Thomson Reuters Corp (TRI) 2004 Q1 法說會逐字稿

Good day ladies and gentlemen, and thank you for standing by. Welcome to the Thomson first quarter results conference call. At this time all lines are in a listen-only mode. Later we'll conduct a question-and-answer session. Instructions will be given at that time. If you should require assistance during the call, please press star followed by zero and as a reminder, this conference call is being recorded.

We'll now turn the conference call over to your host, VP of Investor Relations, Mr. John Kechejian. Please go ahead, sir.

Thank you Barb. Good morning everybody. I'd like to thank you, on behalf of the Thomson Corporation for joining us this morning to discuss the results of our first quarter 2004. All you listening in to our open conference call and with that should have a copy of earnings release and set of slides and supportism, but if you don't both the release and slides are available on www.thomson.com, which is our corporate website.

This morning our CEO, Dick Harrington will be first up and provide us with an overview of the first quarter, discuss the highlights for each market group and reaffirm Thomson's priorities for 2004, and provide you with a outlook for 2004. Then our CFO, Bob Daleo, will take us through the financial results for Thomson, provide you with an update on our financial metrics and then briefly discuss the first quarter performance for each one of our market groups. After our formal remarks we'll then turn it over to you so that we can answer any questions that you may have.

I would like to point out that the following discussion contains forward-looking statements, that does relate to future events, results and events that are based on Thomson's current expectations. Actual results may differ materially from those currently expected because of a number of risks and uncertainties discussed in those documents that we provide to the regulatory agencies. This presentation also contains disclosure of certain non-GAAP financial measures. As required by SEC rules, we have provided a reconciliation to each of these measures and those are on our website.

And now I'd like to turn the call over to our President and CEO, Dick Harrington.

Good morning, and thank you for joining us. As you saw in our press release, 2004 has gotten off to a very solid start. Q1 is Thomson's smallest quarter but nonetheless, we are encouraged by the broad-based improvements by the operating performance across the corporation. We reported sales up 9%, a 6% in constant currencies, driven by core growth and the contribution from acquisition. Core growth was the strongest in over a year.

Growth in online products, software applications and services continues to drive the top line and we are seeing definite signs of improvement in some of our markets that have been weak over the past two years, particularly in the U.S. Financial services market and some markets served by Thomson Learning.

Underlying earnings for the quarter were 4 cents per share, versus a loss of 4 cents per share in last year's quarter. Those EPS figures are adjusted to exclude discontinued operations and one-time items, which we think is a more meaningful comparison.

Thomson historically posts a small loss in the first quarter due to the seasonality of our higher education business where cost are relatively steady throughout the year, but revenues are heavily weighted to the second half. However, operating performance at Legal Regulatory and Financial offset the EBITDA loss at Learning.

We continue to make good progress in implementing our strategies in the quarter. As you know, Thomson is evolving from being a content provider to developing information solutions that are integrated into our customers' work flow and help them be more productive. For example, during the quarter we signed a $200 million, five--year contract with Wachovia Securities for 19,000 Thomson One desktops of which 6,000 were won from Reuter's. We will be providing end-to-end stock trade processing services plus research and analytical tools in a single product for tailored for Wachovia's retail brokers.

In the law firm market, during the quarter, we began testing a new offering called Thomson ONE Legal, which combines rich content from Thomson Financial with our market leading Westlaw research products. And in the scientific research area, we had developed a new solution called Thomson Farmer that will pull from a wide range of databases across Thomson, as well as from third parties, all tailored to the specific needs of the pharmaceutical industry and delivered right to the desktop.

In all of our businesses, we are finding our customers don't just want data feeds and access to reference information. They want integrated solutions that help them make better decisions faster and we think we are very well-positioned to capitalize on that demand.

An important component of our strategy is to acquire companies that have strong content or technology assets that we can leverage in our existing operations to expand our market position.

Several important acquisitions were either completed or announced so far in 2004, particularly at Thomson Financial. The largest, TradeWeb, which we announced this month, will give us a strong foothold in the fixed income market where we currently have a excellent analytical product, but we're a small player. With TradeWeb, which is the leading online trading platform, we will be able to offer an end-to-end solution for the fixed income market as the trend toward electronic trading continues to gain momentum.

Thomson Financial also completed the acquisition of CCBN, in the quarter, which expands our offerings to the corporate customers and investment managers. And this month we announced the acquisition of of Star Quote, which will give us a much stronger presence in the Canadian retail equites market.

Tactical acquisitions were also completed in our market groups in the quarter. And as we have stated before, our acquisition criteria calls for acquired companies to be accretive to earnings in the first full year.

