Q2 2019 Earnings Call

Ladies and gentlemen, thank you for standing by.

Welcome to the.

Thomson Reuters second quarter earnings call.

At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session.

You have a question today Press Star then one on your Touchtone phone.

You may remove yourself from Q at any time by pressing the pound key.

If you are using a speakerphone, please pick up the handset before pressing the numbers.

We ask that you limit yourself to one question today if possible.

And if you should require assistance during the call. Please press Star then zero.

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host Mr., Frank Golden Senior Vice President of Investor Relations.

Please go ahead.

Thanks, and good morning, and thank you all for joining us today.

And then Jim will close with a discussion of the acquisition of affinity and by the London Stock Exchange group that was announced earlier this morning.

Now we have a lot to cover today. So when we open the call for questions. We'd appreciate it limit yourselves to one question each to enable us to get to as many questions as possible.

And I'll remind you that definitive is not included in our adjusted earnings or adjusted earnings per share.

Now throughout today's presentation, when we compare performance period on period, we discuss revenue growth rates before currency as we believe this provides the best basis to measure the underlying performance of the business.

Today's presentation does contain forward looking statements actual results may differ materially through 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.

Let me now turn it over to Jim Smith.

Thank you Frank.

And thanks to all of you for joining us today.

Operating performance came in a bit ahead of our expectations.

We launched new AI powered products that we developed in house.

And we completed two acquisitions that will help us fulfill our mission of building world class platforms to help our customers work more effectively.

Additionally, the merger of our former market data and treating assets with the London stock Exchange group will create even more value for our shareholders in the coming years.

I will provide more detail on this transaction at the end of our formal remarks.

But first.

Let me expand a bit on our Q2 results.

Reported revenues were up 9% in the quarter, which included the quarterly payment from.

Definitive to Reuters news.

Revenues at constant currency were up 10%.

More importantly, our organic revenues grew 4% in the second quarter, which represented our highest reported organic growth rate since 2008.

That solid organic revenue growth performance was driven both by recurring revenues, which were up 5% and by transaction revenues, which are up 2%.

Adjusted EBITDA.

Was $355 million.

On an underlying basis, the adjusted EBITDA margin was 31.2% for the quarter benefiting somewhat from favorable timing of expenses, we do expect the margin to be a bit weaker in the third quarter due to timing of expenses and other factors, which stephane will speak to in a moment.

And finally.

Our legal corporates and tax and accounting segments, which comprised about 80% of our revenues led the way.

Recurring revenues for the Reis These three segments, which make up about 88% of total revenues grew a healthy 6%.

We continue to expect strong performance for these three segments for the full year and as you've seen this is where we have been targeting our inorganic investments as well.

Reuters news revenues were up over 100%, including the quarterly payment from affinity.

With organic revenues up 2%.

You will recall that Reuters news revenue growth rates will be distorted this year until the fourth quarter at which time, we will lap. The first quarterly payment that was made in the fourth quarter of 2018.

Global franchise.

Continues to outperform our expectations by successfully slowing the rate of decline.

Organic revenues declined 3%.

And made up 12% of total revenues.

Since consolidating.

All.

Of our global print businesses under one management team last year.

That team has done a terrific job driving new sales developing new commercial offerings and increasing retention.

And the team also continues to find ways to operate more efficiently as evidenced by the EBITDA margin exceeding 44% for the quarter.

An increase from last year.

For the full year, we now forecast that print revenues will decline mid single digits.

So we're encouraged by our first half results.

And we expect to deliver solid performance in the second half of the year as well.

As we look to 2020 and beyond we're working to build a faster growing business based on a sustainable recurring revenue model that should drive consistent margin improvement and steady growth in free cash flow per share.

We believe we're on a path to achieve that aspiration by executing on three key objectives. First we are focusing on the fundamentals in order to deliver on our 2019 and 2020 targets.

Our first half results indicate that we're making good progress, but we have more to do as we work to achieve our targets for this year and next.

Second we're continuing to build on our strengths as a market leader the strong positions, we hold in our markets provide us with an opportunity to better understand and meet the challenges that our customers face.

Demand for technology led work flow solutions that help our customers save time and deliver more valuable more value to their customers is increasing.

And we are working to capture new customers spend by serving those evolving needs.

That's helped us drive our commitment to develop new AI solutions, which our customers are demanding and expecting from us.

And third we are supplementing organic growth by selectively acquiring businesses and capabilities that are truly complimentary and that have a multiplier effect when combined with our existing workflow solutions.

When we evaluate a potential acquisition, we always ask ourselves.

Why would we be a better owner of this business the answer must be that the business or capability can be plugged into our existing offers offerings and that it will accelerate growth for our entire enterprise.

We are not adding businesses to a portfolio.

We are building industry workflow platforms. That's precisely what we believe integration point is doing for our global trade management offerings.

And what confirmation will do for our tax and accounting solutions.

