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Edited Transcript of TRI.TO earnings conference call or presentation 28-Apr-17 12:30pm GMT

Thomson Reuters StreetEvents

Q1 2017 Thomson Reuters Corp Earnings Call

NEW YORK Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Thomson Reuters Corp earnings conference call or presentation Friday, April 28, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank Golden

Thomson Reuters Corporation - SVP, IR

* Jim Smith

Thomson Reuters Corporation - President & CEO

* Stephane Bello

Thomson Reuters Corporation - EVP & CFO

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Conference Call Participants

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* Vince Valentini

TD Securities - Analyst

* Manav Patnaik

Barclays Capital - Analyst

* Paul Steep

Scotia Capital - Analyst

* Andrew Steinerman

JPMorgan Chase - Analyst

* Drew McReynolds

RBC Capital Markets - Analyst

* Andre Benjamin

Goldman Sachs - Analyst

* Aravinda Galappatthige

Canaccord Genuity - Analyst

* David Chu

Bank of America Merrill Lynch - Analyst

* Peter Appert

Piper Jaffray - Analyst

* Ato Garrett

Deutsche Bank - Analyst

* Doug Arthur

Huber Research - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Thomson Reuters first-quarter 2017 earnings call. (Operator Instructions). As a reminder, this conference is being recorded. I will now turn the conference over to Frank Golden, Senior Vice President, Investor Relations. Please go ahead, sir.

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Frank Golden, Thomson Reuters Corporation - SVP, IR [2]

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Good morning and thank you for joining us as we report our financial results for the first quarter of the year. We will begin as we normally do with our CEO, Jim Smith, followed by our CFO, Stephane Bello.

Now following their presentations, we will open the call for questions and we would appreciate it if you would limit yourselves to one question each in order to enable us to get to as many as possible.

Two items to bring to your attention before we get started this morning. First, a reminder that today's presentation, when we compare performance period on period, we look at revenue growth rates before currency as we believe this provides the best basis to measure the underlying performance of the business.

Secondly, you will note in today's presentation and earnings release that we no longer report on underlying operating profit. This change reflects a simplification of our reporting structure and is in line with how we currently manage the business internally. This change is also consistent with how we provided our guidance for 2017 during our fourth-quarter earnings in February.

Let me point out that on the last page of today's earnings release, there is a supplemental schedule that does provide depreciation and amortization expense by business unit, as well as on a consolidated basis, so you are able to do that calculation.

Now today's presentation contains forward-looking statements. Actual results may differ materially due to a number of risks and uncertainties discussed in reports and filings that we provide to regulatory agencies. You can access these documents on our website or by contacting our investor relations department.

I will now turn it over to Jim Smith, who will take us through the results. Jim?

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Jim Smith, Thomson Reuters Corporation - President & CEO [3]

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Thank you, Frank and thanks to all of you on the call for joining us today. I am pleased to report that our first-quarter results were solid across the board and mark a good start to 2017. Reported revenues increased 1% and are up 2% on a constant currency basis, both representing an improvement over the prior year.

This improved revenue growth performance, coupled with savings from our Transformation program, and that includes the actions we took in the fourth quarter of last year, led to a 17% increase in EBITDA and a more than 400 basis point improvement in margin. Adjusted EPS increased $0.17 or 37% from a year ago to $0.63. Most of this improvement was driven by stronger operating performance as below-the-line items remained fairly constant on a year-over-year basis. Both the margin and the EPS performance for the quarter represent record highs for the Company.

Finally, net sales were positive in our Financial business, which was a good performance, especially since we are in the final stages of migrating a number of legacy products to Eikon in our asset management and foreign exchange segments.

Now let me turn to the results for the quarter by business. Revenues for our Financial business increased 1%. Excluding the impact of acquisitions, recoveries and pricing adjustments, organic revenue rose 2% with all three geographies, EMEA, the Americas and Asia, reporting revenue growth.

Growth was driven by a 9% increase in revenues from our Elektron data platform and Risk businesses and a 4% increase in Transaction revenues. This was offset somewhat by a 4% decline in desktop revenues driven in part by the pricing adjustments we discussed.

As I just mentioned, net sales were positive for the quarter driven by growth in EMEA and Asia; although the Americas were negative due to the migration of legacy Thomson ONE products to Eikon. These legacy asset management migrations are expected to be completed by midyear.

Turning to Legal, revenues grew 1% despite declines in US Print and Transaction revenues. Importantly, Subscription revenues, which represent about three-quarters of our Legal revenue base, grew a healthy 4%.

Finally, Tax & Accounting is off to a strong start with revenue growth of 6% driven by our Professional and Corporate businesses.

Now, before I turn it over to Stephane, let me finish by reiterating our key priorities for 2017. And I'm pleased to say that we are making good progress against each of them and we are increasingly confident as we look ahead.

First, we continue to expect revenue growth to gradually accelerate as we execute on these key initiatives that are in process and continue to invest behind our higher growth businesses. We are also in the early stages of executing our plan to improve the customer experience as we work to eliminate customer pain points and make it easier for our customers to do business with us. We expect these efforts will further improve retention and help us grow revenue.

