these principles will bring.

We're investing to engage learners, to improve performance and grades, to improve skills and employability, enhance career and college readiness, improve the learning experience to reduce the time, friction and the cost of teaching. And we're very confident about making these investments because we know that we have the proven capacity to develop and then scale-up effective products that do really drive learning outcomes in a way that is pretty unique. And as you can see, when we apply these principles across Pearson, we really do create a powerful set of products that work together and which are unmatched by any of our competitors.

In higher education, for example, we know this approach works because, when implemented with rigor, our programs boost learning. They improve retention. They reduce the total cost of education. And that makes us an attractive partner to colleges trying to achieve better outcomes at lower cost. As you can see from this example, from the University of Central Missouri, which we've supported since 2010, of course, redesigned online homework, tuition and assessment programs. What it means is we are actually now further along in this shift from print to digital than you might imagine.

What I thought I'd do now is try to help you with the debate that I know that we're all having about what does this shift from print to digital education actually mean for Pearson. So on this chart, on the left-hand side, you can see that textbook volumes in U.S. higher education fell by 8% in 2013 and you can see that MyLab registrations grew by 9%. On the right-hand side of the chart, you can see that if you adjust total college enrollments that are waiting, then on a revenue-adjusted basis, enrollments declined by 3%. And you can see that our revenue per enrollment was stable. It was actually up about 1%.

So I think what that tells us is this. Where we get high digital penetration, where we get high efficacy, like in that example I just showed you from Missouri, volumes and price points remain high. Where digital usage is low, where efficacy is low, volumes and price points are under pressure. And it's that insight that drives all of the restructuring at our publishing business that I've just been talking about because it's attacking that long tail of publishing textbooks that lack the high digital usage and the high efficacy. But the other point is I think what it can show you is that the total sales in our U.S. higher education business last year were down because of the cyclical and policy factors that I've talked about earlier, not because of the shift from print to digital. And it should give us all confidence that those revenues will grow again as enrollments grow again and as we accelerate the digital transformation of the company.

We'll also grow in higher ed as we expand the market opportunity very significantly. So we're now investing. One of the major areas of investment that we're making is in -- to be able to offer services that support student recruitment, teacher training, online learning management systems, as well as our digital and print resources. And what that means is we shift from competing for 5% or less of the total cost of going to college, the books and supplies, which is the red bar here, to competing for up to 60%, the tuition and fees, which is the blue bar on the chart. We're already doing this. And we now have significant partnerships with Arizona State University Online, with Indiana Wesleyan University, Rutgers and many others. And as you may have noticed, in January, we extended our partnership with the University of Florida to include its graduate and undergraduate programs in providing technology, e-Textbooks, student recruitment, enrollment management, student support and the like. But there's also a much bigger global opportunity in higher education: extra 120 million students going to college by 2030, most of them in these growth markets. And we're investing to build that local capacity so we can deploy those global products.

Now as we invest in these opportunities, there are 2 short-term financial impacts. First, as you can see here, as we invest to build scale in inside services and direct delivery, our new ventures in startup phase are, at best, lower margin or, at worst, loss making. And this chart shows the typical investment profile of a large-scale higher education services contract. And we have more of these, the recently signed deals with the University of Florida that I mentioned, Monash University in Australia. We'll have more of them going through the P&L this year. The important point is that once we get through that period of investment, as you can see, incremental revenue per student then becomes very profitable. And these are long-term contracts with high renewal rates.

The second financial impact of this change is that as we transition from print to digital, we move from a license to a subscription selling, with revenues spread over multiple years. This reduces revenue and margin short term, but it gives us a more visible business and greater market opportunity in the long term. And as we reach scale, the benefits again are very significant indeed.

So as you can see, these new business models create much bigger revenue opportunities for Pearson but with similar margin and cash dynamics. And there are similar trends and opportunities at play in other parts of the Pearson. Just to be clear, these are not absolute numbers, by the way. What we've done is we rebased everything to the value of the textbook and set that at 100s so you can see much bigger addressable market with margins and cash conversion that are very similar to our traditional textbook market.

School, for example, drive to improving learning outcomes to ensure more students are career and college ready, every bit as important as in higher ed. As in higher ed, no silver bullets to help schools and teachers and parents to prepare their pupils for the college or their kids for the college and the workplace. So we contribute by offering pedagogically effective, engaging curriculum; data-driven adaptive learning; enhanced teaching development; assessments which test higher-order skills. But actually, our most important role is actually helping to implement and scale the significant changes that are required to adopt digital, or actually, blended learning. And we're already, as you know, partnering with the early pioneers in this model in L.A.; in New York; Huntsville, Alabama; and the like, and many more School systems will work with us in the year ahead. Again, same model as in higher education, these new business models create much bigger revenue opportunities as we get into bigger addressable markets, but with similar margin and cash dynamics as in the publishing business.

