Thomson Reuters' (TRI) CEO Jim Smith on Q2 2016 Results - Earnings Call Transcript

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Thomson Reuters Corporation (NYSE:TRI)

Q2 2016 Results Earnings Conference Call

July 28, 2016, 08:30 AM ET

Executives

Frank Golden - SVP, IR

Jim Smith - President & CEO

Stephane Bello - EVP & CFO

Analysts

Paul Steep - Scotia Capital

David Chu - Bank of America Merrill Lynch

Vince Valentini - TD Securities

Michael Cho - JPMorgan

Aravinda Galappatthige - Canaccord Genuity

Andre Benjamin - Goldman Sachs

Drew McReynolds - RBC Capital Markets

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Thomson Reuters Second Quarter Earnings Conference. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, instructions will be given at that time. [Operator Instructions] As a reminder today's call is being recorded. A replay information will be given out at the conclusion of the conference.

Hosting today's call we have Senior Vice President, Investor Relations Frank Golden. Please go ahead, sir.

Frank Golden

Thank you very much. Good morning and thanks for joining us as we report our financial results for the second quarter of the year. Our CEO Jim Smith will start today's discussion followed by Stephane Bello, our CFO.

Following their presentations we will open the call for questions. We would appreciate it if you would limit yourself to one question each in order to enable us to get to as many questions as possible.

Several items to point out before we get started this morning. First, a reminder that throughout 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.

Second, reminder that we entered into a definitive agreement to sell our IP & Science business. So its results are classified as discontinued operations and are not in either our reported results nor in our 2016 guidance, with one exception and that one exception is free cash flow, which is in both our reported results and our 2016 guidance and that has been our historic practice.

One additional item, this presentation also contains disclosures of certain non-IFRS financial measures. As you may be aware the SEC recently issued guidance regarding IFRS and GAAP measures including a review of the calculation of the measures themselves.

Now based on this guidance we've reviewed the presentation of our non-IFRS measures and you'll notice in today's release that we've made several changes in its format and provide a more balanced explanation of our IFRS measures.

As part of this process we also reviewed the adjustments we've traditionally and consistently made to our adjusted earnings and adjusted EPS calculations. I want to draw your attention to a prospective change in the way we adjust for two tax-related items that we will be making beginning when we report the third quarter in October. We have not made any changes to our second quarter results.

In aggregate these changes result in an $0.08 decrease in adjusted EPS for 2015 compared to our current calculations. Importantly, these changes have no impact on our previously reported revenue, adjusted EBITDA, underlying profit and free cash flow performance, nor on our 2016 guidance for those measures and that also includes the tax rate guidance that we've provided for 2016.

Now in connection with today's earnings release we have posted on our IR website a reconciliation of our adjusted EPS performance for the past three years, reflecting the difference between the current and the new definitions.

Finally, let me remind you that 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.

Now to the results for the quarter. And I'll turn it over to Jim Smith. Jim?

Jim Smith

Thank you, Frank. And thanks to those of you on the call for joining us. The turbulent market conditions I noted in the first quarter gave way to a cautious and uncertain world leading up to the Brexit vote in June. Against this challenging backdrop for many of our largest customers, especially the big European banks, our own results for the quarter were slightly below the expectations we had at the beginning of the year.

However, we routinely remind you not to read too much into any individual quarter. This reporting period is a case in point. And despite being slightly under our expectations we have seen nothing to change our conviction about our long-term prospects nor to alter our full-year outlook.

In fact, several unrelated items had a disproportionate impact on the quarter's results. First, the expected decline in recoveries revenues and commercial pricing adjustments in our Financial business were compounded by macroeconomic headwinds hitting large European banks and several emerging markets.

Second, Legal saw a slowdown in transaction-related revenues and faced a very difficult prior year comparison which saw transaction revenues increase by 10%. And third, our Tax & Accounting business was impacted disproportionately in the quarter by some growing pains in its more volatile government segment. Despite these developments, our core business showed continued resilience and the headline numbers mask some encouraging progress in the quarter.

For example, in our Financial & Risk business net sales were positive for the ninth consecutive quarter. Our risk offerings had their strongest sales quarter ever and risk revenues grew by 9% and our fees business grew 6%.

Tax & Accounting's growth, excluding government, was 4%. In our Legal business subscription revenues, which make up about 75% of the total revenue, also grew 4%. Furthermore, we saw improved gross sales performance across the business in the quarter and we expect to see a stronger second half in terms of revenue performance from our financial unit.

I've said before that we are ideally positioned to take advantage of global trends disrupting the industries we serve and that's precisely what we're focused on. That means we'll continue executing and focusing on everything under our control.

Now to the results for the quarter. Reported revenues were down 1% as currency had a 100 basis point negative impact. Our adjusted EBITDA margin decreased 20 basis points, while underlying operating profit margin remained unchanged versus the prior-year period. And finally, adjusted EPS increased 11% to $0.50 per share, that's $0.05 better than the prior-year period.