Bob will provide the financials on each of the market groups for the quarter, but let me give you some perspective on our performance so far across the company. Our largest market group, Legal Regulatory, had very strong revenue and profit growth. To a large degree the group drove Thomson's overall results in the quarter. The story at Legal Regulatory continues to be one of high growth in online products, notably Westlaw, which had its highest quarterly growth in over two years in U.S. and grew over 20% internationally.

In addition, we now have sizable software and services businesses for the legal, tax and accounting markets that are growing at strong double digit rates. We saw higher trademark search revenues in the quarter, which can be a leading indicator for the rest of our legal & regulatory business.

Thomson Learning also posted revenue increases across its businesses in the quarter. In the academic segment revenues were up solidly with strong international growth and higher revenues in our library reference business. Libraries have been under intense budget pressures, and we now are starting to see signs that the worst is behind us in this market where we generate well over $300 million a year in revenues.

The lifelong learning segment also posted revenue growth driven by continued strength in our vocational training operations. The first quarter for Thomson Learning is small relative to the full year, it accounts for less than 20% of annual revenues and produces an EBITDA loss.

At Thomson Financial we continue to win new business for our Thomson ONE suite of products and we continue to migrate customers of our Legacy products to the Thomson ONE platform. In addition to Wachovia contract I mentioned earlier we also had competitive wins for Thomson ONE on other major accounts such as Morgan Stanley, Banc of America, Diawa and others. Total Thomson ONE work stations increased 16% in the first quarter from year-end to about 60,000. Over one-third of the increase came from new business wins.

We continue to see signs of an overall improvement in the financial markets, particularly in the U.S.. First quarter IPO activity was the busiest since 2000 and the number of M&A transactions is also up significantly from a year ago. Thomson Financial posted its first revenue increase since Q1 of 2001, and we're confident that full-year revenues will be up as well.

In our smallest market group, Scientific & Healthcare, revenues were up but EBITDA declined, largely due to the timing of Web of Science back year sales, compared to last year, which are quite profitable plus the timing of acquisition-related expenses. Across Scientific & Healthcare we continue to leverage our leading brands and our must have content for researchers and medical professionals.

In terms of Thomson's overall priorities for 2004, we will continue to invest in high-potential markets where information is critical to our customers and where we can leverage our assets most efficiently. That includes making selective tactical acquisitions that can be folded into our existing operations. We also expect international markets to be an important components of our growth. Revenues outside North America account for about 20% of our total today, and we see opportunities to expand particularly in Europe and Asia Pacific.

You've heard me talk before about our front end customer strategy and this remains a key focus across Thomson. We are gaining a deeper understanding of our market segments and our customers' needs so that we can offer information solutions, tailored to their specific requirements and integrated into their daily work flow. And we continue to leverage assets, content, technology and people within our market groups and across the corporation to deliver better products and drive operating efficiencies.

Let me comments briefly on the outlook for the full year. We expect revenue growth, excluding any currency effects, to be in the mid-single digit range for the year, versus 1% growth in 2003. The improving market conditions and our continued focus on innovative solutions for our customers should drive solid core growth in all of our market groups and revenues will also benefit from acquisitions.

We are now looking for EBITDA margins to be slightly ahead of last year. We expect further improvements in the operating performance but as we have indicated before, pension expense, related to prior years, will increase again in 2004, which will be an offset to the operating improvement. A pension expense impact should be much less in 2005 and beyond. And we expect another year of strong free cash flow in 2004.

As you saw from our announcement today, the board of directors increased the common dividend by two cents per share on an annual basis. This follows a increase of two cents per share six months ago and is a further indication of our confidence in the cash flow capability of the company.

Now I'll turn the call over to Bob Daleo for details on the financials, then we will open it up for questions.

Thank you, Dick. Good morning. I'd like to start with slide 12, financial overview, just to give you a sit in. As Dick had mentioned, in the quarter we had strong revenue, adjusted EBITDA and operating profit development. We saw contributions from currency translation, as we-noted, which impacted, benefited our revenues about 3% and we continued to invest in acquisitions in high potential market sectors. We have strong free cash flow and in the quarter we did complete the sale of Drake Beam Morin.

Moving on to the consolidated performance. In the three period ended March 31, revenues increased 9%. Excluding impact of foreign currency the increase was 6%. This increase was due to growth from our existing businesses and contributions from acquisitions. Growth from existing businesses was largely within our legal regulatory and learning groups and I will discuss the individual group performances in just a few minutes.

Operating profit and the related margin growth in the quarter reflected the higher revenues and our continued operating efficiencies across the corporation, with only a marginal impact from a fair volume foreign currency. The quarter's improved performance reflects some timing in foreign revenues and delayed costs, which because of the relatively small quarter did have an impact.

