Pearson PLC

LSE:PSON

Earnings Call Transcript 2020-Q1

[Operator]

Welcome to the Pearson Q1 Trading Update Analyst Call. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present John Fallon, CEO; and Sally Johnson, Deputy CFO. Please begin the meeting.

[John Joseph Fallon, CEO & Executive Director]

Good morning, everyone. As he just said, John Fallon here. Thanks for joining us this morning. And I hope you're keeping safe and well. I am joined, at a safe distance of course, by Sally Johnson, who will formally succeed Coram Williams as our new Chief Financial Officer after today's AGM. I'd like to take this last opportunity to thank Coram for all he's contributed to Pearson in various guises over the last 18 years and to welcome Sally to her new role as she steps up from Deputy CFO. I know she's going to make, indeed is already making, as we work our way through these extraordinary times, a great CFO.This is our regular Q1 trading update, so let me start with the headlines, which Sally will walk you through in more detail shortly. As a direct result of COVID-19, our sales through the end of March, which would otherwise have been broadly flat, are down 5%. We are performing in line with the framework we set out on March 23, and we are reducing costs in the businesses most affected to help offset some of the impact. And so whilst this may be our regular Q1 trading update, these are, of course, quite irregular times. And we are, as you would expect, doing all we can to safeguard the health and well-being of our employees, learners and customers.As we deal with the pandemic, Pearson is in a strong financial position with a healthy balance sheet, low net debt and good liquidity. That financial strength means that the Board is recommending the payment to shareholders of the final dividend for 2019. And our financial strength also enables us to deploy all our people and resources to support our communities as the world's learning moves online at an unprecedented speed and scale. We are redeploying, not furloughing, colleagues who can't currently do their regular job to where we see the biggest customer needs and opportunities. And I'm very impressed with the speed, spirit with which Pearson's colleagues, working with our customers, partners, have rallied the cause.To share just a few of many examples, obviously, this all started back in January in China and then moved on to Italy. And across those 2 countries, we now have over 1.2 million teachers and students who've been using our online platforms containing thousands of interactive lessons. Since then, we've provided 45,000 hours of online tutoring to American college students, enabled 100,000 school students to access virtual schooling. We've seen 350 parents in the U.K. turning to the Math factor to help them with their kids' math school work. And in the last -- in the first 2 weeks since its launch, our Global Online Learning hub has already been used by over 500,000 times, and that's scaling by the day. And we have seen a surge in March in applications for our Connections Academy, our virtual schools network, compared to 2019. I could give many other examples, but just to quantify, we have now provided somewhere in excess of GBP 25 million worth of courseware and services for free to support our customers and our communities as they respond to this unprecedented challenge.But we're also moving quickly to scale up new platforms and products. For example, there are millions of people here in the U.K. and worldwide that have been impacted by the pandemic with potentially huge implications for the jobs market. And that's why today we're announcing plans to launch UK Learns, a portal with a richly curated portfolio of employment-enhancing short courses personalized to meet the needs of the furloughed and the unemployed.When the threat of the pandemic eventually eases, it will be even clearer that the future of learning is increasingly digital. So as well as I've described, scrambling quickly to support our customers and communities through the crisis, we also continue to invest for the longer term in the platform, the products and the services that will help make the next generation of digital learning a reality. We're making good progress against an exciting road map of new digital products and services that we shared with you in February.And also looking beyond the pandemic, we do see further opportunities to make Pearson a simpler and more efficient company, bringing further significant cost savings next year. Sally will talk you through that in more detail as well as giving you a more thorough update of our Q1 trading. And then we'll both be happy to answer your questions.So Sally, over to you.

[Sally Kate Miranda Johnson, CFO & Executive Director]