Second, our enterprise group is doing a great job of managing the transformation programs and we are on track to deliver further savings and productivity gains this year. But just as importantly, this group is now applying the same rigor and discipline toward driving a number of key initiatives aimed at improving both customer experience and sales productivity.

Thirdly, given our strong start to the year, we are confident we can deliver on our financial commitments and therefore, we reaffirm our full-year 2017 guidance.

Now, let me turn it over to Stephane.

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [4]

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Thank you, Jim. Before I begin discussing the results, I'd like to remind you that I will talk to revenue growth before currency as we always do as we believe that this is the most appropriate way to judge the performance of the business.

In addition, currency did not have a material impact this quarter on profitability metrics for each of our businesses. As such, I will be referring primarily to our reported EBITDA performance and margins in my remarks.

So on a constant currency basis, first-quarter revenues were up 2%. The Financial & Risk and the Legal businesses were both up 1% and Tax & Accounting's growth rebounded to 6%. Adjusted EBITDA was up 17% with the margin up over 400 basis points to over 31% driven by better operating performance in each business and lower Corporate costs, some of which was timing-related. Nevertheless, this represents the highest quarterly EBITDA margin we have ever achieved and it is a strong start for the year.

Now Corporate costs decreased significantly on a year-on-year basis for three primary reasons. First, we worked hard to reduce center costs last year following the sale of our IP & Science business. Second, we made some adjustments to our locations. These adjustments have no impact on our consolidated results, but, at a high level, they will reduce our Corporate costs and there will be a commensurate increase in cost allocated to our Tax & Accounting business in 2017.

Finally, the first-quarter results benefited from some timing factors, which we expect will be reversed over the balance of the year. As such, our first-quarter Corporate costs should represent the low watermark for the year.

Now for the full year, we expect that Corporate costs, inclusive of depreciation and amortization expense, will be approximately $300 million, which would represent a reduction of about $80 million from last year. As we discussed during the last earnings call, about half of that $80 million reduction consists of real savings achieved following the divestiture of our IP & Science business whereas the other half is due to the reallocation of various Corporate costs as I discussed earlier primarily to our Tax & Accounting business.

Now let me provide some additional color on the performance of our individual segments starting with Legal. Overall, Legal revenues were up 1%. Subscription revenues, which makes up three-quarters of the business, were up 4%. Transactions, 11% of the total, were down 8% and US Print, which makes up the balance, was down 4%.

From a margin perspective, Legal's revenue growth and effective expense management led to a 100 basis points margin improvement versus the prior-year period.

Now here's a more detailed look at the revenue performance of the three main subsegments in our Legal business during the first quarter. US Online Legal Information, which represented 43% of total revenues in the first quarter, was up 2%. We are now in the third consecutive year of positive growth for this subsegment. This provides a solid foundation for Legal given this segment's high margins and strong free cash flow characteristics.

US Print comprised 13% of total revenues and was down 4% and our Solutions businesses made up 44% of revenues and grew 2%. Recurring revenues, which comprise the vast majority of revenues in that segment, increased 5% while Transaction revenues continued to be a drag and were down 9% in the first quarter.

Now while Transaction revenues are by definition pretty hard to predict, we do expect that the year-on-year comparison will become a little easier in the second half of the year.

Let me now turn to our Tax & Accounting business. In the first quarter, revenues grew 6%. Recurring revenues, which are 83% of the total, were up 7% and Transaction revenues, which is the remaining 17%, increased by 4%.

EBITDA was up a healthy 24% with the margin up over 400 basis points versus the prior-year period to 33.8%. That strong EBITDA performance was driven by revenue flowthrough, coupled with the savings related to the charge we took in Q4 2016, tight expense management and also the absence of $5 million of severance costs that we took in the first quarter of last year and that made the year-over-year comparison a bit easier. But even if you exclude this $5 million of severance cost, the EBITDA margin would still have been up by a healthy 320 basis points.

We do expect the margin to be a little lower in Q2 and Q3 than in the first quarter due to the seasonal nature of the Tax & Accounting's revenues and largely fixed cost base.

Now turning to Tax & Accounting's results by subsegment, our Professional business delivered another very strong quarter posting revenue growth of 13%. The Corporate segment grew 7%, Knowledge Solutions was down 1% and the smaller Government segment saw revenue decline by about $2 million on a year-over-year basis.

Now turning to our Financial & Risk business, first-quarter revenues were up 1%, continuing the trend of the previous two quarters. Growth continued to be dampened by commercial pricing adjustments on the remaining legacy foreign exchange products and as we have said previously, and as Jim just reminded you, the overall impact is diminishing and we expect these pricing adjustments to be largely completed in the first half of 2017.

Growth was also affected by lower recovery-based revenues. On a full-year basis, we still expect recoveries to be only marginally down compared to 2016. So overall, excluding acquisitions, which contributed about 1% to the growth rate, Financial & Risk's organic revenue growth rate during the first quarter was about 2% before recoveries and pricing adjustments. We expect a more modest impact from these headwinds in Q2 and no further impact in the second half of the year.

Turning to Q1 profitability metrics, EBITDA increased 6% to $463 million resulting in a margin of 30.8%, up 180 basis points from a year ago. This strong performance was primarily driven by improved revenue flowthrough and by the actions we took in the fourth quarter of last year.

