Pearson PLC Q4 FY2024 Earnings Call

Good morning, everyone, and welcome to Pearson's 2024 Full-Year Results. Today, we will host a presentation followed by a Q&A session. There will be three ways to submit your questions. For those of you who have joined us in person and wish to ask a question, please raise your hand at the end of the presentation. For those of you who have joined us virtually and would like to ask your question personally, please use the numbers that are displayed on screen. These lines will open following the main presentation. Alternatively, please type your questions into the questions tab at the top right of the screen in the event platform and we will address them in turn at the end. And with that, I'll hand over to Omar.

Thank you, Alex. Good morning, and welcome to all of you. Thank you for joining us today. As well as hearing from Sally and me, we're also joined by our colleagues, Art, Tom, Vishaal, Tony, and Sharon for Q&A. Many of you will recognize Sharon from the Assessments and Qualifications investor seminar that we held back in November 2023. But let me formally introduce her to all of you. Sharon has held many leadership roles over her successful Pearson career and is currently MD of our U.S. Student Assessments and UK and International Qualifications businesses. She has a track record of strong results delivery. I'm pleased to announce that Sharon will become our new President of English Language Learning effective next month. This means that Gio Giovannelli has decided to leave Pearson. Gio has contributed so much to Pearson over the last 12 years. I'm glad for Gio, and he's been instrumental in driving the strong revenue and profit growth of our English Language Learning business. I'd like to thank him for his significant contribution and wish him all the best for his next endeavor. He'll continue to be available to Sharon and the team over the coming period. Now I'll kick off with an update on our strategic progress before handing over to Sally, who will run you through our financial results for 2024 and our expectations for 2025. You'll remember that we set out three priorities for 2024, and I'm pleased to say that we successfully delivered on all three. First, we delivered a financial performance in line with market expectations. We grew sales by 3% and profits by 10%. I'm particularly happy with the resulting EBIT margin of 16.9% and strong free cash flow generation. Second, as further evidenced by today's announcement of our partnership with AWS, we're building real momentum in the enterprise business. And third, we are scaling the application of AI across a wide range of our products and services, and this is happening across the entire business, and we're starting to see commercial benefits flow through from these initiatives. We will share various examples during the presentation. For those of you here in the room, we have lots of great demos for you outside that I would love for you to go and experience. I'm now one year in, and I would like to take a moment to step back and reiterate some of my initial observations about the company that I shared at our interims presentation last year, as they are every bit as applicable today as they were then. Pearson is a financially strong business with good growth options, and it is a trusted business with a respected brand and is viewed as the gold standard by many of our customers. Our core is in assessments and verification. We spoke last year to you about two seismic trends of AI and demographics that are shaping the world of work and education. Last month at Davos, we published a paper Lost in Transition, quite a nice bit of research on the cost of the gaps in the learning to earning transition, which in the U.S. alone accounts for $1.1 trillion of loss. We spoke to dozens of CEOs on the back of this, and they all shared a common concern: how do they upskill their employees while they are busy driving AI-based transformations in their business? This reinforces our conviction in these trends, and I believe strongly that Pearson is uniquely well placed to help address these issues. I'd like now to run through our progress on each of the four strategic priorities that you can see on the slide, starting with driving core performance. I'm pleased with our progress on our execution orientation, the evolution of our products and services, and our people initiatives. We achieved many milestones in our two largest business units and delivered what we said we would deliver. Our team in Assessment & Qualifications, thank you, Art, had a fantastic year of execution. Pearson VUE achieved customer retention of 99%. We successfully renewed key contracts in U.S. student assessments and scaled our qualifications business internationally. We also continue to evolve our products and services. In Pearson VUE, we built out test prep content and sales capabilities. And in clinical assessment, we launched the fifth edition of the Wechsler Scale, the leading measure of adult intelligence in the world. And we extended our digital assessment library for schools. These achievements set us up well for 2025. And this year, Art and the team will focus on maintaining our leading positions through contract renewals and new wins as well as expanding into faster-growing markets. For example, monetizing our test prep capabilities in Pearson VUE and accelerating our efforts in formative assessments in the U.S. student assessment. Just as we said we would, we successfully returned Higher Ed to growth for the first time in a decade and improved our adoption share position in 2024. This was achieved through customer-focused sales execution and rapid innovation in the product. These included the accelerated rollout of our AI-powered instructor tools for teachers and study tools for students. Critically, these tools are delivering results for learners, and our research shows that students are four times as likely to engage in active and efficient studying when using our AI tools. I'd encourage you to check out some great examples of our progress on this in the product demo zone for those of you here, in particular, the new image-powered features, for example, around MyLabs, which further enrich and personalize the learning experience. We also built out a direct sales team to extend our reach directly into the U.S. K-12 channel for advanced placement, dual enrollment, and career and technical offerings. This improves our ability to capture value from this fast-growing segment over the medium term. In addition, we successfully scaled and started to monetize our channels product. Thanks, Tony. These achievements provide a strong basis for 2025 when combined with the execution mindset that Tom and the team have brought to the business unit. They will focus on continuing to win adoption share, further scaling our channels product and expanding our target market through our new K-12 channel and opportunities in new collar skills. We also successfully delivered on our strategic milestones across our other business units. In Virtual Learning, we opened three new schools, scaled our career programs and made numerous operational improvements, including implementing a new portal that halves enrollment times. This progress gives us greater confidence in the growth outlook for virtual schools. We're also continually improving the Connexus product offering, leveraging the technology piloted in higher education. We've extended our AI study tools into the platform to provide high school students with step-by-step assistance. For teachers, we've launched an AI-generated custom assessment, which halves the time it takes to create an assessment. We're confident in delivering improved performance this year and stronger growth over the long term as we continue to scale our career and college readiness programs, drive improvements in the enrollment performance, and look to expand our school footprint through new school openings. We built new foundations in our Workforce Skills division in 2024. Vishaal and the team are building momentum in their enterprise approach and have landed key wins over the recent months with ServiceNow, Microsoft, and now AWS. This is on top of the partnership with Degreed that broadens our capabilities. I'm happy to also report that they turned to profit. I'll speak more about the evolution of workforce skills to enterprise learning and skills later in the presentation. For 2025, the focus is on execution for the new business unit, capitalizing on sales momentum in Enterprise Solutions, aided by the new go-to-market approach as well as international expansion and vocational qualifications. And lastly, we turn to English Language Learning. Gio and the team continue to execute with strong performance in the institutional business, scaling in key international markets, delivering an exceptional performance in PTE, where we grew sales despite a challenging market backdrop. While we expect the immigration market to remain a headwind this year, we remain confident in the medium-term outlook for PTE given demographic projections and our competitive strength. We continue to release AI-powered product services for English students and teachers globally. I'd now like to give you a taste of our most recent AI-powered product launch, a digital language tutor, which you could also take for a spin in the product zones after the presentation. We've also been applying