Pearson PLC Q4 FY2021 Earnings Call

Good morning, everyone, and welcome to Pearson’s 2021 Full Year Results. Today, we will have a presentation followed by a Q&A session. Now, I will hand over to Andy to begin the presentation.

Good morning. Welcome again. I am very pleased to welcome you here in person today and also all of you online. Thanks very much for joining. I know it’s very busy for many of you, and welcome to our full-year results and strategy presentation. And I am here with our CFO, Sally Johnson, and the entire executive team that you see here, who will also introduce themselves after the presentation. You will be hearing from our divisional presidents shortly as we lay out the strategy. You will also hear about how our new company purpose, to add a life to a lifetime of learning, really sits at the heart of everything we do. What we are really doing is redefining Pearson’s purpose to meet this moment in our world, where learning is becoming more fluid and exists inside and outside of formal education. It’s a purpose and a strategy that would mean nothing without the employees who bring them to life. Over the last 12 months, our employees have shown the dedication, perseverance, and commitment to drive Pearson forward. As you will see throughout today’s presentation, everyone at Pearson has been and will continue to be relentlessly focused on execution. This is reflected in our strong financial performance in 2021, where we delivered ahead of expectations, with an 8% sales growth and a 33% increase in profit to £385 million, along with a cash conversion of 101%. Now, Sally will go into more details about future expectations shortly, but the headline is that we will deliver further sustainable revenue and profit growth this year and beyond. The management team is aligned, focused on growth, managing our businesses well, and delivering results. I hope you will see a new Pearson today, one that’s streamlined, well organized, and working as a much more agile and interconnected company. I am more excited than ever about our opportunity to make a positive impact through both our products and our people as we continue to evolve our sustainable business plan to align with our company’s strategy and purpose. The digital growth and product development we will feature today is part of our effort to drive learning for everyone. We have also placed renewed energy into building our talent and our own innovation culture so people can make a difference at scale. As we become more digital, we are providing products with a smaller carbon footprint that meet the demands of a green economy and influence action. We are on track with our goal to make Pearson a net-zero carbon business by 2030. This time last year, I set out to create a strategy around a lifetime of learning. My priorities continue to center on building a company that is digital-first, puts the consumer at its heart, and delivers high-quality learning products to more people at scale than ever before. To do that, we created a new organizational structure with five core divisions and supplemented that with a dedicated direct-to-consumer team that successfully launched Pearson+. We laid the foundations for our Workforce Skills business, and the leaders of those divisions have spent significant time crafting their strategies to execute our plan. There is much work underway, and you’re going to hear more details from each of the divisional presidents today. We recognize that learning is no longer a stage in life; it’s a lifelong journey. We will continue to work with longstanding partners such as schools, universities, and colleges, but we are also increasingly working with employers. Companies now play a critical role in this learning life cycle, and we have an opportunity to help individuals and employers turn the great resignation into the great re-engagement. The recent acquisitions of Faethm and Credly in our Workforce Skills division signal the direction of travel you can expect from us, including our expansion into data-as-a-service for employers and into credentialing for employees. There are three reasons why I think Pearson will win. Firstly, we’re the world’s leading learning company with unmatched scope and scale and the deep expertise of thousands of employees who deliver high-quality, trusted learning solutions every day. Secondly, we have a great foundation with established businesses that are well-managed, cash-generative, and underpin the company financially. Thirdly, we are bringing together multiple facets of our expertise to deliver innovative digital learning products through a more connected commercial and consumer strategy. You should start to think about Pearson not just as a collection of individual businesses, but increasingly as a highly interconnected company with capabilities that work together to help people learn at multiple points in their lives. Pearson has the potential to greatly accelerate our growth when we leverage our businesses in a coordinated fashion across the entire spectrum of learning. Pearson+ will be the centerpiece of that growth effort as we begin to realize its potential beyond our higher education business. You will hear the team reference that today, and I’ll lay out my vision for Pearson+ later in the presentation. The success of Pearson and the work we do have never been more important. There’s been incredible progress this year. During our time together today, I hope you get a better sense of our ability to deliver on our bold ambition. Before we dive into each of the five businesses in detail, I’m going to hand over to Sally to take you through our financial performance and expectations. Sally?

