Thomson Reuters Corp (TRI) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Thomson fourth-quarter and year-end results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, your conference is being recorded.

I would now like to turn the conference over to our host, Mr. Frank Golden, Vice president of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to the Thomson Corporation's full-year and fourth-quarter 2005 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 www.thomson.com.

Dick Harrington, our President and CEO, will begin this morning with a review of 2005 and will outline the Company's priorities for 2006. Bob Daleo, our CFO, will then discuss the full-year and fourth-quarter financial results on a consolidated basis, as well as for each of the market groups. Bob will also review the Company's financial metrics for 2005 and we'll conclude with a discussion of the Company's outlook for 2006.

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.

Now, I would like to introduce the Company's President and CEO, Dick Harrington.

Good morning and thank you for joining us. Before we get started, I want you to know how pleased I am with our 2005 results, which provide us a very solid foundation and give us an excellent momentum as we enter into 2006.

I want to begin this morning with a brief recap of the areas that we focused out in 2005 and why we believe Thomson is well-positioned for the years ahead.

First, we continue to expand our offerings of workflow solutions to solve our customers' problems and meet their needs. We integrated the acquisitions we made in 2004, including TradeWeb, IHI, and KnowledgeNet, and in doing so, generated incremental revenue, reduced costs, and integrated applications into our workflow solutions.

In addition, we spent 289 million last year, primarily on fold-in acquisitions that will enable us to further enhance our workflow solutions and derive growth.

We further refined our portfolio optimization process to ensure capital will be allocated to higher growth areas. We continue to improve operating efficiencies. This is especially important as we look across our market groups for greater operating leverage. Lastly, we continue to focus on free cash flow growth.

There are a number of operating highlights I would like to mention. Thomson Financial completed the rollout of over 23,000 workstations to more than 500 Merrill Lynch retail brokerage offices across the United States, and TradeWeb processed a record $43 trillion in trades.

Westlaw Litigator continued to further penetrate the corporate litigation market, evidenced by a 77% increase in revenues to $80 million. Likewise, Thomson Tax & Accounting continues to gain share as it moves from a product-centered model to solutions-based model, growing more than 10%.

Thomson Pharma was launched early last year and already has more than 100 customers. Our Health Care Decision support business, with five of the world's largest corporations as customers, grew 10% also.

Lastly, Thomson Learning successfully integrated KnowledgeNet advanced technology platform, which will be leveraged across its businesses as it seeks to drive migration from print to digital solutions. In addition, TL completed an extensive review of its portfolio, which will result in several dispositions which are not strategic.

2005 highlights include organic growth was 4%. This was the highest in four years. I am particularly pleased with Scientific & Healthcare's organic growth, which accelerated as the year progressed and finished the fourth quarter at 6%.

Revenues from Electronic Solutions Software Services, which is our core business, increased 12% and they now comprise nearly 70% of total revenues. This growth is being driven largely from new sales and greater usage on the part of our customers, as the transition from print to electronic is essentially complete in each of our market groups except for Thomson Learning.

In addition, tactical acquisitions helped to drive profitable growth by enhancing our workflow solutions and enable us to enter adjacent markets.

Operating margins were up again last year and have increased by more than 500 basis points over the last four years. Capital expenditures continue to decline as a percentage of revenue and free cash flow of, which has quadrupled in the past five years, was up again in 2005. And on the back of this strength, we returned more than 760 million of cash to our shareholders, a more than 50% increase from 2004. In addition, this morning we announced a 10% increase in our annual dividend and moved the annual dividend review date to the first quarter from the second quarter.

Adjusted earnings per share growth continued to expand in 2005, increasing 17% following a similar increase in 2004. We expect continued strong growth for 2006 from accelerating organic growth, improving operating margins, and a stable tax position. In addition, we expect to achieve greater EPS leverage through a decline in the number of shares outstanding resulting from our share buyback program.

Let's turn to 2006. As you know, we are number one and number two in most of the markets we serve. To grow, we must keep moving up our customers' value chain, or in this illustration the value pyramid, by developing innovative workflow solutions.

This pyramid shows the components of a workflow solution. We started our business with content, which is the foundation of our workflow solution. We add more value and increase our revenues when we bundle that content with sophisticated technology platforms and software tools. That's the second layer of the pyramid.

At the top are higher analytics, decision support, and transaction tools, services, and consulting. All of these offerings help our customers be more productive. In essence, we are moving from informing the customers' decisions to enabling the customers' actions. This approach results in greater customer retention, a larger share of wallet, and we build higher barriers to entry, all of which lead to higher margins, cash flow, and returns.

As this chart shows, we have launched several workflow solutions in the past couple of years and today they are our growth engines.

Let me now discuss our top priorities for 2006. Our first priority is to build and enhance our workflow solutions to improve organic growth, and I am expecting that the positive traction achieved in 2005 will continue in 2006. We will also be very focused on margin improvement through a combination of top-line growth and achieving greater operating efficiencies by taking advantage of operating leverage across our businesses.

Our second priority is to optimize our portfolio. In 2005, we undertook a rigorous analysis of our portfolio and assessed the contribution of each business from a strategic and growth and returns perspective. Our primary goal is to ensure that we are investing in the greatest opportunities to drive growth and returns.

From this analysis, we are announcing today the disposition of several businesses. Thomson Scientific & Healthcare will dispose of American Health Consultants, part of its continuing medical education business. AHC represents $35 million of TSH's total revenue.

Thomson Learning will also dispose of three businesses which represent 145 million of its total revenue, but no longer fit its strategic objectives. The three businesses are Thomson Education's Direct U.S. operation, the direct-to-consumer business; Peterson's, a provider of books, directories, and online resources for consumers; and K.G. Saur, a publisher of German and worldwide reference products.

