Thomson Reuters (NYSE:TRI) Q2 2019 Earnings Conference Call August 1, 2019 9:00 AM ET
Frank Golden - Senior Vice President, Investor Relations
Jim Smith - Chief Executive Officer
Stephane Bello - Chief Financial Officer
Conference Call Participants
Toni Kapilan - Morgan Stanley
Drew McReynolds - RBC
Gary Bisbee - Bank of America Merrill Lynch
Kevin McVeigh - Credit Suisse
Tim Casey - BMO
Ladies and gentlemen, thank you for standing by and welcome to the Thomson Reuters Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded.
I'd now like to turn the conference over to our host Mr. Frank Golden, Senior Vice President of Investor Relations. Please go ahead.
Thanks and good morning and thank you all for joining us today. Our CEO, Jim Smith; and our CFO, Stephane Bello will review the results for the second quarter and half year and will update you on our outlook for the balance of this year. And then, Jim will close with the discussion of the acquisition of Refinitiv by the London Stock Exchange Group that was announced earlier this morning.
Now, we have a lot to cover today, so when we open the call for questions, we'd appreciate, if you limit yourselves to one question each to enable us to get through as many questions as possible.
As a reminder we do not control Refinitiv as we own 45% of the partnership. We account for our ownership interest as an equity method investment on our income statement. And I'll remind you that Refinitiv is not included in our adjusted earnings or in adjusted earnings per share.
Now, throughout today's presentation when we compare performance period-on-period, we discuss revenue growth rates before currency as we believe this provides the best basis to measure the underlying performance of the business.
Today's presentation does contain 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 Web site or by contacting our Investor Relations department.
Let me now turn it over to Jim Smith.
Thank you, Frank. And thanks to all of you for joining us today.
The second quarter was another eventful period for our organization and one that was marked by a number of significant steps forward in the execution of our strategy. Operating performance came in a bit ahead of our expectations. We launched new AI-powered products that we developed in-house and we completed two acquisitions that will help us fulfill our ambition of building world-class platforms to help our customers work more effectively.
Additionally, the merger of our former market data and trading assets with the London Stock Exchange Group will create even more value for our shareholders in the coming years. I will provide more detail on this transaction at the end of our formal remarks.
But first, let me expand a bit on our Q2 results. Reported revenues were up 9% in the quarter, which included the quarterly payment from Refinitiv to Reuters News. Revenues at constant currency were up 10%. More importantly, our organic revenues grew 4% in the second quarter, which represented our highest reported organic growth rate since 2008. That solid organic revenue growth performance was driven both by recurring revenues was around 5% and by transaction revenues which are up 2%.
Adjusted EBITDA was $355 million, up 2% due to the benefit of currency. Free currency adjusted EBITDA was unchanged from the prior period that despite much higher one-time cost. On an underlying basis, the adjusted EBITDA margin was 31.2% for the quarter benefiting somewhat from favorable timing of expenses. We do expect the margin to be a bit weaker in the third quarter due to timing of expenses and other factors, which Stephane will speak to in a moment.
And finally, adjusted EPS was up $0.12 to $0.29 per share versus $0.17 per share a year ago. Our legal corporate and tax and accounting segments, which comprise about 80% of our revenues led the way with strong organic revenue growth of 5%.
Recurring revenues for these three segments which make up about 88% of total revenues grew a healthy 6%. We continue to expect strong performance for these three segments for the full year. And as you've seen, this is where we've been targeting our inorganic investments as well.
Reuters news revenues are up over 100% including the quarterly payment from Refinitiv. With organic revenues up 2%, we will recall that Reuters News revenue growth rates will be distorted this year until the fourth quarter at which time we will lap the first quarterly payment that was made in the fourth quarter of 2018.
Global print continues to outperform our expectations by successfully slowing the rate of decline. Organic revenues declined 3% and made up 12% of total revenues. Since consolidating all of our global print businesses under one management team last year, that team has done a terrific job driving new sales, developing new commercial offerings, and increasing retention. And the team also continues to find ways to operate more efficiently as evidenced by the EBITDA margin exceeding 44% for the quarter, an increase from last year. For the full year, we now forecast that print revenues will decline mid-single digits.
So, we're encouraged by our first half results and we expect to deliver solid performance in the second half of the year as well. As we look to 2020 and beyond, we're working to build a faster growing business based on a sustainable recurring revenue model that should drive consistent margin improvement and steady growth in free cash flow per share. We believe, we're on a path to achieve that aspiration by executing on three key objectives. First, we are focusing on the fundamentals in order to deliver on our 2019 and 2020 targets.