Thank you, John. As John said, March results were in line with the framework we set out in our COVID-19 update on the 23rd of March. Underlying revenue is down 5% in the quarter, with good growth in Global Online Learning offset by expected declines in our other segments. Covering each segment briefly. Firstly, Global Online Learning revenue grew 6%, driven by good growth in enrollment in our Virtual School. Online blended learning is likely to be the most material short-term commercial beneficiary of the increased interest in online learning, with 1/3 in applications in March compared to 2019 as many explore full-time digital learning for the first time.In Online Program Management, revenue grew slightly. As I said at our full year results, we have deliberately slowed the rate of growth in OPM in order to transition to a new operating model.Global Assessment revenue declined 3% due to the closure of testing centers since mid-March in our Professional Certification business, along with a decline in Clinical Assessment given school closures, offset by growth in Student Assessment.We estimate that the financial impact of professional assessment closures will be to reduce operating profit on average by approximately GBP 20 million to GBP 30 million for each month the centers remain closed. We expect to open test centers in a phased approach and a test run throughout the year. This provides time for pent-up demand to be partially realized in the last part of the year, although any ongoing social distancing will also impact it.In Student Assessment, revenue was slightly favorable. However, a number of states and boards have waived testing for this year, which will impact our 2020 operating profit by around GBP 20 million after mitigating actions. We continue to believe there could be further state test cancellation, which would further impact on operating profit modestly.In International, revenue declined 10% as a result of school and test center closures impacting courseware sales and the Pearson Test of English. There was also a phasing impact on courseware sales in the U.K. We expect to see a modest impact on profit due to the cancellation of GCSE A level and BTEC testing following the announcement made by the U.K. government. The full year impact on International courseware is uncertain, especially given that the period for which education institutions may be closed is unclear and our sales periods are seasonal. We expect some impact from physical site closures in our Higher Education institution in South Africa and our franchise and sistema businesses in Brazil.North American Courseware declined 10% due to the expected continuation of trends seen in U.S. Higher Education in 2019 as well as a decline in courseware in Canada as a result of school closures. U.S. Higher Education was down slightly less than 10%. Print revenue declined as expected, returns are in line with expectations and there is a small impact from the closure of campus-based bookstore as a result of COVID-19, which we expect to continue into the second quarter due to the escalation of the pandemic.Q1 continues to be a small quarter. And this year has seen less benefit from physical sales in Q4 shifting to digital sales in Q1, given the extensive decline of print in 2019. To partially mitigate the impacts of COVID-19 on operating profit, we have identified actions to reduce discretionary spend this year, whilst ensuring that Pearson is still well placed to benefit as the macroeconomic landscape recovers.On a longer-term basis, the progress we have made on our simplification and digital transformation has enabled us to identify a further GBP 50 million of cost savings, which will benefit profits from 2021 onwards. We have a strong financial position with low net debt and strong liquidity. At the end of March, we had GBP 800 million of immediately available liquidity. After quarter end, we received GBP 530 million, as we completed the sale of our remaining stake in Penguin Random House. And we have recently secured material new lines of credit to enhance our existing revolving credit facility.The Board also took the decision to pause the share buyback that we initiated earlier this year as a prudent measure given the current pandemic. These actions, alongside a short-term moderate negative impact to the business, enables us to navigate both the COVID-19 pandemic and to continue to drive our digital transformation.And with that, I'll hand back to John.

[John Joseph Fallon, CEO & Executive Director]

Thanks, Sally. Just before we take your questions, a quick reminder. Like many of the listed companies and for reasons you well understand, we have changed the format of our Annual General Meeting today, and we're proceeding with the minimum necessary quorum of shareholders in order to pass the resolutions. And in addition to Sally being appointed the Chief Financial Officer, today, also very pleased, as you may have seen the announcement yesterday, Andy Bird, the former Chairman of Walt Disney International, will join us as an Independent Nonexecutive Director on May 1. Andy brings a huge amount of highly relevant experience and a real passion for education to what is already a strong and engaged Board.So just to recap very quickly on the headlines, our financial performance was in line with expectations to the end of February, with COVID-19 impacting our businesses in March. We have a strong balance sheet and ample liquidity. We're managing the business very actively in these highly uncertain times, cutting costs and conserving cash in those that aren't able to operate as normal and redeploying and scaling up in the areas of growing demand. And as you heard from Sally, looking ahead to 2021, we will deliver a further GBP 50 million of annualized cost savings and launch the next-generation of digital learning products that, post the pandemic, should be an even greater demand. And with that, Sally and I will be very happy to take your questions.

[Operator]

[Operator Instructions] And our first question comes from Katherine Tait from Goldman Sachs.

[Katherine Tait, Associate]

Firstly, maybe I could just ask on the OPM side. I appreciate that this is a business that you are sort of looking at the business model and how it can sort of shift to make it more profitable going forward. But I guess my question is, is now really the right time to be, I guess, doing that sort of more internal process of looking inwards when there's so much demand externally from universities to make this emergent fees or a very drastic shift online? Is this really the right time to be taking the foot off the gas in terms of engaging with those universities? Is there a sort of longer-term risk that you'd perhaps lose share, given that we're facing such an unprecedented point in time where these universities are looking to shift online? So just keen to understand a little bit more there.And then my second question is just on Virtual Schools and whether or not the sort of boost that you're seeing at the moment is related to the sort of longer-term programs that -- my understanding was that your Virtual Schools product were very much for students that we're looking to home school, so on a more permanent basis. Did you expect that this sort of near-term boost will phase out or come out once the sort of lockdowns and things like that normalize? Or is this sort of more structural shift that we should expect kind of persist going forward?And then finally, perhaps just on the shape of the group. We think there's sort of 2 digital areas that you sort of alluded to that are going to continue to benefit from this shift to digital that's being accelerated by the current situation we find ourselves in. Those 2 businesses made up about 15% of revenue last year. Is that too little? How are you thinking about scaling up those businesses? Or are you still pretty happy with the overall shape and footprint of the business?

