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Thomson Reuters Corporation (NYSE:TRI)
Q2 2019 Earnings Call
August 1, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. 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. If you have a question today, press * then 1 on your touchtone phone. You may remove yourself from queue at any time by pressing the # key. If you're using a speakerphone, please pick up the handset before pressing the numbers. We ask that you limit yourself to one question today if possible. And if you should require assistance during the call, please press * then 0. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Frank Golden, Senior Vice President of Investor Relations. Please go ahead.

Frank Golden -- Senior Vice President, Investor Relations

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 the half year and will update you on the outlook for the balance of this year. And then Jim will close with a discussion of the acquisition of the 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 it if you would limit yourselves to one question each to enable us to get to as many questions as possible. As a reminder, we no longer 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 also 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. Now, 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 website or by contacting our Investor Relations department. Let me now turn it over to Jim Smith.

Jim Smith -- Chief Executive Officer

Thanks, 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 and 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, which were up 5% and by transaction revenues, which were up 2%. Adjusted EBITDA was $355 million, up 2% due to the benefit of currency. Pre-currency adjusted EBITDA was unchanged from the prior period despite much higher one-time costs. 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, Corporates, and Tax and Accounting segments, which comprise about 80% of our revenues led the way with strong, organic revenue growth 5%.

Recurring revenues for these three segments, which made 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 were up over 100% including the quarterly payment from Refinitiv with organic revenues up 2%. You 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- to single-digits. So, encouraged by our first-half results, I'm expecting 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 and free cash flow per share. We believe we're on a path to achieve that execution 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 that we have more to do as we work to achieve our targets 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 provided us with an opportunity to better understand and meet the challenges that our customers face. Demand for technology led workforce solutions that help our customers save time and delivered more value to their customers is increasing. And we're working to capture new customer spend by serving those with all the needs. That's helped us 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 HighQ will do for our legal and corporates 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 white space where we can increase our share wallet by improving customer productivity. AI solutions are now a 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 and just last month released Quick Check, a new module available in Westlaw Edge that furthers the lead we have in legal information and 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 memorandum 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 opponent's 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 form a law firm partner, if clients know this exists, every firm will have to have 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 to also drive sales the second half of the year as it has adopted a commercial model that's very similar to the one we use with Westlaw Edge. And now, as 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 in sales forces. And each of them fits an essential acquisition criteria. They're 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, within our first half performance, we are raising guidance for 2019 and '20 for 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 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 strand cost by the end of 2019. Therefore, corporate costs in 2020 are expected to raise between $140 million and $150 million versus the prior estimate of $140 to $190 million. So, with that, let me turn it over to Stephane.

Stephane Bello -- Chief Financial Officer

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 components of Refinitiv. Also, I will talk to revenue growth before currency. So, on a constant currency basis, second quarter revenues were up 10%. Currency had a $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. I will 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 you 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 diluted 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 than we had planned. 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 had provided earlier for our full-year outlook. I will 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 would present 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% organically, an improvement of 130 basis points from last year. Recurring revenue growth in the second quarter, and it's likely below 5.5%, which was very marginally below the first quarter performance. This was driven by stronger 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 will recall that in the first quarter, transaction revenues had declined 3% driven by our legal segment. Now in spite of 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 in the 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 our revenue growth guidance to the top height of our guidance range of both 2019 and in 2020. Now let me provide some additional color on the performance of our individual segments starting with legal. Legal revenues were up 3% 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 from the finished savings and some federal 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 professional's 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. Government 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's retention rate in the second quarter climbed above 91%, which speaks to the health of the business and 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 was up 9% organically.

And transaction's revenues were down 2% organically due to softness in our former legal managed service business, which, as a reminder, we sold to EY on May 31st. From a profitability perspective, the margin of 32.2% was up 20 basis points from the prior year despite the diluted impact of the Integration Point acquisition. Now looking at corporate's result by subsegment, large corporate grew 10% driven both by tax and legal solutions in addition to the newly acquired Integration Point business. Organic growth in that subsegment was 7%. The medium-sized corporate grew 7%. And global corporate grew 4% thanks to a stunning performance from our Asia business. Now moving on to the tax and accounting professional's segment, second-quarter revenue 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, the tax and accounting segment is our most sealed 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 incurred in a more linear fashion throughout the year. Now looking at the tax and accounting revenue by subsegment, small, mid, and large accounting firms, which make up nearly 80% of the total, grew 4%. Our global businesses grew 27%, primarily driven by our Latin-America business. And our government segment, which makes up just 6% of revenues, declined 11%.