We typically derive a greater portion of our operating profit and operating cash flow in the second half of the year. Customer buying patterns are concentrated in the second half of the year, particularly in the learning and regulatory groups, while cost are incurred more evenly throughout the year. As a result, our operating margins and profits increase as the year progresses.

For the quarter, our total assets were $18.2 billion, a decline of roughly $500 million from the year-end of 2003. A reduction in accounts receivable of $321 million, reflecting cash collections and the seasonality of our businesses and a reduction $134 million reduction in our overall cash balance, accounted for the decline.

Reduced assets from discontinued operations of $215 million reflect the sale of Drake Beam Morin. On the other side, acquisitions contributed $200 million of total assets.

Shareholders equity was reduced as earnings from operations of $36 million are more than offset by dividends paid on common shares of $118 million. Again, this is not unusual due to the seasonal nature of our business.

Now I'd like to take a minute, as has been our practice, to step through the important valuation metrics about which we manage our business. Starting with revenue, this slide identifies some key revenue metrics for each market group and for the company as a whole. Growth at constant currencies, as I said we will discuss detail for each group, was up 6%, compared to a 2% decline in Q1 of last year. The electronic revenues were 64% of total, consistent with last year. And again, because of the seasonality, I'll remind you that last year's full year electronic revenues represented about 56% of the overall revenues.

Recurring revenues are in line and consistently about in excess of 70%. And you can see how we continue to drive international and it is an important part of our overall business mix.

Moving on, the next slide shows our trend in adjusted EBITDA margin. It addresses the efficiency of our business and the progress we have made on leveraging and an overall business initiatives. This is presented on a trailing 12 month basis and it shows a good performance at a consolidated level and was driven by improved margins in all of our operating groups, exception of Scientific & Healthcare. This is noted on the following slide.

As we again Legal & Regulatory, which drove a significant part of the improvement, shows 0.8 percentage point improvement. And again, I would remind you this is against an easier quarter of a year ago. So we're likely to see an ease in this improvement as the year progresses. But, nonetheless, overall good start the to the year in this metric.

Capital expenditure to revenue ratio reflects both efficiency and, to some degree, timing issues. As you can see we continue to make progress over the last five years and we have noted that we would expect this metric to be close in the 7% range. Now, this increase on a trailing 12 months average for the first quarter is due to some stepped up spending on technology initiatives, particularly in Legal & Regulatory and in Thomson Financial.

In Legal & Regulatory, we have begun an expansion of our data center in Egan, Minnesota and we've also continued to invest in the new Novis online platform for the Legal & Regulatory global business. In Thomson Financial, we continue to invest in building out our data center strategy and invest in the products and the delivery of technology to customers.

The next slide discusses free cash flow. Cash provided by our operating activities in the quarter was $290 million, compared to $165 million in the comparable period last year. The increase was primarily attributable to improved EBITDA and the timing of payments for some our normal operating expenses.

Now cash used in our investing activities in the quarter totaled up to $132 million, compared to $118 million in 2003. The increase reflected higher spending on capital. Overall, the net result is a year-to-year increase in free cash flow of some $116 million.

As our business becomes marginally less seasonal it is a natural consequence in both free cash flow and to a less degree earnings to become a bit more balanced over the course of the year. The result is year-over-year improvements in Q1, which are different than than they were in Q4.

Now, moving on and looking at this free cash flow on a rolling 12 month basis, you can note that part of the improvement that we made in generating free cash in 2003 was masked by the effect of certain one-time items. As I had mentioned both last year and at the end of 2002, we made significant strides in strengthening our accounts receivable efforts, which benefited our day sales outstanding and contributed $151 million of cash at the end of 2002. We maintained that receivable level in 2003 and hence that was a one-time benefit.

We also had timing differences between the prepayments for the Merrill work station contract and our expenditures. We received cash in December of 2002 and invested $40 million in 2003. And, of course, throughout these three years we've continued to make a voluntary pension contribution.

It's important to note that excluding these one-offs, our business model continues to demonstrate consistent growth in free cash flow as noted by the line in the graph.

Our ROIC is truly a long-term measure, however, we report on an annualized basis each quarter, but truly understand that driving this performance is as long-term development in growth focus. Now as we noted at the end of last year, our return on invested capital was impacted by a movement in cash taxes and that's quite apparent. However, on a pretax basis our return on invested capital in the quarter was 9.2%, which equaled Q1 of '03 and represents an improvement over Q4 of '03, which was 8.8%. We are confident that our business model will drive improving returns over the long-term.