AI internally to drive improvements in our core operations. These benefit all five business units, allowing our teams to be more productive, service our customers better, release products to market faster, and ultimately drive cost efficiencies. Let me give you more detail on our progress. We've made a suite of content development tools available for our authoring and editorial teams, which are powered by a range of leading LLMs, giving our content teams the best possible tools for their use cases and offering significant time savings. Importantly, these tools are always inside our secure environment, ensuring the protection and ongoing development of our valuable proprietary data sets. On customer service, our analysis finds that 40% of incoming support calls are initiated because there is no alternative. This represents a target of approximately 3 million customer service interactions per annum that can be reduced through the application of AI. We're deploying a range of solutions here, including greater automation, AI bots, and agent support to improve and deliver efficiencies in our customer experience. Finally, on people. I believe strongly that if we have the right people in the right positions with real clarity on expectations and incentives, we get much better outcomes. This is why we have implemented a new career architecture across the whole company that lays out career expectations and career pathways across all the roles. We've also optimized organizational spans of control and put in place other elements of our performance culture. As anticipated, this work has identified efficiencies that we have already implemented. Before I move on, I wanted to take a step back. I'm really pleased with the rapid progress that we've made in driving performance, and you've heard the execution milestones we accomplished in 2024. And we know this is a journey. There's always room to improve. For example, with ongoing work in areas like growth rates in virtual schools, our margin in higher ed, and rolling out our enterprise account management approach. You can be confident that we continue to focus on all these areas, and Naseem Tuffaha, who recently joined us as our Chief Business Officer, is going to help a lot in our ongoing progress here. We spoke last year to you about execution synergies, and I'd like to highlight our progress in the product and software areas. Let me reiterate a point I made last year. Pearson is a major software business. But historically, we have not run ourselves in a way to take advantage of modern software approaches. Under Tony, we've now put in place a product excellence team that is implementing new approaches for product discovery, development, and deployment. This will benefit Pearson as a whole, ensuring a common software product development life cycle, enabling faster innovation and expansion into ever more valuable learning experiences. It also provides a sharper investment focus on scaling emerging products that have the best chance of commercialization to support our growth ambitions. In addition, we'll benefit from a common approach to a small number of core platform services across Pearson, which will drive cost efficiencies in our product development spend. You could already see the early benefits of this approach through the speed of AI product enhancements that we're already making across the business, and we're pleased to show you another example from assessments and qualifications. We've changed our product branding approach, which over time will improve our external signal-to-noise ratio. We will deliver changes through clearer product suites, better branding, and more established market positioning, which will help customers better navigate our offerings and in turn, make it easier for them to buy from us. You'll remember our targeted market expansion where we spoke about investing more intentionally in higher-growth markets, and on this, I want to mention three things. First, I'd like to explain a little more of our thinking regarding the formation of enterprise learning and skills. You'll recognize this slide from last year, where we identified the enterprise customer segment as one of the key opportunities to expand our addressable market from a $15 billion core to a larger $80 billion market growing at 5% plus. To sharpen our focus on this customer segment, we've simplified our approach by bringing together our sales capabilities that target enterprises, both corporations and government agencies, excluding education departments. We're building dedicated strategic account management and a joined-up go-to-market approach so that we can better service this customer segment with the full suite of Pearson solutions. As we're starting to build momentum, as we've shown through the deals that we recently announced with large-scale technology companies, the product bundling across our enterprise offerings, for example, VUE with Credly and Faethm, and also our Pearson VUE team developing test prep content and capabilities to target the enterprise segment. Secondly, we're making good progress outside the enterprise space as well, capturing value from shifting focus to faster-growing markets. An example here is formative assessments, in particular, our work with the school districts in North Dakota, where we're providing a comprehensive assessment approach, including formative, interim, and summative assessments that provide a fuller narrative of an ongoing student performance. Thirdly, we've established our internal capital allocation process, which targets investment dollars at businesses that provide a platform for faster growth. We're also progressing steadily with our medium-term growth vectors, and you'll recall these are in early careers and enterprise skilling. In our Virtual Schools business, we've expanded our career programs to over half of our network, and we're seeing very strong student usage and demand for the offering. We have also expanded our career partnerships with associations like the National Technical Honor Society, the CAPS Network, as well as universities like the University of North Texas and Southern New Hampshire. This helps expand our reach of the career programs and provide students with additional opportunities to identify a unique customized pathway for their own individual career journey. In higher education, the extension of our career and technical offerings, now being sold directly into the U.S. K-12 channel is also part of our effort here. On enterprise skilling, Vishaal and Art are making steady progress across enterprise learning and skills and the VUE team. As you know, our multiyear deal with ServiceNow is aimed at accelerating the identification, development, and validation of skills for employers. As part of this, ServiceNow will collaborate with Pearson on research and insights to explore how emerging technologies like Agentic AI will transform key technology occupations globally and how to test, credentialize, and award employees for those skills. Pearson will use the ServiceNow's AI-powered Now platform to boost employee productivity, efficiency, and talent retention. Hot on the heels of the Microsoft announcement last month, today, I'm delighted to let you know about another large-scale strategic partnership, this time with AWS. At Pearson, we've had a 13-year partnership with AWS, and I'm pleased that we're taking our relationship to the next level. There are three main elements: first, leveraging AWS engineers to help us accelerate our tech transformation across higher education, virtual learning, and English Language Learning by deploying AWS high-performance cloud infrastructure to improve the learner experience across our products. Second, AWS and Amazon are increasingly important customers across a range of talent planning and development areas and have committed to extending our enterprise learning relationship, including Pearson VUE, alongside our GEDWorks program and the Credly platform. Third, we will also collaborate on joint go-to-market opportunities, focusing on clinical assessments, professional assessments, and English Language Learning. We're really pleased to add this partnership as it plays into a number of strategic priority areas for us and helps enhance our AI and technology capabilities in areas that we know AWS are best placed to support us. I see this deal through a similar lens as our Microsoft relationship. First, that we've secured the base business that we have with these partners for the coming several years. Second, we're expanding that base business as part of the arrangement to deliver at least mid-single-digit growth. And third, we will collaborate on joint go-to-market activities across many parts of our business. We're really excited by what these partnerships can do for us strategically and operationally, and these deals together support our confidence in our medium-term growth outlook. With regards to the joint go-to-market, we're in the early stages of these long-term relationships where our leaders and theirs are co-innovating and co-designing future products and solutions. As these are built out, we will have incentives for our and their salespeople in place to drive our joint growth. I look forward to updating you on this as we progress. I'll come back to you to discuss our 2025 priorities before we close out. But for now, Sally will take a more in-depth look at our financials.