With a solid start of the year coupled with the recent launch of Checkpoint Edge and the acquisition of Confirmation, we believe that these businesses are 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 grew 2%, which was mainly attributable to a price increase related to the Refinitiv contract. And EBITDA was $10 million. But we expect higher costs and investment in the second half, which will result in a weaker EBITDA performance over the balance of the year. As a reminder, the revenues from Refinitiv, essentially covered the cost of providing the new services. And therefore, this contract has a diluted impact on our overall EBITDA margins.

And last but not least, our Global Print revenues declined 3% over the prior year with organic revenues also down 3%. The better than expected performance was attributable to improved sales growth and improved retention, which had 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 revenues side and the cost side. Best practices are being implemented in each [inaudible] for contract renewals, which is helping sale and retention. And on the cost side, savings are being achieved in a variety of areas, including having recently announced the 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 that recent M&A activity. Overall, the three businesses we have acquired over the last eight months are expected to generate about $135 million in annualized revenues in 2019. And they are growing at about 25% aggregate. Now please note that the revenue base shown on this slide represents their expected annualized revenue banks. And since we only acquired Confirmation and HighQ two weeks ago, these businesses' contribution to GR 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 will 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 costs. 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 to 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 owing to $1.6 billion. Recurring revenues excluding recoveries were 2%. And continued marketability led to a 10% 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. Federal 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 would also update you on our expectations for corporate costs. So, starting with earnings per share, adjusted EPS increased by $0.12 to $0.29 per share resulting from fewer shares outstanding and our 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. Finally, currency had a $0.01 budget impact on EPS during the quarter. I will now turn to our free cash flow performance for the first half. Our reported 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. From 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 other payments totaling $370 million all related to the Refinitiv separation. So, comparable free cash flow from continuing operation was $380 million, an improvement of just over $20 million over the prior-year period primarily due to stronger EBITDA performance before strand and one-time costs and also to our interest expense. Now a quick update on the corporate cos for 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 stand above $570 million. Looking at our spend during the second quarter, it was lower than we 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 previously mentioned, we are raising our full-year 2019 guidance for organic revenue growth to 3.5% to 4%. And even after considering the diluted impact of our recent acquisitions, we now anticipate being in the upper half of our adjusted EBITDA guidance range of $1.45 to $1.5 billion. For 2020, we are updating our organic revenue growth guidance to 4% to 4.5%. And we are updating our guidance for adjusted EBITDA margin to the top of the range at approximately 31%.

Finally, as mentioned earlier by Jim, we expect to eliminate all strand costs in 2020 such that total corporate cost will decrease to between $140 and $150 million next year. All guidance metrics remain unchanged. Let me now turn it back over to Jim for some comments regarding the transaction that was announced this morning between Refinitiv and the London Stock Exchange Group.

Jim Smith -- Chief Executive Officer

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 LSE Group confirms our initial thesis about consolidation in the global financial services market. This transaction transformed LSEG's position as a leading global financial market 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 LSE Group will double down on operational enhancements with significant additional cost in revenue synergies expected to be realized once the transaction closes. As an investor, we are comforted by LSE 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 more confident that this transaction will create significant further value going forward. At a high level, the transaction creates an $8 billion company and positions the LSE 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 LSE 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 partners for revenue growth, cost and revenue synergies, expected returns for earnings per share and return on invest to 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 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 LSE group if you have further questions regarding this information. Turning to financial performance, the LSE Group has demonstrated strong and consistent financial results with both revenue and EBITDA growing 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.