Thanks, Andy, and hello, everybody. As Andy said, we delivered a strong group performance in 2021, with an 8% sales growth and profit of £385 million, with a lower interest charge than previously expected of £57 million and a tax charge of 20%. We delivered an EPS of 34.9p, up 22%. Our cash performance was also strong, with 101% operating cash conversion driving an improved net debt position at the end of the year of £0.4 billion. We have a clear and rigorous capital allocation policy and a robust balance sheet with significant headroom. Our strong financial position has enabled us to make bolt-on acquisitions like Faethm and Credly to help drive our strategy and future growth. Given these solid results and our confidence in the outlook, the Board is proposing a 5% increase in the dividend to 20.5p. We have also announced our intention to commence a share buyback during 2022 of £350 million. We shared our revenue performance with you along with more detailed data in our January trading update. There has been significant growth in the top line at Pearson, which is partly due to the restrictions easing post-COVID, but also due to the strategic positioning of our business and the growth initiatives that we’re undertaking. By way of a brief reminder, assessments and qualifications grew 18%, with VUE and clinical revenues now having grown in comparison to 2019, demonstrating that 2021 performance is more than just COVID recovery. Virtual Learning grew 11%, with 17% growth in virtual schools and 7% underlying enrollment growth in OPM. English grew 17%, showing a strong performance in both the Pearson Test of English and our institutional courseware businesses. Workforce Skills grew 6%, while higher education declined 5%, which was less than in 2020. Group profit grew 33% to £385 million with operating leverage on our revenue growth and cost savings, offset by inflation and investment to drive future growth. At the divisional level, you can see more normalized margins as the business has recovered post-COVID. Assessments and qualifications deliver more than 50% of group profits with a margin of 18%. Profit grew strongly in the year due to the operating leverage on revenue growth, partly offset by FX. Virtual Learning grew profit through margin on revenue growth and operating improvements in OPM, partly offset by investments in virtual schools in curriculum, enrollment processes, and the teaching platform. Virtual Learning margins were low at 4% due to the lower profitability of the OPM business, where we see potential for improvement and have demonstrated progress in 2021. English grew profit through the operating leverage on revenue growth with margins improving from flat to 6%, and we expect them to improve further as COVID recovery continues in 2022. Workforce maintained a margin of 16% with margin on revenue growth, partially offset by investments. We see opportunity to invest substantially in this division to drive significant future growth. Higher education profits reduced due to revenue declines, which had to be offset by continued substantial cost savings. The higher ed margin was 9%, which we expect to stabilize in 2022 and improve thereafter. Our reorganization into our five new global business divisions is now complete. We’ve incurred around £50 million of restructuring costs and expected to reinvest those savings into growth generation. The financial implications of the restructure of our corporate offices have also been finalized for 2021, incurring costs which are predominantly non-cash in nature of around £160 million. This has generated property savings of £10 million in 2022, which is incorporated in our guidance and £20 million thereafter. Our KPIs are brought together on the following two slides. Group digital sales grew 9%, meaning digital and digitally-enabled revenues now make up 75% of the business. Our divisional leaders will talk through these KPIs as they go through their divisions. We’ve once again seen a strong cash conversion of 101% and continue to manage our balance sheet and working capital efficiently with tight inventory management and strong collections. Turning to net debt, this decreased from £0.5 billion to £0.4 billion, with operating cash and the disposal of our Brazilian Sistemas business partially offset by dividends, interest, and tax, which included the state aid payment, which we expect to recover in time. Return on capital increased from 6.6% to 7.9%, and we continue to be disciplined in our investments and rigorous about securing the required returns. I’d like to touch on the dynamics of our cash flow before I later talk about how it will develop in the future. Firstly, looking at a simplified version of our cash flow, you can see that the key drivers of operating cash conversion are the investments we make in CapEx, such as enterprise technology and initiatives like our global ERP program and product development. Working capital levels are relatively low and flat. CapEx cash increased slightly in 2021 as we paused elements of technology programs at the height of the pandemic in 2020, and product development declined due to the natural ebb and flow of our product roadmaps. Turning to 2022 and beyond, my colleagues will take you through the divisional expectations for this year and out to 2025, which we’ve summarized on this slide. In 2022, at a group level, we expect revenue growth with higher education declines further moderating and growth in our other four divisions. Adjusted operating profit, interest, and tax will be in line with current market expectations. Profit growth will be driven by the operating leverage on revenue growth and property cost savings, partially offset by inflation. In terms of investment, we see three key areas of focus: ongoing investment in our products and services and technology to maintain our competitive advantage in positions of strength; maintaining our investment in Pearson+ to accelerate our growth and our direct-to-consumer strategy; and reallocating resources to our workforce division where we see a significant growth opportunity. We will offset any increased inflationary pressures through cost efficiencies and as appropriate price increases. Cash conversion will continue to be strong and is expected to be over 90%. The marketing process for our international courseware local publishing business is well underway and progressing well. We expect it to conclude at some point during 2022. The sales and profits of this business can clearly be seen in our segmental analysis and we will update guidance as and when it is relevant. These businesses do share costs with our other international businesses, duplication of which will need to be eliminated as TSAs unwind. You should also note that these businesses are H2 weighted given their nature. From a quarterly phasing perspective, group growth will be relatively consistent across the year with virtual learning H2 weighted aligning to the start of the new academic year and Assessment & Qualifications, H1 weighted, given the resumption of exams, with the U.S. now back to a more normal timing. Revenues for the businesses under strategic review will decline in H1 due to the discontinuation of certain low-margin businesses. As we look out to 2025, we expect the group to achieve mid-single-digit revenue CAGR. For 2022 to 2025, the margins will remain relatively stable before increasing to mid-teens by 2025. Looking at those key elements of the cash flow that I highlighted earlier, CapEx peaked in 2021 as our enterprise technology and property transformation programs reached completion and will reduce from 2022 forward. We will reinvest this incremental cash into revenue-generating product development and still maintain our strong cash conversion. Return on capital will increase throughout the period and will be double digits by 2025. Our rigorous capital allocation policy is clear and consistent and serves the business well. Our balance sheet remains strong. Net debt is low and leverage is well below rating agency targets. Our dividend is progressive and sustainable. We continue to invest in our business. As I set out on the previous slide, we expect to maintain our strong cash conversion while investing organically in product to drive growth. Whilst we see potential for further incremental M&A to accelerate our strategy and growth, it’s unlikely to utilize a significant proportion of our headroom. Thus, we can continue to manage our balance sheet prudently and also return capital to shareholders by way of the £350 million share buyback, which will also mitigate the earnings dilution from the strategic disposal of those international courseware local publishing divisions. In summary, we have exceeded the financial expectations in 2021 and we have improved return on capital. We’ve shared the KPIs, which we expect to drive the business and which will evolve as the strategy builds. We expect to meet expectations in 2022, and looking out to 2025, we expect good revenue growth and for margins to improve to mid-teens. Our strong balance sheet provides the capacity to invest in future growth and raise our dividend as well as making an additional £350 million return to shareholders. With that, I will hand over to Bob.