Professional division. You've heard me talk before, single biggest opportunity is in English learning: 500 million people using English online, 2 billion people learning English as a second or foreign language, much more interested in learning real-life speaking and listening skills rather than being able to recite grammar and vocabulary. And our next-generation English language learning experience, it's one of our big priorities for investment this year, enables them to communicate more effectively, built on the principles that I outlined earlier. This is a program that we can create once and which we can then deploy with marginal local variation in Brazil, where we've now got 800,000 students through a network of over 2,500 franchised schools; in China, there are test prep and professional English centers; and to our corporate and institutional clients worldwide.

And again, as in school and higher ed, it very significantly enhances the market opportunity for Pearson. As you can see, in direct delivery, whilst the absolute opportunity is substantially bigger, the margins are lower than in an inside services and franchise model, but in both cases, the absolute profit margin and cash contribution are significantly higher than in our traditional print-based textbook publishing business.

So I hope that gives you a sense of how the restructuring and the investment programs combine to open up opportunities for Pearson in both our biggest and most developed markets and in the new growth markets which we are investing in. They do require investment in these transitional years, but they certainly create much bigger opportunities with margin and cash profiles that are at least as attractive in the years ahead.

But these restructuring and investment programs also combine to change the shape of Pearson. We are choosing to drive the shift from print to digital actively through this transformation program rather than waiting for it to happen to us. As a result, print-related sales are now only 40% with Pearson, down from 60% just 5 years ago. And we're making very good progress in delivering on our target of 70% of our sales from digital and services by 2015. Same time, we are driving that shift towards emerging markets, up 12% on underlying terms last year, now 16% of our total, some $1.3 billion. And whilst I understand this probably looks a slightly more conceptual slide, it's an important one because the other big change that we are driving is we're transforming Pearson to a company that is absolutely focused on learning outcomes. A recent paper by Professor Michael Fullan at the University of Toronto, written by -- with colleagues from Pearson, and I'll quote a little bit from it because it gets right to the heart of it: "The Internet is becoming a powerful access portal and content is increasingly an open and free commodity. The impact on education and learning, however, is still murky." What's clear is that as we make this transition to digital, Pearson's unique position is, in a way that nobody else can, we can help teachers, school systems and students to navigate their way through that murk and combine the technology and the teaching practice to improve better outcomes and scale. And that's, I would argue, the biggest single change in the shape of our company that we are driving through.

So that is the summary of our restructuring and investment plans and how they're transforming both the shape of Pearson and our underlying business models and make us very confident that once we complete this very intensive, difficult 2-year period, we can deliver a recovery in Pearson's sales growth, its profitability, its cash, and that, that recovery starts in 2015.

We could stop there, but it misses out one final point of our long-term outlook because it's what it positions us to do to capture these structural changes in education, because it means we will capitalize on the opportunity provided by the growth in online learning. We will capitalize on that mega trend, the rise of the emerging middle class. We will capitalize on the need for the higher-order knowledge and skills, powered by more effective education, as the world faces over the next few years a quite wrenching digital transition. And as the new research from the Pew center demonstrates, on every measure of economic well-being and career retainment, college graduates are better off today than at any point in history.

It also helps us to capitalize in a new competitive landscape and build new partnerships. What we're discovering is that big technology companies value our ability to go that last mile into schools and universities and to deploy digital solutions in ways that really do improve learning outcomes. We're working with Apple to deliver personalized connected learning in Los Angeles, as you know. And Microsoft announced last week that they are investing to deliver our Common Core system of courses on their platform. At the same time, startups realize that they can prosper and build their own businesses by integrating their products and services around our APIs and our online learning platforms. And most importantly, that means that our customers get much better value from these partnerships that we form because, collectively, we can deliver more -- much more learning, much more higher levels of attainment at the same total level of total cost.

And finally, we can capitalize on the most important opportunity of all: improving learning outcomes on a global basis. I think leaders everywhere understand the importance of investing their education budgets on effective education with proven outcomes. And that's why the efficacy agenda for Pearson is actually at the heart of the investment and every opportunity that we see ahead of us.

So I hope that, between Robin and myself, we've given you a good sense of how we are reshaping the company to reassess [ph] resources towards the biggest growth opportunities. We are halfway through the most substantial reorganization Pearson has ever undertaken. Simultaneously, we are investing in business models that expand our addressable market very substantially, and they do apply technology to make education far more effective. And we're doing all that in the face of some short-term cyclical and policy-related headwinds. But it does mean that, by the end of this year, and I mean by the end of this year, we look and feel like a very different organization more focused on digital education, with a substantially reduced print infrastructure; more service led, selling large solutions to universities and school districts, often on subscription models, and enabling us to compete for bigger value of the education supply chain than we have in the past; more focused on emerging markets; more learner- and consumer-focused professional, particularly in those growth markets.

