John Fallon - CEO Coram Williams - CFO.

Thomas Singlehurst - Citi Nick Dempsey - Barclays Ian Whittaker - Liberum Ruchi Malaiya - Bank of America Merrill Lynch Matthew Walker - Credit Suisse Katherine Tait - Goldman Sachs Giasone Salati - Macquarie Patrick Wellington - Morgan Stanley Sami Kassab - Exane.

Hello and welcome to today's Pearson 2017 third quarter trading update presentation. [Operator Instructions]. And today I'm present John Fallon, CEO and Coram Williams, CFO. Gentlemen, please begin..

Okay. Good morning everybody. Thanks for joining us for this nine months trading update. As Houston said I'm John Fallon, along with me is Coram Williams our Chief Financial Officer. Headlines for today are, we're performing well competitively. Condition in our biggest market, U.S.

higher education courseware remain challenging but the media actions that we announced in January to maximize the value of print and accelerate our digital transition are helping in U.S. higher education, sales are down 1% overall with digital sales up 11%. We're benefiting from our work to make Pearson a leader a more efficient business.

We're seeing that in a good past performance and a strong balance sheet, net debt is on track to be below £800 million by year end and we're making good progress and our plan is to take a further £300 million of cost out of the business over the next two years.

We continue to simplify the company, you'll see that we've completed the disposal [indiscernible] the Chinese test preparation business and the sale of just on the half of about 47% stake in Penguin Random House and we will soon start to return £300 million of surplus capital to shareholders through a share buyback as planned.

So let's have Coram take you through the details of current trading and how all this progress enables us to narrow our operating profit guidance for this year to the top half of the range as we set out last January. I will then say a little more about the benefits we are seeing from the actions we're taking in U.S.

higher education courseware and also give you a very quick update on our work to ensure that by 2020 Pearson is a growing sustainably profitable company with a more reliable and predictable revenue and cash profile. Coram over to you..

Thanks, John and good morning everybody. Let's first look at our performance by region. In North America sales in the first nine months declined by 4% in underlying terms primarily due to the expected impact of contract boxes in U.S. School Assessment, weakness in school and higher education courseware and declines in learning studio.

The learning management system that you know we're retiring, that was partly offset by growth in professional certification, online program management and connections education on higher enrolment. In U.S.

higher education courseware revenue declined 1% on an underlying basis due to lower growth sales partially offset by significantly lower returns and good grades in digital revenues which were as John noted up 11%.

The largest single quarter of trading is now behind us in this business and we're tracking in the upper half of our guidance range and I'll come back to the [indiscernible] a bit shortly.

In Core, sales decreased by 1% in underlying with strong growth in English assessments and OPM services more than offset by declines in professional certification and in courseware revenues in the smaller markets of Europe and Africa. The U.K. School Assessment business continues to stabilize with sales only slightly down on last year.

In growth sales increased by 3% in underlying terms as school textbook sales in South Africa recovered, the pace and test of English continued to grow nicely and China grew driven by new centers opened at Wall Street English and a good performance in English courseware.

That was partly offset by declines in Brazil and continued macro-economic pressures and the impact of business exits in the Middle East. The performance across the board is very much within the range we expected and communicated in January. In our key U.S.

higher education courseware business our performance and market trends in the first nine months are actually in the upper half of the range. So let's go into a little more detail on what we think has been happening in higher education course relative to the model we gave you at the beginning of the year.

As a reminder this is a slide that we first shared with you in January, the blue bars in this chart where our expectations for the components drivers of North American higher education courseware performance in 2017. The dotted bar shared a range of outcomes for channel inventory and returns behaviour.

We explained at the time that the upper end of the guidance range we have seen that retail inventory had stabilized and at the bottom end the channel inventory levels continued to fall. That range of outcomes led to an overall expected range for this business of plus 1% to minus 7%.

The year is not complete but the pink bars here show where we think each of the factors is likely to land in 2017 based on year to date trading. Let's take each in turn starting with enrolment on the left and working through to our updated guidance shown by the shading on the right.

We went to see detailed enrolment data until December but we believe that enrolment has continued to decline in the 1% to 2% range we've seen in recent years and that translates to around a 2.5% revenue drag on our business.

We have good data on OER adoptions and that data suggests that the impact from net lost adoptions will be around 1% negative in 2017 similar to last year but a bit better than our prudent original assumption of the 2% drag. Despite being slightly better than we'd expected OER continues to be something that we watch very carefully.

The secondary market which is primarily driven by rental and used books but also includes an incremental impact from counterfeit product is impacting us the way we expected it would driving a decline of around 3% to 4% as students continue to shift their buying behaviour.

