Thomson Reuters Corp (NYSE:TRI)
Q4 2015 Earnings Conference Call
February 11, 2016 08:30 ET
Frank Golden - SVP Investor Relations
James Smith - President & CEO
Stephane Bello - CFO
Tim Casey - BMO
Vince Valentini - TD Securities
Paul Steep - Scotia Capital
Sara Gubins - Bank of America Merrill Lynch
Drew McReynolds - RBC Capital Markets
Ato Garrett - Deutsche Bank
Aravinda Galappatthige - Canaccord Genuity
Claudio Aspesi - Bernstein
Ladies and gentlemen, thank you for standing by. Welcome to the Thomson Reuters Fourth Quarter Earnings Conference Call. At this time all participants are in a listen-only mode and later we'll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] And as a reminder, this conference is being recorded.
I would now like to turn the conference over to our host, Senior Vice President of Investor Relations, Frank Golden. Please go ahead.
Thanks very much. Good morning and thank you for joining us as we report our financial results for the full year and the fourth quarter of 2015. Our CEO Jim Smith will start today's discussion, followed by Stephane Bello, our CFO. Following their presentations, we'll open the call for questions. We would appreciate if you would limit yourself to one question each in order to enable us to get to as many questions as possible.
Now let me point out three things before we begin. First, throughout today's presentation, 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. Second, our discussions of the 2015 results include our IP & Science business. And third, in 2016 the IP & Science business will be included in discontinued operations for reporting purposes, and therefore is not included in our 2016 guidance. You will see that Appendix A in today's release 2015 pro forma results removing IP & Science business. This will enable you to compare our 2016 guidance against the pro forma '15 results excluding this business.
Also on our website we've posted quarterly 2015 pro forma results excluding IP & Science, and later this quarter we'll provide the same for the full year 2013 and 2014. Lastly, also on our website there are several schedules that update our currency exposures.
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.
Let me now turn the call over to Jim Smith.
Thank you, Frank, and thanks to those of you on the call for joining us. Let me start by saying that 2015 was a milestone year for Thomson Reuters. Today's results reflect the significant progress we've made putting the company back on a solid footing.
Last year we returned the company to organic revenue growth for the first time since 2011. We delivered the highest level of adjusted earnings per share in our history and free cash flow exceeded our expectations, translating into free cash flow per share of $2.30, the highest in the history of the company.
Our financial business also hit a number of milestones which demonstrate that we truly turn the corner including achieving flat revenue growth for the year despite having to absorb lower recoveries revenues and pricing adjustments. On an underlying basis, revenue growth was north of 2%, hitting its EBITDA margin target of 30% in Q4, a remarkable achievement given our starting point. And last but not least, financial net sales were positive in Q4. And 2015 marks the first year we achieved positive net sales in all four quarters since we acquired Reuters in 2008.
Today we announced our 23rd annual dividend increase, a testament to the stability of our business and the consistency of our free cash flow model. So 2015 was the year that our strategy clearly began to yield results which gives us growing confidence as we look to 2016 and 2017.
Now to the results; 2016 marked the fourth consecutive year that we've met or exceeded our guidance metrics. We've accomplished this because we've been sharpening our focus and prioritizing investments behind the opportunities we see at the intersection of global, commerce and regulation. We are simplifying the organization and focusing the business on driving revenue growth organically rather than through an expansive M&A strategy. Today's results demonstrate that our efforts are beginning to bear fruit with an organic growth 150 basis points better than last year, and 250 basis points better than 2013.
In the fourth quarter revenue growth before currency, margins, earnings and free cash flow were all up. Reported revenue numbers were again dampened by unfavorable currency movements, so I'll therefore highlight for you both, our reported results for the quarter and our results before currency so you can see the underlying progress we're making.
First, the reported results for Q4. Revenues were down 2% as currency had a negative impact of 400 basis points. We've been cautioning each quarter that the strengthening of the U.S. dollar would likely have a higher than usual impact on our results throughout this year. That was again the case this quarter. Nonetheless, adjusted EBITDA increased 13% and underlying profit was up 28%, driven primarily by the financial segment and strong contributions from legal and tax. Currency had very little impact on margins this quarter. Adjusted EPS in Q4 was $0.65, $0.22 better than the prior year period.
Now, moving to results before currency for the quarter; revenues were up 2% and EBITDA increased 16%, with operating profit up 32%. The improving revenue trend coupled with the savings we achieved from simplification programs drove significant increases in profitability and earnings this quarter. And EPS was 27 since better than last year.
Lastly, we continue to execute our capital strategy and over the past three years we have returned $6 billion to shareholders in the form of share buybacks and dividends. And today, we announced a new $1.5 billion share repurchase program on the heels of having essentially completed our third $1 billion program.
Now, before I discuss the full year results let me comment on the state of the markets we serve which remain attractive long term, and are certainly dynamic today. We of course close monitor external factors to manage risk and to take advantage of emerging opportunities. And since the start of the year, macroeconomic and geopolitical conditions have been volatile, and the markets are unsettled right now.
When it comes to our financial business, our biggest customers are buffeted by wins from all directions. Certainly those of you sitting in Canada today are seeing the effects from the energy and commodity meltdown. In the Europe particularly, big sell side banks continue to content with regulatory capital structural challenges. That said, in Europe we have nearly 12,000 financial customers and the vast majority of European domestic banks are in solid shape as confirmed by the recent stress tests and their healthy balance sheets.
Some markets, like hedged funds, are really being impacted. But I have to note that these aren't significant parts of our business right now. So I suspect we may see some choppy quarters ahead but the overall macro picture is not 2008/2009 all over again. And our competitive position has never been stronger. In fact, I've never left a year feeling better than 2015 or entered a year in better than 2016.
Our focus on helping our customers be more efficient, reduce their overall costs, and deal with the increasing burden of regulatory compliance has never had more resonance. We will keep executing and focusing on everything within our control and the numbers will follow, just as I had in the past four years.
Now, to the highlights for the full year, in 2015 we made real progress on continuing to transform the company from a portfolio of individual businesses into a more integrated enterprise capable of sustaining growth and efficiency. Financials revenues were flat, compared to down 2% in 2014. And underlying revenue growth was again north of 2% when remove the impact of lower recoveries and the commercial pricing adjustments.