So whilst I can understand that, perhaps particularly today, it may have seemed less risky on the face of things to put off some of these big changes that we are currently making, not do the restructuring, not increase the investment, and in which case, we could have continued to see profits rise year-on-year, at least in the short term. But we would simply have been delaying further the changes that are essential to the future of this company. And the longer we delay that, the greater the risk would have been. More than that, in our view, the far greater risk would have been not to grab with both hands the opportunity we have, which is to be the first organization to offer proven learning outcomes on a global scale. That's the purpose of the company. It's responsibility we take seriously. And it's an exciting opportunity, one we're uniquely equipped to seize. It is and will, we believe, set us up for another sustained period of growth. And I can tell you that we won't let up, I won't let up, until it does.

So on that note, Robin and I will very happily answer your questions. Sami, and then we'll go to Mark. And I am determined that we will have you out of here by 10:30 so you can get over to the UBM meeting.

Question-and-Answer Session

Sami Kassab - Exane BNP Paribas, Research Division

I'll be quick with my 3 questions. It's Sami at Exane. First one, with regard to 2015, can you please elaborate on your confidence that enrollments to higher ed is likely to stabilize in the face of demographics and student funding pressure? Second question, with regard to 2015, can you elaborate on your confidence that you will be able to benefit from curriculum changes in the light of increased competition from new entrants, established players, OERs? And lastly, in your guidance of increased investments in 2014, does your guidance include the upfront costs from -- for the Embanet- and LearningStudios-related contract gains? Or should we fear a further margin pressure and guidance miss the more we see you win contracts?

Robin Freestone

I'll take that.

John Fallon

Okay, I'll let Robin take the third one. I think that it's a very good question and that it's difficult trends to read, which is why, this morning, we tried to strip out what's happening from overall enrollments, from what's happening in the career college and the community college. But I think we can see that the rate of decline is slowing. And clearly, the trends we're showing are total enrollments, not first year enrollments. And because we get a larger proportion of our revenues from first and second year students, we tend to benefit from that tick-up. So we will certainly start to see them stabilize in '15. How quickly they recover, I think, we will be able to give greater visibility on as we get through the back end of this year.

Sami Kassab - Exane BNP Paribas, Research Division

They being new enrollments, or total enrollments?

John Fallon

I think we will start to see new enrollments start to stabilize and then recover in '15. On the second point, I think there's 2 elements to that. First of all, does Common Core get implemented in '15? I think there is now greater cause for optimism. I think you can see a greater sense of momentum from the PARCC consortium, from Smarter Balanced, the way that states are gearing themselves up, a whole swath of editorials in the press recently in support of Common Core, so I think we will. It will be patchy, won't happen simultaneously everywhere, but one, the funding will start to come in 2015. Secondly, life is competitive and there's no guarantees, but we are very, very confident, because of the investments we're making in our new digital Common Core system of courses and as -- and, actually more importantly, given the size of the opportunity, the investment we've made in our TestNav platform to ensure that, that can work on mobile devices as schools start to introduce Chromebooks and app and iPads and the like, that there is every reason to believe that we can take our share and more of the opportunity. And Robin, do you want to pick up on the third one?

Robin Freestone

Yes. On the guidance and investment question. Just by a way of background, what you're seeing is it going a little bit more complicated to explain to you what's happening in sale and with the investment. In the old analog days, of course, pre-pub represented investment in new programs. We were running it, and still are running it, about 8% of education sales. And you could very easily track what we were putting into new products and what was then going to launch in few years and hopefully pay us back. But unfortunately, in the digital world, it's more complicated to actually capitalize that type of expenditure on the pre-pub. Things like going to mobile and going to the cloud are generic investments which cover a range of products, and therefore, we don't actually try and put them into pre-pub. We expense them through the P&L account straightaway, which is conservative but means that our overall investment level is actually running at about twice the number you're seeing in pre-pub. We're spending the same again on other investments, which are going through the P&L, as you're seeing in the pre-pub number. And that is a feature of the new world that we're in. The guidance we've given reflects the fact that we're saying there's a GBP 50 million incremental investment of that latter type which we envisage going through the P&L accounts in 2014. And that's in -- designed to encompass the various thing that you mentioned, the potential for Embanet recruitment costs, which are those type of investment we're now making because we're going to recruit the students and then the revenues come the following year. That's encapsulated within that number.

John Fallon

So Sami, if you could hand the microphone over to Mark. Just before I do -- I should have said before: As this is a bit of a transitional year, it's Robin and I taking all the questions. This year, when we get to the interims, we will introduce the new leadership team to you, so you will get the chance to meet them at future results meetings. Mark?

