Thomson Reuters Corp (TRI) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome today to the third quarter earnings results conference call. At this time, everyone is in a listen-only mode. Later, there will be an opportunity for your questions, and at that time I will give you instructions. If anyone during this conference should need assistance, press 0, then star. As a reminder, this conference is being recorded. And now I'd like to turn the conference over to your host, Mr. John Kechejian; go ahead, sir.

Thank you. Good morning, everybody. On behalf of the Thomson Corporation, I'd like to thank you for joining us this morning to discuss our results for the third quarter of 2002.

All of you listening in to our open conference call and also our webcast should have a copy of our third quarter earnings release and the set of slides in support of them. But if you don't, both the release and the slides are available on the Thomson corporate website at www.Thomson.com.

Before we begin our presentation, I would like to refer you to the Safe Harbor statement that's contained in the last page of the slide package. As always, I'm not going to take the time to read the slides, but I do want you to be aware of it.

Please note that this morning we have our CEO, Dick Harrington, on the call with us today, and Dick will take us through and give us an overview of our third quarter results. Following Dick will be our CFO, Bob Daleo, who will take us through the financial results for Thomson and each of the market groups. And as its results are seasonal towards the second half of the year, our featured market group speaker this morning is Thomson Learning, and we have David Shaffer, president and CEO of the market group, to provide us with an update in their critical third quarter. After Dick, Bob and Dave's formal remarks, then we will turn it over to you and let you ask any questions that you may have.

Dick?

Good morning, everyone.

I'm glad to have the opportunity this morning to update you on Thomson's latest results and ongoing strategy. During the third quarter, the market environment in which we operate remained weak and we expect these conditions to continue throughout the year and into 2003. Despite the weak market conditions, we had a good quarter. We remain focused on our long-term objectives: sustained revenue growth, expanding margins, driving free cash flow, and being selective in our investments. And it is important to note that we continued to show progress on each of these metrics during the third quarter.

Number one, our revenues continued to grow; organic revenues were up 3% during the quarter with our learning group posting the strongest results with a 9% increase. To eliminate the effects of seasonality, we evaluate our other metrics on a 12-month rolling basis. On a rolling 12-month EBITDA margin, it increased to almost 25% by the end of September as a result of the integration and leveraging efforts across our businesses. Our rolling 12-month free cash flow per share increased to $1.34 -- $1.35 from 23 cents the same period last year. This growth and free cash flow is a result of driving efficiencies across our businesses and doing a better job of leveraging capital expenditures. An example of this is our rolling 12-month Cap Ex metric, which declined as a percentage of revenue for the third quarter in a row. It now stands at 7.3%, down from 8.1% three months ago. And Bob will go into these metrics in more detail.

Before that, let me give you a brief overview of some of the highlights from each of our market groups. In the legal regulatory group, our global online revenues continued to outpace the market, resulting in good organic revenue growth and market expansion during the quarter, but the weak market environment continues to impact the results of Dialog and our global trademark business. The learning group delivered very good results in a very important quarter. As many of you know, learning is a seasonal business and the third quarter is an important one. So, we were pleased with the numbers there.

As David Shaffer will tell you in a few minutes, we are beginning to reap the benefits of the Harcourt acquisition, particularly in the academic sector. Our broader product offering has enabled us to successfully grow revenues and increase margins around the world. Within life-long learning, most of our businesses also performed well during the quarter, however, the market for corporate training and development, particularly in the IT sector, remained weak and affected our results.

I don't have to tell you how difficult the market is for Thomson Financial. With the continued head count reductions, and there was another 14,000 announced in October, and the reduced number of deals, the downward pressure in this marketplace is tremendous. But the added depth of our offerings, from the acquisitions, has helped us here. This group continues to focus on upgrading their bundled products and services and aligning their organizational structure to fully support an integrated sales of marketing approach for the financial marketplace. As a result, they have delivered four straight quarters of improved EBITDA margins.

Our scientific and healthcare group is continuing to generate solid growth and solid returns. The Web of Science increased their penetration in academic research institutions from 44% to 56% globally. We also acquired current drugs during the quarter, to expand our capabilities in the drug discovery and development process in our pharmaceutical and biotech companies. It is solutions-oriented, all electronic, and subscription based. In summary, we had a very solid quarter, and we expect to end 2002 exactly where we thought we would be at the beginning of this year. We're pretty happy about this in this difficult and uncertain market. For the full year 2002, revenue growth will be in line with our long-term target, EBITDA margins will expand, free cash flow will increase and capital expenditures, as a percentage of revenues, will continue to decline. We do not have the same visibility regarding next year. We do expect that the difficult market conditions will continue and we are currently in the midst of developing our operating plans and will continue to focus on growth and margin expansion.

With that, I'm going to turn the call over to Bob.

Thank you, Dick. I'd just like to mention that the financial results for the quarter will be certified by Dick and myself as we -- when we distribute them.