Offsetting those pressures we see ongoing benefits from the transition to digital and the gradual shift in the market towards institutional selling. We've also seen some benefit from new additions and increased e-book revenue and that has helped to offset the negative of sacrificing some upfront revenue with our print rental program.

Returns are down considerably from last year's elevated rates although they not quite reach the levels we saw before the inventory correction. This gives us a one-time year on year benefit from the easy comparison created by last year's inventory correction as returns and buying behaviour normalize.

So now we would expect to land somewhere in the shade upper half of this range on returns. Putting all of this together means we were down just over 1% in this business to the end of September and early trading in October on both sales and returns has continued to demonstrate the same patterns we've seen to-date.

Although the key October to November returns period is still not complete and we do still have the second semester selling period in late December to come this puts us in a strong position for the remainder of the year.

We don't have perfect visibility into Q4 but the combination of current trading the actions we're taking to improve the channel and the timing impact last year of switching from gross to net revenue to sales incentive purposes means we do not expect to see a repeat of Q4 last year.

This is why we're narrowing our guidance to be upper half of the original range at this stage of the year although that still leaves room for further deterioration in Q4. We should also be clear that we're assuming that the underlying decline of 6% to 7% in demand in U.S.

higher education courseware that we've seen this year will persist for the next couple of years as the secondary market continues to impact the sale of new textbooks, but we're pleased that the business is performing as we expected and we are confident we have the right strategy in place to deal with that transition.

So here you have our guidance is updated in this morning's release. As we said we are narrowing to the top half of the guidance range. On our new guidance fully reflect the impact of the partial Penguin Random house and full [indiscernible] disposals.

Below the operating profit line the share buyback which will commence shortly will have limited impact this year so we haven't factored it into the guidance.

The debt buybacks we've completed recently have had a very high take up, as a result interest costs will nudge up a little this year but will reduce more than I've previously communicated in subsequent years so you should be modelling finance cost of £40 million to £45 million for 2018.

On tax we're revising our guidance for 2017 as we've seen some favorable outcomes on certain historical tax issues which means we now expect tax to be around 16% for 2017 and not 21% as previously communicated. This is a reflection of our prudent approach to tax provisioning which may result in further incremental benefit.

For EPS that means the new range will be 51p to 54p based on exchange rates at the end of 2016 and current exchange rates that translates to 49p to 52p.

The longer term tax modelling range of 20% to 22% that we've talked to you about in the past is still valid but been given current trends it probably makes sense to model at the bottom of that range would be obvious caveat that there is lots of uncertainty about the details of future tax policy particularly in our large market in the U.S.

And with that I'll hand back to John..

Thanks Coram.

As I have applied earlier in these results we're seeing some benefits from the actions we announced back in January the 20% to 50% cut in e-book rental prices has helped to increase e-book rental revenues by over 20% will ensure this option continues to offer compelling value and we are increasing direct to student marketing around this initiative for January back to school.

We signed 195 new institution wide direct digital access partnerships in the first nine months that's up 89% from last year, there are many, many more universities and colleges who would benefit from this initiative and so we're driving it hard.

The initial success of our print rental pilot means we're extending it from the original 49 titles and adding an additional 100 titles from January and the steps we've taken to manage the channel more actively shifting sales incentive from growth to net as Coram mentioned introducing the challenge on returns industry wide action on counterfeiting and piracy are all helping as well.

This is all part of transforming Pearson into a growing sustainably profitable company with a more reliable and predictable revenue and cash profile.

Our strategy is centered around the needs of our customers teachers and students, it's about combining our world leading content and assessment capabilities powered by innovative services and technology to support more effective teaching, delivering a richer learning experience to many more people and that drives three strategic priorities, one is growing share in our courseware and assessment businesses through digital transformation, two is investing in the structural growth opportunities we see and three in everything we do becoming a simpler and more efficient company.

On the first of those initiatives in higher education this means driving changes in our business model and channel to market and the formats in which we sell our products and you can see that on this slide here.

Over the next three years we expect to accelerate the shifts that are already well on the way from ownership to access to a healthier mix of channels with more Direct to Consumer, and Direct to Institution and from print to digital.

The work we're already doing to make these shifts is greatly enhanced by the evolution of our technology stack from its complex fragmented and siloed past towards a simplified scalable micro-services based architecture in the cloud the global learning platform.

This platform will enable us to lead, to innovate much more quickly, it will allow us to get future products and services to market faster to embedded data inside right across the business and create products that adapt to the personal needs of teachers and students in ways that help them to be more successful.

