Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Thomson Reuters fourth quarter earnings Conference call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session instructions will be given at that time, if you should require assistance during the call.
Please press Star then zero and an operator will assist you offline.
As a reminder, this conference is being recorded I would like to now I'll turn the conference over to our whole head of Investor Relations for Thomson Reuters with a friend Goldman. Please go ahead Sir.
Thank you and good morning, and thanks, everyone for joining us today.
There's a significant day for Thomson Reuters not only will be announcing continued improvement in the performance in the business, but it also marks the beginning of an orderly succession to the next generation of management leadership, which you will you have seen in today's press release.
And which Jim will discuss in a moment.
We're also joined today by Mike Eastwood, who will succeed Stefan is chief financial Officer, and who many of you know from having attended investor meetings in which makes participated over the past few years.
Now as we've done in the past will review the results for the fourth quarter in the full year 19, and will then discuss our outlook in priorities for the year ahead.
Needless to say, we have a lot to discuss today. So when we open the call for questions. We'd appreciate if you'd limit yourselves to one question each to enable us to get to as many as possible.
Before we get started there is one reporting item to call to your attention.
Following the completion of our transformation program in the fourth quarter of 2019.
We now have a clear view of how to allocate our enterprise center expenses and certain revenues across our business segments.
So we reassessed our allocation methodology and as a result will adjust our cost allocations amongst the business segments beginning in the first quarter of 2020.
Such that adjusted EBITDA for Reuters News will increase and adjusted EBITDA for our other business segments were marginally decrease.
And will transfer $14 million of revenues, primarily from the corporates business to our legal business will be managed to where it fits better.
Importantly, there are no I repeat no changes to our consolidated results.
I'd direct you to the Investor Relations section of our website, where we've posted as schedule that reflects our restated full year 2018, and 19 quarterly results in a manner. We will begin reporting in 2020 in which I just mentioned.
Now before today's presentation, when we compare performance period on period, we discuss revenue growth rates before currency as well as on an organic basis. As we believe this provides the best basis to measure the underlying performance of the business.
Today's presentation contains forward looking statements.
Actual results may differ materially due to a number of risks and uncertainties discussed in reports and filings that we provide to regulatory agencies.
You can access these documents on our website or by contacting our Investor Relations Department I'd now like turn it over to Jim Smith.
Thank you Frank.
Thanks to all of you for joining us today.
This is an especially important day for me in Stefan.
And not only because we can report that we've delivered what we told you we would deliver for the ROE.
Earlier today us in a note to my colleagues around the world telling them, just how proud I am them.
Worked alongside them the past three decades.
I'm proud of where the business stands today.
End of the difference we make in the world.
We are where we are today because of their hard work.
I know I speak for Stephane, as well and telling them just how much we've appreciated their support over the years.
This morning is also so important because we get to tell you why we're so confident that Thomson Reuters couldn't be in a better place or in better hands for the next chapter in our remarkable story.
Steve passenger and Mike Eastwood are the right team to lead an extraordinary castle professionals onto unimaginable pipes.
I look forward to supporting them and that journey.
Now for the numbers.
2019 was our first full year of operations since completing the refinished of transaction and restructuring Thomson Reuters into customer focused segments.
The results of these changes have been promising with our organic revenue growth rate accelerating more than 100 basis points compared to 2018.
And adjusted underlying EBITDA margin, increasing to more than 31%.
The third consecutive quarter, we've posted organic revenue growth of 4% in Q4.
And the company is positioned to further improve our organic growth rate in 2020.
We entered this year with our reorganization and separation from refitted largely behind us.
Im, particularly proud of the fact that we were able to fully offset all stranded costs associated with the definitive transaction.
What looked like a tall order when we set that objective less than two years ago is now down in behind us.
We can now dedicate our attention.
And our investment toward further strengthening our positions and accelerating growth in our core businesses.
We entered the year with healthy information services market in general and improving legal and regulatory markets in particular.
Demand growth in the us legal market was up more than 1% for the second consecutive year.
Marking the first time this has occurred in more than 10 years.
Regulatory complexity continues to drive demand for solutions that can help clients navigate the maze.
Government agencies are increasingly adopting new technology and modernizing longstanding practices.
And maybe the most important factor technology is transforming the practice of law in accounting.
Firms recognize the need to invest in technology solutions in order to compete and they have a preference for fewer more trusted strategic partners.
We are particularly well suited to leverage our unique position to view that partner.
Now to the results for the fourth quarter reported revenues revenues at constant currency and organic revenues were each up 4%.
Adjusted EBITDA was $396 million up 44%.
Underlying adjusted EBITDA, which excludes stranded and onetime costs increased 12% to $502 million.
And finally, adjusted EPS was 37 cents per share.
Versus 19 cents per share a year ago.
Our legal corporate.
Tax and accounting segments, which make up about 80% of our revenues recorded another strong quarter with organic revenue growth of 6%.
We expect this solid performance to continue in 2020 for these three segments.
One particular highlight to note pertains to our legal business.
Organic revenue growth for the quarter end the year was 4% and momentum continues to improve for both our business in the U.S. legal market overall.
Importantly, our net sales momentum, which was particularly strong in the legal segment.
And the retention rate of 91% was up 50 basis points from 2018.
This is a positive indicator for the strength of the business.
New sales continued to be bolstered by the success of Westlaw edge, including a multiyear contract we announced in December with the administrative office of US courts that contract provides westlaw edge and other legal research tools to the federal judiciary.
This includes the Supreme Court, All Circuit district, and bankruptcy court as well as federal public defender.
And it follows a similar big win with US Department of Justice. We believe these marquee reference contracts will provide a knock on benefit to additional edge sales this year.
Westlaw is edge is now in 100% of us law schools, and nearly 50% of analog 100 firms.
Overall.
We've now converted about one third of our Westlaw revenue base to edge.
And we expect us to increase the more than 50% by the end of 2020.
This should allow us to post another step up in Legals organic growth in 2020.
Additionally, legals improving revenue growth is leading to increasing operating leverage reflecting a 10% increase in EBITDA in the nearly 300 basis points improvement in the full year margin versus the prior year.