Now I'd like to talk about slide 10, for those of you following with the slides. I will start with an overview of our ongoing businesses. Revenues from ongoing operations for the third quarter were $2.1 billion, representing an increase of 7% over a year ago. A significant portion of this growth was due to strong quarter at learning, which grew 13% in scientific and health care which grew at the same rate. I will discuss them more in detail when we get to the groups. Ongoing EBITDA for the quarter, after our corporate and other costs with $637 million; we're 17% ahead of a year ago. And our margin expanded by 2.7 percentage points.

Ongoing operating profit for $87 million was up 19% over last year. And income of our businesses benefited from the effective acquisition and the capturing of synergies related to the [PrimeArt] and Harcourt acquisitions and our EBITDA in Thompson Media. And I think as we go through these results, one thing will be evidently clear, that we are definitely cycling through the integration of these acquisitions, and they're certainly starting to pay off in terms of business performance and cash generation. Moving on to slide 11 --

Bob really means it's slide 10.

Oh, I'm off one; I apologize.

Moving to slide 10, the -- this is -- shows our earnings per share and breaks down all of the components from operating profit through to earnings. The improved results from learning, as I mentioned, certainly contributed to this performance. It is important to note that we also benefited on a year-to-year basis from the lower amortization expense of about 7 cents per share. This is due to the CICA adoption, which is equivalent to FAS-B 142. Some of this is partly offset, obviously, by aid higher tax rate in the quarter compared to a year ago, but you should also note that -- that the tax rate in the third quarter of 19.2% is reflective of a year to date adjustment where we expect now our full year tax rate to be closer to 20% as opposed to 22%, which we had been booking through the first half of the year. This is not unusual, as we get further into the year we get closer to year end and see where most of our profits are coming from, the estimates get harder and we get better at it.

Moving on to the next slide, this slide compares our earnings per share after adjusting for these accounting rules and excluding some one-time items such as restructuring costs and disposal gains or losses. On this base in the third quarter, we earned $259 million or 40 cents per share, and this compares to -- to 32 cents per share for the same period a year ago.

The next slide shows that overall some characteristics of our financial position. Total assets declined by almost $400 million from the beginning of the year. This is primarily due to improvement in accounts receivable balances and the transitional impairment charge made in the second quarter for a 20% equity investment in Bell Globemedia. This was amounted to $116 million, to remind you. Our net debt declined by $360 million after using the proceeds of our primary share offering in June to pay down debt. The significant reduction in our leverage position over the past 12 months clearly reflects our commitment to maintaining a strong financial position and rock solid balance sheet. Shareholder equity increased due to the issuance of common shares in connection with our offering, and was offset in part by a payment of dividends and the effect of that transitional impairment I mentioned earlier.

I'd like to move to evaluation metrics. At the investor day that we held in October, I presented these. For us, we remain focused on long-term objectives, which are sustained organic revenue growth, expanding our margins, driving free cash flow, and continue to be selective in our investments. We continue to show good improvement in these important metrics in the quarter. Core revenue growth, as you can see, organic revenue in the third quarter for the four market groups grew 3% in a rather challenging market. In the first nine months of the year, in constant currencies, we grew about 2%. This compares to organic growth a year ago in the 3 or 4% range. The estimated organic growth rates for each of our four market groups were about 7% for learning, 4% for Thomson Scientific and healthcare, where it also is reflective of the advertising-sensitive areas of magazines and periodicals, and legal group grew about 1%. Excluding our Dialog business and our trademarks, organic growth would have been close to 2%. And this is all offset by the downturn in TF of about 3% organically.

EBITDA margins, the next few slides, what I wanted to talk about are these metrics, which we look at really on a 12-month rolling basis. First of all, we do have a seasonal business, and these statistics would be, we believe, meaningless on a quarterly basis, but are more indicative when you look at the 12-month periods. And this slide in EBITDA shows the rolling 12 months, and it really does speak to our efficiency of our businesses. It shows the progress we're making in the integration of major acquisitions that we made in 2000 and 2001 and our leveraging initiatives. Using this 12-month rolling will adjust for seasonality, and it demonstrates that we are realizing the expected results of our integration efforts. We've begun this cycle over the integration of Harcourt, and the annual run rate margins preceding those of the Harcourt level and up significantly from the low of 22.5% two years ago.

In terms of capital expenditures, Dick talked about this. It does address the same points as our EBITDA margin. We do invest in -- in -- we invested early in the integration phase of these businesses and we're beginning to see the leverage and the fruits from that. Our capital expenditures average is down to 7.3%, and, by the way, this includes significantly higher book plate related to a much larger book business than we had certainly 12 -- 12 to 14 months ago. We've had good reductions noted in both financial and in learning, while in legal and scientific we continue to be highly efficient. Again, we're coming out of that heavy investment spending that we've incurred over the past few years to integrate these acquisitions, and these results are very much in line with our long-term objective regarding overall capital efficiency, which we expect will be in the 7 to 8% range of revenues.

In terms of free cash flow, again, what you see is a 12-month total. Which, again, in our view, is the best judge of performance. And you can see not only the significant growth and the cash provided by operations, which comes from improved operating performance and reductions in working capital, as we integrate these great these businesses and get more efficient in that regard. Our other investing activities improved $148 million from last year due to reduced integration costs and other payments associated with acquisitions and dispositions. I would mention that this performance for the current 12 months also reflects a contribution of $107 million to our U.S. defied benefit plans, and I'm going to discuss those more fully in a minute.