Looking at the Financial & Risk revenue in a bit more detail, you can see on this next slide that desktop-related revenue represented 38% of total revenues and declined 4% during the first quarter. Excluding the pricing adjustments, desktop revenues were down 3%.

The balance of our recurring revenue base is comprised of Elektron BETA platform, which we use to refer to as our feeds business and Risk. And in aggregate, revenues were up 9% in these segments in the first quarter.

Recoveries made up 8% of the total and were down 9% and finally Transaction revenues were up 4% during the quarter. Foreign exchange volumes continue to be challenging, but this was more than offset by a strong performance in Tradeweb.

Now let me update you on our earnings-per-share and free cash flow performance and I will start with earnings per share. For the first quarter, adjusted EPS increased by $0.17 to $0.63 per share, which was a 37% increase compared to the prior-year period and as you can see on this slide, that improvement was primarily driven by stronger operating results across the board as the so-called below-the-line items did not have a material impact on EPS in aggregate. Finally, currency had no impact on EPS during the quarter.

Looking for the full year, however, and assuming that exchange rates remain roughly where they are today, we believe that currency could have a $0.04 to $0.06 negative impact on EPS.

In addition, the recent acquisitions we've made could also have a $0.02 to $0.03 dilutive impact on EPS.

Now the timing factors I referred to earlier in our Corporate expenses represented a benefit of about $40 million in aggregate and they contributed about $0.05 to the year-over-year increase in earnings per share.

This next slide reflects our free cash flow performance. As you will recall, there are several items impinging on free cash flow in 2017 with the majority of the impacts being felt in the first quarter.

So working from the bottom of this slide upwards, you can see that our reported free cash flow was negative $585 million during the first quarter versus a positive performance of $223 million in the prior-year period. Now our prior-year period benefited from the inclusion of our IP & Science business, which we sold last October and the year-over-year guidance related to that disposal was just over $150 million.

In addition, there were two other significant factors impacting the first quarter. First, as indicated in our last earnings call, we made a $500 million cash contribution to our pension plan in January. This contribution drove the funded status of the plan to over 90% and we expect that it will eliminate the need for any further material contribution in the near term.

Second, we incurred $86 million of cash payments related to the severance charges that we took in the fourth quarter of 2016. So the aggregate impact of these three factors that I just described was about $740 million negative. Excluding these items, our free cash flow on a comparable basis would have been $42 million in 2017 versus $112 million for the prior-year period with the variance being driven primarily by working capital timing items.

On a full-year basis, we continue to expect free cash flow to range between $900 million and $1.2 billion. Since the pension contribution and the cash impact of the charge are clearly temporary, we do expect to return to a stronger free cash flow performance in 2018.

So in conclusion, we are affirming our 2017 outlook. Overall, we are pleased with the improving revenue trends, record profitability and record EPS performance we achieved in the quarter and as we look to the balance of the year, accelerating revenue growth remains our number one priority, as Jim just discussed. And we expect revenue growth to continue to improve as we progress throughout the year.

Now, given the largely subscription nature of our business, the improvement will be gradual, but it is reassuring to see that our recent actions are beginning to flow through into our financial results.

With that, let me turn the call back over to Frank so that we can take some of your questions.

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Frank Golden, Thomson Reuters Corporation - SVP, IR [5]

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Terrific, Stephane. Thanks very much and that concludes our formal remarks, so we'd now like to open the call for questions. So could we have the first question please, operator?

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Questions and Answers

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Operator [1]

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Vince Valentini, TD Securities.

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Vince Valentini, TD Securities - Analyst [2]

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Thanks very much. Hopefully, I can get a clarification and then a question. Just, Stephane, to clarify, if it's $300 million for the full year in Corporate costs and you did $46 million in Q1, the quarterly pace should have been $75 million, so that would've meant $29 million of one-time benefits. I think you cited $40 million though later in your remarks. Is that correct, that it's actually $40 million, not $29 million that you got a boost from?

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [3]

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I think it's somewhere between $30 million and $40 million, Vince, but your math is generally correct. So Corporate costs are going from -- are decreasing from $380 million to $300 million and I explained the factors that drove this decrease. If you take [$50 million] in Q1, you should expect a run rate for Corporate costs of somewhere between $80 million and $90 million for the balance of the year each quarter.

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Vince Valentini, TD Securities - Analyst [4]

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Okay. And a broader question, the net sales being down in the Americas seems certainly counter to the employment trends we have seen and the better results you have had there than your other geographies recently. Can you peel that onion back a little bit more for us? If you maybe exclude the commercial pricing adjustments on these FX migrations to Eikon, would the net sales in the Americas have been positive and maybe even talk more generally, Jim, about the conversation you are having with clients in that region and whether there's increasing optimism or a bit of a pause for reflection?

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Jim Smith, Thomson Reuters Corporation - President & CEO [5]

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Sure. I would welcome the opportunity to peel the onion on that a little bit more. This is purely driven by -- in March of last year, we announced the end of life for the old Thomson ONE products. So we have been migrating over the past year our clients from 14 Thomson ONE products onto the new modern platform. And obviously, anytime you have a product migration like that, the people who are eager for the new product sign up first. Those who are more ambivalent are toward the middle of the pack and the tough slogging is toward the end.