Mark Braley - Deutsche Bank AG, Research Division

Mark Braley, Deutsche Bank. Three as well, I'm afraid. Just the North American sales force incentive cost. Can you give us a bit of background as to why that is? Is that competitive pressure there, or is it the mix of where revenue is coming from in North America? Second one was University of Florida: Can you give us a feel for whether the pricing and the revenue share on that is similar to the way that the Arizona State contract has worked up? I think the headline cost per credit hour in University of Florida is actually quite a bit lower than the conventional offline cost per credit hour, so I was wondering what that means for your share of revenue. And then the third one is sort of balance sheet, dividends, credit rating, M&A appetite. If this is a 1-year process or if we're into the last year of this process, then fine. If we're not, then your dividend cover, your credit rating -- it's sort of, how long did the board spend discussing whether allowing one notch and growing the dividend by 7% was the right balance?

John Fallon

Yes. So on University of Florida, yes, the economic characteristics actually are very similar to ASU. On the sales force incentive, I think what you have there is so we saw that very strong growth in U.S. higher ed through to 2010. 2011 and '12, sales growth becomes harder to come by. Your sales targets that you've set for your sales force probably still reflect history rather than market reality. The net result is sales force start to earn lower sales commission and you become more vulnerable to losing talent to competitors or actually to other industries. And so you just have to adjust the sales targets for the new market reality, and that's what we did in 2013. Now on the third part of the question, I'll let Robin talk about the credit rating and the other elements of it, but just first of all, I mean the reason we're so confident this is a 2-year transition and why earnings recover in 2015 is, quite simply, restructuring costs go away, restructuring benefits come through. Investment returns to more normalized levels and the benefits of the investment we've made in '13 and '14 starts to come through. Common Core curriculum starts to get implemented, creating a bigger opportunity. College enrollment starts to stabilize and recover. So 4 very hard, strong reasons why we're confident that earnings will grow again in '15. And that reinforces our approach to the dividends. We've had 22 years of dividend growth above the rate of inflation. The progressive dividend policy was reinforced by the board last week. Robin will correct me if I don't get this right, but I think I'm right in saying that we have 1.5x dividend cover post restructuring, about 1.7x pre restructuring last year. Some of those in this room will remember, back in 2001, 2002, dividend cover fell to about 1.1x, I think it was. So we -- I think you should see that us sustaining the dividend is recognition, one, that it's the way that you can be sure in Pearson that cash is returned to shareholders; and secondly, very strong confidence from the board and from all of the management team that this is a short, sharp 2-year transition.

We get through it and then start to grow again. And then, do you want to pickup on the credit?

Robin Freestone

Yes. Just on the uses of cash question, Mark. I mean -- I think, really the 4 things we've talked about in the past haven't changed at all. So I mean, the first priority is organic investment, and you've seen us talk a lot about that this morning and that is being prioritize upwards at the moment. Second thing is dividends, and you've seen, as John has talked about that, fully committed to that ongoing dividend growth above inflation. The third one is M&A, and you probably see that de-prioritize a little bit at the moment. We've got a lot to do in terms of integrating Multi. We're still working on Penguin Random House. You guys already got that as over. That still a major piece of work that we're doing to move things on to the Penguin Random House systems. And frankly, the organic investment is also something we want to really focus on this year. So M&A, not saying it won't happen at all, but it will be slightly less prioritized this year. And the buyback is something that we've only really ever considered in the event that there was a significant slide of cash that came to us. It's not something we do on an ongoing basis. So those 4 things remain the priorities, but the emphasis may have changed just a little bit in the short term while we're going through this 2-year transition.

Rakesh Patel - Goldman Sachs Group Inc., Research Division

It's Patel from Goldman Sachs. I've only got 2 questions. The first one is on this cloud based technology and the move to mobile and so on. Do you think you're going to have to take impairment charges for your legacy technology going forward? How should we think about that? And the second question really is about execution risk. You've had a lot of changes. I noticed in Europe, there are still a lot of very senior digital posts unfold. Is that because you haven't sort of put the top layer of management yet or is it because people don't want to work at Pearson? Can you maybe talk a little bit about that?

John Fallon

Yes, okay. Do you want to pick up on the risk of impairments and cloud based technology?

Robin Freestone

Yes. I mean, that risk is always out there, Patel. You can't ever avoid it. In a pre-pub world, you're building programs with a hope that they work in the market, and if they don't work in the market, then you're going to have a write-off. We've never seen that because we've actually generated revenues from those programs that we expect. We do inevitably have a stable of digital products and programs, some of which are brand new and are doing really well. Some of which we're going to upgrade. MyLabs, we'll be upgrading at the moment. enVisionMATH, for example. So we're investing behind those and that means that some of the older technology, by definition, is slowing down. Most of that technology we write off very quickly, and therefore, there isn't for the older technologies, a vast slug of stuff on the balance sheet, which we need to certainly remove, and you're not seeing us do us that, and I don't envisage that happening.

