Thomson Reuters Corp (TRI) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to The Thomson Corporation fourth-quarter results conference call. At this time all the participant lines are in a listen-only mode. However, there will be an opportunity for questions; instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, today's call is being recorded. I would now like to turn the conference over to the Vice President of Investor Relations, Mr. Frank Golden. Please go ahead, sir.

Good morning everyone. I would like to welcome you to The Thomson Corporation's full-year and fourth-quarter 2004 earnings call. Those of you listening should have a copy of today's earnings release and related slides. If you do not have a hard copy, you may obtain one from our website at Thomson.com.

We will begin with our President and CEO, Dick Harrington, providing a strategic overview of 2004, and will also touch on some financial highlights for the year. Dick will also discuss the highlights for each market group, and we will finish with a discussion of the Company's priorities for 2005.

Next up, Bob Daleo, our CFO, will discuss the full-year and fourth-quarter financial results on a consolidated basis, as well as for each of the market groups. He will also provide some information on the Company's financial metrics, and will conclude with some comments on our outlook for 2005. Following Dick and Bob's presentations, we will open the call for questions. We ask that you limit yourself to one question each in order to enable us to get to as many questions as possible.

Before we begin, let me mention that the following discussion contains 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 currently expected, due to a number of risks and uncertainties discussed in documents that we provide to the regulatory agencies. This presentation also contains disclosures of certain non-GAAP financial measures. As required by regulatory rules, we have provided a reconciliation of each of these measures to the most directly comparable GAAP measure in the Investor Relations section of our website, again found at Thomson.com. And now I would like to introduce the Company's President and CEO, Dick Harrington.

Good morning, everyone, and thank you for joining us for today's earnings call. Let me begin by saying we are pleased with our 2004 results. Despite uncertainties in some of our markets, our businesses performed very well. Over the past few years, Thomson has continued to invest in its businesses and technology, enabling us to drive growth and differentiate ourselves from our competitors. The strategy is now paying off as we grow the business and solidify our leading positions in each of the markets we serve.

Through a combination of our front-end customer strategy across Thomson, plus strategic acquisitions, we have been able to tap into new revenue streams from existing customers and enter adjacent markets, all of which is helping to drive growth. In 2004, our strategy produced the results we had been anticipating and that we expect will continue. As indicated in this morning's press release, revenue, operating income, and earnings per share were all up substantially in 2004. And importantly, each group achieved organic revenue growth.

Our continued evolution from a valued content provider to a valued information solutions provider resulted in double-digit growth from electronic products, software and services, enabling us to achieve our long-term growth target of 7 to 9 percent. We also continue to become more efficient across the Company as we seek ways to take costs out of the business. Whether through sharing technology platforms or taking advantage of our scale, we continue to grow our margins. And we continue to generate significant free cash flow, which has been used to increase dividends, invest in strategic acquisitions and enable us to maintain our investment grade rating, a top priority.

Bob will discuss the full year and fourth-quarter results in a moment, but here are some highlights. Full year revenue increased 9 percent, including a 2 percent benefit from currency. Operating profit increased 14 percent, helping to improve margins. And EPS rose 15 percent, reflecting solid revenue growth and improved efficiencies. And importantly, we surpassed $1.1 billion in free cash flow, a 14 percent increase.

Let me now turn to a quick review of each of the market groups, beginning with Legal & Regulatory. The group had another very impressive year by almost any measure and continues to be a powerful growth and cash flow engine. The story here continues to be strong growth from online information, software and services, which grew at high single/ low double-digit rates. We continue to expand our electronic product offerings and build software tools and applications in the legal and accounting markets that help our customers be more productive. These are some of the fastest-growing areas for us and will be increasingly important going forward.

Legal & Regulatory's clear understanding of its customers' business, and its ability to develop products and services to meet their needs, resulted in solid growth in nearly every product area in 2004. We also continued to manage our print business more efficiently. Print revenue, which represents one-third of the group's total revenue, declined 2 percent for the year. To manage our print business more efficiently we have begun shifting print products more evenly throughout the year, rather than concentrating shipments in the fourth quarter. This affects fourth-quarter year-to-year comparisons.

In Learning we saw an increase in revenues across all our businesses for the year, including U.S. and International Higher Education, Library Reference, e-Testing, and Corporate e-Learning. We continue to see solid growth in the area of Custom Publishing, Vocational Education and English Language Training. Higher Education textbook sales, overall, were up about 7 percent for the year, up 4.5 percent excluding foreign exchange.

With the acquisition of KnowledgeNet last year, our Learning group is developing a common technology platform that it expects to use across each of its businesses. In addition, TL is implementing a common content repository that will deliver economies of scale and enable us to create new products for the changing marketplace.

We are also expanding the number of products that combine print and electronic components for Higher Education, as technology continues to reshape the way professors teach and students learn. With our strong market position and technology capabilities, we are prepared to take advantage of future changes in the Higher Education market. Learning, overall, had a good year in 2004. However, there were some one-off items that affected profitability, particularly in the fourth quarter, that Bob will detail in his comments.

Thomson Financial posted very strong results in 2004 and achieved its first full year of organic revenue growth since 2000 -- a notable achievement, especially in light of all the changes we have implemented in this business over the past 5 years. We are making further inroads for our Thomson ONE suite of products, which are tailored for the specific needs of end-user markets like retail wealth management, investment bankers and investment managers. The number of Thomson ONE workstations increased 56 percent since December of 2003, largely as a result of continued migration from our legacy products, plus new customer sales and total workstations increased by 9 percent for the year.

