Reuters Group Plc FY 2007 Earnings Call Transcript

Reuters Group PLC (RTRSY)

FY '07 Earnings Call

March 6, 2008, 06:00 AM ET

Executives

Tom Glocer - CEO

Miriam McKay - Global Head of IR

David Grigson - CFO

Devin Wenig - COO

Analysts

Polo Tang - UBS

Colin Tennant - Lehman Brothers

Jonathan Helliwell - Cazenove

John Clarke - Brewin Dolphin

Simon Baker - Credit Suisse

Paul Gooden - ABN Amro

Mark Braley - Deutsche Bank

Presentation

Tom Glocer - Chief Executive Officer

Miriam really enjoys reading the SEC forward-looking statement; and for my many friends in the Reuters legal department, I will not deprive them of a commemorative reading of the warning.

Miriam McKay - Global Head of Investor Relations

Thank you, Rosemary.

Tom Glocer - Chief Executive Officer

I think you know the results are good when we don't have to give the warning. Let me start today by just saying what a special day it is for Reuters and for me personally. This is the last time that we will be presenting Reuters at least as a standalone entity. So, we thought we would do it slightly differently today as you can probably already tell.

It's not always been that easy getting up in front of you for me at these presentations; but over the last six to seven years, I have to say I have come to really enjoy these sessions, and in particular responding to some of your exacting questions. I have actually learned quite a lot from the nature of your questions as to what you think the important drivers of value in the business really are. We thought we would also have a very special welcome for John Clarke of Brewin Dolphin, who is in the front row today. John was at the very first Reuters presentation in 1984. So it's a wonderful book-end appearance. And I think that the results that we have issued this morning really are fitting and to at least this chapter in the Reuters story.

And now as we begin to move on to the next chapter at Thomson-Reuters, I hope you will all stay interested in this story and continue to engage with us here in London, where I certainly plan to continue to spend the considerable amount of time.

Let me now just give you really my own view of what the key achievements were in 2007. This was really a signature year for Reuters, despite ambitious targets in turbulent markets and the potential distractions that can come from an acquisition of this size. I think Reuters delivered really excellent results underlying revenue growth improved to 7% finishing the year strongly at 7.6% growth in the fourth quarter and heading into even stronger growth of around 9% in Q1 2008. And the business itself is strong really right across the board, both from a geographic perspective and across the four business divisions. The Core Plus program is now really starting to produce the goods generating an additional 2.6 percentage points of top-line growth, and this is the first year in which the Core Plus program has started to provide meaningful transformation cost savings as well, which along with high cost control helped us to deliver the 14.8% trading margin well ahead of what had been our guidance at the beginning of 2007.

I am particularly pleased that we started to deliver early on cost savings out of Core Plus with 50 million pounds of additional or incremental savings versus the original target of some 20 million and that's been driven principally by our continuing efforts to simplify the company and the product line. And it builds on I think what's now a track record that Reuters has established for hitting or even exceeding our cost saving targets, and I am pleased that something that Thomson knows a thing or two about as well.

So, with excellent revenue momentum and really good profit improvement, standalone Reuters is going into this transaction stronger than it's certainly been at any of my time in Reuters as the CEO. What I thought I might do today in keeping with approaching it from a slightly different perspective is to recognize that today is David's last presentation as Finance Director. So in addition to just running you through the numbers, we all thought it would be a great opportunity for him to give you... step back a bit and give you a more free ranging review of the transformation that Reuters has undergone during his time in the company.

And now that Devin is stepping up from COO role to run the combination of Reuters and Thomson Financial. I think it's an even better time for him to take you through the divisional results and talk in particular about the resilience we are seeing in the business. Why are we doing so well in projecting to continue with a very strong first quarter when all around us it looks like it's been doom and gloom since the summer, and I think that's sort of the core question today.

But before I hand over to David, I want to take a couple of moments to thank him personally for his work and achievements during his time at Reuters. Some of his accomplishments... many of them are familiar to you such as slimming down the company in a £1.5 billion divestment program, which we started almost immediately upon forming this team taking out close to £1 billion in the annual cost base of Reuters, which at sometimes was quite painful.

The establishment of really a world class finance function some of whose members are here today, which is great. The enviable record we created together in terms of free cash flow conversion and then the discipline use of that cash flow in investments and in returning capital to shareholders. So, I think these are many and I could have cited other tangible and fittingly numeric expressions of David's success; and they really are huge achievements in it themselves.

But I think what not everyone has had a chance to see outside or David's other achievements. Some of these I think of as the dogs that didn't bark. So, it's the acquisitions that we didn't make, because they didn't meet our strict criteria, where the internal projects that we killed, because they weren't hitting targets. I think of things like the introduction of profitability inside an MIS to give us a system really even a language by which to run the business. And then lastly and I think most importantly, the incredible energy, enthusiasm, and good cheer that David has bought, which inspires all of us.

So I am going to spare David further embarrassment and me as well and turn it over to him.

David Grigson - Chief Financial Officer

Well; thanks Tom very much, and good morning everybody, and thank you for coming to this the business end of our day, and very much look forward to see you as many of you as possible later on tonight. When we are going to let head the down, celebrate the end of the bit of an era and celebrate you guys, I guess the end of a long result season as well. So it should be a really good night.

Like Tom, I am conscious of today, it's about closing out one chapter of Reuters' history, but it's also about moving on, and it's also about looking to the future. So, as I run through the 2007 numbers, I want to introduce three themes to show how Reuters recent past can inform the future Thomson-Reuters. These are that our business is in substantially better shape that when Tom, Devin and I took the controls. So, this year... from this year's performance, we can draw a series of positive to take forward into Thomson-Reuters, and finally my belief that the best has yet to come.

So bearing this in mind, let me start for traditional fashion with our top level trading numbers. As Tom has said as an introduction, we had a great 2007, whichever way you look at it, be it revenue growth, trading margin, earnings growth or cash conversion. We delivered underlying revenue growth of 7%, testament not only to strong markets, but to the strength of our business mix. When you dissect our revenue growth into our divisional and product lines, we see that over 80% of our business has delivered double-digit growth this year. Only the product lines with legacy migrations underway about this trend; and with the tolerated migration now complete, the revenue from this legacy product is becoming increasingly insignificant. The robustness of our business mix bodes well with Thomson-Reuters.