Thanks, Sally. I am Bob Whelan, and I’m the President of the Assessment & Qualifications business. Nice to see many of you here again today. I have seen some of you in the past, and it’s great to see you come back to see us. As you might already know, this is my last hurrah as President of the business. I am proud to have led this great business. We had a great year, and I am very confident that we will continue to thrive under the new leadership of Art Valentine, whom you will meet shortly. I have a few highlights before I hand it over to Art. Our message is simple: We are now the largest business at Pearson. That’s hard for me to say because, for many years, we were not, and we are very proud of that. We had an excellent year in 2021, and we’re poised to continue to grow as a source of strength and stability in the company. Our business provides assessment and qualifications that lead to certifications and licenses that allow people to demonstrate their knowledge for a lifetime of learning. From a youngster in pre-kindergarten all the way to someone advancing their career, assessments work for everybody to help them move along in their career. We also have clinical assessments that diagnose why someone might have learned and how we can help them get along the way. In 2021, COVID impacted our business, but our teams really met the challenge and achieved terrific results. Sales were up 18%. Profits were up 59%, which is remarkable, and I’m very proud of those numbers. This excellent performance was driven by VUE’s strong role in online proctoring, which accelerated quickly during the pandemic, and then the second half of ‘21 when the test centers began reopening again. The focus on mental health and new product offerings were key drivers in our clinical business, along with the excellent leadership of Art, who you’ll meet soon. U.S. assessments bounced back from 2020 cancellations to a more normal year with some choppiness as exams moved from spring to fall, but it was much more normal in ‘21. UK qualifications saw most exams canceled in ‘21 but are going to resume in 2022, which they already have starting in January. While I have enjoyed a great run at Pearson, I am very grateful for many people's support and contributions. Before I introduce Art, I must thank Marjorie Scardino, John Fallon, and Andy Bird, who believed in me enough to give me the opportunity to build this fantastic business. So with that, I’ll turn it over to Art.

I am just going to say, even though Bob is leaving Assessment & Qualifications, I’m not going to let him go too far. He is going to stay with the company and advise us in a broader capacity, because while he still wants to play a bit of golf, he can really help me and the rest of the team. In 2022, we expect to continue our strong market position and share capture with low to mid-single-digit growth across the portfolio. We also expect to maintain our profitability and margins with each of the business units through 2025. We will continue to invest across the businesses to ensure we have innovative, best-in-class products and services. In 2022, U.S. student assessment will show high single-digit revenue growth, powered by a return to the normal cadence of in-classroom assessment delivery and the annualization of some of our large contracts. Our UK international and qualifications business has already started conducting exams this past January, and we expect to resume normal exam volumes later this summer. We do expect this business to rebound to pre-COVID testing levels and revenue. Clinical Assessment revenues will be slightly down. We are going to show strong growth in our digital and subscription products. That’s going to be offset by a very strong 2021, where we had two stellar new product releases and some pent up demand for clinical services. Our VUE business is going to be generally flat year-over-year. We continue to have very strong core volumes and a fantastic win rate of new contracts, but it’s going to be offset by a reduction in the UK Driver and Vehicle Standards Agency test, that’s the driver’s license here in the UK. We continue to expect to renew 98% or better of our contracts, consistent with prior year’s performance. Test volumes in 2021 were up 30% and will be stable to up slightly more in 2022, including mid-single-digit growth in our on-view exam deliveries, which is our remote proctoring offering. As we look into 2025, we expect the Assessment & Qualifications business to deliver low to mid-single-digit revenue and profit growth across the portfolio. VUE will return to low to mid-single-digit growth in 2023 and beyond as we enter new markets and broaden the solution set. Clinical will generate low to mid-single-digit growth as we continue to enhance the customer experience and invest in our digital initiatives. U.S. student assessment revenues will be flat over this horizon. We anticipate some changes in the contract portfolio as well as a move towards more frequent but shorter assessments. Our UK qualifications business will grow through international volume growth and our investment in the digital experience for our customers.