Now just some highlights for each of our businesses. Legal revenues grew 1%, a bit below our expectations due to weaker transaction and print revenues which declined 4% and 8% respectively, excluding print, revenues grew 3%.

Tax & Accounting was impacted by challenges in the Government business resulting in revenue growth of 1%. If you exclude some charges taken in the Government business this quarter, revenues grew 4%. Our Q2 results are certainly not reflective of the performance we expect from Tax & Accounting over the balance of the year.

We continue to expect revenue growth to pick up from the Q2 pace and to be back in mid to high single digit range for the second half of the year. Revenues for the Financial business decreased 1% for the quarter due to a 17% decline in recoveries revenues, as well as ongoing commercial pricing adjustments, both of which are expected to largely be complete later this year.

While these factors will still have some impact during the second half of the year, that impact should be more modest than what we saw in the first half as we've previously predicted. Therefore, barring any surprises related to transaction revenues, we expect Financial to report positive revenue growth in the second half.

Now the uncertainty following Brexit will likely create some short term headwinds as customers reassess priorities. But there is little doubt that the cost pressures on big banks are likely to let up anytime soon - are unlikely to let up anytime soon, that in and of itself is not a bad thing for us over the long-term.

We've built a scalable global platform with operations on the ground in all major European money centers. We believe we cover regulatory changes better than anyone in the world.

So regardless of how things shake out, we are well-positioned to support our customers wherever they need us. In fact, we are one of the few companies that finds opportunity in a more complicated regulatory environment.

Furthermore, a key tenet of our value proposition has been our ability to help customers lower their overall costs. We've already seen some significant wins through taking on tasks that used to be performed inside banks.

We recently launched a major partnership with leading South African banks to build and operate a KYC utility to support their compliance requirements in the region and globally.

Lastly, despite difficult macroeconomic conditions in several emerging markets, our GGO revenues grew 2% and were up 5% excluding recoveries and pricing adjustments.

Now before I turn it over to Stephane let me speak for a moment about the sale of our IP & Science business that we announced two weeks ago. This divestiture marks an important step in sharpening our focus on the intersection of global commerce and regulation.

As I said at the outset, IP & Science is a terrific business and I'm confident it will continue to thrive into the future under new ownership with a clear focus on the markets it serves.

We're pleased with the outcome of this transaction given the volatile external environment in which it was run. And we were very pleased, both with the evaluation we achieved and with the buyers who we believe will be very good owners for the business. We expect this transaction to close later this year.

I'd like to offer a special note of thanks to our IP & Science colleagues who have gone above and beyond the past several months to drive impressive results in the face of the uncertainty the sale can bring.

Now let me turn it over to Stephane.

Stephane Bello

Thank you, Jim, and good morning or good afternoon to all of you. As I did on the first quarter call, I would like to cover a few housekeeping items before discussing the results for our second quarter.

First, as Frank mentioned, when discussing our performance against the prior year, I will be comparing year-on-year results excluding IP & Science which is classified as discontinued operations. This will also hold for all metrics except free cash flow which includes IP & Science and is not restated in line with the way we have always treated divestitures in the past.

Second, currency had a much smaller impact on our results than last year. However, as always I will talk to revenue growth before currency.

And finally, given our focus on driving organic revenue growth and delivering simplification, our recent acquisition activity has been far less significant than in prior years, meaning that growth rates discussed on this call are organic.

So on to our results. On a constant currency basis our second quarter revenues were unchanged compared to the prior year. Financial was down 1% while our Legal and Tax & Accounting businesses each grew 1% during the quarter. Adjusted EBITDA was down 2% with the margin down 20 basis points to 27.3%.

Currency had a 40 basis points favorable impact on the margin. Operating profit was down 1% with the margin at 18.2% flat to the prior year, and currency also had a 30 basis points favorable impact on that margin.

As Jim mentioned, there are a few specific items that had a dampening impact on the second-quarter results. And I will discuss these items in more detail as I review the performance of our individual business segments.

So let me start with our Legal business. Demand for legal services in the US market as measured by Peer Monitor showed a modest decline in the second quarter. While one quarter does not make a trend, the second quarter was a step back after nine consecutive positive quarters.

During the second quarter Legal revenues grew 1% and excluding US Print revenues were up 3%. The EBITDA margin was down 110 basis points while the operating profit margin decreased 120 basis points. And currency had no impact on either the EBITDA or operating profit margin during the quarter.

Here is a more detailed look at the revenue performance of the three main sub-segments in our Legal business. US Online Legal Information, which represented 41% of total revenue in the second quarter was up 2%, marking the sixth consecutive quarter of positive growth for this segment, an encouraging performance. US Print revenues were down 8% during the quarter which negatively impacted total growth.

And finally, the Solution businesses made up 44% of revenues and grew 3%. The weaker growth performance in the second quarter was attributable to lower transaction revenue growth and I will show this more clearly on the next slide.

We do still expect an improvement in Solutions growth in the second half and we continue to expect mid-single-digit growth for this segment for the full year.