Our tax and corporate segment also delivered strong organic growth during the fourth quarter, our tax business delivered particularly strong revenue growth with some of that was due to timing factors, which Stefan and Mike Eastwood will discuss in a few moments.
Turning to our two smaller segments Reuters news revenues were up 5% with organic revenues down 1% due in part to timing factors. The fourth quarter was the first period, we lapped the refitted related revenues. So Reuters quarterly results will no longer be distorted by that 30 year contract.
And finally global revenues declined 4% with organic revenues also declining 4%.
For the full year printing declined 3% organically, which represented its best performance since at least 2013 in overall declining market.
Now the strong performance I just discussed is the result of all the achievements reflected on this slide.
And in particular I am.
We used to report that our restructuring program related to the separation from a definitive is near complete and we're looking forward to a clean year in 2020 with no further stranded or onetime costs related to this separation.
A quick bit of context, 2018 was the year, we announced the refinished of transaction began separating the two companies and closed the deal late in the year.
That transaction has driven significant value creation.
And it has allowed us to dramatically sharpen our focus on the core professional businesses.
2019 was the year, we focused on standing up the new Thomson Reuters.
This included setting up our new customer focused organization structure.
De layering the number of management levels.
Bringing new talent into the company and deploying half of the 2 billion dollar investment fund, but making for strategic acquisitions.
These acquisitions net of disposals are expected to contribute about 70 basis points to our total revenue growth rate in 2020.
And even with all this change we saw an acceleration inorganic revenue growth and an improvement in underlying profitability, which speaks not only to the strength and resilience of our business, but also to the dedication of our people.
As I mentioned 2020 marks the first business as usual year, we've had in several years from a reporting standpoint.
We will focus 100% of our energies on improving operating and financial performance.
Accelerating our platform strategy and further accelerating product and technology development.
2020 is also the year, we expect to return to mid single digit organic revenue growth.
And achieve historic highs for free cash flow per share.
In 2021, we would expect this progress to continue.
Now I'm, particularly pleased that in 2019, we met or exceeded each of our annual guidance targets for the eighth consecutive year.
This accomplishment is result of extraordinary work our teams turn in each year as well as the fact that our businesses have a high level of predictability a large percentage of recurring revenues are growing book of business and our attractive retention rates give us good visibility into the year ahead.
One of our key metrics organic revenue was up 120 basis points from 2018.
Well above the 2.5% to 3% threshold required before operating leverage kicks in.
Now, let me turn to our outlook with current year.
For 2020, we forecast organic revenue growth.
Between 4% and 4.5%.
In total revenue growth between four and a half in five of half.
Which includes the net impact of acquisitions and divestitures made in 2019, that's about 70 basis points as mentioned earlier, but which does not include potential impact in an additional acquisitions, we may make in 2020.
Adjusted EBITDA margin is expected to range between 31.5% and 32%.
The adjusted EBITDA margin will be partially impacted by investments in our platform strategies and digital initiatives.
As I just mentioned, we are expecting healthy free cash flow growth this year, resulting in free cash flow per share of $2.40 or better.
Further details related to our outlook can be found in today's press release, and Mike Eastwood will provide additional information in a moment.
Now, let me turn to our plans for 2020.
Those of you followed us for the past eight years no. It has been a heavy lift to achieve the progress we see today, but Stefan and I couldn't be more pleased with all that the company's achieved for all our Cheryl shareholders in stakeholders.
This slide summarizes the company's performance.
And improvement over the past eight years.
Revenue growth profitability return on invested capital and market capitalization.
We inherited a business declining by 4% this year the business is forecast to grow between four and a half and 5.5%.
A business in 2012 that recorded flat organic revenue growth has now achieved three consecutive quarters of 4% organic growth.
A business that in 2020 is forecast to achieve a 500 basis point improvement in EBITDA margin as compared to 2012.
A business in which corporate center costs are about half the level. They were before the refinished of deal at a 140 million to 150 million this year.
And the company, that's become more efficient and allocating capital to prop to profitable investments evidenced by the ROI see that's expected to exceed 10% this year.
Well above both our 2012 rate and our current cost of capital which is 7.4%.
And finally, despite being half the size we were in 2012 from a revenue perspective, our market capitalization has increased by slightly more than $18 billion between 2012 and today.
And that number does not reflect the 10 billion, we returned to shareholders in 2018 in connection with the definitive transaction. Moreover.
Total shareholder return in US dollars was 289% over that period compared to 199% for the S&P 500 and.
And our Canadian dollar total shareholder return is up 411% compared to an increase of 93% for the Ts. Thanks.
I'd now like to turn to the value creation model I shared with you last quarter and compare our 2020 guidance targets to the models metrics to assess our progress.
You will recall that our value creation models based on four key principles first achieving and sustaining mid single digit revenue growth that is our number one priority.
Second we focus on delivering the highest possible level of free cash flow and free cash flow per share.
Third we seek to carefully balance reinvestments in the business and return of capital to shareholders.
And finally, we aim to maintain strong capital structure.
Let me expand a bit on each of these four principles.
We believe the company's position to achieve a total revenue growth rate of 4% to 7% over the business cycle.
Most of our growth should be organic and tactical acquisitions could add 1% to 2% annually to our overall growth rate.
And that level of revenue growth combined with the operating leverage inherent in our business model should drive higher free cash flow.
And with that higher free cash flow, we intend to use between 50% and 60% to fund our annual dividend.
This implies that our annual dividend should start increasing inline with the growth of free cash flow.
Which is why the board decided to increase the annual dividend by eight cents.
Importantly, we believe this level of dividend payout will still leave ample room to fund business development activities.
Finally, we're committed to maintaining a solid capital structure with a financial leverage target of two and a half times net debt to EBITDA.
As we grow our EBITDA over the years, we will be able to gradually increase that debt capacity within the leverage target.
As a reminder, our net debt to EBITDA today stands well below our target range at 1.9 times as of the end of year.
So in summary, we believe we're now well positioned to deliver on the value creation model summarized on this slide using both growth and capital returns to drive value for shareholders.