And what high Q will do for our legal and corporate businesses.

Let me now speak to our recent acquisitions, a bit more and our new AI products, which we believe will contribute to an accelerated revenue growth rate.

Building that growing sustainable recurring revenue model of course requires healthy organic revenue growth.

And that's what these three AI solutions on this slide are expected to do.

Each of these solutions further strengthens our position enables us to tap into white space, where we can increase our share of wallet by by improving customer productivity.

AI solutions are now part of our developmental fabric and we plan to release additional AI solutions in each of our three core business segments over the next 18 months that will also contribute to growth.

Westlaw edge was released one year ago.

It has been very well received in the market and it continues to command a premium.

We're also enriching the product having just last month released quick check a new module available in west La edge that furthers. The lead we have in legal information and analytic tools to help lawyers work more effectively.

Quick check quickly reviews, a user's motions briefs or other legal documents to find highly relevant authority secondary sources and other related briefs and memoranda to ensure that westlaw edge customers find what they may otherwise miss in traditional legal research.

It provides lawyers with peace of mind that their research as thorough.

They can also know that they've cited the most relevant authority and most accurate law.

It can also help find weaknesses in an opponent's brief.

And it delivers the best work product possible.

For the client, while also saving and attorney time.

As evidenced by the quote on this slide from a law firm partner.

If clients know this exists every firm will have to have quick Jack.

Our customers are already recognizing the benefits and we are pleased with the positive reception thus far.

And finally checkpoint hedges, our recently released AI enabled intelligent tax and accounting research and guidance tool, which is also being well received in the market checkpoint as delivers the most relevant and accurate information that tax and accounting professionals need to respond to the challenges their clients space with a constantly changing tax and regulatory landscape. We expect this solution also drive sales in the second half of the year as it has adopted a commercial model that's very similar to the one we use with less loss edge.

Now as you've seen by our recent acquisitions, we are supplementing our improving organic growth rate with fast growing and strategically aligned businesses like the ones listed on this slide.

I've consistently said since closing the refinished of deal last year that we plan to use our investment fund of $2 billion, primarily to strengthen our positions in legal tax and accounting businesses by pursuing cloud based software businesses.

That's exactly what these acquisitions do.

Specifically each of these acquisitions is highly complementary to.

To our product suite and also explained it expands the geographies where we operate.

They are in high growth market segments, and they are growing at 10% to more than 30%.

They will be able to utilize our significantly larger distribution networks in sales forces.

And each of them fits in essential acquisition criteria. They are cloud based software businesses that help our customers work more effectively with their customers.

They are important building blocks in the construction of industry platforms.

So within these three acquisitions, we have utilized approximately half.

Of our $2 billion investment fund.

So given our first half performance, we are raising guidance for 2019 and 20 for both revenue growth and EBITDA margin.

We now expect 2019 revenue to grow between 3.5% and 4% and we expect 2020 revenue growth to range between 4% and 4.5%.

A reminder, that these are organic growth rates.

And for EBITDA, we forecast that both 2019 and 2020, we will be at the upper end of the ranges that we had previously provided EBITDA is expected to be between 1.45, and 1.5 billion. This year and the margin is forecast to be approximately 31% in 2020.

In spite of the true traditional impact associated with the acquisitions, we just completed.

I remind you here that all three of our recent acquisitions will be accretive to free cash flow next year.

And last.

We now expect that we can fully eliminate stranded costs by the end of 2019.

Therefore, corporate costs in 2020 are expected to range between $140 million and $150 million versus the prior estimate of 140 to 190 million.

So with that let me turn it over to Stefan.

Thank you, Jim and good morning, or good afternoon to all of you joining us today.

As we always do let me start by reminding everyone that our results exclude the performance of anything.

Also I, we took to revenue growth before currency.

So on a constant currency basis second quarter revenues were up 10%.

Currency had a $21 million negative impact on revenue.

Or just under 2%.

On an organic basis.

Revenues grew 4% during the second quarter, which excludes the impact of the orders under this contract was definitive the integration for an acquisition and a few small divestitures.

And we provide more detail about the breakdown of our organic revenue growth rate on the next slide.

But first.

Turning to profitability.

Adjusted EBITDA was $365 million in the second quarter of 2%.

At performance reflects additional costs and investments related to the separation of the two companies.

Offset by margin expansion across most segments.

And as Jim mentioned.

We do expect the margin to be weaker in the third quarter, given the higher cost we will incur related to our ongoing transformation programs as well as the diluted impact of our recent acquisitions.

From a timing perspective.

We spent about $30 million less in the second quarter related to onetime corporate costs and we had a fact.

But he is expected to fully reverse in the third quarter.

Importantly, we still expect to finish the year with EBITDA in the top half of the range. We have provided earlier our full year outlook.

I will provide more specific details on our outlook for corporate costs in Q3 and Q4 in just a moment.