Turning to Legal, revenues grew 2% organically, up from 1% growth last year. Importantly, U.S. online revenues grew 1%, a 200 basis point improvement from the prior year. This marks the first time our U.S. online legal business has been positive since 2009 and reflects improving net sales and higher Westlaw retention. It's very encouraging to have Legal's most profitable segment back to growth as we look forward to 2016 and 2017.
Tax & Accounting continues to execute very well and had another year with revenues up 8% against a tough prior year comparison where revenues grew at 12%. And for the year the IP & Science business grew 1%, with subscription revenues up 3% and transaction revenues down 4%. Lastly, our global growth businesses grew 7%, nearly all organic and that now comprises $1.3 billion of our revenue base.
Lastly, you'll recall that in November we announced we were exploiting strategic options for our IP & Science business. This segment contains growing and profitable businesses which operate in attractive markets. However, as we continue to sharpen our focus, we are increasingly prioritizing investments behind the many opportunities we see at the intersection of global commerce and regulation. We believe that the sale of IP & Science will enable that business to thrive in the future and we want to put it in the best position possible to realize it's potential. We are preparing to launch a process that is expected to lead to a transaction in the second half of the year.
Now, let me turn to our priorities for 2016. As I've said, we operate in markets that provide us with ample growth opportunities that we're now in a position to take advantage of. Our priorities moving forward are to accelerate growth, drive profitability and to continue to strengthen relationships with all our stakeholders. We remain committed to doing all of this while maintaining a solid capital structure.
The first priority, accelerating organic growth, is based upon reallocating resources and accelerating investment through opportunities in four high growth market segments. Those segments include legal software and solutions, global trade management, global tax and risk solutions. These four growth segments currently represent about 25% of our revenue and grew double digits in 2015. Prioritizing our investments towards these big levers that can move the needle is a critical stepping stone towards achieving our 2017 EPS target and returning the company to a path of long term sustainable growth.
Now, despite these investments, we're forecasting margin expansion in 2016, albeit a little less than otherwise will be the case if we let more flow through to the bottom line. We are confident these investments will drive stronger revenue growth and margin expansion in 2017 as we work to return to mid-single digit growth.
Additionally, while focusing investment behind our biggest opportunities, we're also applying world-class go-to-market capabilities to help fuel growth. Our go-to-market strategy involves deploying a set of shared standards, processes, tools and technology across the company with a goal of further improving retention and sales growth. It's about improving customer satisfaction and employee engagement. There are many ways to deliver results in the short term but you won't do it for long if you don't deliver for all of your stakeholders.
Priority number two is improving profitability and achieving our 2017 EPS target which Stephane will discuss in a moment. We're ramping up our efforts to transform the business under an enterprise model to direct growth, efficiency and profitability. As I said on our Q3 call, I believe we have a solid road ahead of us and a lot of opportunity to continue to accelerate the consolidation of platforms on a fewer, more common, more modern, reliable, robust platforms. So we're right on track at achieving everything we laid out two years ago, and in fact, I think we see increased opportunity going further.
And priority number three, we will continue to execute against the consistent capital strategy by balancing opportunities to reinvest in the business against the value created by returning capital to shareholders. As we focus at the organization on organic growth opportunities and free cash flow growth, we have reduced our reliance on acquisitions over the last couple of years, and evidenced by average annual acquisition spend of less than $100 million, down for more than $1 billion annually in the previous three years. This in turn has enabled us to increase returns of capital to our shareholders while remaining within our leverage target. Moreover, we expect to use the proceeds from any sale of IP&S for general corporate purposes, including investing in the core business, repaying debt, and share buybacks.
Given our strong capital position and our confidence in the cash generating capacity of this company, this morning we announced a dividend increase of $0.02 per share to $1.36 per share, and reflects a dividend yield of 3.8% of current share price. This marks the 23rd consecutive annual increase in our dividends. And as mentioned earlier, we also announced the new $1.5 billion share buyback program having essentially completed our third $1 billion tranche.
The timing for completing this new buyback program will depend upon the timing of the divestiture of our IP & Science business. We intend to maintain our leverage target of 2.5X net debt to EBITDA, and as such we will execute this new buyback program in a way that allows us to remain within that target overtime.
Let me conclude with our 2016 outlook. Our outlook excludes IP & Science, and is reflected at constant currency rates relative to 2015. Stephane will walk you through a reconciliation of our 2015 results, both with and without IP & Science in a moment. And for perspective here, IP & Science contribute about $0.27 to our adjusted EPS in 2015.
In 2016 we're projecting further improvement in both underlying revenue growth and margins. We are targeting low single digit revenue growth which includes an estimated $100 million decrease in recoveries revenues. Excluding recoveries our growth rate is forecasted range between 2% and 3% which will represent another 50 basis points to 150 basis points versus 2015. Our projection for 2016 implies that 300 basis point to 400 basis point turnaround compared to 2013 organic growth rate, and we put out a striking distance of our objective of returning to mid-single digit growth rates.
The EBITDA margin is expected to range between 27.3% and 28.3%. As mentioned earlier, we see an opportunity to accelerate organic growth through focused investments in key areas. As we did in 2015, we will use the savings generated by our transformation program to fund these investments. In the long term, returning the company to mid-single digit revenue growth is the most certain path to sustainable growth in EPS and free cash flow per share. Based on our progress this year and what we see in our key markets, we feel increasingly confident that achieving mid-single digit revenue growth is an objective within our reach and one that warrants investment in 2016.
Underlying operating profit margin is forecasted to range between 18.4% and 19.4%. And lastly, free cash flow is forecasted to range between $1.7 billion and $1.9 billion.
So to conclude, 2015 was a milestone year for us and we return to organic growth, and continued to show strong margin improvement. More importantly, we're encouraged by our continued progress as we look forward to 2016.
With that, I'll turn it over to Stephane to review the details that reinforce our outlook for growth and the continued upward trajectory.
Thank you, Jim, and good morning or good afternoon to you all. Let me start with our usual slide which provides a snapshot of our fourth quarter results and full year results.
We've been cautioning each quarter that currency movements would have a higher than usual impact on the results throughout the year, and that was again the case during the fourth quarter. Therefore, as always, I will talk to revenue growth before currency. So on a constant currency basis our fourth quarter revenues were up 2%. Our financial business was flat to the prior year while our three other businesses grew 4% in aggregate during the quarter, all organic.
