標普全球 (SPGI) 2013 Q4 法說會逐字稿

Good morning, and welcome to McGraw Hill Financial's conference call. I'd like to inform you that this call is being recorded for broadcast.

(Operator Instructions)

To access the webcast and slides, go to www.mhfi.com -- that's MHFI for McGraw Hill Financial, Inc., dot com, and click on the link for the fourth-quarter earnings webcast.

(Operator Instructions)

I would now like to introduce Mr. Chip Merritt, Vice President of Investor Relations for McGraw Hill Financial. Sir, you may begin.

Good morning. Thank you for joining us for McGraw Hill Financial's fourth-quarter 2013 earnings call. Presenting on this morning's call are Doug Peterson, President and CEO; and Jack Callahan, Chief Financial Officer. Also joining us is Ken Vittor, our General Counsel.

This morning we issued a news release with our results. I trust you've all had a chance to review the release. If you need a copy of the release and financial schedules, they can be downloaded at www.mhfi.com.

In today's earnings release, and during the conference call, we provided adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the Corporation's operating performance between periods, and to view the Corporation's business from the same perspective as management's. The earnings release contains exhibits that reconcile the difference between the non-GAAP measures and the comparable financial measures calculated in accordance with US GAAP.

Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates, and descriptions of future events.

Any such statements are based on current expectations and current economic conditions, and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our form 10-K, 10-Qs and other periodic reports filed with the US Securities and Exchange Commission.

I would also like to call your attention to a recent European regulation: Any investor who has, or expects to obtain, ownership of 5% or more of McGraw Hill Financial should give me a call to better understand the impact of this legislation on the investor, and potentially, the Company.

We are aware that we do have some media representatives with us on the call. However, this call is intended for investors, and we would ask that questions from the media be directed to Jason Feuchtwanger in our New York office at 212-512-3151, subsequent to this call.

At this time, I would like to turn the call over to Doug Peterson. Doug?

Thanks, Chip, and good morning, everyone. I would like to begin this call this morning by summarizing the highlights of what was a truly momentous year for the Company. We completed the sale of McGraw Hill Education in March, probably the most significant change to the portfolio that we could have made.

In addition, we sold Aviation Week in August, as we continue to prune the portfolio of publishing assets. We launched McGraw Hill Financial with a new name and a new ticker symbol to signify the extraordinary changes taking place at the Company.

We increased our investment in CRISIL to roughly 68%. CRISIL has proven to be a well-run growth company, and this was an excellent use of non-US cash.

We achieved record revenue from continuing operations, and record adjusted diluted EPS for the year, highlighting what tremendous portfolio of assets this Company possesses. Standard & Poor's ratings services, S&P Dow Jones Indices, and S&P Capital IQ all delivered very strong revenue growth.

The Company continued its strong commitment to returning cash to shareholders with $1.3 billion in dividends and share repurchases. After exhausting the previous share repurchase authorization, the Company announced a new 50-million share repurchase authorization.

As you know, Terry McGraw retired as President and CEO after having led this Company and served its shareholders so commendably for the past 15 years. Terry, what a tremendous achievement.

As you can see from this slide, earlier this year we completed the Growth and Value Plan that was announced in 2011. We believe this plan proved to be a considerable success. After shedding over $2 billion of revenue, predominately from the sale of McGraw Hill Education, we are a vastly more profitable Company, with considerably higher adjusted operating margins and lower capital expenditure needs. More importantly, we unlocked value for our shareholders, who've enjoyed a total shareholder return of 140% over the last two years.

Now let's turn to our financial performance during the quarter and for the full-year 2013. Revenue increased 10% for the year. Adjusted operating profit increased 16%, resulting in a 180-basis-point improvement in margin. And adjusted diluted EPS increased 21%.

Fourth-quarter revenue tied second-quarter revenue as the highest of the year. However, revenue only increased 2% versus the strong fourth quarter of 2012.

Impacting the profitability of the quarter was a $26-million non-cash impairment charge in S&P Dow Jones Indices, and a full-year adjusted tax rate that was lower than anticipated. Jack will elaborate on these and all of our financials momentarily.

With that, let me turn to the individual business segments, and I will start with Standard & Poor's rating services. The fourth quarter in 2013, while down versus a very strong fourth quarter of 2012, was the second best of 2013. The operating profit decline in the fourth quarter was due to both lower revenue as well as a 4% increase in costs. For the entire year, revenue increased 12%, adjusted operating profit increased 15%, and the adjusted operating margin increased 120 basis points to 43.7%. That's the second year in a row the margin has improved by more than 100 basis points.