Good morning, everybody. 2024 proved another year of good financial performance. We saw a 10% increase in profit with margin expanding from 15.6% to 16.9%. Adjusted EPS increased 7% to 62.1p, reflecting that trading performance as well as reduced share count due to the buybacks in the year, partially offset by higher interest and tax. Cash performance was excellent with operating cash conversion of 110% and free cash flow conversion of 117%. This strong performance, alongside our balance sheet strength means that we're increasing the dividend by 6% as well as announcing a share buyback of £350 million, which will commence as soon as administratively possible. Before we get into the detail, I think it's worth reflecting on our financial performance over the last five years. This progress shows real momentum across the business, which gives us confidence in delivering another good year in 2025 and in our guidance beyond that. In 2024, we delivered underlying group sales growth of 3%, excluding OPM. By business unit, Assessments and Qualifications delivered a solid performance across each sub-business unit, accelerating growth in H2. Virtual Schools declined 1% due to the known school losses but 2024-2025 enrollments were up 4% on a same school basis, and we also opened three new schools. Virtual Learning declined 4%, given the final portion of OPM ASU in the first half comp. Higher Ed returned to growth given gains in adoption share, enrollments, and pricing, partially offset by mix. The H2 U.S. Higher Ed growth of circa 3.5% underpins our confidence going forward. English Language Learning delivered a strong 8% performance, driven by Institutional with PTE performing well against a tough market, and Workforce Skills grew 6% with a solid performance from both Vocational Qualifications and Workforce Solutions and momentum given recent partnership contracts with ServiceNow, Microsoft, and now AWS. Group adjusted operating profit grew 10% on an underlying basis to £600 million, with margin up 130 basis points to 16.9%. This was driven by margin on sales growth and delivery of cost efficiencies, partially offset by investments and inflation. By business unit, Assessments and Qualifications grew its margin to 23% due to margin on sales growth, partially offset by inflation. Virtual Learning margins increased to 13% with absolute profit reducing due to the final portion of OPM ASU in the first half comp. Higher Ed margins remained flat given sales growth and cost savings were offset by inflation as well as one-off investment and restructuring costs. English Language Learning margins increased to 12%, with profit increasing due to margin on sales growth, partially offset by currency movements. Workforce Skills turned profitable, delivering a 4% margin driven by margin on sales growth and cost savings. I highlighted last year that 2024 would see a step change in Pearson's free cash flow generation, and we have seen it increase by more than £100 million to £490 million. Operating cash conversion was 110% with favorable working capital given lower inventory purchases as we increasingly become a digital business, good collections, and favorable FX. Investment amortization and depreciation was higher than the cash cost with CapEx stable year-on-year. And product development cash spend decreased slightly as we drove further cost efficiencies in higher education. Our free cash flow conversion was 117%, reflecting operating cash performance and cash tax of less than the adjusted tax charge. In comparison to the prior year, free cash has increased due to the operating cash and below-the-line reorganization costs dropping away, slightly offset by tax and interest. Net debt stood at £0.9 billion at the end of 2024, a £0.1 billion increase year-on-year with free cash flow more than offset by dividends and in-year share buybacks. During the year, we issued a £350 million education bond, providing long-term financing for the business, and both Moody's and Fitch upgraded Pearson's long-term issuer rating, moving the outlook to stable. Return on capital increased slightly to 10.4% as whilst the return growth is higher than the capital increase, the particular mix of average versus closing FX rates counterbalanced. Taking a step back, we show on screen a five-year view of financial strength with positive cash flow characteristics, comfortable leverage, and improved return on capital. Turning to 2025. We expect each business unit to grow with group underlying sales growth, adjusted operating profit, and tax in line with current market expectations. Underlying free cash flow conversion will be 90% to 100% with an additional assumption that we receive the £100 million state aid repayment this year. Interest will be circa £65 million, equating to market expectations of 2025 interest plus the impact of the £350 million share buyback. Included within this guidance is new investment to support our strategy and drive growth, including brand and innovation spend as well as transformation costs. This investment is more than offset by the margin on sales growth and operational improvements, which drive the group's margin expansion. And as a reminder, on FX, a US$0.01 move against the pound equates to around £5 million of adjusted operating profit. As we announced in January, Workforce Skills will evolve to become Enterprise Learning and Skills, resulting in modest revenues and costs being transitioned into the Enterprise Learning and Skills business unit from Higher Education. We've outlined this impact for 2024 financial terms in the appendix to the presentation. On a business unit basis, Assessments & Qualifications will grow low to mid-single digits following the successful retention of several contracts in 2024. Virtual Learning will return to growth through enrollment increases, partially from new school openings for the 2025-2026 academic year. Higher Education growth in 2025 will be higher than in 2024 as we build on the successful results of our sales team transformation and product innovations, particularly using AI. English Language Learning growth will moderate given the likely impacts of elections on immigration rates in 2025 but we remain confident in the medium-term outlook given demographic progressions. Enterprise Learning and Skills will grow high single digits with both vocational qualifications seeing solid growth and the addition of a number of new contracts for Enterprise Solutions. As we've previously guided beyond 2025, you can expect CAGR underlying sales growth at mid-single digits, sustained margin improvement equating to an average of 40 basis points per annum, and strong free cash flow conversion in the region of 90% to 100% on average across the period. In terms of phasing, as we have seen in other years, growth will generally be weighted to H2, given these known business unit dynamics. Assessments & Qualifications growth will be H2 weighted with those new and renewed contracts and the new test prep business building during the year. Virtual Learning will decline in H1 given the final impact of the previous school losses and the timing of funding in the previous year. H2 and the full-year will grow through enrollment increases for the 2025-2026 school year. Given the growth profile of English Language Learning in 2024, we expect Q1 to decline with growth increasing in each quarter thereafter. ELS growth will increase quarter-on-quarter and Higher Education growth will remain relatively stable throughout the year. So for the group overall, Q1, which is our smallest quarter, will be muted. H1 will see low single-digit growth with strong growth in H2. Our disciplined capital allocation policy remains the same, focusing on maintaining a strong balance sheet, investing both organically and inorganically, paying a progressive and sustainable dividend, and then returning surplus cash to shareholders. The slide you see now demonstrates the application of this policy over the last five years. Organic investment is relatively stable at a macro level, albeit internal capital allocation priorities evolve over time and are monitored continuously, as Omar described, as markets and customers' needs change. Leverage remains comfortable, currently below our medium-term average expectation of 2x EBITDA to maintain optionality to make value-enhancing investments. You can also see the £1 billion of share buybacks over the period with a further £350 million announced today, given the strength of 2024 free cash flow and our confidence in 2025 and beyond. Going forward, we will continue to apply this policy and through our strong cash generation, we'll continue to invest behind opportunities to drive further growth and create value for our stakeholders. So in summary, 2024 performance was in line with expectations with excellent margin expansion. We saw strong free cash flow. And this, combined with our strong balance sheet, means we're announcing a further £350 million share buyback and our confidence in the future and the strength of the business is reflected in our guidance for 2025 and beyond. And with that, I'll hand back to Omar.