The two significant acquisitions we made earlier this year, TradeWeb and CCBN, have been effectively integrated into Thomson Financial, are performing very well and have exceeded our expectations. Since we acquired TradeWeb in the second quarter of 2004, we have signed up 10 new dealers, bringing the total number of dealers to 37. TradeWeb's trading volume was up 42 percent in 2004. In addition, there are several major new products and partnerships currently under development which will further strengthen our position in the online fixed-income trading market.

In terms of the overall market and financial services, we continue to see positive signs of improvement mainly in the U.S., while Europe is still lagging. And we believe that we have the content and the technology to deliver superior products tailored to the specific workflow of our customers.

Scientific & Healthcare also had a very strong year, thanks to higher subscription revenues from our Web of Science and Web of Knowledge solutions in the Micromedex databases. In fact, renewal rates for our electronic products continue to exceed 90 percent. The acquisition of BIOSIS earlier this year and IHI in the fourth quarter, also contributed to the strong results. Both of these acquisitions will help expand the solutions we offer our customers.

Our Medstat unit, which helps employers, insurers and hospitals monitor and control healthcare costs, also had a very strong year. Medstat is very well positioned for further growth as healthcare costs continue to be a major public policy issue. In December we launched Thomson Pharma to very positive feedback. This is the first integrated information solutions for the pharmaceutical market. Customer migration to the new solution has begun as we move from a price-per-product model to a price-per-seat model.

Before I introduce Bob, I would like to comment briefly on our priorities for 2005. We are well positioned in each of our market groups to continue to grow revenue and expect to again meet our long-term growth targets of 7 to 9 percent. Organic revenue growth is expected to accelerate further as we continue to focus on workflow solutions for our customers and expand into new adjacent markets. We expect margins to further improve as we take advantage of the operating leverage in our business model and continue to drive efficiencies. Our strong free cash flow will enable us to fund our growth and pay an attractive dividend to enhance shareholder returns. And we remain focused on solid and sustainable earnings growth.

With that, let me now turn it over to Bob Daleo.

Thank you, Dick, and good morning everyone. As Dick mentioned, our strategy delivered solid financial results this year. We not only met our revenue growth target for the year, but also achieved organic revenue growth of over 3 percent. This compares to a 1 percent decline in 2003. And we accomplished this while driving operating efficiencies across our Company, resulting in higher margins for the fourth consecutive year. We continue to emphasize the importance of free cash flow generation as an important component of our business model. And I am pleased to report 2004 marked the fourth consecutive year of higher free cash flow.

Let me now turn to a discussion of our results for the full year and the fourth quarter. But before I begin, I want to draw your attention to the general shift in timing of our financial results as we continue to move to electronic solutions and away from our traditional print product base. This is most evident in our fourth-quarter results. So please keep this in mind as you review our financials, and I will have more to say about this over the next few minutes.

Starting with our full year 2004, our revenues increased 9 percent to over $8 billion, helping to drive significant increases in EBITDA and operating profit. Organic revenue was up more than 3 percent. Acquisitions added just under 4 percent and 2 percent came from our favorable exchange rates. There was solid revenue growth across each market group, with each posting organic growth for the year. EBITDA growth for the year of 10 percent was driven by strong revenue growth and continued operating efficiencies across the Company. Our margin was 30 basis points, to just shy of 28 percent.

Turning to the fourth-quarter results, revenue growth was 9 percent. Organic revenue grew 2 percent, acquisitions contributed 5 percent, and favorable exchange added another 2 percent. EBITDA rose 4 percent in the quarter and margin declined slightly to 31.7 percent. This is due to lower margins at Legal & Regulatory and Learning which I will discuss during my remarks of each of these groups, and this was somewhat offset by improved margins at both Financial and Scientific & Healthcare.

I will now discuss the full-year and fourth-quarter results for each of the groups, starting with Legal & Regulatory.

Legal & Regulatory had a strong year thanks to continued growth across nearly every business segment. Revenues improved 8 percent with organic revenue up 5 percent and acquisitions and currency translation contributing about 1.5 point each. Westlaw revenues were up 8 percent, international revenues were up 22 percent, Checkpoint's online revenue was up 19 percent, software and services revenue was up 25 percent, Legal Education revenue anchored by our Barbri business was up 9 percent, Trademark revenues grew 9 percent, and print/CD, as Dick has mentioned, declined 2 percent, and the print shift continues through the first half of this year.

Now EBITDA, adjusted EBITDA, increased 11 percent, and the margin rose for this group 8 basis points to 32 percent due to strong revenue and improved operating efficiencies.

Turning now to the fourth quarter, revenues rose 5 percent of which 2 percent was organic and 1 percent was acquisitions and the balance was exchange. Here Westlaw revenues were up 7 percent with strong growth across all of their segments, international online revenue rose 19 percent, Checkpoint online revenue was up 20 percent, software and Services was up 13 percent, Trademark 9 percent, and print/CD declined 5 percent for the factors that Dick mentioned earlier. Overall EBITDA increased 4 percent as the margin declined slightly again in the quarter due to the shift in print and some expense timing.

Turning to Thomson Learning, revenues increased 6 percent for the year, 2 percent organic, 2 percent acquisitions and 2 percent for foreign exchange. The Global Higher Education business saw revenue growth of 7 percent, 4.5 percent when excluding foreign exchange, driven by significant growth in Custom Publishing, vocational training and international sales. Library Reference revenue increased 3 percent led by a double-digit growth in electronic products which were up 19 percent, but partly offset by a 10 percent decline in print products. Here in this market we're facing two important dynamics. First, the overall drive of conversion from print to electronic, but we are doing this within a declining market. Last year Library funding actually declined 4 percent.

e-Testing and Corporate e-Learning overall grew 4 percent on a combined basis. This excludes the impact of acquisitions. The e-Testing revenue was up due to a growth in the corporate and professional segments, including the launch of the CPA exam in the second quarter. Growth was achieved despite continued weakness in the IT market and the termination of the UK, the expiration of the UK driver's license contract which impacted the fourth quarter.