Good morning. It’s great to be with you here today. I’m Tom Ap Simon, and I lead Virtual Learning, which comprises virtual schools and online program management. The path forward in virtual learning is clear. Our businesses meet today’s learning needs, where online and hybrid learning are becoming the norm and the lines between high school, higher education, and workforce are blurring. We are well positioned for continued growth. Currently, our virtual schools business supports nearly 50 virtual schools in the U.S. and the UK, around 110,000 students, and 5,500 teachers. Our support for these schools includes marketing and enrollment services, the technology, and curriculum to deliver individualized learning, as well as a wide range of services from substitute teachers to special education. In online program management, we provide marketing and enrollment services, student support, and instructional design for 477 programs across 31 academic partners globally. We see plenty of headroom for sustained growth in our Virtual Schools business over the long term, along with growth in the OPM business. Our virtual schools had a good track record of growth before the pandemic, achieving an enrollment CAGR of 9% and a revenue CAGR of 14%. The pandemic naturally drove increased uptake of virtual schooling in 2020, and in that year, we grew enrollments by 43%. In 2021, despite a widespread return to brick-and-mortar schooling, we grew enrollments by a further 2%, which we believe to be ahead of the overall market. We estimate that the overall virtual schooling population in the U.S. is still only a small fraction of U.S. K-12 students today, around 1.5% of a $3.5 billion market. So there is significant room to grow. Our primary growth driver centers on increasing penetration in the 30 states where we already operate. While we have a COVID cohort in our base for 2021, which we need to factor into 2022, we are confident that over the period to 2025, we can continue to grow in the mid-single digits due to the growing acceptance of virtual learning, the increased ability of parents to work remotely, and to support learning at home. The OPM market was worth $4.5 billion in 2021, and we expect it to grow at 14% over the next four years. The market is relatively fragmented, and growth has been driven by a strong rise in online enrollments and increasing propensity to outsource by universities. The division has undergone extensive changes over the last two years, and we’re now ten months into a transformation program designed to reduce fixed costs and improve our marketing and enrollment funnel for cost efficiencies and better conversion rates. We have also reduced a number of programs where we could not scale or reach profitability. Pulling this all together, what does it mean for future growth? In 2022, we anticipate sales growth to be low single digits in Virtual Schools as the COVID cohort unwinds, and high single-digit growth in OPM as the impact of discontinued programs has ended. We expect to see continued margin expansion in virtual learning as margins in OPM improve due to operational efficiencies. Long term, we expect a 20-25% sales CAGR in mid-single digits for Virtual Schools and high single digits in OPM. Growth in Virtual Schools is supported by opening three new schools a year, offset by the loss of one school annually, and in OPM by the addition of approximately 40 to 50 new programs per year. By 2025, we anticipate operating profit margins to be in the low double digits, largely driven by operating leverage and improved profitability in OPM. We have strong foundations in both Virtual Schools and OPM that lay a solid path forward. I will leave you with four reasons why we are going to deliver on growth for shareholders and a high-quality experience for students. Firstly, the pandemic has entrenched virtual learning across the board, giving more people more exposure to it and increasing the use of hybrid learning models. Secondly, we have a market-leading position as one of only two national players in U.S. virtual schools. Thirdly, we are going to capitalize on this market opportunity, thanks to our 20 years of experience, our strongly differentiated value proposition, and our good track record of growth. Lastly, in our OPM business, we are focused on a complete reset with the aim of building a profitable business that provides close linkages to both Virtual Schools and the workforce. This is why we feel confident about the virtual learning strategy as well as the synergies to the lifelong learning mission at Pearson. Thank you. And I will now hand it over to Gio.

Thank you, Tom. Hi, everyone, I’m Gio, and I lead our English Language Learning business. Our vision at ELL is to be the world’s leading destination for committed learners to prove, to be able to improve their English proficiency. With 1.5 billion people currently learning English, there is a big opportunity for us to grow in the institutional assessment and direct-to-consumer spaces, and we are well positioned to capitalize on it. We’re focused on those who define themselves as committed learners, those who dedicate time and money to language learning. English is a gateway to the world. More than 140 countries include English as a mandatory subject in their national curriculum. English is indispensable in the workplace, making it a vital part of closing the skills gap globally. Our ELL division grew its revenues in 2021 by 17% to £238 million. We have well-established businesses with solid market shares, plenty of room to grow, and the ability to contribute to the success of other Pearson divisions. We’ve also built a strong brand and developed unique IP and services, like our proprietary internationally recognized Global Skill of English, against which we map all our content and assessments as well as the Pearson Test of English, which has a growing synergy with Pearson VUE. Our Versant testing product also has crossover potential with Pearson’s new Workforce Skills division, which Mike will address shortly. Our go-forward strategy focuses on three market segments: first, institutional ELL, a growing global market worth £2.2 billion, of which £1.5 billion is courseware. We are one of the three biggest players in courseware with around 11% market share, generating £160 million of revenue in 2021, up 13% year on year. Our value proposition to academic institutions and private language schools is made up of digital and blended solutions that reach some 21 million people in 160 countries. Second, the growing £0.8 billion market for high-stakes English assessments, which are officially recognized by immigration authorities, universities, and professional bodies. We are well placed to win in this segment with our flagship PTE, a top three player with a volume share of around 10%, taken over 400,000 times in 2021, with revenues of £78 million, up 23% year on year. A key focus for us is to grow more in the direct-to-consumer space. We estimate the online direct-to-consumer English market we are focusing on is worth more than £1.5 billion and is expected to grow at double digits in the next five years. This segment benefited from the shift to online learning brought by the pandemic and can be an effective, engaging, and affordable way to learn for millions of people. We are actively exploring how to best grow in this exciting DTC space, including the role of an ELL offering within the Pearson+ ecosystem over time. We are excited by this growth opportunity in each of the three market segments. In 2022, we foresee mid-single-digit revenue growth underpinned by PTE volumes as the business continues to recover from COVID-19 with margins improving versus 2021. In the next five years, we expect mid to high single-digit revenue growth, with PTE being a core driver. Due to our operational leverage, we can expect margin enhancement across ELL to mid-teens by 2025. While we further build our direct-to-consumer strategy, the key to our success will come from winning in our other market segments, especially high-stakes assessments. Here is how we will succeed: we will focus on maintaining our differentiation in PTE and continue to improve the test-taking experience. PTE is already a fully digital, computer-based test with high security and AI-powered, unbiased scoring. We deliver score reports to test takers faster than anyone else, with an average time of 1.2 days. We are widely available in over 110 countries thanks to our network of over 380 Pearson VUE and third-party test centers. Last year, we reduced the length of the test to make it more convenient and launched the first online at-home PTE academic test made possible by Pearson’s VUE online proctoring. It’s another example of how we’re leveraging capabilities across divisions. With a consumer-friendly test and a wide delivery network through Pearson VUE, we will continue to expand our addressable market by gaining recognition from universities and governments across the globe. One recent example of this is in the UK, where we developed our new test, the PTE Home portfolio. Last year, we grew our volumes by 42% compared to 2020 and almost double versus 2019 levels. In short, with a focus on our institutional business, continuing to grow in our high-stakes assessment business, and building our consumer strategy, we believe that we can be a significant contributor to Pearson’s lifelong learning mission. Thank you for listening. I will now pass it over to Mike.