Thank you so much, Sally. I'd like to turn to the topic of how we track the progress of the business and the metrics we will use. The way we think about this is in three tiers. At the bottom of the pyramid, we have hundreds of analytics that we use to track the performance of the business every day. Think of things like user engagement or pipeline aging metrics. Next, we have a small number of metrics, less than 20 that the Pearson executive team used to run the business, for example, new bookings. Now at the top of the pyramid are our power metrics, a small number of KPIs that we plan to share externally to track our progress against our strategic priorities. We believe these will be more helpful to you in understanding the progress that we're making, and they, therefore, will replace our current set of strategic KPIs going forward. You will recognize this slide as the executive summary of our strategy that we shared last July. And you'll remember that assessments forms approximately two-thirds of our business and that we're very focused on driving growth in the Enterprise segment. For this reason, we will share two power metrics linked to these two themes going forward. First, is our assessments and verifications renewals and also the level of assessments, new business acquisition. Second, is the number of customers in our most commercially and strategically material tiers. We have customers at different levels of scale and scope in terms of their usage of Pearson services, and the most important are our advanced and elite tiers that individually contribute millions of dollars per annum. We will share with you the absolute number of these customers going forward as a second leading indicator of growth. Now, of course, I'm very pleased to announce today, an enhanced customer relationship in our elite tier, which is AWS. I would now like to share our priorities for 2025, which are simply an evolution of our 2024 priorities, and that's because they've been serving the business well, and we see plenty more to go for. First, we will deliver financial performance in line with market expectations. Second, we'll continue to lead on the application of innovative technologies like AI across our products and services. And third, we will grow our business across the Enterprise customer segment. We've embedded these three priorities across the whole organization through our detailed objectives and key results approach. Everyone knows that this is what we're focused on. So closing out, I'd like to leave you with these two takeaways. Firstly, I'm happy with the strategic and financial progress our team has made in 2024. This leadership team is focused on driving performance in the core business with a strong execution mindset. I'm pleased with the milestones achieved in our approach to the enterprise market and infusing AI capabilities across our products and services. Secondly, we're building momentum in the business and putting in place the building blocks for future sustained shareholder value creation. The opportunities for Pearson in our markets are significant, and we're making good progress towards unlocking them. We're, therefore, confident in meeting the financial guidance outlined for 2025 and sustaining mid-single-digit growth with ongoing margin improvement in the years beyond that. We will do it while helping people around the world realize the life they imagine through learning. With that, I'd like to open up for Q&A for me and the team. And if I can please request name and serial number when you go, Adam? There's a mic coming your way.