This next slide provides a snapshot of our Legal revenues by type splitting out subscription, transactions and print revenues. As you can see, subscription revenues, which account for three quarters of the total, were up a healthy 4% in the second quarter and they were up 3% year-to-date. The continued strong performance of our subscription revenue base is a good indicator of the underlying strength of the business.

The slightly disappointing overall growth performance in the quarter was therefore driven by two factors. First, a 4% decline in transactional revenues, primarily related to FindLaw and legal managed services. This decline was partly due to a difficult prior-year comparison when transaction revenues grew 10%.

Second, as I just mentioned, the decline in print revenues accelerated in the second quarter, down 8% versus a 3% decline in the first quarter, bringing the first half performance to minus 6% which is broadly in line with the expected performance for the full year.

Now turning to our Tax & Accounting business, revenues for the second quarter were 1%. Recurring revenues, which are 87% of the total, were up 7% while nonrecurring revenues decreased 23%.

From a profit standpoint EBITDA was 9% lower than the prior-year period with the margin down 220 basis points. And excluding the impact of currency, the margin was down 340 basis points. Operating profit was down 13% with the margin down 230 basis points and 290 basis points before currency.

There were two main factors that impacted margins in the quarter, both arising within our Government business. First, we had to reverse some revenues due to delays we are experiencing in the go-live phase on two significant projects.

And second, we are incurring additional expenses as we are putting more development resources behind these projects in order to mitigate the risk of further delay. These factors had a 300 basis point or more impact on the EBITDA margin in the quarter.

We may see some additional pressure on margin in the third quarter as a result of these additional expenses. Therefore, we expect Tax & Accounting's margin for the full year to be 100 to 200 basis points below last year as a result of these issues.

As you can see on this slide, our Professional business continued its solid growth performance, posting a 7% increase. Our Corporate business delivered revenue growth of 1% during the quarter. However, looking at the first six months in aggregate, growth for this segment was a more robust 9%.

Knowledge Solutions saw revenues unchanged in the quarter. And, finally, our smallest division, the Government business, saw revenues declined by 32% for the reasons I just mentioned.

Now for further clarity, this slide shows Tax & Accounting's organic growth both including and excluding the Government business, which as I just mentioned is more unpredictable than other revenue streams.

As you can see, revenue growth in the first half excluding Government was 6%, a little below previous years but still a good performance. As we have stated before, small items can have a disproportionate impact on the quality of revenue and margin performance of our Tax & Accounting my business, and therefore it's more appropriate to look at the performance of this business over the full year.

This was especially true this quarter and we expect the full-year performance of the business to be better than what we saw in Q2 both in terms of revenue growth and in terms of margin.

Now turning to our Financial & Risk business. Second quarter revenues were down 1%. As was the case in prior quarters there were two temporary factors that had a dampening impact on F&R's reported growth.

First is a decrease in recoveries which negatively impacted F&R's revenue growth by about 170 basis points in the second quarter. This was expected as some of our partners moved to a direct billing arrangement with our customers.

And the second factor impacting revenues in Q2 was the ongoing commercial pricing adjustment on our remaining legacy foreign exchange products. Excluding recoveries and these pricing adjustments F&R's revenues would have increased by about 2%, building upon similar performances in the previous three quarters.

Foreign exchange commercial pricing adjustments are expected to be completed in the second half of this year and the decline in recoveries is likely to be smaller in the second half of the year.

As Jim said earlier, we therefore expect to see our Financial & Risk business to move into positive revenue growth territory in the second half barring any surprises in our transaction revenues.

Turning to the second-quarter profitability metrics EBITDA was up 3% and the reported EBITDA margin for the quarter was up 140 basis points. Excluding currency, the margin was up 90 basis points, reflecting the benefit associated with last year's platform closures. And operating profit was up 8% with the margin increasing 180 basis points, and that margin was up 130 basis points before currency.

Now looking at the Financial & Risk revenue base in a bit more detail you can see on this slide that desktop-related revenues represented 39% of F&R's total and they declined 3% during the second quarter.

Excluding pricing adjustments these revenues were down 1%. One item to point out, desktop revenues from large European banks were down 6% before pricing adjustments while all other desktop revenues were flat.

The balance of F&R's recurring revenue base is comprised of fees, risk and other revenues which account for 38% of F&R's total revenue and which grew 4% in aggregate during the quarter. Obviously this is the part of the business towards which we are focusing most of our investments going forward.

Turning to recoveries these pass-through revenues made up about 9% of the total and they were down 17% in the second quarter. As we discussed on the fourth-quarter call, we expect these reductions to have a noticeable impact on revenue growth throughout 2016, although we do expect that the impact will be lower in the second half. The decline in recoveries has almost no impact on EBITDA or operating profit.

Finally, transactions revenues, which is 14% of the total, were up 1% in the second quarter. While volatility around the Brexit vote did increase foreign exchange volumes at the very end of the quarter, with over $480 billion being traded on our platforms on June 24 alone the overall trading activity was relatively muted during the run-up to the vote, resulting in only minor growth versus the prior year.