[John Joseph Fallon, CEO & Executive Director]

Thanks, Katherine. Well, I'll deal with the first and the third of those questions, and Sally will pick up on the one around Virtual Schools. So I mean, first of all, on the shape of the portfolio, yes, we are happy with the shape of the portfolio. We have strong balance sheet, ample liquidity, plenty of scope to invest organically. And that's what we're doing in both those businesses, and that's the way that we'll continue to do so.In terms of your first question, I think we should sort of separate 2 things. First of all, we were and are actively managing our portfolio of university partnerships, and we are bringing some relationship to an end so we can focus on others where we see the opportunity for a bigger and more strategic engagement. And that's what you see in the revenue performance in Q1 and what you will see for the rest of the year. And that's entirely consistent with the guidance we gave back in January. We're doing that so we can build a more profitable, more sustainable, faster-growing business, and that's reflected in the guidance we've given you for these businesses in the medium term.But I didn't think I've left you in any doubt, but just to be clear, we are deploying all the power of Pearson to help every university partner who wants it to help to scale online. And we have the scale and competitive edge to do that in a way nobody else can because we can bring our online partnership skills to bear, we can bring all our digital courseware to bear. As you heard, we're offering all of our online tutoring capabilities. So we are all in with our university partners. And I have to tell you they are very welcoming, very supportive. And this has just unleashed a whole amount of energy, creativity, spirit of partnership and collaboration both within the company and externally, which I am very proud of. So if I didn't communicate that as clearly as I should. Please do not be on any doubt now. Thanks, Katherine. And then Sally will pick up on the Virtual Schools point.

[Sally Kate Miranda Johnson, CFO & Executive Director]

Katherine, yes, as you say, we've seen huge increased interest in our Virtual Schools business and where we've received applications and enrollments for the '19/'20 year, where we've been able to take them. Of course, looking forward, that interest in applications needs to turn into enrollment for the '20/'21 year. I think we'll see people exploring this for the first time and realizing it's something that can work for them.But I think the most important point to note is that the availability of the sort of schools on a state-by-state basis. I think you probably know there are some states which don't have virtual schooling as things stand at the moment. And I think states are now looking at the possibility for virtual schooling, probably wanting to prepare themselves should such an event happen again into the future. And therefore, more open to virtual schooling. And therefore, the possibility opens up to a greater number of students in those states to engage in virtual learning probably for the first time.

[John Joseph Fallon, CEO & Executive Director]

Thanks, Sally. Thanks, Katherine. Where are we going next?

[Operator]

Our next question comes from Tom Singlehurst from Citi.

[Thomas A Singlehurst, MD & Head of European Media Research]

It's Tom here from Citi. Three, if it's okay. Firstly, on the testing. I mean, obviously, from an economic perspective, it sounds like getting the testing business is back up and running as quickly as possible is the primary sort of driver. I just wonder whether you can give us a sort of sense of sort of geographic shape. I mean if lockdown comes to an end in the U.S. and the U.K., is that -- does that mean the business largely is back to normal? Or can you try and quantify which are the important markets to get back up and running? That was the first question.Second question was on Higher Ed cost. I appreciate we won't really know until September, but one of the concerns that has really taken hold is that universities will be under pressure, in particular in the U.S. A lot of investors, I think, are looking at that through the lens of risk, falling enrollments and then less people buying courseware. But can you talk about some of the puts and takes there? I mean can you quantify the number of international students and whether that's particular risk variable for you? And can you also talk about the interplay between sort of public universities and the for-profit and community college channels?And then the final question is the buyback you've taken out, what is the trigger for putting it back in?

[John Joseph Fallon, CEO & Executive Director]

Okay. Thanks, Tom. So Sally, do you want to pick up on the first and third of those questions, the one around testing and the other on the buyback, and then I'll answer the question around Higher Ed Courseware.

[Sally Kate Miranda Johnson, CFO & Executive Director]

Yes, sure. So for testing, I think you're probably picking up particularly on our professional testing centers. Obviously, we had to close those in the middle of March. And then there's going to be a phased return to those centers across the world with different times. So for example, in China, centers are starting to open back up now. As I think we've mentioned, we do have some centers that have opened back up in the U.S. in order to certify health workers. We're looking at opening some centers back in the U.K., for example, for those GCSE driving theory and for ambulance workers. So I think there'll be a phased return over time.One thing that we do know is there is a pent-up demand. We hear that from our customers every day. People are really keen to take certification and tests for the things that they've been studying for, for some time. If there's still social distancing when we open back up, which seems likely, then we will manage those centers to make sure that we protect people, both our staff and the people coming in to take tests, but we will also make sure we open those test centers for extended periods of time so that we can help our learners to take the qualifications that they so much want to. On the share buyback, I think we are clear this was a pause to share buyback. And once the situation becomes clearer and the outcome to the year becomes clearer, we will look to that decision and restarting the share buyback at that point.