You will see all these characteristics in a way of new integrated digital products that come to market over the next two years some of which I talked about on our call back in May, but we are already increasing the pace of innovation, this is rather busy slide just shows some of the new features of our courseware lined up this year.

We are [indiscernible] and interactive, greatly improved user interface, more granular student data for instructors, new titles in business and economics and other subjects that are increasingly less textbook and much more education software.

We're also really focusing on improving the stability and reliability of our digital product, quality of our customer service and support and that has really helped us in this year's back to school campaigns and all of this made possible by the work we're doing to develop promote and hire the talent we need digital service oriented very focused on efficiency, changing how we run the business, how we engage with our customers, how we drive everything on the back of insight and research that we need to grow.

And these new digital personalized learning capabilities we're building also help with our second strategic priority which is investing in structural growth opportunities where demand is growing rapidly and some of which you see on the slide here.

Professional certification English language assessment, partnering with universities to power online degrees, virtual schooling, all big growth opportunities, all areas where we're focusing on how your digital course run assessment capabilities and our global footprint we can build sustainable businesses with real competitive advantage and this also brings growing synergies which are fully in-line with our preferred strategic priority which is to make Pearson a simpler and more efficient company central to that of course is our plan to take a further £300 million pounds of cost out of the business by 2020 as we discussed on August 4th and we've done a lot of work on those plans and they remain very much on the track.

So in summary today's results at the end of our biggest trading period of the year are encouraging, we're performing well competitively, this outlook in many of our markets is stabilizing and U.S. higher education courseware the more tactical actions we took at the start of the year helping and digital revenues are up 11%.

We're narrowing our guidance to the top of the range we gave at the start of the year but to be clear there is a lot still to do. The U.S.

higher education market remains challenging but we are making good progress in simplifying the company, improving efficiency and accelerating digital transformation and we're determined to ensure that Pearson is the leader in digital learning.

And this alongside our disciplined approach to financial and capital management will drive long term growth in earnings and dividends and create significant future value for our shareholders and for our customers. And so with that Coram and I are very happy to take your question. So Hue back to you..

[Operator Instructions]. We are first over the line of Thomas Singlehurst at Citi. Please go ahead, Tom. Your line is open..

So a couple of questions, firstly on the higher ed courseware you have got a very easy comp in the fourth quarter, I think it was minus 30 last year but then last year was - it was down quite a lot impart because of the some of the actions you've taken to improve the channel.

Can you just go through how we should think about that sort of that comp and should we just think about last year as a sort of normalized base in the fourth quarter just a bit more detail on what happened and how we should think about trends into the fourth quarter? Second question very easy one really, Wall Street English talk potentially of a sell obviously we'll have to wait and see what happens there but can you talk a little bit about what will happen with any additional proceeds from asset sales? Will they be used for buybacks in particular? Thank you..

So I think that there are couple ways of thinking about the comp, I mean firstly so the Q4 comp last year, firstly at this stage of the year last year we were down low double digits in our U.S. higher education business whereas at this stage of this year we are down 1%. So we're trading more strongly at this stage in the year than we were last year.

The second point I think is that the minus 30 that you referenced was impacted somewhat, we haven't quantified it but was impacted somewhat by the move in the sales incentives from gross to net and so I think in some ways it isn't artificially depressed comparative.

So the way that we've thought about Q4 trading going forwards is that we're minus one now the trends we're seeing going into October which is the start of the crucial returns period are very similar to the ones we've seen until now so there has been no significant change in the trend line and on that basis we don't expect to see a repeat of Q4 but the point I made in the presentation which I think is important to note is we could see a significant decline and given where we're at we would still land in the upper half of the regs [ph] so that's how we've come at Q4.

In terms of Wall Street English I mean we're just starting the buyback relating to Penguin Random House as you know that will take a little while to complete because of the volume restrictions that are placed upon us and obviously we haven't finalized the deal relating to Wall Street English.

So I think it's probably too early to comment on what we'll do with the proceeds but just to remind you the board is very clear on our capital allocation which is maintaining a strong balance sheet, investing in the business and returning excess capital to shareholders.

So if once we've completed the deal there is excess capital I think you should expect that that will be returned..

We are will now open the line to Nick Dempsey at Barclays. Please go ahead, Nick..

So when we look at slide six, if we add up all the puts and takes excluding the inventory correction it's slightly better than you previously thought but I had Coram say that minus 6% to 7% is still the underlying decline. Isn't the underlying decline a bit better than that this year or is OER a small factor so it doesn't really move the needle.