Good morning. It's Adam Berlin from UBS. Thank you for allowing me to ask three questions. I would like to hear from you, Omar, about your vision for the partnerships with AWS and Microsoft. What exactly will these partnerships entail? How will they generate revenue? What is the nature of these businesses? It’s challenging for us to grasp how you envision these new products operating. If you could explain it in straightforward terms, that would be appreciated. My second question concerns your opinion on how the new Trump administration policies might influence your business. The areas that come to mind for me are PDRI and Student Assessment within AMQ. Are there any updates you could share, positive or negative, regarding that? Finally, I'd like you to clarify the guidance on English for us a bit more. You mentioned a slowdown from the 8% last year. Could you discuss your thoughts on volumes, pricing, and institutional factors? It would help us understand the dynamics in English. Thank you.

Sure. You asked about the hyperscaler relationship in simple terms, which is a complex topic. I'll start by discussing the structure of the deals and then their financial impact. These companies are currently investing vast sums into AI data centers. They have top-tier engineers, and through these partnerships, we are bringing some of those engineers on board to help develop our product offerings and implement AI effectively. Another important aspect is that they are already our clients and are set to expand their business with us as part of our agreement across various Pearson services. Recently, we hosted leading talent recruitment personnel from Amazon, who typically hire millions of employees each year and are exploring new strategies for talent sourcing and development with us. We are collaborating closely to align our resources with their needs and those of their customers. Additionally, we are working on joint go-to-market strategies, where our software engineers collaborate with theirs to create AI tools that enhance productivity, such as providing suggestions to improve work processes or content. The teams are currently developing these tools, which takes time. Once we have these products ready, there will be incentives for numerous Microsoft and AWS sellers, as well as our sales force, to promote them to their clients. In summary, these deals help to solidify and expand our current business, with potential for growth in the joint initiatives we are working on, which could have interesting financial implications. On the topic of the new U.S. administration, I mean, I'll say a couple of words, and then maybe I'll ask Art to comment a little bit as well. The new administration is focused on things like school choice, parental choice, and ultimately building an incredibly adaptive competitive workforce for the U.S. in an era of AI. Those things play super well to what Pearson does. So virtual schools will benefit tremendously from school choice. This business of accountability and meritocracy is also at the heart of a lot of the thinking there. Maintenance and management of standards is a critical part of this. Then, of course, the whole alternative skill pathways part of this is a key consideration. Now you asked about PDRI, and maybe, Art, you'd like to say something about how you think about it and also Schools Assessments.