[John Joseph Fallon, CEO & Executive Director]

Thanks, Sally. And just expanding on that first question on testing, I mean too easy to make a broader point. What times like this do is really sort of unleash speed, innovation, creativity. So for example, I think as Sally mentioned, we have the best part of 200 professional testing centers in the U.S. back open now to provide the ability to get thousands of health care workers into the front line very quickly. And the benefit of doing that, of course, more widely, as well as the societal benefit, is we're learning as to how you can operate those centers effectively in a social distancing environment. So that will help us as the sort of lockdown eases. And likewise, something we've been worried about, pushing on for years, which is how we do remote proctoring, we've seen a 350% increase in use, and we've redeployed a lot of our test center administrators from working in-center to acting as remote proctors. So there's a lot of opportunity here. And we're learning a lot so we can respond quickly to what is going to be, obviously, a highly uncertain and rapidly changing situation.On your Higher Ed Courseware point, I mean, yes, I think there is -- clearly, there is a concern about what will happen with enrollments and around sort of international students. I think it's fair to say that the universities that have the highest number of international students are not the ones that tend to be our biggest customers. So if you remember, most of our revenue comes from 2-year community colleges, 2- and 4-year for-profit colleges, and obviously, 4-year public universities. They tend to have much larger numbers of students who live locally. And I think what we're seeing -- we're talking every day to large numbers of college presidents and working out how we can help them, how we can best help them. And I think what we're seeing is that most of them are planning on the basis that there'll probably be some sort of hybrid for back-to-school in the fall. That there'll be some students, perhaps who live locally, who are on campus, they're probably doing their lab sessions, where you can do social distancing. They're probably doing tutorials, which you can manage through social distancing. But they're not going to be sat in 500- or 1,000-seater lecture halls. And frankly, they don't need to. Because using our digital courseware and a lot of other capabilities, that part of the learning process can be done remotely and safely in a virtual environment. So I think we are -- clearly, it's a very uncertain set of circumstances, but I hope that gives you a bit of a feel for how it will play out. And I think as important is to think about 2020, is to think about 2021, because this is an incredible opportunity for us to build much deeper and more strategic partnerships. And what's interesting is, actually, this is where inclusive access comes into its own because we've built sort of enterprise-level partnerships with universities around making textbooks into digital courseware, enable them to access it at better prices, but then that provides an opportunity to expand that relationship in a much more strategic way. So yes, there will be short-term challenges, but I think it will be something of a hybrid for back-to-school. And the better the job we do in supporting our customers now, the better it will be for us in '21 and beyond.

[Operator]

Our next question comes from Matthew Walker from Crédit Suisse.

[Matthew John Walker, Research Analyst]

First of all, could you say, just for Q2, how many test centers do you have in total? What percentage will be closed in Q2, do you think? And for the rest of them, what do you think the utilization level will be? And maybe give us a bit more color about the business model there. Is it based on the absolute numbers of tests taken? And are some tests more valuable to you than others? That would be helpful.And then maybe one for Sally. On the discretionary savings in 2020, how much mitigation of the fall in international profits can you do through cost savings in 2020? And then one last one for John, which is, obviously, you said you're deliberately slowing the OPM transitioning to a new model. Can you remind us what is the new model for OPM? Why are you slowing it? I mean I know, for example, that -- or I thought, for example, that one thing you wanted to get from your OPM partners was the ability to use student leads that you generated from one partner to -- if they didn't take up that partnership, to use them for other partners. And some people are okay with that, some people aren't. What are the other elements of the transition to the new model? And how long until the growth recovers to the level, 10% or whatever, that we would normally expect in OPM?

[John Joseph Fallon, CEO & Executive Director]

Yes. So Sally, do you want to pick up on the second question?

[Sally Kate Miranda Johnson, CFO & Executive Director]

Yes. Sure. So the discretionary cost savings that we have in place across various things, some costs relatively easy, no one's spending any money on P&E at the moment. We're obviously focusing -- whilst we're not furloughing staff, we're making sure that we're focusing and redeploying people, which means that recruitment isn't as high as it would have been in other circumstances. And with things like marketing spend with such pent-up demand across the piece, that probably isn't the ROI on marketing spend that we would normally see. So that enables us to just take very sensible decisions around our cost base.International courseware, how that might play out over the next few months given the varying dates that return -- that schools would return to school anyway and the impact of the pandemic is uncertain, but we're working to offset as much of that with cost savings as we possibly can.

[John Joseph Fallon, CEO & Executive Director]