In addition, Corporate e-Learning revenues increased 7 percent as a result of a contract with the Air Force and several other significant contracts. Adjusted EBITDA was flat and the margin declined versus 2003. I will discuss several of the items that impacted the full year and fourth quarter in just a moment. But turning to the fourth quarter, revenues rose 5 percent, of which 2 percent was -- organic growth was actually down 2 percent -- acquisitions contributed 5 percent and foreign exchange contributed 2 percent. Global Higher Ed was up by the same rate, 7 percent; Corporate e-Learning was up 6 percent; Library Reference for the factors I had previously mentioned, declined 5 percent; and e-Testing declined slightly primarily due to the expiration of the driver's license contract.

The fourth quarter experienced several one-time and unusual items which resulted in decreases in EBITDA and operating profit compared to the prior year. These in turn impacted the full year. Slide 18 highlights these. First off, we had $11 million of benefits, expense benefits, last year related to some one-time cost savings. But importantly, as we transition the business from a print to an electronic environment, we are beginning to see a higher level of deferred revenue, and that level increased $20 million in the Higher Ed business related to the continued expansion of a migration to subscriptionbased offerings, largely electronic.

In addition, one-time costs related to KnowledgeNet and Capstar acquisitions of $9 million were incurred in the quarter. These relate to integration costs which we take to the P&L as opposed to the balance sheet. In addition and finally, we had the impact of the expiration of the UK driver's license contract. This resulted in a loss of $9 million in revenue and $5 million of profit in the quarter. Now normalizing for these items, fourth quarter results in EBITDA see an EBITDA margin of 33.9 percent, which is unchanged from the prior year. If you were to take these to the full year EBITDA growth is 8 percent and the margin improves for the business from 24.8 percent to 25.4 percent.

Moving on to Thomson Financial, overall revenues were up 15 percent for the year, 3 percent organic, 9 percent acquisitions, and 3 percent foreign exchange. As Dick has mentioned, 2004 marked the first full year of organic revenue growth for TF since 2000. Strong revenue growth was attributable to results from acquisitions which we have mentioned, the continued successful rollout of Thomson ONE, as Thomson ONE workstations increased from 52,000 at the end of 2003 to 81,000 at the end of 2004, an increase of 56 percent. And this growth fueled an overall growth in Thomson Financial workstations of 9 percent. And this, combined with higher usage and transaction revenues, is what drove the organic revenue growth.

EBITDA increased 19 percent, and the margin improved 1 full percentage point for the year. In the fourth quarter revenues grew 24 percent. Organic revenues were up 6 percent, and acquisitions 16 percent in the balance from exchange. It is important to note momentum continues to build in the business. This is the third consecutive quarter of accelerating organic revenue growth for the group. Revenue continues to show strength not only from acquisitions, but also new products as Thomson ONE gains traction, and the strength in our transaction services businesses of Beta and AutEx which are driven by higher trading volumes.

European revenue was actually up 17 percent due to acquisitions in exchange. It actually declined organically 3 percent. But the good news is that this 3 percent decline is in stark comparison to a 13 percent decline of a year ago reflecting the improvements in the market and the strength of our products. Overall EBITDA for the quarter was up 37 percent, and the margin rose to 29.5 percent from 26.6 percent of a year ago.

Finally, Scientific & Healthcare, where revenues increased 10 percent for the full year which was comprised of 3 percent organic growth, 4 percent of acquisitions, and as this is a truly global business, 3 percent currency translation. Revenue growth was due to the acquisitions of IHI, which we had actually for a month, and BIOSIS, which we had for virtually the full year. But also, the organic growth reflected the increase in subscriptions for both of the Web of Science and the Web of Knowledge. Dick talked about the performance of Micromedex and the strong growth of Medstat. In addition, our adjusted EBITDA increased 16 percent and the margins rose to 30 percent from 28.6, as you can see. And this margin improvement reflected both the higher revenues and continued efficiencies in the business.

For the fourth quarter Scientific & Healthcare achieved 13 percent revenue growth, importantly, 5 percent organic growth, 6 percent acquisitions and the balance from currency. And the revenue growth was driven by the same factors as for the full year. EBITDA was up 21 percent and the margin was 43 percent for the quarter compared with 40.2 a year ago.

Now we continue to focus, as you know, on metrics that we have regularly highlighted and believe drive our long-term business objectives. These are revenue growth, driving margins as we take advantage of our size and scale, effectively and efficiently investing in our businesses to enable us to maintain a competitive edge, continuing to emphasize growth in free cash flow, improving our return on invested capital and driving earnings growth.

Now let's review these specific metrics. As you can see on this slide, we had good growth across each of the groups in 2004. Growth at constant currencies for the year was 7 percent compared to being flat last year. And as I mentioned, organic growth was up 3 percent versus a 1 percent decline a year ago. Electronic Solutions and Services, which exclude print, comprised two-thirds of our revenue base compared to about 64 percent a year ago. A full 65 percent of our revenue is recurring in nature. We believe these metrics continue to reinforce our business model, and we believe we are building momentum for higher organic growth going forward, while at the same time maintaining consistency of revenue and strong free cash flow generation capabilities.

As you can see on this slide, showing adjusted EBITDA margin, whether in good markets or bad, we have had success in continuing to improve our margins. It reflects our business model and the large fixed cost nature of our business. We will continue to leverage the size and scale of the Company across each of our groups and expect to continue to see margin improvement, albeit certainly at a more gradual rate of expansion as we go forward.