Following Blackboard's merger with WebCT, which is anticipated to close by April, we also expect to realize approximately $60 million from our minority interest in WebCT.

Our approach to portfolio optimization includes a heightened focus on investments in high growth areas and the disposition of nonstrategic assets.

The third priority for 2006 is infrastructure optimization, meaning reducing redundant functions and systems across the Company. In the past few years, we have been quite successful reducing costs within the market groups. We now are looking across the Company for ways to further reduce costs and take advantage of leverage.

Last year, we outsourced certain HR administrative functions, which is expected to save over 10 million in 2006. We also plan to continue to increase our presence in low-cost locations, both domestically and internationally, further consolidate data centers, and will be looking to continue to streamline back-office operations. Our objective is to create a leaner, more agile and efficient Company.

Let me finish by saying that we have done a lot of heavy lifting over the past few years building the Company and the business model we have today. I believe we are extremely well positioned to grow shareholder value in the coming years and I am looking forward to a successful 2006.

With that, let me turn it over to Bob, who will walk you through the financials.

Thank you, Dick and good morning. I am also pleased to report that we have achieved solid financial results and finished the year strong. Fourth-quarter revenue growth was 6% excluding exchange. This was comprised of organic growth of over 4%, while acquisitions contributed 2%. Exchange actually dampened the overall growth in the quarter by 1%.

Operating income increased 14% and the margin rose 180 basis points to 22.9% due to revenue growth and operating efficiencies. For the full year, revenues increased 8% to over $8.7 billion, with organic and acquisition revenue each up 4%. There was solid revenue growth across each market group, and each group posted organic growth for the year.

The EBITDA margin was 26.9%; it was down about 50 basis points for the year, but the reasons for this were the $19 million of insurance proceeds in the prior year, higher corporate costs for pensions, and outsourcing of our HR functions -- certain HR functions, and $12 million of operating expense at Thomson Financial related to expensing investments that we -- had been previously capitalized.

Operating income for the year increased by 10% from strong revenue growth and continued operating efficiencies. The operating margin increased by 30 basis points to 16.8%. While I have noted the EBITDA performance, let me emphasize that we are not a traditional media company, and because of our technology and investment dynamics, operating income is a clearer measure of business efficiencies and long-term cash generation than is EBITDA.

Now I will discuss the fourth-quarter and full-year results for each group, starting with Legal & Regulatory. Legal & Regulatory's fourth-quarter revenues rose 6% to $974 million. It was comprised of 4% organic growth and 2% from acquisitions. Online revenue rose 12%, driven by strong growth from Westlaw, which was up 9%; International online services, which was up 18%, and our tax online product, Checkpoint, was up 20%, the 11th consecutive quarter of double-digit growth for this product.

Software and Services revenue rose 14%. Premium CD was down slightly, about 2%. Adjusted operating profit increased 10% for the quarter. The margin increased to 31.6% from 30.4% in the prior period due to strong revenue growth and continued improvement in operating efficiencies. For the full year, revenue was up 7%, operating profit increased 9%, and the full-year operating margin increased 70 basis points to 28.1%.

Turning to Thomson Learning, let me begin by pointing out that the three dispositions that Dick mentioned for Thomson Learning that we announced this morning are included in 2005 results, but will be moved to discontinued operations when we report our first quarter of 2006.

Thomson Learning's fourth-quarter revenues rose 2%; it was all organic. But there are a lot of moving parts in this quarter that belie the performance of a solid and strengthening business. I hope to walk you through the major items here.

Global Higher Education was up 2%. This reflected strong custom and international sales and growth in our traditional higher ed textbook sales of about 6%. This compares to an industry average of about 3%. This growth, by the way, is after providing for a significant increase in a reserve for textbook returns due to a 30% increase in December returns, which was also an industrywide issue.

Offsetting this performance was the decline in sales in our vocational channel, primarily reflecting sales to for-profit career colleges where we are a very large provider. These institutions specialize in vocational programs like information technology and allied health careers. This sector faced softening enrollments last year and appears to have delayed fourth quarter ordering. I say appears to because early 2006 indications are that January and February sales are rebounding, and in fact, are up by double digits.

Now, library reference revenue increased 4%, and this driven by a 24 increase in electronic products, which now comprise 50% of its revenue base. Corporate and testing revenue declined 5% in the quarter, primarily due to retroactive volume discounts under certain new contracts that we have.

E-learning revenue also declined 5%. This is a business that is transitioning from discrete sales to recurring subscription services. As a consequence, an increasing portion of current sales are being deferred and amortized over the contract period. In this quarter, this factor represented $7 million if deferred revenue, and in fact it was $12 million for the full year.

Operating profit for the quarter rose 5% and the market increased 60 basis points to 21.3% compared to last year. For the full year, revenue increased 7%, adjusted operating profit was up 7%, and the margin increased slightly to 15.1%. I want to emphasize, just as the quarter is not indicative of Higher Education's performance in the full year of 2005, it is also not indicative of our ongoing expectations for this business.

Moving on to Thomson Financial, before exchange, Thomson Financial's fourth-quarter revenues grew 5%, all organic. Exchange dampened this growth to 4%. Revenue continues to show strength across the product spectrum, including further Thomson ONE traction, growth in TradeWeb, which was up 18%, and other transactional services, and good growth from investor banking, which was up 7%, and corporate services, which was up 10%.

Fourth-quarter operating profit was up 20% and the margin rose to 22.1% versus 19.1% a year ago, due to good revenue growth and greater capital efficiencies. The operating profit growth also benefited from certain onetime items that contributed about 1 percentage point to the margin improvement.

For the full year, Thomson Financial's revenues increased 9% and operating profit was up 14%, while the margin increased 70 basis points to 17.6%. All geographic regions showed improved performance in 2005. The Americas grew 10%, of which 5% was organic; Europe grew 5%, of which 2% was organic; and Asia, off of a small base albeit, grew 12%, of which 10% was organic.