Looking at revenue by type, recurring revenue growth remained strong through the year, powered by healthy volume trends and price increases that yielded 2 percentage points of additional revenue. As you can see from the graph on your booklets, underlying revenue growth accelerated to 7.7% in the fourth quarter showing that the trends remain strong. Usage revenues, which include FX brokerage and TV usage, grew an underlying 15% with FX brokerage growing 19%. This excellent performance in FX brokerage reflects volatile markets, the incredible strength of our FX franchise and also the developments of our product line with additions such as Prime Brokerage.

Outline revenues were roughly the same as last year, but there's an important shift in the mix with customer demand for trade and risk management software, another area we've been developing and investing more than offsetting plan withdrawals from legacy information management systems.

Trading costs are now growing considerably more slowly than revenue, an underlying 3% versus 7% for revenue, the result of accelerating the returns from our Core Plus cost saving initiatives and tight cost controls everywhere else, all of which delivers trading profit of £385 million at a margin of 14.8%, an underlying increase of 43%.

If you look at it a little more detail what's driving trading profit, you'll see good contributions to profit growth from both the core business and Core Plus. With £25 million Core business contribution on the chart is being driven both by revenue growth and tight cost control, excluding possible business, which are effectively cost troughs like recoveries. This represents a margin of 31% on incremental revenue, a clear demonstration of our ability to drive profit growth from an increasing top-line. Core Plus contributed 89 million pounds to the improvement in our 2007 trading profits.

The period of heavy investment is now complete. Revenue momentum is building and cost savings are coming through ahead of plan. We saw 63 million pounds of new revenue this year from Core Plus initiatives, making 95 million pounds in total and adding 2.6% of revenue growth in the year. It's encouraging to note that our customers are continuing to invest in areas, where we are targeting, so high value content particularly on the buy side, new markets such as in India and China, next generation electronic trading initiatives and new enterprise solutions to promote business automation. All areas that we would expect to prove resilient in tougher times.

As Tom has already said, Core Plus cost savings are coming through faster than we have originally anticipated, £50 million pounds versus our original target for this year of £20 million. This shows that far from being a destruction, integration and planning with Thomson has strengthened our result to pursue savings as fast as possible.

Now pausing for a moment to look at currency; you will notice that the currency impact in the second half of 2007 was less marked than in the first half. Most major currencies notably the U.S. dollar stabilized against sterling in the second half. Nevertheless, exchange rate movement is still reduced to full year revenues by 135 million and trading profit by 36 million. One of the benefits of the Thomson-Reuters transaction is of course that the combined entity with all which we report in U.S. dollars will be proportionally less exposed to currency movements that Reuters has been obliged.

Moving down to P&L, it's great that I'll report a 35% increase in adjusted EPS, which rose to 23.0p. Looking beyond the actual 25% increase in trading profits, you will see that the effective tax rate was 17% this year and my thanks one again to an outstanding tax teams some of whom here, who are constantly finding ways to create sustainable value from Reuters' global presence.

Reuters' adjusted... sorry, looking at adjusted earnings growth over the last few years, you can see that we have more than delivered the double-digit earnings growth target we set out back in 2001. To do so, we used a variety of levers [ph], cost savings, revenue growth and share buybacks to name the most obvious.

Looking forward to Thomson-Reuters the proven ability of both management teams to use all the levers of their disposal and especially at time when integration offers us even more opportunities is to meet confidence and continued strong earnings performance.

Our polls at this point to give due regard to the key lines in our strategy income statement, operating profit grew 14% to £292 million; and this is after including £45 million of transaction cost related to the Thomson-Reuters deal. Profit before tax, profit for the year and basic EPS all defines not only because of the deal related costs, but also because profits from disposals were lower in 2007 than in 2006, but you remember that we booked a gain on the sale of our stake in Factiva.

Moving onto cash flow; I am delighted to report that we have exceeded our cash conversion targets. This time last year I talked about achieving a trading profits into trading cash conversion ratio of about 90% over the two years of 2006 and 2007, which was a step-up year's in our investment in Core Plus. So, it's great that reported cash conversion over the two years averaged 100%.

Now cash conversion has always been strength of Reuters and a particularly important focus for the finance function. We once again have played a vital important role in the delivery of these results, and my thanks to you all for the support you have given me over the years and the significant contribution you've made to Reuters performance.

Just a little bit more on CapEx; here again we are well inline with the target, which was the key 2007 CapEx in similar levels to 2006. As it turned out, we spent $225 million compared to $228 million in 2006. And as you can see from the chart, our CapEx has increased. This has been to invest in transformation projects such as the common platform. Now this investment may turn out to be our most significant and highest returning year, and the potential for considerable margin uplift in the longer-term is only increased by the additional scale benefits of the enlarged Thomson and Reuters.

As you have seen, Reuters is naturally cash generative and over the past few years, we developed an excellent record of returning cash to share holders. As you can see from the chart, we've returned £1.5 billion since 2004, about a third of our then market capitalization. And we intend to start buying back shares again as soon as legally possible; and when we do, we'll buy back up to our previously established threshold of 50 million shares and then carry on right through to when the transaction completes on April of 17th.

And so to conclude; as this is my last results presentation, you allow me to brief us a retrospective. The Reuters, I joined nearly eight years ago, was a great company with a fantastic brand and amazing franchise and wonderful people, and I am pleased that it's all those things still today. Back in 2000 it was also and unnecessarily complex company, strategically confused, unwealthy... structurally unwealthy, and fundamentally unmanageable.

Well, I am pleased to say that after much fast-forwarding Core Plus and numerous other initiatives that didn't get branded publicly. We have managed to turn ourselves around and it's been an amazingly satisfying journey. Reuters today is a straight forwardly focused and purposeful company. We said we were an information company back in 2000, but we took a sweeping program of disposals and closures for us to become one. Reuters has always attracted great people, and today's leadership team is the strongest ever, is the strongest ever as demonstrated by Tom and Devin's appointments to Thomson-Reuters, and by the fact that 75 of the top 100 leadership positions in Devin's new team are taken by Reuters folks.

And in the streamline Reuters is today, we are seeing the investments of recent years really beginning to payoff. Divisional profitability, which we introduced to you in April 2004, was a key turning point. It finally enabled our long standing goal of moving to managing by geography to managing by global division and it's shown a light to the complexity of the shared prospects. The margin improvement we see in every division and the great returns we are seeing from our Core Plus investments are due in most small part to giving talented manager the tools they need to manage the business.

