Thomson Reuters Corp (TRI) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Thomson third quarter results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call please press the star and zero. As a reminder this conference is being recorded. I'd like to turn the conference over to John Kechejian. Please go ahead.

Good morning, everybody. I'd like to thank you for joining us this morning to discuss our results for the third quarter of 2003. All of you listening in to our open conference call and webcast should have a copy of our third quarter earnings release and also the set of slides that support them. But if you don't, both the release and the slides are available on be www.thomson.com which is our Thomson website. This morning Dick Harrington, CEO, is on the call with us today; and Dick will provide an overview of our third quarter results, and we'll also be available for Q&A. Bob Daleo, our CFO, is also on the call and Bob will take us through the third quarter financial results for Thomson, each market group; and also give us an update on how our financial metrics are proceeding.

After our formal remarks we'll turn it over to you and answer any questions that you may have . The following discussion contains some forward-looking statements that relate to future results and events and are based on Thomson's current expectations. Actual results may differ materially from those expected because of a number of risks and uncertainties discussed in documents that we provide to the regulatory agencies. Our presentation also contains disclosures of certain non-GAAP financial measures as required by SEC rules. We provide a reconciliation of each at our website. And now I'd like to turn the call over to Thomson President and CEO Dick Harrington. Dick.

Thanks, John. And welcome everybody. As you know, today we reported very solid earnings performance in the third quarter, despite continued weak market conditions in some of our businesses. I believe our ability to grow earnings in this environment shows the underlying strength of our business model and the soundness of our strategies. It also shows that we can leverage assets and resources across the corporation to improve efficiency and expand margins even in periods of low top line growth. And perhaps most important, I believe it demonstrates the potential Thomson has to drive earnings as the economy improves and when spending in some of our key markets returns to more normal levels.

We were very pleased to report that adjusted EPS rose 13% in the quarter to 43 cents per share. Profit improvement in the quarter was broad based. EBITDA increased to double-digit rates in three, of our four, market groups and the Thomson Financial EBITDA grew a solid 8%. EBITDA results also expanded in all market groups and, on a consolidated basis, grew 210 basis points to 32.4%; making this the fifth consecutive quarter of margin growth for Thomson in the face of a tough economic climate. On the revenue line, we posted 3% growth in the quarter with very solid increases in legal and regulatory at 9%, and Scientific & Healthcare at 8%. The 3% revenue increase masks some impressive gains in the quarter in some key strategic areas of our business.

For example, online revenues in legal and regulatory grew at a double-digit rate as we continued to transition our customers from print based products to online solutions that are embedded in the work flow of legal professionals. At Thomson Learning, while higher education sales were up 4%, our front most business which consists of new copyrighted text books had an excellent year-on-year growth in excess of 20%. We have been building our market position on higher education and the front list growth is important indicator for the business.

And Thomson Scientific and Healthcare is a good example of using tactical acquisitions to accelerate growth in a strategic market. About half of the TSH growth in the quarter was through acquisitions as we continue to build scale in this market group. Importantly, TSH EBITDA margins also rose in the quarter, demonstrating our ability to successfully integrate newly-acquired businesses. A key financial metric for Thomson is free cash flow. In the quarter free cash flow increased by $101 million to $289 million. And for the year-to-date it was up 47% to $501 million versus last year. Our principal uses of cash flow are to reinvest in the business to drive growth, pay dividends, and repay debt.

As you saw today, we announced a 3% dividend increase and also indicated that we would move our annual dividend review to the second quarter of the year rather than October, beginning next year. This makes more sense since Q4 is such a big-time for us. The new schedule will also be coincide better with our annual planning process. On the subject of cash flow, remember too that in July we announced that our principal shareholder, at our request, would no longer participate in the dividend reinvestment plan. Their participation in the drip had been a sizable source of cash; and our mutual decision that no longer- that they no longer have to participate is another indication that Thomson has built a business with significant and sustainable cash generating capabilities.