Adjusted EBITDA was up 13% in Q4 with an EBITDA margin up 370 basis points. Currency had a 20 basis points favorable impact on the margin during the quarter. Operating profit was up 28% in the fourth quarter and the margin was up 470 basis points, and currency had a 10 basis points negative impact on the operating margin. Now as you may recall, we booked charges in the fourth quarter of 2014 that had a negative impact on both, EBITDA and operating profit margins last year. But even excluding these charges, the margin improvements are meaningful, a 110 basis points at the EBITDA level and 240 basis points at the operating margin level.
Now let me provide you with you some additional color on the performance of our individual businesses, starting with our legal segment. Demand for legal services in the U.S. market as measured by Peer Monitor, was essentially flat in both the fourth quarter and for the whole of 2015. Demand at large law firms is slightly better, up 2% with smaller firms a bit weaker, a pattern replicated on the full year basis. During the fourth quarter, legal grew 2% all organic. As expected, U.S. Print revenues continue to be a drag, declining 6%. Excluding the impact of U.S. Print, revenues rose 3% organically.
Transactional revenues for the quarter, which represent 13% of the total, were up 2% organically driven by strong performances in our legal enterprise solutions businesses. Subscription revenues which accounted for about 72% of the total were up 4%, all organic. The continued strong organic performance of our subscription revenue base during the quarter is a good indicator of the underlying strength of the business.
Turning to our profitability metrics, the EBITDA margin in the fourth quarter was up 260 basis points, while the operating profit margin increased 340 basis points. Currency at 60 basis points and 40 basis points, favorable impact respectively. Margin improvement in the fourth quarter was driven by revenue growth, close management of discretionary cost, and timing of some investment initiatives. For the full year excluding currency, EBITDA margin was down 30 basis points and the operating profit margin was up 50 basis points. Given the challenging revenue mix resulting from the continued decline in the high margin U.S. Print revenue, keeping our margins broadly flat was a good performance by the legal business and very much in line with the expectations we had set at the beginning of the year.
Here is a more detailed look at the revenue performance of the three main sub-segments in our legal business. U.S. Online Legal Information which is 38% of the total was up 2% in the fourth quarter, in line with the performance observed in the third quarter. This marked the fourth consecutive quarter of positive growth for this segment. Higher net sales and improving retention rates were the key contributing factors and we are also happy to confirm that we have successfully retired a Westlaw Classic offering, meaning that all our U.S. clients are now using WestlawNext.
Looking ahead, later this month we will officially launch Practice Point, which will integrate the research capabilities of Westlaw and the knowhow of Practical Law, marking the next step forward in our goal of reimagining legal workflows, giving lawyers the help and not just the why [ph]. We expect this to open up additional revenue streams which will be small at first, but are expected to contribute to the positive momentum that has been achieved in 2015.
U.S. Print revenues were down 6% as I said during the quarter, broadly in line with the trend we foresee continuing in 2016. And finally, the Solutions businesses made up 46% of the revenues in the fourth quarter and revenue growth for this quarter came in at 5%, and for the full year growth was in line with our expectations at 6%.
Turning to 2016, we continue to feel positive about the improving trends in the business. From a phasing perspective, we expect that the first quarter will be the weakest quarter given the 3% organic growth rate we achieved in the first quarter of 2015. But year-on-year growth is expected to improve over the balance of the year.
So in summary, the revenue trends in the legal business are encouraging as you can see on this slide. The graph shows you both the growth trend for the overall business and for legal excluding U.S. Print revenues which now represent about 15% of the total and are in secular decline. Both trends show consistent year-on-year improvements in revenue growth, illustrating the sustained strong performance in the Solutions businesses, the stabilization in return to growth of our U.S. Online business, and the diminishing importance of print revenues.
Our Tax & Accounting business had another strong year. Revenue for the fourth quarter grew 7%, all organic. Recurring revenues which was about 86% of the total grew 8% organically. From a profit standpoint, EBITDA was up 22% in Q4 with the margin up over 600 basis points. And excluding the impact of currency, the margin was up 440 basis points. For the fourth quarter, operating profit was up 28% with the margin up 490 basis points before currency.
As you can see on this next slide, our professional and corporate segments, which represent over two-third of the business maintained the strong performance they recorded in the first three quarters of the year with growth rates of 7% and 14% respectively in the fourth quarter. And for the full year, their growth rates were 10% and 13%.
Knowledge Solutions revenues declined 2% during the quarter, which was partly timing related. For the full year, growth was 1%. And finally Tax & Accounting smaller segment, the government business saw revenues increase 19%. As we have stated before, revenues from the government business are less predictable in nature and will fluctuate quarter-by-quarter. For the full year, these revenues were down 12%.
Now this next slide on your screens shows the trends of our Tax & Accounting business over the past four years. As you can see, total revenues for the business were $1.2 billion in 2012, with 85% of the revenues coming from the United States, and 15% internationally. Fast forward to 2015, revenues now exceed to $1.4 billion with an increased proportion coming from outside the U.S. up to 19%, and this is the result of our focus on global tax opportunities. The benefit of this strategy and our focus on software-based workflow solutions can also be seen in our organic growth rate which was been accelerating, and for 2015 stood at 7%, up from 4% in 2012. We expect to continue to allocate capital to the fastest growing areas of this business, and we continue to feel quite positive about its prospect.
Finally, turning to EBITDA margins, the benefits of operating at scale are becoming more and more apparent. With full year margins of 32.2%, up 180 basis points, one-third of that was due to the benefit of currency. As alluded to you by Jim earlier, we will always prioritize upon the growth over a point of margin and this is especially true for our Tax & Accounting business which is our fastest growing business. Nevertheless, this business would see continued margin improvements going forward, and although it would probably not be to the same extent as what was the case in 2015.
Moving on to IP & Science, revenues were up 3%, all organic for the quarter. This performance was driven both by subscription revenues as we've seen in previous quarters and by transactions as a number of these were completed before year-end.
Turning to profitability metrics, excluding currency the EBITDA margins was down 130 basis points and the operating profit margin was down 110 basis points. For the full year, revenues grew 1%, a gain all organic, as subscription revenue growth was offset by lower transactional volumes. And excluding the impact of currency, the EBITDA margin was down 220 basis points, while the operating profit margin was down 240 basis points.