So to me, the most satisfying achievement of these last few years has been to turn Reuters into a company, where great people can achieve great things and nothing underpins its future success more than that. So we are delivering to Thomson a strong business and strong people with a strong hand to play over the next few years, and I genuinely believe that the best has yet to come.

And with, I hand over to Devin.

Devin Wenig - Chief Operating Officer

All right, now that our CFO has done all that fluffy stuff; let me tell you what's really going on in this business. On a serious note, David, I share all of those sentiments, and I add one, which is none of it would have been possible without you; so on behalf of myself and 20,000 people in Reuters, thank you.

I am going to take you through both the divisional and the regional performance, and then I am going to talk a little bit about some of the macro drivers of what's driving our business. Let's start with Sales & Trading.

Sales & Trading's performance was helped by good conditions in main markets, which are FX and commodities and energy. These two assets classes together, account for about 60% of the S&T business. And in addition, we saw great progress in credit, which is a Core Plus initiative and it's been multi-year initiative, where we are really gaining traction against our main competitor in that case. Offsetting this was the drag from tolerate migrations, which took around 2 percentage points of revenue growth, but of course this effect will drop away in 2008.

Sales & Trading also saw very strong contribution from tractions revenue, up 19% to the year. We are continuing to expand our capabilities here, building across assets classes and launching new services in markets like shipping, carbon [ph], and real-estate. We kept costs firmly in control in S&T, continuing to reduce the complexity in the business. This helped drive trading profit up an underlying 28% for the year. This is a significant achievement as we have been investing heavily in a common platform for future growth. This investment will continue through 2008 in advance of a major set of product launches in 2009, next year.

Research and asset management continues to see impressive growth 25% increased underlining. Investment banking, investment management, and corporates delivered 34% underlying revenue growth, primarily driven by the sale of content, fees, and the continued success of Reuters Knowledge. Wealth management grew double-digits as well, thanks impart to growth in Lipper funds information and a desire of our clients for data fees and online solutions. Of course, this is the division that will be most transformed by the merger with Thomson, and we'll get the real scale in this business.

I am really pleased that research and asset management reported its first full year profit, because if you recall, we set a double-digit margin as a mid-term goal at the beginning of 2007, and obviously we've achieved that in one year. We did that, because revenue grew 25% while we held our underlying trading costs to 10% despite investing in the business, very impressive performance.

Enterprise growth also continues to be very strong with double-digit increases in both the top and the bottom-line. Enterprise Information's 18% underlying revenue growth continues to be driven by client demand for machine readable data. Now this is a trend that we think will continue, given the market conditions. The second important driver of Enterprise was the 14% growth in Trade and Risk Management. Obviously risk management is in demand in this market, and a lot of that growth came out of Germany, Eastern Europe, the Gulf and Asia. New products also contributed significantly both to Core Plus and to this division's results.

Finally, I'll wrap up with media. Media saw a 6% gain for the year, but what that masks, is in the second half of the year growth was 11%. And there were some one-off reasons for that phasing. Our consumer business we grew our online audience 17% of the year, and that resulted in a 15% increase in revenue in our consumer media business, which was a strong contributor to both Core Plus and the overall media results.

Let me just take a moment now to look at the geographic slide of this; all of our regions in 2007 were performing well. In EMEA, we are seeing double-digit growth in Russia and the Gulf as well as good performance in France, the UK, Germany, Nordic and Central and Eastern Europe. The Americas grew by a healthy 7% driven by the enterprise and media results that I've spoken about, growth in Asia continues to improve, and now at 9% is our fastest growing region largely on the back of our results in China and in India.

Let me now shift away from the divisions and regions specifically just to give you some of the sense of the macro drivers. David touched on a few of these, but the benefit of our business mix is really coming through strongly right now. I can't emphasis that enough taking back to 2001-2002 the good old days, many of you will remember that we were really hit by the perfect storm at that period of time. We saw a retrenching FX market on the back of the introduction of the euro. We saw equity markets collapsing after the bursting of the dot com bubble, and significant headcount reductions indiscriminately across our banking clients. We saw flat commodities in energy markets, really hard to believe now but in 2002 oil was $25, a barrel. And right now, of course the situation could not be more different.

FX markets are at their most volatile and robust in a decade. Spot market volumes have more than doubled over 01 to 07, and volumes transacted on our systems grew by 52% in the fourth quarter alone year-on-year. I just can't stress enough the strength of our FX franchise right now. The total FX market approaches a $3 trillion a day market and it's our news, our transaction systems, our data that really makes this market run. Of course, volumes in equity markets, although equity markets have been suppressed volumes have been very high; thanks to volatility and a continued rise of algorithmic trading. It contributed to a growth in our equity transactions volume up 17% in 2007 as we continue to transition our equities desktop business into an equity's desktop and transactions business. And the rise of electronic trading continues a pace helping drive that demand that I spoke about from machine readable date and algorithmic trading.

Finally, commodities and energy is obliviously hot with oil now at $100 a barrel and gold at record highs. This is a segment of the market, where Reuters is particularly strong, and we are investing to grow our lead. In 2007, we added about 3,300 new accesses in commodities and energy alone. And I will wrap up with emerging markets, where of course this has always been a traditional Reuters' strength. Emerging markets were strong in 2007 continued to be strong in 2008 on the back of rising wealth and emerging middle class and an increase transaction volume.

So, I think the point is this is not just riding the way of a cyclical shift in our markets. Our improved performance is a direct result of deliberately pointing our business at areas that are growing. That's what we said when we launched the Core Plus program, and now we are seeing those benefits come through very strongly.

Now, I don't want to give you the impression that we are unaware of the events that are occurring with many of our clients. We are in constant communication with them from the CEO to the trading guys. Our customer's response to-date to the write-downs has been surgical. They have cut back substantially in effective businesses, but they are continuing to invest in the growth businesses many of which I have mentioned already. Cost consciousness has never gone away. It's there today, it's always been there. But that's where we are trying to help them with tools like our enterprise license agreement.

We made significant renewals of four enterprise license agreements in 2007, and we will sign two new ones in 2007. We see several new ones again in 2008. To give you a sense of what these agreements are like, it's best to understand them from our customers' perspective. The problem many of our major clients have is that they have got dozens of data and software suppliers. We tell them to take our tools and our data right through your enterprise, rationalize your spend, and simplify your business, just like we've simplified ours. Of course, we charge for it, but it really benefits their clients both on cost and by complexity.