Yes, absolutely. First off, Omar is right. Our products and services support the ultimate goals of many of the objectives of the output that we're seeing from the administration. Specific to the Department of Education, Adam, I'll remind the group here that almost all of our work across all of our business, including A&Q, is at the state level. The thrust of many of the initiatives coming out of the administration are about giving more control to the states from the federal government. We're quite experienced at dealing with different types of states with different viewpoints on these types of things. So we're quite comfortable continuing to navigate that. Of course, we're watching carefully the announcements that are coming out, and there is volatility happening in all of the departments, and we've got the right relationships to stay plugged into that. On PDRI specifically, I'll remind this group here. PDRI is a relatively small part of the overall Pearson portfolio, less than 2% of our revenue. While it does a lot of direct federal government work, the core value proposition of PDRI is around merit-based hiring. The overwhelming bulk of its offerings help hiring agencies identify candidates who have the exact skills and the exact knowledge to fill the jobs that they need. Again, this is absolutely in line with what the objectives of the administration are. The passage of things like the recent Chance to Compete Act supports that value proposition. In the current swirl of things that are happening, we're paying very close attention to specific contracts, although much of our work is with military and public safety functions like TSI, which are viewed differently in the scope of the administration actions. We're very, very bullish on the long-term match between our value proposition and what's coming out while at the same time, monitoring each of those specific things.

Thank you, Art. Now on ELL, normally, I would throw this at Sharon, who is not yet officially in position. She's been going through a fantastic transition with Gio, which we strongly appreciate. But you asked really about guidance unpacking. So I'm going to ask Sally to pick up on that.

To be fair, you mentioned the word decelerate, while I referred to it as moderate. English is still expected to grow significantly, although not at the same pace as last year due to a slight decline in PTE caused by fluctuations from the Australian and Canadian elections. We're confident that the demographic factors we've identified indicate a strong future market for us, despite some volatility this year. Our institutional business performed excellently last year and is set to thrive again this year. While I noted some phasing issues, I am very confident about the growth in that sector overall. You might have seen the video showcasing the English language shooter and the assessment tool within English as well. The innovations we are introducing in that product are going to significantly drive growth in those markets. We're also focusing on geographical growth in MENA and Latin America, and we feel very confident about English this year.

Thank you, Sally. Okay. Who's next? Yes, sir.

It's Nick Dempsey from Barclays. I have three questions. First, following the pattern of the year, if the low single-digit growth in the first half is around 2%, then a growth of about 7% in the second half seems quite significant. Can you provide insight into how much visibility you have regarding this to alleviate concerns about achieving that target by the end of the year? Secondly, in Higher Education, you've indicated consistent growth rates throughout the year. However, the surprisingly strong enrollment growth in fall 2024 is likely to benefit the first half but may not extend into the second half. What strategies do you have in place to sustain growth in the second half amid a potentially lower enrollment environment? Lastly, regarding Higher Ed, Cengage and McGraw Hill have been outperforming their peers in terms of top-line growth for some time. From what I've observed, they attribute their success to a higher percentage of revenue from inclusive access, which has been growing for them. How have they achieved this higher percentage, and do you plan to catch up to match their growth?

Thanks, Nick, for your forensically detailed questions, which is perfect. So Sally, why don't you take the one on H2 visibility, please?

Sure. So we don't have perfect visibility but I've got good visibility. Obviously, internally, I've got a detailed budget, which is why I'm able to share how the quarterly kind of growth dynamics are going to play out. As we look to H2, all of those things I talked about from a business unit basis build that growth. So Higher Education relatively stable throughout the year. I'll let Tom double down on the Higher Ed bit when he talks. That English piece I just talked to as well, seeing that growing throughout the year, then the contract wins and renewals that we've had in both Assessments and Qualifications and ELS, I know we call it workforce, all of those dynamics we built a detailed bottom-up budget that shows that phasing throughout the year. In terms of data points that we use. We’re using detailed data around trends about students moving and immigration across borders, detailed bottom-up budgets in terms of what we're expecting in market share, what we expect to see in terms of enrollments, which we are expecting to be relatively flat for H2 but what we're seeing in market share, what we've done in product. That data point we showed you for fall back-to-school last year around double-digit growth in our AI products. We're going to have a lot more of those in next year. I’m confident in both that phasing profile, but also that growth dynamics we’ve given you for the full-year.

Thanks, Sally. All right, Mr. Tom. The first one on enrollment growth, but H2.