Okay. On your first question, Matthew, I think we have something like 22,000 professional testing centers that we either operate directly or we operate with partners around the world. So as you can imagine, it's quite hard to answer your question without having a detailed view of how global lockdown and social distancing will be eased on a country-by-country basis. I think what I can say is if you think that if you are operating a center using social distancing, then let's say you've got 10 seats in the center, when you reopen, you've essentially got 5 -- you've essentially halved the capacity of the center. So that's sort of how we are thinking about it. So then we have the job of meeting the demands of large numbers of customers who want to see the ability for their candidates and students to take the test. So if you've halved the capacity of the network, this is where the sort of innovation and the testing comes in, so those centers are normally open for 8 to 10 hours a day. Can we work with our partners and the test takers that we open the test for more hours a day? And can we complement those tests with much greater use of online proctoring? And in some cases, can we work with our testing partners to shorten a test? So if there's a professional test that often might take as long as 9 hours, if just the regulatory body feel that for a certain period of time, actually if we could shorten up test to 5 hours, we can still be confident of establishing the level of competence that they can then safely practice. So there's not an easy answer to the question, but I hope that gives you a sense of the way that we're thinking about it and how we're trying to get as much -- stand up as much capacity as we can, as quickly as we can. And then on the sort of -- on the OPM. I mean let's just be clear here, all that we've done really is there are a relatively small number of legacy contracts with universities where we may have been just running one program for them. And frankly, that's not the way to build a strategic relationship. So really, what we're trying to build is more enterprise-type relationships of the sort that we have with Arizona State University or Maryville or that we're developing with King's College here in London, or a sort of a deeper relationship that at least approaches a whole business school or a whole suite of programs. And that's a much more effective way for us to operate. And frankly, it's a much more effective way for the university to operate.Some other examples of transitioning to the new model, Learn U.K. that we are launching in the next few weeks actually is built on a pathways framework that we developed in our U.S. business. And how this essentially works is we bring together something like over -- for the launch of this program, 200 courses, some of them from within Pearson, others generated by a range of partners. And the learner has 3 choices. They can browse, they can search or they personalize. And so they come in and say, "I have these career history and skills. I'm interested in these potential career paths or new jobs. I have this amount of time that I can study, and I have this amount of money that I could spend." And it then curates and personalizes and advises, and then direct them to the relevant partner.Another example is all of our first year introductory courses at American universities that we built on the back of our major introductory textbooks, we have built purely digital courses, self-paced, which are regulated by regional accrediting bodies in America. So you could see, for example, how universities struggling with this challenge of are students going to be on campus or are they going to start to study the first year virtually, can integrate that into their offering. We've also taken some of the fantastic courses that exist in edX, huge wealth of range and curated them in a way that is much more accessible and usable. And that, too, can be bundled with the universities' own offerings and partnerships. This is a much, much richer, higher-value business, where a world -- which is what the old world of OPM, where essentially we were identifying, recruiting and enrolling students on the behalf of university. That's still an important role. But in the spirit of the world's learning company, there's a huge amount of more value that we can add. And that's the way we are building and repositioning the company. And that's why, after a pause this year, I think in the guidance we gave you in February, we talked about the medium-term outlook, you will start to see the growth of the business accelerate from next year and then onwards.

[Operator]

Our next question comes from Nick Dempsey from Barclays.

[Nicholas Michael Edward Dempsey, Research Analyst]

I've got 3 left. So first of all, do you -- can you comment on the kind of share you might have lost in North American Courseware, particularly in January? I mean back on the 12th of February, Cengage was predicting flattish growth for calendar Q1 2020. They'd already seen January, which is a clearly important month. I appreciate what you're saying about campus bookstores in March, but it seems a bit unlikely that, that would be able to massively change their expectation for that quarter. So yes, if you could talk about how you've done versus them in Q1?Second question, the GBP 50 million of savings that you're flagging for 2021 on a structural basis, when we're forecasting for 2021, how much should we think about just adding GBP 50 million to operating profit because those savings weren't there before? Or to what extent are those going to be eaten up by elements of investment or costs coming back from the 2020 savings? So yes, how much should we think about on a net basis when we're forecasting?And the third question, just in terms of U.S. student assessment. I think you've talked about 50% of that business being -- supporting the providers of the SAT and ACT tests. And you were talking about that as fairly resilient because they get taken through the year. Now as lockdown kind of persists, could we expect some negative impacts for both businesses and therefore the knock-on for you as a provider?

[John Joseph Fallon, CEO & Executive Director]

Okay. Sally will take the second and third one, and then I'll come back and pick up on the first one. But just before -- there's a little bit of a cut on the line. What percentage of our school assessment revenues did you think came from...

[Nicholas Michael Edward Dempsey, Research Analyst]

I thought it was somewhere just shy of 50%. I think someone might have said before, but I'm guessing a little bit.

[John Joseph Fallon, CEO & Executive Director]

Yes. I think it's significantly lower than that. But I'll let Sally pick up on the school assessment and the cost-savings point, and then I'll talk about our competitive performance in Higher Ed.

[Sally Kate Miranda Johnson, CFO & Executive Director]

Yes. Thank you. So the GBP 50 million of savings, so that is a program that we were working on in February and in March before the pandemic took place. We decided to put that on pause in the circumstances and given the uncertainty, but we are picking up and implementing, taking those actions now through the rest of the year. So if you had a model for 2021, those GBP 50 million of savings are on top of that model. The savings that we are making this year are on discretionary costs and/or to protect profit in this year. So I would look at those 2 things differently.On U.S. Student Assessment, the revenues that we see across the year are broadly in sort of 3 buckets. First of all, the work that we did in the first part of the year, which have been billed with billable given the progress that we've made for our partners across that time frame. And actually, the work that we do and bill at the back end of the year is for next year's testing. So it's a proportion of that, that is then impacted by people deciding to either defer or not to take tests. And I think as we've said, we see from the decisions that were already made a GBP 20 million impact to profit for 2020, and then a risk of further impacts, but those are pretty modest in turn. So I think we talked about GBP 15 million plus and a possible extra GBP 15 million in our COVID relief, I think you'd probably get to the same place. Today, it's just some of those are now more certain.