But first and similar to last quarter before turning to the segment results I'd like to go a little deeper into our organic revenue growth performance in the first half.

Overall organic revenue growth was 4%.

Which represents an improvement of about 170 basis points over performance in the first half of 2018.

As shown on the left hand side of this graph. This was driven by better organic growth performance in all three of our core businesses legal contracts and tax and accounting.

Overall, both recurring and transaction organic revenues are contributing to the 170 basis points improvement, which is reflected on the right hand side of the slide.

Starting at the top.

Our recurring revenues in the first half grew about 5.5% organically.

An improvement of 130 basis points from last year.

Recurring revenue growth in the second quarter, and a snacking below 5.5%, which was very marginally below the onest.

Quarter performance.

This was driven by strong net sales improved retention as well as improved price realization.

The year over year improvement in recurring revenue growth was particularly visible in the corporate segment.

While legal and tax and accounting professionals.

Each grew by about 100 basis points.

Now shifting to the bottom right portion of the slide you will recall that in the first quarter transaction revenues have declined 3% driven by our legal segment.

Now despite a better performance in the second quarter.

During which transaction revenues were up 2%.

Our transaction organic revenue growth.

It was down 1% during the first half of the year.

However that performance reflected an improvement of 190 basis points over the prior year period.

Andy pulling west all concentrated in our corporate segment, we've both legal and tax and accounting professionals slightly worse than the prior year.

So we are encouraged by our first half revenue growth performance, which gives us the confidence in the trajectory of the business and that is the reason why we raised our revenue growth guidance to the top half of our guidance range for post 2019 and 2020.

Now let me provide some additional color on the performance of our individual segments starting with legal.

Net revenues were 73% during the quarter with organic revenue up.

4%.

Recurring revenues, which were 92% of the total were up 4% organically.

While transaction revenues were up 6% organically, primarily driven by growth in our elite products.

From a profitability perspective.

The margin of 38.5% was up 500 basis points over the prior year period.

Driven primarily by revenue growth productivity savings and some favorable timing of expenses.

We continue to expect the full year EBITDA margin to be up from last year, driven by the factors I mentioned earlier.

And here's a more detailed look at bigger professional this revenue performance for the second quarter.

Law firms, which includes small mid and large law firms and represented about two third of total revenues.

While service grew 2% up from 1% growth in the first quarter.

Government was up 6%.

And the global segment was up 3%.

Now that performance was negatively affected by the divestiture of some of our transaction based businesses in Canada.

Which had a negative impact of about 650 basis points.

Finally, legalise retention rate in the second quarter climbed above 91%, which speaks to the health of the business and he is also contributing to revenue growth.

Now moving to our corporate segment.

Corporate <unk> revenues were up 9% during the quarter with organic revenue growth of 7%.

The acquisition of integration point, largely explains the difference between the total and organic growth rates.

Recurring revenues, which made up 85% of the total 9% organically.

And transactions revenues were down 2% organically due to softness in our former legal managed service business, which as a reminder, we sell to Eli on May 30 Onest.

From a profitability perspective.

The margin of 32.2% was up 20 basis points from the prior year. Despite the diluted impact of the integration point acquisition.

Now looking at culprits reason by sub segment large corporates grew 10% driven both by taxing ego solutions. In addition to the newly acquired integration point business.

Organic growth in that sub segment was 7%.

The medium size corporates grew 7% and global corporates grew 4% thanks to a steady performance from our Asia business.

Now moving onto the tax and accounting professional segment second quarter revenues grew 6% in organic revenue growth was also 6%.

Recurring revenues, which were 81% of the total were up 9% organically driven by a strong performance in our Latin American business as well as some favorable timing factors.

Transaction revenues declined 4% organically.

And the adjusted EBITDA margin for the segment was 33% compared to 23% in the prior year period due to revenue growth efficiency savings and favorable timing of expenses.

As a reminder, the tax and accounting segment is our most seasonal business, we have nearly 60% of full year revenues typically generated in the first and fourth quarters.

Because of these.

The margin performance in this segment is generally higher in the first and fourth quarters.

As cost are inherent in a more linear fashion throughout the year.

Now looking at our tax and accounting revenue by sub segment small mid and large accounting firms, which make up nearly 80% of the total grew 4%.

Our global businesses Rose, 27%, primarily driven by our Latin America business.

And our government segment, which makes up just 6% of revenues declined 11%.

With a solid start of the year.

Coupled with the recent launch of checkpoint edge and the acquisition of confirmation. We believe that these big season positive trajectory as we look to the second half and two next year.

Moving on to rotors news.

The second quarter results include $84 million of revenues from our affinity which explains the revenue growth rate exceeding a 100% in the quarter.

The third quarter will be the last quarter of higher growth rate before returning to a more normalized level.

Organic revenues grew 2%, which was mainly attributable to a price increase related to derivative contracts.

And EBITDA was $10 million.