So speaking of capital returns today, we announced that 8% annualized dividend increase to $1.52 per share the largest annual increase since 2011.
This marks the 27th consecutive year of annual dividend increases for the company.
The increase will be effective with our Q1 dividend payable next month.
These consistent annual dividend increases speak to the solidity of our business and it's consistent.
Capability to generate free cash flow.
Finally.
Let's look at our key priorities for 2020.
Our first priority is to deliver higher revenue growth as we drive toward sustainable mid single digit performance second we'll work to deploy the remaining 800 million in our investment fund.
On acquisitions that are street.
Highly complimentary to our existing businesses and that accelerate our platform strategy.
Based on the changes we announced this morning. This will be one of Stephens key areas of focus in his new role.
And a third priority consists of several initiatives geared toward building on our strengths, which are listed on this slide.
So we're excited about the opportunities ahead, and we're confident that the company as well position to deliver on our 2020 financial targets.
Given the high level of recurring revenue, we generate and the inherent operating leverage in our business. We believe we can continue to aggressively increased profitability and free cash flow.
This should in turn allow us to fund our ongoing growth journey and provide attractive returns of capital to our shareholders all while maintaining strong capital structure.
Now, let me turn it over to Stefan.
Thank you, Jim and good morning, or good afternoon to or even joining us today.
As we moving to the new year, we have changed a bit the format for this portion of the whole quarterly reporting.
Hopefully you will find the new format more Chris and more relevant.
But as we always do we welcome your input and feedback to ensure that we present is headed for to you.
So we start by providing some color on the revenue performance of our three core segments.
And then I will also provide details are on recurring and transaction revenues in a moment.
As a reminder, I, we hope to revenue growth before currency and on an organic basis.
So organic revenue growth for the three core segments was 6% for the quarter and 5% for a year.
Legal or professional as revenues increased 4% during the fourth quarter.
With organic revenues also up 4%.
Law firms revenues grew a healthy 4%.
Government related revenues had another strong quarter was 9% enrolled.
And our global Eagle businesses were flat on reported basis, but up 4% organically.
Wesco Ash continues to yield a healthy premium was strong sales momentum.
As evidenced by the months of December being the best sales month since the launch.
Edge contributed over 100 basis points to the legal segments growth rate in 2019.
And as Jim previously mentioned.
The legal market remains healthy.
According to pure monitor demand growth in the us legal market in Q4 was 1.1%, which was slightly better than the four year.
Rates for hours work increased 4% in Q4, which was the highest increased recorded by tier monitor.
And it all your growth in Q4 was 2.4%.
Highest quarterly gain since the fourth quarter of 2011.
So we continue to remain confident with regard to the trajectory of the video segment for 2020.
In our corporate segment revenues were up 5%.
Organic revenues also up 5%.
And by both our legal and tax solutions.
And finally tax and accounting at a very strong quarter as revenues growing 12% organically.
That strong fourth quarter growth was partly due to a timing benefit as we were able to accelerate the release of some of our architect state tax software from January to December.
To more closely aligned with the traditional December royalties of a federal software.
This change our old customers earlier access to the documents.
To start the on your tax finding work.
Now.
This change will result in lower growth rate for effects that coating segment in the first quarter, which we likely being the low single digit area.
But this is purely timing related and we expect a growth rate for thats not going to quickly rebound to the 6% to 8% range for the balance of the here.
And importantly, the normalized growth rate for tax professionals to adjust for that our products.
Change was also very strong.
Stood at 7% for the quarter and 6% for four year.
Now on a finer than important note our tax accounting business sold its government business also known as momentum in November of last year.
Many of you remember that business at a fair level availability from one quarter to the order and the generating above $40 million in on your revenues.
Now before turning to the remaining segment, let's look closer at recurring and transaction revenue results for the year.
Starting on the left of the side.
Total organic revenue growth was 4% for the full year.
Which represents an improvement of one basis points for 2018.
As shown this was driven by all three of our core businesses.
Overall, most recurring and transaction organic revenues contributed to the 120 basis points improvement, which is reflected on the right hand side of the site.
Starting at the top.
Recurring revenues grew 85 basis points to just under 5.5%.
The improvement was driven by legal and was especially if it had index accounting, which was partially impacted by products software in these previously mentioned.
Turning to the graph on the bottom right of the site transactions revenues were about flat year over year, which was an improvement of about 120 basis points.
This improvement was most evident in our corporate segment with Ziggo slightly worse than the prior year.
Now moving to rotors news revenue growth in Q4 was no longer destroyed by definitive license.
Revenues in the fourth quarter grew 5% and declined 1% organically due to some timing factors.
The acquisition of FCB, right, which is now rebranded as rotors event.
Explains the difference between total growth and organic growth in the fourth quarter.
And lastly, as Jim mentioned Grove, and print revenues declined 4% over the prior year with organic revenues also down 4%.
As we set or here, we very fee, we the Grover print performance, which is driven by improved sales growth and steady retention.
So in aggregate and on the consolidated basis fourth quarter revenues were 4% was organic revenues also growing 4%.
Turning to our profitability performance in the fourth quarter.
Adjusted EBITDA for the three core segments was $453 million up 7%.
Due to higher revenues and despite the diluted impact of our recent acquisitions.
The legal professionals EBITDA margin in the fourth quarter.
190 basis points to 34.9% compared to the prior year.
To the impact of acquisitions.
And also to the timing of expenses during the quarter.
On a full year EBITDA margin was up 280 basis points, reflecting revenue flow through and efficiency savings.
Corporate EBITDA margin increased 460 basis points to 31.1% during the quarter and this was primarily driven by revenue growth.
80 savings and currency.
And was somewhat offset by the impact of recent acquisitions.
And finally tax accounting EBITDA margin increased 170 basis points to 49.1% due to the strong revenue growth recorded during the quarter.
Moving to rotors news.
EBITDA was $4 million, which was 2 million less than the prior year period.
Due to higher costs and investments.
As mentioned by Frank earlier.
Okay and adjustments we are implementing in 2020, when primarily benefit orders.
And we expect based on your EBITDA margin, we'd be in the low teens going forward.