[John Joseph Fallon, CEO & Executive Director]

Okay. Thanks, Sally. And then, Nick, on your -- on the first question you asked. So end of April brings us to the end of the spring back-to-school season, which is the sort of second semester. And really, that pretty much flows through from the decisions that colleges made for the fall back-to-school. So I think what we told you back at the start of the year, that is a result of the major changes that we've been making in the business and the disruption that brought in its wake. We thought that we lost about 1 point to 1.5 points of cost reductions. And I think that will have flowed through to the spring adoption season as well. The good news is that we are now through the supply chain challenges that we're still flowing through are now done. So we have seen actual returns fall significantly in the first quarter of the year and carrying on into April as we stated in our opening comments. And our new sales force model is going very well. So if you remember, we've got a smaller sales force than we had previously, generalists, so they sell across the whole of the portfolio. But the early indications is we are performing well, and we would certainly expect to at least stabilize our competitive performance before back-to-school. And you never know, maybe we might actually start to claw back some share, but it's far too early to say that yet. And the other point I would make is that, clearly, with our balance sheet financial strength, we're not having to cut the salaries of our sales force and we're not facing major disruption as people have to, in the years ahead, do the things that we've already done. So we've taken it on the chin. We took the pain of losing a bit of share, but that's behind us now, we're in better shape. And I think, over time, you'll see the competitive performance improve again.Where should we go next?

[Operator]

Our next question comes from the line of Adam Berlin from UBS.

[Adam Ian Berlin, Director and Equity Research Analyst]

Three questions from me. The first question is, if we were in a scenario where domestic U.S. students decided significantly to postpone starting university in September because they're worried about getting the virus on campus, when would you get visibility that, that was happening and that trend is emerging?The second question is about U.K. assessment. I just wanted to understand what you're saying about the U.K. assessment business. Because I think your original trading statement said it wouldn't be too affected. But I think the -- Sally, you made the point this morning that you thought actually you would see some impact. Can you just explain a little bit more what's happening with U.K. assessment? Are you being paid for these kind of virtual exams and how that's working?And the third kind of more of a longer-term question about School Courseware outside the U.S. Clearly, lots of school students are now experimenting with different forms of online learning. What's your strategy in that area? If schools switched from textbooks to these more varied online ways of learning on iPads, how are you positioned for that? And what impact could that have in your business longer term?

[John Joseph Fallon, CEO & Executive Director]

Okay. Thanks a lot. I will take the first and the third, and I think -- see if Sally wants to add anything on the second question. But I think we've said quite consistently that there would be a modest impact from U.K. qualifications, and that remains the case. But Sally, maybe you want to add something to that.On your -- on the third question around the International Courseware. I mean I think what -- I think it's what I said earlier. I think what we'll see is the pandemic will accelerate trends that are already underway, but I don't think it will fundamentally change things out of all recognition. And what we're seeing in those international markets is that gradually, over time, print is moving to digital. And we are doing a very good job of leading that transition, and we tend to perform better in the shift. It's also important to note that textbook price points are much, much lower in our international school, Higher Ed and ELT businesses than they were 10 years ago in U.S. College publishing. So there's not the same sort of economic threat to us in shift from analog to digital in the international world. And actually, there tends to be more of an opportunity because it enables us to build deeper relationships. And you've seen that, for example -- an example in China, the government was very keen to see sort of nonstop learning, I think was the phrase, that there should be no interruption just because the schools were closed. So we formed a major -- worked with a start-up there called Namibox and Microsoft. And the 3 of us have moved quickly to put together a new business model that has got a lot of support and traction. We made it available for free in the short term, but I think it's proved very valuable. And I think in time we'll be able to charge for it. So I think that's a proxy for what you're seeing in markets around the world.In terms of enrollments, I mean the -- I think the sort of National Clearinghouse data that you see tends to be a sort of lagging rather than a leading indicator. But you will start to get -- we obviously have an extensive network of -- we have a relationship with over 1 million faculty. We have very good strategic relationships with many university presidents. We have our authors on campuses across America. So we have a very sort of good insight and feel. And as you would expect, we are constantly calibrating and will reflect this intelligence as we work through the year. And I think our -- the framework that we've given you enables you to get a feel for that. And obviously, we'll update through the year as we go. As I say, I think there are a lot of things can change, but I think the working assumption would be wise to assume that there will certainly be significantly fewer international students, but most universities will be working very hard to try to ensure that their courses start on time, but with a mixture of face-to-face and purely online learning. But we'll see how that unfolds over the next few months.