Capital expenditures rose 9 percent in 2004 to 619 million. This represents 7.6 percent of revenue which is essentially unchanged from last year. Bookplate comprised about 19 percent of our total spend. While the capital spend as a percentage of revenue has remained in the 7 percent range over the past few years, the nature of our investments continue to evolve. Today more than ever they reflect projects which drive greater leverage within and across our businesses, such as the investment in the Novus platform to support our Legal, Tax, Financial and the Library Reference businesses. Our global data center consolidation project, which will ultimately result in three large data centers in North America, each with hot-site backup. We refer to these as the three twins, and also projects to consolidate the content management in both Learning and Scientific & Healthcare within their respective businesses.

At the same time, these investments reflect our continued investment in major products like Thomson ONE, Thomson Pharma and in the Westlaw Litigator. We maintain an emphasis on capital discipline allocating funds to the areas of greatest opportunity and highest return potential. We continue to expect overall capital expenditures to be in the range of 7 percent of revenues over the longer term.

Moving to free cash flow, it continues to be one of the most important metrics we measure across the Company, and we firmly believe strong and consistent cash generation is critical to strengthen growth of our business over the longterm. We have increased free cash flow each year for the last 4 years, from approximately 300 million in 2000 where it was 5 percent of revenue, to more than 1.1 billion where today it represents 14 percent of revenue.

According to Thomson Financial, which I'm happy to quote, this level of free cash flow puts Thomson in the top quartile of S&P 500 companies.

We have successfully grown free cash flow in a compound annual rate of 39 percent since 2000, and although it may appear that there was no free cash flow growth between 2002 and 2003, you will recall as shown that 2002 included a benefit of $150 million related to an improvement in our working capital position. Adjusting for that improvement, Thomson has continued to grow free cash flow at a healthy pace each year for the past 4 years, including this recent one. And we expect to continue to generate strong levels of free cash flow.

I point out this slide and take a moment here because I want to make sure we all understand that timing of free cash flow is very significant and can vary from year to year. And the way we manage this business is not simply on an annual basis but on a directional basis, where we've achieved the plateau of one billion and now have exceeded that billion on our way to 1.2 billion. And so while free cash flows may flatten from year to year, it is not an indication of overall business long-term capability.

Now our return on invested capital increased slightly in 2004 to 7.6 percent. As I have previously said, the investments made in building our market positions over the past 5 years have had the effect of repricing our asset base, which has dampened our return on invested capital. Now we understand the long-term importance of returns no matter how it is measured. And while they are lower than we would like, they are not representative of the capacity of our business. Over the longterm, growth of free cash flow and improving margins will work through to strengthening our overall returns.

As you can see in the overlay graph, our growth in free cash flow continues to be strong, running counter to ROIC, an excellent indicator of our business returns capacity.

In spite of this, both management and the Board are very focused on improving returns and a component of management's compensation is based on this ROIC metric.

This slide on financial position is a brief summary. Suffice to say our balance sheet and debt position reflect the strength of the Company and the commitment of management and the Board to ensure business growth is solidly grounded in financial discipline.

In 2004 we spent $1.3 billion in acquisitions net of cash. Now in addition, there has been another $200 million in contingent or deferred payments related to these transactions, which don't appear in these figures. Now many of these acquisitions were small tactical fold-ins, however the larger acquisitions noted on this slide were primarily made in adjacent markets enabling us to immediately tap new revenue streams or capabilities while also strengthening the depth and breadth of our core offerings available to our existing customers.

We received proceeds from divested assets totaling $561 million. These funds came from the sale of solid businesses but they did not fit our long-term strategy. These include Thomson Media, an advertising based print publication, and DBM, an outplacement services firm.

Earnings attributable to common shares for the year, as we reported, increased 15 percent based on our strong operating profit -- performance, rather. Adjusted earnings rose 16 percent to $1.23 per share. This significant one-time item affecting earnings for the year. These include discontinued operations, which report here of $148 million, $112 million is related to Thomson Media, and this includes $94 million of a gain on the sale of that business, an after tax gain.

Other income of $24 million includes the gain on the sale of interest in Fitch, a pre-tax gain related to the Skillsoft settlement which we also had in 2003, the sale of tax losses, and these are offset by a one-time charge related to the debt financing which we completed in the fourth quarter and have previously announced.

We also benefited from the release of tax credits totaling $41 million, a non-cash item, and this related to a change in the UK tax law which was enacted last year. Other effective tax rate on an adjusted earnings basis for the full year was 26.9 percent, and this compares to 22.3 percent a year ago. That change alone accounts for about 7 cents per share.

Before I leave this slide, let me also point out that Thomson began expensing options in 2003. According to a recent Bear Stearns' report, only 20 percent of public companies in the S&P 500 Index currently expense options. Our options related expense was $19 million in 2003 and $23 million in 2004. That is an impact of 2 cents per share in each of the years.

On this slide we highlight the similar earnings analysis for the quarter as I did for the full year. Again, our overall earnings increased 11 percent, while adjusted earnings actually declined 4 percent. I would point out in addition to the general shift in our business that the effective tax rate in the quarter, as we have previously noted, was 25.7 percent, significantly higher than last year's rate of 19.2 percent.

Now, Dick talked about our priorities for 2005. I want to summarize some important financial metrics, which will better your understanding of the potential future dynamics facing our business in 2005. First, as we demonstrated this year, we continue to believe the business has the capacity to grow top line between 7 and 9 percent, and that, of course, in constant currencies. We also believe our business model supports continued margin expansion. However, it will be more gradual, reflecting the significant improvements already recorded in our business.