Second question, you mentioned [indiscernible] inventory levels have not quite reached levels seen prior to the inventory correction, does that mean that the channel could again be a positive in 2018 the growth calculation or is it since the inventory levels are lower because underlying demand has reduced? And the third question, rest of North America clearly coined negative in Q3, is that the assessment of the big driver of that and is this the last year of big weakness in assessments in your opinion?.

Hi, Nick. I will pick the third question and then Coram can come back on one and two.

You know yes, we did see some decline in North America excluding higher ed in Q3 that was entirely in line with our expectations for example in our school assessment business if you remember we had an emergency contract in Tennessee last year that we haven't got this year, but picking up on your point in our school assessment business this year we've renewed and extended contracts in Virginia, Massachusetts, Colorado, Minnesota and I think you've heard us talk earlier that we're now moving through strategy much more where we're willing to be the sub-contractor to other players rather than have to prime and that's hiding a lot of other activity where we have actually signed some very significant contracts all of which means that we are very confident that the school assessment business has now stabilized and we're in better shape in the years ahead, I will sort of start on your first point and then get Coram to pick up.

I mean I think what we've talked about earlier which is you know for '17 and '18 and '19 we're expecting underlying declines of in the 6% to 7% range with declining enrolments, continuing growth in secondary and a bit of negative impact from OER offset by growth in digital and the institutional selling mobiles and them by 2018 [ph] the enrolment starts to stabilize and the benefits are integrated digital strategy come through is it five or six rather than six or seven, I think we're in the rounds I think we would be cautious and say we are running the business on the basis that we're dealing with challenging underlying conditions in that market for the rest of this decade.

Coram did you want to pick up on inventory levels?.

Yes.

Just one thing I would add to the Q3 point two points perhaps Nick, one as I've said in the presentation the business is trading exactly in-line with expectations so there is no part of the business that has declined more than we were expecting and is being covered by what's happened in higher education just want to be really clear on that and secondly throughout the year we talked about the phasing this year where the first half would show the benefit of the inventory correction and the returns and the second half would show some of the pressure points that we've highlighted in our guidance on higher ed on testing and on K12 so I think to be clear it's doing exactly what we thought it would.

On returns inventory levels, I think what I said in the presentation was that returns have not quite reached the levels that they were at prior to the inventory correction. They are significantly down on the levels that we saw in '16 and '15 which is good news and that's the big driver of the narrowing of the range this morning.

Does that mean they could be better? Yes is the answer and I think we're encouraged by the trends but I would remind you that there is still a fair amount of volatility in this channel and those sales declines that John and I have both referenced will put pressure on the channel overtime.

So I don't think it's necessarily going to be a linear benefit and I think we should be prudent in the way that we think about it..

We're now over to the line of [indiscernible]. Please go ahead. Your line is open..

Few questions please, first of all 11% growth in the U.S.

higher ed digital is quite strong, can you comment a little bit more on what's driving that? I don't think the e-book rental can explain everything so perhaps a bit more color as to what you think is driving the 11% growth in digital? Secondly can you quantify the impact from you retiring the LMS market, how much drag has the learning studio and other products removal had on the nine months and lastly can you give us a North America organic revenue performance excluding the K12 courseware segment please?.

Okay.

I will pick up on the first of those Sammy, and then Coram will think about two and three, I think you are right, e-book rentals is a flagship but it's not the whole story in the digital revenue growth you heard me reference the big increase in the pace of innovation and the new features that we've introduced that is helping significantly because clearly in the sort of shift from analog to digital the more value there is in the digital, the more that helps revenue so there's a factor there as we add more features and more functionality more of the value in the digital supplemental models which is from print to digital so that's a factor and whilst as I flagged at the half year you should expect the digital registrations to be flat or down slightly for the next year or two until we unleash our next s-curve of innovation around the integrated digital within that the waging of registrations is to more high value registrations.

So the registrations we're retiring or losing are ones that are the less value. So that's also helping to mix from a revenue point of view that I think there's also another factor of play on the digital revenue growth that you wanted to pick up on..

Yes.

So on the digital revenue growth I think you mentioned that it's slightly counter-intuitive but the inventory correction actually helps the comparative last year, so when bundled product comes back with physical and digital components then obviously that impacts the revenue growth and that means we've got a slightly easier comp than you might have imagined.

So you've put that together with the driving of value through additional features and the mix which has shifted more towards the direct and unbundled and that really is the driver of the 11%.