The next slide shows our precash flow on a per share basis. It's another important -- another way to look at the same measure. Again, the Q3 results, which include $107 million or 16 cents per share. It shows a dramatic turn around in cash generation of these businesses. It is dramatic, but it's not unexpected on our perspective. We know these businesses have this capacity, and we've made these investments, and as I've said before, we're cycling over them right now.

I'd like to spend a minute to talk about our pensions. We, like all major companies, have been buffeted by the equity markets and also by declining interest rates. Our -- our worldwide pension plans, our funded status, declined from 124%, or being overfunded by a quarter to 81%, just over the last two years. In September, as a result of this, we decided to contribute $107 million to our U.S. plans. This was not required under RISA, but the contribution strengthened the balance sheet and reduces our future pension expense. We're still evaluating a potential contribution for international plans, which will happen before year end. But these would be significantly less than anything regarding the U.S. contribution.

We do not anticipate the need for significant additional cash contributions over next several years as a result of making this contribution at the time, and certainly as you saw from our cash generations slides that we can certainly accommodate this within all of our current cash planning. Now, reportedly we do expect that pension expense will increase by about $30 million next year. We believe it is a manageable expense, but none the less, it is one we take into consideration. I would just give you -- I know these are important statistics. When you look at our pensions, we have taken our total assumption of returns on our asset investments down over long-term, including the U.S. plan from 9% to 8%, and we're currently employing a discount rate, which is very important. The discount rate is used to set the liability. The lower the discount rate, obviously, the higher the liability. The reduced debt from over time -- over the past two years, from 7.2% down to 6.2%. And the returns calculations reduced over the same period as I said from 9% to 8%.

Next slide, we turn on investor capital. This is very much a long-term measure for us, and it is obviously a lag indicator. The ROC reduced slightly in the -- this quarter, when you look at a 12-month basis. It is due to the full effect of the Harcourt investments that we've made, the $2.1 billion. We will see further reduction in the fourth quarter, not unexpected. We will begin to see a turn around in this, we believe, in 2003.

I'd like to take a few minutes and step through each of the market groups quickly. Starting with Legal and Regulatory. As the slide notes, we've increased our revenues by 5% in the quarter and EBITDA grew 10%. Organic growth was about 1%. Now within that are -- our overall or online revenues grew about 7% and remain a key driver of organic growth for the business. We had some good growth within that and significantly enhanced operating performance at Finelaw, which is our online business that maintains websites and directories for the legal market in the United States. And this performance was offset in part as we noted -- the continued decline of trademark search activity and the weakness in transaction portion of Dialog's core products. These products were down by 14% alone in the quarter. We did experience some slower sales in new sales in accounting and tax products in the quarter, which we believe are due to the economic environment, and we continue to -- to see a very weak economic environment in Latin America, which certainly is translating to poor performance ultimately for our businesses in those regions.

Now, we'd like point out that -- that in the -- in the quarter, our print performance, the print business, was favorably impacted by the movement of some titles within West from the fourth quarter to the third quarter. As a result of this, our print-based revenues in next quarter will be lower compared to the prior year. So, that's something I just wanted to point out to you.

In Thomson Learning, our revenues increased 13% and EBITDA increased 28%. Organic revenues grew about 9%, and in the academic group, overall growth was 12.5%, pretty much close to the overall 13. And the organic growth was, again, 9%, driven by strong growth and higher education in the U.S. and internationally. In the Netg, which has struggled through the previous quarters performed well in this quarter, and grew revenues and expanded margins in a down market.

In Life-long earning, most of the sectors performed well. Particularly notable were both Prometric, our testing business, and DBM, our outplacement and services business. The IT training market continued to be impacted, as Dick mentioned. Lower integration costs and other one-time charges compared to Q3 last year were lower. Our one time integration costs were $10 million in the quarter versus $15 million a year ago. Adding back these integration costs would result in EBITDA margin of 35.6% compared to 32.5% a year ago.

Now, last year we said that these Harcourt one-time integration costs would total about $60 million, that we take to the P&L and we're tracking to this total. Since we acquired Harcourt, we have incurred $49 million of these one-time costs. $34 million last year and $15 million through the first nine months of this year. Dave will talk more about the learning business in detail in a minute.

In Thomson Financial, I think we talked about the environment here. Our performance revenues declined 3%. However, EBITDA increased by 1% in the third quarter. This performance was felt most significantly in investment banking and -- and sales and trading. Those two vertical segments of our market. However, the outsourcing service we provide continued to do well both our joint venture with the Depository Trust Corporation and Beta had very strong growth, and our corporate group continued to grow due to increased work in the corporate sector.

Now, we introduced many new integrated product pilots we launched in the third quarter. Thomson Equity One, which many of you saw at our investor day. Thomson Advisor and Thomson Analytics. We had some good sales results with some looming in sales. A mid-market company selected First Call [unintelligible] managers, wealth management platform was selected by many money concepts. In addition, our EBITDA margins continued to improve, and our rolling 12-month average improved for the fourth consecutive quarter. Overall, we've experienced 110 basis point improvement in the margin over this timeframe as we've been buffeted by a very, very weak market for top line growth.