Non-transaction growth, both in the fourth quarter and for the full year, was driven by increased entity credit rating activity, particularly in Europe. In fact, during the fourth quarter we added more than 60 new clients in EMEA. In addition, fourth-quarter non-transaction revenue increased due to strength in CRISIL's Coalition and Irevna analytical businesses.

While fourth-quarter transaction revenue increased sequentially, it decreased from the fourth quarter of 2012 due to a decline in US corporate issuance, particularly high-yield issuance. For the full year, 2013 transaction revenue benefited from both healthy issuance and a 42% increase in bank loan ratings.

With an 8% increase in international revenue, fourth-quarter international revenue reached 50% of total revenue. This is the highest international percentage since the fourth quarter of 2008, and is an encouraging sign as the European economy continues to recover. High-yield European corporates drove the outsized international growth for both the fourth quarter and 2013.

During the quarter, US corporate and public issuance were down 18% and 19%, respectively, driven by the government shutdown, interest-rate volatility, and economic uncertainty. Recall that issuance in the fourth quarter of 2012 was particularly strong, with a rush to market due to the looming fiscal cliff and upcoming presidential elections. Conversely, in the fourth quarter of 2013, October issuance was significantly impacted by the government shutdown and the debt-ceiling crisis. Structured issuance in the US was flat, with strength in commercial mortgage-backed securities, which increased 35%, offset by weakness in residential mortgage-backed securities, which decreased 43%, and CDOs, predominantly collateral loan obligations, which decreased 15%.

During the quarter, European corporate issuance was flat, with weak investment-grade issuance offset by very strong high-yield, which increased by 71%. Improved economic conditions drove a structured issuance increase of 25%, due primarily to strength in asset-backed securities and covered bonds. European high-yield issuance was benefiting from an improved European economic environment, investors' appetite for yield, and an increase in the number of companies turning to capital markets for the first time. As for 2014, Standard & Poor's rating services published its expectations for corporate new issuance to grow modestly in 2014 at of a rate between flat and 6% higher.

Now, let me update you on our litigation matters. Three additional cases were dismissed in the quarter, bringing the total to 36 cases dismissed outright. One case was withdrawn since we last reported earnings. There are now 11 cases that have been voluntarily withdrawn, and 13 dismissals by lower courts that have been affirmed by higher courts. That leaves us with a few [non-dozen government] cases that remain outstanding.

In the Department of Justice case, we are in discovery, and the next hearing is scheduled for March 11. In the consolidated states' cases, we are awaiting a ruling on the states' motion to remand the cases back to the states.

One new constant proportion debt obligation case has been filed in the Netherlands. And a notification has been received of a potential claim from an Italian prosecutor at the Corte dei Conti since the Company's third-quarter earnings call.

In the Italian matter, the prosecutor's potential claim of EUR234 billion would allege, in essence, that by downgrading Italy's sovereign rating, S&P, quote, interfered in the institutional independence of Italy as a sovereign state, which caused serious damage to its economic credibility and international credit worthiness, unquote. If any such claim were to be made in the future, we believe it would be frivolous and without merit.

S&P Dow Jones Indices delivered the largest revenue growth of any segment during the quarter, delivering 18% growth. This growth was primarily driven by increased licensing fees from ETF customer-based on AUMs, and from exchanges based on increased derivative trading volume.

During the quarter, adjusted operating profit decreased due to a $26-million non-cash impairment charge associated with an intangible asset acquired through the formation of our S&P Dow Jones Indices joint venture. Notwithstanding this non-cash charge, costs in the quarter were up primarily due to increased royalty payments, marketing and incentives.

By the way, S&P Dow Jones Indices recently marketing campaign was focused on increasing brand awareness, which, in turn, supports our customers. Over 10,000 viewers watched over 2,750 hours of our advertising campaign videos.

For the full year, organic revenue increased 12%, and adjusted operating profit increased 19%, despite the non-cash charge.

In each quarter of 2013, we established a new record of AUMs in exchange-traded funds linked to S&P Dow Jones Indices. Year-end AUMs increased 43% to $686 billion (sic - see Press Release '$668b') from the end of 2012. Importantly, roughly one-third of the AUM increase was a result of new inflows into these passively managed ETFs.