Now turning our attention to the makeup of IP & Science revenues, you can see that in the fourth quarter, subscription revenues were up 1% compared to the prior year, marking the 10th consecutive quarter of growth. Transaction revenues were up 8% which was the first positive quarter since 2013.
Looking at the full year, subscriptions which make up over three quarters of the business were up 3%. And despite a positive end to the year, transaction revenues were down 4% for the full year. As Jim already mentioned, we are currently exploring a sale of our IP & Science business and as such, this probably marks the last quarter we will discuss their results in detail.
Now turning to our Financial & Risk business, fourth quarter revenues were down 4% on reported basis, with currency once again having a significant impact. Before currency, revenues were flat compared to the prior year. It is important to point out that this flat revenue performance was dampened by a $24 million decrease in the recoveries revenues, negatively impacting revenue growth by about 160 basis points during the quarter. This was expected as some of our partners moved to a direct billing arrangement with our customers.
Also impacted revenues in the fourth quarter was a small decline in transaction revenues, more on that in a moment, and the ongoing commercial pricing adjustments on a remaining legacy foreign exchange products. Excluding recoveries and these pricing adjustments, F&R's revenue would have increased by more than 2% for the second consecutive quarter. As a reminder, the foreign exchange commercial pricing adjustments are expected to be completed in the first half of 2016.
For the full year, revenues declined 6% but were flat before the impact of currency, representing our best organic performance since 2011.
Turning to the fourth quarter profitability metrics, EBITDA was up 26% and reported EBITDA margin for the quarter was up 710 basis points. Excluding the negative 50 basis points impact of currency and also backing out the impact of the charges taken in Q4 last year of $70 million, the margin was up 320 basis points to 30% which as you know was a key milestone for us. For the full year, excluding the negative 80 basis points impact of currency and prior year charges of $130 million, the EBITDA margins increased by 220 basis points.
The drive to improve retention and for further simplification continues, end of life notices have been sent out for dealing and matching products as we migrate customers to a new foreign exchange flagship product, Thompson Reuters FXT. End of life notices are also being sent to various legacy asset management products as migration continue to the Eikon Research and Advisory Desktop. Furthermore, with a return to positive revenue growth expected in 2016, we are also able to increase investments behind key strategic initiatives such as risk or commodities, in order to ensure that our financial and risk business is well placed to capitalize on market opportunities and that it contributes towards our mid-term goal of achieving mid-single digit revenue growth.
As such, you should expect to see us powerfully balance our goal for continuing margin improvement in our financial business with a need to make investments in what we see as promising growth areas, as well as investments necessary to meet new regulatory requirements such as MiFID II.
Looking at the Financial & Risk revenues in a bit more detail, you can see that recurring revenues which were 77% of the total in Q4 were up 2%, which can be attributed to the annual price increase and to the positive net sales throughout the year. This is encouraging as this is the portion of F&R's revenue base that is impacted by the pricing adjustments taking place in our legacy foreign exchange desktops. The majority of these pricing adjustments have now be made, meaning that the impact on growth will be smaller in 2016 once we get through the first half of the year.
Turning to recoveries, these past-through revenues made up about 9% of the total and were down 14% in the fourth quarter which marked an acceleration in the rate of decline as we have predicted during our third quarter call. And transaction revenues were down 1% in Q4, and they were up 1% for the full year. Volumes in the fourth quarter was some of the lowest we have seen in the last decade as large banks, in particular, are committing less capital than before to training activities. Given the transactions are highly profitable, F&R's margin achievement is all the more impressive, it was partially assisted by strong one-time deals, particularly, in our risk business which traditionally tend to be the highest in the fourth quarter.
Now having spoken about the reduction in recovery revenues, I wanted to provide some additional color around what we expect. As a reminder, recoveries represent low margin revenues for content or services provided by third parties and distribute it to our platform. As you can see from the chart, we expect 2013 to show a significant decrease in recoveries lowering them as a percentage of total F&R revenue from 10% to about 8%, an estimated reduction of about $100 million. This will impact our reported revenue growth in 2016 by about 100 basis points at a TR consolidated level, and by about 150 basis points at the financial and risk level.
From an economic perspective, we are not concerned about these changes in billing arrangement since they have no impact on EBITDA or free cash flow but they do impact our reported revenue growth negatively. And at this time, I would say that we do not expect this decline to be that material beyond 2016, and we currently believe that the rate of the client will be noticeably smaller as we enter 2017.
And finally for Financial & Risk, here is an interesting view of the evolution of revenues by type and region since 2009. Starting with revenues by type; desktop revenues have declined from about 55% of F&R's revenue base in 2009 to about 40% today. And whereas the -- where our driving revenues seven years ago, they were essentially flat last year. So financial business has become less dependent on desktop revenues over the last few years and we expect the growth rate for desktop revenues to continue to improve once we have completed the remaining pricing adjustments for legacy foreign exchange desktops.
The chart also illustrates the increasing proportion of our revenues that are attributable to feeds and risk, 36% of our revenue base in 2015, up from 25% in 2009. These higher gross areas are becoming an increasingly important component of our F&R revenue base, with feeds growing 8% and risk revenue growing 12% during the fourth quarter. Finally in terms of regional mix, there has been relatively little change since 2009.
Now let me update you on our capital position, free cash flow and earnings per share performance. Starting with our free cash flow performance for the full year, and working from the bottom to the top of the slide; free cash flow for 2015 was $1.8 billion, compared to $1.4 billion in the prior year which represents a 25% improvement. About $50 million of the improvement was timing related. Now the prior period including $306 million of cash payments related to those simplification programs as compared to only $71 million incurred in 2015.
So free cash flow excluding the impact of simplification related cash charges was about $1.9 billion which was $121 million higher than the prior year period, representing a 7% increase. This increase can be largely attributed to improved profitability, lower cash taxes, and to stronger than expected cash collections in the fourth quarter.
Lastly, our $1.8 billion free cash flow performance translated into a free cash flow per share of $2.30 which as Jim mentioned represented the highest free cash flow per share performance in our recent history. And as you know, consistent improvement in free cash flow per share is a key performance metric for us and also one which directly drives our long term incentive plans.
In 2015, we continued to deliver on a commitment to return capital to our shareholders. Over the past three years, we have returned $6 billion in the form of dividends and share buybacks. This is very consistent with the strategy that we laid out in October 2013, to focus on driving growth organically and on driving scale which has led us to a reduced acquisition activity. This focus on organic growth and scale coupled with our expected sale of our IP & Science business, has put us in a position to announce today a fourth buyback program, this time for up to $1.5 billion.
