Thomson Reuters Reports Second-Quarter 2018 Results

TORONTO, Aug. 8, 2018 /PRNewswire/ -- Thomson Reuters (TSX/NYSE: TRI) today reported results for the second quarter ended June 30, 2018 and reaffirmed its full-year 2018 outlook provided on May 11, 2018. The company also announced that its planned sale of a 55% interest in its Financial & Risk (F&R) business to private equity funds managed by Blackstone is expected to close early in the fourth quarter of 2018.

"I am pleased with our second-quarter and first-half results, which put us on track to deliver a solid year," said Jim Smith, president and chief executive officer of Thomson Reuters. "Following the close of our partnership with Blackstone, Thomson Reuters will be well positioned to strengthen and grow our business.  We have leading positions and must-have tools in our core markets. I believe we have a bright future doing what we do best: combining information, technology and human expertise to provide trusted answers."

Consolidated Financial Highlights - Three Months Ended June 30

Unless otherwise noted, all results are from continuing operations and exclude the results of the company's Financial & Risk business unit (F&R). For 2018 reporting purposes, F&R is classified as a discontinued operation, Reuters News is a reportable segment and prior-year results have been restated accordingly.

Revenues increased 2% due to higher recurring revenues. Foreign currency had no impact on revenue growth.  

Operating profit decreased 6% primarily due to costs and investments incurred to reposition Thomson Reuters in anticipation of separating F&R from the company.

• Adjusted EBITDA decreased 8% and the margin decreased to 26.5%, reflecting the same factors.

Diluted earnings per share (EPS) increased due to higher net earnings from the F&R business. Net earnings increased primarily because F&R assets held for sale are not depreciated, and also due to a benefit from fair value adjustments associated with foreign currency derivatives embedded in certain F&R customer contracts.    

• Adjusted EPS, which excludes discontinued operations, was $0.17 and decreased $0.02 per share, or 11%, due to lower adjusted EBITDA. 

Cash flow from operations decreased $31 million primarily due to higher tax and interest payments.

• Free cash flow decreased $25 million, reflecting the same factor.

Highlights by Business Unit – Three Months Ended June 30

Unless otherwise noted, all revenue growth comparisons by business unit in this news release are at constant currency (or exclude the impact of foreign currency) as Thomson Reuters believes this provides the best basis to measure their performance.

Legal

Revenues increased 2% to $882 million.

• Recurring revenues grew 4% (73% of total).
• Global print revenues declined 5% (18% of total).
• Transactions revenues were unchanged (9% of total).

Adjusted EBITDA decreased 1% to $321 million.

• The margin decreased to 36.4% from 37.9% due to product and marketing investments, including costs related to the development and launch in July of Westlaw Edge, a new legal research platform that utilizes advanced artificial intelligence. In constant currency, the margin decreased 140 basis points.

Tax & Accounting

Revenues increased 4% to $359 million.

• Recurring revenues grew 4% (77% of total).
• Transactions revenues were unchanged (20% of total).
• Print revenues grew 9% (3% of total).

Adjusted EBITDA decreased 12% to $91 million.

• The margin decreased to 25.3% from 29.4%, primarily due to charges on a long-term contract in the Government business.
• As a reminder, Tax & Accounting is a seasonal business and nearly 60% of its full-year revenues are historically generated in the first and fourth quarters. As such, the margin performance of this business is generally weaker in the second and third quarters as costs are incurred in a more linear fashion throughout the year. The company expects Tax & Accounting's full-year 2018 margin to be in line with, or marginally higher than, the prior-year margin.

Reuters News

Revenues were $72 million compared to $74 million in the prior-year period due to lower transactions revenues.

When the F&R transaction closes, Reuters News and the new F&R partnership will enter into a 30-year agreement for Reuters News to supply news and editorial content to the partnership for a minimum of $325 million per year. Reuters News revenues do not reflect any F&R payments until after the transaction closes.

• Recurring revenues declined 2% (89% of total).
• Transactions revenues declined 25% (11% of total).

Adjusted EBITDA was $8 million, down $1 million from the prior-year period.

• The margin decreased to 11.1% from 12.2%. In constant currency, the margin decreased 210 basis points.