In terms of the learning management systems, so learning studio we haven't put a number on it but just to give you an idea it's low double digits millions of pounds which is the impact on the year-on-year comparative that will ease but there will still be a drag next year from that I mean on K12 we don't breakout our North American segment but I will tell you that it's mid-single digits in terms of the decline and so a slight worse than North American overall decline year-to-date..

We will now go to the line of Ian Whittaker at Liberum. Please go ahead, Ian..

Just a couple of questions please, first of all sort of just coming back in terms of trend rates I mean if you look at Q3 in terms of North American underlying revenues they look as though Q3 was down 10% and it looks though the group was probably down between 6 and 7 just a point of clarification when you said about the trend rate so did you mean the trend rates of nine months or do you mean in terms of the Q3 in terms of continuation because obviously there's a big difference there between the first half and Q3.

The second question is just coming back on sort of visibility, sort of last year sort of if looking at my notes and look at sort of what you were saying sort of exactly the same date so that there was obviously [indiscernible] on the tsunami that would hit and sort of in fact comments from October suggest its better returns pattern.

Now obviously sort of you've got confidence enough to raise your guidance but I'm just wondering sort of when you do start getting an idea of when things would turn in terms of a sort of sudden return cycle what you could do in terms of costs because presumably this year with a high level of new additions you might be slightly more vulnerable to more returns coming through to the market and then the third question is just come back on U.S.

higher education I guess is sort of the same as the first one again you sort of talked about sort of declines 1% for the nine months. You talked about growth in the first half, we didn't know what the growth was. Glad you did quick calculation assume that the growth was let's say 3% that would imply that U.S.

higher education revenues are probably down around 7% in Q3.

Again when we're talking about trends going into Q4 sort of the trends you're talking about are you seeing more trends for the nine months or more for the Q3?.

Okay. I will let Coram pick up on the trend rates we are going at a lots of different directions there, so let him just sort of pull that through. And just in terms of [indiscernible] really just to repeat the point that Coram made earlier, we are down 1% in higher education at the end of September this time last year we were down 12%, 13%.

Q4 is now 40% smaller than it was two years ago so the ability for it to have a meaningful impact and we've still got a £30 million profit range in our guidance which covers us quite a wide range of contingencies. So anyway you look at it we feel pretty comfortable that we will be somewhere between the middle and the top of the range.

You're right that there is some benefit this year from the strength of the addition cycle and that's a good point to make.

It is obviously offset this year to some extent by the impact of shifting 50 of those new additions into the print rental program which obviously suppresses sales this year but should help in years two and three and whilst we all need to be very careful and cautious about inventory levels because as we move to a more mix of channels and become less dependent on campus bookstores although they remain really important strategic partners there's risk there clearly everything we're doing moving the sales incentives from gross to net, introducing challenges for returns the growth in the e-book rental program which for example has resulted in extra 120,000 units going through e-book rentals that's taking more physical stock out of the market all of which just serves to manage much more tightly the level of inventory.

So clearly the risk remain in this transition no one is denying otherwise but everything that we're doing is really trying to mitigate that as hard as we possibly can.

And then Coram do you want to pick up on the trend rate?.

So a couple of points Ian, firstly I'm not sure how you get to the 10% but I will tell you that the North American sales decline in Q3 was less than that and I just refer us back to the beginning of the Q&A where we were clear that all parts of our business of trading in-line with our expectations there is no deterioration that we were not anticipating and I think perhaps the key point we've been really clear all through the year that there is a unusual phasing effect in our numbers.

So in the first half you were going to see benefits because it's a light sales period with returns upside and then in the second part the structural pressures that we're seeing in higher ed that we've described the waiting tips towards the sales line and you would expect to see a decline and as John mentioned earlier you know there are comparative pressures in testing so the phasing is very much what we thought it would be and just on the trend lines they have been remarkably consistent all the way through the year that's what's striking about this year that trends on growth sales, trends on returns as we've described them have not changed dramatically as I said the waiting of those factors changes because as you go into Q3 it's a heavier sales period and then lower returns period..

Can I just check just because the sort of in the first off you did North American revenues were flat underlying, the nine months sort of it was down minus four obviously we don't know what Q3 revenues were.

If they are not minus 10 presumably though they're not much better than minus 10?.

So we are not getting into the breakdown of quarter by quarter revenue as I've said that they are down but exactly in line with what we're expecting except in higher ed we're actually we're trading in the upper--.

As I explained you earlier Ian, we rewarded emergency contract by Tennessee in July of last year that run from July to September but that had a big impacts on the revenues in Q3 last year and so the risk of [indiscernible] everybody just to repeat the point that Coram has made the reason we are able to narrow our guidance to the top of the range is that every part of the company net-net is performing in line with the expectations we set at the start of the year with the exception of U.S.

higher education courseware that is performing towards the top of the plus one to minus seven range that we set back in January..