Now Dick did touch on the acquisitions that we've made and they continue to be made, except on a relative basis tends to be smaller and more tactical in nature and these mean, as he already indicated, we tend to fold them in more quickly and get good returns for them.

In the first quarter in total we made eight acquisitions. They cost roughly $200 million. The largest was CCBN, which accounted for nearly 3/4 of the spend.

In April we announced two additional acquisitions over $10 million, in Thomson Financial. They were TradeWeb, which, including potential earn out would approach $500 million and Star Quote, which we acquired for less than $40 million U.S.. All of these provide necessary contents and software tools that we need to drive our strategically important sectors and meet or exceed the financial metrics that we have consistently characterized in the past.

Now earnings attributable to common shares for the quarter declined, primarily due to one-time items in 2003, but partially offset by a timing related tax benefit in the quarter. Aside from the sale of BGM, noted under net other income and expense, results for 2003 also included a $24 million gain related to the redemption of our Series V preference shares.

In the first quarter we also refined the method by which we allocate estimated full year income tax among interim periods. The change in allocation results in a interim effective rate that is not indicative of our estimated rate for the full year. Now, we used to book effective rates, the effective rate anticipated for the full year in each quarter. Now we're booking an effective rate anticipated by jurisdiction for each quarter against the impact, against the income in that jurisdiction.

It has no impact on the full year, but results in timing differences in each quarter, hence the line that says normalization of tax rate. We will adjust back to the full rate throughout the year so that we avoid confusion in terms of what our earnings-per-share will look like on a quarterly basis and on a comparison to prior year.

Now I'd like to take a minute and step through each of the market groups. Starting with Thomson Legal & Regulatory, in the first quarter revenues for Legal & Regulatory increased 15%. This compared to a relatively weak first quarter of 2003 when revenues rose only 2% and had no core growth. Excluding the impact of currency, as I've noted in the previous slide, the increase was 12%. This growth was driven by strong performance by Westlaw and Checkpoint online services, increased trademark searches around offset in part by continued weakness in the news and business information sector, but as Dick as noted, at a slower rate of decline than previous years.

Revenue from print and CD products were consistent with that of the prior year as a result of timing. However, for the full year these revenues are expected to decline. Both attributable to acquired businesses with principally from Thomson Elite, a provider of back office software to law firms, which we acquired in May of last year and to a fold in tax software acquisition.

North American Westlaw revenues experienced a growth in all of its major market segments. Law firms, government and corporate. Outside of North America Westlaw increased particularly in Europe and Asia Pacific regions. The North American tax and accounting business experienced a strong quarter led by higher revenues from Checkpoint online service and tax software products.

Finally [INAUDIBLE] revenue increased significantly as a result of continued strong new sales performance. For the quarter, the growth in adjusted EBITDA and for operating profit along with the corresponding high margins resulted from the revenue growth described above, as well as the impact of the of improved operating efficiencies.

In Thomson Learning, first-quarter results certainly, as Dick had mentioned, are not indicative of the anticipated full year performance due to the seasonal nature of the business. However, in the quarter revenues increased 7%, excluding impact of currency, the increase was 4%. Revenues in the academic sector increased 11%, adjusted for currencies that would be 7%, reflecting growth in the higher education sector with good growth in international and, as Dick had noted, improved performance in both electronic and print revenues in our library reference business.

Lifelong learning revenues were 4% higher than the prior quarter, reflecting continued double-digit growth in vocational training, offset in part by more difficult comparisons in the IT education sector, due to state sales that were done early last year.

EBITDA losses were $7 million lower in the quarter. This improvement in adjusted EBITDA and profits largely reflected the increase in revenues and improved efficiencies realized from last year's cost reduction program and some office consolidation efforts.

Thomson Financial revenues increased 2% and EBITDA group 7% for the first quarter, compared with the same period a year ago. Revenue improvements reflected a rebound in North America where revenues grew 3%. And this marks the first quarter of growth in North America since the first quarter of 2001, three years ago. We see improving market conditions and that has resulted in better performance across all units, particularly higher usage and transaction revenues in our transaction businesses and lower cancellations in our other businesses. And we did have the impact of favorable currency translation, as noted.

Now these improvements were in part offset by some continued decline in Europe, which saw about a 10% decline, as the recovery there continues to lag the U.S. But we will note that the rate of decline has slowed from the prior year.

Now the EBITDA margin increased by 130 basis points, this included both adjusted EBITDA and operating profit fortunate. There was a property insurance recovery of $5 million related to September 11th, 2001. Adjusted EBITDA, adjusted operating profit and the related margins increased in 2004 because of this recovery, as well as due to the effect of previously enacted leveraging initiatives across the business.