We currently have enterprise licensing agreements in place with some of our largest clients including Citigroup, HSBC, and Goldman Sachs. These multi-year contracts provide for a floor as well as agreed revenue escalation. For larger and more sophisticated clients, it's very good for them and it's very good for us.

Finally, I just want to give you a sense of progress with the merger and the combination of Thomson Financial and Reuters in particular. We've been able to conduct a very thorough planning process, covering key areas of products, technology, employees, targeted cost savings. We are making really good progress. Of course, we'll get back to you in May with the phasing of the cost savings, but I am glad to say that this is a relatively straight forward process. Where there are areas of direct overlap such as data or real estate, we'll make progress very quickly. We'll get cost savings and achieve them quickly.

Obviously, savings in areas like technology and product will take longer, but we know how to do this. We have expertise from other deals that we've done and we have a very good handle on how those cost savings will end up being achieved in those areas as well. I think more interesting and more exciting is the revenue opportunity. And we see from day one, revenue synergies flowing from this merger and just to give you a few practical examples we expect to have Reuters News available for Thomson Financial clients on day one or some of the excellent Thomson Financial data assets like Thomson Street Events available to Reuters clients on day one. We also intend to make things like our collaboration tools, messaging and collaboration software available to the trade web transaction basic of point. So, we've made a lot of progress. We are expecting this to be a revenue and growth driven merger and to get started really early.

In summary, Reuters is in great shape. Our business mix is providing us with really good momentum held by investments we made under Core Plus, and we are really excited about the pending merger with Thomson Financial.

With that I am going to stop, and I'll turn it back to Tom.

Tom Glocer - Chief Executive Officer

Sort of feels like Chinese New Year here today. Thanks, Devin. Before I go on with my presentation, I just wanted to highlight three areas of the business, where Devin has been instrumental in really making Reuters a completely different company from the one that this team of ours took over six, seven years ago. First, as you all know, through the great majority of Reuters history, we have been run on geographic lines and effectively this was a combination of fee terms [ph] whose priorities were not always cost efficiency or global customer service. These have now really been transformed into the divisional structure under Devin through which we operate the business today, and this has given my colleagues and me the opportunity to pursue a single global vision, clear priorities and economic scale.

Second, Devin has really taken the lead in simplifying the product range and delivering new and improved products, and he has done this among other things by leveraging the divisional structure to introduce greater customer involvement in product development and shortening the feedback loop from customer to deliver product.

And third, Devin has really helped transform the competitiveness of Reuters and it's perhaps easy to forget that it was really only five year ago that many in this room today were convinced that a certain competitor would destroy our few remaining strongholds FX transaction services and real-time data fees. So as both Devin and David have been saying in 2007 we saw record volumes flow through our revamp trading systems including novelties really like FX Prime Brokerage, and an 18% growth in our enterprise information data feed business. So we've made the transition from when Patrick here could write the famous terminal or cyclical note tonight we can celebrate as it's the party invitation, and I think that's great.

Well, then I turn now to a little bit of an update on the Thomson-Reuters combination; I am sure you all have seen that on February 19 we received our regulatory clearance from the EC and Department of Justice through the deal that proceed and although the result itself was never guaranteed, we have done a lot of work before hand to understand the regulatory risk before we announced the deal, and we are very happy with the resulting agreement with the competition authorities. The agreed remedies, which are in fact selling copies of four databases is well within the original strategy and the economics through the deal including in terms of synergy capture.

In completing the sales of those copies of databases isn't a precondition for us to complete our overall transaction, but I am confident that the process itself will be completed in the next couple of months that is actually completing the sales of those database copies. So with regulatory approval obtained, we can now move ahead to actually brining this new company to life.

Last week, you probably saw, we mailed a massive offering circular to shareholders. I am glad you haven't decided to all lug it here today and drill us on all 545 pages of it, and that was really driven by the requirements on both sides of the Atlantic as to what the content would be and in fact that we had to print and mail rather than distributing electronically. So once you are all finished doing bicep curls with this incredible term, I hope you'll recycle it as we are.

On March 26, we are going to hold EGMs both for Reuters and for Thomson, and then we expect to complete the transaction on April 17 when Thomson-Reuters shares will begin trading in London, in New York, and in Toronto. But up until that day, we are going to continue to run Reuters as a standalone entity, so I thought I would now give you a bit more information about how we see the first quarter for us pending out. And I think or I hope this should give you a high degree of comfort on our outlook for the remainder of the year, even though we won't be providing specific guidance on full year 2008 until the first quarter release for the new Thomson-Reuters, which will be on May 1.

There are really sort of four factors that underpin our 2008 first quarter guidance. So first for standalone Reuters, we expect revenues from Core Plus initiatives to continue to accelerate in 2008, helping us to expand our business in the critical areas, where our customers do continue to invest. Second, we experience very strong sales through 2007 and that's continued in both January and February of this year; and those of you who know our business model well know that recurring that sales are the best lead indicator for our revenues.

Third, we are benefiting from the price increases that went into affect at the beginning of the year, and our customers have continued to support our policy of raising prices only in line with inflation. And last of all, as I think Devin mentioned in the context of sales and trading, tolerate cancellations, which were a 2% drag on S&T result, a 1% drag on overall group results, they fall away in 2008.

So putting this all together, we are confident that Reuters' business really is in very good shape. We expect around 9% underlying revenue growth in the first quarter with good prospects through the remainder of the year and 9% underlying growth, which seemed unimaginable four, five years ago is the fastest quarterly growth rate that any of the three of us have seen in our time up here. But I am mindful of course that our markets continue to be volatile, and many of our customers are under pressure, and this is why we are working with them in areas that really support their business priorities such as truck trusted pricing services for hard to value securities, risk management systems, trading services and enterprise data feeds that run really help facilitate business automation.

So, we do have good visibility over a high proportion of our 2008 growth, and the entry rate coming into the year was strong, and our momentum remains strong right now. But you know, I think the real question then is what lies ahead. Because I think most of you have probably already moved on and are thinking about what is 2009 hold; you understand both the lag effect and the subscription model in our business. And certainly if the media are to be believe and I guess we are part of that media, the more restrained, the outlook would seem to be one of absolutely unrelenting gloom. But we don't see that yet in either our revenues or in our sales or sales pipeline.