Now moving on to Scientific & Healthcare, let me point out that the results for this group exclude American Health Consultants for all periods. It is reported as discontinued operations. AHC's revenue was $35 million and its profit was $7 million in 2005.

In the fourth quarter, Scientific & Healthcare achieved revenue growth of 11%, 6% organic and 6% acquisition, again offset by a 1% unfavorable exchange. As Dick had mentioned, this business has witnessed quarter-by-quarter acceleration in organic growth throughout the year.

Scientific revenue was up 17% related to the IHI acquisition and an increase in subscriptions of the Web of Science products. Healthcare revenue increased 7%, driven by solid demands for Healthcare Decision Support products and Hospital Electronic Solutions products.

The fourth quarter's operating profit was up 10%, as the operating margin decreased slightly from the prior period due to some timing of expense and product mix. The full-year margin improved by 130 basis points.

For the full year, revenue was up 14% and the group has now passed the $1 billion sales mark. Operating profit increased 21%. This profit growth was driven by solid revenue growth and greater operating efficiencies, including the fold in of our newly acquired business.

Now on this slide, I have listed five metrics that are really of paramount importance to the Company and that we believe are integral at driving growth returns terms and ultimately shareholder value. Importantly over this past year, as Dick mentioned, we improved the rate of our organic growth from 3 to 4%. We continued to improve our operating margins by 30 basis points. We continued to reduce our capital intensity, as capital as a percentage of revenues declined from 7.7 to 7.4%. We continue to sustain significant cash flow generation. And amongst all, this we continue to return value to shareholders with increasing dividends and, as of early February, we had repurchased 9 million shares through our stock buyback program.

As you can see on this slide, we had good growth across each of the market groups in 2005. Growth at constant currencies for the year was 8%, compared to 7% last year. And again, organic growth was up 4% versus 3% a year ago.

Electronic Solutions and Services, which excludes print, comprised 69% of our revenue base, a 300 basis point improvement over 2004. Our recurring revenue base represents almost two-thirds of our total. These metrics continue to reinforce our business model and we believe we are building momentum for improved organic revenue growth in 2006, while at the same time maintaining a balanced and diversified revenue stream with good cash generation capabilities.

In 2005, our operating profit margins increased to 16.8% from 16.5%, a 30 basis point improvement, and they have shown continuous improvement over the past four years. However, there are areas where our cost increases over the short-term significantly outpaced the overall growth of our business and to some extent dampened the leverage from our operations.

These include, for example, pension expense, which was $35 million in 2003, $78 million last year, and is expected to approach $120 million this year, and our auditing compliance costs. Furthermore, we continue to make investments for the long-term, which sometimes have immediate expense consequences. In spite of such pressures, we are confident we will continue to see gradual increases in operating profit margins across the business.

Now, capital efficiency is a priority, and capital expenditures as a percentage of revenue declined last year. This decline was driven primarily by improvements at Thomson Financial and Thomson Learning, and we expect to see further decline in capital expenditure as a percentage of revenue in the years ahead.

Turning to free cash flow. Strong free cash flow growth continued in 2005. The businesses have done a very good job of focusing on cash generation and I believe the results speak for themselves. Free cash flow was up 17% to $1.3 billion before a $125 million onetime tax payment was made in December. Including the onetime tax payment, our free cash flow was up 6% to nearly $1.2 billion.

This payment was related to repatriation of profits associated with the recapitalization of several of our subsidiaries and actually will be returned to us through the P&L over the next several years.

In driving free cash flow, we continue to focus on working capital improvements and in the fourth quarter generated about $35 million of cash at Thomson Financial related to onetime working capital improvements. Free cash flow growth will vary somewhat from year to year, associated with tax-related items like the ones I have discussed. That is why it is helpful to look at our pretax free cash flow.

As you can see from this chart, pretax free cash flow is a good indicator of the consistency of our business's cash generation capabilities. You can see on the chart that pretax basis free cash flow growth has been strong, consistent, and in fact, grew 18% last year.

Now, we are not introducing a new metric, nor are we saying that we should ignore tax payments which are an integral part of doing business. We're simply indicating that the timing of such payments can vary and therefore influence year-to-year comparison of free cash flow.

On this chart, return on invested capital, we are clearly focused on improving returns. 2005 was the second consecutive year of the gradual improvement. Now, we do not believe that current returns are representative of the capacity of our business and we are confident our growing free cash flow and improving margins will help strengthen our overall returns over the longer term.

This slide is a brief summary of the Company's financial position. Our balance sheet and debt position reflect the strength of the Company and our commitment to ensure that we have the financial flexibility to continue to grow the business and continue to strengthen shareholder return.

Our net debt levels remained essentially flat over the year at $3.7 billion. We are comfortable with our debt level. Furthermore, as a result of the debt refinancing we completed over the last two years, we have lowered and extended the average maturity of our portfolio at very attractive rates -- about 5.25%, and 80% of that is fixed. These lead to relatively stable interest expense.

Now in the fourth quarter, adjusted earnings per share increased 27% compared to the prior year due to strong growth in operating profit and a lower tax rate. The fourth-quarter Earnings Attributable to Common Shares included the $125 million withholding tax on dividends, which is removed to arrive at adjusted earnings per share of $0.62, just as earlier in the year in second quarter, we removed the benefit related to a $137 million tax credit. 2004's earnings were adjusted to exclude discontinued operations of $129 million, largely related to the sale of Thomson Media.

Full-year adjusted EPS rose 17% on strong operating results, coupled with a decline in the tax rate to 24%.