Before I turn the call over to Bob let me comment briefly on overall market conditions in our business. It's no secret that our top-line growth in 2003 continues to be hampered by weak spending in some segments. Particularly in our print-based businesses and in industries like financial services and IT where employment levels have been depressed. So our expectations for full year 2003 are unchanged; namely that we expect revenue growth for the full year, but below our long-term target. It's too early at this point to provide revenue guidance for 2004, but we will share our perspective when we report the full year 2003 in February. We are, however, starting to see signs of improvement in some areas that have been under pressure this year.

At Thomson Financial, for example, the year-over-year revenue decline in the U.S. has slowed. In the third quarter it was down about 3% from 2002 compared with the declines of 7% in Q1 and 6% in Q2. That improving trend, combined with further inroads we expect to make with the Thomson One product, point to a revenue increase for Thomson Financial in 2004 after two years of decline. Overall, we are cautiously optimistic about 2004. And we have more to say about that outlook for Thomson come February. But the more important point I believe is that we are building businesses that have excellent long-term potential, businesses that leverage Thomson's strengths and contacts in technology and applications.

We are in the business of helping knowledge workers make better decisions faster; whether they are doctors, lawyers, accountants, educators, scientists, or financial advisors. We provide them with information that is critical to doing their jobs, and we deliver content to them in ways that allows them to use it most effectively. We have established ourselves as leaders in the information services industry, and we are very confident that we have the foundation in place, and the business strategies to drive superior shareholder returns over the long-term. With that, let me ask Bob to provide detail on the financial metrics and business performance in the quarter as well as our overall financial position.

Thank you, Dick. Good morning, everyone. As Dick said, I'm going to take you through the details of our business and financial performance. Starting with slide 8, it's overview, as we have reported strong earnings development in the third quarter consistent with our year-to-date performance. The financial metrics across our business continue to develop strongly, reflecting the benefit of our leveraging and efficiency initiatives across all of our market groups; and the benefit of selective accretive acquisitions.

As Dick has mentioned our cash flow continues to show signs of continuing to strengthen, and as reported, while not in these results; we did announce a sale of our healthcare magazines which was completed on October 1st of this year. Our consolidated results will exclude the results of Drake Beam Morin, as well as, our former healthcare magazines since both of these properties were classified as discontinued. It was noted our revenue growth reflected the growth from several of our business segments, particularly Thomson Legal and Regulatory online and our healthcare segments; with contribution from acquisitions and favorable foreign currency translation. These improvements were offset in part by reduced revenues from Thomson Financial and reduced sales of the U.S. back list editions within the academic business of Thomson Learning.

The increase in adjusted EBITDA and related margins during the third quarter reflected efficiencies realized across the corporation and, to a much lesser extent, the favorable impact of foreign currency translation. Those increases were positively offset by unfavorable year-to-year comparisons related to our stock appreciation rights program. Moving on to the financial position. At September 30th of this year our total assets were $18.5 billion, virtually unchanged from the beginning of the year. The September 30th shareholders equity, I would note, declined by $207 million. This reduction was primarily a result of redemption of our outstanding Series 5 preference shares which occurred in April of this year.

And moving on to a discussion of our valuation metrics. Thomson remains focused on its long-term objectives- which are revenue growth, margin expansion, driving free cash flow, and continuing to improve returns. Our overall performance continues to show the strengthening of the business as evidenced in these metrics. Now we have restated the historical financials in this presentation to conform to the current year's presentation of revenues and expenses. In particular, we adopted the standard on stock options and adjusted accordingly. We increased financial group revenues in order to present on a gross basis certain stock exchange fees that had previously been netted; and Thomson Learning freight and distribution fees as well.