The 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 Refinitiv, increasing from approximately $2.5 billion to more than $6 billion. This increase was a result of swift implementation of operational enhancements at Refinitiv and the value or law from the trade web IPO. Importantly, the proceeds that we received from the sale of F&R we used 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 billion 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 of LSG Group shares valued at $6.7 billion based upon the closing price of the LSE Group yesterday. And when I walked in the office this morning, that stake would now be valued at $7 billion. That number of shares reflects the exercise of warrants we've negotiated with Blackstone as part of the original deal. There will be a two-year lockup on all LSG Group shares that we receive with one-third salable in years three, four, and five after closing. This transaction also crystalizes 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 LSE 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 full monetization.

Furthermore, this transaction significantly derisks our investment in Refinitiv through greater diversification and significantly lower leverage with the LSE 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.

Frank Golden -- Senior Vice President, Investor Relations

Thanks very much Jim and Stephane for those opening remarks. And now, Operator, we would like to take questions please. So, first question.

Questions and Answers:

Operator

Thank you. Our first question comes from the line of Toni Kaplan with Morgan Stanley. Please go ahead.

Toni Kaplan -- Morgan Stanley -- Analyst

-- you. And Jim, you just touched on this, but just wanted to understand --

Jim Smith -- Chief Executive Officer

Toni, can you just get a little closer to your phone? It's just a little hard to hear you.

Toni Kaplan -- Morgan Stanley -- Analyst

Sure thing. Sorry. Jim, you just laid out the capital allocation strategy here. But 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 it closes and post the lockup period obviously could be significant in terms of value. So, could you just talk about capital allocation with the proceeds from this transaction announced this morning? Thank you.

Jim Smith -- Chief Executive Officer

Yeah. Thank you. Obviously, it's a bit premature to be very specific about that, Toni. And it's 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 to best spend that cash. In any given year, we'll make decisions about what our dividend increase is gonna be, how much we're gonna allot for buy-back, how much capex is needed, how much we need to allot for acquisitions. But we 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 proceed along the path we're on right now, frankly. There won't be any near-term changes shortly because there's not gonna 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'll be coming in from the dividends. And we'll never turn our nose up at additional cash that'll flow through.

Although, I don't think it'll be significant enough to change our overall capital strategy. It'll be nice, nonetheless. One point that I want to underline here when I think about our business. And it's that virtuous cycle that we have of having the ability -- if we can grow our top line in the mid- to single-digits, then we're gonna get some leverage that falls through to the bottom line. We're gonna see continued growth in our free cash flow. And that free cash flow can then be reinvested to just the kind of acquisitions that we've done to help that top line keep growing. And actually, we'll live 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.

Toni Kaplan -- Morgan Stanley -- Analyst

Thank you. Congratulations.

Operator

Thank you. Our next question comes from Drew McReynolds with RBC. Please go ahead.

Drew McReynolds -- RBC -- Analyst

Thanks very much. Good morning. Just wanna talk about organic revenue growth and the updated guidance either for Jim or Stephane. Wouldn't mind just peeling this away a little bit. I guess the broad question is when you look at your asset mix going forward, it sounds like 4% is the new baseline growth for the business. Can you talk about just what's driving that? In your prepared remarks, you talked about recurring. And that's really the basis for today's upward revision. But talk about the upsell and cross-sell initiative if you 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, your over-year growth. Organic goes into that calculation. Thank you.

Jim Smith -- Chief Executive Officer

Sure. Don't know where to begin. That's quite a mouthful. But I'll start. Is 4% a new floor? It's a very, very interesting question. And as you noted, 80% of the business is on this recurring revenue model. And if you look underlying, as we reported here, that's growing nicely. In fact, it's growing 5% or 6% across the core businesses. So, that's highly repeatable. That's highly recurring. And 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 life for life, year-over-year in terms of what gets published and what those schedules look like. So, am I gonna tell you that in any particular corner, transactional revenues -- the 20% transactional and print couldn't 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 and the performance we see in that -- we look to 2020 thinking that a quarter beginning with a five is far more likely than a quarter beginning with a three.

Drew McReynolds -- RBC -- Analyst

Okay. Thank you. And maybe Jim, if I could follow-up or one for Stephane. 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.