Now let me update you on our free cash flow and earnings per share performance. I will start with our free cash flow performance for the first six months of the year which we are presenting with and without the contribution of IP & Science.

Starting from the bottom of the slide, free cash flow for the first half was $748 million compared to $644 million in the prior year. The key drivers of this improved performance were lower tax payments, lower interest expense and CapEx-related timing.

Now the IP & Science contribution to free cash flow was $169 million in the first half of the year, a $40 million decline on the prior year driven primarily by working capital movements. So excluding IP & Science, the free cash flow generated by our continuing operations was $579 million, an improvement of $144 million on the prior-year period.

As we have consistently stated, we remain committed to returning capital to our shareholders and over the past 3.5 years we have returned $7.2 billion in the form of dividends and share buybacks.

This is very much in line with a strategy that we laid out in October 2013: focus on driving growth organically and on delivering scale, which has led to a reduced acquisition activity and an increased level of capital return to shareholders via dividends and buybacks.

Now a couple of weeks ago we announced a definitive agreement to sell the IP & Science business for $3.550 billion. We expect to generate somewhere between $3.1 billion and $3.2 billion of net proceeds after factoring in transaction costs as well as the taxes we will occur in connection with this transaction. As indicated by Jim we expect to use about $1 billion of the net proceeds to buy back shares and the balance to pay down debt.

On a preliminary basis we estimate that out of the $0.27 dilution we will incur from losing IP & Science's earnings we will recover about $0.14 in 2017, $0.08 from the billion dollar buybacks and about $0.06 from the lower interest expense associated with the debt reduction.

So the transaction will be somewhat diluted on an EPS basis in 2017 as we had expected due to the fact that we will use a large portion of the proceeds to pay down relatively cheap debt, primarily the outstanding commercial paper balance which we have accumulated over the last few months in anticipation of the transaction.

We fully intend to maintain our solid investment-grade credit rating by continuing to target a net debt EBITDA ratio of about 2.5 times. We do expect to be below that level followed the closing of the IP & Science divestiture.

Now let me turn to our earnings per share performance. Second-quarter adjusted EPS increased $0.05 to $0.50 per share which represents an 11% increase compared to the prior year. $0.03 of this improvement was driven by a lower share count and during the second quarter we bought back 6.3 million shares at a cost of $258 million.

The remaining of the improvement was contributed by the other factors highlighted on this slide. Currency only had a $0.01 positive impact on EPS during the quarter. And for our year-to-date results EPS is up $0.14 or 17% with currency having a $0.02 positive impact.

Now Frank mentioned that we plan to make a change beginning in the third quarter in the way we adjust for two tax-related items in the way we define adjusted earnings per share. I would now like to briefly describe these two adjustments and their impact on our reported results.

The first change relates to the add-back of non-cash intangible amortization expense which we have been doing since the Reuters acquisition eight years ago when we became dual-listed in London and Toronto.

Since we started adding back this non-cash expense in 2008 we have always made an adjustment on the pre-tax basis based on our understanding of practice at the time, particularly for UK listed companies.

Based on a review we just completed on a recent practice we will begin tax effecting this add-back beginning with our Q3 results. This will have the effect of increasing our effective tax rate and decreasing EPS.

The other tax adjustment relates to a large tax charge we incurred in 2013 related to a taxable gain we triggered when we consolidated our technology and content assets around the world.

We had been amortizing this charge over seven years which represents the period over which we expect to actually pay the tax. Going forward we will eliminate this adjustment again to better align with the spirit of recent SEC guidance. This change will have the effect of reducing our effective tax rate and increasing adjusted EPS.

As you can see on this slide the net impact of these two changes will be an $0.08 decrease in our 2015 adjusted EPS from our current definition. On the other hand, these changes will also result in a slightly higher EPS growth rate over 2013 to 2015 period about 20% compared to 18% reported previously.

Now importantly as Frank said these changes have no impact on our previously reported revenue, EBITDA, underlying operating profit and free cash flow performance nor on our 2016 guidance for those same measures including our tax rate guidance.

As you recall from our call at the beginning of the year, we had indicated that our original EPS target of $2.80 will have to be adjusted to approximately $2.30 to reflect the divestiture of our IP & Science business which accounted for $0.27 decrease as well as the cumulative impact of currency, the impact of which was $0.23.

So if you now take into consideration the additional factors I just described they would represent a net increase of about $0.05 in aggregate, $0.08 positive impact from the buyback, about $0.06 positive impact from the reduction in interest expense resulting from the debt reduction we will achieve once we get the IP & Science proceeds and about $0.08 to $0.10 negative impact from the revised treatment of our tax expense as I just described.

So taking all these items into account puts us in the area of about $2.35 for 2017 which gives you a good directional sense of what we are driving for as we enter our planning season for next year.

Now let me turn it back over to Jim before opening up the call for your questions.