Neither had a significant effect on revenues and had absolutely no effect on EBITDA. We also restated to reflect the transfer of DBM and healthcare magazines to discontinued operations and none of these had a material effect. In terms of revenues, on a trailing 12 month basis our total revenues increased 1% reflecting the growth in legal and regulatory and healthcare; partially offset by the declines in Thomson Financial. Electronic revenues for the last 12 months were 56% of total revenues; and this was led by strong growth in Scientific & Healthcare, which grew 16%, and in legal and regulatory which grew 9%. This slide shows a rolling 12 month EBITDA margin. It speaks to the efficiency of our business and the progress we have made on our leveraging, and overall business efficiency.

Good performance at the consolidated level was driven by improved margins across all of our market groups as Dick had previously mentioned. The Cap Ex, capital expenditure, to revenues ratio reflects greater efficiencies and, to some degree, timing issues. As we have communicated before, we knew that we would have some nominal investing to make in the second half of this year. The capital expenditures related to the merit contract, which were $14 million in Q3, and increased overall on a consolidated basis. We also had some higher spending at Legal and Regulatory, where we continue to invest in our data center. As we've previously stated, for the full year we would expect that we would be closer to the 7% of revenues than 6% that had been reported in the earlier quarters. Free cash flow, which Dick talked about, is an important measure for Thomson; and as you can see from this slide, we have registered consistent improvement throughout this period.

In a little bit greater detail, the improvement in free cash flow in the third quarter was primarily a result of, obviously, our higher profits; we had a lower voluntary pension contribution which we made in the quarter of $50 million compared to $107 million a year ago. We also had the benefit of receipt of $22 million as part of a legal settlement related, associated with SkilSaw. We also had lower levels of investing activities, which reflects the completion of many post acquisition and disposal activities during the period; and we had reduced dividends paid on preference shares due to redemption of all outstanding Series 5s which occurred in April for $308 million.

These improvements were partially offset on a year-to-year comparison by income tax refunds which benefited last year and higher capital investments. Our return on invested capital of 8.5% as of the end of the quarter was higher than 8% a year ago rather at the year-end of last year. This is reflects the improvement of our operations, a slightly lower asset base, a timing of tax payments; and does speak to our ability to integrate acquisitions effectively and accretively on a returns basis.

Moving to discussion on these acquisitions, we continue to make them, but as you can see from this schedule they have been currently quite small and tactile in nature, and this means we're able to fold them in more quickly and get good returns on them. Going to forward we expect to continue to make similar kinds of acquisitions. As you'll note, we made only three acquisitions in the first nine months which were over $10 million. The Elite Information Group is a provider of back office software to law firms, which was acquired in May of this year. Tax Relief is a tax preparation product line which was acquired by the tax business in July. And Gage Publishing gives our learning group a strong position in the French-as-a-second-language market in Canada.

Moving to earnings, this schedule strips out all of the one time charges and restates the years based on the new accounting treatment for goodwill and intangibles; and it demonstrates strongly our continued improvement in earnings performance. This next slide provides a little bit more analysis of the third quarter. Since market expectations are based upon our adjusted earnings, which include certain one-time items; this slide presents a summary of our earnings, and of our earnings per common share after adjusting for the following one-time items. The SkilSaw settlement and the discontinued operations of DBM our healthcare publications.

The difference between the 43 cents reported and the 40 cents first call consensus, we believe is primarily attributable to better performance from Legal and Regulatory group; in part offset by our higher effective tax rate and increased depreciation. I'd now like to move to discussion of each of the businesses. Starting with Thomson legal and regulatory. As this slide indicates revenues in the quarter increased 9% and EBITDA grew 12%. The revenues benefited from strong growth in online revenues which overall grew 13%. Under pinning that was the growth of Global West Law revenues which increased 12%. And this growth reflected strong performance in the U.S., from new products and services and represents a third consecutive quarter of increased revenue growth. Both of online and international markets also contributed primarily here in the UK and Spain.

Checkpoint, our online tax information service, released several new productivity tools; and continued to grow sales and expand subscriptions in the quarter. We also had a strong performance in our software and services, which were up 48%, but albeit from a small base. This reflected good growth in Finelaw and the impact of the acquisition of Elite in the second quarter. While software at Thomson tax and accounting declined 7% year-over-year. We also saw in the revenue numbers a contribution for foreign exchange of roughly 2 percentage points.

