DBRS Confirms Thomson Reuters at A (low), R-1 (low) and Pfd-2 (low), Stable

DBRS has today confirmed its A (low), R-1 (low) and Pfd-2 (low) ratings with Stable trends on Thomson Reuters Corporation (Thomson Reuters or the Company). The ratings confirmation reflects positive expectations regarding the Company’s enhanced product offerings, particularly in the Financial & Risk segment, along with its stable free cash flow generation over the past year. The ratings continue to be supported by the Company’s entrenched market position, predominantly subscription-based revenue model and the diverse nature of its customer base. The ratings also reflect intensifying competition in key segments as well as risks associated with the Company’s acquisition and divestiture program.

Thomson Reuters’ earnings profile remained commensurate with its current rating categories as the Company continued to focus on product enhancements in growth segments, operating efficiencies, and the divestiture of non-core assets. Revenues from ongoing businesses (for 2013 comparison purposes) increased by 1% year-over-year to $12.4 billion in 2012; modest growth was primarily due to a rebound in the global economy. Moderate margin declines as a result of the Company’s shifting business mix led to slightly lower operating income year-over-year, a trend that should reverse as acquisitions are integrated and begin to grow. Thomson Reuters’ financial profile remained stable and consistent with the current rating category, based on the Company’s free cash generating capacity and relatively steady debt levels. Gross debt-to-EBITDA decreased modestly to 2.04 times (x) (1.97x swap-adjusted) from 2.07x (2.01x swap-adjusted) the same period prior due to a decrease in commercial paper borrowings, which was partially offset by slight declines in operating income.

DBRS expects the earning profile of Thomson Reuters to remain stable over the near term as the Company continues to integrate its acquisitions and complete its restructuring process. That said, success within the Company’s largest operating segment, Financial & Risk, is primarily dependent on the effective rollout of the Eikon and Elektron product offerings. DBRS expects revenues from ongoing businesses to grow modestly, rising in the range of $12.5 billion to $12.7 billion in 2013, based on existing business growth as a result of increasing global demand and the lagging impact of ongoing product release programs (given their subscription-based revenue models). DBRS expects negative net sales within the Company’s Financial & Risk segment for the first of half of the year; as gains made from the launch of Eikon and Elektron are not expected to contribute to revenue growth until late 2013 at the earliest. DBRS expects operating margins to remain fairly steady within Thomson Reuters’ organic business lines, with EBITDA from ongoing businesses ranging from $3.3 billion to $3.4 billion in 2013. The slight year-over-year expected decrease is due to the operating income lost from past divestitures. In 2013, cost savings are expected to offset severance charges and losses in operating profit from the disposition of mature businesses. Management is hopeful that it will be able to attain 30% operating margins in the Financial & Risk segment within a three-year time frame.

In terms of financial profile, DBRS expects Thomson Reuters to remain stable going forward, based primarily on the strength of its free cash generating capacity and the Company’s relatively stable financial policy. DBRS notes that the Company’s free cash flow growth prospects will depend on the success of its new Financial & Risk segment product offerings as well as its ability to execute on acquisitions. DBRS forecasts that the Company should generate approximately $800 million to $900 million in free cash flow before working capital in 2013. Given the level of asset dispositions associated with the Company’s restructuring initiatives in 2012, DBRS expects minimal proceeds as a result of divestitures in 2013. DBRS believes that Thomson Reuters should direct free cash flow toward funding acquisitions (if opportunities arise) and/or returning value to shareholders. As such, the Company’s credit metrics should remain relatively stable (i.e., gross debt-to-EBITDA at or below 2.0x) and remain commensurate with the current rating category.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating the Newspaper and Magazine Publishing Industry, which can be found on our website under Methodologies.