As Jim mentioned at the start of this call, the increase in the size of this next installment of our buyback program is directly related to the proposed divestiture of our IP & Science business. And as such, the exact timing for completing this program will depend on the timing of divestiture. And by the way, our focus on driving growth organically rather than through acquisitions, and on driving scale has also led to a noticeable improvement in our return on invested capital metrics which was up 90 basis point in 2015 to 6.7%.
Now turning to our earnings per share performance, fourth quarter adjusted EPS was $0.65 per share, $0.22 higher than the year ago. The increase was driven by a stronger underlying operating profit performance, lower charges, a lower tax rate and lower share count. All these factors are set by a negative $0.05 impact relating to currency.
Let me also point out that our fourth quarter EPS, included about $20 million of severance costs. As we have done in the past, we do not exclude these charges from our adjusted earnings as we consider them to be part of the way we need to run the business. For the full year, adjusted EPS was $2.13 per share, $0.28 higher than a year ago, with the increase almost wholly attributable to the factors mentioned above. For the full year, foreign currency had a $0.21 negative impact on earnings per share.
Now the slide you are now looking at walks us from the adjusted EPS of $1.85 in 2014 through our adjusted EPS of $2.13 in 2015 which as Jim indicated earlier, represents a record adjusted EPS for us. The key step in the walk that I would like to draw your attention to is the $0.34 increase that is attributable to the improving underlying performance of the business, and to a lesser extent, to share buybacks and lower tax and interest.
I would now like to spend some time discussing two factors illustrated on this slide that will impact our $2.80 EPS target for 2017. The first of these two factors is currency. As you can see on this slide, currency had a negative $0.21 impact on 2015 EPS. If you combine that with a currency impact we reported in 2014 of $0.02, the total impact is about $0.23 compared to when we set our original target of $2.80 in March 2014. Any additional strengthening of the U.S. dollar will exacerbate this.
As we did last year, we had posted an updated view of our currency footprint on our website. Our major exposures continue to be a long bureau [ph] position and a short stirring position. Overall and based on currency movements so far, we hope that impact from currency movements in 2016 and 2017 will not be as prolonged as last year. Obviously, we can't predict the impact of currency going forward, so we will continue to be transparent about this impact as we report our results going forward.
Now the second factor that may impact our EPS target is obviously the removal of our IP & Science business from the numbers. As Jim mentioned earlier, IP & Science contributed about $0.27 to EPS in 2015. Of course, this number represents the gross reduction to earnings and it does not take into consideration any offsetting positive impacts coming from the proceeds we expect to get from this disposal.
We would eventually expect to be able to offset a portion but not all of the dilution to lower interest expense and lower share count. We are not yet in the position to update our 2017 target given the fact that there are still several significant unknowns including the sale price for IP & Science, the net after-tax proceeds, the exact timing of the disposal and how precisely we allocate these proceeds. I can say however, that at this time, we would expect little impact from these offsetting factors in 2016 due to the projected timing of the transaction. We should have more clarity on all these questions later in the year at which time we will of course share the information with you.
Now turning to our debt profile, we closed the year with a total debt position of $8.8 billion, which consisted of $7.8 billion of term debt and $1 billion of commercial paper. As you can see on this slide, our debt portfolio continues to be well balanced with an average maturity of eight years, and an average interest rate below 5%. Finally, our net debt position was $7.9 billion at year-end, with a net debt to EBITDA ratio of 2.3X which is within our 2.5X target. Unless we have stated previously, maintaining a strong and stable capital structure remains a key tenant of our overall capital strategy.
Let me now turn to our guidance for 2016. As Jim mentioned a few moments ago, our 2016 guidance excludes the results of our IP & Science business, as these results will be reported as discontinued operations until the business is solved. This slide summarizes the impact of removing IP & Sciences' contribution from our 2015 results. As you can see, we intent to retain a small portion of the business representing about $50 million in revenues and consisting primarily of patent related information sold through the Westlaw platform. That small revenue base will be reported under our legal segment going forward.
As you can also see, the divestiture of our IP & Science business is projected to have virtually no impact on our growth rate. The net impact on our margins is projected to be about 50 basis points at the EBITDA level and 70 basis points at the operating income level. The dilutive impact on margins is due to two factors; first, IP & Sciences' margins are slightly higher than the rest of TR.
And second, we also expect to retain about $40 million of cost at the EBITDA level as a result of the divestiture. These are central costs that are currently allocated to the business which cannot be easily transferred with the business, for instance, data center buildings or central corporate functions. We will of course do our best to eliminate as much as possible of this stranded cost, but the numbers you see on this slide represent our current best estimates of what we will not be able to eliminate. As such, these numbers may change in the coming months to the extent that we are successful in reducing stranded costs.
As I just mentioned, the EPS contribution of the business last year was about $0.27. And one final note about free cash flow, consistent with past practice, we would not adjust our free cash flow performance to reflect the loss of IP & Sciences' contribution to free cash flow. So there free cash flow contribution will continue to be reflected in our consolidated free cash flow number until the day we sell the business.
Now since the majority of IP & Sciences free cash flow appears in the first half of the year and since we do not expect to sell the business until the second half of the year, we expect that the impact of the divestiture on our free cash flow performance will be relatively small in 2016, with most of the impact occurring in 2017.
Now Jim has already presented our key metrics for our 2016 outlook, so I will speak to those he didn't address. Capital expenditures are expected to remain at approximately 8% of revenue, similar to 2015. Interest expense is expected to range between $420 million and $460 million and this is somewhat dependent on the timing of the sale of our IP & Science business. And we forecast that our effective tax rate will range between 10% and 13% in 2016, in line with the 11.3% rate we experienced in '15.
I would like to take this opportunity to remind you that we historically pay more in cash taxes than our effective tax rate may imply.
With that, let me turn it back over to Jim for a brief conclusion before opening up the call for your questions.
Thank you, Stephane. I'd like to conclude by saying that we're pleased with the progress we achieved on multiple fronts in 2015. And we're especially pleased with the strong finish we had last year, particularly, positive net sales performance in Financial & Risk, the steady improvement in legal’s growth rate, the continued strong performance of our tax business and last but not least, our stronger than expected free cash flow performance.