We expect depreciation and amortization to be 10 to 15 percent higher than in 2004, driven by the acquisitions we made that year and our capital investments in technology and products. On a positive side, we do expect our full-year effective tax rate on adjusted earnings basis to be down slightly from what it was a year ago. And we expect to continue to generate significant free cash flow.

Finally, I would like to again address the changing seasonality of our business. I mentioned last quarter that more and more of the Company's earnings are being generated in the first half of the year, as our business model has changed. More revenue is now being generated electronically, which is less seasonal. And the publishing business in which we continue to operate are seeing shift of more revenues to the first half.

This first chart is to highlight the dramatics of this change. In 2001, 61 percent of Thomson's earnings, adjusted earnings, were recorded in the fourth quarter of that year. With today's report, we recognize that 40 percent of our earnings, adjusted earnings, are recorded in the fourth quarter.

Over the past 5 years, there has been an almost lock-step shift in the timing of our earnings. This shift has evolved with the changes in our business model. We expect this trend will begin to stabilize as the shifts in print revenue to the first half of the year begin to lessen. However, we continue to encourage our investors to look more towards annual than quarterly performance as true indicators of business trends and business achievement.

Now let me wrap up by saying 2004 was a great year, and we look forward to continuing that momentum in 2005. I would now like to turn this back over to Frank.

Thanks very much, Bob, and we would now like to open the call for questions. I'd like to repeat that we would appreciate it if you would keep to one question per person so we can get as many on as possible.

(OPERATOR INSTRUCTIONS) Vince Valentini with TD Newcrest.

Thanks very much. Questions on your 7 to 9 percent revenue growth target. That is a long-term target, it seems we have seen in the past couple of years there are some years where you've fallen a bit below that. Would it be fair to say there would be some years when you make more than an average number of acquisitions and when the cyclical drivers are strong that you actually see better than 7 to 9, or is 7 to 9 a peak year in your view?

Well, I think first of all 7 to 9, if we take our 5 year averages over the last few years we would be within the 7 to 9 percent range. So we always look at that as a 5 year average. And obviously some years, depending on what acquisitions we would make, yes, might shoot above 9 percent. But again on average, if you look at rolling 5 years the last few years we have been approximately at 8 percent.

Jeffrey Fan with UBS.

Good morning. I have a question about your guidance or your financial outlook in terms of margins. Bob, you mentioned that you expect to see margin expand but on a more gradual basis. I guess when we look at your 2004 numbers, and if we adjust some of the one-time items in Learning, for instance, the cost savings in '03 and also the integration costs that you incurred in Q4, it looks like instead of the 30 basis point increase in margin from '03 to '04, you actually get something closer to 60 basis points. I guess, can you talk a little bit about your financial outlook for margin '05 in context to what your base is for 2004 margins?

I think that if you look at that five-year history and see how we have expanded margins, a lot of that has come from what I would say the natural consequence of how we organize the business and how we have taken costs out in terms of consolidating platforms. Yes, you can adjust those. Every year we will have across the businesses certain one-offs or project investments that we deem to make. And our guidance is meant to reflect the fact that within that margin expansion we must accommodate what we need appropriate funding to grow and invest in the business. And such as we do make acquisitions and increasingly more of those acquisition integration costs are expensed as opposed to capitalized, we call out the ones in Learning because they were most significant and impacted the quarter.

So I think our guidance is correct in the sense that -- I know it is correct in the sense that we believe that we will continue to expand our margins, but they will be more gradual because of the fact that we always have these one-offs and investments that we need to make, and because the significant margin improvements. For example, I will take Thomson Financial. They have done a tremendous job in expanding margins in that business, and they did it during a period while our revenues actually declined. I have said this before, I will say it again, that margin expansion in Thomson Financial will be driven by revenue growth. And so that is -- and not any other significant operating efficiencies.

I guess what I was trying to get at is the base is like, are you looking at '04 as having achieved sort of more 60 basis points, or is it the 30 basis point that you are mentioning?

I look at it from the total business we reported, the 30 basis points that we reported.

Okay. Thank you.

Lauren Fine with Merrill Lynch.

I guess sticking with the margin question, could you review as you look at the 4 operating segments for 2005, where you would expect to see more or less of that margin expansion? I guess embedded in that question is what you just said on Thomson Financial, that that is going to be driven by revenue. But on Scientific & Healthcare, what kind of an impact would you expect to see with IHI, whether there will be any integration restructuring costs embedded in there so that we can keep margins flat or down? So if you could just go through some general assumptions on each of the units of what we would expect directionally.

I'll start with Legal & Regulatory. They had some margin expansion this year. I think it's important to remember that a key component of the growth in that business comes from the lower margin businesses, meaning the software services kind of businesses. And so we would expect some gradual and not significant margin improvement. They are already at 32 percent as we reported. In terms of Learning, we would not expect to see significant margin expansion because we do have, we've acquired these businesses, it takes a while to get the efficiencies out of them, and we continue to make investments in the electronic side of the business. And we will continue to see an expansion of deferred revenues, which means that we will be pushing more revenues out which will certainly affect the profitability there.

In terms of Financial, again, it will be revenue driven, but there we continue to invest in the business. And while we will see margin expansion, it certainly wouldn't be at the degree that we saw during the -- when we were taking all the costs out. But we would expect to see some gradual margin improvement there. Scientific & Healthcare, really the IHI acquisition occurred really in the month of, at the end of November. So we only had one month there. So the margins in Scientific & Healthcare we would expect them to actually go down in 2000 slightly or at least slightly in 2005 because those businesses do not have the same kind of profitability and we will be integrating them throughout the year. Some of those costs are taken to the P&L, but a large measure of the IHI costs will not. They will be taken to the balance sheet.