As we expected higher costs and investments in the second half, which will result in a weaker EBITDA performance over the balance of the year.

As a reminder, the revenues from our affinity for essentially covered the cost of providing the new services and therefore these contract as the diluted impact on our overall EBITDA margin.

And last but not least our global print revenues declined 3% over the prior year.

These organic revenue was also down 3%.

These better than expected performance was attributable to improved sales growth.

And improved retention.

Which has increased some.

500 basis points over the last five years.

EBITDA margin for the quarter actually increased from the prior year period, ending at about 44%.

These new global segment structure is enabling the management team to better identify areas to leverage scale on both the revenue side and the cost side.

Best practices are being implemented in each geography for contract renewals, which is helping sales and retention.

And on the cost side savings are being achieved in a variety of areas, including recently announced the consolidation of or North American printing in our Minneapolis facility.

For the full year, we continue to expect lower print revenues to decline mid single digits.

Now before turning to the RAF inhibitor results. Let me provide you with a quick snapshot of the projected financial impact associated with the acquisitions and divestitures, we recently completed.

The information provided on this slide is somewhat directional but hopefully it should give you a good idea of which business segments would be most impacted by that the recent M&A activity.

Overall, the three businesses, we have acquired over the last eight months.

I expected to generate about $135 million in annualized revenues in 2019.

And they are growing at about 25% in aggregate.

Now please note that the revenue base shown on this slide represent their expected annualized revenue base and since we only acquired confirmation and high Q2 weeks ago.

These vacancies contribution to TR revenue in 2019 should be about half of the amount indicated on the slide.

We also divested businesses with an annual revenue base of about $70 million.

These disposals will reduce our exposure to services and transaction revenues going forward.

From a profitability perspective, we expect the acquisitions, we recently completed to be diluted to our margins in the near term due to onetime deal related and integration costs.

But in no way reflects the long term potential of these businesses.

In fact, we do expect all three acquisitions to become accretive to our margins within a 24 month period.

Let me now speak for a moment for the performance of the affinity business.

As a reminder, our previously reported its results for the ethanol business are not fully comparable to the basis on which we finish currently reports its financial performance.

For instance, refunded must apply specific purchase accounting rules, which were obviously not applicable to before the closing.

Also refinish gives management team uses slightly different definitions to calculate non IFRS metrics.

So what you see in the stable order results as provided by our affinity as management.

Now to the results for the second quarter Refinish give revenues before currency were up 3% in the second quarter rounding to $1.6 billion.

Recurring revenues, excluding recoveries with 2%.

And continued market volatility led to a 10% growth in transaction revenues.

Adjusted EBITDA of $565 million excludes the transformation costs.

Our $126 million during the quarter and on that basis. The adjusted EBITDA margin was just under 36%.

Free cash flow for the second quarter was $89 million.

Debt outstanding was just under $13 billion and the preferred equity outstanding was about $1.1 billion.

And lastly, refinish achieved run rate savings of $318 million as of the end of Q2.

And expects to achieve over two third of its total run rate cost savings target by the end of this year.

So the company is very much on track to achieve its full run rate target of $650 million by the end of 2020.

Now, let me turn to earnings per share and free cash flow performance and I will also update you on our expectations for corporate costs.

So starting with earnings per share adjusted EPS increased by 12 cents to 29 cents per share.

Resulting from fewer shares outstanding and lower interest expense following our debt repayments in 2018, using part of their affinity transaction proceeds.

The increase was partially offset by higher depreciation mainly due to the adoption of IR 16.

As well as higher income taxes, which is very much in line with what we had projected in the guidance. We provided earlier this year.

And finally currency at a one cents positive impact on EPS during the quarter.

I will now turn to our free cash flow performance for the first half.

Our reported free cash flow was negative $176 million.

Versus a positive $675 million in the prior year period, So that was a decline of about $850 million.

Consistent with previous quarters.

This slide will hopefully help you remove the distorting factors impacting our free cash flow performance during the first half.

Working from the bottom of the page upwards.

Terrific related component of our free cash flow was down $502 million from the prior year and that was primarily due to affinity from no longer be included in our results.

Also in the first half we made a pension contribution.

And outer payments totaling $370 million or related to this directive separation.

So comparable free cash flow from continuing operation.

Was $318 million, an improvement of just over $20 million over the prior year period.

Primarily due to stronger EBITDA performance before stripe and onetime costs and also to lower interest expense.

Now a quick update on corporate cost from 2019 and 2020.

Let me start by saying that the 2019 annual estimate has not changed from what we showed in our original 2019 guidance for the full year, we continue to expect to spend about $570 million.

Looking at our spend during the second quarter. It was lower than we had expected at $140 million and that was primarily timing related.

We now expect onetime spend to peak in the third quarter.

Driving corporate cost to a quarterly high point of about $160 million.

We have a number of initiatives slated for the third quarter, including building out our own communication networks and shifting several products to the cloud.

