Pearson, Plc (PSO)

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Pearson plc (PSO)

Deutsche Bank's DbAccess 21st Annual Media and Telecom Conference

March 04, 2013 3:40 pm ET

Executives

Robin Freestone - Chief Financial Officer and Executive Director

Analysts

Mark Braley - Deutsche Bank AG, Research Division

Presentation

Mark Braley - Deutsche Bank AG, Research Division

Okay. Thank you for joining us. My name is Mark Braley from Deutsche Bank's London Media Research Team. It's my pleasure to introduce Pearson this afternoon. Robin Freestone, the CFO, has joined us.

Question-and-Answer Session

Mark Braley - Deutsche Bank AG, Research Division

Pearson announced results last week. And with that, a big acceleration of its strategic development, a big restructuring plan, a big investment plan. I suppose my opening question, Robin, is kind of why now? Why push ahead now?

Robin Freestone

Okay. I think that's a fair question. Just to characterize this, I think what we've really understood over the last couple of years is that there are 2 kind of mega trends, if you like, happening in global education, and they are very different. So in the developed markets of the world, what you're seeing is governments under pressure, really no more money to spend on education, and yet results coming out from PISA league tables not reflecting the sort of money that's being spent and a real concern that the results are not good enough compared to the Fins and the South Koreans and the Chinese. So a desire there to do something about productivity, if you like, and I'll come back to some of the answers to that. In the developing world, it's a very different set of circumstances. There you've got much less state-based education and more private education. So if you look at Brazil or India, you've got about 15% of the market in those countries which is privately-educated children. And this is because as the global middle-class grows, we know that parents will spend money first on accommodation, housing, travel, in other words getting a car, and then they want to educate their children. And so one of the great global trends -- and other companies I know are talking about this, whether it's Burberry or Diageo, are looking at is that every year, you are seeing another 100 million people globally join that middle-class cadre, and every year, you are seeing spending by the middle-class globally go up by $1 trillion. And because education is such a fundamental part of what they want to do when they get wealthy enough to afford to do it, that's a trend which we are also tapping into. Now if you look at what we're doing in developed markets, therefore, it's about efficacy. It's about trying to improve the outcomes with less money. And in the developing markets, it's about direct-to-consumer, where we're selling educational resources and actually education itself through our own colleges or through other people's colleges to that global middle-class. And I think those 2 trends now are becoming very well-established. And now is the point, I think, at which to look at our organization and say, we've really got to focus on those 2 trends. We're still selling books, and I suspect we'll be selling books for a long time to come, but that is clearly not the growth path of the market. It is going to be about selling a bundle of things or indeed opening schools. And so our cost base still reflects the old organization, if you like, to an extent, and we've got too many people, I'm afraid, who are designing beautiful books, ready to put them into the market and too few people designing software and running schools. So it's really been about looking at the cost base. And actually, more or less following with the cost base, what we've been doing with our acquisition capital and putting that into digital and services and emerging markets. And those are the 3 focus for our capital -- for our capital allocation for acquisitions. And increasingly, we're thinking about our overheads in the same way and trying to make sure we've got the right balance between people who do design books, and we still need quite a few of those and content certainly is still absolutely key to the offering, but probably rather fewer of them.

Mark Braley - Deutsche Bank AG, Research Division

Okay. I'll come to the, if you like, the great parts of the story in a moment.

Robin Freestone

Sure.

Mark Braley - Deutsche Bank AG, Research Division

Just to address that issue of the books business and the kind of static or even declining nature of that over time. How much is this a specific issue within your North American college business? That's -- it's your largest single business. It has been performing extremely strong before over the last sort of 5 to 7 years. How much of this is dealing with a slow down in the college business that's enrollment led, that's down to textbook rentals coming back, and that's down to digital being most penetrated within the college space?

Robin Freestone

Yes, certainly. Just to give you a few stats there. So we know that when the U.S. economy picks up, that enrollments into college go down because more students go into jobs rather than go to college, and you're seeing that phenomenon at the moment. It's a well-known counter-cyclical phenomenon and enrollments probably contracted by about 2% last year, and they're probably likely to be down this year as well. So that is not a new phenomenon. If you look at the overall higher education market for books last year, it was down about 6% according to the AAP. So that's a pretty tough market to be in. Fortunately, with things like MyLabs, which again grew double digits last year, through our online university offerings, such as the deal we've done with Arizona State University, the new deal which starts up shortly with Cal State University, which has got the potential to be rather bigger over time, we've managed to beat the market again for the 14th consecutive year. So we don't see quite the same level of decline as the market has declined by. And again, we'd hope to achieve that this year, but it's a pretty tough market to be in. So I think some of the restructuring that we talked about will inevitably affect that college business, but it's across the board. It's not a simple as saying, "Okay, this is a U.S. college issue" at all. I think U.S. college will suffer no more and no less. They're a proportion of the sorts of reductions in people that we're going to see elsewhere in the world.

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