Our first half results indicate that we're making good progress, but that we have more to do as we work to achieve our targets for this year and next. Second, we're continuing to build, on our strengths as a market leader. The strong positions we hold in our markets provide us with an opportunity to better understand and meet the challenges that our customer face. Demand for technology led workflow solutions that help our customers save time and deliver more valuable -- more value to their customers is increasing and we are working to capture new customer spend by serving those evolving needs. That's helped us to drive our commitment to develop new AI solutions, which our customers are demanding and expecting from us.
And third, we're supplementing organic growth by selectively acquiring businesses and capabilities that are truly complementary and that have a multiplier effect when combined with our existing workflow solutions. When we evaluate a potential acquisition, we always ask ourselves, why would we be a better owner of this business. The answer must be that the business, or capability can be plugged into our existing offerings and that it will accelerate growth for our entire enterprise. We are not adding businesses to a portfolio. We are building industry workflow platforms. That's precisely what we believe integration point is doing for our global trade management offerings and what confirmation will do for our tax and accounting solutions and what IQ will do for our legal and corporate businesses.
Let me now speak to our recent acquisitions a bit more and our new AI products which we believe will contribute to an accelerated revenue growth rate. Building that growing sustainable recurring revenue model, of course, requires healthy organic revenue growth. And that's what these three AI solutions on this slide are expected to do. Each of these solutions further strengthens our position and enables us to tap into wide space where we can increase our share wallet by improving customer productivity.
AI solutions are now part of our developmental fabric and we plan to release additional AI solutions in each of our three core business segments over the next 18 months that will also contribute to growth. Westlaw Edge was released one year ago. It has been very well-received in the market and it continues to command a premium. We're also enriching the product. I mean just last month released Quick Check a new module available in Westlaw Edge that furthers the lead we have in legal information in analytic tools to help lawyers work more effectively.
Quick Check quickly reviews a user's motions, briefs, or other legal documents to find highly relevant authority, secondary sources, and other related briefs and memoranda to ensure that Westlaw Edge customers find what they may otherwise miss in traditional legal research. It provides lawyers with peace of mind that their research is thorough. They can also know that they've cited the most relevant authority and most accurate law. It can also help find weaknesses in an opponents brief. And it delivers the best work product possible, for the client, while also saving an attorney time.
As evidenced by the quote on this Slide from a law firm partner, if clients know this exists every firm will have to have a Quick Check. Our customers are already recognizing the benefits and we are pleased with the positive reception thus far.
And finally, Checkpoint Edge is our recently released AI enabled intelligent tax and accounting research and guidance tool, which is also being well-received in the market. Checkpoint Edge delivers the most relevant and accurate information that tax and accounting professionals need to respond to the challenges their clients face with a constantly changing tax and regulatory landscape. We expect this solution also drive sales in the second half of the year as it has adopted a commercial model that's very similar to the one we used with Westlaw Edge.
Now, and you've seen by our recent acquisitions, we are supplementing our improving organic growth rate with fast growing and strategically aligned businesses like the ones listed on this slide. I've consistently said since closing the Refinitiv deal last year that we plan to use our investment fund of $2 billion primarily to strengthen our positions in legal, tax and accounting businesses by pursuing cloud-based software businesses that's exactly what these acquisitions do.
Specifically, each of these acquisitions is highly complementary to our product suite and also expands the geographies where we operate. They are in high growth market segments and they are growing at 10% to more than 30%. They will be able to utilize our significantly larger distribution networks and sales forces and each of them fits an essential acquisition criteria. Their cloud-based software businesses that help our customers work more effectively with their customers. They are important building blocks in the construction of industry platforms. So within these three acquisitions, we have utilized approximately half of our $2 billion investment fund.
So given our first half performance, we are raising guidance for 2019 and '20, both revenue growth and EBITDA margin. We now expect 2019 revenue to grow between 3.5% and 4% and we expect 2020 revenue growth to range between 4% and 4.5%, a reminder that these are organic growth rates. And for EBITDA we forecast that both 2019 and 2020 will be at the upper end of the ranges that we had previously provided, EBITDA is expected to be between 1.45 billion and 1.5 billion, this year and the margin is forecast to be approximately 31% in 2020.
In spite of the traditional impact associated with the acquisitions we just completed. I remind you here that all three of our recent acquisitions will be accretive to free cash flow next year. And last, we now expect that we can fully eliminate stranded costs by the end of 2019. Therefore, corporate costs in 2020 are expected to range between $140 million and $150 million versus the prior estimate of $140 million to $190 million.
So, with that, let me turn it over to Stephane.
Thank you, Jim and good morning or good afternoon to all of you joining us today.
As we always do, let me start by reminding everyone that our results exclude the performance of Refinitiv, also I will talk to revenue growth before currency. So, on a constant currency basis, second quarter revenues were up 10%. Currency at $21 million negative impact on revenue or just under 2%.
On an organic basis, revenues grew 4% during the second quarter, which excludes the impact of the Reuters News contract with Refinitiv, the Integration Point acquisition and a few small divestitures. And we provide more detail about the breakdown of our organic revenue growth rate on the next slide.