Compared to the 6% margin we reported in 2019.
Global principally the margin quarter quarter declined by about 300 basis points due to the decline in revenues, but it remains strong at just under 40%.
So in aggregate reported adjusted EBITDA was nearly $400 million up 44% due to higher revenues ended our strides and onetime costs in the quarter and despite the day, leaving back of our recent acquisitions.
Now. These next slide provides a bit more power on the various factors impacting for full year 2019 reported adjusted EBITDA margin.
And then excludes the impact of both Brian and onetime costs in order to provide you with the better understanding of the underlying trajectory of our adjusted EBITDA margin and the path we seek to achieve the 31 in the had to 32% margin target, which Jim just discussed.
As you can see on this slide.
Our reported 29 in full year EBITDA margin was 25.3%.
There were several factors that the story that margin.
First.
Stride and onetime costs related to the separation.
At about a 630 basis points negative impact slightly more than was the case in 28.
In addition.
The affinity for payment to rotors news I had a negative.
Impact of 120 basis points on the margin.
Third.
M&A activity negatively impacted margin by about 40 basis points.
And we continue to have a diluted impact to margin in 2020.
And Conversely, I Fysixteen had a budget a 70 basis points in back and currency added 60 basis.
So if you're factoring all these items.
Revenue flow through and efficiency initiatives added about 100 basis points.
In summary, if you exclude strengthen onetime cost the full year underlying marketing with it being 31.5%, which represent represented an 80 basis points improvement over 2018.
And they see the base from which we will build towards a 31 and half to 32% margin target for 2020.
Given that there will be no further impact from either onetime cost or striding costs.
The rate moves I sense or our 60.
So 2020 should be a much more normal year from a market perspective.
As you mentioned, we want to preserve the exhibiting to make the necessary investments in 2020 in order to ensure that we whether position for 2021 from an organic growth perspective.
In addition, the four acquisitions, we made last year are projected to deliver a combined margin of about 18% in 2020.
So they will contribute that we've continued to be day duty toolbar over marketed by about 50 basis points.
For another year.
So in conclusion, we believe we have a good visibility overall into the levers at our disposals to achieve the 2020 margin target.
With that let me turn to or earnings per share and free cash flow performance and that we also update you on corporate costs and captive structure.
Starting with earnings per share adjusted EPS increased by 18 cents.
37 cents per share during the fourth quarter.
That increase was driven by higher adjusted EBITDA and lower income taxes.
Offset by an increasing depreciation and amortization as well as interest expense.
Our effective tax rate for the full year and a lower than we had anticipated.
Primarily as a result of a really change by the US Treasury Department in the interpretation of the recent us tax reform.
We do not expect these favorable development to re occur in 2020.
And as a result, we expect our tax rate range somewhere between 17 and 19% in 2020.
Finally currency had a one cents positive impact on EBIT in the quarter.
And for full year, EPS increased 54 cents to a dart and 29.
Sand due primarily to higher EBITDA and fewer common shares outstanding.
Let me now turn to our free cash flow performance for a year.
Our reported free cash flow west $159 million very much in line with the guidance we have provided earlier.
For perspective, we generated about a billion won in 2018.
So last year's performance were presented a decline of nearly $950 million.
Consistent with leading prior quarters. This slide with hopefully help you to remove the starting factors in fact Asheville during the four year.
Working from the bottom of the page upwards direct energy related component of our free cash flow was down slightly more than $900 million from the prior year and that was primarily due to a definitive no longer being 30 in our results.
Also during the year, we made a pension contribution and part of payments totaling $746 million, primarily related to the affinity transaction with Blackstone.
So if you adjust for these items.
Our free cash flow from continuing operations was just under 1.1 billion, an improvement or nearly $400 million over the prior year period.
Primarily due to the stronger EBITDA performance before strength and onetime cost and also due to lower interest expense.
Now these next slide should the bar last and final slide the scrap corporate costs.
Given that we've largely completed the onetime and trying to test spending related to the definitive transaction.
Spend during the fourth quarter was about $160 million right inline with our expectations.
Full year total corporate costs were $564 million, which was also broadly inline with our target up about $570 million.
And finally, given that we don't expect to record any further onetime costs related to the definitive transaction in 2020, we continued to project corporate customer inch somewhere between 140 and $150 million this coming year.
A quick update on our capital structure.
As we previously shared we remain committed to maintaining a stable and robust after structure.
At year end 2019, well get restructure remain very strong.
We ended the year with $3.4 billion update outstanding.
We also at $800 million of cash on hand at year end. So our net debt position was above $2.8 billion, including these diabetes.
This translated into a net debt to EBITDA ratio of 1.9 times, which was below 2.5 times target.
The average maturity on a remaining long term debt outstanding 10 years, and our average interest rate is 4.6% and darlie fixed.
Thats, but at least we had about 500 million shares outstanding at year end.
And as we have previously disclosed our objective remains to buyback enough shares each year to a set new share issuances associated with the dividend reinvestment plan and with our equity incentive plans.
With a target of maintaining our outstanding shares at around 500 million.
Now a quick update on our investment into affinity.
The agreement to set up into the London stock exchange growth.
Transaction originally valued at $27 billion.
He is expected to close in the second half of 2020.
When that transaction closes.
PR is expected to indirectly along.
Approximately 2.5 million shares in VIP.
Or about 15% of the shares outstanding.
Subject to some exceptions agreed to with NBC.
It will be a two year post closing lockup for PR, and Blackstone, which would restrict any immediate set down of our respect these days.
One third of each party's shares can be sold in year three.
And for after the closing and the lockup we terminated.
In the fourth anniversary of the closing.
Why do we expect that the Hennessy transaction, we'd be predominantly effects. The first for TR, we're expecting that a portion of the capital gains taxes will become payable when that these growth in the second half of this year.
And we intend to fund these tax liability by either sending down some of our as you share as permitted under the lockup agreement.
And our via other means so we do not expect DC to constrain us from a liquidity perspective.
Our future equity interest in NFC reader and present, a store value, which can be monetized fourth time.
We believe that these will provide us with significant.
Financial flexibility for the foreseeable future.