Jim Smith -- Chief Executive Officer

I'll be happy to turn that over to Stephane.

Stephane Bello -- Chief Financial Officer

Sure. Good morning, Drew. 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're simply exchanging. It's a fair exchange. So, the tax should not be triggered at the time of closing. There are some circumstances where the deferred tax liability that we will book in connection with the transaction could potentially be accelerate.

For instance, if we receive cash for a portion of the investment -- and you may have read in the announcement from the LSE that yes, you have an option to pay up to $2.5 billion of the proceeds in cash rather than shares. And under that scenario, obviously, since we would be monetizing probably the adjustment, it would be a portion of the deferred taxes that would be accelerated. But by and large, I think what you should assume is that that taxes should be deferred until such time we actually realize again on the investment. And that will happen when we eventually sell our shares based on the stock price of the LSE at which we sell our shares at that time.

Drew McReynolds -- RBC -- Analyst

Okay. Thanks, Stephane.

Jim Smith -- Chief Executive Officer

Yeah. And Drew, I just realized I didn't answer the last part of your multi-factored question there about how we calculate our organic growth rates. Generally, we do not include acquisitions in the first year that they're acquired. And then as we la -- but once we lap them, they would contribute. So, they contribute a small amount to organic growth in any given year.

Stephane Bello -- Chief Financial Officer

Yeah. So, a tiny portion, exactly what you described in your question. We can confirm that that's the way it's calculated.

Operator

Thank you. Our next question comes from Gary Bisbee with Bank of America Merrill Lynch. Please go ahead.

Gary Bisbee -- Bank of America Merrill Lynch -- Analyst

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 on the operations -- over the weekend, when the first reports of a potential deal came out, it talked about the $27 billion valuation. And I think between you and Blackstone, 37% ownership. LSE stocks up 20-some percent 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 gonna be largely based on shares? And then the fundamental question, 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 is there 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? Thank you very much.

Jim Smith -- Chief Executive Officer

I'll have Stephane, if he'd please address the first one. And I'll take the second one.

Stephane Bello -- Chief Financial Officer

Sure. So, your premise is correct. The number of shares that Blackstone and us are receiving as part of the transaction was based on the unaffected stock price of the LSE. 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 for us is greater than the $27 billion headline number.

Jim Smith -- Chief Executive Officer

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 gonna affect products in 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, you'll find that it's 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 and mid law firm size segments. So, actually, these productivity tools could be even more effective in smaller operations where that efficiency is ever more valuable.

Gary Bisbee -- Bank of America Merrill Lynch -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Kevin McVeigh with Credit Suisse. Please go ahead.

Kevin McVeigh -- Credit Suisse -- Analyst

Great. Thank you. And let me add my congratulations. Was the EBITDA the boost to the 2020? Was that all a result of the acceleration of the stranded cost? Or was it a combination of just the improving fundamentals as well? And then just around the acquisitions, the 10%-30% growth, really, really impressive growth. How does that look like as you scale those deals across the core Thomson platform? I guess another way of saying it is is there any way to think about what they can look like as you're cross-selling them across the legacy business if you would?

Jim Smith -- Chief Executive Officer

Stephane, do you wanna take the first one? I'll take the second two points.

Stephane Bello -- Chief Financial Officer

Yeah. So, the first question -- I'm sorry.

Stephane Bello -- Chief Financial Officer

The 2020 EBITDA margin. It's a combination of the two factors. And so, you see the fact that we now have the level of confidence that we will be able to fully offset the stranded cost as we use Refinitiv. And it's also a reflection of the higher growth rate, which obviously comes with pretty good flow through. And these two positive factors are offset by the slightly dilutive impact of the acquisitions on 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 based on these three factors if you want.

Jim Smith -- Chief Executive Officer

And on the second one, I think there's a significant opportunity for us to accelerate the growth rates on those businesses that are already growing much faster than our core business. But when you think about the scale of our global networks 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 of the Practical Law Company as a really good guide. And for those of you who were around then, you'll recall that we purchased the Practical Law Company, which had a great footprint in the UK and was a preeminent provider of knowhow knowledge and checklists and things like that for attorneys who were right in the middle of transactional deals and things.