Another World Trade Center related recovery of approximately $13 million is anticipated in the second quarter. This is expected to be reinvested in the business. This combined with the $5 million received last year will bring total reimbursement to slightly more than $20 million and will complete the claims process around this event.

Finally Thomson Scientific & Healthcare. In the quarter the revenues for this group increased 5%, excluding the impact of currency, the increase was 1%. The remaining increase was attributable to contributions from acquired companies, primarily BIOSIS, a provider of data bases and services for life sciences research, which we acquired in January of this year.

Revenue growth benefited from higher subscription revenues from Micromedics electronic product portfolio and increased customer spending for healthcare decision support products. However, overall revenues from existing businesses declined slightly due to the lower discrete sales of historical Web of Science information and first quarter information comparability was impacted by a delayed release of a Mexican drug information product, which is similar to the PDR or Physicians Desk Reference in the United States, which was shipped in the first quarter of 2003 but will ship in the second quarter of this year.

The decreases in adjusted EBITDA, adjusted operating profit and the corresponding margins reflect lower revenue from existing businesses and slightly higher expenses which resulted from the BIOSIS acquisition and severance associated with related in Thomson Scientific, also the timing of certain other costs compared to last year.

Corporate and other revenues relate solely to Thomson Media, which increased 6% in the quarter. This increase was attributable to higher advertising revenues from the fixed income and mortgage related industry, as well as the financial services industry.

The adjusted EBITDA loss as you can see was $9 million, compared to $10 million of a year ago. This improvement was a result of higher revenues and the timing of expense to media, which contributed $4 million of EBITDA. Corporate expenses, the increase, reflects higher anticipated pension costs, offset in part by lower stock expenses during the quarter.

In closing, I'd like share the following with you so that you understand our expectations for the full year. For revenues, as Dick has noted, we expect our revenues to grow in mid-single digits for the full year in constant currency. This will continued good growth from many of our online initiatives like Thomson ONE and improving market environment, especially in financial services and the supplemental effect of our tactical acquisition program.

EBITDA margin, which improved 240 basis points in Q1, reflected our operating efficiencies in the quarter, some one-time benefits and flow through from these higher revenues. But more difficult comparisons in the second half of the year, higher pension cost flow and lower initial margins from newly acquired companies could offset a portion of this improvement.

It's important to note that the depreciation will accelerate in the second half of the year due to higher capex spending in 2003 and 2004 as a result of acquisitions and higher technology spend. Spending in 2004 for depreciation could be up as much as 10% over the $590 million we spent in 2003.

The income tax rate in the first quarter we reported a rate of 28.9%, it's not indicative of our full year expectations, our normalized expectations for the full year are 25 to 26%. Our free cash flow, we're off to a good start, but again we do see some timing issues here as well.

With that, I'll turn it over to John.

Thank you, Bob. That concludes our formal remarks for the call. I'll now turn it over to Barb, who will explain to you how you may queue up to ask those questions.

Very good. Ladies and gentlemen, at this time if you have a question, please press star 1 on your touchtone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you're on a speaker phone, please pick up the handset before pressing the numbers. Once again, for questions press star 1.

At this time our first question is from the line of Lauren Fine from Merrill Lynch. And at your host's request, limit your questions to one, plus one follow-up. Please go ahead Ms. Fine.

Great. I think I can keep it to that. I'm wondering if you could go through each of the business segments and provide us with the organic growth rate. I mean you directly indicated where acquisitions contributed, but if you could give us that organic growth rate for the segments and the consolidated.

And then the follow-up is, if you could indicate whether, on the Merrill Lynch contract, things have now smoothed out so that you're actually getting paid for your services.

Lauren, this is Bob. I will answer the first and I'll let Dick answer the second one on the Merrill Lynch contract. In terms of core growth Legal & Regulatory had core growth of 7% in the quarter. Learning had 3%. Financial had a decline of 1%, Scientific & Healthcare had a decline of 1%. Overall company growth was 3%.

Lauren, this is Dick. The Merrill Lynch contract, we will begin, actually recognizing revenues on the online portion as we speak, April 1st, actually we began recognizing. But the main roll out will begin in the third quarter.

Great, thank you.

The next question is from the line of Peter Appert from Goldman, Sachs. Please go ahead.

Hi. The performance in Legal & Regulatory looks particularly robust relative to what we've seen in years. You gave us some indications of what was driving that and I was hoping you might just dig a little further into that.

And then the related follow up would be, anything unusual from a pricing standpoint within that business this year in terms of, particularly, aggressive increases, or even more broadly, within the universe of your portfolio, anything that you should be aware of from a pricing standpoint this year?