Well, our performances have remained robust right through February, if we do see a slackening as we go into the year, we certainly know what to do about it, and we are managing the business prudently and not laying on costs or headcounts. We stayed tight on costs all the way through 2007 with underlying costs only going up 3%, and that is in a year, where classically the Reuters I knew it was growing 7% plus would be laying on cost and not worrying about it too much.

So, we have been cautious about them all through last year and our budget for 2008 remains a prudent one. And if we do need at some point to do more, I think it's very fortuitous that we have an integration process in place, because it provides an excellent framework for cost reduction, and if need to be the ability to turn up the dial somewhat.

I am also please that we began to actually deliver cost savings early under our Core Plus program and Thomson you all have seen also brought forward some of it's Thomson Plus savings. And combined, this just gives me even greater confidence that we'll be able to achieve the $500 million of synergy savings when we combine the two companies. So now the question is what about beyond that. And then I think we are really on to the exciting prospects through the combined Thomson-Reuters. As Devin has said before, we've done this deal because of really the growth prospects and the growth platform, not because we are able to finance the deal out of cost savings. And the combination is just such an information power house, serving the needs of professionals wherever and whenever they need that critical information and business support tools to do their jobs; it really is must have content and services.

And the company, Thomson-Reuters will have great scale. So the combined 2007 revenues would have been $12.5 billion. It's a 90% plus digital business with leading positions in Financial Services, Legal, Healthcare, Scientific, Tax and Accounting; and as Devin said, energy and commodities markets as well. And I think we'll be ideally suited to be able to innervate at some of the cross over points, because all of our jobs would become much more complex. It's not enough anymore just to have five years of P&L and balance sheet data and basic real time pricing. You need to generate alpha, you need to get inside and some of that comes from the real crossover points.

So, this could include providing clinical trial data from Thomson Scientific for former investors in front of a Reuter screen or the latest bankruptcy court decisions for the distressed debt trader. I think we have a real opportunity and it doesn't just go one way into the finance market increasingly M&A lawyers like I used to be -- really need financial information and information about their clients, and we'll have the ability to deliver that into the great west [ph] franchise.

Thomson-Reuters will also be able to share technology that's applicable in each of these markets, because the customers actually do have quite similar needs. Professionals are looking not only for great in-debt content in their particular vertical, but search tools, things like alerting applications and news. And you can add to that, the opportunity that I think exist to greatly internationalize the Thomson businesses via Reuters' global presence, global brand as well. And I think when you start looking at that together, we really have the opportunity to deliver meaningful revenue synergies at attractive margins.

So this is only a slight peak ahead. I don't want to steal the thunder from when we do this once the few companies are together. But 10 months, since announcing the deal itself, I am even more convinced of the long range strategic logic and shareholder value here. Just to summarize a little bit, our recurring revenue has real momentum at present. We are going to deliver meaningful integration and other self help savings irrespective of the market turbulence. And the powerful digital platform that we are brining together by putting these two companies together, I think can drive growth for many, many years to come.

And with that I just like to thank you all for coming, investing in, believing in Reuters. And I know I have done my job well if you stay with us in the combined firm. Thanks; and Miriam, let's open up for questions.

Question And Answer

David Grigson - Chief Financial Officer

Yes. Okay, right, starting with Polo. We are looking for microphones, yes we are. Here in the front row, behind that... [ph]. Thank you.

Polo Tang - UBS

Thanks. It's Polo Tang from UBS. Just have a few different questions; you are highlighting how the business is different from before in terms of 2001-2002. But can you maybe talk about the operational gearing of the company has not changed from before, something last time, you indicated that the operational gearing when incremental revenues was about 80%. So, is it different nowadays? Second question is just on Core Plus, because if you look at our revenues and cost savings, you are aiming for $150 million of new revenues, $150 million of cost savings, so given that you don't see well in 2007. Do you think you can top that $150 million number? Can you give us some color on that? And the final question is just on FX market space; can you just give us an update in terms of how that's doing? Thanks.

David Grigson - Chief Financial Officer

So, I can jump with operational gearing?

Tom Glocer - Chief Executive Officer

Yes, why don't you?

David Grigson - Chief Financial Officer

Pickup on Core Plus and...

Tom Glocer - Chief Executive Officer

I'll take the FX in this.

David Grigson - Chief Financial Officer

Fundamentally, I don't think, Polo, it has changed particularly. I think that the basic factors that we have far greater visibilities through the connections between revenue and costs. And therefore, when it actually comes to making the adjustments of the business to take account of the different top-line environment, we though that we were quick to do that today than we have been previously. Clearly back then, there were huge buckets of costs that we are just kind of went after before fast-forward and then in fast-forward. Not necessarily it was particularly connected to where the kind of revenues were coming out. Those were just quite easy, most of the quite easy stuff to go for. There is more variability in our cost base around the investments we are making, and clearly it's one of those areas, where you can accelerate or slow down entirely depending on whether you think projects really have an appetite. Our customers have an appetite for those products in today's market or not. And the business as a whole, using the tools that we have given it are just thought better equipped to turn the dial up around... or up and down that P&Ls. And I think therefore the operational gearing is actually more manageable in some respects, but no less material in the context of opportunities to offset any revenue issues that we might have.

Tom Glocer - Chief Executive Officer

Core Plus, I guess the question is just about how far the program goes and is there anything in addition. I am thinking about it slightly differently as we go forward. I mean we will deliver the $150 million, and then of course on top of that, now we've got $500 million of net synergies savings from the merger. I think where at least I am thinking about Reuters and Thomson financial is to get beyond program savings and get to a target growth and margin range.

So the short answer right now is no, I don't think you should assume there is any additional saving, but in part that will depend on where the growth rate is and where the target margin rate is. Obliviously, we've talked about the target margin range for Reuters standalone in the past 17% to 20%. And there is... there should be scaled benefits to putting these two businesses together. So it's a bit premature right now, but I sort of want to get out of the program mentality of the savings and get into running the business for the optimal growth and margin range, which should be better than either Reuters or Thomson alone, because of the scaled benefits.