Jim Smith

Thank you, Stephane. So in conclusion we are reaffirming our 2016 outlook given the visibility we have into the second half of the year. Our ability to deliver the bottom line in this quarter in spite of the challenges on the top line speaks to the underlying quality of our business.

Accelerating organic revenue growth remains one of our key priorities. And we continue to prioritize efforts towards the big levers that we believe we can pull to accelerate our journey to long-term sustainable revenue and profit growth.

As I said a moment ago, the global economic uncertainty following Brexit could create some short-term headwinds. Therefore, we are in the process of reviewing whether we can accelerate some of our transformation in this.

As we start our 2017 planning process will further sharpen our pencils to ensure that we deliver on our near-term commitments while at the same time continuing to invest and build for our long-term growth.

Now let me turn it back to Frank so that we can take your questions.

Frank Golden

Thanks for much, Jim, and that concludes our formal remarks. And now we'd be happy to take questions. So, operator, if we could have the first question please.

Question-and-Answer Session

Operator

Operator

Thank you. [Operator Instructions] Okay. First question from the line of Paul Steep [Scotia Capital]. Please go ahead.

Paul Steep

Morning. Jim, just on Brexit obviously there was an impact on volume there. Are there opportunities, though with Brexit I guess on the F&R side in terms of you stepping in and providing a new series of systems that your global clients and even regional clients have need in that environment and what's your team saying and what's been the feedback so far from those clients?

Jim Smith

I think it's far too early to make bold predictions about where Brexit is likely to lead because the negotiations haven't even begun yet as to what the landscape will look like post-separation.

However, it is fair to say that we are one of the few companies in the world that could benefit from both a more complex regulatory environment that one can imagine might follow Brexit and also from the continued cost pressures that our largest customers are facing. So we do believe there's opportunity.

A big part of our value proposition over the past few years has been our ability to help our customers reduce their overall cost base by taking on some tasks that they used to perform themselves.

Those talks are ongoing and I suspect that they will gain even more importance and strategic direction at the very top of those banks in light of the continued macroeconomic pressure.

Paul Steep

Great. Just one follow-up as well for I guess either over you. Stephane outlined the use of proceeds from IP & Science. There will be some capital left over out of that.

How are you prioritizing the balance between a desire to go back and do M&A to add strategically to the portfolio versus internal organic investment to accelerate maybe the next generation of platform, be it in Legal or in Tax & Accounting or maybe even in a segment of F&R? Thanks.

Jim Smith

I will give you a high-level answer and Stephane can certainly add to it or correct me if I give the wrong impression. Our strategy on focusing on organic growth is not impacted in any way by the fact that we're going to have these extra proceeds for a period of time. We are focused on driving organic growth.

We are focused on knitting together a scalable global platform and our appetite for M&A has never been limited by how much cash we had in our back pockets. And so we will make a strategic decision on what the best way to deploy that capital is after we go back and discuss it with our board at the end of this year as we always do and set out a capital plan for the year. So it really doesn't change our perspective at all.

We still see lots of opportunity to continue to build. And as we have done in the past we've done a lot less acquisition activity over the past few years. But we've always been mindful and had our eye on those things that could make a difference.

And if we have an opportunity to make a meaningful acquisition that can help us we will consider it, but it won't be impacted by the amount of cash that we have on hand.

Operator

And next question is from the line of Sara Gubins [Bank of America Merrill Lynch]. Please go ahead.

David Chu

Hi, this is David Chu for Sara Gubins. Thanks for taking the question. So can you just discuss net sales trends? I mean it seems like revenue for Asia and EMEA worsened a bit, so just any thoughts there?

Stephane Bello

We've seen very similar trend to what we've seen in prior quarters, David. Net sales were positive for the ninth quarter in a row and if you look at the geographic breakdown it was pretty much the same thing I think we've seen for the last at least couple of quarters, which is positive net sales in the Americas and in Asia offset by negative sales in Europe because of pressures that Jim detailed in his remarks. So really no major change in the trends that we've seen.

David Chu

Okay. Great. Can you quantify what transaction volume would have looked like ex-the Brexit-related trades?

Stephane Bello

For the quarter?

David Chu

Yes.

Stephane Bello

Good question. I would expect they would have been probably flat to maybe very slightly negative.

David Chu

Okay. Great. Thank you.

Stephane Bello

Big volume increase on June 24. But as I said the ramp-up to the vote we saw volumes being still more modest.

David Chu

Okay. Actually should we see a continuation as we head into third quarter, like are you seeing elevated trade volumes still?

Stephane Bello

Not – sorry, not to the extent that we have seen on June 24. That was really a spike, I would have say that we haven't seen since then.

David Chu

Got it, okay. Thank you.

Operator

[Operator Instructions] Next question is from Vince Valentini [TD Securities]. Please go ahead.

Vince Valentini.

Thanks very much. A question on the recurring revenues within F&R, so your commentary is that in the back half of the year the drag from recoveries and the drag from commercial pricing adjustments will get better.

But I'm wondering specifically about the recurring revenues. They were up 1% in the first quarter, now they are flat in the second quarter. Do you also see an improving trend in that segment of revenues in the second half?