We continue to listen to the marketplace and create innovative new indices. During the quarter, 14 new ETFs based upon our indices were launched, providing opportunities for future growth from these new products.

Fourth-quarter licensing revenue from derivative trading increased. This was primarily due to SPX and VIX trading volumes, which increased 11% and 19%, respectively.

At the end of the quarter, the Company made the final payment to acquire the intellectual property for the S&P GSCI, eliminating future royalty payments. The S&P GSCI is the first major investable commodity index. The index includes the most liquid commodity futures, and provides diversification with low correlations to other asset classes.

With that, let me now move on to S&P Capital IQ. In the fourth quarter, this business delivered quarterly revenue with top-line growth of 4%. Excluding the lost revenue from ongoing portfolio rationalization of several small products, organic growth was approximately 5%. Adjusted operating profit increased for the second straight quarter, although the margin was down slightly.

For the full year, revenue increased 4%. As we continue to build new products and new data sets, however, operating profit decreased for the year. It is worth noting that for both the quarter and full-year 2013, desktop solutions, enterprise solutions, and ratings IP all delivered mid-single-digit revenue growth, while proprietary research revenue declined middle-single digits.

During the quarter, we sold the first portfolio risk solution with a five-year contract. This product offers next-generation risk and scenario analytics to traders, portfolio managers, and risk managers for pricing, hedging, and capital management of multi-asset-class portfolios. This is one of several new desktop analytics and capabilities scheduled for launch throughout 2014.

While there are many areas of S&P Capital IQ where we have been investing, there are other areas we have shut down or divested. This quarter we continued to fine-tune the portfolio by shutting down funds management research Europe. This was an independent qualitative research service that provided assessments of fund manager investment processes. As result, we expect that both revenue and adjusted operating profit will increase in 2014. Robust equity markets, new product launches, and increased customer compliance requirements also point to improvement in 2014.

With that, now let me turn to the commodities and commercial market segments. Revenues grew 2% in the quarter. Excluding the impact of the sale of Aviation Week, organic revenue increased 7%.

Platts delivered double-digit revenue growth, and J.D. Power delivered high-single-digit growth. This was partially offset by softness at McGraw Hill Construction.

For the full year, revenue grew 4%, with organic revenue increasing 7%. Adjusted operating profit increased 41%, resulting in record quarterly adjusted operating profit of $84 million.

In commodities, Platts achieved a 10% increase in revenue for the quarter, and a 13% increase for the year. Platts' revenue has doubled in the last five years, with 2013 revenue setting a new annual record.

During the quarter, subscriptions from metals and agriculture, and petrochemical products, grew faster than petroleum, driving double-digit growth. In addition, licensing from revenue from petroleum derivative trading increased more than 30%, as volatile oil prices increased trading activity.

In commercial markets, revenue decreased 6% in the fourth quarter, and 4% for the year. Excluding the sale of Aviation Week, organic growth increased 4% in the quarter, and was flat for the year.

J.D. Power delivered second year of strong growth in the quarter and for the full year, driven by the auto business in China, and license revenue from customer advertising. Furthermore, the decline in construction revenue moderated compared to recent years, as our new product launches gain traction, and the US construction industry recovers.

Summing up, 2013 was a great year. We completed the highly successful Growth and Value Plan, and launched our new Company, McGraw Hill Financial. We achieved records in revenue from continuing operations and adjusted diluted EPS.

Importantly, we expect to deliver an even better 2014. Today we introduced 2014 guidance of mid-single-digit revenue growth and diluted EPS of $3.75 to $3.85 per share, representing growth in the mid-teens.

During my first few months, we have made a number of changes to improve our management structure, and drive growth, performance and productivity. We have appointed Neeraj Sahai as President of Standard & Poor's rating services. He brings the right skill set to lead our largest business.

We've added Larry Neal to Head of Platts, and Alex Matturri to Head of S&P Dow Jones Indices to our executive committee. Many of you already know Larry and Alex, who are excellent managers. In addition, Larry will be relocating to London, which is the global hub of our Platts business.

Following these moves, Glenn Goldberg, President of Commodities and Commercial Markets, has decided to leave the Company to pursue other career opportunities. Glenn is a seasoned professional who has had great success running our commodities and commercial segment. We thank Glenn for all of the tremendous contributions he's made during his 23 years with the Company.