Devin Wenig - Chief Operating Officer

And on FXMS, I mean I guess the thing to say nothing has dramatically changed. We are doing something very innovative. We continue to believe that we've got a better mouse trap for how the trade FX on a centrally cleared basis. The venture is a little bit behind plan, not dramatically so. And we remain really committed in part, because we have a long history of Reuters of seeing how long it takes markets to adopt new ways to trade. Instinet took a good couple of years; the original Reuters monitor dealing had a pretty slow uptake. And then when they go, they really go. Probably the other thing to say about it is we... the real risk I think for our franchise, and maybe this is a bit of sort of snapshot of how we approach the whole area of innovation. Our big risk would have been to only stay with the old, and let somebody else go off and try and do exchange traded FX.

We are really nicely hedged, positioned with participation in conversational dealing market, matching dealing the information terminals, one to many systems, the RAT franchise, and now the exchange centrally cleared model. And as you've seen, we have done incredibly well, because the FX market has essentially told us it's not rushing yet to the exchange model. We think that may still come, but the important thing is wherever it goes, we plan to be there with the big basket under it to collect the profits.

David Grigson - Chief Financial Officer

Colin.

Colin Tennant - Lehman Brothers

Hi, Colin Tennant at Lehman Brothers. Just going back to the Q1 guidance and the 9%, it's obviously a very strong number. I wonder if you could give us any idea of across the markets and functions, where maybe something going ahead and particularly I guess in the same weighing on the net sales line, are you seeing some markets like... perhaps you would expect that to be weaker for strong with U.S. and idea of how that is planning out. And the second thing is on the synergy revenues, Devin that you talked about. If you... are you going to be in a position at some point to sort of give us an idea, quantify what might be out there or is it, I guess from your answer to the last question maybe going to be possibly overall target as we go into through this year?

Devin Wenig - Chief Operating Officer

The trends early in the year, obviously we have two months under our belt, but they very much back up the things that I was saying in the presentation. I mean January, February were two of the best months we've ever had in our history in the FX franchise. Commodities and energies continues to perform well, emerging markets early in the year has continued to perform very, very well. Obviously, there are some areas that are slower. Ironically, fixed income is not one of them; we are actually doing pretty well in fixed income because of credit. The only response to some of the issues around mark downs has been a need for independent pricing data. And we came to market about a year ago with a credit pricing suite, including news, data, and all of our traditional tools, and we are seeing great uptick in that. So actually credit and fixed income has been an opportunity for us right now.

Equities desktops has been relatively slower than those areas and there has been a few others that have been relatively slower, but you know the new year has absolutely seen the trends that we've talked about for 07 continued for us, and in some cases even stronger. In terms of the revenue side, I mean I think that will be up to Tom and about the way we are about, how they want to set those goals and targets for the combined company. From my perspective, I will track internally revenue that we can achieve from the combined company revenue synergies. But I am not fundamentally managing the business that way. I really do think that this about a target growth in margin range for the company, when we get beyond program after program after program. And a contributor to that will be of course cost savings and revenue uplift. But it's not fundamental way that I think about it. I think about it in terms of where will we be against competitors and against our shareholders expectations on revenue growth and on margins.

David Grigson - Chief Financial Officer

Jonathan?

Jonathan Helliwell - Cazenove

Thanks. It's Jonathan Helliwell at Cazenove. Just again trying to get a bit of comfort on this surprise acceleration to 9%; and could you... you are clearly doing... seeing good circumstances of net sales; can you talk about whether it's... are you seeing a higher rates of cancels, but it's offset by an even greater acceleration of gross sales, or it works through that? Second, if a large U.S. investment bank laid some people off say in January of this year, just walk us through when you'd see that in... well, it's pretty obvious I guess [ph] in sales, and when you would see it particularly in revenues? Just how it's been through in terms your contracts, so that we can get a sense of the lack that is or isn't? And just lastly, is there anything unusual? How you centralized people, your sales people to sale, particularly during this tough period of this year? Is there a danger that you've accidentally over incentivised them to push a lot of things as it all before April?

Tom Glocer - Chief Executive Officer

I will start with the last point. I don't think so; I mean if you looked at our sales commission plans across the world or management bonus plans they have been properly focused on driving growth, but I think you can see in terms of our cost performance last year that neither commission cost spiked up hugely or compensation costs. So I think for years, Reuters was arguably under geared to push performance in good periods. Your question on sort of what happens to the trader who gets fired in January is a complex one in the sense that... I can give you an easy answer, if that person is trading at a firm that's signed a multiyear enterprise agreement, nothing happens to the Reuters revenue through, let's say, the next couple years.

And Devin mentioned some of the places including Citi and HSBC who had large write-downs, where we do have enterprise agreements in effect. And the interesting thing is we are still seeing appetite for them, because the big firms are realizing there is an opportunity to actually save through rationalization. But let's assume for a second, it's not an enterprise customer; you still have one to two year contracts and especially, where it's the terminal business you more likely have that. The part of our business, where there is greater flexibility in terms of cancellation tends to be our data feed business, and that's very resilient. So I guess the last thing I'd say about the whole area before turning over to maybe Devin for a comment on the gross sales versus cancels mix is... we don't have a perfect crystal ball on the second half of 2008 or 09.

Some of the conversations I have been having with customers the reason they are not doing indiscriminant lay-offs across the board is they still think the second half of the year might not be bad. I am hearing from some of the biggest firms that first quarter might be our worst quarter. But we have the sort of relationships now with our customer, and we are positioned in way that where we headed into a period as bad as 2002 and 03 was, I would have expected to some traces of that. David made reference to how bad our December 2002 was. Well, I've gone back and looked at November, October, September, those were painful months too, which isn't to say that this couldn't come that the world is going to end, but we don't see that and we don't see even the sort of bread crumbs that would lead to that trial.

Devin Wenig - Chief Operating Officer

Yes, to that point, today to this point, we've seen an accelerating additions, new sales, and we've not seen any meaningful pick up in cancellations, nothing unusual, nothing off the trend from the past.

David Grigson - Chief Financial Officer

Okay. John, let's get on to the front row.

John Clarke - Brewin Dolphin

John Clarke, Brewin Dolphin. Well, it's good to see that you beat your estimates then, just as you beat your estimates in 1984, and I actually think 19% ForEx growth was certainly something that ran through the congratulating you forming [ph] even though then of course you talked rest of advantage of launching the Reuters monitor dealings service, and of course you still got 6%, I think revenue from media, which is about slightly more than that in 1984, but still there. And we were all tending you to sell it for at least the past 20 odd years. It's good to see that you've got it. Anyway, that was then, this is not and looking to the future, I was going to ask you I don't know if I am allowed to ask the question on this. But mergers have often been difficult to bring into effect to mere disappointed in early phase because of IT integration difficulty, so how is that proceeding?