Stephane Bello

I think what we're seeing is like the headwinds that we've seen in the first half will start abating in the second half as we have predicted. Underlying if you look at what happens to recurring revenues it's really a combination of volume, which is driven by net sales, and we have now nine consecutive quarters of positive net sales which obviously means that's not - that's a good factor.

And price, and we've been consistently achieving the price we were hoping somewhere between 1.5% and 2%. So that’s - it's really the reduction of the headwinds that inspire or are more confident about what growth should look like for Financial & Risk in total in the second half.

Vince Valentini.

If I can just clarify, so in that net sales number as you said volume and price. So the commercial pricing adjustments you've been talking about they are still flowing through on the FX segment, those are included in the net sales calculation or is that a separate number?

Stephane Bello

No, they are not included, so net sales is purely a volume calculation.

Vince Valentini.

So it doesn't factor in the annual price increases you might do or any of these sort of one-off adjustments, none of the price equation there, it is purely just the volume?

Stephane Bello

Correct.

Vince Valentini.

Great, thank you.

Operator

Next question is from the line of Andrew Steinerman [JPMorgan]. Please go ahead.

Michael Cho

How're you doing? This is Michael Cho in for Andrew. Just a couple of quick questions. First, on the F&R segment you guys referenced it before on the commercial pricing adjustments.

So what kind of actual revenue headwind is from the actual pricing adjustments, given like what can we expect in a given quarter? And then can you also remind us when that is going to stop?

Stephane Bello

Yes, Michael, let me try to take that question. Look what we've said is that F&R reported revenue growth of minus 1% in the quarter and we said that excluding recoveries, which we quantified at 170 basis points and pricing adjustment it would be around 2%. So that gives you a sense of, a broad sense of what these commercial pricing adjustment have in terms of impact.

And in terms of the timing, they have been declining every quarter as essentially we have rolled out the new offering to most of our customer base. So we expect that to and by the end of the year, the negative impact of these pricing adjustments.

Michael Cho

Got it. Thank you. And then just one follow-up, just a question on FX, what kind of headwind are you expecting in 3Q just given that the volatility on the pound was really towards the end of 2Q? Thanks.

Stephane Bello

That's an interesting question, Michael. On our reported results we have about 15% of our revenue base that is generated in the UK. So the impact of the depreciation of the pound sterling obviously is going to weight in negatively on reported revenue.

We always focus on revenue before currency so we show you clearly the impact but the reported revenue will obviously be impacted by the decline in the sterling as we have seen since the Brexit vote. No major impact, though, at the EBITDA or free cash flow level because as you know we have a very large expense base in the UK also.

So on a net basis if you want from a currency perspective we actually are slightly short sterling to the extent of maybe $150 million to $200 million a year. So if anything it may be slightly beneficial, but pretty minor because it's not a big exporter anymore.

Michael Cho

Thank you.

Operator

Next question is from the line of Aravinda Galappatthige [Canaccord Genuity]. Please go ahead.

Aravinda Galappatthige

Good morning. Thanks for taking my questions. I was wondering if you could talk a little bit more about the transactional component in legal. I think you referred to some headwinds in FindLaw.

I was wondering if you can discuss sort of the outlook there. I know it was a tough base but were there other factors that put pressure on the business and how should we think about that component going forward? Thanks.

Jim Smith

I think there were a number of factors within the transactional bucket in legal and, frankly, they are unrelated. But part of that business is building websites and maintaining websites for law firms. Other parts of that business are more directly related to customer acquisition and helping firms market themselves.

The latter part of that business was tougher for us in the quarter. And then by far the biggest swing in that bucket was in our Legal Managed Services where we do legal process outsourcing business, and that's highly dependent upon big litigations.

And in fact, if you look at that category business alone it was up 35% in the second quarter last year based upon the back of some work we did in one big commercial litigation that settled and didn't repeat.

So that's just by nature a lumpier business as you might suspect as large class action lawsuits for example get filed or a government enforcement action against a regulated business transpire. That's just lumpy business in general. So it's kind of all three of those things put together.

Aravinda Galappatthige

That's great color. Thank you.

Operator

Next question is from the line of Andre Benjamin [Goldman Sachs]. Please go ahead.

Andre Benjamin

Thank you, good morning. I guess, my question was about the KYC solution, if you could maybe give a little bit of color on how large you think the addressable market is there and within say the next couple of years, two or three years how much revenue you think it could be contributing and how the competitive environment is trending versus market in TTC?

Jim Smith

Sure. I think this is - look, we think it's a significant market and we think it falls right into the sweet spot of what we've been building toward for the past several years. One, in reference to the prior question from Paul, it’s a perfect example of the kind of thing that we can be doing that banks would have done themselves.

And our capabilities on the regulatory front and the assets that we have related to KYC are clearly leaders in the market. We think it's the first step in what could be a significant line of business for us.