But first, turning to profitability, adjusted EBITDA was $355 million in the second quarter up 2%. That performance reflects additional costs and investments related to the separation of the two companies offset by margin expansion across most segments.
And as Jim mentioned, we do expect the margin to be weaker in the third quarter given the higher costs we will incur related to our ongoing transformation programs as well as a dilutive impact of our recent acquisitions. From a timing perspective, we spent about $30 million less in the second quarter related to one-time corporate costs and we had a plan, but this is expected to fully reverse in the third quarter.
Importantly, we still expect to finish the year with EBITDA in the top half of the range we have provided earlier or full year outlook. I would provide more specific details on our outlook for corporate costs in Q3 and Q4 in just a moment.
But, first and similar to last quarter, before turning to the segment results, I'd like to go a little deeper into our organic revenue growth performance in the first half. Overall, organic revenue growth was 4%, which represents an improvement of about 170 basis points over the performance in the first half of 2018.
As shown on the left-hand side of this graph, this was driven by better organic growth performance in all three of our core businesses, legal, corporate and tax and accounting. Overall, both recurring and transaction organic revenues are contributing to the 170 basis points improvement, which is reflected on the right-hand side of the slide.
Starting at the top, our recurring revenues in the first half were about 5.5% organic, an improvement of 130 basis points from last year. Recurring revenue growth in the second quarter and it is slightly below 5.5%, which was very marginally below the first quarter performance. This was driven by strong net sales, improved retention as well as improved price realization. The year-over-year improvement in recurring revenue growth was particularly visible in the corporate segment, while legal and tax and accounting professionals, each grew by about 100 basis points.
Now shifting to the bottom right portion of the slide, you would recall that in the first quarter transaction revenues had declined 3% driven by our legal segment. Now, despite a better performance in the second quarter, during which transaction revenues were up 2%, our transaction organic revenue growth was down 1% during the first half of the year. However, that performance reflected an improvement of 190 basis points over the prior year period. And the improvement was all concentrated in our corporate segment with both legal and tax and accounting professionals, slightly worse than the prior year.
So, we are encouraged by our first half revenue growth performance, which gives us the confidence in the trajectory of the business and that is the reason why we raised a revenue growth guidance to the top half of our guidance range of both 2019 and 2020.
Now, let me provide some additional color on the performance of our individual segments starting with legal. Legal revenues where 73% during the quarter, with organic revenue up 4%.
Recurring revenues which were 92% of the total were up 4% organically, while transaction revenues were up 6% organically primarily driven by growth in our elite products. From a profitability perspective, the margin of 38.5% was up 500 basis points over the prior year period driven primarily by revenue growth, productivity savings and some favorable timing of expenses.
We continue to expect the full year EBITDA margin to be up from last year driven by the factors I mentioned earlier. And here's a more detailed look at legal professionals revenue performance for the second quarter. Law firms, which includes small, mid and large law firms and represented about two-thirds of total revenues, law firms grew 2% up from 1% growth in the first quarter.
Governance was up 6%, and the global segment was up 3%. Now, that performance was negatively affected by the divestitures of some of our transactional based businesses in Canada, which had a negative impact of about 650 basis points.
Finally, legal retention rate in the second quarter climbed about 91%, which speaks to the health of the business and it is also contributing to revenue growth.
Now, moving to our corporate segment, corporate revenues were up 9% during the quarter with organic revenue growth of 7%. The acquisition of Integration Point largely explains the difference between the total and organic growth rates. Recurring revenues, which made up 85% of the total were up 9% organically. And transactions revenues were down 2% organically due to softness in a former legal managed service business, which as a reminder we sold to EY wide on May 31.
From a profitability perspective, the margin of 32.2% was up 20 basis points from the prior year despite the dilutive impact of the Integration Point acquisition. Now, looking at corporate result by sub-segment; large corporates grew 10% driven both by tax and legal solutions, in addition to the newly acquired Integration Point business. Organic growth in that sub-segment was 7%. The medium sized corporates grew 7% and global corporates grew 4%, thanks to a solid performance from our Asia business.
Moving onto the tax and accounting professionals segment, second quarter revenues grew 6% and organic revenue growth was also 6%. Recurring revenues which were 81% of the total were up 9% organically driven by a strong performance in our Latin American business as well as some favorable timing factors.
Transaction revenues declined 4% organically and the adjusted EBITDA margin for the segment was 33% compared to 23% in the prior year period due to revenue growth, efficiency savings and favorable timing of expenses.
As a reminder of the tax and accounting segment is our most seasonal business with nearly 60% of full year revenues typically generated in the first and fourth quarters. Because of this, the margin performance in this segment is generally higher in the first and fourth quarters as costs are [indiscernible] in a more linear fashion throughout the year.