I guess if you go back to that, do you -- I think you just answered it, but what magnitude of integration or restructuring costs do you expect there? And then you just touched on the deferred revenue increase on the Thomson Learning. I am not quite sure I understand that, so if you could explain that, that would be helpful.

In Thomson Learning the reason why we will increase deferred revenues is because we're selling more and more electronic products in the Higher Ed and in Legal, as well. In Higher Ed, those products are being sold independent of the textbook, and those products therefore are not earned discreetly. They are earned over a subscription period, and those periods tend to overlap calendar years. And so that is what will drive the Thomson Learning increase.

IHI, I am just trying to get the magnitude.

IHI, the bulk of the -- very little. The bulk of the IHI integration costs will go to the balance sheet. And I really don't have a figure at what that would be, but it is significant. I just don't remember what the number is. Certainly not hundreds you know, I was going to say 15, 20 million, something like that.

The reason why the bulk, the reason why there is a large percentage of acquisition related costs in Learning is because we took our business and merged it into theirs, with KnowledgeNet. And as a result if you do that you don't take those costs to the balance sheet, you have to write them off as incurred. So it was a function of how we handle the acquisition internally that determines how much goes to the balance sheet and how much goes to the P&L. It just so happens Learning, because again we merged our NETg business in with KnowledgeNet to take advantage of all the technology platforms, etc., that many of the costs had to go to the P&L.

Great. Thank you.

Douglas Arthur with Morgan Stanley.

Just looking at the Learning group's bottom line performance in 2004 and understanding the one-time impacts in the fourth quarter, but earnings or EBITDA for the year was flat. And I'm wondering -- I certainly wouldn't have assumed that at the beginning of 2004, particularly with Higher Ed being up pretty nicely. Are there deeper issues here? I'm aware of the weakness in certain parts of the corporate training sector that have been ongoing, but can you sort of talk about the various components of Learning and what you expect to see in '05 to sort of change this fairly dull momentum in a critical group?

Doug, first of all, the two largest sectors, Global Higher Education and Corporate e-Learning, e-Training -- e-Learning rather, both grew 7 percent for the year. And so what you are seeing here is a series of these one-offs, which by the way as I said, if you were to adjust these one-offs, the group had EBITDA growth of 8 percent. So that is significant. It is a significant impact there. And the areas where we have seen the slow down, have been the one-off items that I mentioned. In addition to that, as I also stated, we had a decline in Library Reference group in their print products which significantly impact overall growth. Library Reference only grew 3 percent for the full year. And in the e-Testing area we did lose a contract for the UK driver's testing in the UK. And that had an impact in the quarter, and will dampen some of the growth going forward in 2005 as we work our way out. That contract expired at the end of the third quarter. And so the full impact is in the fourth quarter, and will carry through to 2005.

So I should take from that that you expect to see EBITDA growth in '05 but probably not doubledigit?

Well, we don't give forecasts for individual groups, but we expect to see improvement in this group in '05. We do not, as we said, we believe that the fourth quarter performance was not indicative, certainly of the long-term business nor of what we expect in 2005.

Okay, great. Thanks.

Frederick Searby with J.P. Morgan.

My question I guess, one question, if we're limited to that which is great, would be how you started off the year. If you could give us some update on what you are seeing. It should be pretty indicative of the whole year I would think. And if you can tie that in, you had indicated you expect accelerating organic growth and just what you are seeing this year that suggests that. Thank you.

Well, first of all this is not even the middle of February, so my guess is as good as yours at this point because January is just completed, and second of all, we really wouldn't give those interim updates. But to give you a sense, I know what you're looking for. I think the sense that you should take away is that we ended the year of 2004 with the momentum that we expected that will carry us well into 2005. Thomson Financial had fourth quarter organic growth of 6 percent. Certainly up and it increased every one the past 3 quarters, so that is good.

We had strong closes in all of our businesses, and what you don't see is we had strong sales in the fourth quarter which don't impact the fourth quarter revenue as much but carry over into 2005. So I would say across all of our businesses, the results that we had in the fourth quarter of 2004 were expected, and we look at those as encouraging for our position going into 2005.

I guess if your guess is as good as mines, then we should take the comment that you are seeing accelerating organic growth, is what we should make of that. And I would think that your business with the subscription nature of it and it tends to be very indicative, right, the first quarter. You should have I would have thought a better visibility or window into what is --.

Actually, I don't want to be flip about it. I would not respond to that question in terms of a perspective of performance, certainly on a quarterly basis. I think that we give guidance for the full year, and we give that guidance in a very perspective way. So I wouldn't answer that even if I had that information. What I tried to respond to you with was what I believe how we ended the year for 2004, what does that bode for us going into 2005. And your observation is correct. 65 percent of our revenue base is recurring in nature. So we have an idea of how we close 2004, about how we think about 2005.

All right. Thank you.

Megan Anderson with RBC Capital Markets.

My question is about pension expense and details of the pension plan. Are you still expecting the increase to be about half of what it was in 2004 and that's for 2005? And also, if you can provide any details regarding the level of any deficit at the end of the year and any change in assumptions you might have made.

The pension expense increased $27 million in 2004. We expect increase around $14 million in 2005. In terms of the assumptions, I don't know if I have that. It will certainly be in the financial statements that we release, and we can certainly—I'll ask Frank to put them out on the website. I just don't remember them offhand. I know that as every other company -- first of all, we didn't have to make a contribution in 2004 based upon the strength of the assets. I think last year we made about $80 million in total across our global pension plans.