Corporate

Corporate costs at the adjusted EBITDA level were $72 million compared to $57 million in the prior-year period (up 26%). As previously announced, this is due to investments to reposition Thomson Reuters in anticipation of separating F&R from the company. These cash investments are expected to be incurred in 2018 and 2019.

Financial & Risk – Discontinued Operation

Revenues increased 2% to $1.6 billion, including an impact from the adoption of a new accounting standard, IFRS 15.  On an organic basis, revenues increased 3%. 

• Recurring revenues grew 2% (77% of total).
• Transactions revenues grew 7% (15% of total). On an organic basis, transactions revenues grew 14%.
• Recoveries revenues decreased 3% (8% of total). 

Adjusted EBITDA increased 3% to $472 million.

• The margin decreased to 30.4% from 30.5%. In constant currency, the margin increased 50 basis points.
• Adjusted EBITDA included $39 million of costs related to the separation of the business. Excluding these costs, adjusted EBITDA increased 13% and the margin increased 300 basis points, primarily due to higher transaction revenues.

Cash flow from operations was essentially unchanged from the prior-year period.

• Free cash flow decreased 8% as higher adjusted EBITDA was offset by increased capital expenditures and deal costs related to the F&R transaction.

Consolidated Financial Highlights – Six Months Ended June 30

Revenues increased 3% due to higher recurring revenues and a positive impact from foreign currency.  

• At constant currency, revenues increased 2%.

Operating profit decreased 4% due to costs and investments incurred to reposition Thomson Reuters in anticipation of separating F&R from the company.

• Adjusted EBITDA decreased 2% and the margin decreased to 28.9%, reflecting the same factor.

Diluted EPS decreased 40%, reflecting an $812 million deferred tax charge, most of which was recorded in the first quarter of 2018, associated with the proposed sale of a 55% interest in the F&R business. The tax charge is required to be recorded when a business is first considered held for sale, rather than when the sale is completed. The company estimates that a cash tax payment of approximately $300 million will arise later in 2018 in connection with the closing of the transaction, with the remainder deferred until such time as the company disposes of its 45% interest in the new partnership.

• Adjusted EPS, which excludes discontinued operations, was $0.44, unchanged from the prior-year period.   

Cash flow from operations increased $756 million primarily because the prior-year period included a $500 million pension contribution as well as lower severance payments. 

• Free cash flow increased $680 million, reflecting similar factors.

Highlights by Business Unit – Six Months Ended June 30

Financial & Risk – Discontinued Operation

Dividend & Share Repurchases; Financial & Risk Transaction Proceeds Update

In January 2018, the Thomson Reuters board of directors approved an annual dividend of $1.38 per common share for the year. A quarterly dividend of $0.345 per share is payable on September 17, 2018 to common shareholders of record as of August 16, 2018.

Thomson Reuters previously signed a definitive agreement to sell a 55% majority stake in the Financial & Risk business and enter into a strategic partnership with private equity funds managed by Blackstone. Canada Pension Plan Investment Board and an affiliate of GIC will invest alongside Blackstone. Thomson Reuters will receive approximately $17 billion in gross proceeds at closing (subject to purchase price adjustments) and will retain a 45% interest in the business. The transaction is expected to close early in the fourth quarter of 2018 and is subject to specified regulatory approvals and customary closing conditions. Substantially all required regulatory approvals have been received at this time.     

The company repurchased 9.1 million shares during the second quarter at a cost of $359 million under its $1.5 billion buyback program, which is being effected under the company's normal course issuer bid (NCIB). The company did not repurchase any shares in the first quarter.

The company currently expects to use between $9 billion and $10 billion of the estimated $17 billion of gross proceeds of the Financial & Risk transaction to return capital to its shareholders. A significant portion of this return is expected to be through a substantial issuer bid/tender offer made to all shareholders, which may be at a premium to the then-current market price of the company's shares.  The company's principal shareholder (Woodbridge) is expected to participate pro rata in the substantial issuer bid/tender offer. Repurchases in 2018 under the NCIB program prior to the closing of the transaction will be included in the contemplated $9 billion and $10 billion of shareholder returns.