As for scientific and healthcare, our last group to talk about, revenues increased 13%. EBITDA grew roughly about the same. Organic revenues were about 3%. And the growth in the Web of Science subscriptions was very well continued in the quarter. We've maintained 100% renewal rate in this product, and our penetration, as Dick talked about, of our leading academic institutions is a major factor in the success of this business. And we've also experienced higher subscription-based revenues from our drug information sector. And all of this was offset in part by the continued lower journal advertising spending. While the declines in this segment have slowed from what they were in 2001, which were very sharp, they continue. And the magazine segment is down about 10% in the quarter from the prior year. In addition, a small amount of operating profits has been influenced a bit in terms of margin by the timing of some expenditures associated with the directory mailers, which we moved forward from the fourth quarter to the third quarter.

Now, speaking about corporate and other, this is where we also contained the media group, and as been our practice, we will separate that out so you can see the performance of this group related to relative to ongoing corporate expenditures. Revenues of the media group declined by 13% as a result of reduced advertising across all of its publications. However, the business did improve its EBITDA. Albeit, a small amount. This is a result of the business integration and cost reduction programs that are implemented at the end of 2001 and throughout the first half of 2002. In terms of the corporate expenses, corporate costs in Q3 related to the World Trade Center of last year and they were one-time. That's why you see this improvement on a year-to-year basis. I would point out that -- that depreciation is increased at corporate from a year ago, due to some corporate-wide initiatives that resulted in higher capitalized software.

With that now, I will turn over to David Shaffer to talk about the learning group.

Thanks a lot, Bob and good morning, everyone.

I'm going to be on slide 27 to begin with. And I'd like to start with just a couple of overall comments. First of all, Thomson Learning continues to follow in line with the Thomson strategy of providing integrated solutions to its customers. At the tail end of my remarks, I will show an example of how Thomson Learning is continuing to build electronic solutions into its product mix to make learners and teachers more effective and efficient. I will also provide you with another example of how Thomson Learning has leveraged a business opportunity by combining the assets and the distribution channels of one business, Peterson's, with the capabilities we acquired in the Harcourt acquisition, to build a truly differentiated online product in a cost-defective manner. We are continuing to see such cross asset opportunities in the number of areas within Thomson Learning and these will continue to help us be leaders in providing high value learning solutions. We've seen synergies on both the cost and the revenue side that extend across all of our assets.

First, a couple of words about the market environment moving to slide 28. The higher education market has been driven by enrollment increases and outside the U.S., in particular, we like what we see. As we've said to you before, the demand for higher education outside the United States will far outstrip the ability of bricks and mortar universities to serve that demand. Library budgets, however, are down. But the acceptance of electronic products, especially integrated ones, is proving strong. And in information technology, certification test volumes down about 12%, reflecting the overall decline in the IT sector. In testing, however, Prometric is seeing increases across-the-board in other areas, including our academic professional, corporate drivers testing and with regard to ETS in the international markets.

If we move to some of the specific results now, beginning on slide 29, let me talk about the academic group and the progress that they're making. Our strategy here is very sound. We focus on the adult learner and provide instructional materials and tools wherever he or she is found. Colleges, career schools, corporations, or other institutions. As I said at the October 1 investor day conference, we deselected the k-12 market because of its unfavorable adoption economics. So, in higher education, with the bulk of the Harcourt integration work now under our belts, we've turned to maximizing the potential of those assets by cycling them efficiently our production and publishing programs. Our margins in this particular sector are in excess of 25%. And more importantly, our international group continues to outperform the market in all regions.

The library reference segment is performing well in a very challenging market. An example would be our new opposing view points resource center, which is our fastest-growing resource center to date. This is a good example of how we take a tactical acquisition,this case, Green Haven, and leverage it into our sales channel and our cost structure, but then we configure it, as well, for our resource centers. This product gives pro and con view points on social and other issues, an important teaching tool in schools. As a resource center, it is Gale's fastest growing, as I said. And it, too, benefits from the linkage Gale's other resources, the periodicals and so forth. And it links to social issue websites. It has daily relevance to the topic being examined. Such Gale resources are providing us strong tie-ins to the college instructional market, and we will continue to be aggressive in leveraging the resources. In just the first eight months of this resource center's launch, we've had sales of $2.9 million. And our U-21 product, being launched in Singapore, is on target for enrolling students in the first quarter of 2003. And with regard to Peterson's, which is also managed in this space, I will have an example I will show you a little later about how we're doing there.

Let's shift to slide 30 and our life-long learning group progress. We're making significant progress in all of the life-long learning group areas. As I mentioned before, Prometric is growing in all areas outside of IT. Some of these in double digits. For example, our driver's license testing. Our computer book business has been strategically focused in academic areas that have shown resilience from the IT market problems. I will show you one example of how we're growing profits and revenue in the computer book business. Also, we're combining NETgv course ware and our WAV Bootcamps with ILP manuals produced by course technology to provide blended solutions.