Thanks, Gio. Hi, everyone. I’m Mike Howells, and I lead our new Workforce Skills division. The main point of this business is clear: we are shifting to a new business model and go-to-market strategy for Pearson as a provider of workforce skills solutions. I want to share our confidence in this transition. Over the past few months, we have engaged with our partners in Pearson’s extensive global network to understand the challenges faced by our customers. These challenges are consistent: current solutions are fragmented, ineffective, and result in poor returns on investment and employee experiences. Many businesses are trying to address these issues, and while some great options exist, the U.S. market valued at $100 billion is still undergoing significant disruption. We believe Pearson can stand out by leveraging four key competitive advantages: First, our capacity to offer customers an integrated end-to-end solution that starts from identifying their problems, to providing tailored learning solutions, and verifying the outcomes. Second, Pearson’s extensive reach and scale, enabling us to serve individuals, enterprises, governments, and institutions through a unified ecosystem of products and services. Third, our position as a leading provider of accurate, trusted data on skills and talent, which will be a recurring theme today. Finally, our global brand is acknowledged for the quality and rigor of our learning solutions. Let me explain this in more detail. Our new business model will provide enterprises with what they need: an integrated solution for their specific challenges that generates measurable returns at scale. We're starting with Pearson’s current excellent enterprise products such as TalentLens, Versant, GED testing service, Accelerated Pathways, and Pearson VUE. Historically, we have marketed these products on a case-by-case basis, but we are now uniting them into a cohesive solution suite and forming a world-class enterprise sales team to market them effectively. This approach will increase revenues from Pearson’s existing portfolio and exemplifies how we are integrating offerings across our five divisions. Additionally, we have added our first acquisition, Faethm, an AI-driven platform for strategic workforce analytics and planning. Faethm assists enterprises in identifying the skills they will need for success, backed by extensive data and experience with numerous companies in the past five years. We encourage you to stay after the presentation for a demonstration of Faethm. Last month, we also expanded our product suite to include Credly, the largest digital credentialing network worldwide. Credly allows employees to demonstrate their learned skills, while employers can identify the skills they require. The Credly team will also be available after the presentation. As showcased in the video, Credly enhances our opportunities in the Workforce Skills area. With Faethm and Credly, we have assembled a comprehensive dataset on current demand and supply in the skills economy, and by integrating these capabilities with Pearson’s learning offerings, we have established a unique end-to-end value proposition for employees. We can envision a scenario where much of this learning becomes accessible through Pearson+, providing another opportunity for product expansion. Our second competitive advantage is our scale. Pearson has a remarkable capability to serve governments, institutions, enterprises, and individuals in this market. The connection between the needs of employers and individuals is particularly vital and challenging. Few providers effectively cater to both, and we are addressing this issue from the outset by combining our deep expertise in creating learning experiences for individuals with new enterprise-focused capabilities offered by Faethm and Credly, who collectively serve over 2,000 enterprises and organizations today. Our goal is to assist individual learners in finding the right solutions and support employers in attracting, retaining, and developing the right talent. The crucial factor here, and our third competitive advantage, is our ability to provide accurate, verified, and trusted data on skills. Skills are now the new currency in the labor market. Both employers and employees are moving away from traditional learning pathways and talent solutions. Reliable and impartial data on skills will empower employers to understand their needs and how to achieve them. The conventional CV or resume has become outdated; we must enable a system where opportunities are based on solid insights into capabilities rather than inaccurate assumptions drawn from past experiences. Finally, Pearson’s strong brand binds this all together. Large enterprises are familiar with our entry into this market and recognize our reputation for quality from products like TalentLens, VUE, BTEC, and PTE. There is confidence that a learning experience with Pearson will help individuals reach their goals. This transition is substantial. Since the division formed last July, we have been establishing the needed foundations. We’ve integrated our existing businesses and recent acquisitions into a performance-focused structure poised for revenue growth across our portfolio. Our newly consolidated workforce qualifications business, which includes BTEC apprenticeships and higher education qualifications, has already gained scale and will continue to grow in the UK market. We also see significant opportunities for international growth, leveraging our data and analytics capabilities to collaborate with global government partners in addressing skills gaps. Our new Workforce Solutions business integrates our smaller, rapidly growing assets with Faethm and Credly and includes new products coming online this year to drive rapid growth in our B2B market. We have numerous pilot and beta testing projects in progress, alongside key partnerships that will help us refine our offerings. We are utilizing a blend of direct sales and channel partnerships, which we plan to maintain, and leveraging our new acquisitions to develop a scalable enterprise sales workforce for our connected products. We aim to grow our customer base and annual recurring revenue by leveraging Pearson’s established client relationships and broadening our product offerings. For 2022, we expect Workforce Skills headline sales to see significant growth, primarily due to the acquisitions of Faethm and Credly, both forecasted to grow over 40% on an underlying basis. Excluding acquisitions, we anticipate mid to high single-digit underlying growth, with quicker growth in our smaller B2B-focused products and international markets, while growth in our core UK qualifications business will be more modest. The workforce sector is characterized by high margins, and our priority is scaling growth. Hence, we will invest significantly in 2022 to expedite our product development and strengthen our market position, while anticipating margins to be roughly breakeven. By 2025, we expect the division to more than double in size and achieve margins in the low double digits as the business expands and our investments yield results. Our new key performance indicators will include the total number of enterprise customers, the net retention rate of those customers, and the number of registered users in Workforce Skills. To summarize, we are confident we are positioning Pearson to seize the significant workforce skills opportunity with a comprehensive solution that will benefit both employers and employees within one integrated ecosystem, supported by a reliable portfolio of products and services, solidifying Pearson's potential as a leader in labor and talent data. This marks a tremendously exciting time for us as we play a crucial role in advancing Pearson’s strategy. Thank you for your attention, and I’ll now turn it over to Tim.