So we always anticipated that we would have a difficult sales period as we migrated our clients from the legacy products onto the new products. And that has indeed been the case with the brunt of that coming in Q1, a little more in Q2, but we will be completely through that migration in the first half of this year. If you take that out, we are quite encouraged with what we are hearing in the Americas and with the opportunities that we have in the Americas and what we are hearing back from clients.

So a temporary hit to net sales because of cancellations of some old legacy products that we were no longer going to continue are more than offset by the opportunity to move the new clients or to move clients onto the new modern, reliable, robust platform, our ease in operating that platform, the reliability, the security that our clients get, and we are particularly encouraged because, in almost 50% of the cases where we have moved an asset management client onto the new platform, we have had the ability to upsell another product as well.

So this is just the natural transition of that move in the asset management space away from the legacy Thomson ONE products to the new platform.

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Vince Valentini, TD Securities - Analyst [6]

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Thank you.

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Operator [7]

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Manav Patnaik, Barclays.

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Manav Patnaik, Barclays Capital - Analyst [8]

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Yes, thank you. Good morning, gentlemen. So just to follow up on that a bit. I guess based on your commentary of less headwinds in the second quarter and now in the second half, is that 2% the right normalized organic growth rate that you guys should report going forward?

And then this -- I think your commentary was down to people being optimistic on signing up to the new FX platform, but just broadly in the industry, it feels like at least the buy side has joined the trend of feeling the pain. Can you maybe give some comments there on how that is impacting your business?

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [9]

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Sure, let me try to take the first part of your question. We have been giving you what the underlying organic growth rate for our Financial business is if you exclude these two headwinds and it's been about 2%. This is what we should be getting from just the annual pricing increase that we get and that happens pretty naturally in the Financial business for us, so that's 1.5% to 2%.

And then the total growth rate of the business is supplemented by whatever volume increase we could see and that's really driven by net sales, as we said in the past and obviously also by the Transaction revenue dynamics, which obviously changes from one quarter to the other.

But we have had now a number of quarters where, if you exclude these headwinds, which we know will disappear, you are going to see them going down in Q2 and then disappearing in the second half of the year. We know what the underlying growth rate of the business is, so that's why we feel pretty confident that the evolution of the growth rate of our Financial business this year, if you exclude Transactions, what it should look like give the impact of these headwinds.

So we are very pleased that we are nearing the end of these headwinds. It's really around the corner. Jim, do you want to say something about the foreign exchange?

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Jim Smith, Thomson Reuters Corporation - President & CEO [10]

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Please go ahead.

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [11]

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No, I think the foreign exchange, what we have seen the strategy that we have pursued has enabled us to actually see a slight increase in the number of users of our foreign exchange platform. This had been incurring some declined, some headwinds over the prior years. We have been able to stabilize that and now we are starting to see an increase of usage and users on the foreign exchange platforms, which obviously is very comforting also for us.

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Manav Patnaik, Barclays Capital - Analyst [12]

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Got it. And just my follow-up to that was just if you could make some comments on -- outside of [this] actually broader generally, all the pain [of] the buy side and sell side continues to [face], how that's impacting maybe not just F&R, but maybe Legal as well. It sounds like Tax is the only one that has good trends going forward.

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [13]

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I'm not sure I understand your question.

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Manav Patnaik, Barclays Capital - Analyst [14]

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Just in terms of the headcount reductions and so forth, like you guys aren't seeing any of that impact your businesses?

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Jim Smith, Thomson Reuters Corporation - President & CEO [15]

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If I might -- Jim here. Look, I think, obviously, there are many different parts to our business and even your question specifically around the FX market, there are many sectors in the FX market, whether that's the sell side banks or it's the broker dealer network, whether it's treasury, dealer to end customer and we are seeing certain sectors of that market under more pressure than other pressure. And I would say that generally where we have headcount-dependent businesses, we continue to see more pressure.

The encouraging -- an encouraging thing for us I think in Q1 was in the faster growing part of the business in a marketplace that is still growing -- so if you look at market data in general in financial services, it is still continuing to grow and you look at our Elektron data platform business and our Risk business, which are far less headcount-dependent, those grew 8% in the first quarter --

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [16]

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9%.

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Jim Smith, Thomson Reuters Corporation - President & CEO [17]

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9% each in the first quarter. So those are still growing healthily. So I think you have to peel apart the onion on that one as well, but certainly headwinds have not completely diminished; I wouldn't want to ever give that impression. But there are many aspects to the business and some of them are doing quite well now.

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Manav Patnaik, Barclays Capital - Analyst [18]

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Thanks a lot, guys.

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Operator [19]

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Paul Steep, Scotia Capital.

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Paul Steep, Scotia Capital - Analyst [20]

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Good morning. Jim, maybe you can talk a little bit about the growth businesses, particularly Risk, as well as Elektron data. Those are the two you highlighted, I guess, last quarter and again this quarter. Maybe give us perspective of how large those are within the whole and then maybe what the addressable market opportunity looks like relative to the headcount challenges we've talked about seemingly forever.

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Jim Smith, Thomson Reuters Corporation - President & CEO [21]

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Sure. If you look for the quarter across the -- and there was consistent growth, low watermark would have been 6% and the high would've been 9%, but they have all been growing nicely for us this year and have seen an acceleration there.