As a result.

We do expect Q3 to be our heaviest quarter from a onetime cost perspective.

And finally as in prior to the previously mentioned, we are raising our full year 2019 guidance for organic revenue growth to 3.5% to 4%.

And.

Even after considering the diluted impact of our recent acquisitions, we now anticipate being in the upper half of our adjusted EBITDA guidance range.

Of one point $45 billion to $1.5 billion.

For 2020, we are updating our organic revenue growth guidance to four to four and a half a percent.

And we are taking our guidance for adjusted EBITDA margin to the top of the range at approximately 31%.

Finally, as mentioned earlier by Jim we expect to eliminate or stranded cost in 2020.

Such that total corporate cost will decrease to between 140 and $150 million next year.

Or auto guidance metrics remain unchanged.

Let me now I'll turn it back over to Jim for some comments regarding the transaction that was announced this morning between refinished.

And the London stock Exchange group.

They use to fund.

At the time, we announced our partnership with Blackstone 18 months ago, We mentioned that one of the key reasons to do that deal was to position the business for what we saw coming on the horizon.

Which is a phase of consolidation in the financial services industry.

Separating the financial business from Thomson Reuters was a necessary first step to put us in a position to participate in the industry consolidation.

It also enabled us to focus 100% of our attention and resources on our remaining legal and regulatory businesses.

The second quarter results indicate that we are well on our way to accelerating growth in those core businesses.

And the transaction announced this morning by us in the Elysee group.

Confirms our initial thesis about consolidation in the global financial services market.

This transaction transformed LSC jeeze position as a leading global financial markets infrastructure business.

And it increases its ability to capture global growth opportunities.

With a greater range of leading market positions.

Now the value creation that refinish since we began working with Blackstone.

Has largely been driven by operational enhancements and cost savings.

This transaction with LSC group, we'll double down on operational enhancements with significant additional cost and revenue synergies expected to be realized once the transaction closes as an investor.

We are comforted by LSC groups, a strong Tac track record.

Of integrating acquisitions, realizing synergies and driving growth and profitability and with Blackstone remaining a very significant shareholder in the business alongside us.

We are even more confident that this transaction will create significant further value going forward.

At a high level the transaction creates an $8 billion company and position it positions. The LSC group for the next phase of sustainable long term growth.

The two businesses are highly complementary.

Their combination will create a globally diverse company with a well balanced mix of stable developed markets as well as emerging markets with good growth opportunities.

The business will also bring together.

Two leading global market infrastructure businesses.

Two companies that have successful open access philosophies and.

Similar customer partnership approaches.

Two companies that are systemically important.

World class businesses, serving a customer the global customer base.

And the combined company will be a market leader across most of its business segments, just 25% of revenues will come from desktops down from 38% at Refinish live alone.

Now this slide was used by the LSC group early this morning during its investor call. The slide lays out their forecast across key metrics in and the financial returns they expect to achieve.

Including financial targets for revenue growth cost and revenue synergies expected returns for earnings per share and return on invested capital and their capital management framework for leverage and dividends.

The combined company will have an attractive financial profile with mid to high single digit predict projected revenue growth and strong EPS accretion in the first full year post completion supported by cost savings and revenue synergies.

I would direct you to the LSC group if you have further questions regarding this information.

Turning to financial performance.

The Elysee group has demonstrated strong and consistent financial results with both revenue and EBITDA growing mid teens on a compound annual growth basis since 2010.

And this consistent revenue and EBITDA growth was achieved through a successful combination of organic and inorganic investments.

And by any measure it's an impressive performance.

Let me now turn to several specific points about the transaction that are pertinent for our shareholders.

As I mentioned, a moment ago the transaction validates the rationale for our original deal with Blackstone.

And it represents a logical next step along our path to the full monetization of investment.

The transaction provides a balance of additional long term value creation.

With a greater certainty on the path and timing of future liquidity down the road.

Having received about $17 billion of cash in October of last year, when we close the deal.

We also benefited from substantial increase in the value of our equity stake in refinish.

Increasing from approximately $2.5 billion.

To more than $6 billion.

This increase was a result of swift implementation of operational enhancements and definitive.

And the value on law from the trade web IPO.

Importantly, the proceeds that we received from the sale of ethanol, we used to strengthen our operating strategy and our capital structure.

We repurchased $10 billion of our common shares at prices well below the current level.

We repaid over $3 billion of debt and reduced our leverage to a very mild modest level.

And we set aside a $2 billion investment funds to make acquisitions that further strengthen our businesses.

Now as part of this deal Thomson Reuters is expected to receive up to 82.5 million.

LSG group shares valued at $6.7 billion based on the closing price of the LSC group yesterday.

And when I walked in the office. This morning that stake would now be valued at $7 billion.

That number of shares reflects the exercise of warrants we've negotiated with Blackstone as part of the original deal there will be a two year lock up on on it on all LSG group shares that we receive with one third salable in years, three four and five after closing.