Now, print and cd product line revenues increased 3% in the quarter. A measure of this improvement was due to timing, and we do expect print and cd revenues will decline in the fourth quarter. It's important to note, that this business in- overall is seeing a shift from print to online and that shift is affecting how we recognize revenues. In a print business they're recognized up front; and so, therefore, in that case the fourth quarter as we book those print revenues would all accrue. As you shift that revenue online that revenue's recognized ratably, so some of the improvement year-to-year as we continue to move from print to online in the first nine months; is attributable to this shift and will also then have an unfavorable impact in the fourth quarter which is historically the largest print quarter.

Now moving on- trademark searches grew in the quarter, were up 2% in the third quarter for the first time in almost two years; but remain down overall in the year by 5%. Now, this performance was offset in part by a decline in dialogues at revenue- dialogue revenue due to market conditions. But it's important to note, the rate of decline in dialogue slowed in the third quarter. Strong adjusted EBITDA in the third quarter reflected the flow through of higher online revenues, our improved productivity, and cost management. Thomson Learning- revenues increased 1% while EBITDA increased 12% in the third quarter. Included in that is the favorable benefit of currency translation of about 2%. Overall our academic revenues increased 1% in the third quarter.

Now, the growth in higher education was 4% overall. As Dick had mentioned, we had strong front list performance up 27%. This was partly offset by a decline in the back list which declined 5%, reflecting reduced demand for older textbooks due to price sensitivity and the availability of used books. Also local government budget cuts have affected the demand for library reference materials, and these declined 5% in the quarter. In Lifelong Learning, revenues in the third quarter were down 4% on a year-to-year basis reflecting continued weakness in the IT testing and certification market, currently offset by solid growth in our vocational training business.

Margins improved overall 3.6 percentage points to 38.9% in the quarter reflecting improved performance in the lifelong training sector, cost synergies resulting from the Harcourt acquisition and the assets of one-time Harcourt costs which were roughly about $10 million a year ago in the quarter. Thomson Financial has reported revenues declined 5% while EBITDA continued to increase, increased 8% in the quarter. Market conditions continued to affect demand for financial services, especially in Europe where we've seen a 15% decline primarily due to cancellations in some older products. The banking and brokerage sector was most impacted by these conditions which declined 8% in the quarter; and revenues from investment management and corporate issuer sectors reached down around 3%. Now this was offset partially by favorable currency translation which was 1% in the quarter.

We recently started to see some signs of a turnaround in this market. The rate of decline in U.S. revenues has slowed. It was 7% in the first quarter, 6% in the second quarter, and here it's 3% in the third quarter. And, in fact, we turned positive in the month of September. We have a strong pipeline for Thomson One equity offerings. Signs were encouraging for new integrated offerings, as feedback from users has been positive, and several important wins were reported for Thomson One products in the quarter. These which had been reported were Bear Stearns and Legg Mason.

However, stand alone and legacy products, particularly in Europe, continue to be affected by market conditions. EBITDA margins improved across all sectors in the third quarter reflecting leveraging initiatives, cost controls, platform consolidation across all of the financial groups; and also includes though an insurance recovery of $4 million related to 9-11. That is a recovery of additional expenses incurred as a result of the events of 9-11. Thomson is nearing completion of all the development testing activities on the management Merrill Lynch work station at this time.

Moving on to Scientific & Healthcare, revenues grew 8% while EBITDA grew 18%. Revenue growth from existing businesses were led by higher growth and continuing medical education, where revenues grew 8%; and higher subscription revenues from the Web of Science and Micromedics electronic portfolio. We also saw contributions from the businesses we acquired. Current Drugs, a provider of databases to the pharma and bio industries; and Delphion research site, a patent research solution. And 1% is related to favorable currency translation. This was offset in part, by a delayed release of our semi annual drug supplement from September to October of this year; and it released in September of last year; and continued softness in our patent business. EBITDA margins expanded due to the increased revenue flow through, and through cost control.