Thank you, Mike, and hello, everyone. I’m Tim Bozik, leading our Higher Education division and co-leading our direct-to-consumer division with Lynne Frank. The main point for our Higher Education division is simple: we are moving toward stability and will promote digital growth in a larger market. Although we operate our higher education business globally, over 80% of our revenue is generated in the U.S., so I will concentrate on that today. Our current total addressable market is defined by the number of students and the courses they enroll in that require course materials, essentially student enrollments and course enrollments. These students spend about £5 billion on required materials. While our business model currently focuses on securing course adoptions, we are also adapting to a market that is increasingly driven by consumer demand. This presents us with the chance to broaden our market reach beyond university students and required courseware to include anyone needing to supplement their education. I will outline how Pearson+ can assist in achieving that. In 2021, we faced a 7% drop in digital registrations due to lower enrollments and a shift back to more on-campus instruction. Our registered Pearson+ users were at 2.75 million, while text unit volume remained steady at 5.4 million units compared to 2020, indicating an opportunity for recovery. In 2022, we expect a decrease in sales, though not as significant as last year, and margins to stabilize as we work on optimizing costs. We have several key assumptions guiding us. Firstly, we anticipate declines in student enrollment this spring, reflecting last fall’s reductions and their impact going forward. Our plan predicts continued, albeit slower, declines from fall ‘22, with the potential for improvement. Course enrollments are expected to reflect those student enrollment trends. Although we have observed students taking fewer courses during the pandemic, U.S. universities still require the same number of courses to earn a degree, and students will eventually need to catch up. Therefore, we’re closely observing the possibility of an increase in deferred courses. Our product mix will increasingly shift from print to e-books and Pearson+, moving from bundles to digital-only options. Print currently represents a smaller portion of the business with an ongoing decline in demand. We anticipate continued growth in both Inclusive Access and Pearson+. By 2025, we foresee low to mid-single-digit revenue growth and improvements in margins into the mid-teens due to operational efficiencies and better cost management. Three main factors will contribute to stabilizing and promoting digital growth in the higher education sector. First, we will keep enhancing our core products, Mastering, MyLab, and Revel. These widely used products have been central to our success, providing excellent tools for instructors and interactive experiences for students. We are actively investing in improving the student learning experience by leveraging Pearson’s learning platform capabilities. Specifically, we are transitioning our Mastering and MyLab applications to the cloud to enhance reliability and stability, integrating these platforms into a single application for a consistent user experience and a quicker innovation cycle. The next factor for success is secondary recapture. The overall opportunity for reclaiming secondary consumption remains significant as we continue to limit secondary supply and focus on delivering through Inclusive Access and Pearson+. Consumer preferences are increasingly leaning towards digital, limiting print's downside. In retrospect, our print sales in the channel dropped dramatically from nearly 6 million units in 2018 to 2 million in 2021, reducing secondary supply. Looking ahead, our print mix is evolving across three commercial formats: rentals, standalone sales, and bundles. The availability of rental titles for high-demand courses is increasing, with over 400 titles planned for our rental program by fall ‘22 and most of them available by 2025. Titles in our rental program will exclusively be available from us and our partners, rendering secondary supply for high-demand titles redundant. For consumers preferring print, we will ensure payment. Remaining standalone print sales consist of a long-tail of titles, with revenue expected to decline steadily over time. We anticipate that bundles will phase out completely as consumers transition to a digital-only platform and choose to rent print if they require a physical textbook. When this shift occurs, the revenue loss from the approximately 500,000 bundles sold in 2021 will be less than $25 million due to pricing differences, which is factored into our plan. With secondary supply and its associated downside minimized, we expect an increase in recapture through Inclusive Access and Pearson+. Regarding Pearson+, the third success driver is our capacity to scale the platform and broaden our market reach. We have made a good start with our initial launch just before the fall semester, achieving 2.75 million total registered users, including 133,000 paid subscriptions. By the end of the year, more than 1,600 titles were available. Our App Store rating is an impressive 4.8 because we prioritize customer feedback and continually enhance the user experience. Furthermore, we will expand our market footprint to Canada and other international regions beginning in 2023. This year, we are introducing two new significant services on the Pearson+ platform, which we believe will enhance the product's appeal for students seeking additional learning resources, not just those assigned a Pearson eText. Let’s take a moment to view a video that showcases our Pearson+ channels and social features. I am excited to announce that we have signed an agreement to acquire Clutch Prep, an online video-based learning service that will greatly enrich our channel content with high-quality original video tutorials. The Clutch Prep team has spent ten years developing a library of short video content and practice resources with clear explanations to aid students in achieving better grades and saving time in demanding college courses. To conclude before I hand it back to Andy, our higher education business is progressing well toward stabilization and growth. We will accomplish this by reinforcing the strength of our core products, actively pursuing the secondary market, and scaling and enhancing Pearson+. I trust this gives you an understanding of why we are optimistic and excited about this division and its potential to support Pearson’s future growth. Thank you. Now, back to Andy.