And it is exactly the result of an ongoing conversation about ways to improve and streamline the KYC offerings in Sub-Saharan Africa and the fact that we've got the four leading banks in South Africa to work with us as we pull it together we think is going to be very significant.

We think it's something that can expand not only throughout Africa but throughout the rest of the world. And it's a good model for us. Can I put a number on how big a business I think it could be? I would be very hesitant to do so at this point.

But we think it could be a significant part of continuing to build out our position in that risk and compliance world, serving financial services customers and providing things for them that they used to do themselves.

Andre Benjamin

Thanks. If I could squeeze in a follow-up because it seems like there is a window here, I guess Stephane, how are you thinking about the 6.5% notes due in 2018?

Is that something you would look to address given how low rates are these days or do you feel like they are going to be low long enough that you will just address that when you get a little bit closer?

Stephane Bello

I'm not sure I follow you, Andre. What's the question?

Andre Benjamin

The 6.5% interest debt about $1 billion that is due in 2018. How you thinking about potentially calling that sooner given where rates are? Do you feel like rates are going to be low long enough that you don't need to deal with that right now?

Stephane Bello

In the past we have redeemed some of our debt. We've done that when it makes sense economically to do so, and we continue to look at it at this. At this point in time there's no specific plans of doing anything like this.

But it's something we look at, our treasury team obviously looks at. And at some point in time if something makes sense we will consider it.

Andre Benjamin

Thank you.

Operator

Next question is from the line of Doug Arthur. Please go ahead.

Q –Unidentified Analyst

I just wanted to ask a few more questions on Tax & Accounting. I've got to go back to the fourth quarter of 2012 to see an organic growth rate of 1% for that segment. Government, obviously, you've been pretty clear on that. But that's such a small part of the segment.

It looks like also Corporate Solutions slowed down quite a bit from the first quarter. I assume that's timing, but is there anything else going on that concerns you there?

Jim Smith

So again, if Stephane could – kind of four big buckets there. You are right, Government is a small sector, but it took a big hit. That made an impact on the quarter as you saw in the numbers.

I would say it was up flat quarter for as well as for our Knowledge Solutions business which is just the underlying information business that was used to be known as Checkpoint which is now the online information business. And that's been a low grower for us that just had a flat quarter.

The Professional business continues to be solid for us and the Corporate business did go back but it had a very strong first quarter. So we expect that all in throughout the year those segments will - those three segments will perform as they have in the past. We don't see material changes in those underlying trends.

And it's been a big grower for us. We think it will continue to be a big grower for us and there is nothing that causes us to think anything will be different than it has been over the past several years.

Q –Unidentified Analyst

Okay great. Thank you.

Operator

Next question is from the line of Tim Casey. Please go ahead.

Q –Unidentified Analyst

Thanks, good morning. Jim, as you look to the planning process through the back half of this year, can you talk a little bit about how you are thinking about efficiency initiatives beyond 2017? Because that is going to be the conclusion of sort of the enterprise-wide four-year plan you have articulated. And just – and I'm assuming that's a process that's going to be ongoing.

Can you speak to us about how we should think about things after this efficiency program has ended?

Jim Smith

Yes and I will ask Stephane if he wants to quantify anything. But I would start by saying that as you know, this year we set up our enterprise technology ops center and fold all of the central technology, all of the individual operating technology budgets and the operating centers all into the control of our Chief Transformation Officer.

And directionally I have been delighted at the opportunities we've seen as a result of having done that. And every time we sit down and have a quarterly review with that group I think we see more opportunity to continue to streamline our operations and to become more effective and more efficient.

So I think we have a healthy runway in front of us to continue to become more effective and efficient. And I think we have a number of years in front of us where we can be on a steady path to continued improvement in that regard.

We will always make those tough trade-offs between how much those - how much of those savings we reinvest in revenue opportunities that are there and how much we take to the bottom line in any given period.

And as we kind of do quarter-by-quarter and year-by-year we'll just make those decisions based upon how attractive we think the revenue growth opportunities are and how achievable those opportunities are.

We've always said we'd trade a point of margin for a point of growth. The good news is I see ample opportunity for us to create that dilemma for ourselves because we are, I don't want to say relatively early in the process, but we are far from the end of the process.

Operator

Okay. And our next question is from the line of Giasone Salati. Please go ahead.

Q –Unidentified Analyst

Hi, just a quick clarification. When we look out at the F&R business in Europe is it right that your presence in Continental Europe is relatively stronger than peers, and if you could quantify that?

Stephane Bello

Yes, if you look at the F&R business our revenue base is just under 40% European base and I would say half of that is in the UK and half is in Continental Europe. We probably have a larger exposure in Europe than many of our competitors.

And so call it round number 20% of F&R's revenues are in the UK and about 20% is in Continental Europe, which is I would say proportionate, I'm not totally familiar with what our competitors have. But I would think it is larger than what our competitors see.

Jim Smith

And if you think about it, and again I like Stephane wouldn't have market share numbers by European countries or even by Europe and the UK at hand, would expect that to be the case.