Turning to corporate and other, revenues which are related solely to Thomson Media increased $1 million or 2%, from $45 million in the third quarter of 2002. For the nine month period, revenues overall were down 2%. Important to note the third quarter of 2003, corporate expenses were higher due to reduced benefit of stock appreciation rights. Now, this last slide is to provide some background on be our upcoming fourth quarter and appropriate comparisons. Now operations in Q4 we believe will continue to perform well.

We'll continue to benefit from leveraging and efficiency initiatives. However, it's important to note and we did note these, one time items will affect comparisons to the prior year. As I noted in our year-end conference call in 2002, I noted that we did have a one-time favorable UK pension adjustment; which was in the corporate expense line, which benefited us by $32 million. It also noted that we had one-time savings in our financial group of $10 million primarily related to incentive based compensations. Now, so those affect us year-to-year unfavorably from the fourth quarter a year ago. This year we will continue, as I've talked about, we'll continue to shift our print and cd as we move those to online.

And I did note we have higher pension cost. We have for the full year, our pension costs will be almost $30 million higher than they were a year ago and those are spread evenly throughout the full year. And on a year-to-year basis for the full year, when you compare the UK pension adjustment and the higher pension costs, that is a swing of over $60 million year-to-year in our performance. In addition in the fourth quarter we'll continue to incur higher depreciation expense as we invest in technology and drive the business. Now with that I'm going to turn it back over to John.

Thanks, Bob. As in the past, could we please have just one question per caller. We'll cycle back through if you have another question, but this way it'll free up time so that everybody that wants to ask a question can and now I'll ask the operator to provide instructions as to how you may queue up to ask the questions.

Ladies and gentlemen, if you wish to ask a question press star and then 1 on your touchtone phone. You will hear a tone indicating that you've been placed in queue. You may remove yourself by pressing the pound key. Once again, if you wish to ask a question, please press star then one. Our first question will go to the line of Lauren Fine with Merrill Lynch.

Thank you, I guess what I would like to do, on a couple of the divisions to go back maybe you can tell us what the acquisitions contribution was to give us a sense of organic. And, I guess, specifically at Legal, could you give us a sense of sort of what is changing going into the fourth quarter because there seems to be a suggestion that it will slow.

Lauren, I will provide, if you would, put on a piece of paper columns across core growth foreign exchange, acquisitions and total growth; and then run the groups down the side. In legal and regulatory our core growth was 4%, foreign exchange contributed 2%, and acquisitions another 3%. In Learning, core growth was down as I said 1%, foreign exchange contributed 2%, for the overall 1%. Financial, core growth was down 6%, foreign exchange contributed 1%, for a decline of 5%. Scientific & Healthcare, core growth 4%, foreign exchange was 1%, acquisitions were 3%, for a total of 8%. And for the total company of the 3% overall growth, 1% was foreign exchange, and 2% was acquisitions.

And in terms of our thoughts for the fourth quarter, particularly as relates to Legal and Regulatory; we have the fourth quarter is a big quarter in terms of print; and what we have seen year-to-date is two things, one a conversion from print to electronic, which is done ratably. But second of all, there has been shift in timing of some of those print shipments between quarters. From fourth to third quarter, from third to second and so on; as we try to manage the business. What we have said repeatedly is that you need to look at our businesses more on an annual basis than a quarterly basis; and so part of the growth that we've seen both in the quarter, and in through the nine months for Legal and Regulatory regulatory is some timing issues related to this transition.

Thank you. We have a question from the line of Jeffrey Fan with UBS, please go ahead.

I want to talk about learning and in particular the higher education business. You said overall growth was 4% in the quarter. Can you kind of separate the trends you're seeing internationally versus what you're seeing in the U.S., especially given McGraw Hills statement last week regarding these segments? Thanks.