This transaction also crystallizes the value achieved to date by the original definitive deal.

Having largely achieved the targeted synergies.

Definitive can now contemplate another round of attractive synergies as as it becomes part of the large LSC group.

And as a future shareholder we will benefit from the value creation, that's expected to be generated over the next several years until we achieve full monetization.

Furthermore, this transaction significantly de risk our investment in refinish live through greater diversification diversification and significantly lower leverage with the LSC group.

And finally, we expect to receive a dividend stream from our investment which is something we hadn't received from our investment in definitive.

Following closing, we look forward to being a supportive shareholder and partner.

Now, let me go back to Frank for any questions.

Thanks, very much Jim and Stephane for his opening remarks, and now operator, we would like to take questions. Please so first question.

Thank you. Your first question comes from the line of Toni Kaplan with Morgan Stanley . Please go ahead.

Yes, and Jim you just touched on this but just wanted to understand.

Yes, Tony can Tony can you just get a little closer to your phone, it's just a little hard to hear you.

Sure. Thanks, sorry.

Give me just played out.

The capital allocation.

Strategy here, but I guess.

If you could just talk a little bit more about what this means for a couple years out in terms of any changes to capital deployment.

You know you're you're obviously this is an investment assuming a close and.

Post the lockup period.

Obviously could be significant in terms of value so.

Yes, I guess can you just talk about capital allocation with the proceeds.

Now from framing this transaction announced this morning. Thank you.

Thank you.

I mean, obviously, it's a bit premature to be very specific about that Tony and is a good question and.

Certainly one that we've been discussing a good deal the way we handle our capital allocation decisions is that we sit down with our board once a year take a look at the current environment look at the current needs of our business what our opportunities are.

And then you know we're in a very fortunate position already in that we have a business that is highly accretive from a free cash flow perspective, so we generate a lot of cash and the decision in discussion is all around where to best spend that cash.

So and you know in any given year, we'll make decisions about what our dividend.

Increase is going to be how much we're going to allow for buybacks how much capex is needed how much we need to have a lot for acquisitions, but we kind of tune that every year on on on an annual basis and traditionally we've done that in September . So we will have a robust debate about that.

Next month and.

You know based upon that will will will will will.

Kind of proceed.

Along the path, we're along right now frankly, there won't be any near term changes shortly.

Because we're not going to be any.

Near term.

Big distributions that we would be expecting I wouldn't say, however, that frankly, where we are.

We're very happy to have the cash flow that will be coming in from the dividends and.

We will never.

Turner knows about additional capital flow through.

Although I don't think it'll be significant enough to change our our overall capital strategy it would be nice.

Nonetheless that I just.

No. It did one point to and to do that I want to underline here.

When I think about our business and is that kind of virtuous cycle that we have of having the ability. If we can grow our top line and a mid single digits. Right. Then that we're going to get some leverage that falls through to the bottom line, we're going to see continued growth in our free cash flow and free cash flow can then be reinvested.

You know to the just the kind of acquisitions that we've done to help that topline keep growing and actually to add a little bit to the headline number every year. So.

I don't think we'll change that basic model.

But is it will be a good problem to have and have a good discussion with our board.

Thank you congratulations.

Thanks. Thank you. Our next question comes from June Mcreynolds with RBC. Please go ahead.

Hi, Thanks, very much good morning.

Just want to talk about organic revenue growth and the updated guidance either for Jim or Stephane just do in mind.

Just kind of peeling away a little bit.

I guess the broad question is when you look at your asset mix going forward I mean, it sounds like 4% is kind of the new baseline.

Growth for the business can you can you talk about just how what's driving that in your prepared remarks, you talked about were occurring.

And Thats really the basis for today's upward revision, but talk about the upsell and cross sell initiative if you can.

Does the drag in transaction revenues ultimately reverse when you look forward.

And then lastly on the calculation of organic revenue growth are you, including.

The organic revenue growth of the acquisitions that you add.

They're apples to apples year over year growth organic goes into that calculation. Thank you.

Sure Deliberative again, that's that's a quite a mouthful, but well start to look.

Is 4% to you the kind of the new floor, it's a very very.

Interesting question and as you noted.

Though some 80% of the businesses can't among as recurring revenue.

Model and if you look underlying as we reported here.

That's growing nicely in fact, this growing five 6%.

You know across core businesses so.

Thats highly repeatable.

Thats highly recurring that gives us great confidence, we do have 20% of the revenue that's in this transactional in print.

Im space print schedules aren't always you know exactly like for like year over year in terms of what is published and what those schedules look like so I'm not going to tell you that in any particular quarter.

You know transactional revenues, the 20% transactional imprint couldn't have us rounding down to three no I wouldnt.

Tell you that but I would say if you look at that underlying recurring base right and in performance we see in that.

We look to 2020.