I mean a couple of things to think about. So firstly, as Sally highlighted, good growth in the second half of last year. We're confident about good growth in the first half of this year. Obviously, January and February are pretty much out of the way now. They're the third and fourth biggest month of the year, and we're tracking well and in line with that progress. Clearly, your opportunity for the fall is somewhat dependent on how you've done from an adoption share perspective this spring and where we win new adoptions in the spring, that's additional business that we can retain in the fall. Some things that we've been doing around reorganizing the sales team means that there are segments of the market that we haven't really gone after properly in the past that we're going after much more aggressively now. We've got a much more focused sales team. We've got sales teams focused on winning new business, retaining new business. We’re thinking about the customer life cycle very carefully. We've got a much stronger approach to sales operations and how we think about the market and segmentation. We feel very good about the selling side of things. On the product side of things, we’re building a much more robust product value proposition. You saw that last year with some of the wins that we saw in products powered by AI. With all that in mind, plus some pricing, we feel fairly good about sort of the second half dynamics from a growth perspective. The other thing to say is from an international perspective, international obviously had a tough year last year. We expect to see that factored into the first half of this year. Where you see more growth in higher education in the second half is driven by international. We’ve got a great leader in the international team. He’s built a great new team out. They’ve been making changes in terms of sales operations, increasing our footprint in key emerging markets. We’re looking forward to seeing a return to growth in international this year in higher education, and that will also help. Lastly, in the IA piece, I might dispute some of your analysis on the relative growth rates of some of our competitors once you break them down in a bit more detail, and we can chat about that offline if you like. What I would say is, as Sally alluded to, we did a good job of taking share for the first time last year, both in the spring and the fall. That hasn't happened for a long time. We feel very pleased about that. From an IA perspective, it's a law of marginal gains. If you've got a math title, you're already going to have relatively high sell-through. The pricing reduction you get in math is not going to offset the revenue growth from moving that into IA. So clearly, that's not necessarily a discipline you'd want to. There are some other products that you might have in print, for example, eText, which makes sense to move into IA. We’ve built in more analytics in understanding where it makes sense to move some titles into IA that we wouldn't have necessarily done in the past. It’s very much a horses-for-courses approach in terms of disciplines. If you’ve got disciplines like we do with high market share in those STEM areas, they’re not natural candidates to move into IA because you’re giving more of a discount away in terms of the discount versus price as you’re thinking about revenue. Clearly, we're thinking about the most cost-effective and holistic approach for students in terms of value creation in the first place. Ultimately, we want to provide great quality products to students at reasonable prices.

Thank you, Tom. The gentleman over here.

Good morning. Steve Liechti from Deutsche Numis. I would like to follow up on Nick's question regarding the first half and second half of the year. Could you provide some insight into your exposure to discretionary or project-type spending compared to subscription services? That would be helpful. Additionally, considering your full-year revenue guidance, how much of that is already secured as signed backlog revenue, and how much is still pending? My second point pertains to the share buyback. Last year, you mentioned that we were managing net debt leverage below our preferred levels as we were interested in pursuing mergers and acquisitions. You've touched on that in your comments. With the current £350 million buyback, does that imply that potential M&A opportunities are not available, or have you shifted your focus towards organic growth instead? Any clarification on this would be appreciated. Thank you.

Yes. I mean just one thing to remind you, which I know you know and Sally will dig into the guidance is for the services part of our business, so I think of things like school assessments, VUE PVS, those are very long-run contracts. So when you've got a multiyear contract in place, a lot of the revenue backlog is in place. Sally, over to you for that.

That was how I was going to answer it. I'm not going to call out anything particular. You were kind of asking about big exposures, but there isn’t anything like that in there. A proportion of our businesses like students I'm pointing behind me because it’s Art's business, for example, where it is long-term contracts, we're already delivering against them, that's using your words in the bag. Something like Higher Education, we will be going — we’re going into full back-to-school with knowledge of that adoption pipeline we've built, but then the sales happen nearer to when the kids are going back to school. So it's a mixture across the piece.

And then have we lost interest in M&A versus share buybacks? That kind of was the heart of the question.

Yes. Our capital allocation policy is clear: invest in the business, the dividend, the leverage that you talked to. Then the Board makes a decision about whether a further return to shareholders is the right thing to do. We're not the sort of business where a kind of M&A budget for the year makes sense. It’s about the opportunity that comes up and a tool that we can use that helps to move our strategy forward. We're really focused on organic growth. At points in time, the stars will align on a piece of M&A that makes sense. It will be about driving the strategy of the business at the right return as opposed to I've got a budget in the year, and I'm going to fill out the budget. That’s the way we think about it. Do you want to add?

I mean, I totally agree with what Sally said. Our leaders here have got their organic growth baked in their budgets, and that's the plan. If someone’s got an excellent idea of some M&A target, which, by the way, must be part of a pre-agreed deeply debated strategy and based on a pipeline of targets that we've been thoroughly investigating and typically working with testing out that our capabilities jointly make a difference for customers, then we can consider it, but it means that we adjust the plan like. If you’re going to bring an M&A into your organic plan, fine, but your plan has just gone up. For us, it’s a tool for accelerating organic growth. Anyone else?

Our first question today comes from James Tate at Goldman Sachs. James, please go ahead.