We have continued to seep strong growth internationally. Where we have seen softness is, and we've seen strong growth in front list. Where we have seen softness is in the back list or of older titles. Which- where you would have more copies in circulation, and, therefore, older copies in circulation so, therefore, the used book market has a little bit more of a play into it and, therefore, price sensitivity is higher. So the softness that we've seen is entirely located in the back list of our business. And international continues to perform quite well. As a matter of fact, in the higher ed segment of international, the growth has been double digits.

Thank you. We have a question from the line of Peter Appert with Goldman Sachs.

In the Thomson Financial segment you mentioned with regard to the U.S. more positive tone perhaps in September and you gave some indications of wins in the third quarter. Can you give us a sense, if possible, on- of all these tests that are taking place currently; or client tests of your product, would it be reasonable to anticipate in the fourth quarter and first quarter some meaningful re-acceleration of revenue growth in that business based on stuff you see in the pipeline?

It's difficult -- first of all, as you know these are longer term sales in the sense that you obviously have to get the customer interested. You usually have a beauty contest with ourselves and other competitors and then that usually takes a while, and then when it's sold then you have to basically incorporate it into their enterprise system to go. So these have a longer sales cycle than historically. I would turn around and say we do have products in the pipeline but when they actually turn to revenue is a little bit difficult to determine at this time because a lot depends on the delays of the client.

Once the client decides that they want the product we have to queue up into their technology backlog and move it up so the timing of when those will happen is difficult to say by quarter. I will add though that we do expect as I said in my remarks that we do expect Thomson Financial to have positive growth next year.

We have a question on the line from Vince Valentini with TD Newcrest, please go ahead.

Question on the dividend policy. You've done $1.1 billion of free cash flow over the last 12 months. The dividend increase announced today would amount to about $13 million extra per year, so it seems like a pretty token amount relative to the free cash flow improvements you've had. Can you clarify what you mean by the dividend review will be held in the second quarter of the year. Does that mean these small little changes are just normal course, but any sort of big changes would be held back for that date?

Vince, it's Bob. First of all, that's the board's decision, not management. We have shifted- we decided to shift the review to the second quarter because our business is very much back ended. As a matter of fact, we get about 90% of our free cash flow in the last six months of the year and making decisions in advance of that just didn't seem to make sense. The dividend announcement that we've had to date is based upon our view of two things. One is that this is -- we're still starting to see the run rate of the business in terms of cash generation, and so we tend to be a little cautious in that regard; but second of all, we do have a view toward the fact that in the second quarter we will be examining our dividends policy again and perhaps recommending to the board to take an action at that time. So with those two factors together.

Okay. Thanks.

Thank you. We have question line on Douglas Arthur with Morgan Stanley, please go ahead.

I'm trying to get my hands around the 9% increase in revenues in Legal and Regulatory that particularly the organic growth rate of 4% sounds like an awfully big pick up from what you have seen. Could you amplify on timing issues of business that may have been -- come into the third quarter that may not come into the fourth quarter. You did talk about the print versus online shift. Was there anything else behind this big surge in revenues?

Doug, as I mentioned, first of all, we continue to have very good performance in our online businesses. But what's happened is that we recorded in the quarter a 3% growth in print and print is, you know, well over a third of the business. So our performance up until that point we've continued to have our online growth has been consistent. And underlying high single digit, low double digit. The reason we're calling out the fourth quarter is because we had this contribution in print which further buoyed the online performance and allowed us to record that kind of revenue growth overall. So that's why we're calling this out at this time.

We have a question from the line of Andrew Mitchell with Scotia Capital. Please go ahead.