We are thinking that a quarter beginning with the fives far more likely than a quarter beginning with a three.

Okay. Thank you and maybe Jim if I could follow up or one first year end I'm. Just just if you can talk to what the tax implication ultimately is here for Thompson on.

On the flow through from what's happening with repetitive on and this transaction.

Let me have it is there in that office upon sure good morning look.

We.

We would expect to pay taxes on the gain.

Which we will eventually realize on our investment when we when we monetize that investment.

Our our expectation is that the closing of the proportions action will not give rise to any significant.

Taxes, as we simply exchanging its a share for share exchange so.

The tax should not be.

Triggered at the time of closing that there are some circumstances, where.

The deferred tax liability that we booked in connection with the transaction could potentially be exit array for instance, if we receive.

Cash for a portion of the investment and you may have writing the announcement from the lessee that yes. He has an option to be up to two and a half billion of the of the proceeds in cash rather than shares.

And under that scenario obviously.

Since we would be monetizing part of the the adjustment it would be a portion of the deferred taxes that would be accelerated but by and large I think what you should assume is that.

Taxes should be defer until such time, we actually realize the gain on the investment and that will happen.

When we eventually said our shares based on the stock price of the LMCFT, which we set our shares at that time.

Okay. Thanks best of entry and then Andrew.

I just realized item answer the last part of your multi year multi.

Factored question about how we calculate.

Our organic growth rates.

Generally we do not include organic acquisitions in the first year of that they are acquired right and then as we lap belt, but once we lap them. They would contribute so they contribute a small amount of organic growth in any given year, yes, I think thats exactly the way you described it in.

Your questions, we can confirm that that's the way it's calculated.

Thank you. Our next question comes from Gary busy with Bank of America Merrill Lynch. Please go ahead.

Hi, good morning, and congratulations on the quarter and the transaction.

I guess, if I could sneak in one question on the transactional one of the operations over the weekend when the when the first reports of potential deal came out and talked about the 27 billion valuation and I think between you and Blackstone, 37% ownership.

Lses stocks up 27%. This weeks. It was 27 really the right number are we are we north of 30 billion transaction value at this point given given that it's going to be largely based on shares in and then the fundamental question.

Just as we think out over the next couple of years with the new.

AI powered cloud offerings that you're rolling out across your businesses is there any reason to think that those won't be adopted by the vast majority of the customer base or are there some reasons that either in in legal or or in tax that yes.

Those are likely to appeal only to the very largest segment of customers or or anything else. Thank you.

Our average Stefan.

If you please address the first one and I'll take the second chart.

So your premise is correct.

The number of shares that Blackstone and us are receiving as private transaction was based on the unaffected stock price of the site was based on a weighted average stock price.

Before the recent jumping in the stock price that was the result of.

The announcement eventually sell.

What you're describing is correct effectively to the imputed value farsi greater than the $27 billion headline number.

And as to the second one is it's a it's a great question and.

Frankly, one we're learning a lot more about.

Our technology team now is operating.

With a theme and that theme is AI everywhere.

And I do think AI is going to affect.

Of products in our offering mix across every segment in every product that we.

Deliver and in fact, if you look at the early results on.

Westlaw edge.

If I Vince positively surprised.

But actually been positive surprise by a lot of things, but I did not expect.

The level of take up that we've seen in the small law firms sex and mid law firm.

Size segment, so actually these productivity tools.

Could be even more effective.

In in smaller operations, where that efficiency is ever more valuable.

Great. Thank you.

Thank you. Our next question comes from the line of Kevin Mcveigh with Credit Suisse. Please go ahead.

Great. Thank you and let me add my congratulations in terms of.

What's the EBITDA tended to boost to the 2020 was that all a result of the acceleration of the stranded costs or was it a combination of just the improving fundamentals as well.

And then just around the acquisitions the tenant 30% growth I mean really really impressive growth.

How does that look like as you scale that those deals across to core Thompson platform I guess another way of saying is is there any way to think about what they can look like your cross selling them across kind of the legacy business. If you would.

Stimulant first and I'll take the second.

Points.

Yes, so the first question I'm sorry.

Gross margin in 2020 of the emerging it's a combination of the two factors. It's obviously the fact that we now have the.

Level of confidence that we will be able to fully offset the stranded cost saves definitive and its also reflection of the higher growth rate, which obviously comes with.

Pretty good flow through and these two positive factors are offset by the slightly dilutive impact of the acquisitions on the margins, but or in that I would say we feel comfortable at this stage that we can achieve a margin of about 31% next year Thats a mix of these these three factors if you won.

And on the second one I think theres, a significant opportunity for us to accelerate.

Some of the growth rates on those.

Business that are already.

A growing much faster than our own.

Core business, but.

When you think about the scale of our global networks and our sales forces.

And these businesses arrive at the right size to really really benefit from that and.

We look at them actually with our acquisition of the practical law company.

As a really good guide and if you for those of you who around then you'll recall that we.