As you can see on this slide, the company has achieved steady and tangible improvements, both in terms of organic growth and margins. We enter 2016 with good momentum, while we will continue to be impacted by macroeconomic developments; the markets in which we operate continue to present us with opportunities. As we look at 2016, we are squarely focused on three key financial objectives; first, lay the ground work required to achieve our 2017 EPS goal. Second; continue to drive improvements in our free cash flow per share as we did in 2015. And third but not least, build upon the recent improvement in our organic growth performance by making judicious investments for our highest growth markets.
As we have done in the past, we fully intend to self-fund these investments through the savings generated by our transformation program. And as you've seen us do in the past, we expect to fund these organic investments, while at the same time, further improving margins. As you can tell from our guidance, the projected improvement in margins will be somewhat mitigated by the organic investments we'll make in the business. Given our success in improving our organic growth, we are now more confident than ever in our ability to gradually bring our business to mid-single digit growth, provided we make the necessary but self-funded investments in our most attractive markets.
In the long term, we believe further improvements in our organic revenue growth is the best way to maximize the growth and free cash flow per share. As you have seen us do for the past four years, we will continue to pursue this objective in a fiscally disciplined and responsible manner, while at the same time, returning attractive levels of capital to our shareholders. Our strategy is clear and it has not changed since we announced it in fall of 2013. Our 2015 results clearly show that strategy is starting to bear fruit.
With that, let me turn it back over to Frank.
Thanks very much, Jim and Stephane and that conclude our formal remarks. And now we would like to open the call for questions. So operator, if we could have the first question please.
[Operator Instructions]. And our first question comes from Tim Casey with BMO. Please go ahead.
Thanks. Question for Stephane, could you talk a little bit about the progression of growth you're expecting through the quarters this year, particularly in light of some of the macro trends you talked about. But also in terms of price increases which had been offset by some adjustments you had to make last year, just curious of how those will float through to 2016?
Yes, Tim, good morning and thanks for the question. Just to remind where we start from, we achieved organic growth of about 1.5% this year and our guidance for next year is for growth of 2% to 3% excluding recovery, so that would be a 50 basis point to 150 basis point step-up on the growth performance we achieved this year. Now as you look at the progression of growth over the course of the year, there is a couple factors to keep in mind, one is exactly what you mentioned Tim which is these commercial adjustments as we continue to make as we are migrating our legacy Foreign Exchange Desktops to our new platform. The bulk of that impact is behind us, I'm glad to report, but it still got to have an impact through the first half of this year. So we expect to be largely complete with these commercial adjustments by the middle of this year and so that's one reason why you should expect to see growth to increase, probably bit more dramatically in the second half than in the first half.
The second factor is the recoveries that I mentioned earlier, and I mentioned this was about $100 million for the full year and again, this has no economic impact, no impact on EBITDA or free cash flow, but it will have an impact on our reported revenue growth. And that $100 million impact based on what we think is going to be weighted more heavily in the first half, only two-third of that will happen in the first half, one-third happening in the second half. And the final point I would note is what I mentioned for our legal business, I think we are facing a really tough year-on-year comparison in the first quarter, so Q1 would probably be the trough a drop in terms of their growth performance this year and we should see an improvement from there. So all these factors combine to essentially explain why we would expect the growth acceleration to be more noticeable in the second part of the year not in the first part of the year.
Our next question comes from the line of Vince Valentini with TD Securities. Your line is open.
Yes, thanks very much. Hopefully a quick clarification and then a question, the $20 million of severance Stephane, is that mostly in the corporate line or has someone allocated to one of the segments?
Yes, that is the corporate line; they are related to the simplification program. I mean to be very specific; this is related to the consolidation of our technology organization under one umbrella. And we did consolidate a technology operation we took the opportunity to streamline little bit the ranks of the technology organization and we took about 20 or somewhere between 20 million and 25 million and that was all taken at the corporate line level.
Okay, thanks. And question is done, similar to Tim's question, little bit different. Price increases at F&R, can you give us some context on what you've been able to put through in January of this year exclusive of those commercial adjustments. I mean we're starting to lap a couple of years here over the first icon installations mostly on the sell side, are you starting to see a better price contraction.
Yes, thank you, Vincent sorry, for not answering the question fully in my prior answer. Yes, you now the model of our Financial & Risk business essentially its heaviest subscription based and we have price increases that are pushed through at the beginning of every year, and I would say this year, we've seen the same price increases that we see in prior year. So it's usually in line with inflation and it's something that happens automatically that we don't really have to negotiate on a case by case basis with every of our customers.
And we have a question from the line of Toni Kaplan with Morgan Stanley.
Good morning. This is actually Patrick Hoffmann [ph] in for Toni. I appreciate the color on F&R trends during your prepared remarks, but wanted to dive in a little bit deeper there. I've heard a lot about banks tailor-managing expenses, some are exiting full business lines. So kind of first thing, net sales are obviously negative and EMEA this quarter. And I was wondering first, if they turned more negative in the fourth quarter than they were in the third? And then second, if you're beginning to see signs of weakness in the United States as well? Thanks.
No, it's a great question; I'm glad you asked it and let me clarify. When we look at our fourth quarter, we were positive in the Americas and we were positive in Asia and we were just barely negative in Europe and it was actually an improved performance. So year-on-year improved performance from the prior year, so it wasn't the kind of impact and as you know, for the last several quarters, as we floated right around that positive line, one or two contracts can move you above or below the line, particularly in Europe. But we did see actually an improved performance in Europe, not a declining performance in Europe in the fourth quarter.
And then, just as a follow on there, are you beginning to see any signs of weakness in the United States? You just mentioned that markets are really choppy and things in Europe seem pretty weak, are you starting to see any signs that's kind of moving across the Atlantic?
No, I think the markets are unsettled everywhere, and I think there's a great deal of talk but the month of January is a very light month for us and frankly it's not a month in which we would see something reflected in our numbers or trends, so it's too early to see anything like that. I just would take the point of saying that when you think about -- and I know this may be a bit counterintuitive, but when you see the volatility in these markets, and when you think about our position, certainly uncertainty causes hesitancy to take action, and CEOs, and people who run major divisions may hesitate to act.