[Sally Kate Miranda Johnson, CFO & Executive Director]

I think...

[John Joseph Fallon, CEO & Executive Director]

Yes, sorry. Yes.

[Sally Kate Miranda Johnson, CFO & Executive Director]

So to be clear, the financial impact on this for us this year will be modest. So what is happening is, obviously, kids aren't taking GCSE and A-level exams this year, but they will still get qualification, so a grade for each of the exams that they are registered for, and that is through teacher assessment. And we are here to support those teachers in making that assessment, gathering those marks and then the statistical analysis that we've taken on top of that to make sure that kids get the qualification they deserve and that is there, and we will be making that award.There are some ancillary products around that. So for example, revision guides. I think probably most kids aren't going to be revising for the exams that they are going to be taking, but the financial impact of that is very modest.

[John Joseph Fallon, CEO & Executive Director]

Okay. Thank you. How are doing? Any more?

[Operator]

We have our last question from Patrick Wellington from Morgan Stanley.

[Patrick Thomas Wellington]

Amazingly, still have got 3 questions. The first one actually is on -- going back to Matthew's question about the OPM model. You bought Embanet in 2013. We had a big reshaping of the business or the contracts within the business. I think it was in 2018, a lot of contracts came to an end and there was sort of a hiatus at that point while a lot of new contracts were resigned. And there's some quite bullish talk about how the growth was going to pick up at that point. And now we're getting a further reshaping of the business in 2020. And throughout this period, the business has been barely profitable. So how confident can we be that we've actually got a stable model going forward in OPM? That's the first question.Second one is just about online. John, you gave an interview to Reuters in which you talked about the amount of activity that was going on in online and everything that was happening. But you also said it would have very little short-term profits or financial impact, revenue impact. I'm kind of confused as to why. I mean, why don't you -- and this is the moment when everybody wants your products, why don't you charge for them? And in that context, also, if you could give us an update on Connections, where I think in the March statement there were 2,000 additional enrollments, which actually seem to me quite small in the context of what's going on. Maybe you can put that in context or maybe update the number.And then thirdly, one for Sally. In this new environment, I'm still getting to grips with the GBP 449 million of enabling costs and what they truly are. Are they fixed costs? Or are they quasi-fixed costs? What's in them? And if we look at that GBP 50 million of cost savings that Nick was talking about earlier, is that going to be GBP 50 million of the GBP 449 million? Or is it going to be in the divisions? Or how do we model that number?

[John Joseph Fallon, CEO & Executive Director]

Okay. Sally, do you want to pick up on the -- thanks, Patrick. Do you want to pick up on the last, Sally, and then I'll pick up on the other two?

[Sally Kate Miranda Johnson, CFO & Executive Director]

Yes. So first, those central costs we call them enabling functions. They are services that support the whole of our business. So they would include technology -- enterprise technology costs, finance, HR, legal, all of those sorts of things, and we support each of the businesses which is why we show them centrally. There is an element of salary costs depreciation in there, which, whilst they're fixed in the short term, obviously we've demonstrated those are things that we count on an ongoing basis. So around about half of those costs would be sort of salary depreciation costs, around about half of those costs would be more sort of very short-term flexible in nature.The GBP 50 million for 2021 savings, I think you can assume that, that will predominantly come out of that cost base.

[John Joseph Fallon, CEO & Executive Director]

Okay. Thanks, Sally. And then picking up on the other 2 questions, Patrick. So I think -- look, I think the -- I think Online Program Management has been, frankly, a challenge for Pearson and for every other player in the space. Because what's clear is that if you take any sort of medium-term view of the world, you are going to see more learners wanting to learn fully online, and that's the biggest growth opportunity that universities have ahead of them. But frankly, finding a way to be sure that you can scale that business in a sustainable and profitable way, like the early years of many nascent industries, it's not always clear. You're clear on that there's a big growth opportunity, but you're not necessarily clear as to what the best business model will be. And we have to sort of work the way and iterate and test. I think we now have a model. The reasons I've described earlier in answer to the question, I think it was to Matthew, why we believe we're now there and why should you have confidence on it, because the -- we look at relationships we have with people like Arizona State University, with people like King's, with people like Maryville University, the relationship we're building with Northeastern University or with Boston. And those are sustainable, mutually profitable relationships. So if we can do more and scale more of those, that gives us confidence that we will, over time, have a business that works and will scale. And I -- just to broaden the question out a little bit, we are about to go into a significant global recession. In every recession since the Second World War when unemployment goes up, college enrollments go up. I think that will hold true again this time. But I think it will happen in a very different way. Because I think, this time, learners are going to want to be getting shorter courses, they're going to be more flexible, stackable credential. They're going to want to do things that are more directly related to jobs. They're going to want to do it at much more affordable prices. They're going to want to do it online. And they're going to expect fantastic experiences and great outcomes. And so this is where actually, finally, something that I wanted to see for the last 10 years, which is actually our Online Program Management business and our courseware business rather than operating are on parallel tracks, have the opportunity to converge. That opportunity now exists, and that's what we're going to take.And then, Patrick, you and I have known each other for a long time and I think you would expect of a company like Pearson, when we face the sort of crisis that we faced in middle of March, my first instinct is not how do I make money, my first instinct is how do I help my customers. And that's what this company has done, and I'm proud of the fact that we've responded in that way. But actually, I do think that will be the best way to make money longer term because customers will remember how you behaved when they needed your help. And by behaving in the way that we are, that's the best way of building a faster-growing, more profitable business longer term.And the other key point is we are learning so much because suddenly we have millions more people using our digital products. And we're not be -- you heard me say, we're actually giving a lot of it away with products worth more than GBP 25 million in sales so far. But what we're getting in return is huge amount of data, insight, feedback. And that's going to make us a better company with better products, and that will make for a business longer term.