Our commitment to total return is reflected in this morning's announcement that the Board of Directors approved the 10% increase in the quarterly cash dividend. These steps reflect confidence in the growth and sustainability of our business to grow profits and generate cash. We are at a stage where we expect dividend growth to be generally in line with cash flow growth around a payout target in the 40% range.

At the same time, under the current stock buyback program, we have now purchased more than $300 million of stock, representing over 7 million common shares. All repurchased shares have been canceled, putting our current outstanding share count at roughly 647 million shares.

It is essential to note that our capacity to return cash to shareholders is an outcome of our growth-oriented investment philosophy and not an alternative to it. We continue to focus on investing in our business for the long-term and deliver both growth and returns.

This final slide, I'll share with you a bit of visibility into 2006. Dick talked about our priorities for the year; now let's discuss the financial outlook.

First, as we have demonstrated, we continue to believe the business has the capacity to grow top line between 7 and 9%, with the majority of that growth being organic. We also believe operating profit margins will expand in 2006 despite an estimated $40 million increase in pension and other defined benefit expense.

We expect depreciation and amortization to be about 5% higher. We expect (indiscernible) to sustain an effective tax rate in the low 20% range beginning in 2006. Last year, we spent $289 million for acquisitions. This year, we expect to continue to spend between $200 million and $500 million on such tactical acquisitions. Again, we expect to continue to generate strong free cash flow.

Let me wrap up by saying we are pleased with our performance in 2005 and we look forward to continuing momentum in 2006. I would now like to turn it back over to Frank.

Thanks very much, Bob. That concludes our formal remarks and we will now open up the lines for questions.

(OPERATOR INSTRUCTIONS) Douglas Arthur, Morgan Stanley.

It's actually Lisa Monaco. Bob, if you could just give us a little bit more color on the outlook for '06 in terms of revenue growth and margin improvement, just which segments do you see the most upside for revenue growth and margin improvement?

Secondly, could you just give us a little bit more color on TradeWeb in the fourth quarter? It was up 18%. If you could just give us a little bit more color. Thanks.

First of all, in terms of revenue growth, we expect to see consistent organic revenue growth across all the segments, and we expect them all to contribute and all to have organic growth rates at or above what they earned, obviously, in 2005. In terms of margin improvement, again we expect to see it across all of our operating segments and we would expect that the improvement at the operating segments would be dampened a bit by, as I said, these pension cost increases.

The significant amount of those increases are really continued amortization of losses, and so that is picked up at the corporate level, but there is also higher service costs, which are embedded in the businesses as well.

So I think that there is -- the way we look at moving into 2006, we have balanced businesses with all the significant growth opportunities and we believe we will see balanced growth and balanced improvement in margins across all of our sectors.

In terms of TradeWeb, the growth in TradeWeb was driven by, as Dick said, significant increase in volumes, which occurred also in the fourth quarter as well as throughout the year. Also, since we acquired that business, we have significantly improved -- expanded both our geographic areas and the types of financial instruments that we cover.

And so those two items combined, and since TradeWeb is a platform, a global platform, it is relatively easy to implement those kinds of additions. We are able to see those improvements and impacts very quickly in terms of the revenue.

Okay. Just one nitpick question. What exactly was in the net Other expense item of $14 million in the quarter?

I'll take a look and get back to you on that. I don't have it particularly in front of me here.

Okay, thank you.

Lauren Fine, Merrill Lynch.

A couple really quick ones. I am wondering on the businesses that you are divesting, you gave us the revenues. I'm wondering if you could give us what their operating contribution was.

Then I am wondering for Thomson Learning if maybe you could recap for us on '05, excluding those businesses, what the margins might have been and the organic revenue growth. Then I have two quick follow-ups.

As you look at all those businesses, the net margin for those businesses was certainly below the margin for Thomson Learning as a whole, so it certainly would have improved for the full year. I don't have that in front of me, Lauren, but we will get that, and we will put it on the website -- because I don't have that particular number in front of me.

Okay, great. I'm just wondering two things. One, what were the onetime items at Thomson Financial that you referred to? Secondly, did you look at the Promissor acquisition that Pearson made? It would have appeared to have been a good fit for you as well.

I'll let Dick talk about an acquisition prospect. In terms of the onetime items, the largest item there was that we were very efficient in our collections, which had an impact in the process because we had items that we had thought were bad debt and they were not. So we actually had the opportunity we to reverse them, and so that improved the profitability. That was the single biggest item, and I think there were 5 or $6 million in that regard in the quarter.

I'm sorry, did you quantify those? I might have missed it.

About 5 or $6 million. 5 or $6 million range.

Lauren, as far as Promissor is concerned, we have a very strong position with Prometric. We had number 1 in that marketplace. We have had a good growth in new clients in '05. We expect to have another very good year in '06. Our strength is we have -- our distribution network is the largest in the world also. And we just find in that business it is much easier for us to continue going and build the new customer base, which we have been able to do successfully -- we have a lot in our pipeline -- than to do an acquisition at this particular point in time.

Great, thank you very much.

Peter Appert, Goldman Sachs.

Dick or Bob, I'm wondering if you could just give us some more color on how you think about this process of portfolio optimization. Specifically, if we should anticipate perhaps some step-up in the pace of divestitures in '06 and beyond, and how important that might be in terms of being a margin driver.

I think from a strategic point of view, the portfolio optimization is an opportunity for us to basically -- and all companies, my guess is, do it, but we probably do it more rigorously than most -- we built a business with a lot of acquisitions over the last few years to build size in scalable markets. And primarily building size and scale because as we move towards workflow solutions, which we think is the key -- and that is why we have put that slide in, so I could just discuss it -- we think that is the key for the future for us and where our growth is going to come from and where our profitability is going to come from.