Thanks, good morning. Back to Thomson Financial I wonder if you can clarify some of the highlights. On Europe, is there any clear sense of when the contraction in the marketplace might actually turn. And secondly, on Thomson One, is there- are you going to have any capability to give us a sense of the annualized revenue impact that you're seeing from the contract with Merrill Lynch and just following along on that, I understand that you're doing a fair bit of upgrade activity with current customers that'll have limited impact initially on the revenue flow from Equity One with a view that you're going to be adding on additional products and ferreting those on to Equity One as time goes on. I'm wondering if you could talk overall about Equity One; what you are seeing on dates for new customers and current customers when we can see revenue impact?

I think, well first of all, you also asked about Europe. We see some slight signs that Europe may be improving but I think it's, it would be -- I'd still be cautious on when Europe was actually going to turn around. As we said, we only have about 15% of our business in Europe so the bulk of our business, about 80% of Thomson Financial revenues, 75% to 80% is in the United States so we're -- at this point we're more concerned about the U.S. showing some signs of improvement. Number one.

Number two on The Thomson one product the first goal is to basically -using The Thomson one platform is to swap out our legacy products. And that was our first goal and we've made excellent progress in there, although we have some more work to do. But that was the number one goal was to swap it out so that we could basically have a more robust product in the marketplace with existing customers to obviously retain those customers. I don't have the numbers in front of me of exactly how many Thomson One wins that we've had or the number of dollars but they have made excellent progress with Thomson One and we hope to see continuing improvement in 2004.

Thank you. We have a question from line of Tim Casey with Nesbitt Burns. Please go ahead.

There's some press reports about a week and a half ago regarding the difference between textbook prices in the U.S. and offshore. Could you talk a little bit about that issue. Do you see much better pricing in the U.S. versus international markets and is, you know, I guess a -- are you concerned at all that you won't be able to hold price in the U.S. particularly in light of your comments of a little bit of pressure on the back list? Thank you.

Two things. First of all, the products in the U.S. just, you know, some of this pricing, the products in the U.S. almost every single product comes with a robust set of electronic offerings that come along with the text. So the difference is the price is built into that text because we don't sell those as separate pieces. So if I'm a student I not only have the text, but all sorts of online products and services that help me learn faster and better. The international products do not have those. The international products is the raw text so they're sold for less for that particular reason, because we don't have to build in the cost of all the electronic products and services that follow behind it. Number one.

Number two, what's happening in the back list really happened, it happened probably seven or eight years ago and it happened before that. We're in a time now that because of some of the budget constraints that are created in some of the states, obviously in the states and federal government but primarily the states; some of these state schools to basically have -- you read the other articles on it have increased tuition anywhere, private schools to state anywhere from 6 to 20% tuitions have been increased. And they've been cutting their cost and classes so back list is a function of kids have less money to spend because the tuition have been up there which has driven to a slightly higher percentage of used books, we've had a reduction in certain classes that have impacted that also.

So we're dealing with a number of triggers that are impacting the market. We just have to wait and see how they play out this year to determine what impact they may have on us in the long-term.

We have a question from Kevin Gruneich with Bear Stearns, please go ahead.

Bob, understanding that it's probably modest, you mentioned the accretive acquisitions. Could you isolate what they added to EPS or pre-tax income in Q3 and year-to-date; and given what you said about Q4 are you comfortable with the First Call consensus number? I think it's 57 cents.

One at a time here. In terms of the acquisitions in the quarter, I don't have what it would be down to -- they contributed in the aggregate about $35 million in revenue and very small amount in terms of EBITDA so they were very, they had very little impact in the quarter in terms of earnings on a positive basis. In terms of the First Call estimate we think it's an exceptional product. And we think that everybody should use it, but we don't comment on fourth quarter performance. I think that the statements I've provided you in terms of comparisons are to give you a background which will help in assessing our performance, but we do not comment on it.

Thank you. We have question from line of Randal Rudniski from Credit Suisse First Boston.

I also have a question on the U.S. college business. Can you comment where college enrollments are in this fall semester, and the second part may be more difficult. At this point, looking forward into 04 would you say that the growth rate that the college text market in the U.S. can achieve would be consistent with what we've seen over the past few years; or do you think that these trends are going to result in a more flattish top line performance? Thanks.