Now as of February 24.
Our stake wasn't worth about $8.9 billion pretax.
Versus just under 3 billion at that time over the original transaction.
After the deal closes we expect to receive regular dividends from the SCG estimated at about $660 million per year based on the company's current annual dividends per share.
Now before I turn this over to Mike.
I would just like to say how much I appreciate the support and advise at many of you on these calls providing to him and my sense is at the time, we became CEO and CFO back in late 2011.
As many of you may recall, we both added a lot of health and the device as we jumped into our respective roles at time of great uncertainty for the company.
And with a limited level of transition planning.
Many of you another they gave us the benefit of the doubt.
Also we always there can provide advice and guidance when we asked for Rick.
So it should come as no surprise.
Many of the key financial metrics, we used to date.
Both to drive performance internally and to govern our incentive grants.
Many of these metrics adjusted free cash flow per share came directly of conversations we had with many of you about what really matters to investors.
You are really helped us more than you can imagine.
Especially during these early days and that would really like to thank you port hardly for all to support has been indication you provided to us.
Now I turn the CFO role over to Mike.
I could not thing of a better executive to succeed me at this point.
Mike and I have been working closely for the last four years.
And we've been working hand in glove, although that 18 month.
As a CFO.
I have never been let down by Mike.
Someone who always under promise and over delivers on these commitments and wasnt extraordinarily strong commercial and operating acumen.
Many of you already know him as he participated in a number of investors events over the last couple of years.
If you can simply providing with the same level of supporting advice as you gave me over the years I know that the we'd appreciate it and really need very much just related.
With that let me turn it over to Mike will outline what 2020 expectations.
Thank you define and good morning, and good afternoon to all of you.
Let me start by saying that will very honored to soon leadership the finance organization at Thomson Reuters.
And I look forward to getting to know more review at the upcoming conferences and meetings.
As we look to 2020, let me first speak to our organic revenue growth and EBITDA margin performances.
As mentioned earlier, we expect our organic revenue growth performance for 2020 to range between 4% and 4.5%, which would represent a 30 basis points to 80 basis points improvement over 2019.
This performance level stands in Stark contrast, our average revenue growth performance over the 2009 2017 period.
When various factors primarily related to our financial business dragged our average organic revenue growth rate to the mountains, 0.3%.
Interestingly at 3.7% organic revenue growth performance, we achieved in 2019.
He is very much in line with the average performance we achieved over the 2002 to 2008 period.
Time, when our exposure to the financial services industry has much more reviews and when our business profile and revenue base, we're more similar to Watney are today.
So we did our current level organic performance as being back to where it was before 2008.
And we also do unit and something we can still improve upon in the coming years.
Turning to our EBITDA margin performance, we see room to further improve from the 35% to 32% level, we are projecting in 2020.
Our margin guidance for 2020 reflects both the dilutive impact of the acquisitions, we completed last year as Wallace inorganic investments, we will continue to making the business to further accelerate our growth.
Given the stronger revenue growth performance, the operating leverage inherent in our business model should allow for a fragile improvement in margin in future years.
That level revenue growth and operating leverage inherent in our value creation model should drive higher free cash flow growth and we anticipate our free cash flow per share in 2022, the $2.40 or better.
Achieving this level of free cash flow per share will allow Thompson will owners to return at or above the record highs for free cash flow per share that we achieved in 2016.
So the stronger and more stable characteristics of our overall business model should allow the company to deliver an attractive value creation model for shareholders.
One that is driven both by growth and returns.
As we enter 2020, we feel confident we can build upon the momentum we achieved in 2019.
This slide summarizes some of the key drivers that underpin our overall 2020 guidance and provide some color on the performance you should expect.
Three largest business segments.
As shown on this slide the organic revenue growth performance for each of our three largest segments in 2019.
It was within 2020 targets, we had laid out during our Investor day meeting in December 2018.
So we delivered on our 2020 targets one year ahead of what we had projected.
For 2020, we do expect the growth rate for these three core segments to again be within the targets, we provided at our Investor day.
Let me now provide some color on how we expect each segment to contribute to that overall acceleration.
Starting with legal we ended the year with strong net sales momentum, which should which should lead to an acceleration and organic revenue growth rate in 2020, and expect to be wall within the 4%, 5% organic revenue growth range. This year provided at Investor day.
Our confidence stems from the fact that in December less small edge delivered its strongest net sales performance since launching the product in 2018.
Driven in part on the launch of quick chat last July.
And as discussed earlier the adoption of this product by the US Federal courts has driven a very strong level interest from law firms.
As of the end of last year, we had converted about one third of less laws revenue base to while small edge and we see the potential to bring this between 50% and 60% by the end of 2020 with the product continuing to demand and attractive premium.
The acquisition of high Q should be another key accelerated growth in 2020 and in future years.
So in summary, we're confident that we will see continuing improvement in legals organic revenue growth rate in 2020, and we forecast of first quarter growth rate will exceed 4%.
Turning to tax and accounting.
We continue to forecast very solid revenue growth overall.
That said the growth in Q1 is forecast to be about 1% to 2%.
Due to the ultra tax timing change that Stefan described earlier, which resulted in an acceleration of our state tax forms from Q1, 2022 Q4 2019.
Revenue growth is forecast to rebound to the 6% to 8% range for the balance of the year.
As a reminder, tax and accounting total growth rate will be negatively impacted by the sale of our government business, which represented about $40 million revenues and was sold in November last year.
The corporate segment should continue to build on this successful trajectory in 2020.
Adding improvements with any growth rate from 5% to 6% in 2019, we forecast its growth rate to further accelerate in 2020.
Looking at Wal within the range that we had shared with you during investor day at 6% to 8%.
Away from our victory segments, we expect our print business to decline by 4% to 5% in 2020 mile Reuters news should grow low single digit.
With these two segments, we expect their first quarter performance tomorrow, the low point of the year and accelerate modestly thereafter.
And on a consolidated basis, we also expect the first quarter to be the low point for the year with organic growth of approximately 2% and total growth of approximately 3%.
This is due to tax and accounting and what I just discussed regarding print and Reuters news.