If you put all of those together, that's now over $4 billion of the revenue base. That's in that zone growing overall at 8%. And the components of that are pretty evenly spread, a large part would be the Elektron data platform right now, but the others are coming on and three of those four segments are now over $1 billion in revenue in their own right. So we are quite encouraged by them and they are less frankly headcount-dependent in all cases and they are right in the heart of the world that's changing so fast right now.

When you think about the geopolitical uncertainty and you think about the regulatory changes that are afoot, we think that bodes quite well for these businesses because when things change, that's the time our customers turn to companies like us for the trust and answers that they need to navigate those changes. So we are encouraged that those trends can indeed continue.

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Paul Steep, Scotia Capital - Analyst [22]

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All right. I will change my follow-up really fast because you have got me intrigued. If we are growing at this pace, there's one argument that would say you have done two tuckunders in Clarient and Avox in the most recent quarter. Is there a sense having transformed the business to where you are at today a willingness to step up to a larger transaction, a $500 million plus type deal, that would further accelerate one of those areas? Where is the appetite for that at the moment? Thanks.

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Jim Smith, Thomson Reuters Corporation - President & CEO [23]

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Our strategy and our appetite for acquisition hasn't changed from where it has been for the last three or four years. We are still primarily focused on driving our business by driving organic growth, by improving the quality of our products, by improving our customer service and we always have our eyes open, particularly for those tactical acquisitions that we can fold into our business that can support our growth initiatives by bringing in capabilities that we might not have, by plugging a gap in our product offering, by bringing a customer set with them perhaps a little more quickly than we could do if we were to build and to do that organically.

But we are very much looking for the tactical fold-in opportunities while always keeping our eyes open for opportunities out there and as you know, everyone talks about everything all the time. So we are certainly not sitting in a cave and not aware of what is happening in the competitive landscape or the M&A landscape generally.

But our focus is on driving the business we have and if we see opportunities to improve that with tactical acquisitions that support what we are already building, then I think you will see us continue to do that. But we have made a couple of relatively small acquisitions in recent months and our plan this year is to invest behind those, to integrate those into our offerings and continue to build them to scale.

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Paul Steep, Scotia Capital - Analyst [24]

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I'll slide in one quick clarification. Stephane, in Tax & Accounting, you didn't talk about -- we've had some challenged government projects in the US, I guess, for lack of a better word in the last few quarters. What's the progress on that? I know it didn't matter on the top line, but it was more a margin drag. Thanks, guys.

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [25]

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It wasn't and look, we are making progress on these. There was no impact, no meaningful impact, as you could see from our results in the quarter. We still have work to do and we continue to make good progress. The team is continuing to make good progress on addressing the issues we had last year. So as we said in the Q4 earnings call, I think, we do expect a continuing level of spending to be reflected in our numbers throughout this year and actually there was a fair bit of spending in Q1, but we hope that you are not going to see the volatility from one quarter to the other that we saw last year because we obviously had to take some actions with regard to the assets we have on our balance sheet in the course of 2016. So continued progress.

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Operator [26]

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Andrew Steinerman, JPMorgan.

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Andrew Steinerman, JPMorgan Chase - Analyst [27]

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Hi, it's Andrew. I have two questions. The first one is about the $2.35. I know that's before currency; it is clearly labeled on slide 19, but does that include any small dilution on EPS that might come from the recent acquisitions earlier this year? That's my first question.

My second question is a bigger question, Jim. It's about the strong margins in the first quarter and given that strong margin start, have you changed the amount of innovation spending for Thomson in terms of planning for innovation spending this year?

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Jim Smith, Thomson Reuters Corporation - President & CEO [28]

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Can I answer the last one first? The answer is no. In fact, I think we are doing a much better job of reallocating capital spend within the business, but if you look behind those big four growth initiatives I talk about, they are getting substantially more funding this year than they got in the prior year. So we feel quite comfortable with that. That's not a result of cutting back. That's a result -- it's interesting, in our model, as you well know, high fixed cost basis, as the revenue starts to improve, you get lots of great flowthrough dynamics so it's encouraging to see that. Even at low rates of overall revenue growth, it's good to see that powering some flowthrough to the bottom line.

And then the simplification initiatives that we took in Q4 last year have stuck and those costs have come out, but to be honest with you, we would've taken them out regardless of the cost impact of those actions simply because it allows us to simplify the organization and become more nimble. So it's not the result of overcutting on investment spend.

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Andrew Steinerman, JPMorgan Chase - Analyst [29]

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Right. But how about if margins continue to trend favorably, would you step up your innovation spending this year or is it more a matter of we have our annual plan for innovation spending, it's already in there?

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Jim Smith, Thomson Reuters Corporation - President & CEO [30]

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No, look, it's the great trade-off that we make all the time and we will make that dynamically. It's a nice problem that I would love to have. But we continually look at the transformation savings we were able to generate and then we allocate and decide how much of that do we take to the bottom line and how much of that could we reallocate toward innovation spend that we don't have or toward speeding up a product to market or fixing services.