Now, looking at the tax and accounting revenue by sub-segment, small, mid and large accounting firms which make up nearly 80% of the total grew 4%, our global businesses lose 27% primarily driven by our Latin America business. And our government segment which makes up just 6% of revenues declined 11%.
With a steady start of the year, coupled with the recent launch of Checkpoint Edge and the acquisition of Confirmation, we believe that these businesses on a positive trajectory as we look to the second half and to next year.
Moving on to Reuters News. The second quarter results include $84 million of revenues from Refinitiv, which explains the revenue growth rate exceeding 100% in the quarter. The third quarter will be the last quarter of higher growth rate before returning to a more normalized level.
Organic revenues were 2% which was mainly attributable to a price increase related to their Refinitiv contract and EBITDA was $10 million, but we expect higher costs and investments in the second half which will result in a weaker a EBITDA performance over the balance of the year.
As a reminder, the revenues from Refinitiv essentially cover the cost of providing the new services. And therefore, this contract as a dilutive impact on our overall EBITDA margin.
And last, but not least, our global print revenues declined 3% over the prior year with organic revenues also down 3%. These better than expected performance was attributable to improved sales growth and improved retention, which has increased some. 500 basis points over the last five years.
EBITDA margin for the quarter actually increased from the prior year period ending at about 44%. This new Global segment structure is enabling the management team to better identify areas to leverage scale on both the revenue side and the cost side. Best practices are being implemented in each geography or contract renewals, which is helping sales and retention. And on the cost side, savings are being achieved in a variety of areas, including having recently announced that consolidation of all North American printing, in our Minneapolis facility. For the full year, we continue to expect global print revenues to decline mid-single digits.
Now, before turning to the Refinitiv results, let me provide you with a quick snapshot of the projected financial impact associated with the acquisitions and divestitures, we recently completed. The information provided on this slide is somewhat directional, but hopefully it should give you a good idea of which business segments will be mostly impacted by the recent M&A activity. Overall, the three businesses we have acquired over the last eight months, I expect it to generate about $135 million in annualized revenues in 2019. And they are growing at about 25% in aggregate.
Now, please note that the revenue base shown on this slide represents their expected annualized revenue base. And since, we only acquired conformation and IQ two weeks ago, these businesses contribution to TR revenue in 2019 should be about half of the amount indicated on the slide.
We also divested businesses with an annual revenue base of about $70 million. These disposals would reduce our exposure to services and transaction revenues going forward. From a profitability perspective, we expect the acquisitions we recently completed to be dilutive to our margins in the near-term due to one-time deal related integration cuts. But, this in no way reflects the long-term potential of these businesses. In fact, we do expect all three acquisitions to become accretive to our margins within a 24-month period.
Let me now speak for a moment, the performance of the Refinitiv business. As a reminder, our previously reported results for the F&R business are not fully comparable to the basis on which Refinitiv currently reports its financial performance.
For instance, Refinitiv must apply specific purchase accounting rules which were obviously not applicable before the closing. Also Refinitiv's management team uses slightly different definitions to calculate its non-IFRS metrics. So, what you see in this table are the results as provided by Refinitiv's management.
Now to the results for the second quarter. Refinitiv revenues before currency were up 3% in the second quarter rounding to %1.6 billion. Recurring revenues excluding recoveries were 2%. And continued market volatility led to a 10%percent growth in transaction revenues.
Adjusted EBITDA of $555 million excludes the transformation cost of $126 million during the quarter and on that basis, the adjusted EBITDA margin was just under 36%. Free cash flow for the second quarter was $89 million, debt outstanding was just under $13 billion. And the preferred equity outstanding was about $1.1 billion.
And lastly, Refinitiv achieved run rate savings of $380 million as of the end of Q2 and expects to achieve over two-thirds of its total run rate cost saving target by the end of this year. So, the company is very much on track to achieve its full run rate target of $650 million by the end of 2020.
Now, let me turn to our earnings per share and free cash flow performance. And I will also update you on our expectations for corporate cost. So, starting with earnings per share, adjusted EPS increased by $0.12 to$0.29 per share resulting from fewer shares outstanding and lower interest expense following our debt repayments in 2018 using part of the Refinitiv transaction proceeds.
The EPS increase was partially offset by higher depreciation mainly due to the adoption of IFRS 16. As well as higher income taxes which is very much in line with what we have projected in the guidance we provided earlier this year. And finally, currency had $0.01 positive impact on EPS during the quarter.
I will now turn to a free cash flow performance for the first half. Our reporting free cash flow was negative $176 million versus a positive $675 million in the prior year period. So that was a decline of about $850 million. Consistent with previous quarters, this slide will hopefully help you remove the distorting factors impacting our free cash flow performance during the first half.