This is strictly timing related and another way reflects what we expect full year evidenced by our organic revenue growth guidance of 4% to 4.5% and total growth of 4.5% to 5.5%.
Importantly, we believe as strong revenue growth from our three core segments as Wallace the efficiency initiatives completed last year will drive strong free cash flow per share in 2020.
Now speaking about free cash free cash flow per share just a few housekeeping items from a financial modeling perspective.
First we expect our capital expenditures will be less than our depreciation and amortization by about 150 to 175 million in 2020.
There will be a quicker impact to free cash flow due to the timing will the depreciation run off.
Also I FRS 16 should add about 50 million to depreciation, but will not impact capital expenditures or free cash flow.
Second.
We expect cash taxes to be approximately 102 125 million lower than PML taxes due to the negative impact of the various tax reforms.
This impact will be less pronounced on our cash taxes and our effective tax rate.
Lastly, as should be about 25 to 50 million of miscellaneous items that impact the PM now, but not free cash flow.
We expect annual pension cash contributions to be lower annual pension expense.
In addition, and our expenses related to our employee stock purchase program and stock based compensation that has no impact on free cash falls.
One thing I want to say upfront before turning to the outlook is I intend to continue the tradition established by Jim and Stephane during their tenure of delivering profitable and reliable guidance each year.
I had been intimately involved in preparing that guidance and I intend to keep that track record with regard to any targets, we provide moving forward.
So building on a strong performance in 2019 and positive momentum in our markets. We expect 2020 total revenue growth of between 4.5% and 5.5% and organic revenue growth in to range between 4% and 4.5%.
So improving revenue growth trajectory is expected to generate and adjusted EBITDA margin of between 31.5% and 32%.
And as we discussed a few moments ago, we expect total corporate costs of about 140 to 150 million in Twentytwenty.
We are projecting free cash flow to be 1.2 billion or better and expect free cash flow per share to be $2.40 for better.
Turning to capital expenditures, we continue to expect lower spending as a percentage of revenue, which will range between 7.5% and 8%.
Depreciation and amortization expense is expected to range between 625 million and 650 million.
And we expect interest expense to range between 175 and 200 million.
Lastly, we forecasted effective tax rate to range between 17% and 19%.
Let me now turn it over to Jim to wrap up.
Thanks, Mike.
Before we open the call for questions.
Let me conclude with both few thoughts regarding this morning's announcement on succession.
The appointments as Steve has grown as my successor and Mike as the funds successor is the culmination of a deliberate plan executed by our board.
And in which Stefan and I have been active participants.
Steve is a proven leader whose background in prior experience give them exactly the right skills to leave Thomson Reuters as we make the shift from product platform.
I also firmly believe that now is the right time to pass the baton to the next generation of leadership.
Our company is on his firms footing in many years in a foundation has been laid for continued success that will serve the interest of all stakeholders for many years.
As you've seen in this morning's announcement all become chairman of the Thomson Reuters Foundation and will provide transition support Steve among other duties Stefan will become vice chairman of the Corporation and we'll have responsibility for overseeing our investment in refinish to until the transaction closes with the London.
Stock Exchange group later this year.
I also will oversee business development operations as we deploy the remainder of our investment funds.
Play a key role in developing the commercial policy the supports our revolving platform strategy.
Stefan I feel incredibly proud and fortunate.
Two of two very talented and experienced executives to succeed us.
Steve is widely respected as an innovative leader with an exceptional combination of integrity intellect and people skills.
Expert at information and media businesses and his deep capability with product technology partnerships and the ability to monetize data is just what we need to capitalize on the many opportunities the future holes.
Mike is a 20 year Thompson veteran who had been working hand in glove with Stefan over the last several years.
Mike has proven his financial and operational chops in a number of rolls over those two decades.
Has been a driving force in both our turnaround and in creating new Thomson Reuters.
So I'm confident that our future will be in very good hands with these two executives and an extraordinary group of dedicated professionals on the broader leadership team.
With that I'll turn it back over to Frank.
Thank you, Jim and Stefan and Mike and that concludes our formal or more remarks annual report on the quarter in the year.
And we would now like to open the call for questions. So operator, if we could have the first question. Please.
Ladies and gentlemen, if he wants to ask a question. Please press London zero.
And our first question comes from the line as Gary Bisbee with Bank of America. Your line is open.
Hi, guys good morning, and congratulations everybody on the on the new roles.
I guess, a two parter on margins if I could you called out some.
Internal investments in 2020 to position the business for continued improving growth I guess, if you could give any color on exactly what those are there the size of those investments and then bigger picture as you think long term you did a great job eliminating stranded costs, but is the organization right size given to.
And you have now or are there other opportunities to to streamline and improve.
Margins. In addition of what should be healthy operating leverage as your growth businesses expand over the next few years. Thank you sure. Gary This is Mike ill take the lead on that question on multiple parts first in regards to our margin guidance of 31.5 to 32, certainly with organic growth guidance of four to four and a half were running experience.
Hi, good operating leverage in Twentytwenty and as we move forward. Your specific question in regards to the organic investments that we're making a couple of examples would be our pivot platform as that John touched on earlier and we just discussed in prior calls also we've made some additional investments in our go to market resources, especially in.
Our next segments, specifically regards to additional sales.
Account managers working with our customers at the third example, Gary would be in the area digital we recently hired in the leader within the last six months to lead our digital initiatives. So thats going well. So those are three examples here area of investments.
Last question in regards to Rightsizing certainly we're very pleased completed all of the onetime costs associated with the definitive separation.
In 2019, we don't have any onetime costs plan for 2020, but we're going to certainly always consider opportunities that arise.
To make a stronger and to expand margin.
And the Havent good return for our shareholders.
Thank you.
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Thank you and our next question comes from the line of drew make Ronald.
Your line is open.
Thanks, very much good morning, and congrats Jim and Stefan on on the succession and team Mike as well.
I'd for me a big picture question on the M&A front.
Your your below your balance sheet target that Theres, obviously, some some funds still there to do tuck in acquisitions.
Is there any temptation here and maybe.
A question for.