Drake B. Moore and DBM's provision of e-service for outplacement candidates is being rolled out worldwide now. And it has the ability to transform this business while leveraging other TL assets. And our professional training segment, in particular at Delmar, is having another very strong year. NETg has placed its strategic focus on working with all management system providers, which are compatible with our software to ensure inter-operability and ease of deployment.

Let's look at a couple of examples of some of the things going on in the learning group. We move to slide 31. We will talk about how we're transforming technology instruction. This is a -- an example of a product which we call Skills Asset Manager or SAM for short. And it underscores the value that -- that will drive electronic usage in sales in -- in the instruction market. Course technology solution provides instructors and students simulation and testing tools for the Microsoft XP product suite. It now covers Word, Excel, Access and Powerpoint. And the program simulates the application environment. The application is downloaded to a student's hard drive, and communication of data occurs via the internet. It provides skills practices, scheduling of tests, transmission of grade book and other monitoring for the instructor. SAM for this product is a four-fee electronic product in higher education and other academic markets. It has had 85% growth over the 2001 SAM product. It was introduced for the Fall semester, and already, as of October 31, 560,000 exams have been taken by 111,000 students. So, as you can see, more than five exams per student. This product also allows instructors to customize instruction and monitor the progress of a student. And it's being expanded to other areas of XP such as Outlook and we're evaluating multiple language use, as well. This is mostly a higher-ed product, but some career schools and other schools are also in the mix.

Let me move now to my last example, which is Peterson's and demonstrate for you some of the cross group leveraging that's going on within academic and our life-long learning segment. There are actually two products on this slide that make this a suite. What's pictured is the NETg online product. Peterson's also leveraged our academic group to use the Brooks Cole assessment as a basis of online practice tests to accompany the actual prep test being delivered in this area. This product will help users improve skills in the specific areas in which they are weak, as they prepare to take the SAT exam. Peterson's leverage NETg's learning object technology in order to build a differentiated online SAT test prep product. The product was build in our life-long learning group development center in Limerick, Ireland, and it diagnoses skill gaps and provides learners with the ability to focus their specific problem areas related to their upcoming exam. It can be used within schools or at the student's home, and it will be launched in December of this year. We believe that we can also extend this technology into other areas. And to demonstrate to the power of leveraging the assets across Thomson Learning and the newly-acquired Harcourt assets, Peterson's was able to quickly define for our Limerick operations the features and functionalities and Limerick produced quickly re-using existing platforms.

That concludes my remarks on the -- regarding the third quarter operations, and I will turn it back now to John Kechejian.

Thank you, Dave. Before Dick, Bob an Dave take your questions, I'd like our conference call operator, Royanne, to explain how you may queue up to ask your questions.

Ladies and gentlemen, at this time, if you have a question, press 1 on your touch-tone phone. You will hear a tone indicating you've been placed in queue, and you may remove yourself by pressing the pound key. If you're on a speaker phone, please pick up your handset before pressing the numbers. Again, ladies and gentlemen, for any questions at this time, please take the opportunity to press 1 on your touch-tone phone. And we will first go to the line of Vince Valentinie with TD Newcrest. Go ahead, please.

Thank you very much. Question would be on the other investing activities, $35 million for the quarter and $133 million year to date. First of all, when you do the Cap Ex to revenue, are you including those items? Wondering if you could explain what's in there? And what the outlook is for the segment going forward?

Very good, thank you. First of all, when we do the Cap Ex, no, there are no capital expenditures in there. What those are, primarily, the integration costs of -- of making acquisition, that aren't -- that don't go through the P&L. There are certain costs that -- that you set up as you're about to integrate these businesses. It could be -- it could be certain severance costs, it could be, maybe perhaps ongoing lease arrangements that you decided you're not going to need. Those are all cost-related and figured very much into -- into the capital planning of, you know, the investment planning around the acquisition. But they tend to be balance sheet items and definitely cash expenditure items, which is why we include them in the free cash flow. The reason you see the declines is for the simple fact if you looked at that over history, you would see the numbers, you know, one or two years ago, were, you know, hundreds of millions of dollars. As we integrate in the acquisitions, the PrimeArt and Prometric and so on, those were -- those were expenditures that the company was making to integrate those into our ongoing businesses. So, those are declining because the integration of programs are behind us, more or less.

Thank you. Next in queue, we will open up the line of Dina Dijere with Blue Water Investment Management. Your line is open. Go ahead.

Sorry, I have no questions.

Thank you. I beg your pardon. We will go next to the line of Carl Choy with Merrill Lynch. Your line is open. Go ahead.

All right, thanks, I'm calling on behalf of Lauren Fine. A couple of questions. One, I understand you're used to doing a budget at this point, but as you look toward 2003, specifically for the financial segment, do you expect revenues to be at least flat? And second, if you could quantify the impact of the timing shift of textbook shipments in the second quarter to the third quarter. Thanks.

I will take the first question. It is Dick Harrington. I think in times of financial, it is too early to determine what's going to happen next year. As you know, our business isn't in sales and trading side, it is in investment banking and investment management and corporate. And in those businesses, in those areas, we have segments that were doing, actually, quite well, but also have segments that are getting hurt. It is a function of what happens in the investment banking area. At this point in time, we won't have a better handle on Thomson Financial next year until we get closer to year end.