Working from the bottom of the page upwards, the Refinitiv related component of our free cash flow was down $502 million from the prior year. And that was primarily due to Refinitiv no longer being included in our results. Also in the first half, we made a pension contribution and out of payments totaling $370 million or related to the rare punitive separation. So, comparable free cash flow from continuing operation was $318 million, an improvement of just over $20 million over the prior year period primarily due to stronger EBITDA performance before [indiscernible] and one-time cost and also to lower interest expense.
Now, a quick update on corporate costs from 2019 and 2020. Let me start by saying that the 2019 annual estimate has not changed from what we showed in our original 2019 guidance. For the full year, we continue to expect to spend about $570 million.
Looking at our spend during the second quarter, it was lower than we had expected at $140 million. And that was primarily timing related. We now expect one-time spend to peak in the third quarter driving corporate cost to a quarterly high point of about $160 million. We have a number of initiatives slated for the third quarter, including building out our own communication networks and shifting several products to the cloud. As a result, we do expect Q3 to be our heaviest quarter from a one-time cost perspective.
And finally, as Jim previously mentioned, we are raising a full year 2019 guidance for organic revenue growth to 3.5% to 4% and even after considering the dilutive impact of our recent acquisitions, we now anticipate being in the upper half of our adjusted EBITDA guidance range of $1.45 billion to $1.5 billion. By 2020, we are updating our organic revenue growth guidance to 4% to 4.5%. And we are taking our guidance for adjusted EBITDA margin, the top of the range at approximately 31%.
Finally, as mentioned earlier by Jim, we expect to eliminate all stranded costs in 2020, such that total corporate cost will decrease to between $140 million and $150 million next year, overall guidance metrics remain unchanged.
Let me know turn it back over to Jim for some comments regarding the transaction that was announced this morning between Refinitiv and the London Stock Exchange.
Thank you, Stephane.
At the time, we announced our partnership with Blackstone 18 months ago, we mentioned that one of the key reasons to do that deal was to position the business for what we saw coming on the horizon, which is a phase of consolidation in the financial services industry. Separating the financial business from Thomson Reuters was a necessary first step to put us in a position to participate in the industry consolidation.
It also enabled us to focus 100% of our attention and resources on our remaining legal and regulatory businesses. The second quarter results indicate that we are well on our way to accelerating growth in those core businesses. And the transaction announced this morning by us and the LSC Group confirms our initial thesis about consolidation in the global financial services market. This transaction transformed. LSC GE's position as a leading global financial markets infrastructure business and it increases its ability to capture global growth opportunities with a greater range of leading market positions.
Now, the value creation at Refinitiv since we began working with Blackstone has largely been driven by operational enhancements and cost savings. This transaction with LSC group will double down on operational enhancements with significant additional costs and revenue synergies expected to be realized once the transaction closes. As an investor, we are comforted by LSC Group's strong track record of integrating acquisitions, realizing synergies and driving growth and profitability. And with Blackstone remaining a very significant shareholder in the business alongside us, we are even come confident that this transaction will create significant further value going forward.
At a high level, the transaction creates an $8 billion company and position it positions the LSC Group for the next phase of sustainable long-term growth. The two businesses are highly complementary. Their combination will create a globally diverse company with a well balanced mix of stable, developed markets as well as emerging markets with good growth opportunities. The business will also bring together two leading global market infrastructure businesses, two companies that have successful, open access philosophies, and similar customer partnership approaches two companies that are systemically important, world-class businesses serving the global customer base. And the combined company will be a market leader across most of its business segments. Just 25% of revenues will come from desktops down from 38% at Refinitiv alone.
Now this slide was used by the LSC Group earlier this morning during its investor call. The slide lays out their forecast across key metrics and the financial returns they expect to achieve including financial targets for revenue growth.
Costs and revenue synergies expected returns for earnings per share and return on invested capital and their capital management framework for leverage and dividends. The combined company will have an attractive financial profile, with mid to high single digit predict projected revenue growth and strong EPS accretion in the first full year post completion supported by cost savings and revenue synergies.
I would direct you to the LSC Group, if you have further questions regarding this information.
Turning to financial performance, the LSC Group has demonstrated strong and consistent financial results with both revenue and EBITDA rolling mid teens on a compound annual growth basis, since 2010. And this consistent revenue and EBITDA growth was achieved through a successful combination of organic and inorganic investments and by any measure it's an impressive performance.
Let me now turn to several specific points about the transaction that are pertinent for our shareholders. As I mentioned a moment ago, the transaction validates the rationale for our original deal with Blackstone and it represents a logical next step along our path to the full monetization of the investment. Transaction provides a balance of additional long-term value creation, with a greater certainty on the path and timing of future liquidity down the road.