But if you think about where we've made our investments over the last several years, they've been in areas that help our banks be more efficient, where they help them to take out costs and where they help them to deal with regulatory complexity. And all of this activity actually makes that value proposition even stronger. So we haven't seen that, we've seen in fact increased discussions with our customers about more things we might be able to do for them.
And Patrick, what I would add to that is refer --you to the slide we discussed during the formal remarks showing that the dependence of our financial business on desktop revenues has decreased quite dramatically over the last 6-7 years, from about 55% to 40% of the revenue base, it's still significant but it's certainly not the majority anymore.
Great. Thanks, guys.
Our next question comes from Paul Steep with Scotia Capital.
Thanks. First one is a clarification for Stephane, can you talk on U.S. legal, print, the decline rates been about 100 basis points, is there any reason to think about an acceleration or change in those trends? And my bigger question would be for Jim, could you just recap for F&R, the major remaining platform initiatives that have to go along with the milestones or the timing over in the next two years? Thanks.
So Paul, let me quickly address your first question. So U.S. Print revenues are declined by 6% to 7% a year so as you point they are becoming increasingly less important, an impactful part of the business and we expect that trend to continue in 2016. So, probably again 6% to 7% decline.
Sure. And Paul if you look at the remaining large platform migrations that are likely to impact the numbers, they are two big ones really, and the first is the completion of the modern foreign exchange platform. We will, as Stephane mentioned, we will likely be through the majority of that economic impact in the first half of this year, the rollout of the new tools will continue for some time as customers are ready and as we were -- and as we work on the implementation schedules there but the economic impact on the numbers will likely be completed in the first half of this year. And then we'll probably go through the first quarter of 2017 with the other one which is the conversion of all of our by side functionality from the old Thomson One products onto the new integrated platform. That will continue throughout this year and move into the first part of 2017.
Our next question comes from Sara Gubins of Bank of America Merrill Lynch.
Hi, thanks. Question about margins next year, but first with net context, it looks like there were some segment cost that shifted to corporate and I know that you're consolidating quite a bit of the corporate level. Could you help us think about what might have shifted out of the segments into corporate? And then after that could you help us think about Legal and F&R margin expectations in 2016?
Sure. I don't think there was any major shift from the businesses to corporate. What we did as we mentioned earlier, we took the severance cost associated with the consolidation of our technology operations at corporate. For the rest there was really no other movement in terms of -- from the segment to corporate or vice versa.
And in terms -- I mean there were other factors that impacted the corporate line in Q4, that maybe what you are referring to. We have some higher healthcare cost and other miscellaneous bunch of items but these are typically taken at the corporate level, so there was no shift there. In terms of the evolution of margin for next year, I would refer you to the answer to the question from Tim earlier that I gave with regard to revenue progression and obviously, the margin trend will, to a certain extent, fuddle [ph] the revenue trend. So probably a more pronounced improvement in the second half than in the first half.
The other point to note is that, as Jim noted during his remarks, we will make some very surgical investments in the few key areas which we see as good growth opportunity for us and we'll probably do these investments earlier in the year in order to try to read the benefit on the topline as quickly as possible. So these two factors combined would probably lead you to saying that the margin improvement would be more pronounced in the second part of the year than in the first part of the year.
Okay. And do you think we should expect legal margins to increase when we look at it on an annual basis in '16 versus '15?
No, I mean legally still facing that change in revenue mix right which is pretty dramatic when your most profitable business is declining 67%, it certainly has an impact. So that's really what's still the -- what I say the headwind that they are facing, and so I think that our goal for the legal business is to see a gradual improvement in top line with relatively flat margin and this is what's going to drive improvement in free cash flow or EBITDA.
Right, thanks very much.
And we have a question from the line of Drew McReynolds with RBC Capital Markets.
Just on -- for you Stephane, on the cash tax rate for 2016, can you give us just a little guidance there? And then just a follow up within desktop and F&R, maybe for you Jim, can you comment on the market share battle in desktop, we're obviously hearing a lot of noise out there among the major vendors and who is looking at replacing who. So just -- can you comment on whether that competitive dynamic has changed tangibly over the last one or two quarters? Thanks.
Good morning, Drew, and thanks for the question. So our guidance for effective tax rate, booked tax rate is 10% to 13%. For cash taxes, we would that actually cash taxes will go up a little bit next year, and cash taxes are higher our booked provision as you know for the reasons we explained multiple times on prior calls.
And Drew, from a competitive position, I would say our competitive position continues to improve. And if I look as per the last records, I think consistently over the last three years we've been stronger quarter after quarter. And as I look at, kind of our head to head competitive battles, I think we are in a position where we are winning our fair share of those contest and I think there is opportunity for us to continue to improve in terms of share. So do I see a dramatic change in the competitive dynamic in the last few quarters, no, but I do see a steady strengthening of our position over the last few years.
Okay, thank you.
And our next question comes from Manav Patnaik with Barclays.
Hi, this is actually Greg calling on for Manav. If I look at the low single digit growth that you're talking about with the $100 million in recoveries it sounds like that's about 1% drag. Just wondering on the transaction side of the business, what you're expecting to get to that target?
Greg, thanks for the question. Transaction has been a difficult area for us, especially in the financial business and we've pointed out on numerous calls. I think that last year in particular, the growth in transaction revenues was pretty anemic, it was minus one in Q4 and plus one for the full year. What we're hoping to see is -- what we're hoping frankly is that sets the stage for what should be hopefully an easier comparison year-on-year. So hopefully slightly better growth rate or transitions but we don't know, we'll have to find that out, we're certainly not banking on double-digit growth rate in transactions at this point in time but hopefully it would be better than last year.
Okay. And I guess for Jim, you highlighted the organic investments, that's a reason for slightly lower margin expansion. Just given the amount of M&A we've seen in the Centex [ph] base, maybe you can just touch on that that build versus buy decision that you're making.
We do -- look, we do that all the time. We look at build versus buy all the time and as you know our historic reflex had been to buy. And I think we ask the same questions when we see an opportunity today that we always ask, what can we build? With whom should we partner to deliver the solution or who do we need to buy? I think historically, the old Thomson culture would have asked the same three questions but in the reverse order. So today we're looking to build more and we're looking to partner more and we see opportunities there. Frankly, we see opportunities to partner with, and build opportunities with same Centex startup. We're involved with Centex startups literally from Europe to Africa and increasingly with formalized networks, whether they be in the Toronto-Waterloo quarter, whether they be with MIT or Imperial College of London.