Next we will go to Ruchi Malaiya in Bank of America Merrill Lynch. Please go ahead, Ruchi. Your line is now open..

Could you tell us what percentage of [indiscernible] new editions this year and then on the rental any titles what's the feedback that you've been having in the early stages from your rental partners or even from [indiscernible] with regard that and you clearly had enough confidence to roll out another 100 titles in January (audio gap) what the lengths is the contracts are with the rental only partners?.

So out of our 2000 titles you probably got a proportion upto 500 that are more of a blacklist nature so you're addition cycle is about 500 titles year.

I think at the back of the pack some of you've been asking for some idea with the sort of titles that we've put into the backlist I think on the deck we've provided some so they are across a whole range of subjects and disciplines as you sort of signaled in your question it's still early days.

We've learned a lot operationally from the work that we've done, feedback from faculty and students is initially positive but it is very early days in the pilot and the contracts exists for the life of the edition so in other words if it's a three year edition cycle then the book store has the title for the three years and to be clear at the end of those three years that physical book is returned to Pearson and is our property which is another way in which we are quite tightly managing the degree of inventory in the channel..

We now go over to Matthew Walker of Credit Suisse. Please go ahead, Matt. Your line is now open..

Just a couple of things please.

The thing is on the digital growth, you sort of went into some detail on that, does that imply if I read I think you said it was around 50:50 digital print does that mean that print is down slightly more than the 11% and would you see that kind of decline persisting into the next couple of years? The other question is Coram mentioned the tax rate, so would you be modelling around 20% modelling for '18, '19, '20 going forward? And also on Wall Street English there was a report I think it was on Reuter saying that someone a product or company was willing to bid $400 million or £300 million that is a multiple of operating profit of about 40 times, obviously the margin in that business is low and the revenues are growing I think overall particularly in China, but the registrations were pretty flat last year overall.

Why would someone pay so much for that business? Is that something where you were depressing [ph] profitability through investments so the margin should really be you know much higher than the £7 million level. Thanks..

On the third question, I think you will understand why I will resist commenting on any of our when we have something to announce on Wall Street English, we will announce it in my own view, Wall Street English is a great business with a great future it's just a business model direct delivery that doesn't fit with the full capability but it's a cracking asset that somebody will be getting their hands on so we will see how that approach is worked through.

On tax rate Coram I think you've already answered that but just I'm going to remind everybody what you said..

Sure. So you know I said in the presentation that the range of 20% to 22% for the next few years still holds given what we have seen this year and given the direction of travel of U.S. tax reform although it remains very, very uncertain. We think you should be modelling towards bottom end of that range. So I would go to 20%..

And then the impact was 11% digital growth - declining print level..

So the short answer is yes, but the max implied of print is down, more than that and I think that's very consistent with the way that we have been describing the structural pressure points in that business, the biggest one being the impact of secondary rental and used which falls completely on the 50% of the business that is physical.

So you would expect double digit decline in that business as long as you still have enrolment pressures some pressure from OER the most important the secondary effect which lands on the physical..

We are now over to Katherine Tait at Goldman Sachs. Please go ahead, Katherine. Your line is now open..

Two questions from me, firstly just back again on that digital growth of 11% and can you give us a little bit of an indication of how much and [indiscernible] proportion of that growth I think you just understanding how big that now is as part of your digital offering and also the trajectory going forward I mean should we expect 11% growth within digital to be a sort of new normal or are there other things that we should consider there? And then secondly you mention that you are watching OER very carefully, clearly it wasn't as much of a drag so far this year as you had initially anticipated, t but given that it has been an area of growth and I think one of your competitors has been making quite a bit of noise about their new OER platform at very competitive prices, is this an area that you would consider moving in case should OER adoption accelerate?.

First of all OER is an area that we have been actively engaged for many, many years, a lot of our products and services incorporate OER enable it, support it, so I think it's been an ongoing part of what we do.

Coram mentioned that we're are able to track every adoption that we're competing for on every campus across America and we track our performance both against traditional competitors and people moving to doing nothing and against OER and we have that view.

I think what OER is also doing is actually opening up the direct digital access conversations because what often happens is when an institution is considering OER is what they're really trying to do is focus on the access agenda for their students and so we can come in and offer as we can you know digital courseware that meets all the needs of students for prices in the range of $50 to a $100 of very high quality content supported by data analytics, supported by adaptive learning that's a very highly competitive offering and we know that from the research we've done both with university presidents, college faculty and indeed with students themselves.