Thanks, Tim. In summary, Assessment & Qualifications is a source of strength and stability in the company, and we expect that to continue in 2022 as that business maintains its broad, long-standing customer base, fed by market demand for upskilling and reskilling. Our virtual learning business is poised to benefit from the normalization of online schooling and from our strong foundation in OPM, which provides upside. Our ELL business aims to be the destination for committed English learners, and we’re pursuing that with institutional business, high-stakes assessments, and a direct-to-consumer strategy. You’ve also seen today the strategy for our Workforce Skills division, which we will execute by bringing to market an end-to-end business solution that meets the learning and upskilling needs of both employers and employees. Finally, you just heard from Tim about the path to stability and digital growth for our higher education business, anchored by our trusted core products, the capture of the secondary market, and the growth of Pearson+. Twelve months ago, I laid out a strategy for this new Pearson, and I truly believe that we’re at a pivotal and important inflection point in our evolution. As we move into 2022, my priorities are very clear. Firstly, we’re going to deliver sales and profit growth. Secondly, we’re going to continue the focus on execution, quality, and trust. We’re going to further embed customer and consumer insights across the entire company, and we’re going to progress and scale Pearson+. I have shared that when we launched Pearson+ last July, I’ve always felt that higher education was just the starting point for a broader consumer offering. It is now time to see Pearson+ in a new light. Earlier today I talked about how building a connected consumer and commercial strategy is one of the ways that we win. Pearson+ will be the connected product experience to deliver that. We will share Pearson+ registered users and subscriptions at each of our prelim and interim results to mirror both the fiscal year and academic year. We’re building Pearson+ to be the premier digital ecosystem for lifelong learning, whether through school, university, work, languages, or life skills. Today, we’ve reached tens of millions of people. With Pearson+, we aim to scale to a growing addressable market of even more people and do it globally. Consumers need a way to discover, learn, build skills, and show credentials, and they want a great user experience, which we will deliver with the broader Pearson+ vision. We’ll accomplish this by leveraging the company’s existing assets, including recent acquisitions and new investments. We will link our growing relationships with students, consumers, and enterprises to their specific needs through robust data infrastructure. The possibilities are vast when we connect all of this into one experience that meets consumer-led learning where it happens. You can see some of that potential in today’s Pearson+ channels demo. Using this model, it’s easy to imagine how we could deliver content for everything from language learning to life skills. When you add our diagnostics, assessments, and credentials, Pearson can scale and succeed, and that’s our aim. Pearson+ is the digital future of the company with transformational potential to create an entirely new business generating incremental growth. You’ve heard about the foundational strength of our core businesses and the opportunity over the coming years for all five divisions. Pearson+ has the potential to drive growth beyond that. I hope you now have a sense of where we’re heading. I think it’s exciting, and Pearson+ will become the company’s North Star. While we execute today, we’re working hard across the company to deliver a bright tomorrow, one that’s focused on where the market is going, one that plays to our strengths and brings all the different parts of this company together to drive growth for consumers and shareholders alike.

We will now take any questions. If you have a question in the room, please raise your hand and wait for a microphone so that the people online can hear your question.

Good morning, everyone. I have three questions, please. The first one: I’m assuming that your forecast of more than doubling Workforce Skills revenues by 2025 is all organic. If so, I’m kind of backing out 20% to 25% organic growth for the three years beyond 2022. Inside that, are you assuming any reduction in the BTEC business in the UK as T levels come on stream or do you have a more optimistic assumption for that slice of the revenues? Second question: Can you give us a sense of the scale of the stranded costs that you mentioned will be left behind once you’ve sold the businesses under strategic review? Lastly, in Higher Ed, Cengage sticks their version of MyLabs and Mastering into Cengage Unlimited. Will you eventually have to do that to kind of match the product? And will that represent another leg of revenue reduction per student as you get a bundling effect?