Tom Glocer - Chief Executive Officer

I'll let Devin comment on some sort of more specific product platforms. I think there are usually... there are two great challenges. One is the software cultural issues, where it's just an absolute mismatch, people don't consciously recognize that acknowledge it and do something about it. And one of the benefits of having had a longer regulatory review is there has been a lot more time for the sort of pro forma management group, which has been functioning as a steering committee for the integration to get a level of trust and get a pattern of working together, which we've been doing all through the year.

So well, undoubtedly the areas, where different companies, but so far culturally... I think it's working out quite well that for me is an interesting bridge into the IT area, where I think Reuters has come a very long way from having big problems doing the big IT projects to the point now where things like the Core Plus programs, the common platform, a really well managed in teams under Devin. Thomson is particularly good at large scale IT, Mike Wilens, who run technology, but also strategy and innovation is one of the most original thinkers in the way you apply technology for business benefit. So, I actually see... I see all the challenges, but I think it's going to be one of the core strengths of the combined company, once we get over the initial hump of how do you pull out Oracle, how do you put in SAP and which is a real example.

And Devin you want to comment a little bit on the products?

Devin Wenig - Chief Operating Officer

: Yes, it is the right question, because it is an area of particular complexity. And we do have some hard issues, but I'll just point out a few things. The first is that actually the state of technology has moved on to the point, where there are some things that may have been challenging years ago that are at today. So an example is Thomson Financial in particular is a very web services oriented company. It doesn't solve everything, but it helps, right? So, some of the things that I talked about in terms of availability on day one wouldn't have been possible ten years ago, they are possible today, because we are really talking about integrating pretty standard web feeds, right? I don't want to make it too simple, but it is simpler than it has been historically. There are other areas, where it's not that simple, and the one lesson that I have is that in those areas you make your big decisions quickly and you implement quickly. So, for product platforms one of the reasons we are successful with the Telerate acquisition is there were two complex pieces of software: the Reuters desktop in the Telerate desktop. And rather than try to pick our way through the best of this and best of that, we just decided to choose one and we implemented one. And I think you can take a lesson from that as the way we'll approach this.

Tom Glocer - Chief Executive Officer

Okay, let's just quickly take a question of the webcast and I think certain it is better, isn't it? [ph]

Unidentified Analyst

Yes, I do. Going back to margin of revenue growth in Q1, you have got it interested in the breakdown between revenues coming from Core Plus and from the Core business?

David Grigson - Chief Financial Officer

I'll just very quickly answer that. We saw... obviously, we saw Cope Plus accelerate in terms of its contribution quarter-to-quarter through 2007. I really expect this year to get into the 2008 and throughout, probably because as we've been saying an awful lot of those initiatives that are in... at our customers are investing continue to invest, and we'll continue to do so in tough time. So it wouldn't surprise me if Core Plus contributed a good one sort of that one to about 3% of the growth in that first quarter and then accelerated further from there.

Unidentified Analyst

Just one more follow-up question well with that?

David Grigson - Chief Financial Officer

Okay, quick.

Unidentified Analyst

Which is very skeptic and do expect CapEx to remain at the Continental for the first half of 2008?

David Grigson - Chief Financial Officer

Yes. Speaking for conformation from a member; Simon, let's give you. [ph]

Simon Baker - Credit Suisse

Thank you. Simon Baker, Credit Suisse; three questions. One is in terms of the signature that has become a signature 15 months and whether you could give us a little bit more in terms of the run rate of the cost savings that you may have had over delivery in 07, what does this mean for 08 from Core Plus. And if we are at least given 150 million pounds, where it is, what we can say about maybe bringing that forward a little bit as a consequence. Secondly, n the 1st of May presentation, we've... I appreciate it's going to be perhaps a bit of more margin targeted within the business as Thomson Reuters is going forward, but will we have some sort of information in terms of the revenue synergies that we'll e kicking in from day 1 and have something there? And thirdly the quick question just on price increases from the beginning of this year? Thanks.

Devin Wenig - Chief Operating Officer

Okay. Price increases, I'll start at the end, because it's always easier for me. We are doing... I'd say a little bit better even than we've done in previous years, so 2% and 2% plus. I think it's particularly good in an environment, where both because of what's going on in the markets. And everybody knew we were in a long regulatory review if somebody was really going to have a problem with price increases. The natural time to come have a discussion is when the regulators are looking at you carefully about what's your pricing policy. So I think here we are benefiting, because we don't press price gauge. We never just turn up the heat when and if we can. We've been I think really cooperative with our customers, and they have turned around and supported us strongly through the regulatory process. As for revenue synergies, we'll have more examples for you, I can't promise you that we'll actually give you a number, but you we understand that the thing that's most in our interest is to help you get a good picture of what the 2009 will look like. And towards that end, we are trying to not only just give you a single number for 2008 but a sort of comparison pro forma back the 2007, so you can see the momentum in the business.

David Grigson - Chief Financial Officer

And on the Core Plus savings more familiar I think to project exactly what Devin and his team are going to do, we are sufficed to say that, yes we did anticipate that we would see a further acceleration this year in our standalone budget process. But clearly it gets amalgamated in to the integration effort and Thomson Plus. And Devin and his teams have been working very hard to figure. But how do I actually maximize the overall benefit from all those activities to delivered the best possible result as early as possible, and that's the stuff you are going to back with on May, the 1st. Probably that's the best time to talk about it.

Let's go to this side as there is Paul at the back. We can get a microphone to Paul.

Paul Gooden - ABN Amro

Thanks. Paul Gooden from ABN Amro. Two questions please; first one, is there any evidence you had at revenue dissynergies, where perhaps you sat down with customers and they said what are Reuters bill and Thomson bill and one plus one doesn't equal two, or examples of where clients were set for business contingency purposes, they have had to drop either on Reuters or Thomson products. And then the second question is if you do go into a downturn, I see to recall last time around, there were agreements with customers and you said well we are not going to force our customers to take our product, because that's not good long-term relationship management. Are you saying that this time around if we are to end up in a similar situation, Reuters would just be more organized about it?