Ill for new management, but is there any temptation here to do larger M&A you, obviously have a valuation here that's much better than it has been in the past you have the LSC as a potential source of funds just you seem to be very flush share with cash and just trying to.
Figure out where ultimately all that funnels too. Thank you.
Let me try to take a question.
Drew and obviously.
It's a question you should as you.
At our direct to due to the new management team in terms of what their ambitions are what I can tell you, though is that we have a pretty robust pipeline of potential needed. We can do straightener wheelhouse at this point in time so.
The initial in priority I can promise you will be to try to see how many of these potential transaction we can land.
And as you said we have.
We feel very fortunate to have a high degree of financial flexibility. So.
[music].
We have deployed about half of the war.
Vessels going to be at investments and we get the other has deployed and we even have a bit more capacity beyond that if we feed into deals.
Our strategic and financially attractive.
Thank you.
Thank you and our next question comes from the line of money Patnaik with Barclays. Your line is open.
Thank you good morning, gentleman and congratulations to all of you as well.
Jim maybe just some perspective in terms of all the I guess cleaning up than sorting through that you get it done so forth what have you last or what is the next leg up like that I guess bucket and spade, Steve and Mike to be doing is that kind of shift to the cloud Replatforming AI, just some high level of holiday would be.
Created.
Sure I think all of the above Menominee.
I think you're exactly right and Thats why I think there the guys to to lead it.
I think in my conversations with Steve.
It's extraordinary to find someone who shares the same strategic vision for what's possible, but I think is intentions will be to build upon.
The platform that Weve that we've established here and bring his.
Unique skill set and background.
To that task, we really believe that we have the foundation and the footprint.
To be successful and as Stephane said Theres a lot of growth on the left in our.
A lot of headroom.
That we have to continue to grow our underlying businesses and I.
I think what you can expect.
There's not a radical change in strategy of but every effort to accelerate that strategy designed to accelerate the growth.
[music].
Thank you and our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is open.
Thanks, and I want to offer my congrats as well.
Kevin can you talk about why news fits in.
Folio, it's profitable at promote that brand and there's a legacy element, but just talk about why it sits within cash generators, which seems like it's now being position more like an information services Company, then and media company. Thank you.
Sure I look I think there's a lot.
For Us in addition to the tradition.
You know MB emotional attachment to the news business that.
Many of us in leadership should share.
I think is we think about the tools, we want to provide our professional customers in the future kind of current awareness news.
Being real time plugged in.
You too to their communities.
It is very important and.
I think what we've tried to explore and what I'm sure. Most Stephen Mike will lead is further exponent exploration along with my friedenberg at Reuters.
Who is working to develop more corporate verticals and to the extent that are unique news assets.
Can help complement support and underpin the development of some of those professional verticals.
I see no reason why we can have news feeds and integrate Reuters news into our professional products.
As successfully as we've done in financial markets.
Thank you.
Thank you and our next question.
The line of Vince Valentini with TD Securities. Your line is open.
Yes, thanks very much thanks for all the disclosure this morning and congrats everybody.
If I can try to impact the the revenue a bit.
Yes, Im not sure if I heard you correct. If I did you say the organic revenue growth for tax would have been 7% in Q4, instead of 12%. If you take out that ultra tax timing shift that's correct.
Okay. So if we adjust for that is it fair to say that the organic revenue growth guidance for 2020 would be pushing up towards 5% if not for that somewhat anomaly of December versus January revenue.
Well I would say that the the.
The 5% impact that we've seen between the or the tax accounting reported revenue growth of 12, and what the underlying whipping absent.
That acceleration.
It's about the same impact you're going to see in Q1 and Thats, we set that that's a timing impact and I frankly, havent done the math about what the guidance would be adjusted for that but Thats why we really got people to look at the annual revenue growth rate by this puts and takes every quarter, but we certainly do expect to see a continuing.
Apart from the norm organic revenue growth trajectory in.
In 2020.
Latches, sorry, Frankovich is one really big related question I promise the.
On your slide 12, the revenue target organic three to five and then and then add one to two for acquisitions.
Is that three to five meant to be your longer term targeted that some sort of average over the course of.
Business cycle could it seems like you're trending already.
Especially if you adjust for this tax item, we just talked about already trending towards the high end of that three to five and it sounds like things could get even better maybe in a five 6% range within a year or two I'm wondering why this targeted only three to five and what that timeframe is supposed to be.
Obviously, we would have to see how the of the other business continues to evolve right and to the extent that.
We move towards higher growth portions of the markets, we serve for period of software piece of the market.
You know that target.
You could see us in every week with exceed that target, but we think it really one year at the time and and.
If and when we need to change that that would be great between.
That does to Steven might depending on how things evolve over the upcoming years.
Thanks.
And let me just that let me just add to that events.
As we see on to slide I.
Kind of the.
The gravity that surrounds the businesses that we're in today as we said on a slide is kind of 4% to 7% over the cycle. So you know in good economic times, we're executing really well it should be higher.
But as you have seen in the past its not a business that you know precipitously.
Falls off a cliff or goes backwards it to the grocery gets impacted bit so thats kind of an over the cycle and if we continue to execute well and of the in a market conditions continue to favor us we'd expect to see continued growth.
In that number and you approach the higher end of the ranges in the best at times.
Thank you and our next question comes from the line of Kevin Mcveigh with Credit Suisse. Your line is open.
Great. Thank you, Hey, I wonder if.
Just going back to that the organic growth or rather that revenue growth of four to seven.
In the organic the three to five what would be the split it kind of what you're calling counted the big three the 80, 80% of the revenue or so in that versus kind of that the 20%, though the less traditional so I guess, what's the core of 80% growing at versus kind of the noncore in that 3% to 5% organic.
Yes, Kevin is mindful that Mike.
Hi, good for the Big three I would refer back to the Investor day guidance that we provided legal has afforded by the we have corporates and tax it was 6% to 8%. So those are the ranges that we are targeting for twentytwenty.
Kevin and those will be offset with the print decline of about 4% to 5%. This year and then a lower growth within our borders businesses. Those are the overall components the organic growth.
Great and then if and only one but just if he can answer great. What's the retention implied in those targets.