So really important as Coram says that we keep a very watchful eye in OER but it does also open up new opportunities for us to have a different conversation with faculty and university leadership which we are doing and the Coram do you want to I mean point on what impact is that e-book rental growth having on our overall digital revenues and what's the trajectory going forward?.

So we've said that e-book rental revenues account for about 3% of our total higher education revenue and we said that they are 20% up. So you can see that that will have had an impact on the 11% but it's not the biggest driver.

In terms of the 11% growth and how you should think about that going forwards in a couple of minutes I think we outlined that there is a comparative effect here because of the inventory correction last year which depresses the comp and therefore I think increases that 11%. So I don't think you should think about it as the new normal.

We've said previously I think we still feel this is the case that you should be banking on mid to high single digit growth in digital revenues driven in the short from the value effect of adding increased features as well as the mix effect of selling more unbundled and direct digital product.

Over time you see an increase in registrations but that's really as we get the global learning platform in and drive the next s-curve upgrade.

So I hope that gives you a sense of how to think about it going forward?.

We are over to Giasone Salati of Macquarie..

Just two questions please.

If you find that Pearson was tracking ahead of the cost plan at the end of the year, would you prefer to range is that? Or would you like that flow through the bottom line? And second question, it seems like the school assessment headwind was quite heavy in 2017 and I think qualitatively you are saying is going to even reverse into 2018.

Could you give us - could you size that swing?.

On the second point, I didn't mean to give you the impression that the trend would reverse. I meant to suggest clearly that it will stabilize. So I think with contracts that we have - because I mentioned the contracts we've on. We lost Indiana, but then we've won these other contracts.

So sort of net-net with the Tennessee effect flash through, we're in a good position to stabilize.

And Coram, do you want to pick up on the first?.

Just to be clear on the cost saving plan, you see this in our slide deck that John presented the slide. The impact in 2017 is largely one-off costs, it's £70 million of one-off costs. And there are really 2 areas that's focused on.

One, continued investment into our systems and platform changes to help us drive of transformation of the back-office and the significant rationalization of our property footprint. And there are no real benefits that flow through this year relating to either of those. They start to come through in '18.

So it's really a theoretical question, because I don't think we're going to see any major benefits from the plan in '17.

If we were to see significant additional benefits in '18, I think we would make the decision based on where the business was trading year but as I said in the past that the cost saving plan is intended to flow through straight to bottom line. And we feel we're making the right level of investment in the business going forward..

I think it's also worth making the point that compared to the previous the benefits are very much phased over '18, '19 and '20, as you see on the slide. And it's also important for people to note that this is very, very significant of the taking.

It depends on successful learning platform, delivering on our enabling program, which is rationalizing something like 50 different finance and HR systems on to 1 platform, dramatically upgrading the direct-to-consumer experience we can offer us through Pearson.com. It requires us to retire another couple of thousand technology applications.

So we're very confident that we can deliver this. We have done a lot of planning and implementation, but there is a reason why benefits are phased in the way they are..

Okay. And, if I may, just follow-up on the first one on that assessment headwind in 2017.

Have you quantified the impact on group organic growth?.

No, we haven't broken it down..

Or are you willing to do that?.

I don't want to get into individual components. But I think John's point is the key one, which is the anticipated this. It's a combination of '15 and '16, plus Tennessee and we should see that business stabilize going forward..

We are now over to [indiscernible] Capital Management..

I just got a question to your comment on the inventory correction, where you said this is a one-time effect.

So if you take up this one-time effect to going forward in the future, do we have to think about that the revenue - net revenue range would be more on the negative side like minus 7?.

So that is the right way to think about it. Both John and I have been clear that maybe the underlying structural pressures in the business driver decline minus 6 and minus 7. The reason I described the inventory improvement as onetime is because there is volatility and uncertainty in the channel.

But as per my answer to next question earlier, I think it was, if returns were to reduce further, you will see that flow through in a further benefit. I just don't think we should bank on that for the stage..

Just to be totally clear, that's the sort of rate of decline we see in the underlying declined stepping out inventory correction in '17 is what we see in '18 and '19. But by 2020, we start to see college enrolment stabilize. We start to see the full impact of the growth in the secondary market on the back of rental sort of mature.

And we start to see the benefit of our next wave of innovation in the integrated digital models come through. So from 2020, we do start to see this market stabilize and the start to grow organically again..

Okay. But there is no changes to be expected in the kind of return policy you all out to bookstores.