First of all, on the trends, I think we've stated before that we think the college markets are somewhere around four to 6% growth rate within the market long term and we would expect it to stay there. As far as the growth trends in colleges, first of all, they are increasing but at a lower pace than they've increased in the past. But the key is that that we're focusing -- when we look at the marketplace, we've got two-year schools and four year schools and we've got others. And we think that marketplace will continue to increase over time. But not at the increases that we probably originally estimated a couple of years ago; primarily because of the financial constraints of some of these states and local schools.

Thank you. We have question from the line of William Bird with Smith Barney. Please go ahead.

Bob, I was wondering if you could give us a sense of what your blended EBITDA multiple has been on acquisitions if we look back over like the trailing 12 months? Thank you.

There's a really a very wide variation. I would say that I probably point to the more say, -- more to say what we look at, one of the things that has been pretty standard is probably our revenue multiple is somewhere between one to two times revenues depending upon the type of business. EBITDAs are all over the lot because many times you have to remember we're buying these businesses and they're highly accretive; so when you look at an EBITDA multiple that we're paying for a business it might seem ridiculously high. We're taking all the costs in that business and the contribution is equally high. So it would be a better -- if you want to look at a guide, I would use in the range of one to two times revenues is generally what we'd be paying for some of these businesses.

Thank you. We have a question from the line of Barton Crockett with J.P. Morgan. Please go ahead.

Hi, it's actually Frederick Serbey from J.P. Morgan. Thank you. One quick question. Can you just talk about given your strong free cash flow, just prioritize how you tend to allocate that and whether you see small deals and where the opportunities are in the private market and which sector or debt reduction obviously given the small dividend increase it looks like and share repurchase as well. Just talk about that if you could.

I think our priorities and free cash flow just stated is the number one priority is basically to continue to grow the business both through obviously organic growth as well as acquisitions. And as you know acquisitions we can only do acquisitions as they become available so we take them as they come. So the number one priority is growth in those two methods. Number two priority would be dividends and the number three priority would be to pay down debt.

Just where do you see, which segment, I assume you're pretty much maxed out on the university side with the market share. Where do you expect to focus in terms of acquisitions? I know it's opportunistic.

All the businesses to a degree make some acquisitions but if I go back, we do acquisitions for a couple reasons. One is in the case of higher ed, if a small list came up for sale and it made sense we would buy that to supplement the list. But if you look at sizable dollar acquisitions, the whole lifelong learning area is we still think is a very excellent marketplace long-term even though it's having problems with the IT sector today. So we're still bullish on this which is the E-Learning, E- testing and career side. Obviously Financial as we move more to Europe and to Asia Pacific regions we will look at acquisitions that help us out there.

That would be the same with Legal Regulatory, as we continue to increase our presence overseas. And Scientific & Healthcare, Scientific is a global business today as you've seen what we've done with Current Drugs and some of the other acquisitions, we basically, we tried to strategically increase and improve the quality of our offerings for the research side. And Healthcare we are primarily a U.S. based business but we continue to look for areas that help us in the drug information area. And we will continue to do that.

Okay. Thank you.

Thank you, we have a final question from the line of Peter Appert with Goldman Sachs, please go ahead.

You--back to the issue of revenue growth in the Legal and Regulatory business, since you got a boost here in the third quarter from the print business that goes away in the fourth quarter, is it possible to give us a sense of what you think the underlying organic growth rate is in the second half of the year ?

I think that --I think that's a bit of a challenge for us. I think that we've done organic growth was 4% in the quarter, on a year-to-date basis it was overall about 1%. I would say that the second half of the year would be more representative of the first six months than it was of the quarter.

Great.

Thank you very much. This is John Kechejian, I'd like to thank all of you for joining our call today and for your active participation and now we'll turn it back over to the operator who will give you information with regard to the replay. Thank you.

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