John Fallon

In terms of the execution risk, I think specifically, the vacancies that you're talking about, I think that's just the result of this transition where we go from running local, technology operations embedded locally in stand-alone operating companies, which is why we could never scale at anything to move into global technology organization, and it reflects the fact that whilst a huge amount of the groundwork in preparation for that has been done over the last 3 years, our new CIO joins us from Vodafone next Monday, and so he is still just building out his new team. I think execution risk is a great question because, more generally, it's obviously something that I spend a huge amount of my time worrying about chasing off about focusing on. And I would say that the execution risk, actually, is probably greatest in our analog businesses, which is still contributing very significant amount of our sales profit and cash today. And just making sure that whilst we are sort of very focused on the future opportunities that I talked about, we're also ensuring that we don't get too far ahead of our customers because of this interest in dynamic. L.A. is going purely digital in implementing Common Core. New York bought more books from us than it has in the last decade. Our fastest single growing business in Pearson last year was textbook publishing. So we're not just sort of crudely going print to digital in each and every part of the company. We're trying to make sure that we are getting just ahead of our customers, but not too far. But inevitably, that does mean execution risk is the single thing. The good news for this year is we did all the organizational changes, we made all the appointments last year, and every member of the executive team is completely focused on their must wins for this year and the things we've got to get done. But this is the reason I talk about risk every time we meet because that is the biggest issue we've got to work on here.

Rakesh Patel - Goldman Sachs Group Inc., Research Division

You won't have sort of any loss of sales if your new guy only joins in the next 3 or 4 months to hire people it's...

John Fallon

No, I mean -- I think, I'd give you a practical example of it. One of the reasons why you saw a growth in international tail off in Q4 last year, this wasn't an execution risk, but it was an absolute result of the restructuring because, if you remember, there's 10 countries in the world where we basically closed down our local operating company and moved to third-party distributor arrangements. When you do that, you've basically given a bigger discount to the local distributor, which reduces your headline sales, but you're making that up and more in the fact that you've taken out all your operating company cost. So there's thing like that, that will be happened as we work our way through.

Matthew Walker - Nomura Securities Co. Ltd., Research Division

It's Matthew Walker from Nomura. The first question is how -- I mean, I appreciate the solutions and tools that you are developing. How are you going to protect yourselves against open access? Is it likely, for example, that one of the big technology companies starts to embed free content on their iPad programs instead of going with you like they had to do in California for the L.A. experiment? And the second question is on the growth in school and college. You mentioned 3% plus, 3% minus. Was that a constant currency number?

John Fallon

Say that again?

Matthew Walker - Nomura Securities Co. Ltd., Research Division

3% up the school, 3% down, so was this an organic number or constant currency numbers for organic?

John Fallon

Yes, organic.

Matthew Walker - Nomura Securities Co. Ltd., Research Division

Organic. And lastly, in the trading statement, you gave a long list of reasons for North American weakness. You didn't interestingly mention rental, and it didn't feature in your slide about the print to digital transition. So could you give us a better perspective on what's happening in the rental market and the impact on textbooks?

John Fallon

Yes. So I think those are great questions, and clearly, we're all working our way through the dynamics of this. But I think there's probably 2 elements to your open access question. First of all, there's the logic of the fact that we're now 60% digital and services means that we're 40% about sort of GBP 2 billion of sales that are still essentially textbook publishing led. I would put that into 3 broad categories. Probably, the largest single category is now content textbooks that is bundled with MyLab. And where, over time, we are migrating more and more of the value from the textbook to the digital product. Another thing, as my chart demonstrated, we're managing that transition very effectively. There is another part of textbook where I would argue that even the most native of digital natives still has a value and a utility for a textbook rather than a digital device. What was happening, for example, in trade publishing, the rate of e-book sales slowed significantly last year. And there's still going to be a substantial minority of the trade publishing market over time that still wants a printed book, and I think we have to plan for a world that, certainly for the next decade, places like South Africa, for example, are still going to be buying large numbers of textbooks and there's a real value from the scope and sequence and the pedagogy of that book, the way it's embedded into the teaching and learning process that you can't just sort of download some free resources to the Internet and displace it with. But then there is a third part of our textbook publishing business, that long tail that I was talking about where digital usage is low, efficacy is low. It's probably a recommendation rather than a mandatory adoption where, frankly, displacing that textbook with open educational resources of one sort or another may well be an entirely rational decision to do. So that's the reason why we are taking costs out of that part of our publishing business as quickly as we can and using that money to go into the digital and services where we've got a much bigger addressable market. I think the second part of your question on OER was, what happens to sort of MyLabs and the like? And this is where -- could the MyLab be displaced with some free digital contents or another? And this is where, I think, efficacy is so important. This is where last mile is so important because the deeper we embed our MyLabs into the workflow of schools and universities, the more value we add from those, the common characteristics of our next generation of products and services that I talked about, the harder it is for anybody to displace them. And more likely our customers are going to say to somebody, we need you to partner with Pearson not displace them. And I think, so far, we are proving very successful in that. I think that partly answers your rental question as well. Clearly, it appears there was a big increase in textbook purchases for the rental market last year. As you can see, that is not yet, certainly, not yet, and we've not seen it for anytime now over the last few years affecting what we are -- the revenue we are getting per enrollment, so that's one factor. Secondly, I'd say is, you can't -- just like you can't buy a second hand MyLab, you can't rent a MyLab except with our support and engagement. And interestingly, one of the challenges we are facing in our customer services around back-to-school time is we're getting a large -- a growing number of students who are calling our call centers and saying, I can't use this pin code to get into the MyLab and they can't -- the reason they can't use the pin code, it's a second hand pin code in the back of a book, which a student has already used once. And so as you move to the MyLab world, we have the direct relationship with the customers, so it puts us in a stronger position. So that's our best understanding of it as it stands today.