That said, as we acquired business over the past, when we acquired the businesses, we have occasionally picked up a number of small businesses within those businesses. So two things happen. We either look at these businesses today and say, wait a minute, they're really not going to be involved in a workflow solution going forward, so there's really no sense of basically leaving that asset on the balance sheet and trying to drive a small asset. So we should sell it -- these are all good assets -- we should sell these assets, get the proceeds in and redeploy the assets to higher growth areas.

Then in some cases, we buy a particular business -- a lot of these businesses are small -- assuming, I will say, X to happen, X did not happen. So when you sit back and say, would we buy that business today knowing what we do today, because the market didn't move in that direction, the answer is we wouldn't, so there's no sense maintaining those assets.

So it is a very logical, very strategic review of the business, and I think -- and these businesses, again, because of some of their size and scale, cannot generate the profitability of other businesses or the free cash flow, or absorbs more investment based on their size. So my guess is as we continue to do this and we continue to fine-tune our portfolio, my guess is you'll see some slight margin improvement from it, as well as free cash flow.

Okay. But it is not the primary driver of the anticipated margin improvements?

No.

Just as a brief follow-up on that, it sends like you have relatively modest margin expansion expectations for '06. Would it be reasonable to think something maybe in the 50 basis point range would be fair?

I'll take that. We really -- the guidance that we provide you in that visibility is the guidance that we are comfortable providing. I think that -- let me put it this way. We don't have a cap on it. We will drive our improvement as much as we can. I think that we have some things dampening it, so I think that -- would we like to see a growth rate expansion higher than it was this year? Absolutely. Will it happen that way? Tune in next year.

Okay.

Fred Searby, JPMorgan.

It's actually Dave for Fred. Two questions. One, the working capital improvement in 4Q, I think you said that Thomson Financial contributed a piece of that. What else was in there? Can you update us on international opportunities? Thanks.

I'll take the working capital and I'll let Dick talk about the international. Working capital improvement that I cited was all Thomson Financial. As part of that, Lauren asked a question about what contributed to the margin. Part of that also was recorded to the P&L because they were so efficient in capturing business that we thought we'd lost. So it is all Thomson Financial, 35 million.

On international opportunities, we look at international kind of in three segments. One, which businesses are global, meaning we have a single product that is sold around the world, and that would be primarily our scientific businesses.

We look at businesses that are kind of international or regional in nature, which would be Thomson Financial, Learning, etc., where usually the product or service has to be tailored for the particular marketplace. So if you look at Japan for Thomson Financial, for example, it's a $600 million market. We have 3 in the English-speaking, we want to move into the 300 million, which is in the Japanese language. And we will add some databases, etc. to tailor ourselves to that market.

And then we have what we call multidomestic, which would be Healthcare and actually TLR, where unless it can stand by itself within a particular country, it does not necessarily buy you anything just to own a number of countries.

That being said, then obviously the international expansion we would expect Scientific to have good international experience and we are pretty excited of what's going on the Asia-Pacific region these days. We would expect Thomson Financial to continue to basically drive some international expansion. And we will be selective in TLR and we will be selective in Healthcare going forward.

So hopefully that gives you our strategic view of the marketplace and where we see the growth.

Thanks.

Andrew Mitchell, Scotia Capital.

First area, just on Learning. I was wondering, Bob, if you could just talk about Bookplate CapEx as a percentage of revenue, and maybe where you can take that as you optimize the Learning portfolio and look to gain efficiencies there.

Secondly, can you just give us some more flavor on the driver of the 30% increase in returns in Learning that we have seen across the industry?

Then I have a question on dividend. Maybe I'll just ask it now. Dick, if I heard you correctly, it sounded like you indicate in your comments that you have advanced the dividend review to Q1. Did you mean Q4 or does that mean the Board of Directors will have the opportunity to consider raising the dividend again next quarter?

No, we moved it from Q2 to Q1 to coincide with this announcement. I don't see us raising the dividend again second quarter.

Okay, Andrew, in terms of Bookplate, Bookplate spend for Thomson Learning as a percentage of revenue for the full year was 4.7% versus 5.5% a year ago. And in fact, I did mention that we improved our capital expenditure position in my slides, and I mentioned there were two areas, Thomson Financial and Thomson Learning. That Thomson Learning improvement came out of Bookplate.

It has gone through a very rigorous process here of analyzing their investments and also consolidating how they go about purchasing, and the net of that is that we do expect Bookplate to continue to improve a bit as a percentage -- continue to improve as the efficiency of the business continues to improve.

In terms of the returns, I think that the answer is that this 30% all happened in the month of December. We know because of industry reporting that, unfortunately, this is a case where misery has company; it happened across the entire industry. And so we're still analyzing the source of those. I do believe, though, it was not isolated to a particular discipline or a particular region, or even a particular type of an institution. It was simply across the industry.

I also think that part of it is driven by the fact that industry sales were up significantly in the year. For us, in our Higher Education, our Higher Education textbook sales were up almost 9% for the full year on a gross basis. On a net basis, they were up about 5% because of higher returns. So you drive higher sales, you would expect some level of higher return. But this phenomenon in December was a little bit different.

Andrew, this is Dick. Let me just add one thing to it just to give you scale. The things are evaluated every single quarter, these reserves. And so what would happen is you would have it up one quarter, down another, up another. But I think the best way to look at this, you always have to look at these as the average as opposed to per quarter, because we've had these kind of anomalies before.

Our total reserve is about a 20% reserve. It went from 20% in '05 to 22% in '06. It just so happens that a chunk of it came in the fourth quarter. So the overall reserve for the year did not change dramatically. It was just it went up 10% because of dynamics. It was just the dynamics in which quarter it happened in.

So bottom line, would you agree with McGraw-Hill's expectation the industry growth 5 to 6% next year on college?

I would turn around and say the market industry -- we always look at it kind of 4 to 6% and it will probably fall somewhere in the middle. They may say 5 to 6. We would probably hedge a little bit in 4 to 6 because it's not quite that predictable.