I’ll start with the last question and then hand over to Sally for the first two. At this stage, as I think of our Higher Education business, it’s useful to remember the defined cohort of users of Pearson products today, which stands around 10 million students. They represent a low-cost and efficient consumer acquisition tool. Think about the cost of acquiring our 2.75 million students, most of whom entered through Mastering and MyLabs, into the Pearson+ ecosystem. That is a very cost-effective way to generate scale within that community. As we add channels and other functionalities to Pearson+ this year and in the coming years, we create opportunities around user registration numbers, driving the three phases of our Pearson+ growth. Our job is essentially to build a seamless integration of Mastering and MyLabs into the Pearson+ system. As for the financial aspect of your question, we see no need to reduce those costs. Instead, users transition from Mastering and MyLabs to other aspects of Pearson+, allowing exploration of many features.

Hi, Nick. On stranded costs, I’ll update guidance when we’ve got anything to say around those businesses, whatever that point in the year may be. Presuming it’s a normal disposal, there’ll also be transitional service agreements in place for some time because the other side will require those services. That time will give us the chance to work through eliminating duplicated costs. We’re talking about costs of around £10 million to £15 million. As for Workforce, the financial breakdown I tried to provide earlier shows the underlying organic growth of the existing business and the growth rates for the two acquisitions we’ve made.

Would you like to add to the aspect of the BTEC revenue continuity?

Regarding the impact of the L3 policy review on BTEC revenue: Of course, that’s a factor, but we have a diverse portfolio of services. We’re also a T-Level provider, so we’ve got enough optionality in the portfolio to cover changes in consumer preference. As we’ve guided you, we expect to see BTEC revenue continue to grow domestically and internationally.

Where do we go next? Jo?

Thanks. It’s Omar Sheikh from Morgan Stanley. I have three questions. The first is for Andy, a two-parter. Sticking with Workforce, if you look at your target of doubling the size of the business by 2025, you’re discussing a £30 million to £40 million increase in operating profit. Is that ambitious enough against the opportunity you have highlighted in the $100 billion market? Relatedly, can you assess how fast you’re moving with the transformation plan? How do you weigh the organic versus inorganic opportunities, especially given your strong balance sheet? Finally, for Sally on Higher Ed: I’d like you to clarify the revenue decline this year, as it’s quite a wide range. You suggest a decline better than last year, which indicates somewhere between minus 1 and minus 4. Can you give us an indication of where you think it might land, whether at the bottom or top end of that range?

For your first question on Workforce Skills, the phrase under promise and over-deliver comes to mind. We’ve been diligent with the strategy that we have established. We have a strong base with extensive experience in various divisions — be it PTE or Pearson VUE — and we’ve engaged extensively with our enterprise market. I also fully expect that we could return to you with updates that may affect our projections as we further acquire the right businesses and talent going forward. Regarding your balance sheet inquiry and the pace of innovation we’re pursuing, it’s about being focused on balancing the budget with the innovative culture we’re trying to create across the company. I hope you can sense the enthusiasm and passion to really harness the strengths of our employees and leveraging our organizational culture.

Yes, I am not going to be specific about Higher Ed for 1 year. What I am emphasizing is that there will be growth projected out to 2025. The moving parts on enrollments, market share, and secondary recapture have been provided, and I'll allow you to draw your own conclusions.

We have an additional question from Katherine Tait.

A couple of questions for me. Firstly, on Assessment and Qualifications: why is your growth outlook so conservative or, perhaps, you wouldn’t describe it as conservative? Why can’t Assessment grow faster, particularly VUE and clinical? For OPM, I think you addressed a 14% market growth level. Why are you only discussing mid-single-digit growth in that market? Second question: for Workforce Skills, can you clarify how you’re winning recent corporate contracts? Are you displacing competitors, or is it a completely new product for the corporates? Are they displacing in-house solutions? Finally, regarding the buyback: if you are successful in selling the businesses under strategic review, can we expect further cash returns, or is that already baked into the £350 million?

With regard to our conservative outlook for growth: We feel quite good about the Assessment and Qualification business and what has been historically achieved in steady market growth. We highlighted the breadth of our portfolio, particularly in key sectors like IT. So the overall picture positions us well, even if there are areas that react specifically to COVID disruption. With adequate investments and geographic expansion, we feel consistent with that growth.

To respond effectively to the question on corporate contracts: The market is indeed very fragmented and rapidly changing. We are winning contracts through innovative services and solutions that fill existing gaps and add value to our clients. We notice a significant amount of demand from employers for high-value services; thus, many of our recent wins reflect our unique value proposition and our expertise across various sectors.

In terms of our capital allocation policy, I’ve already built in assumptions regarding the international courseware local publishing businesses. The board prioritizes investing in our business and driving future growth while returning value to shareholders when possible.

We are going to take a question from Adam Berlin.

On Higher Ed, does it make sense to target a stable margin this year? You mentioned a revenue decline amidst salary inflation in the U.S. Also, regarding MyLabs and Mastering, what’s your strategy to stop the decline in units? What’s being done about its importance in the acquisition funnel for Pearson+?

It certainly makes sense to target stable margins in Higher Ed. We’re anticipating revenue decline and ongoing costs-saving measures, which we’ve been implementing in recent years. Our strategy is to maintain stable margins while making concerted efforts toward enhancing the student experience.

We are actively enhancing the MyLab and Mastering platforms. They have always been pivotal for our business and student engagement. We’re currently migrating them to the cloud for improved user experiences. Our focus remains on achieving growth within them while adapting to the evolving marketplace.

I will hand back to Andy, I believe.

Thank you very much, everyone, for your interest in our company. We are all here for continued discussions after. There will also be product demonstrations for Faethm, Credly, and the Pearson+ team. So thank you once again.