This is Dick Harrington. The answer is there's no unusual pricing items. It's really been driven, if we look at Westlaw which is, it's first of all, one growth drivers are online, our online products and services with Westlaw being the largest one. And in that case those revenues were up about 9% and usage was up in excess of 20%. And then when I get to Checkpoint, which is our tax online service, which is obviously much smaller than Westlaw, but that was up in the 23 to 24% range, as well as our Westlaw international small base was up in the 20% range.

Those are revenue numbers, Dick?

Yes, those are growth of those particular products and services. The other side, as you know, we entered in the area of front office/back office software, as well as electronic directories and websites for law firms, and those are up in the double digit range also. So that's where the growth is coming from. I would say dialogue, although it had a slight decline it's performed much better this year than in prior years and our trademark business is up.

So clearly, high growth areas are doing as we expect and we've had a couple of areas that have had tough times over the last couple of years that are doing better.

Great. Thank you.

Thank you. Next question is from the line of Jeff Fan from UBS. Please go ahead.

Thank you very much. I want to dig a little further, again, into Legal & Regulatory. Dick, can you - - in the past we've talked about the growth of some of these high growth services over taking some of the growth in the prints and CD. Do you believe you're at a point now where you're going to continue to see a net core organic growth?

And the second part to the question is the profitability of these segments, do you believe that with the strategies that you put in place over the last few years, are you're starting to see greater operating leverage, meaning, some of these incremental revenue is contributing, have higher profitability going forward? Thanks.

Well, these segments are quite profitable today so we want to be a little concerned about abusing our customers. So obviously we can continue to leverage the business.

We're doing more leverage with the Westlaw technology across The Thomson Corporation, in Novis platform we use for Westlaw. The new platform that Westlaw is going up with, we've already moved portions of dialogue over to it. We are moving portions of TF, we'll move Gale, et cetera. So we're leverage ending some of their technology and their software capabilities across the organization will continue to do that.

The high growth areas that we have, Electronic Products & Services, I think today in the first quarter, I think you saw Bob up there said, represented about 68%, of total sales, actually somewhere around, I think, almost 60% of total sales. And as those become a larger portion of sales they'll obviously offset any normal declines we have in print going forward.

Is the electronic number include CDs?

Yes, it does.

Do you know what that number could be, ball park, without the CDs?

We count CD and print.

Oh, you do, okay.

Because CD is, it's a solo technology, we don't consider CDs as electronic.

All right, thanks.

The next question is from the line of Vince Valentini from TD Newcrest. Please go ahead.

Thank you very much. Dick, I think you sort of targeted $400 million of tactical acquisitions per year, and it looks like you've spent closer to $700 already this year. Does that mean we should see a slowdown for the balance of the year?

And just a follow up. We've seen in the past that acquisitions kick in that the other investing line follows suit as you have integration cost and so forth. Should we see an investment in that line over the next few quarters as well?

I think, number one, as you know, as acquisitions become available and they fit us strategically and we can fold them in, and they meet our financial criteria, which Bob mentioned, which is basically obviously we expect certain returns and we also expect certain - - we don't expect them to be, obviously have a specific payback and to achieve, be accretive in the first full year. So assuming they meet those we will continue to look at those.

This was an exceptional year where TradeWeb became available, which would represent a substantial portion of that. We also thought TradeWeb would help us significantly in driving into the fixed income market.

As far as expense and acquisition expenses relating to these particular businesses, it's a function of what the fold in are. In a business like TradeWeb there's not a lot of fold in costs associated with that.

And I'll turn the balance over to Bob as far as how these acquisitions are accounted for, how they've changed over the years.

Yeah. I think that we have been making in the past couple years $200 million, roughly of tactical acquisitions. They tend to be folded in quickly and, actually, relatively inexpensively, compared to the large integrations that we have with businesses like Hardcore or Prime Mark or so on. And in particular, most of these other businesses, CCBN will be some folding cost, but not that significant.

Certainly in terms of TradeWeb, we acquired that business because of the platform it provides to that fixed income market. So we will operate that business as a business and drive our products through that platform. So you shouldn't see very much in the way of integration costs there.

And so the answer is there might be some increase, but certainly not along the lines of what I think you're thinking behind the question, but we used to have in the past.

Thanks.

You're welcome.

Next question is from Megan Anderson from RBC Capital Markets. Please go ahead.

Hi, good morning. Can you just remind us or at least advise us what proportion of your capex this year you expect to relate to technology? And if you can give us some indication of the next two, three years, how important that technology spends is going to be, such that I would assume it would keep your rate of spending at about 7% of sales?