Thank you very much.

Andrea Horan, Genuity Capital Markets.

Just in the context of the strategic review that you did and in looking, I guess, at your slide 22 and Learning's profile relatives the other divisions, I am wondering if we should expect further divestitures of Learning as you focus your efforts more on the Electronic Services with recurring revenues rather than the more legacy profile that Learning seems to have.

I think, Andrea, what we're excited about, say, the core Learning business is when it moves to digital. Because obviously we have all the assets, the infrastructure, the know-how, etc., and we feel that would give us a big uptick. And this year, actually, their total digital revenue -- it used to be 36% of revenues moved up to 39, so it moved up 300 basis points.

The question is -- the real question is, is it going to move to digital and how fast? And the faster it moves, the more beneficial it will be for us. And I think the other question is, if it doesn't move there fast, what happens? And I think we'd have to take that under consideration at the time.

But right now, as you know, we have the knowledge of that platform that we are driving across TL for this particular business. We're moving into solutions. We're moving into Thomson solutions, which is actually delivering courseware, enabling our customers to deliver courseware electronically, as well as a lot of digital solutions. So 2006 will be a great year to see what type of momentum is driven in that area.

Okay, thanks very much.

Vince Valentini, TD Newcrest.

First of all, Bob, I did not catch the organic growth by division for Q4 except for Financial, so if you could go over that, it would be great. Second question is on the guidance for '06, the 7 to 9% growth in revenues, would you adjust for the three Learning businesses that will be discontinued starting at the beginning of the year or is this just a wash factor in your view?

I will start with the last one. First of all, they would be discontinued and out of the base, and so that 7 to 9% is off of a base excluding them. So they don't really have any impact in that particular guidance.

In terms of the full-year organic growth rates, in Legal & Regulatory, it was 4%; in Learning, it was 2%; in Financial, it's 5%; and in Scientific & Healthcare, it was 3%.

You say that was full-year or that's the fourth quarter?

Full year. I'm sorry, did you ask for the fourth quarter? I apologize. Fourth quarter was 4% for Legal & Regulatory; 2% for Learning; 5% for Thomson Financial -- sounds kind of familiar, doesn't it? And the big difference was Scientific & Healthcare, which was 6%.

Okay, thanks.

Michael Meltz, Bear Stearns.

At TF, can you just talk about the competitive environment there, what, if anything, has changed in the tone in the past quarter or so, going into '06?

Then secondly, on the tax rate, I was looking back -- I think you had been guiding to 26% as recently as October. I'm just wondering if you can talk a little but more as to what is now pushing you to go to low 20% sustainable, and what exactly low 20s means. Is that 24 or should we be thinking 20%? Thank you.

I'll start in reverse. Low 20s means low 20s. If we meant 24, we'd say 24; but it means low 20s. Part of the reason why we said it that way is because at the beginning of last year, we tried to be a little bit more precise. We said it was going to be 24%; it turned out to be -- we thought it was going to be then up to 26%. Those of you who follow us throughout the year know that; we gave guidance that it was going up. And then we closed the year and said it was going to be 24%.

And I think that -- and that is what caused that change. It's simply because tax is a very complex area, as I'm sure you are all very aware of. As I talked about in my presentation, the cash tax side of it, which is obviously related to it, is an example of how it tends to move around, because our income comes from different jurisdictions throughout the year.

In terms of sustainability, we are comfortable with that rate because of our current tax structure and because of the fact that our tax structure and our tax planning has been audited now for the past several years. And as a matter of fact, it's a result of those audits that we had a release of a reserve earlier in the year of $137 million.

And so with that in mind, we feel comfortable with the fact that we believe that our tax rate in the low 20% range is sustainable. And whether that is 24 to 20%, I think a lot depends on the source of income and the timing.

But I think what is really important about this is that it really speaks to our ability to drive free cash flow over the coming years and also, our ability to drive earnings, really importantly. With the stability of taxes, that has a dual benefit to us. And we are really looking forward to the opportunity of having the stability to demonstrate the capabilities of our business model over the coming years.

Great. On the TF question?

I think on the TF, because obviously all these environments are competitive, but I think -- but I would say it appears that the pricing for certain commodity products has leveled off. And I think that was the area where most of the intensity was at. And that's leveled off. So I think the rest of it is just normal pricing, our product against theirs. Again, we don't see the issues dealing with any price cutting along the way to buy accounts, etc. So I would say it's under normal competitive circumstances now.

Great, thank you.

Amy Glading, CIBC World Markets.

Just a quick question on Checkpoint. It's been a good driver of growth in Thomson Legal & Regulatory. Just a bit more outlook for how things are looking in 2006?

I think I'll answer that one because it easy. I'll take the easy ones. First of all, Checkpoint is an electronic database for sophisticated tax research information. It has been very successful. First of all, as we said, it's had 11 quarters of double-digit growth and we see no reason why that wouldn't stop as they continue to -- basically, continue to build up that product and they begin to integrate that into their other Tax Workstations that they have.

Just a brief history of this, because I was involved with this many, many years ago when we bought it. I wasn't quite as successful with it, so I will give them the credit that is due. But CCH, as we all know, is an extremely large -- which is owned by Wolters Kluwer -- owned the tax market back 10 or 15 years ago. And I would say that TTA attacked it through the electronic marketplace. Although we had a strong print position, we were not necessarily in the bigger CPA firms and law firms.

Because we are able to attack it from the electronics side and really built it on a great platform -- it's on the Westlaw platform -- that we have been able to really increase sales dramatically. And I think it is a superior product and that's why their sales are coming and we are taking those sales, obviously, from our competitors. There are only two major players in the marketplace.