I think Stephane has alluded to, in a number of our calls, if you look at the totality of our transformation savings, they are well in excess of what we have taken to the bottom line and just each and every year and dynamically throughout the year as we see opportunity, we try to fund that opportunity. So there's not a hard and fast rule for how it works, but we are evaluating what we do with every dime that comes through the door and trying to apply it appropriately. And I would hope that if we could continue to get more effective and efficient in how we are managing the business, that there will be lots of folks here knocking at the door to speed up things that would power the top line.

I have always said, since the day I became a CEO, I would trade a point of margin for a point of growth any day and I still believe that.

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Andrew Steinerman, JPMorgan Chase - Analyst [31]

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Well said. Thank you.

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [32]

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And Andrew, your first question I think was on the $2.35 EPS target that we have. And look, the way we provide guidance for the year usually is before the impact of acquisitions and before currency. The $2.35, I would say you heard me in the remarks, we do expect currency may have a slightly negative impact over the course of the year and acquisitions exactly building on the point that Jim just made. We're actually investing behind the acquisitions that we've made, so we do expect some investments, which will be dilutive to EPS, particularly in the KYC acquisition that we have made because we feel pretty strongly about the opportunity there, so we are putting dollars behind them.

This being said, to the extent that the impacts are pretty minor, both currency and acquisitions, we're very hopeful we can overcome them and achieve our $2.35 target.

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Andrew Steinerman, JPMorgan Chase - Analyst [33]

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Got it. Thank you.

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Operator [34]

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Drew McReynolds, RBC.

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Drew McReynolds, RBC Capital Markets - Analyst [35]

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Thanks very much. Just a clarification and then a question on F&R. Stephane, just on the $300 million in Corporate cost guidance for 2017, that has some depreciation and amortization in it, but we are now focused on EBITDA, not EBIT. Can you give us what that adjusted EBITDA Corporate line would be?

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [36]

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I can if you give me two seconds. Why don't you ask your second question; I will give you the numbers by then.

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Drew McReynolds, RBC Capital Markets - Analyst [37]

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Okay, thank you. Just on F&R, maybe for Jim while Stephane looks through that, so you did I think flat organic in Q1 and you've done plus 1% the back half of last year and you did flat with Transactions up this quarter. So I am just wondering, within the mix, what took that sequential step back?

And then as we look at flowing through these buy side migrations that you are doing that's impacting net sales, what kind of revenue flowthrough on a reported basis impact would that have? Thank you.

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Jim Smith, Thomson Reuters Corporation - President & CEO [38]

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Stephane, you are probably better positioned to answer that.

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [39]

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Well, I was looking for the number. Can you repeat it, if you don't mind? I apologize for this, if you could repeat your question.

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Drew McReynolds, RBC Capital Markets - Analyst [40]

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Yes, so the second question you want me to repeat? We can do the other one off-line if you want, but I'm just trying to better understand the puts and takes within F&R. If you exclude the acquisition, it was flat organic in this Q1. You did, I think, plus 1% in Q3 and Q4 of last year. So I'm just wondering what took a step back.

And then in addition to that, when we look at the net sales impact of that Thomson migration for this quarter and next quarter, that's going to have an ultimate reported flowthrough revenue impact after that. And I am just wondering is that a significant impact in reported revenue, organic revenue in the back half of this year and into 2018.

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [41]

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Yes, look, I would say directionally we would expect for the difference between reported and organic revenue to be about the same for the balance of the year. So acquisitions, assuming no additional acquisitions for F&R for the balance of the year, will contribute about 100 basis points also to the top-line performance of our F&R business.

In terms of your other question, I'm not sure exactly what drove the numbers. I think it's probably rounding more than anything else that may have driven the organic from like the reported organic growth rate from 1% to flat this quarter.

As I said, I think that directionally what we expect to see in that business is an improvement in the growth rate that's driven by the gradual elimination of these headwinds and then obviously what's going to have an impact also is the evolution of our net sales performance over the balance of the year. And as Jim said, in that respect, being positive in Q1 in the face of having to go through the final phase of our migration for the asset management business was a very good performance in our perspective. So that was encouraging.

And in answer to your other question, I believe that the correct number for the Corporate expense is about -- I think depreciation and amortization is about $40 million or so in that segment. So the $40 million from the -- yes, about $300 million of that given -- and you should see about $260 million or so thereabout that we would expect on the EBITDA line.

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Drew McReynolds, RBC Capital Markets - Analyst [42]

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Okay, perfect. Thank you, Stephane.

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Operator [43]

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Andre Benjamin, Goldman Sachs.

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Andre Benjamin, Goldman Sachs - Analyst [44]

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Thanks. Good morning. My question wanted to focus on the growth potential and the data feeds business, where that could possibly go over the next couple years versus the 9% you put up this quarter and wondering if you can maybe talk a little bit about what's underpinning the strong growth, how much of it is from customers shifting revenue from their desktop businesses versus new business with new customers.

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Jim Smith, Thomson Reuters Corporation - President & CEO [45]

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Sure. I think we saw -- we have seen some external reports in the last couple of months or so about the underlying growth in the demand for market data. So that demand is growing for market data and obviously, more of it is being consumed by machines than people these days and that's what's driving the growth.