Ian Whittaker - Liberum Capital Limited, Research Division

It's Ian Whittaker from Liberum. 3 questions. I guess 2 on '15 and just one following up from Matthew's question. On the follow up from Matthew's, are you therefore saying the book rental hasn't had an impact on your higher education sales in absolute terms? I hear what you say about revenue per enrollment. And I'd be interested in your sort of views on the commencement Chegg that they expect. On the commencement Chegg, they expect textbook price deflation to accelerate in '14? And the other 2 questions. First of all, on Common Core. I was quite interested in your comment that there is great cause for optimism. Yet if you look at sort of a lot of the statements that seem to be coming out from the states here in terms of the individual states, there seems to be increasing concerns about the costs, particularly, for example, IT side. You've had -- the Republicans, generally as a party, seem to be more opposed to Common Core. You have a number of states who pulled out in the testing consortium. It does seem as though, as you look at the individual your state level, the more and more questions being raised. And I guess the question that would be, if Common Core does get delayed, what then is your next plan of action? And the final question is just on higher education and the enrollments. Again, if enrollments don't sort of pick up in '15 because there seem to be number of factors impacting that, again, what should we expect in terms of more restructuring?

John Fallon

Yes. I think the -- I think picking up on the Common Core point. I think you are absolutely right. I mean, in the sense that the pace of change and momentum around Common Core is uneven. So I don't think we are working on the principal that every single state that was a member of PARCC and smarter balance is all going to move lock step and do everything at the same time. And in fact, we're already seeing some -- we have already seen some states sort of dissociate themselves. We don't need every state to do everything in '15. We need some states to do some things in '15, and that's the basis on which we are -- that's the basis on which we are proceeding. On book rentals, I think the only way we can look at it really is, what's happening to the sale, what's happening to voloumes, what's happening to MyLab registrations, what's happening to enrollments and what's happening to our revenue per enrollment and that's what we can -- what we're sharing with you is what we can see. And clearly, what we don't know is the extent to which rental is displacing second hand sales. And actually, given the MyLab dynamic, working with a Chegg or a Barnes & Noble where we facilitate the book rental and provide the MyLab registration and displace used book sales is net-net a positive and a benefit to us. On higher ed enrollments, as I say, we are not banking on a recovery in higher ed enrollments in '15. We are expecting that the rate of growth starts to slow this year and then starts to stabilize in '15. And as I say, it's that you'll -- we will see growth before you start to see the enrollment decline stop, if you see what I mean, because of the effect. And if you got growth in first year enrollments, 2, 3 and 4 are working through. And what else. You're asking, do I think textbook prices are going to go up above the rate of inflation this year? Was that your question or what was your...

Ian Whittaker - Liberum Capital Limited, Research Division

No, no, no. What I was saying is that, even though -- If enrollments continue to decline in '15, if we do get continuation of the trends, I guess what then is the next plan B? I mean, is there more restructuring that comes through?

John Fallon

Well, I think I've explained as clearly as I could that the restructuring relates to the structural issues that we need less capacity in textbook publishing to drive faster growth in digital services and enrollment. It just so happens that we're doing this at the point when college enrollments are declining. But if you're asking me, do I believe that the U.S., the biggest economy in the world, can continue to have a competitive advantage and increasingly global economy by allowing a situation to continue where a smaller proportion of the cohort goes to higher education when all the evidence you got from the Pew Center is that the value of a college degree has never been greater? I think that's unlikely to happen. What I think is important is the reason why you've seen the decline in career colleges in recent years is concern about efficacy. There was too much -- in the growth, there was too much focus on enrollment and not enough focus on completion. And actually, all the things that we are doing help that. So a good question. I think -- hope it helps.