So I think it is a superior product. I think we're attacking it correctly, not in the book side but in the electronics side. CCH is still probably larger in total tax information, but the most important area to be number one is electronics, and we feel we're number one and we'll continue to drive that in our products and services. We have a great team there that is driving that.

Okay, great. Thanks very much.

[Mike Riley], Deutsche Bank.

Just wondering a couple of things, if you can help us on them. Thomson Financial, 5% organic growth in the quarter, with TradeWeb, I think you said, ahead 18%, which would seem to imply the rest of the business is probably only up organically by about 1 or 2%, if my math is correct there.

Then second is a is sort of bigger question on acquisition capacity. On slide 28, you show net debt to EBITDA at sort of 1.5 times. Can you give us a feel of where you might think the upper limit of your capacity is on that metric, either if a compelling acquisition opportunity came along or if you decided simply to leverage the business in financial terms?

I'll answer the last one first. In terms of our acquisition capacity, we feel that we have sufficient capacity to do anything we need to do right now. We would not leverage the business up short of making an acquisition and we wouldn't leverage it up unless we saw we had the opportunity to really drive a lot of growth and value on it.

But you just need to look within the parameters of the quality of the debt rating that we have, and say what are the upper limits of that debt rating. That probably would be what would be the upper limits that we feel comfortable doing. And I would say roughly, in terms of capacity, it would be in probably the $1 billion range that we could take.

But we have demonstrated, certainly in the past couple of years with our expanding free cash flow, that we have the capacity within our business to significantly invest in all the growth that we need. In fact, investment growth that we need and return cash to shareholders. So we are very comfortable with our capacity from our business.

Obviously it's nice to have the powder, the dry powder sitting in reserve if you need it, and if we do need it, we won't be shy about using it.

In terms of TradeWeb, I really don't have a breakdown in that, but I will tell you that no, TradeWeb did not account for all the organic growth in the business. As I talked about, I talked about both in the quarter Thomson -- our investment banking product and our corporate products, which grew 7 and 10% respectively, that is all organic growth.

And the TradeWeb growth certainly contributed to it, but is not the sole driver in terms of it. We've had it across all of our business there, and we've had growth across the entire product spectrum.

Okay, thanks. Just one follow-up if I can. Apologies, since you get this question almost every quarter. Scopus -- are you seeing any signs of it impacting, either on revenues for your equipment products, whether Science etc., or is it forcing you to increase the investment level around those products? Basically, is it making a difference yet to your marketplace?

I think in terms of Scopus, we have a lot of respect for Reed Elsevier and they have a good product. We bought look at the competitor product. We look at the market and our customers. And I think Dick wants to add a few more comments on that.

Yes, obviously, our biggest regret is they didn't bring it out a few years ago, because we have had the best year in the Company's history since they have announced it. So to be honest with you, it hasn't changed our investment. We have always continued to upgrade these products and services, and we will continue to upgrade our products and services.

But I don't know what caused us to be able to all of a sudden have a really outstanding year since they have launched. And in some cases, they have really given the product away as free trial, so people -- we don't do that -- so people paying for ours. But our Web of Science product was up almost 13% this year, which was excellent, super growth for us. So I don't know if it's complementary or what, but again, my only regret is that it didn't come out a few years ago.

Okay, thanks.

First of all, I'm not knocking their product. They have a very good product, but somehow it's stimulated something in the marketplace that helped us.

Okay.

Jeff Fan, UBS.

A question for Dick. You mentioned in your comments about the electronic transformation being complete excluding Thomson Learning. Can you just talk a little bit more about that, what you mean by complete? I just want to understand whether the efforts going into the transformation has been completed and you continue to see the benefits, or whether you see your customers' migration is complete.

Then maybe just a follow-up on that. You recently appointed a couple of individuals that report to you on the strategy side and also on the technology side. Just wondering what their roles are going to be in more details and what their near-term initiatives are going to be for 2006.

Great, I'll answer both of those. First of all, I'm not sure if I used the word "complete" or basically saying that -- I guess the best way to say it, online is not necessarily bastardizing our old product lines. If you look at it now, you have got Thomson Financial is like 99% electronic, I think. Thomson Scientific is 88%, 88 or 90% electronic software services.

Really what I am saying is -- Thomson Legal & Regulatory I think is 68% electronic, and so they still have a relatively large print base, but their electronic base is not taking customers away from print. Their electronic bases is just new products and services, new workflow solutions, really expanding the market.

The decline in print is people just kind of accept not to use it. Most of our print customers have the electronic components also. So what I am saying is that transition where we are stealing from Peter to pay for Paul, so to speak, is over those three markets. This is really just now just to continue to upgrade and develop the workflow solutions and basically drive forward.

Learning only because it is the lower amount, it still has a large print base. As that moves to digital, we will have to understand how that business model -- obviously it will impact the print. I hope the print goes away, but we will determine what the financial model is of that as we go forward.

So some of that growth in Learning going forward, the real growth will be on the solution. The growth in the information base or the textbook side moving to digital will probably just be going from print to electronic.

I guess I am saying is we are well-positioned. We are over the hump in three of the four market groups as far as any bastardizing of [old line] products.

The people issue, one of the things -- it turns out both people were insiders. Richard Benson-Armer is coming in as Chief Strategy Officer. Richard is an ex-partner at McKinsey. He worked for Thomson Learning for about 1.5 years, did a super job over there. And as we look at growth --and I think you've heard me say this before -- but we want to look at international growth, we want to look at -- first of all, we want to continue to look at our expanding markets, continue to reframe those markets and look at opportunities going forward.

We want to continue to look at the international -- markets we can really grow in internationally and be successful. And then thirdly, we want to look at new markets or new opportunities where we have the basis to go from. We also want to basically understand what opportunities we have working with some of the search engine companies, etc. So we have a lot of things we want to do, so we felt it was critical that we had a staff at corporate.