And the second part of of that, the shift is about $20 million that went from second quarter was backlog, that moved into third quarter.

Your next question is coming from the line of Tim Casey with Nesbit Burns. Go ahead, please.

Thanks, a couple of things. One, I wonder if you can talk a little bit about Dialog, if you could just give us some indication on order of magnitude, basically of how much it represents of -- of legal and the degree of the impairment? And then, are you concerned at all that this is a permanent impairment rather than a cyclical one? Maybe if you could talk about some of the -- the things you think will bring that business back? And also, just wanted to confirm, the $30 million in pension expense, just wanted to confirm that that will go through the P&L above the EBITDA line, and I guess we should assume it just gets factored into the various market groups? Or is it -- does it go into -- right into the corporate items? Thanks.

Tim, this is Bob. I will answer the pension comment. It goes in the EBITDA and part of it -- part of it, you know, corporate has pension expense, too. It will go back to market groups, but it will be in the EBITDA line. In terms of Dialog, I will start. If Dick has anything to add -- Dialog represents certainly less than about 7% of the overall group. So, it is a small part of the overall group. Where we're seeing the decline is entirely in transaction-related marketplace. We have a large -- a good part of the business is -- is contract-related and a large part of that serves the -- the scientific market and other markets. Where we're seeing the decline is in -- in investment banking, which has been a big customer of Dialogs and in consulting. And that's where it is occurring. So, it is very systemic in terms of what's occurring in Thomson Financial. The core market of Dialog is not declining anywhere nears that rate or even at all. It is pretty much flat. And so I think that, you know, from our view here that that transaction revenues will just have to cycle over it as the market declines as we're doing in investment banking.

Thank you. Next in queue, the line of Tom Law. Go ahead, please -- I'm sorry, with McDougal and McDougal.

Good morning. First of all on your pension contribution -- I'm going to show my weakness in accounting, I guess -- why wouldn't that flow through the P&L statement? And the second question is with this contribution, where does that take you in terms of percent funded?

I will answer the second question first. First that, -- we're pretty much fully funded in that regard. That's why we made the contribution. We -- so -- so that's not a concern for us. In terms of $107 million, that is not a P&L item. It is -- it is a cash item. But it doesn't flow its way through the P&L. I'm not an expert in accounting, either. It goes against our liability as someone reminded me. But it's not -- it's totally a cash item which, in our perspective, isn't as important as -- as -- as anything. The expense is -- is calculated in. There is no expense impact in 2002. The expense impact is in 2003 based upon with this level of asset base and the assumptions in terms of what we -- what the long-term assumptions of returns will be and what the long-term assumptions of liability will be, I talked about the impact weighing heavily in that regard. Those two factors are what weigh into to determine what the level of pension expense will be.

Thank you.

Next in queue I will open up the line of Randall Rudzinski with CSFB. Your line is open.

Thanks. I have two questions. First of all, regarding the comment of challenging market conditions in 2003, and I was just wondering if you foresaw -- or foresee any spreading of market weaknesses into perhaps the science or the higher education market? And then the second question is on the higher ed segments, and if you could kind of quantify what portion of that business is international operations? And if you could give us a bit more visibility in terms of the growth trend in international versus domestic?

Okay, let me -- this is David Shaffer, Randall. Let me take the higher ed pieces first, then Dick can comment on the science side. The -- the international piece of this -- you can count international by origin or destination, a number of different ways, but we -- we do about 10% roughly of our revenues in a learning group in the international side of the business. Skewed a little bit more highly toward the -- toward the academic side, the higher education side. And that business, as I said in my comments, has been growing quite nicely. To the -- to the first question, though, I do not see a softening in the higher education market for 2003. I don't expect that it's going to be any different than it is this year.

And as far as the scientific and healthcare, scientific and healthcare cycle is slightly different than the economic cycle. It really depends on what's happening in the pharmaceutical biotech companies and the drugs that are in process. The already -- I would say small rate we have, we do about $80 million in ad based revenues in scientific. That gets impacted by the pharmaceutical companies. But our scientific research products and information, CME products and do -- should do -- should continue to do the same growth as they've done historically.

Thank you. And next in queue we will open up the line of Chris Hussy with Goldman Sachs. Your line is open.

Good morning, gentlemen. Maybe Dick or Bob, could you clarify on, you know, in the -- in the press release -- in the guidance section you talk about 2003 being a weak, you know, being very weak visibility. Can you just clarify for us, are you sort of suggesting that we should be taking down 2003 numbers -- should we be taking down 2003 numbers by just the 4 cents for the pension contribution, or should we be thinking more than that as we look here? Or are you not trying to make that signal? And the second question is clarity on the investments you made in the third quarter '02, $165 million? Bob, maybe you could break out to the extent possible what the investments were?