Good morning. I apologize for not being there, but I have two questions. First, the margin improvement in A&Q was quite strong last year, with operating profit dropping by around 55%. Can you let me know if there were any one-off items to mention for last year? If not, should we expect this level of operating leverage to continue in the division going forward? Secondly, the full-year margin came in at 16.9% for the group. Considering you initially guided for 16.5%, how should we view the group margin in the next couple of years? Is there potential for exceeding the 40 basis points?

Thanks, James. I’m sorry, automatically assumed it’s mine.

Yes, go ahead, Sally.

Thanks, James. I hear you poorly. I can hear it in your voice. Sorry to hear that. I hope you get better soon. On the margin improvement and any one-offs, there are no one-offs as such that I’d call out but that improvement, well done Art, was driven by sales growth and some cost efficiencies that we had in the year as well. I generally think about the operating leverage in that business, depending on which business sub-unit it is being between 40% and around about 60%. So 40% would be a kind of VUE business, and 60% would be a Clinical business. As for the margin, I'm not sure I did guide to 16.9%. I think I guided to being happy with expectations. Obviously, we're delighted with the 16.9%. You can tell from guidance for 2025 we’re going to see margin improvement in 2025. I’ve guided to the 40 basis points improvement over time. To break that down, it’s super simple and actually applies across each of the business units as well. It’s operating leverage on sales growth and then cost efficiencies that we will find as part of business as usual as new technologies come into place as we do things differently, offset by investment to drive that growth. Those three elements apply at each business unit and from an overall perspective.

Yes, I want to add to that, James. First, I hope you feel better soon. Our approach to margins is centered around Pearson's commitment to creating high-quality products that benefit learners and educators. The value we provide will be reflected in our margins. Healthy margins indicate that we are delivering exceptional products to our customers, which is our main priority. As Sally mentioned, we aim to utilize technological management innovations in our operations to continually enhance efficiency and productivity. This is an ongoing process; we are always striving for improvement, and you can expect to see that from us in the years ahead.

There are no further phone questions, and I would now like to pass over to Alex for questions from the platform.

Yes, we've got one question from Sami at BNP Paribas. Sorry, two questions. Firstly, despite improving contract renewal rates at VUE, your A&Q guidance points to low to mid-single-digit growth. Under what scenario would you deliver low single-digit growth, i.e., contract losses in U.S. school, expected volume pressures in VUE or any other scenario? The second question, despite enrollment growth in U.S. Higher Ed, paid users to Pearson+ did not increase. Why was that?

Yes. I mean, Sami, obviously, in any competitive business, if you lose customers, and that's not a good outcome. Obviously, we're very focused on not doing that. But do you want to respond to that what would it take to make sure that A&Q is at the upper end of our guidance rather than at the lower end, Art?

Absolutely. I think we called out in our statement what the elements of growth are for 2025 within A&Q. It is the launch of new contracts that we won last year. We feel very, very good about that. That's an execution task that we have a wonderful track record on. We are continuing to invest in go-to-market resources for our test prep offering, which you'll see we’re now referring to as the Pearson Skilling solution, and that will ramp up throughout the year. We are focusing on formative and interim assessment, as Omar pointed out in his introductory remarks. Those are the growth levers that we’re counting on. We wouldn't be committing to this guidance if we didn't feel very, very strongly about delivering on them. But those are the things we have our eyes on.

Thank you, Art. I've got a couple of words on Pearson+, but Tom, I think you should go first around like the subscriptions and then we'll make a comment.

Yes, sure. I mean, I think firstly, Pearson+ has been a great success for us, and we're delighted with it. It’s one of our three product lineups, right? We’ve got the MyLabs. We’ve got Pearson+ and then we’ve got channels. We’re excited with that breadth of product portfolio in the Higher Education space. I think secondly, in terms of any growth there, what's really happened is that as we think about distribution, one of the things we need to get right is how we integrate that into Inclusive Access. That’s one of the things that’s on our roadmap, and we’re working through. So it’s part of our broader portfolio strategy. What we need to really get right is great products for each different part of the market in terms of segmentation and understanding. We’ve got courseware, Pearson+, and channels. They’re all appealing to faculty and students in different ways in terms of driving increased active learning. As we’re working through some of the integration pieces with the LMS and the integrations, you’ll expect to see that Pearson+ number grow over time. It’s nothing I would be particularly concerned about. It’s an important part of the strategy, and it’s a great part of the portfolio for us to have.

Yes, thanks, Tom. I'm very glad that Pearson invested in Pearson+ because we gained valuable insights. One key takeaway is the development of a modern, full-stack cloud-native technology platform and the use of innovative AI techniques. The ideas generated during this process are being shared across the rest of Pearson. Another important lesson was how to engage directly with end users through various forms and channels, which has proven beneficial, and you'll see us utilize that in smart ways in the future. So, Sami, thank you very much for the question. So we're out of questions. Anyone else in the room? Going, going? Okay. Well, thank you so much for being with us. I mean, seriously, for those of you here, please do take a few minutes and go and have a look at the products out there. I think you'll find them enjoyable and hopefully productive. So thanks for being with us. We appreciate you.

Thank you.

Thank you.