Having received about $17 billion of cash in October of last year, when we closed the deal. We also benefited from substantial increase in the value of our equity stake in a Refinitiv, increasing from approximately $2.5 billion, to more than $6 billion. This increase was a result of swift implementation of operational enhancements [indiscernible]. And the value on law from the trade web IPO. Importantly, the proceeds that we receive from the sale of ethanol are we use to strengthen our operating strategy and our capital structure. We repurchased $10 billion of our common shares at prices well below the current level. We repaid over $3 dollars of debt and reduced our leverage to a very modest level. And we set aside a $2 billion investment fund to make acquisitions that further strengthen our businesses.
Now, as part of this deal, Thomson Reuters is expected to receive up to $82.5 million LSC Group shares. Valued at 6.million dollars based on the closing price of the LSC Group yesterday and when I walked in the office this morning that stake would now be valued at $7 dollars. That number of shares reflects the exercise of warrants, we negotiated with Blackstone as part of the original deal. There will be a two-year lockup on all LSC Group shares that we received, with one-third sale in years three, four and five, after closing.
This transaction also crystallizes the value achieved to-date by the original Refinitiv deal, having largely achieved the targeted synergies, Refinitiv can now contemplate another round of attractive synergies as it becomes part of the enlarged LSC Group. And as a future shareholder, we will benefit from the value creation that's expected to be generated over the next several years until we achieve for monetization.
Furthermore, this transaction significantly derisk our investment in Refinitiv through greater diversification and significantly lower leverage with the LSC Group. And finally, we expect to receive a dividend stream from our investment, which is something we hadn't received from our investment in Refinitiv. Following, closing, we look forward to being a supportive shareholder and partner.
Now, let me go back to Frank for any questions?
Thanks very much Jim and Stephane for operating opening markets. And now, operator, we would like to take questions please. So, first question.
Thank you. Our first question comes from the line of Toni Kapilan with Morgan Stanley. Please go ahead.
Thank you. And Jim you just touched on this, but just wanted to understand…
Toni, can you just get a little closer to your phone, it is just a little hard to hear you.
Sure. Thanks. Sorry. Jimmy just laid out the capital allocation, strategy here, but I guess if you could just talk a little bit more about what this means for a couple of years out in terms of any changes to capital deployment, you're obviously this investment assuming and closes and post the lockup period obviously could be significant in terms of value. So, I guess could you just talk about capital allocation with the proceeds from this transaction announced this morning? Thank you.
Yes. Thank you. I mean obviously, it's a bit premature to be very specific about that Toni, and it is a good question and certainly one that we've been discussing a good deal. The way we handle our capital allocation decisions is that, we sit down with our Board once a year, take a look at the current environment, look at the current needs of our business what our opportunities are, and then we're in a very fortunate position already in that we have a business that is highly accretive from a free cash flow perspective. So we generate a lot of cash and the decision and discussion is all around where the best spend that cash.
So, in any given year, we'll make decisions about what our dividend increase is going to be, how much we're going to -- a lot for buybacks, how much CapEx is needed, how much we need to allot for acquisitions, but we kind of tune that every year on an annual basis and traditionally we've done that in September. So, we'll have a robust debate about that next month. And based upon that we'll kind of proceed along the path or along right now, Frank. We won't be any near-term changes shortly because you're not going to be any near-term big distributions that we would be expecting.
I would say however that frankly we're very happy to have the cash flow that will be coming in from the dividends and we'll never turn our nose up at additional cash flow through. Although, I don't think it would be significant enough to change our overall capital strategy, it will be nice nonetheless. And I just -- 1.8 so that I want to underline here.
I think about our business, in it's that kind of virtuous cycle that we have -- of having the ability we can grow our top-line in the mid single digit, right, then that we're going to get some leverage that falls through to the bottom-line. We can see continued growth in our free cash flow and that free cash flow can then be reinvested just the kind of acquisitions that we've done to help that top-line keep growing. And actually to add a little bit to the headline number every year. So, I don't think we'll change that basic model, but it'll be a good problem to have and a good discussion with our board.
Thank you. Congratulations.
Thank you. Our next question comes from Drew McReynolds with RBC. Please go ahead.
Thanks very much. Good morning. I just want to talk about our organic revenue growth in the updated guidance either for [indiscernible] on -- just one mind just kind of peeling us away a little bit. I guess the broad question is, when you look at your asset mix going forward, I mean it sounds like 4% is kind of the new baseline growth for the business.
Can you talk about just how what's driving that? In your prepared remarks you talked about recurring and that's really the basis for today's upward revision, but tuck with the up-sell cross-sell initiative if he can that the drag in transaction revenues ultimately reverse when you look forward.
And then, lastly on the calculation of organic revenue growth, are you including the organic revenue growth of the acquisitions that you add i.e., their apples-to-apples year-over-year growth, organic goes into that calculation? Thank you.