Well, our capital expenditures that are related to technology would roughly be about 70% of overall spending. Keep in mind that we have roughly about $100 million of our capital that is booked, play development. So when you take that out it is actually a high proportion of the remaining. We would expect that we would see that rate stay in about that 7% range.

We have a major project, which we're initiating across the corporation, where we're going to be consolidating a number of data center operations and in the market groups and we expect to see greater efficiencies there, we continue to see greater efficiencies over time. I think that we also have captured in our capital some of the,what I'll call, customer related cost which relate to Thomson Financial. For example, the cost of providing some technology platforms for the products that we provide. So, it's safe to say that we will see our capital expenditures in over the long-term in the 7% range of revenues.

Now on the other hand, they are step functions here, so as we accelerate revenue growth we don't expect to lock step expansion of capital expenditures. So over the long-term, we would expect to see it hover in the 6 to 7% range.

Okay. Just a quick follow-up. Dick, I didn't hear you. You were talking about Thomson ONE Legal, when did you say that was going to be introduced.

I'm sorry you're talking about the Merrill Lynch contract.

No Thomson ONE Legal.

I'm sorry, we have too many Thomson ONEs outer here. Thomson ONE Legal, I think it's in alpha beta test right now, and it will be introduced probably in the - - I'm sorry, the second half, I think the third quarter.

Thank you.

Your next question is from Andrew Mitchell from Scotia Capital. Please go ahead.

Good morning. It looks like my questions have been answered, so maybe you can tackle the tone on guidance for me. This quarter's guidance appears to be more specific and shows some increased confidence in revenue and margin expansion. Can you just give me a sense if that reflects a change in your thinking on how much granularity you're willing to provide or wether that really reflect some increased confidence in your outlook since the fourth quarter?

I think it just reflects some increased confidence in what we've seen happen over the first quarter.

Just my quick follow up here. The comment on free cash flow off to a good start you said. Last quarter you were saying it was going to be in line with 2003. All signs seem to be pointing to some solid growth potential, even excluding the one times and timing differences. Can you just give me some sense there whether your confidence is improving there as well?

This is Bob. Our confidence in terms of the amount of cash that our operating model in the businesses can drive is unwavering. The hesitation that you hear is that there is certain timing things that we don't control. If we have to make a payment in our pension plans, which we've done in the past couple years or other things, other timing issues. So there's no doubt we look at free cash flow as a metric that we will continue to drive over the long-term. We have consistently been in the billion dollar range and we feel comfortable with that.

So I think that what you hear is not a cautionary note in terms of what we think the business model can generate in terms of consistent expansion of cash generation, but a little bit of a cautionary note in terms of what are some of the timings that might be around that. So we feel have gone about our ability to fund this business and drive the kind of performance that we have and also have the kind of dividend policy that we have.

Thank you very much.

Next question is from the line of Tim Casey from Nesbitt Burns, please go ahead.

Thanks. Back to Legal & Regulatory, I mean, based on the strong results in your commence on full-year guidance, is there anything in these numbers that related to the seasonality of the way you report the revenues as you shift more volume from, what I'd call hard copy to electronic? I know in the past you've mentioned that it smooths a bit. And if that's the case is there any way you can kind of quantify that.

And second, you mentioned, Bob, I think you mentioned that up found the European financial business in TF still lagging U.S., but the rate of lag I guess is narrowing. Is there any way you can put some goal posts on that for us to try and quantify that or a bit more color at least? Thank you.

I'll take the last question first and that in Q1 of last year I think the European decline was somewhere around 12 to 13% and now it's 10%. So that's where we're saying it showed some improvement.

In terms of Legal & Regulatory, I think I did mention this in my comments on the group, that important to note that print and CD, while certainly becoming a lesser part of the business are still substantial. And we had, because of some timing issues of shipments and so on, we actually had a performance in that segment that was a little better than we anticipated and didn't show the decline that we would expect for the full year. So, I think that is one of the issues.

The other one is, though, that there is a gradual and consistent shift as print and CD decline and we migrate more of our you customers to online. Online is billed on a regular basis on a monthly and quarterly basis, whereas as, as you know, print is billed as the shipments go in and out.

The other side of that is that online revenues, online subscriptions tend to have a much higher stickiness. Renewal rates that can be 5 - - depending on the business, five to 10 percentage points higher. So we consistently see that and that's what is causing this shift. And it's important to note that we did have a comparison to a year ago where print and CD did see a more significant decline and we didn't quite have the kind of growth that we're enjoying right now on the online because of the market environment back then.

So I don't think I can characterize it any more detail than that but I hope that gives you a better understanding.

Bob, have you ever quantified for us what print and CD are declining by?