I would say we have a disproportionate exposure and/or penetration, particularly on the large sell side banks in Europe. And if you think about it, the old Reuters franchise goes back more than 200 years in Europe and the UK.

Q –Unidentified Analyst

Great. So that's potentially has more benefit if Brexit pushes some business through Europe, through Continental Europe? Thank you.

Jim Smith

Yes, thank you. And I would just underscore, we do have feet on the ground in all the major European money centers. We have staff there, we have deep relationships there. And I think we're well-positioned to serve our customers regardless of what happens and what shifts might take place and where the important transactions happen and where our customers choose to locate their operations in Europe.

And so – and we have a scalable platform. So we'll watch very carefully as the events unfold and we will follow our customers' leads in serving them.

Q –Unidentified Analyst

Very clear. Thank you.

Operator

Our next question is from the line of Drew McReynolds [RBC Capital Markets]. Please go ahead.

Drew McReynolds

Thanks very much. Stephane first just a clarification and a question after. Just on your EPS comment for 2017 I think I heard 2.35. Can you, I missed the context of what that number is.

Stephane Bello

Yes, I was trying through a lot of numbers. I was trying to sum up where we are moving from the original $2.80 target. And you remember through in the first quarter we had moved that to like $2.30 and the three elements we discussed on this call were the beneficial impact from the proceeds we are going to get from the IP & Science sale on one hand and then the changing calculation for the two tax items in our adjusted EPS. And the net of these three factors is about a positive $0.05 which brings us from 2.30 to 2.35.

Drew McReynolds

Okay, perfect. And just the broader question, I guess for you as well Stephane, a little confused I guess on your leverage target of 2.5 times. With proceeds and even putting in $1.5 billion buyback, I mean, I just don't get you above 2 times going forward.

So just wondering is my math incorrect, is this just providing flexibility for M&A option value as any large Company would? Can you just kind of clarify or kind of bridge what I see as a fairly under levered situation versus that 2.5 target?

Stephane Bello

Of course, your math is perfectly correct because it always is. Remember we did announce a buyback promise of $1.5 billion in February. That was a little higher than what we had done in the past at about $1 billion and that was really taking into consideration two things.

The first is the fact that we were counting on getting some proceeds from the IP & Science sale and that we would essentially use some of these proceeds towards the buyback.

And the second was a consideration that there are limits, as you are pretty well familiar with, with the number of shares that we can buy in any given year under the rules of the normal course issuer bid programs.

I think the main constraint for us is that we cannot buy more than 5% of our outstanding shares which really limits the amount of buyback we can do in any given year unless we were to do a tender offer which is much more complex and more expensive.

So there are a few considerations to take into account. We will - let us complete the current tranche that we are in the course of doing as you have seen from the release. We are a little bit over a third done.

As of the end of the second quarter we had done a bit more than $500 million, so we still have $1 billion to go under that buyback as soon. As we are done with that program we will sit down with our board, look at the circumstances, the options we have and decide what we will do next.

Drew McReynolds

Thank you.

Frank Golden

Operator, we'll take one final question please.

Operator

Next question is from the line of Rob Peters. Please go ahead.

Unidentified Analyst

Hi. Thank you very much for squeezing me in. Jim, getting back to as I know it's come up a lot, but when people look at Brexit a lot - it seems a lot of the focus is on the F&R segment. But as I understand there is going to be a flurry of legal work that has to be done leading up to any potential exit.

I was just wondering if you could talk about any opportunities you actually see in your Legal segment to benefit from any of that activity?

Jim Smith

Sure. I think the story of Brexit at the moment is kind of short term versus long-term issue. I think short term there's no question there's an opportunity certainly for large law firms to advise their large clients on how to comply with what's going to be a shifting regulatory environment. So I do think it will be and also, frankly, for other professional services firms to advise.

That's a near term opportunity. What it looks like long term it is just impossible to say. But if you look at our Legal business only about 10% of our revenues in the Legal business per se come from Europe and UK.

So it's a less significant impact on us overall and long-term who knows how it's going to play out. I think it is going to create a lot of activity in business in the near term, long term who knows.

But I would say, again, one of the things that's fortunate about where we sit today is that we do have significant operations in every one of the key financial centers in Europe. So we will be able to operate out of office as we already have and perhaps shift staff around if we need to, to serve customers as they shift.

But I would anticipate building off of what we've already built as opposed to having to go out and make significant new investments in new geographic locations to serve our customers.

Unidentified Analyst

Perfect. Thank you very much. And maybe just to quickly follow that up, in terms of the Solutions business, I think you had highlighted the UK, Ireland and LatAm were growing on the Legal side.

Do you think any of that was related to people getting kind of started up ahead of the vote or is that something else driving that there?

Jim Smith

No, I think that's just the underlying growth of the strength of those solutions. I think it is totally unrelated.

Unidentified Analyst

Perfect. Thank you very much.

Frank Golden

Thanks, Jim, and that will conclude our call. We thank you very much for joining us today and we look forward to speaking to you again on our third quarter call in October. Have a good day.

Operator

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