And yes, I think there is a shift from desktops to feeds that will continue to drive the growth, but the aggregate market is going up. But we are seeing it frankly across the face of that business, whether it's real-time data feeds, some of the referential pricing data that's there and for our risk products. So I think it's consistent across the board. It continues to grow with many of our existing customers and we continue to add clients, particularly on the buy side.

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Andre Benjamin, Goldman Sachs - Analyst [46]

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I guess that kind of feeds my follow-up, which is, to the degree you can at least give us a ballpark, what the revenue mix is for that business between sell side banks and the buy side clients.

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [47]

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On that one, we will have to get back to you; I don't have it offhand.

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Andre Benjamin, Goldman Sachs - Analyst [48]

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Okay, thank you.

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [49]

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We will get back to you on this.

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Operator [50]

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Aravinda Galappatthige, Canaccord Genuity.

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Aravinda Galappatthige, Canaccord Genuity - Analyst [51]

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Good morning. Thanks for taking my question. Jim, I was wondering if you can revisit the cost rationalization opportunities ahead of you again. Obviously we saw a big block in Q4 and that's playing out now. As you look at the main pieces that are in front of you, how do you see that play out over the next year or two? Do you feel that it would be chunky as it has been in the past or would it be smaller restructuring programs on a go-forward basis?

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Jim Smith, Thomson Reuters Corporation - President & CEO [52]

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Sure. We have our transformation machine really firing on all cylinders right now, so I do anticipate sitting here today that it's going to be a steady machine that goes after the cost base, that continues to find ways to work more effectively and more efficiently to consolidate technology platforms that were never possible, reduce our overall real estate footprint.

Now particularly to help with simplifying our customer experience, help us become more productive in our sales and marketing activities and our client acquisition and onboarding and customer support. So I think the machine will continue to find ways to streamline our operations and make them better while reducing costs and I think that will be steady. It's built into the run rate of the business. We wouldn't call those out and I have been asked before where are you. I honestly believe we are still in the late early innings to middle innings, if I can use the baseball analogy, of that journey.

So we have lots of opportunity to keep getting better and then to go back to Andrew's question earlier, we will make the decision of how much of that we invest to fire the top line and how much of that we take to the bottom line. But as I have always said, as we move through that exercise and as we make steady progress toward our goals, if we see an opportunity to take a step change that will pay back in short order like the charge we took at the end of last year, which will pay for itself in one year, we will step up and take those and we will call it out, we will tell you what we are going to do, we will tell you the savings we expect to get from it and we won't shy away from that if the opportunity presents itself.

Sitting here today, we don't have any such plans. Nor do we see any on the horizon. We expect it would be steady state continued improved execution.

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Aravinda Galappatthige, Canaccord Genuity - Analyst [53]

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Great, that's helpful. Thank you.

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Operator [54]

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David Chu, Bank of America.

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David Chu, Bank of America Merrill Lynch - Analyst [55]

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Good morning, thanks. So can we dive into net sales for a bit? So how did gross sales look in the quarter and maybe you can speak to retention and just how that compares to recent quarters please?

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [56]

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Sure. I would say, at a high level, gross sales improved overall and they also improved I would say across the businesses. Retention rate was down a little in the quarter and that's very much driven by the factor we have been talking about on this call, which is end of life of our legacy product in the asset management business and that essentially translates in a higher level of cancellation that you would expect. So we still expect a little bit more cancellation in Q2; probably not to the same extent as in the first quarter, but still some impact and then hopefully we hope to see our retention rates start to rebound in the latter part of the year. But good gross sales performance, which was quite encouraging and retention down a little bit because really of that factor that I just described in our financial business.

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David Chu, Bank of America Merrill Lynch - Analyst [57]

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Okay, great. And just lastly, so in terms of F&R, has the buy side been much more stable than the sell side and maybe you can talk about the shift toward passive and the impact to your business?

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [58]

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(inaudible) the buy side has been growing overall as a segment and you have seen some of the slides we showed in the fourth-quarter earnings release where you have seen how much of a percentage of revenue is now represented by buy side. It's a much bigger proportion than it was four or five years ago. There's no question that the buy side is going to become more sensitive to headcount; the same way the sell side was also.

But I think what makes us pretty happy is that we do have now a much better product offering in the buy side. The reaction, the feedback has been very positive. So we believe that we are better positioned to compete in that segment. It's going to remain a very, very important segment for everyone, for us and for our competitors, of course.

And the last point, I would say that buy side clients are starting to be more interested in the feeds business, not just on the desktop business, which is also something that we feel is a good trend from our perspective given how large and well-positioned that business is.

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David Chu, Bank of America Merrill Lynch - Analyst [59]

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Okay. Lastly, so continued shift toward passive, is that a major impact to your business?

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [60]

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Too soon to tell I would say at this point in time, but, in general, that would lead to more reliance on feeds and less on desktops. That would be my very preliminary read on what a trend like that might mean.

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David Chu, Bank of America Merrill Lynch - Analyst [61]

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Okay, thank you very much.

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Operator [62]

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Peter Appert, Piper Jaffray.

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Peter Appert, Piper Jaffray - Analyst [63]

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Thank you, good morning. So a question on guidance. Given the strength you saw in the first quarter, the easing headwinds you have cited, your expectation of accelerating growth, I am just wondering why you are not a bit more optimistic here in terms of the full-year numbers. What are the offsets in the later part of the year that might cause the numbers not to be better?