And so that oddly is a reflection of the strengthening capital markets. I know that we also lowered our expected returns. It is in the 8 percent range, but I don't want to be specific -- I don't want to commit to that. I think the overall returns were slightly more than 8 percent. We lowered them as we have-- as indeed most companies have over the term. We tend to manage our -- not we tend to -- we do manage our pension plan very conservatively. We fund it. We make sure it is well funded. And it has not been an issue for us in the past, nor do we expect it to be an issue going forward. But we will make sure that we post those assumptions so that you can have them.

Andrew Mitchell with Scotia Capital.

Thanks very much, and good morning. Just looking at your comments on Financial. You suggested you are seeing further potential for accelerating revenue growth, and I did just want to clarify that is off of the Q4 organic gain of 6 percent. And also, can you talk about how much of that is being driven by the revitalized industry trends versus what you guys are successfully doing on new customer additions?

Well, I did mention that Thomson workstation increased 9 percent in the year. And so that is a combination of the success of Thomson ONE, which increased more than 50 percent and the maintaining of our legacy products. So that's an absolute growth. That is real growth. In terms of accelerating growth rate, these are subscription businesses, and I think that as I said we recorded about 3 percent organic growth in 2004. And certainly you can take from it from that and the fact how we closed 2004, that the growth rate in 2005 should be better than 3 percent.

And can you just give us a sense for how your customer additions were driving going through the fourth quarter, just looking out to 2005, how that side of the business was looking?

I'm not sure -- I'm not sure I know how to answer that question.

Looking ahead, how is the momentum on your customer additions versus 2004?

The fourth quarter, again, was a strong quarter and so we continued to add customers, and November/December were good months. And I don't have a report on what the interim sales have been through January.

I think the important thing is the order -- when we look at net orders each month or each quarter, the net orders are increasing -- continue to increase each quarter over the last 4 quarters. So we are quite pleased with the direction that the Thomson ONE platform and Thomson Financial is going in.

Thank you very much.

Peter Salkowski with Goldman Sachs.

Just a quick question on the Learning group. In terms of the Higher Ed part of that business, just your expectations for 2005 on the Higher Ed side for Thomson specifically. And then also what you think the market is going to do there, sort of expectations for growth.

Well the expectations for the market are somewhere between 3 to 4, 3 to 5 percent. I think if you -- I mean, that's the consensus. I think if you talk to Terry McGraw and you talk to Pearson, etc., everybody thinks that the Higher Ed portion is going to be in this 3 to 4, 3 to 5 percent. I think that is probably a realistic way to look at it.

How do you guys figure into that in terms of expectations? Can you beat the market? Terry always talks about, he's going to beat the market.

Well, I think we all say we beat the market, but I'm not quite sure how we all do that. But I think the market this year, my guess is, it's probably going to be up 4 to 5 percent. We were up -- you're probably about 4 percent, we're about 4.5. So we're pretty confident that we're a little ahead of the curve. Pearson has not released yet, so we're not quite sure where they are. We have an industry association that pulls all this information together for us at the end of the year, which is in process. So we'll get a better view of that within, probably within the next 60 days. But we feel confident that we're slightly ahead of the market this year and we will be ahead of the market next year.

Okay, great. Thanks.

Andrea Horan with Genuity Capital Markets.

I'm wondering if you can break down your 7 to 9 percent growth forecast and talk about what you are expecting on a core basis. Or I guess alternatively, if there is a number that you are thinking for, what you might spend in acquisitions, if you don't want to break down how your revenue is going to grow.

First of all, we do have acquisitions that carry over. As you know, IHI was only here for a month. It was only with us for one month. So we will have some acquisitions that will carry over to '05. Let me just talk about acquisition spend. I mean, we spent, as Bob showed, I think net around 1.3 million, about 1.5 million or 1.6 million gross, if you consider potential deferred payments. And that is a lot to absorb for the organization and continue to focus on organic growth and continue to drive solutions on organic growth.

So my guess would be, looking at our history and the lumpiness of acquisitions over the past 10 years, that we would probably be in the low end of the range of somewhere $200 to $500 million on acquisitions this year, mainly because I think -- first of all, there's not that many in the pipeline now as we look at it, in the sense that we feel they're going to come up. And number 2, we want to make sure we absorb what we have because the biggest – the most important thing with these acquisitions, as you know, and I've stated this in the past and Bob has stated it, is these acquisitions are very -- very seldom do we buy a stand-alone business. We are buying them because they are being part of a total solution that we're trying to create, like IHI with Thomson Pharma or BIOSIS with Thomson Pharma. So we want to make sure that those are fully integrated. So my guess would be somewhere between that $200 million to $500 million range.

So I can take it, I guess, that the bulk of the growth that you are going to achieve in '05 is basically off of the staple of businesses that you have currently?

Yes, plus a follow-up of acquisitions acquired mid-term in '04.

Fair enough. Thanks a lot.

Sami Kassab with Exane.

Good morning everybody. Could you please elaborate on the reasons for your acceleration of organic revenue growth within Thomson Scientific & Healthcare in your fourth quarter, please? And maybe say a few words on the current business environment within research libraries, given the launch of both Google Scholar and Scopus, please?

I will answer the first; I will let Dick answer the second one. In the fourth quarter, one of the reasons for accelerated organic growth was that we had a little bit of catch-up in continuing medical education. We had a number of programs, and there we helped in the launching of drugs, and our CME is a critical part of that. So we had been lagging all year long, and we had a couple of programs that came in at the end of the year, and that helped in the organic growth. As a matter-of-fact, that was an important contributor. So, in terms of the second question.