Purchased the practical law company, which had a great footprint in the UK and was in was preeminent provider of know how our knowledge in check lists and things like that were attorneys.

We were.

It right in the middle of it of transactional deals and things and.

They were expanding beginning to expand the United States and getting a little toe hold in the us and when we took that business and then.

Pumped it through our platform. We is it was a very successful business, but we tripled the size of that business in three years right and not only that there are all kinds of knock on effects.

As to our other.

<unk> online legal content businesses, and then today, who we think about the work flow solution that we've designed.

For medium sized law firms.

It's going to be based upon a marriage of the practical law.

Taxonomy.

And and work flow mapping right the matter management maps.

Married with our time and billing system level Lee for customized kind of solution. So those are the kinds of things. We're looking at to say, yes, we can take something that and give it a bigger salesforce a bigger global presence.

And immediately get some benefit but also where the addition of of that capability married with while we already have can create something.

That's that's really special and we Wouldnt have done are on our own.

Thanks, a lot of sense congratulation again.

Thank you. Thank you. Our next question comes from the line of George Tong with Goldman Sachs. Please go ahead.

Hi of Ryan on for George Thanks for taking my question.

I was wondering if you guys had a pretty healthy margin expansion in the quarter for legal and tax and accounting I was just wondering if you could discuss how we should think about expansion within the three core segments going forward and then also sorry, if I missed this but could you talk about what caused the corporate tax margin decrease a little bit on the constant currency basis.

Sure let me take that question.

Let me start with that.

Last part of your question.

The corporate margin actually improved a little bit which is not about performance. If you take into consideration the diluted impact of the integration point acquisition that they did late last year. So you still have that impact going through the numbers apps and that acquisition. The margins would have been up more meaningfully and in terms of margin.

Performance for the three sectors at the three segments are as you look at it.

In the future.

I would expect is going to be a mix of these same two fortys right. They should be good flow through now that all these businesses are growing.

At a pretty robust phase and you've seen that flow through essentially this quarter for the tax and accounting business in legal basis, which were were not offset by.

Dilution impact, but going forward, there's going to be for each of these businesses actually for all three businesses a little bit of margin dilution coming from the recent acquisitions. So I would expect margin expansion state for these businesses, but not to the same extent as what you've seen recently.

Great. Thanks.

Thank you. Our final question comes from the line of Tim Casey with BMO. Please go ahead.

Thanks, Jim looking at your increased confidence in the organic revenue growth.

What's driving that.

And are you seeing the benefits of the cross sale is it more about the product mix or are you just seeing better market growth overall can you break that down for us. Thanks. So I do think Theres theres. Some factor there in that it's a healthy market and when we look at our peer monitor index and we did see an increase in the in both demand and in head count certainly in legal sector. We do have a market in which particularly United States incredibly complex tax changes that went into effect. This year. So there's no question, we do have a.

A favorable market environment, I think frankly, though that that it's just focus matters right and our ability to focus on those core customers and for management.

Is it to get up every single day thinking about how we better serve those customers and working on the relationship with those customers and providing the kind of.

Of the improvements to service that I think we're providing as we look at what's driving it is it primarily is increased retention right and at this point and the.

We've got a new sales structure now in place.

But do you think about that and they're really in their first quarter of selling in the in the new territories with the new offerings and with the new incentive schemes that we put in.

In the commercial terms that we put in so we're at the very very early days of seeing success in that cross sell up sell stuff what I can tell you while.

It is early days, we've seen a flow into the numbers, we do have a very exciting.

And excited.

Salesforce, who is really learning a lot about how to do it and what we're learning is that the more we can tailor those cross sell up sell opportunities to particular customers and segments.

The better off is going to be but thats early days.

It's a decent market environment, yes.

But its focus increasing retention improving service.

And in the future you know, we've got a new form to Salesforce empowered by a lot more analytics and tools to better target those sales efforts and with a much broader bag to cross sell but early days at tapping into that.

Add to that opportunity.

Our the AI product suites, moving the dial yet.

Well certainly westleigh edge is if you look at the just the phase of the rollout. The answer is yes. The other two are really early days, but boy they got a lot of interest in the market.

Great. Thank you.

Thank you that was our final question.

Okay terrific and we'd like to thank you all for joining us for our second quarter call.

We'll speak again third quarter.

Late October early November and hope you have a good day. Thank you.

Ladies and gentlemen, this conference will be available for replay after 11 am eastern today through Thursday August eight.

Wendy 19.

You may ask to see TNT teleconference replay system at anytime by dialing one 800, <unk> 0.756701, and entering the access code Foursix 965 for international participants May dial 320, 3653 hate for far.

Those numbers again are one 804, 756, 701, and three to 036538 far far.

With access code Foursix 9654.

That does conclude our conference for today, we thank you for your participation.

Good for using GMP executive Teleconference service you may now disconnect.

[noise].