And they were beginning to expand in the United States and getting a little toehold in the US. And when we took that business and then pumped it through our platform -- and it was a very successful business. But we traveled the size of that business in three years. 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, the matter of management maps married with our time and billing system of Elite for customized solutions. So, those are the kind of things we're looking at to say, "Yup. We can take something and give it a bigger salesforce, a bigger global presence, and immediately get some benefit but also where the addition of that capability married with what we already have can create something that's really special that we wouldn't have done on our own.

Kevin McVeigh -- Credit Suisse -- Analyst

Makes a lot of sense. Congratulations again.

Operator

Thank you. Our next question comes from the line of George Tong with Goldman Sachs. Please go ahead.

Ryan -- Goldman Sachs -- Analyst

Hi. Yeah. Ryan on for George today. 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 if -- sorry if I missed this. But could you talk about what caused the corporate tax margin to decrease a little bit on that constant currency basis?

Stephane Bello -- Chief Financial Officer

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 a bad performance if you take into consideration the diluted impact of the Integration Point acquisition that they did late last year. So, you still have that impact going to our numbers. Absent that acquisition, the margins would have been up more meaningfully. And in terms of margin performance for those three segments, as you look at it in the future, I would expect it's gonna be a mix of these same two forces.

There should be good flow through now that all these businesses are growing at a pretty robust pace. And you see the flow through essentially this quarter for the tax and accounting business and the legal business, which were not upset by dilution impact. But going forward, it's gonna be for each of these businesses -- actually, for all three businesses a little bit of margin dilution coming from the recent acquisition. So, I would expect margin expansion for these businesses but not to the same extent as what you've seen recently.

George Tong -- Goldman Sachs -- Analyst

Okay. Thanks.

Operator

Thank you. Our final question comes from the line of Tim Casey with BMO. Please go ahead.

Tim Casey -- BMO -- Analyst

Thanks. Jim, just looking at your increased confidence in the organic revenue growth. What's driving that? Are you seeing the benefits of the cross-sell? Is it more about the product mix? Or are you just seeing better market growth overall? Can you break that down for us? Thanks.

Jim Smith -- Chief Executive Officer

So, I do think there's some factor there in that it's a healthy market. You look at our peer monitor index, and we did see an increase in both demand and headcount, certainly in the legal sector. We do have a market. It's, particularly in the 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. 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, it's increased retention 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 put in and the commercial terms that we put in. So, we're at the very, very early days of seeing success in that cross-sell/upsell stuff. What I can tell you, it's early days of seeing that flow into the numbers. We do have a very exciting and excited salesforce who's really learning a lot about how to do it. And what we're learning is that the more we can tailor those cross-sell/upsell opportunities to particular customers and segments, the better off it's gonna be. But that's early days. It's decent market environment, yes. But it's 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 at tapping into that and to that opportunity.

Tim Casey -- BMO -- Analyst

Are the AI product suites moving the dial yet?

Jim Smith -- Chief Executive Officer

Certainly, Westlaw Edge is. And if you look at just a 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.

Tim Casey -- BMO -- Analyst

Great. Thank you.

Operator

Thank you. That was our final question.

Frank Golden -- Senior Vice President, Investor Relations

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.

Operator

Ladies and gentlemen, this conference will be available for replay after 11:00 a.m. Eastern today through Thursday, August 8th, 2019. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 469654. International participants may dial (320) 365-3844.

Duration: 62 minutes

Call participants:

Frank Golden -- Senior Vice President, Investor Relations

Jim Smith -- Chief Executive Officer

Stephane Bello -- Chief Financial Officer

Toni Kaplan -- Morgan Stanley -- Analyst

Drew McReynolds -- RBC -- Analyst

Gary Bisbee -- Bank of America Merrill Lynch -- Analyst

Kevin McVeigh -- Credit Suisse -- Analyst

Ryan -- Goldman Sachs -- Analyst

Tim Casey -- BMO -- Analyst

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