I understand you have given them more flexibility on the return and lowered the inventory, is there further action to be seen?.

I think we're actually trying to do the opposite, which is to remove - reduce the amount of inventory in the channel by shifting our own sales incentive plan for our sales force and growth in that charging bookstores for returning inventory, shifting to incentivizing eBook rentals, moving to print rentals program, accelerating digital.

All of this is deliberately designed to reduce the amount of inventory in the channel, which is why, as we say, should be lower in the future than in the past, but it's not eliminated. So you really get through the next phase of the analog to digital shift..

Okay, that's great.

So we should consider it is not any further inventory correction going forward in this kind of scale?.

You should assume, but there is the scope for a further inventory correction as we shift the balance of channels more towards direct-to-consumer and direct-to-institution, but everything that we are doing is determined to minimize the likely impact of it..

We are now over to Patrick Wellington at Morgan Stanley..

I have three questions the first one is to the last one actually. But did I catch Coram said earlier, that the fourth quarter guidance are now sort of further deterioration in returns.

In other words, could you are fourth quarter guidance given you were minus 30 last year and your loving for a deterioration in returns, could guidance we conservative? Secondly, this is asking the question about the minus 6 or minus 7 underlying mix different way.

Basically, going to ask where you can that and in the context of your, if your market share performance minus 1 after 9 months will turn out to be worse than the other big players in the industry and through lower returns, bit of outperformance, can you be minus 6, minus 7 next year? And my third question is on dividend.

The earnings the range on currency is £0.49. I think most people are going for £0.15 dividend, that means you have got 3.3x dividend cover. I think you said the net debt will be well below over £1 billion by the year end.

Is Pearson company that needs 3.3x dividend cover? Or are we all forecasting very different?.

Okay. Thanks, Patrick. I'll pick up in the first one then Coram will pick up third. As you have heard us say several times, does allow for further deterioration. Is that conservative or not? We will find out in January. Could we do better than negative 6% or 7%? Well, we could.

And you bet that every person in Pearson is doing everything that possibly can to ensure we do better. In market share terms, I think, as you know, we track this on a rolling 12-month average, looking at how we are performing in sales of new courseware against McGraw-Hill, McMillan, we will show data with the third party who back.

At the start of the year, we were trailing towards the bottom end of that 40% to 41% share that we normally trade within. On the basis of the September data, think it's fair to say that we are trailing at the top end of that range.

And then Coram, do you want to pick up on dividends?.

Dividends. So just a point of clarification. If you think about cover, excluding penned Penguin Random House, and I think we have said we are keen to be comfortable recovered, and have a sustainable dividend. If you, excluding Penguin Random House, it's an economic asset, which will not be a part of economic asset forever.

So just want to pick up on that point. To the substance question, Patrick, typically 1/3, 2/3 split has been a good way of thinking about the Pearson dividend between interim and final. And I think that's a good way of thinking about the base level of dividend.

But we have also said previously that if we have a good second half then you would expect the board to reflect that in the dividend and therefore, maybe increase it a little above that 2/3s normal split. And obviously, that's a decision that you're not going to take now because we're only 9 months in.

But I'm sure that the board will take that into account when they set in the final dividend, given that we pointed towards performance in the upper half of the range..

We have a time for one final question, and that's follow-up from Sami Kassab from Exane..

Are you including title on consignment model from 49 to 150 for this Can you put context into how this year of fewer lease or your revenues that you are shifting to rentals, 150 that's what's share and what the pace of transition you think of adopting there? Do think that all the remaining pretax will have transition by 2020?.

So I'm - sorry, if you work on the bases that roughly speaking each year we're publishing sort of 500 new additions and we essentially move from 10% to 20% with the scope, obviously, to do more for titles that are released in fall, that will be proportionately less revenue than it is of title volume. So be less but not usually, significant leap.

So and I think we are still calling this as a pilot for reason. The initial results from September back-to-school our encouraging enough for us to extend it bit more titles but we want to see how it goes and is going to take some time to evaluate the full financial impact.

To remind you, we have done this on the basis that financially phase over the 3-year cycle but it hurts revenue in year 1 and we make it back in years 2 and 3.

But back to the point we've made several times on this call, it gives us great visibility and it gives us much greater control of inventory stock in the channel, which is vital, as you're making this transition. I think that's it for today. Thanks, everybody for joining us. Joe, Tom and Angeli have been us with the call.

Get around to take your questions to the rest of the day. Thank you for your ongoing interest in the company, and look forward to catching up with all you soon. Thanks..

This now concludes the presentation. So thank you all very much for attending, and you can now disconnect..