Tom Glocer - Chief Executive Officer

Are you asking that question for Fred or... I'll take the later one and give the other to Devin. The answer is the best relationships are ones where you don't pull the contract out and wave this in customers' face. The issue is not whether we wouldn't sit down and have a conversation, because often the issue is you find other ways to reach the goal and we think we are always focused on is how can we reduce the overall total cost of ownership, whether that's taking market share from another competitor, whether that's reducing the telecommunications or maintenance costs. So even during say a period of relatively more weakness for Reuters in 2001, 2003 period. The contracts basically people respect them, and nobody says, I know I owe you a 100, but I'm only paying you 50, it just hasn't happened, and I don't expect it would.

David Grigson - Chief Financial Officer

On revenue, there will be some revenue dissynergies. It's imprudent not to just assume that in any large merger like this. I have not seen any specific evidence of cases of that now. And I will just point out that the issue of backup of somebody using both Thomson and Reuters is sort of replacements for each other, so a lot less than we probably even thought when announced the merger. But the business is really are complementary. Thomson's business is in a lot of places, where Reuters is not. So that doesn't mean that doesn't exist anywhere, but it's significantly less than say in a case like Telerate, where we said that often times Telerate and Reuters were used by some people in intangible services, much lesser than diagrams overlap much less, where it come to Thomson. With all that said, anytime you are going to swap out technology. Anytime you are going to make some big heavy lifting that we will do. There will be some revenue dissynergies and we've said that. When we announced the 500 million, we said that was a net number, net of about 150 million of revenue dissynergies. At this point, that number seems as good as any; and at the right point I guess we'll update it. But there is no update for that now; that still seems reasonable.

Tom Glocer - Chief Executive Officer

Mark?

Mark Braley - Deutsche Bank

Thanks; it's Mark Braley at Deutsche. Devin, you referred to sort of investment in 2008; how that assumes major product launches in 2009. As I understand at the part of moment, it's sort of sort of Xtra 5.0 gets kind of rolled out this year and we have exercise [ph] an Xtra 6.0 is that kind of the great going forward; is that correct? And more broadly when you talk about major product launches in 2009, can you kind of roughly state how much of the terminals revenue base that will be impacting, so I understand just a degree of kind of change risk?

Devin Wenig - Chief Operating Officer

Yes, you are right about everything other than Xtra 6.0; it won't be called Xtra 6.0. I think we are... the Xtra franchise is doing its last lap now and we are going to retire it along other great Reuters brands like 2000 and 3000, and then we'll probably go with something else. But it will be a major, it will be the most significant product launch in 2009 that this company has had in a long period of time, probably decades; and it will impact a majority of the terminal base, not immediately. Obviously something of that scale takes time to roll out. But it's not just the premium desktop product, the Xtra; it will also the all be all of our mid-tier products. Basically all of our desktop products overtime will get impacted and it will be a significant. In many ways, it is the next modeled year after 2000 and 3000 Xtra the next model year is 2009, and it will be a big event for us.

Tom Glocer - Chief Executive Officer

Yes, just to add, we were incredibly excited about the prospect of changing our game also the common platform with a user experience that was going to be much better just standalone Reuters. But having all of the Thomson content and expertise and scale in the U.S., I think it's just a really exciting event for us. And it's different than a migration from 2000 to 3000. This is something where the user base currently the £1 billion or sort of revenue that's on Xtra 5.0 or will be is very solid on a great product. This is the sort of move up, where we think there are pricing implications, market share implications and that might come at a very handy time in 2009.

David Grigson - Chief Financial Officer

This is when iPOD launched.

Devin Wenig - Chief Operating Officer

But like I said, don't assume that we just immediately... it impacts every single one of customers right away. I mean, actually it will be out there, it will be available, but will be prudent in the way it rolls out for our customer base.

Mark Braley - Deutsche Bank

Okay, got it.

Unidentified Analyst

Hi, Thomas [indiscernible]; just going back to Jonathan's question and your answer about the lag effect on the multi-enterprise contracts. Can you give any idea of the portion of your emphasis that are within these sorts of contracts as opposed to ones that aren't? And then secondly, aside from that lag effect if there is a downturn, can you give any feel for on recurring revenues, if there likely to be any less co-related to financial services headcount reductions?

Tom Glocer - Chief Executive Officer

I was trying to do the mental arithmetic quickly on enterprise. You may have the number.

David Grigson - Chief Financial Officer

A little bit less than 10%, about 8% of our total revenue, and it's not just a total business, but across the board obviously.

Tom Glocer - Chief Executive Officer

I am sorry, the second question was...

Unidentified Analyst

Just a correlation of recurring revenues of financial services headcount reductions; is there any reason aside from the timing effects on the lag effect? Is there any reason space you will be any less correlated than in the last downturn?

Devin Wenig - Chief Operating Officer

Yes, I think there are couple of reasons, so one is a very purposeful reorientation of the firm towards machine-to-machine, the enterprise story, and transaction revenues. Number two is the exactly where we are peak the throw off in the headcount reduction if you want to compare what's happened in the last six months versus three, four years ago. There are also interesting stats that we look at on the percentage of folks, who have two accesses, let's say have, Reuters and Bloomberg today versus before and there are fewer overlapping services. So there are number of reasons why we feel that, yes, taken to the extreme reducing heads will effect the half of our business, which is terminal base. But it's likely to be softer landing than it's been before. And an easy way to see that is just look at our terminal numbers over the last three years. They have been flat or slightly down, while revenues accelerated up. And that's the function of the enterprise story and transactions.

Devin Wenig - Chief Operating Officer

Okay. I think we are done. But before we are, there is one big thank you still to make, and that's to the other lady... the person on the platform here, who is saying you bye today, [ph] to my left, Miriam McKay, who is you've all become very familiar with and got to know extremely well as we have. And we are going to reserve the big thank you and the big send off to her also; so another big dramatic ceremony now.

Miriam McKay - Global Head of Investor Relations

Not yet.

Devin Wenig - Chief Operating Officer

So you should be. So I just thought it will be great if you could give her a big round of applause for being best IR professional in the media. [ph]

Miriam McKay - Global Head of Investor Relations

May I just say that in thanking me, you thanked the whole of the Reuters IR team, and for the guys they are here, [ph] thank you. And you are in great hands with Frank in New York and Christy [ph] in London. So, thank you all.

Devin Wenig - Chief Operating Officer

Thank you, see you later.

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