Okay, as far as the guidance goes, Chris, what we're saying right now is we know that 2003 is not going to be consistent with kind of, you know, long-term market conditions. But we're not saying anything other than that at this point. Because, frankly, we're still going through our plan process and we don't know what the -- what 2003 holds at this point. We're just letting -- letting you know what you already do know that in the fact that 2003 is shaping up to be, for more businesses, not materially better than the current year. In terms of the investments, the largest part of that is we have made and announced an acquisition called Current Drugs, which I think Dick briefly touched on in his comments. That's what is comprised in that investment.

Thank you --

Sorry, I don't have the number in front of me but...

And next in queue we have the line of Douglas Arthur with Morgan Stanley. Go ahead, please.

Just going back to financial for a second. Can you -- and I know this has been asked many times before -- but on the -- in terms of the percent of your financial revenues that is based on sort of large contracts or contracts with large customers, can you just provide any color on kind of what -- what contracts might expire? The magnitude of them? Where are you in that cycle? Or -- there are so many that it is hard to decipher a pattern.

Doug, this is Bob. Before I do that, I want to cycle back to Chris and just tell him that that -- the $165 million, the most significant part of that was Current Drugs. It represented -- it represented about 85% of that, roughly. And the others were some small items which are really not significant. So, just to -- to fully answer your question, Chris. In terms of the contracts, the way TF -- most TF contracts work is that while -- while in fact we do have annual contracts, they really -- in terms of -- I'm going try to read behind your question and say there, Are contracts that are coming up that could be canceled or significantly reduced that haven't been reflected? We generally will flex with our customers. So, even though we might have an annual contract, if the customer comes back to us and says, Gee, I really need to reduce this. I need to cut the number of terminals or cut back on the amount of information, we do not hold them to the letter of the contract. So, even though we have subscriptions, pretty much what you will see today is pretty much the revenue run rate that we -- that we're experiencing in the business. Doug, are you still on the line? Does that get to the heart of your question, or not?

It covers it.

Okay.

Thanks.

Thank you. And next in queue we will go to the line of Jeff Sang with UBS Warburg. Go ahead, please.

Great. Thank you very much. Bob, just wanted to ask you a question about the pension contribution, since you guys made the cash direction bring you back up to full- funded status. What if you didn't have -- what if you didn't make this cash contribution? What -- does that imply, that next year you probably would have a higher pension expense going into '03?

Jeff, yeah, this is -- this is pretty complex territory when you talk about pension accounting. There are two things that drive us. One, and the most important is, our fiduciary responsibilities to our employees and that is best demonstrate through, you know, meeting RISA requirements. And the second is the one you're referring to is GAAP. Under RISA, we didn't have to make a contribution, but we chose to make it because where the funding status was. And -- and also by making that contribution we did lower our pension expense because if you -- the larger that unfunded liability is from a GAAP perspective, you would have a higher expense. The other thing is that -- that -- by making that contribution, if you don't make the contribution under GAAP, you would take an equity mark down. Not not that it would concern us from that perspective, but we're focused on maintaining a strong balance sheet. And we felt, frankly, the most important thing that guided us was the fact that this made economic sense for to us do it this time. So, to answer your question, yes, if you don't make a contribution -- the reason we're facing this ahead of a lot of other companies is it just so happens that our plan year for the U.S., which represents almost 60% of our plan assets, happens to end September 30. And so we had to make these decisions ahead of -- of a lot of our counterparts who will, for most companies, have a pension plan period that ends December 31. They will all be faced with the same situations. As I said before, when you have declining equity markets, there are a number of things that happen. First, you suffer the real decline in your asset base, but second, because of that, you tend to -- it tends to affect and should affect your long-term thinking about returns. Okay? And then third, those -- the declining economic environments also resulted in a decline in interest rates, and we use the Moody's double-A bond rating as our indices, and that's declined almost one full percentage point in the past two years. What that's had the effect of doing, since you take the discount rate and discount your liability going back, the lower the discount rate, therefore the higher your liability. So, you have a double-whammy here. And so, you know, we have to take all of that into consideration. And it is very long and winded and complex response, but I hope I got to the crux of your question.

A couple of...

I'm sorry?

I'm sorry, he has dropped off. Mr. Sang, do you wish to hit 1 to requeue? And there he is. Let me open up his line. I beg your pardon, sir, your line is open again.

Thank you very much. Just a couple of quick follow-ups. Talked about the U.S. -- or the overall academic higher education business doing very well. Can you give us the growth rate that you had in the third quarter for U.S., specifically? And also the growth rate for Westlaw, as well, please.

I can give you the overall growth rate for the third quarter as opposed to the U.S. specific. But the growth rate for the quarter was 11%, and 6% was organic. But -- and I did not hear the second piece of the question.

Can you repeat the second part of that?

The second one was just related to Westlaw. What the growth rate was in Westlaw?

Oh, the Westlaw growth rate was about 4.5%.

Thank you very much.

Thank you. And next in queue we will go to the line of Andrea Horan with RBC Capital. Go ahead, please.

Thanks. A couple of questions, back to the pension, the $30 million expense; is that a tax deductible expense? That's the first question. And in terms of modeling, should we assume that it will get allocated approximately proportional to the segmented revenues? And then the second question was with respect to the margin improvement in Thomson Financial, are you going to be able to keep the pace of margin improvement or have you largely had most of your cost saving initiatives cycling in?