The price that Thomson Reuters will pay for shares in open market transactions under its NCIB will be the market price at the time of purchase or such other price as may be permitted by the Toronto Stock Exchange. The amount of shares that Thomson Reuters buys back under the $1.5 billion repurchase program will be dependent on the timing of the closing of the transaction and other factors, such as market conditions, share price and other opportunities to invest capital for growth. Thomson Reuters may elect to suspend or discontinue share repurchases at any time, in accordance with applicable laws.

The company expects to use between $3.0 billion and $4.0 billion of proceeds from the proposed Financial & Risk transaction to repay debt, enabling it to remain substantially below its target leverage ratio (net debt/adjusted EBITDA) of 2.5:1.

As previously disclosed, the company intends to utilize the remaining $1.0 billion to $3.0 billion of proceeds to fund strategic, targeted acquisitions to bolster its positions in key growth segments of its Legal Professionals, Tax Professionals and Corporates businesses.

The company also expects to use between $1.5 billion and $2.5 billion for cash taxes, pension contributions, bond redemption costs, and other fees and outflows related to the transaction.  These funds include $500 million to $600 million of spend that the company views as necessary to eliminate stranded costs as well as investments to re-position the company following the separation of the businesses.

Organizational Changes

On July 1, 2018, Brian Peccarelli and Neil Masterson became Co-Chief Operating Officers. Mr. Peccarelli is overseeing the customer-facing operations including Legal Professionals, Tax Professionals and Corporates, as well as driving sales. Mr. Masterson is overseeing Operations & Enablement with responsibility for managing commercial and technology operations, including those around sales capabilities, digital customer experience and product and content development.

The company also announced it is transitioning from a product-centric structure to a customer-centric structure. This new structure is intended to move decision making closer to the customer and allow it to serve customers better with its full suite of offerings.  The company expects to begin reporting under the new organizational structure with its fourth-quarter 2018 results.

Business Outlook 2018 (At Constant Currency)

Thomson Reuters today reaffirmed its Outlook for 2018 as previously provided on May 11, 2018.

The company's 2018 Outlook assumes constant currency rates compared to 2017 and does not factor in the impact of acquisitions or divestitures that may occur, except for the planned F&R transaction. F&R is considered a discontinued operation for the full-year 2018 and is excluded from the company's 2018 Outlook.

For the full-year 2018, the company expects:

• Low single-digit revenue growth (excludes any 2018 payments to Reuters News from F&R following the closing of the transaction)
• Adjusted EBITDA to range between $1.2 billion - $1.3 billion (including the costs referred to below)
• Total Corporate costs between $500 million and $600 million (including stranded costs and investments to reposition the company following the separation of the businesses)
• Depreciation and amortization of computer software between $500 million and $525 million
• Capital expenditures of approximately 10% of revenues
• Effective tax rate on adjusted earnings between 14% - 16%

The information in this section is forward-looking and should be read in conjunction with the section below entitled "Special Note Regarding Forward-Looking Statements, Material Assumptions and Material Risks."

Thomson Reuters

Thomson Reuters is the world's leading source of news and information for professional markets. Our customers rely on us to deliver the intelligence, technology and expertise they need to find trusted answers. The business has operated in more than 100 countries for more than 100 years. Thomson Reuters shares are listed on the Toronto and New York Stock Exchanges (symbol: TRI). For more information, visit www.thomsonreuters.com.

NON-IFRS FINANCIAL MEASURES

Thomson Reuters prepares its financial statements in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB).

This news release includes certain non-IFRS financial measures, such as adjusted EBITDA and the related margin (other than at the business unit or segment level), free cash flow, adjusted EPS, and selected measures excluding the impact of foreign currency. Thomson Reuters uses these non-IFRS financial measures as supplemental indicators of its operating performance and financial position. These measures do not have any standardized meanings prescribed by IFRS and therefore are unlikely to be comparable to the calculation of similar measures used by other companies, and should not be viewed as alternatives to measures of financial performance calculated in accordance with IFRS. Non-IFRS financial measures are defined and reconciled to the most directly comparable IFRS measures in the appended tables. The term "organic" refers to Thomson Reuters' existing businesses before the impact of acquisitions, dispositions and IFRS 15.