Sure. Again, that's good. That's quite a mouthful. Well, I'll start. It is 4% the kind of the new floor. It's a very, very interesting question and as you noted 80% of the business is kind of on this recurring revenue model and if you look underlying as we reported here that's growing nicely in fact is growing 5% or 6% across the core businesses. So that's highly repeatable, that's highly recurring that gives us a great confidence.
We do have 20% of the revenue that's in this transactional and print space. Print schedules aren't always exactly like-for-like, year-over-year in terms of what gets published and what those schedules look like. So, I'm not going to tell you that in any particular quarter transactional revenues, the 20% transactional and print could have us rounding down to three. No, I wouldn't tell you that.
But, I would say if you look at that underlying recurring base, right, and the performance we see in that, we look to 2020, we're thinking that a quarter beginning with the five is far more likely than a quarter we're getting with a three.
Okay. Thank you. And maybe Jim I could follow-up or [indiscernible] and just if you can talk to just what the tax implication ultimately is here for Thomson on the flow through from what's happening with Refinitiv in this transaction.
I will turn that over to Stephane.
Sure. Good morning. Look we would expect to pay taxes on the gain which we will eventually realize on our investment. When we monetize that investment. Our expectation is that the closing of the proposed transaction will not give rise to any significant taxes as we simply -- it's a share for share exchange. So, the tax should not be triggered at the time of closing. There are some circumstances where the deferred tax liability that we would book in connection with the transactions could potentially be accelerated. For instance, if we receive, cash for a portion of the investment and you may write in the announcement from the LSC that, yes, he has an option to pay up to $2.5 billion of the proceeds in cash rather than shares. And under that scenario obviously things we would be monetizing part of the adjustment that would be a portion of the deferred taxes that would be accelerated.
But, by and large, I think what you should assume is that taxes should be deferred. Until such time we actually realize the gain on the investment and that will happen, when we eventually set off shares based on the stock price of the LSC at which we sell shares at that time.
Okay. Thanks. That's beneficial.
Drew, I just realized I didn't answer the last part of your multi-factored question about how we calculate organic growth rates. Generally, we do not include acquisitions in the first year that they're acquired, right? And then, once we lap them they would contribute. So, they contribute small amount organic growth in any given year.
Yes. I think it works exactly the way you describing in your question. We can confirm that's the way it's calculated.
Thank you. Your next question comes from Gary Bisbee with Bank of America Merrill Lynch. Please go ahead.
Hi. Good morning and congratulations on the quarter and the transaction. I guess, if I could sneak in one question on the transaction and one of the operations, over the weekend when the first reports of potential deal came out, it talked about the $27 billion valuation. And I think between you and Blackstone 37% ownership, LSC stocks up 27% this week. So, is 27% really the right number or are we north of $30 billion transaction value at this point given that it's going to be largely based on shares. And then, the fundamental question, just as we think out over the next couple of years with the new AI powered cloud offerings that you're rolling out across your businesses, is there any reason to think that those won't be adopted by the vast majority of the customer base or there's some reason that either in legal or in tax that those are likely to appeal only to the very largest segment of customers or anything else? Thanks.
Stephane, if you can please address the first one and I'll take the second one.
Sure. So, your premises is correct, the number of shares that Blackstone and us are receiving, probably transaction was based on the unaffected stock price of the LSC. So, it was based on a weighted average stock price before the recent jump in the stock price that was the result of the announcement eventually. So, what you're describing is correct. Effectively the implicit value far is greater than the $27 billion headline number.
And as to the second one, it's a great question and frankly one we're learning a lot more about. Our technology team now is operating with a theme and that theme is AI everywhere. And I do think AI is going to affect products and our offering mix across every segment and every product that we deliver. And in fact, if you look at the early results on Westlaw Edge, if I've been positively surprised, I've actually been probably surprised by a lot of things, but I did not expect the level of take up that we've seen in the small law firm sector -- in mid-law firm size segment. So, actually these productivity tools could be even more effective in smaller operations where that efficiency is ever more valuable.
Great. Thank you.
Thank you. Our next question comes from the line of Kevin McVeigh with Credit Suisse. Please go ahead.
Great. Thank you. And let me add my congratulations. In terms of -- was the EBITDA kind of the boost to the 2020, was that all a result to the acceleration of the stranded costs or was it a combination of just the improving fundamentals as well. And then, just around the acquisitions the 10% and 30% growth, I mean really, really impressive growth. How does that look like as you scale that -- those deals across the core Thomson platform, I guess another way saying is, is there a way to think about what they can look like, is your cross-selling them across kind of the legacy business if you would?
Stephane, you answer the first one, I will take the second.
Yes. For the first question, sorry, 2020 EBITDA margin, it's a combination of the two factors. It's obviously the fact that we now at the level of content that we would be able to fully offset the stranded cost, so is Refinitiv, and it's also a reflection of the higher growth rate, which obviously comes with a pretty good flow through.