Claudio Aspesi - Sanford C. Bernstein & Co., LLC., Research Division

Claudio Aspesi with Sanford Bernstein. 3 questions. The first one picks up on this last conversation you had with -- over plans, B, C and D. What happens if that expansion of U.S. college enrollment were to happen primarily through MOOCs or other non-traditional offerings? What is effectively your strategy there? Second question, does that marked absence in recent months, in everything you communicate to us, about market share and market share gains or losses, which particularly in the past have been one of the compensatory factors when market was relatively weak? Some of it is probably mix, so you talked about the moves in the career colleges. But are you also seeing the new management teams of some of your competitors effectively adopt better -- more competitive policies and strategies instead of affecting your position? And final question. In talking with your customers, and that's particularly true in school, but also to some extent in college, one gets a sense that your digital offerings are vast, but they're not terribly well integrated. And the question is effectively, how long is it going to take to see something that's a coherent fall as a opposed to a collection of assets that don't talk to each other?

John Fallon

Okay. 3 great questions. Let's pick the market share issue first. I think what we -- I think we've given data in the press release this morning about our market share performance in K-12, which is there. I think in most of our markets across -- around the world, whether it's in China or in South Africa or here in the U.K. or elsewhere, we continue to at least hold share and quite often on balance to gain it. In the U.K., if we just focus on the college publishing market where you can sort of measure share against our traditional competitors, I think what we see there is if you look back, we took huge amounts of share through to 2010 because we had a much stronger weighting. We did a much more effective job of building our share in the career and community colleges. This is in the U.S., this is in the U.S., sorry. In the last 3 years, if you look at the data, we have held share. So we've had a very strong competitive performance in that we pretty much held share, even though we were suffering -- we had a greater deficit to make up, if you like, because of the greater weighting that we had. So I think we feel that's a pretty good competitive performance. That said, I think, your -- the assumption behind your question is right. I think, it's true to say that at least 2 of our traditional competitors in college are better placed to be more competitive now than they were when they were going through various travails a few years ago. On the MOOCs, it's quite interesting. I think some of the noise, the MOOCs has sort of died down a little bit in the last year. I think the MOOCs are going to find their place in the ecosystem, but they're going to find it alongside lots of other things. And the reason I say that is it is all about outcomes. And all the research, we actually just published -- John Hattie of the University of Melbourne has just published a huge piece of research that Pearson has just published, but the researcher is -- he's an independent to Pearson. We cross-referenced it. If you look at pure online learning, it has no measurable impact in improving student performance. It needs to be part of the blended solutions. So back to my partnership network, our challenge and our opportunities to think how we sort of incorporate the benefits of the MOOCs alongside our learning ecosystem and our strength have been that last mile provider, that driver of efficacy, I think, we can see it as something that could be part of the solution, but one that we can benefit from rather than feel particularly threatened by. And then, you are right. Our digital offerings are vast. I don't think that's something we should apologize for because that's why we've got 70 million users, more than anybody else, using our digital products and services in schools and universities every day. But clearly, this next part of the transition of Pearson, all the organizational changes, the restructuring that we're doing, is to start to consolidate on a smaller number of platforms and around a few of bigger products. I couldn't, in all honesty, say, it will be done in 1, 3, 5 years. I think, it may well prove to be a lifetime's work, but it's certainly something that we will make very significant progress on in the next 3 years and that will give us scale and benefits as we do it.

Claudio Aspesi - Sanford C. Bernstein & Co., LLC., Research Division

So can I ask you a very quick follow up question? You mentioned the pure online learning. How is it different from what you do for Arizona State? How is that different from where you do for Arizona State? Are you a risk in those [indiscernible]?

John Fallon

No, because I would say -- because Arizona State is not pure online learning because even though the teaching may not be done face-to-face, but there is a tutor, there is support. There is mediated peer-to-peer learning. You're not just on your own. And as a result, the completion rates there are very significantly higher than they are for purely online learning. That's the point. Patrick? And then -- sorry, we'll come to you in a minute.

Patrick Wellington - Morgan Stanley, Research Division

It's Patrick Wellington, Morgan Stanley. 3 quick ones. Can I say that parallel importing issue gets mentioned in the state and you've not mentioned it here. Do you want to tell us how that's affecting the business? Secondly, possibly one for Robin. Your acquisitions seem to have contributed GBP 130 million of sales and GBP 50 million of profit this year. Can you remind us which ones they were and why they are so profitable? And then thirdly, John, I've totally lost sight of how fast this business is supposed to grow when you get back into your normal state? And if I did know, you've then told me that historically, your growth rate was distorted by unusually good circumstances, so I can't use the past as a record, so what should the organic growth of this new Pearson be?