[Patrick Thomas Wellington]

John, are you sure the customers are going to learn that the product is effectively free? Like so any things that people want to have online, they want it for free. Will they learn from this process that actually your product is free?

[John Joseph Fallon, CEO & Executive Director]

No, because to give you an example, in our Higher Education business where we had customers that had -- that were in the middle of courses and where they have students that have, for example, were using printed textbooks and they needed to transition online quickly, we provided that -- those eText and that digital courseware for free. But you might find in the same college, 3 weeks later, a new semester and a new course started, there we didn't provide those products for free because we said, "Well, you can buy the digital courseware from the get-go rather than buy the print product." So we're not doing it in a sort of thoughtless, reckless way, we've been very sort of considerate about it. And I think it will, for the reasons I say, provide that opportunity longer term.

[Patrick Thomas Wellington]

And is 2,000 extra enrollments at Connections a big number?

[John Joseph Fallon, CEO & Executive Director]

Oh, sorry. I didn't answer that question. So the bigger opportunity. So if you think these are -- so Connections Academy is a virtual school. So if you think that on the whole people start at the start of the new school year, so the big opportunity here is not people transitioning in the dog days of the old academic year, it's the decisions that people make for August and September. And what we are seeing is a very big increase. So we're in the middle of our marketing campaign now for the August batch of school and we're seeing very significant increase in lead generation. And when I mentioned earlier that we are redeploying people across the company, one of the places we are redeploying people to is our Virtual Schools business because we -- the one area where we would expect faster growth than we previously expected, if things pan out as we expect, is in Virtual Schools and we're adding more capacity, to Sally's point, there are states that previously, for political reason, were not interested, wouldn't accept Virtual Schools, that are now reconsidering and rethinking. And we're also opening up some interesting international opportunities. So we're launching a Virtual School here in the U.K. We have a partnership with Harrow School Online that we are scaling up. And there's also some interesting opportunities in places like the Middle East. So I think our online school business is an area where you will -- we would very much expect to see good growth through the rest of the year.Thank you very much. We have one last question apparently.

[Operator]

We do from the line of Sami Kassab from Exane BNP Paribas.

[Sami Kassab, Media Research Director, Co]

I have 2 questions, please. The first one, the U.S. has 30 million more unemployed. We know the historical relationship between the job market and the enrollment market. So given the discussions you're having with universities, John, how do you see the U.S. current enrollment trends developing into next year? Would you surprise to see a jump in college enrollment?And secondly, you referred to your Brazilian language school business, the South African Higher Ed business, the system has seen high-margin business. You said there would be an impact, but you didn't qualify the impact. Would you want to elaborate on that, please?

[John Joseph Fallon, CEO & Executive Director]

Okay. Sally, do you want to pick up on that second question, and then I'll answer the first one?

[Sally Kate Miranda Johnson, CFO & Executive Director]

So I think these are areas where it is difficult to quantify the impact as they stand because the progression of what's going to happen is unclear at the moment. We are doing everything we can to keep learners learning in an online environment. But in some cases, that's more difficult than others. So I think we'll see how things progress in those countries, and quantification will be a possibility [ from here ].

[John Joseph Fallon, CEO & Executive Director]

And then on your first point, Sami, I mean, clearly, very hard to know when we look at in a U-shape recovery, a V-shape recovery, who knows what unemployment will look like in 6 months and a year's time. I certainly think that if you do -- if there is high unemployment, I would expect that to feed into higher enrollments in 2021, not in 2020. And to the point I made earlier, I think you will -- it will show itself in different ways than it did, for example, in the late 2000s. And I think whilst there will be growing demand, it will be much more focused around -- there'll be greater propensity to shorter courses, things that are much more directly related to employment and a much greater use of fully online digital courses, which, back to my answer to Patrick's question, is all the more reason why we're working so hard to get a sustainable business model in OPM. Thank you, Sami. Thanks to everyone for your ongoing interest in the company. Jo and Angela have been on the call today. If you have follow-up questions for them in the course of today, please let us know. But for now, thanks and catch up again soon.

[Sally Kate Miranda Johnson, CFO & Executive Director]

Thank you.

[Operator]

Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.