And these two positive factors are offset by the slightly diluted impact of the acquisitions and the margins. But, all-in that I would say we feel comfortable at this stage that we can achieve a margin of about 31% next year, taking mix of these three factors if you want.
And on the second one, I think there's a significant opportunity for us to accelerate the growth rates on those business that are already growing much faster than our core business. But, when you think about the scale of our global network and our sales forces and these businesses are right at the right size to really, really benefit from that. And we look at them actually with our acquisition, the Practical Law company as a really good guide. And if you -- for those of you who are around then, you'll recall that we purchased the Practical Law company which had a great footprint in the U.K. and was a preeminent provider of know-how knowledge and checklists and things like that where attorneys were -- right in the middle of transactional deals and things. And they were expanding -- beginning to expand in the United States and getting a little too cold in the U.S. And when we took that business and then pumped it through our platform, it was a very successful business, but we tripled the size of that business in three years, right.
And not only that, there are all kinds of knock on effects to our other online legal content businesses. And then, today, when we think about the workflow solution that we've designed for medium sized law firms, it's going to be based upon a marriage of the Practical Law taxonomy and workflow mapping, right. The matter of management maps married with our time and billing system [Onvio] [ph] who are customized kind of solution.
So, those are the kind of things we're looking at to say, yes, we can take something that and give it a bigger Salesforce, a bigger global presence and immediately get some benefit, but also where the addition of a back capability married with what we already have can create something that's really special that we wouldn't have done on our own.
Makes a lot of sense. Congratulations again.
Thank you. Your next question comes from the line of George Tong with Goldman Sachs. Please go ahead.
Hi. [indiscernible] on for George. Thanks for taking my question. I was wondering, if you guys had a pretty healthy margin expansion in the quarter for legal and tax and accounting. I was just wondering, if you could discuss how we should think about expansion within the three core segments going forward. And then, also sorry I missed this, because you talk about what caused the corporate tax margin decrease a little bit on the constant currency basis?
Sure. Let me take that question. Let me start with the last part of your question. The corporate margin actually improved a little bit, which is not about performance if you take into consideration, the dilutive impact of the Integration Point acquisition that they did late last year. So, you still have that impact going through the numbers. Absent that acquisition the margins would have been more meaningfully.
And in terms of margin performance for the three sectors -- the three segments, I guess you look at it, in the future, I would expect it's going to be a mix of these same two forces right. They should be good flow through know that all these businesses are growing at a pretty robust pace and you've seen the flow through essentially this quarter for the tax and accounting business and the legal business, which were not offset by the dilution impact.
But, going forward, there's going to be for each of these businesses actually for all three businesses, a little bit of margin dilution coming from the recent acquisitions. So, I would expect margin expansion stays for these businesses, but not to the same extent as what you've seen recently.
Thank you. Your final question comes from the line of Tim Casey with BMO. Please go ahead.
Thanks. Jim, just looking at your increased confidence in the organic revenue growth, what's driving that? I mean are you seeing the benefits of the cross-sell? Is it more of a product mix or are you just seeing better market growth overall? Can you break that down for us? Thanks.
So, I do think there's some factor there and that's a healthy market. I mean, we look at our pure monitor index and we did see an increase in both demand and in headcount certainly in the legal sector. We do have a market in which particularly United States, incredibly complex tax changes that went into effect this year. So, there's no question, we do have a favorable market environment. I think frankly though that it's just focus matters right and our ability to focus on those core customers. And for management to get up every single day thinking about how we better serve those customers and working on the relationship with those customers and providing the kind of improvements to service that I think we're providing.
As we look at what's driving it primarily is increased retention, right, and at this point. And we've got a new sales structure now in place, but if you think about it, they're really in their first quarter of selling in the new territories with the new offerings and with the new incentive schemes that we've put in and the commercial terms that we've put in. So, we're at the very, very early days of seeing success in that cross-sell up-sell stuff. What I can tell you, while its early days, we've seen it flow into the numbers. We do have a very exciting and excited Salesforce who is really learning a lot about how to do it and what we're learning is that the more we can tailor those cross-sell, up-sell opportunities to particular customers and segment, the better off it's going to be. But, that's early days.
It's a decent market environment, yes, but its focus increasing retention, improving service and in the future, we've got a new form to Salesforce empowered by a lot more analytics and tools to better target those sales efforts and with a much broader bag to cross-sell, but early days of tapping into that and add to that opportunity.
Are the AI products suites, moving the dial yet?
Certainly Westlaw Edge. And if you look at just the phase of the rollout, the answer is, yes. The other two are really early days, but boy, oh boy, they got a lot of interest in the market.
Okay. Thank you.
Thank you. That was our final question.
Okay. Terrific. We'd like to thank you all for joining us for our second quarter call. We'll speak to you again in the third quarter late October early November. And hope you have a good day. Thank you.
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