We saw continued improvement in 2019, we are in the 90 ish plus percent, Kevin We had I think our strongest retention in legal in 2019, Kevin that we've experienced in many years at the legal itself was about 91%.
2019, and that's certainly helped Kevin with less low leverage in the strong reception that we receive their devices to add one bit of color Mike.
To that comment because I think it's interesting I don't recall ever happening. If you look among the large law firms segment as we define it.
We had 100% retention last year, we didn't lose single customer and into for the sake, I don't recall that happening before right.
Similarly, awesome congrats again totally.
And again.
Okay. Thank you and our next question comes from the line of George Tong of Goldman Sachs. Your line is open.
Hi, Thanks, Good morning, I'd also like to add my Congrats Jim Stefan and Mike within your legal segment you converted one third of your customers. The Westlaw edge in 2019 in that number is going to 50% to 60% by the end of 2020 can you discuss how much of a pricing lift you get from Westlaw edge and how much organic growth in legal will benefit from additional conversions. This.
Compared to other drivers of accelerating growth such as further improvements in the retention rate.
Yes, sure tour to I'll start and then US Ami wants to to supplement just one point of clarification to 33% by year end 19 that was the cumulative impact on July 18 through the end of 19, when we launched back in 2018 to retarding, 50% to 60% we continue to experience.
It's good overall premium lift George over that time period, and we would expect about 100 basis points of improvement in 2019 and 2025.
From less while edge additional items that are contributing George would be to high Q acquisition that we did in July 19th we have our government business led by Steve Ruefully that is growing very nicely that business is over 400 million now.
So those are through the key components for us jewels in 2020 for legal Stephane Indeed.
No thats assays for obvious competitive reasons, we prefer not to be too specific about the kind of price premium we.
We are getting for hedge but sufficient to say that.
Sufficiently differentiating products from the traditional west, though that we have encountered original issue.
With customers in terms of.
Showing them the value that the new product brings compared to Doug to the other product.
Got it thank you.
Thank you and our next question comes from the line.
From Avondale Galapagos team with Canaccord Genuity Your line is open.
Good morning, Thanks for taking my questions and congrats Jim and Cepheid on your tenure and dial divest and Mike as well.
My questions on the software and solutions component, Thank Stephanie we'll get enough to give us.
A sense of how much of the legal division had how that spread between content and software solutions is there is it possible to give us a consolidated number there and.
Connected to that I mean on Investor day, I know that you provided various side about how significant that software solutions pieces globally in terms of Tam.
I was wondering at this point if you can talk to set of the penetration of that $12 billion bucket.
No that obviously, it's not just Thompson Reuters going after that component. There are there plans alongside you as well, but how much of that 12 billion today's penetrated and how do you see the.
The future set of exploitation of that opportunity.
Hi, it's Mike and I'll take the first part of that question in regards to the software thesis on shared we were around 30%.
Last call overall, we are about 35% for total TR the highest piece within tax which is around 75% incorporates is about 60% to 35% would be to answer to your specific question for total TR.
Jim did you want to comment in regards to the 10 Boston.
Our system, if you want I can be the fund that.
Aravinda and essentially.
We think this.
On the broader software market.
This is a market that these highly fragmented where there's a lot of smaller players.
And so we see an opportunity to penetrate that market we very.
Thinly penetrated in that market I would say overall and we see opportunity through to 2% sorry accelerate our penetration and I think that acquisitions will play a role in that and as you've seen last year. The type of acquisitions we are.
Targeting are exactly in that space and you. So you should expect that as you see us deployed.
More cap of behind acquisition, it's going to be very much to try to increase penetration in that part of the market.
Thank you very much.
Operator, I think we have one final question.
Perfect and our last question does come from the line of Andrew Steinerman with JP Morgan Your line is open.
Good morning, it's Andrew Congrats to Mike and welcome back to the sector. Steve has gotten Jim you indicated wexler edge penetration would reach 50% to 60% of west slow our legal revenue basis. Here do you think that penetration can go much higher further out and when thinking about westlaw add should we think of it as like a module like that.
One step function, where you might have additional modules coming out in west slow edge and so that premium could be like multiple premiums as we go throughout the years ahead.
Yes, I think the penetration great in 19, with some like 33% right growing to 50%. This year end or just to be just to be clear that is exactly how we think about it and.
I think is terminals modules that we'll continue to grow we are in a constant the state of development workflow engine. If we think about our old product cycle. It would've been the drop a big thing into the Salesforce at the beginning of the year new start working on what you're going to do for the.
The next year.
Or two years out of that sort of thing and obviously the world has changed a lot since those days. If you look at what we did last year after after.
Launching westlaw as we came out with with Jack we came out with case analyzer opportunities.
Within the same year and I think we're going to continue.
To see that kind of product velocity and depending upon where clients are in their contract cycle with us remember most of our clients are on multiyear contracts.
We can use that to either extend the contract.
Premium prices for people to take on longer.
Contracts, but it can sometimes get that thrown in each of the improvements around and so I.
I think it's an important part of both sustaining our premium pricing on overall westlaw and.
You know for some clients generating additional sales with the new modules and the other thing I would I would add if you look at the underlying content that powers those AI tools I've actually been surprised to see I think it's a 7% Mike correct me if I'm wrong on the number we've seen a 7% uplift in those under.
Airline content sales because that contents required to.
To power the analytics, so, yes, it's going to be a constantly evolving.
A product I hope, we certainly hope is the gift that keeps on giving for years to come.
Thanks, Jim.
Okay.
I think thats our final our final question. So before we conclude let me just say that.
Jim and suburban congratulations on completing Europe, what I believe is your 33rd and final earnings call together and congratulations for surviving all 33 relatively unharmed.
I know that many of you or all of you will be interested in meeting both Steve and Mike over the course of the next short while Steve's official start date will be March 15th.
So we expect that we will be on the road meeting with many of you. Shortly thereafter, so staying stay tuned for that.
Thanks, Thanks to the team here for for your work today and thanks to all for joining us and we look forward to seeing over the course in next couple of weeks of a good day. Thank you.
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