I will answer the second question first. We continue to see opportunities for some margin improvement, but obviously we've -- we've cycled through a good part of it. So, I would say that we -- we don't see significant opportunities to improve beyond where we are, a little bit, but not much. In terms of the pension expense, the $30 million expense, certainly is tax deductible, and the $107 million contribution that we made is fully tax deductible. So, there are economic benefits to us by making that contribution, as well. And we will allocate back out to the market groups that -- that amount. Let's see. It's -- it's allocated based upon employees. So, I'm sure that you can look at the scale of the businesses and get a sense of that. Does that answer your question, Andrea?

It does, thank you.

Thank you. Next in queue we will go to the line of Mark Braley with Casanova. Your line is open. Go ahead.

Yes, hi, two completely unrelated questions. First of all on Ilex, can you just tell us what the general count was at the start of the year and was it was at the end of the quarter -- the quarter just ended? And also kind of can you give us a feel for what you're projecting on that for the end of this year? And then secondly on DDM, kind of looking at the comments in the presentation it looks like you have firmly decided that that business is going to be retained. Is that the right interpretation?

In terms of Ilex, I don't have those numbers in front of me. I do know that obviously it has declined. And I hesitate about guestimating about it. I will ask John to -- we will get those and we can provide them.

We will post it to the website.

We will post that to the website. But I just hesitate -- I know it's gone down. I also know, on the other hand, that revenue per terminal has gone up as we've increased applications, so we've been able to offset that with better service in terms of DDM.

I think as DDM has obviously performed very well during these times, they are, as you saw, I think some of the comments, they are -- we are moving them into some web operations and moving them into a full service organization and linking them closer with the other Thomson running businesses.

Before we go to the next question, I want to do a follow-up with Andrea on the question of how we'd allocate. It's important on the pension costs. It is important understand that TF -- we have a defined contribution plan, not a defined benefit plan. So, this increase in cost is allocated amongst corporate and the other groups, not to TF. Okay? Just a very small amount would go to them.

Thank you. Next in queue, the line of David McFaggen, your line is open. And Mr. McFaggen is with National Bank Financial. Go ahead, please.

Hi, yes, thank you. You talked about your global online revenue growth, I think it was 7%. I was wondering if you could you tell us what the U.S. experience was? And just on Thomson Learning, you had strong organic growth in Q3, I was just wondering if you think that you might be able to repeat that performance in Q4?

I'll answer the first part and leave that to Dave to answer the second part. In terms of the global -- the -- the U.S. online growth, while I mentioned that Westlaw was about 4.5%, I think if you add in some of our tax-related businesses, that would improve that to about 5%, a little bit more than that. Maybe 5.5. Which are U.S.-based businesses.

And on the -- this is Dave Shaffer, on the higher education side, you know, we're not going to forecast forward the -- the fourth quarter, but David as you know, the fourth quarter is the extremely important quarter for the higher education business, and our performance year to date has been quite strong. So --

Thank you. And next in queue we will go to the line of Tom Law with McDougal and McDougal. Go ahead, please.

Thank you. And just going back to the 2003 outlook, given some uncertainty regarding revenues, I'm wondering how you're going to charge your managers in terms of improving EBITDA margins, operating margins, et cetera? Will you put a much greater emphasis on continuing to improve the margins or take a more longer term view and maybe not get the same bang for your buck that you've had recently.

Well, I think, you know, historically -- if you look at Thomson historically, we've always driven the growth in revenues and revenues growth in EBITDA. We will continue to -- and obviously cash flow, and we will continue to do that in 2003 and beyond.

And can we go on to the next question?

Yes.

The last question, then, is coming from the line of Tim Casey with Nesbit Burns. Go ahead, your line is open.

Thanks. Bob, can you give us direction on what tax rate to model next year? Thank you.

Let me look into this crystal ball here I've got and I will respond. I'd say coming out of the gate right now I would use about 22%, which is the rate we had -- we -- we had 22% this year. We think it's going to be closer to 20%. So, I would use that as -- as a reasonable number. As we get closer, I will try to be more specific with better guidance. Okay?

Thank you.

Thank you. Before the operator informs how you can listen on the replay, I do have a response on the Ilex retail broker work station. Number of terminals, retail broker terminals at year end '01 were approximately 170,000. Today it is about 161,000, and that reflects the continuing market contraction. So, it's not so much loss of share, it is loss of seats.

And with that, I'd like to thank everyone who listened in today on behalf of Dick, Bob and Dave, we appreciate your participation and your interest in the Thomson Corporation. Thank you.

Thank you, ladies and gentlemen. That concludes your conference for today. This conference is being made available by your host beginning November 5 at approximately 2:00 p.m., ending November 12 at approximately midnight. To reach the replay information, in the United States, you may dial 800-475-6701. Outside of the United States, you may dial 320-365-3844. Enter the access code 656428. Again, those dial-in numbers are, within the U.S. 1-800-475-6701. Outside of the U.S., 320-365-3844. The access code is 656428. Thank you for participating in this conference call and using AT&T. You may disconnect at this time.