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [64]

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Peter, I would say I would answer that question very simply. It's still very early in the year. That's really I would say the main reason. Obviously, the performance in the first quarter gives us increased confidence that we can meet all the guidances we have given out, but it's probably a bit early to think about changing anything at this point.

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Peter Appert, Piper Jaffray - Analyst [65]

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But not a specific expectation -- I mean there were some unusual items that boosted the margin, obviously, in the first quarter, but this is not a backdoor expectation that there will be some incremental pressures for the balance of the year?

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [66]

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No, I mentioned some of the potential offsets in my remarks. Obviously, currency, if they stay where they are may have a little bit of a negative impact on the earnings-per-share performance. We saw no impact in Q1, but that impact can increase based on where rates have moved.

We are making investments in these acquisitions that we have made. The acquisition we've made will be a bit dilutive. Nothing major and actually in the case of the acquisitions, it's probably good reasons to have these negative offsets because they represent investments in future growth. But really nothing too major.

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Peter Appert, Piper Jaffray - Analyst [67]

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Thank you.

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Operator [68]

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Ato Garrett, Deutsche Bank.

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Ato Garrett, Deutsche Bank - Analyst [69]

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Good morning and thanks for taking my questions. First, looking at your expectations for Financial & Risk and the improving revenue outlook across the year that you previously mentioned, is that -- can you just talk about the moving parts of that? I know you've called out the diminishing recovery to clients and the small impact from pricing adjustments, but just wanted to get your expectations for the underlying business.

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [70]

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The underlying business will be -- look, we've had like a number of quarters now where the underlying growth rate of the business was 2%. The growth trends in that business will be defined by the evolution of net sales over the course of the year and obviously by Transactions also.

I mean the change in revenue mix, the fact that you saw in the first quarter, I think it was the very first time that we had the feeds and risk business being actually bigger as a percentage of the total revenue base than the desktop revenue base. That should be positive also. So I would say this gradual, very gradual change in the revenue mix hopefully will be beneficial for the revenue rate of the Financial business overall.

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Ato Garrett, Deutsche Bank - Analyst [71]

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Great. And if I could have one follow-up, just regarding the Legal business, finally moving away from F&R a bit, given some of the trends -- you've had volatility we've seen around the Transaction revenues and declining revenues from US Print, which you know are very high margin. Can you just remind us or help us frame up how we should be thinking about Legal margins for the year?

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [72]

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Yes, no change from what we said in prior calls on that question. The trick in the Legal business is to ride the shift in revenue mix. As Solutions revenues get a bigger proportion of the total, they have lower margins. The margins increase in this business, but they are lower margin business in aggregate than the online Solutions business.

For the full year, I think we would expect the margin to be -- if we can keep the margin roughly flat for the full year in the business, it's a very good performance and that's going to be achieved through a mix of -- as I say, the margin in our Solutions business is getting better, number one and number two, continuing tight management of expenses.

So the goal there is to gradually get the revenue moving while the margin is not negatively impacting because of the negative mix effect.

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Jim Smith, Thomson Reuters Corporation - President & CEO [73]

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And if I could just add to that, I'm glad you asked about the Legal business because we are highly encouraged to see those underlying subscription businesses in Legal growing at 4% because those are very sticky, very profitable businesses for us and will contribute to the stability and growth of that business as well.

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Ato Garrett, Deutsche Bank - Analyst [74]

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Great, thanks.

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Frank Golden, Thomson Reuters Corporation - SVP, IR [75]

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Operator, we'd like to take one final question please.

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Operator [76]

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Doug Arthur, Huber Research.

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Doug Arthur, Huber Research - Analyst [77]

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Yes, thanks. I have got a couple questions, but I will take a few off-line. Stephane, in terms of the charge you took for severance in the fourth quarter, I think it was $212 million, is there any way to quantify what the benefit of that severance was in Q1? And I assume it will have some legs for the rest of the year. Thanks.

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Stephane Bello, Thomson Reuters Corporation - EVP & CFO [78]

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I don't know how to quantify it very precisely. You saw clearly the year-over-year margin improvement was pretty meaningful. So a lot of that was attributable obviously to the actions we took in the fourth quarter and yes, it should have legs over the balance of the year. As Jim said, this is a charge, which has a pretty rapid payback. So it definitely pays for itself in the scope of 12 months without any question.

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Jim Smith, Thomson Reuters Corporation - President & CEO [79]

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And I would just add that the charges -- in addition to the financial impact that that move had, it has greatly simplified operations within the organization and as I have said before, it's a move that was -- that was justified on that alone.

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Doug Arthur, Huber Research - Analyst [80]

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Okay, great. Thank you.

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Frank Golden, Thomson Reuters Corporation - SVP, IR [81]

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That will be our final question and we'd like to thank you all for joining us for this first-quarter earnings recap.

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Operator [82]

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Ladies and gentlemen, this conference will be available for replay after 10:30 a.m. today through midnight May 5. You may access the AT&T executive playback service at any time by dialing 800-475-6701 and entering the access code 420186. International callers dial 320-365-3844 using the same access code 420186.

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