John Fallon

Okay. Robin, do you want to deal with the acquisitions and also pick up on the Kirstein?

Robin Freestone

I'll deal with Kirstein first. I mean, this was obviously an interesting debate a year ago, in primary. I think we have seen some negative impacts from Kirstein. And actually, they have fallen more in our international emerging market business where we have actually have 2 things go. One is we've spent some money internationalizing more of our editions. We've always been pretty busy in trying to make sure that our Pearson International Editions, Called PIEs, are not exactly the same as what we sell into North America, which defends us up a little bit from that parallel import, and we put more money down that channel this year because -- we haven't highlighted, it's not material, but -- and it costs us some money. And we have pulled back a little bit on distributions to certain places where we said, okay, that is in danger of going back into the U.S. So we're not going to put it down that particular channel. So there has been an impact, but it's not material. And frankly, it's not big enough to talk about or make a big deal about. On the acquisition front, clearly, the one that's helped us most during the course of the year is the EmbanetCompass acquisition. There are various other acquisitions, which you had a part-year effect from as well from the previous year, but that comes as the biggest single contributor to that acquisition-driven part of the results.

John Fallon

Okay. And then on your question about underlying sales growth. Clearly, the first priority is to get underlying sales growing faster than inflation. We've had essentially flat sales for the last 3 years. So the first priority is to get that topline growing again, and then we'll take it from there. I think we've got time for one more question, so if would you mind...

Patrick Wellington - Morgan Stanley, Research Division

[indiscernible] faster than in the past was your answer, this time last year?

John Fallon

Sorry?

Patrick Wellington - Morgan Stanley, Research Division

Faster than the fast was your previous answer?

John Fallon

I was saying faster than we've had in the last 6 [ph] years.

Patrick Wellington - Morgan Stanley, Research Division

So it's a different section of the past.

John Fallon

Thank you, Patrick.

Nick Michael Edward Dempsey - Barclays Capital, Research Division

I've got 2 quick ones left. It's Nick Dempsey from Barclays. So one them is a follow up to Patrick's question really which is, going back to 2012, your total education margins was 17%. When you get through all of this, which might be never, but when you get through your restructuring process, what sort of margin do you think your total education businesses might be able to achieve? And the next question really is about your forward indicators, or how you think about your guidance for this year? I mean, generally at this time of year, we hear very vague things from you. That's understandable because your big months are in the summer and December. Why this year are you able to guide to a more precise range? And what is it that you are seeing now that makes you feel negative things about this year precisely?

John Fallon

So, Robin, do you want to take both of those?

Robin Freestone

Let me deal with the guidance one first. I'm heartened that we think we're being more precise. So that's really quite interesting. I mean -- I think, inevitably, when you stand up as part of the year, you don't know exactly what's going to happen. And I think, what I tried to stress is, there are kind of 3 levels of uncertainty this year, which is why we've got a relatively wide range, I suppose, 62p to 67p. I mean -- I think, the first one is all the kind of commercial things in North America and the U.K., which John's talked about and we've agonized that quite a lot of here today. So I won't go through those again, but what will the market do this year, and having come out of the pretty tough market in 2013, it doesn't look to us like it's going to be a better at all, and so it's a pretty complex market backdrop. The second thing, of course, is that we've got 2 specific numbers out there for this year. One around restructuring and that number -- and one around investment, another GBP 50 million number. And I can almost guarantee you, they will not be exactly GBP 50 million, whether there'll be a bit bigger or a bit smaller, each of them, I have no idea. But both of those things are things that we will monitor as we go through the year. So I think that's what's caused us to put the range where it is today. On margin, I think, we are pretty keen not to give long-term margin guidance, and there is one individual who will kill me if I do, so I'm not going to do that. And I think what we're trying to make sure is that, through this transitional phase and the restructuring we're doing, that we come out the other side of it, a faster growing, better margin, more cash generation in the business. And some of that slides that John showed you today, with the textbook into C zone and then what our new business models were compared to those indices is hopefully reassuring that as they grow, there is scope for our cash generation and margins to improve again. But clearly, we need to get through the restructuring phase before we can really start to talk more about that.

Nick Michael Edward Dempsey - Barclays Capital, Research Division

So what when you say better margins than now or than before?

Robin Freestone

Just better.

John Fallon

Okay. Just before we finish, just for the colleagues who joined us from the webcast, could you add some color to the dividend policy? I think we've done that? Can give a sense of how digital waiting and margins evolved over the next few years? I think, we've given that. And there's a question about visibility on Common Core implementation, and I think, we covered that as well. And it is 10:29, which gives you a good hour to get over to your UBM investor meeting. So thank you very much for joining us. As usual, Simon, and the rest of us are very happy to help with any follow ups that you have. And I thank you for the interest in our company.

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