Yes, we have. We've said that it probably declined somewhere in the neighborhood of about 5% per year. We've been experiencing it in that range.

Thank you.

Next question is from David McFadgen from Sprott Securities. Please go ahead.

Two questions, the first one is could you tell us what the total potential earn outs are, because you have one on the one that Columbia just acquired in Thomson Financial.

And secondly, could you tell us at Thomson Financial what your banking and brokerage did in the quarter on an organic basis?

In terms of potential earn out, we just told you the one that we have.

Is that it?

If we have others they're small and inconsequential.

Okay.

In terms of banking and brokerage, we're flipping pages as you can tell.

No problem.

I'm not sure I have it in these pages anyway but - - . I'm sorry, I don't have that information. We've kind of reorganized the business, and we're focusing now on the broader market segments, so we don't really capture that particular information.

Would you happen to have just what your work station revenue did in the quarter on an organic basis?

We gave you the work station tallies, we don't really report the revenues associated with that.

Okay. All right. Thanks, that's it for me, thanks.

Next question is from the line of Randal Rudniski from CS First Boston. Please go ahead.

Thanks, I have two questions. First on the U.S. legal market, do you believe that you're gaining share in the market overall and in the U.S. and if so which markets have you been the most successful in.

And the second question pertains to the college market. Can you comment on electronic textbooks for college students? Do you believe there is a business model that works and what plans, if any, do you have to pursue that area?

Randall first on the U.S. legal share we do feel that we are gaining market share both in the online, the Westlaw product line as well as the front office/back office technology.

And the college texts, I think it's, it's too early to determine what electronic textbooks are going to take hold. In our opinion, actually, the assessment programs that go along with the course wear actually is much more valuable than the electronic textbook, combining with the electronic textbook. So as you continue to build the assessment software along with the electronic databases, et cetera, then it will be must more valuable. The electronic textbook has some restrictions on, basically, taking off at this point.

Do you think there's some potential though to recapture some of the used textbook market?

Well, again, it's too early to tell. If you look at what's been written to date they will tell you that the students are pretty smart from an economic point of view and if they buy electronic textbook for 50% off, so let's say it's a hundred bucks and they buy it for $50, they could have bought a used book for probably $70 and sold it for $35 and a net cost to them would have been less, because they only get the use of it for that one term. So on a net economic basis they haven't proven that the electronic textbooks are there.

Now, again, like everyone else, we have prototypes in that arena, and we'll see what happens. But it's difficult to say whether it's, whether we'll meaningfully change the game.

Terrific, thanks a lot.

And our final question is from Kevin Gruneich from Bear Stearns. Please go ahead.

Thank you. Two parter. Number one, could you talk about library and the library reference area? I know that's been pretty soft in the recent past. And I was wondering, number one, if you could isolate what the growth was there in Q1 and understanding that new management came in at the beginning of the year, if you've had a change in strategy there.

And the second part would just be, and I apologize if you went over this, in cash provided by operating activities, one of the major swing factors was other net plus $25 million and I was wondering if you could speak to that?

I'll do the library reference, Kevin and I'll let Bob look up the other one. The library reference for the first quarter grew in excess of 5%. I wouldn't necessarily say it was basically new management. We've been refocusing the business as we saw the market decline over the last couple of years due to the budget constraints and we've been much more focused on the growth areas of the business around I think it's paid off in the first quarter as the budget's lightened up a little bit.

Dick, outside of just, you know, electronic distribution, could you give any examples of some the growth areas, maybe the verticles.

I'm sorry in the library reference side?

Yes, please.

I think what's happened, two things, we found out in the decline, first of all, electronics did actually well during the budget constraints. What was getting hit was the print products, more so. What we found out that the large volume print products did well. It was a lot of the smaller print products. So we realign our development efforts for the larger print products and that worked to our benefit.

Kevin, on the other net that's in cash provided by operations, it's primarily the add back of pension expense year-to -year increase. There were other items, but that's the biggest one, which is a non-cash expense.

Got it.

Okay. Okay.

Thank you.

Thank you. This is John Kechejian and I'd like to conclude the call on a personal note. As many of you know I've been planning to retire for some time and this Friday it becomes a reality. I want to say that I've truly have enjoyed serving you as your IRO over the past seven years and being part of and communicating the transformation of Thomson over that time.

In addition, I really will miss my friends and colleagues here at Thomson. All of you, my friends, colleagues and investors have been so very supportive and I just wanted you to let you know I appreciate it very, very much. A new IRO is going to be named shortly, until then direct your information needs to Brian Martin and Brian's our SVP of Corporate Affairs. With that I'll say cheers, best regards and sign off the call.

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