The company's business outlook contains various non-IFRS financial measures. For outlook purposes only, the company is unable to reconcile these non-IFRS measures to the most comparable IFRS measures because it cannot predict, with reasonable certainty, the 2018 impact of changes in foreign exchange rates which impact (i) the translation of its results reported at average foreign currency rates for the year, and (ii) other finance income or expense related to foreign exchange contracts and intercompany financing arrangements. Additionally, the company cannot reasonably predict the occurrence or amount of other operating gains and losses, which generally arise from business transactions that it does not anticipate.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS, MATERIAL ASSUMPTIONS AND MATERIAL RISKS

Certain statements in this news release, including, but not limited to, statements in the "Business Outlook 2018 (At Constant Currency)" section, Mr. Smith's comments, statements regarding the expected timing for the closing of the Financial & Risk transaction, the company's anticipated uses of proceeds from the F&R transaction and Tax & Accounting's expected full-year adjusted EBITDA margin, are forward-looking. As a result, forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. There is no assurance that a transaction involving all or part of the F&R business will be completed or that the events described in any other forward-looking statement will materialize. A business outlook is provided for the purpose of presenting information about current expectations for 2018. This information may not be appropriate for other purposes. You are cautioned not to place undue reliance on forward-looking statements which reflect expectations only as of the date of this news release. Except as may be required by applicable law, Thomson Reuters disclaims any obligation to update or revise any forward-looking statements.

The company's 2018 business outlook is based on various external and internal assumptions. Economic and market assumptions include, but are not limited to, GDP growth in most of the countries where Thomson Reuters operates, a continued increase in demand for high quality information and workflow solutions and a continued need for trusted products and services that help customers navigate changing geopolitical, economic and regulatory environments. Internal financial and operational assumptions include, but are not limited to, the successful execution of sales initiatives, ongoing product release programs, our globalization strategy and other growth and efficiency initiatives.

Some of the material risk factors that could cause actual results or events to differ materially from those expressed in or implied by forward-looking statements in this news release include, but are not limited to, changes in the general economy; actions of competitors; failure to develop new products, services, applications and functionalities to meet customers' needs, attract new customers and retain existing ones, or expand into new geographic markets and identify areas of higher growth; fraudulent or unpermitted data access or other cyber-security or privacy breaches; failures or disruptions of telecommunications, data centers, network systems or the Internet; increased accessibility to free or relatively inexpensive information sources; failure to meet the challenges involved in operating globally; failure to maintain a high renewal rate for recurring, subscription-based services; dependency on third parties for data, information and other services; changes to law and regulations; tax matters, including changes to tax laws, regulations and treaties; fluctuations in foreign currency exchange and interest rates; failure to adapt to organizational changes and effectively implement strategic initiatives; failure to attract, motivate and retain high quality management and key employees; failure to protect the brands and reputation of Thomson Reuters; inadequate protection of intellectual property rights; threat of legal actions and claims; downgrading of credit ratings and adverse conditions in the credit markets; failure to derive fully the anticipated benefits from existing or future acquisitions, joint ventures, investments or dispositions; the effect of factors outside of the control of Thomson Reuters on funding obligations in respect of pension and post-retirement benefit arrangements, risk of antitrust/competition-related claims or investigations; impairment of goodwill and other identifiable intangible assets; actions or potential actions that could be taken by the company's principal shareholder, The Woodbridge Company Limited; failure to complete the proposed Financial & Risk transaction; difficulties separating Financial & Risk from the company; and failure to realize the benefits of the strategic Financial & Risk partnership. These and other factors are discussed in materials that Thomson Reuters from time to time files with, or furnishes to, the Canadian securities regulatory authorities and the U.S. Securities and Exchange Commission. Thomson Reuters annual and quarterly reports are also available in the "Investor Relations" section of www.thomsonreuters.com.

Thomson Reuters will webcast a discussion of its second-quarter 2018 results today beginning at 8:30 a.m. Eastern Daylight Time (EDT).  You can access the webcast by visiting ir.thomsonreuters.com.  An archive of the webcast will be available following the presentation.

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