Before, we used to beg and borrow from the market groups, because we wanted to make sure that they had their strategies. And we just wanted to have a basic -- a more aggressive look at the corporate area to make sure that we take advantage of the opportunities going on in the future, and there's a lot of things happening out there. We just want to make to sure we can cull them down so we can pick the right ones and make some progress.

Mike Wilens is we're doing a little bit more -- as we leverage technology across the Group, we wanted to make sure that basically corporate had a different type of CTO person who is basically driving it. Mike Wilens, for your benefit, was the CTO of TLR at what time. He was also the CEO of West for a number of years; did a great job out there. And recently the CEO of North American Legal.

He did a great job out there. And he had the unique experience of having outstanding technology -- he's got two or three degrees from MIT, two or three from the University of Michigan. He's actually a good guy on top of that. He's smart and nice. But the important thing is Mike -- he knows technology, he knows how to run a business. He's extremely bright, knows how to use technology to innovate.

And we just felt, again, to continue to drive this Corporation forward and to take it to the next level, we needed those types of people. And it also gives us the opportunity with these type of people to really leverage everything we have out there, so hopefully 2 plus 2 equals 5.

So that is the purpose of adding those people, and I am really excited about having them onboard. I think it's going to be -- first of all, I think we'll do -- they're extremely smart, extremely bright -- but I think we will come up with some really interesting things to drive the business forward.

Can you just quickly confirm both of those roles are new positions?

Both of those roles are new -- well, both those roles are new positions. The CTO is a little bit of a hybrid. We had a CTO at a slightly lower level. But both of them are new positions and they both directly report to me.

Tim Casey, Nesbitt Burns.

Thanks. I got on the call late, so I apologize, Bob, if you went over this, but just looking at the depreciation line, including amortization, it was up only about 3% in the year. My recollection that guidance in the early part of the year was 10% and you've obviously dropped the guidance down to 5% for next year.

Is there something specific that has happened there or is depreciation just declining in line with the reduced capital intensity of the business?

I think you've answered your own question. The answer is just that, that we have become more efficient, and in fact that efficiency is working through that line. Which is why, Tim, if you missed earlier on if you didn't jump on, that I said that our improvements in our operating margins are really driving the business, and you may not see that in EBITDA, but what really matters is operating margin, and so you are seeing it there.

The other point that is in depreciation and amortization is also acquisitions, and our rate of spending has been lower in the past couple of years and therefore, intangibles, which you write off over short periods, they tend to fall off rather quickly. So those two items are in there, and I think it does speak to the overall efficiency of the business.

Going forward, is there --?

As far as the guidance goes, we made a mistake.

Given the lower acquisition activity, does it drop off in kind of a step function going forward or is it more just gradual, in line with capital intensity?

It is more gradual.

Thank you.

William Bird, Citigroup.

Looking across market segments, I was just wondering if you could clarify whether portfolio printing is largely done. Also, you mentioned a slower move to electronic as a [gaining] factor in improving TL returns. What other strategies or dynamics could drive better TL returns going forward?

I think first of all, the portfolio optimization -- it's an ongoing process. Looking at nonstrategic businesses or areas that may not be performing the way we would like or are not going to grow the way we would like, that is just a continuous process, so that is not a onetime thing. It also includes a number of other things as we look at other things within our businesses. So that will continue going forward.

The other question was on TL. On the TL, what is going to drive TL margins going forward? A couple things. I think TL -- Thomson Learning -- has done a very good job in '05, and my guess it will continue in '06, is reengineering all the processes around Bookplate, how to build new products and services, how to evaluate them, etc. And they have done their own kind of portfolio process optimization themselves but they just do it at an extremely deeper level.

To really take a look and understand what are their great products, what are the products that basically are in the middle, what are the products that maybe we should reconsider whether they're going to give us any benefit at all. So I think when you look at the way that they are reengineering the process, understanding the business a little bit better, they've got some good, common platforms now to build, so they are beginning to reduce some of their technology cost as far as infrastructure, you'll see margin improvement from that. And then they are also obviously getting a little more sophisticated with sales.

So we're looking for margin improvement -- two words -- we want to see them continue to grow. take advantage of organic growth and the opportunities of market through the portfolio optimization, so they don't have very much drag on their business. And also make sure that their processes are highly efficient and highly effective, that in that case will drive operating income as well as -- it will drive operating income, it will reduce Bookplate, and drive free cash flow.

Randal Rudniski, CSFB.

Just a couple questions, I think -- related questions on the withholding tax on dividend. That's an item we haven't seen before on your statements. And I was hoping you could describe what gave rise to that item. Also is that an item that we will see again in future quarters?

I will answer that. You won't it see again in future quarters. It truly is a onetime item. It is -- as with other companies do this from time to time, we build up profits in our operating subsidiaries and we take the opportunity to return those, repatriate those profits -- in this case back to Canada. And that repatriation results in a dividend. That dividend payment is what you see there.

As a result of that, when you repatriate and you recapitalize the subsidiary, you are also recapitalizing it, make sure the capital is in there so you have debt that replaces the equity or the profits, and do that increase in the debt levels as they -- in the subsidiaries we are able to improve our tax position.

So it's a rather long and convoluted expression, but to say that it is not something you do -- you do it very infrequently -- as a matter of fact, hardly ever, but we have gotten to the point where the operations of these subsidiaries have been so strong that we felt it was the right time to do this.

Okay, that's great. Thank you.

That will conclude our call. We would like to thank you all for joining us this morning. If you have any follow-up questions, feel free to give us a call. Thanks again.

Ladies and gentlemen, this conference will be made available for replay after 12:30 PM today through February 16. You may access the AT&T Teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 816036. International participants can dial 320-365-3844. (OPERATOR INSTRUCTIONS)

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.