The second question was, I think, Google and Scopus. Let me do Scopus first. As you know, that was launched in November of '04, as a scientific research database by Reed. And if we match that against the Web of Knowledge, Web of Science, we feel that we have a much deeper database and our database has more disciplines in it than the Scopus database. We do take it seriously. It's a good product. It has some good functionality. We feel pretty comfortable with our Web of Science and Web of Knowledge that we will retain our customer base. As I think we've said in the past, our renewals are still above the 90 percentile in the Web of Knowledge, Web of Science. So it has not impacted us yet, although we do think it's a good product; again, not quite as deep as The Thomson Corporation product.

As far as Google's Scholar product and Open Access -- I guess you didn't mention Open Access, but I'll throw that in. Open Access, as you know, is where people are putting their own articles up, and it is basically free to all users. Web of Science compiles and adds value to all these articles, so we would include the articles on the Open Access the same as we would include articles in any journal.

The Google Scholar product is, when we do the abstracts of these articles, there's an awful lot of value-add as far as search capabilities and relevance. And the Google Scholar does not have the same relevance that we have. It's also not as deep because we go back to 100 years. So it's a different type of product. It might be a good entry search product, but it doesn't necessarily compete with our Web of Science or Web of Knowledge, at this time.

Okay. Thank you.

Randal Rudniski with CSFB.

A question for Thomson Financial. The EBITDA margin after the first 9 months had risen modestly in the fourth quarter, a very nice increase in EBITDA margin. And the question is, can you identify the reasons for the margin improvement? Is it just accelerating revenues? Were there any one-timers in either the comps or in the quarter?

I think I would answer that in two ways. First is that the revenues definitely would help contribute to that, and the implications of having TradeWeb and the growth in that business as well. I would also say, as I've said before, these quarterly comparisons are not -- you need to look at this full-year. There is always timing of movement of expenses from one quarter to the other, and they can have an influence. And I'm sure there are some that influence this quarter as well.

I think that the way to measure the business and the way we manage the business, importantly, is on an annual basis. And so I think it is right for you to draw the conclusion that the revenue increases contributed to margin improvements, and that there was some timing of expenses that did it. The specifics of that, I really can't comment on them, because I don't know anything in particular that I could call out that was unusual that would explain it.

That's great. One very quick follow-up. Thomson Financial workstations, I think I heard you indicate they were up. The number grew by 9 percent year-over-year. And I'm not sure if I have my numbers right, but to me it looks like that would be a quarter-over-quarter decrease from the third quarter to the fourth quarter in total workstations. So is that accurate?

I don't think so. We'll look at that and -- I don't think so. I think it's -- it's flat.

Okay, that's great.

So that means that what happened was we added Thomson ONE workstations, and the bulk of that addition was a conversion of legacy product, which is by the way is also a good thing, because we get to keep our customers; we give them greater functionality; we have the opportunity for upsell. So we're very happy with converting legacy product into Thomson ONE platforms, because we have historically, with that opportunity, had opportunities to upsell and increase usage. Does that answer your question?

Yes, thank you.

Randy, this is Frank. Also just to give you a little more color on it, and we can provide you with the third-quarter numbers. For the full year at year-end, we had 191,000 total Thomson workstations. I think, as Dick and Bob both mentioned, the Thomson ONE were 81,000 of those with the balance being legacy.

Terrific. Thank you.

Paul Bradley with Fraser Mackenzie.

Quick question of return on invested capital. You spoke during the remarks about the need to allocate capital to the best areas of the business. You've spoken about the pickup in organic growth and a relatively modest budget there for acquisitions next year. Just wonder what your target rate was for return on invested capital and the kind of timeframe over which you would like to get that.

Well, we've said before that we believe that the Company can get to our double-digit, low double-digit return on invested capital. I think that the timeframe is obviously a longer-term one. It is not next year or even the year after, but I think that what is important is to show the measured improvement. And as I said in my discussion, that one of the ways that we look at that is based upon how much cash generation the business has and the capacity to improve, and also our margins. So it is a matter of time as opposed to timing.

I would also say that when we acquired West, if you were to look at that group shortly after that acquisition, we would have had a pretax return in the neighborhood of probably below 9 percent. And today, it is well into the midteens. So, obviously, the ability of our business over time to continue to grow really makes sense.

Okay, thank you.

Michael Meltz with Bear Stearns.

You can finish up strong here. Quick question on Gale. It had some pretty good growth throughout the year, and then seemed to soften in the fourth quarter against a very easy comparison. Can you just talk about what was going on in the quarter and what you think -- what your expectation is for '05? And then separately, you ran through the list at TLR, how did Dialog do in the quarter? Thanks.

I think Dialog was down 4 to 5 percent in the quarter. And the other thing with Gale, though, what you get hit with in the fourth quarter is there's a lot of large print shipments that go out during the fourth quarter, similar to the old West. So if you reduce those print shipments, it has a major impact on the growth and P&L.

I think a year ago we had something called the 18th-century product that we began shipping in the fourth quarter, which is a discrete sale. It's an electronic product but discrete sale. And that was a new product introduced, and we didn't have something similar to that in 2004.

And your expectation for '05 there?

Well, I wouldn't single out that particular business. I would say that what has happened is that the library funding marketplace continues to be tight. And so while we expect this business to grow, it certainly wouldn't be at the rates the overall company is growing or even at the overall rates that we would expect Thomson Learning to grow.

Thank you.

That concludes our call. We would like to thank you all for joining us, and we are available if you have any follow-up questions. Thanks again.

Ladies and gentlemen, that does conclude your conference. Thank you for your participation, and you may now disconnect.