We're increasingly active in that space, but frankly, this focus on organic growth is beginning to bear fruit for us. So we're looking first to see what we can build, we're looking to see with whom we can partner. And then there will always be an acquisition or two that will strengthen us. But that's not our main focus at this point in time.
Next question comes from Ato Garrett with Deutsche Bank.
Hi, good morning. One question, online legal information, you mentioned some positive trends there and you said that demand overall within -- according to Peer Monitor [ph] was pretty flat within the U.S. So what you think is driving -- can you explain what's driving that improvement for online legal? And just a quick follow-up on your end market exposures, you mentioned your premium commodities energy were very -- pretty weak, can you just update us on what you're exposures might be and maybe if there is any concentration by any of your business lines there. Thanks.
Sure, Ato. Let me take the first part of that question and then give the remaining part to Stephane, if he has those numbers on-hand because I certainly don't. Now looking on my legal business, I think it's quite interesting, it's a reflection of the underlying quality, particularly of our core Westlaw product and what we've seen in increasing and improving retention from that product. And we've gone through a period of pretty intense price competition in that space and we've held the line on our premium pricing and frankly quality has won out, and in fact some customers we've lost have come back. So quality is winning with our core Westlaw platform but we've also seen it improve by adding features and functionalities from our practical law acquisition onto the platform and combining products and strengthening our offerings.
And I think you see that we have really high hopes for this coming year and as Stephane mentioned in addition to this, we have this practice point product that's coming out this year which is a real blending of both Westlaw and practical law and is getting early solid response from both our customers and just with the salesforces last week, I'm very excited about the ability to go out and sell this product. So I think there is -- it's a combination of both our innovation in the space and quality winning out, and frankly, improve sales execution in customer service.
And Ato, I unfortunately don't have the number you're looking for at the pick of my hand but we will definitely come back to you separately for that on your question. I'll ask Frank and Ben to get back to you with a specific answer to your question.
And we have a question from the line of Aravinda Galappatthige with Canaccord Genuity.
Good morning, thanks for taking my question. Stephane with respect to the FX, the negative FX impact on legal and T&A, it's bit more than expected, I mean, it seems like it was 3% on revenue for legal and about 4% for T&A, almost as high as what we've seen in F&R. Given that those two segments have less international exposure, not predominant in North America and predominantly U.S. I was just wondering if you can reconcile why the FX impact was almost as high as what we saw in F&R?
I don't see the impact was as high as that on these segments, bear with me for one second if you don't mind. I'm sorry, you're right, it was like minus 3% for legal and minus 4% for tax and accounting. I think that's really a reflection of the target these business have become more global and in particular, I think what may have had a bigger impact in Q4 was the devaluation we saw in Latin America and that was quite pronounced, it was double digit numbers in percentages and that's why I think it was a bit higher in Q4. Let us double check that and get back to you but I got them in driver for the higher than expected percentages as you see in legal and tax and accounting.
Great, thanks for that Stephane. And just a quick one to follow-up with respect to FX impact, historically you've given the ex-FX EBITDA growth for the company but in this case obviously it's high because of the restructuring impact. Are you able to give us excess ex-restructuring EBITDA growth in Q4?
Yes, we certainly can give you that. What I gave you I think during the call was what the underlying EBITDA margin improvement was ex-currency and ex-charges, reason try to give you an underlying perspective of what the -- that the improvement was in margin. But the exact EBITDA growth, let me see if I can give it to you right now. So the foreign exchange impact in the fourth quarter, it was pretty minimal, on both margins. I think it was a positive impact of 20 bips on EBITDA in the fourth quarter and a negative impact of 10 basis points on operating margin, so it was pretty benign in Q4 in terms of margin impact.
Okay, great. And lastly, I was just -- I was wondering if you can just update on these, sort of the hedges you have in place, obviously below the EBITDA line you have some protection against FX. I was just wondering if you can just talk to that. Thanks.
Yes, we continue to have like a hedging program which is looking at our exposure 12 months ahead. The benefit of these hedges essentially flew through free cash flow in 2015 and not through our P&L. As these hedge were lost and we put new hedges on, obviously they are being put at the new exchange rates so their spread is not going to be as bigger than benefiting like other free cash flow in 2016 as what you saw in 2015. But the hedge probe I mean is still very much in place.
Thank you. I'll go offline.
Operator, we would like to take one final question please.
Our last question comes from the line of Claudio Aspesi with Bernstein. Please go ahead.
Yes, good morning. A quick question on your legal solution business, can you help us how much of the growth is volume and how much is pricing? And more broadly, if you step back, how much more growth can this business accomplish on the volume basis? I assume you're also able to raise the prices over the years but can we expect growth rates like this going forward or at some point you start to run against the duration and competitive issues?
Yes, Claudio, it's Stephane. Thank you for your question and good morning. I will say the majority of the growth comes from volume more than price at this point in time. And this is really not one business, it's a series of businesses; it includes businesses like Fine Law, that serve all small law firms or Elite, that serves our larger law firm or [indiscernible] that will serve primarily corporate counsels. And I would say at any point in time, there is always going to be one of these businesses that doesn't perform at the same level as what we would call. So two years ago, our business in Latin America probably were a little bit underperforming but the solution businesses in hold deliver like 5% organic growth last year. I would say probably a fine law business didn't deliver as much as we would hope but yet in aggregate the businesses did over 6% organic growth rate.
So going forward, I would expect a bit more of the same. There is always going to be one part of the business that may not run perfectly but the strength of the business and the market potential that we still see, we believe it should enable us to, in aggregate, continue to deliver the kind of growth rate we've delivered over the last couple of years. And as Jim mentioned in his remarks, right, these are exactly the businesses behind which we're putting investments.
Alright, thank you.
Okay. That will be our final question and that concludes our call. And we would like to thank you very much for joining us for the fourth quarter call. And we'll speak to you again in April on the Q1 results.
Ladies and gentlemen, this conference will be available for replay after 10:30 AM today, through February 18 at midnight. You may access the AT&T replay system at any time by dialing 1-800-475-6701 and entering the access code 383464. International participants can dial 320-365-3844. Those numbers, again, are 1-800-475-6701 and 320-365-3844, utilizing the access code 383464.
That does conclude our conference today. We'd like to thank you for your participation and for using AT&T Teleconference. You may now disconnect. Thank you.
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