We've also added the S&P Chief Risk Officer and Chief Economist to the executive committee. The entire Company will now benefit from their insights and expertise.

In addition, we initiated a consolidation of our real estate footprint, including the decision to move our Company headquarters to 55 Water Street in New York.

Finally, on March 18, we will host an Investor Day in New York. I will provide additional detail on our strategy, and each of our business leaders will provide greater insights into our growth plans.

So with that, let me turn the call over to Jack Callahan, our Chief Financial Officer, for additional details on the fourth quarter and full year. Jack?

Thank you, Doug, and good morning to everyone joining us on the call. This morning I want to briefly discuss several items related to our 2013 performance and outlook for 2014.

First, I want to recap key consolidated financial results in the quarter and for the full year. Second, I will review recent cost-reduction actions taken to streamline the Organization and to reduce our real estate footprint. These actions did result in one-time costs, which are identified as adjustments to earnings. Third, I'll provide updates on the balance sheet, free cash flow, and return of capital. And finally, I will provide additional color on our 2014 guidance.

In our first year as McGraw Hill Financial, we delivered very strong financial results. Revenue grew 10%, approaching $4.9 billion, with organic revenue growing 9%, excluding the impact of six months of the Dow Jones Indices business, the sale of Aviation Week, and product closures at S&P Capital IQ.

Adjusted segment operating profit grew 14%, driven by the strong results at Standard & Poor's rating services, S&P Dow Jones Indices, and commodities and commercial markets. In addition, I would note that S&P Capital IQ returned to profit growth in the last two quarters of the year.

Adjusted unallocated expense was essentially flat for the year. And the adjusted tax rate decreased 200 basis points, 100 basis points lower than our projected adjusted rate of 35%. This result was primarily due to an increased proportion of income from international markets, and progress on several tax planning initiatives. Overall, adjusted diluted earnings per share increased 21% to $3.33 per share, a great result for the Company.

As expected, fourth-quarter comparisons were the most challenging of the year, but we were able to deliver another solid quarter of growth. Revenue grew 2% to $1.25 billion, matching the second quarter as the two strongest quarters of the year.

Organic revenue grew 3%, excluding the sale of Aviation Week, and product closures at S&P Capital IQ. Adjusted segment operating profit decreased 3%, driven primarily by the $26-million non-cash impairment charge at S&P Dow Jones Indices. Adjusted unallocated expense decreased 7%. And a lower fourth-quarter tax rate is the catch-up that brings our full-year adjusted effective tax rate to 34%.

Adjusted net income from continuing operations increased 9%, and adjusted diluted earnings per share increased 12%. The relatively faster growth was the result of a 2% decrease in the average diluted shares outstanding to 278 million shares. The year-end basic share count was 270.4 million, down 3%. Overall, a solid quarter given the tough comparisons, and a good finish to the year.

There were several one-time charges during the quarter associated with cost reduction and efficiency actions as we work to drive productivity across McGraw Hill Financial. We are excluding a $28-million restructuring charge primarily related to severance, as we took actions to streamline commodities and commercial, S&P Ratings, and Capital IQ.

There is a $36-million non-cash impairment charge related to the pending sale of a data center, driven by a strategic shift to leverage the scale and capability of world-class IT partners. And a $13-million charge associated with several lease terminations, as we reduced our real estate footprint in several major US cities, in part driven by recent divestitures and the shutdown of specific product lines at S&P Capital IQ. Note that we did not have any Growth and Value Plan costs, largely professional and consulting fees to support separation during the quarter, as that plan was completed earlier in the year.

Lastly, as Doug mentioned, the Company has decided to exit its midtown New York City office. In order to do so, a payment of approximately $60 million was necessary as consideration for early termination of the lease, which ran to 2020. There was no P&L impact for this item, as it was offset by deferred gains from the previous sale of equity in the building by the Company.

We continue to maintain an exceptionally strong balance sheet. As of the end of the quarter, we had $1.6 billion of cash and short-term investments, of which about $700 million was domestic cash. We continue to have approximately $800 million of long-term debt. Going forward, this strong balance sheet positions us to continue to make investments that strengthen the Business, and as appropriate, sustain our share repurchase program.

Our free cash flow during 2013 was $624 million. There were several large items that have negatively impacted results. As we've discussed before, because of Hurricane Sandy, the IRS allowed fourth-quarter estimated tax payments, that are normally paid in December, to be paid in February. This payment was approximately $130 million, and was paid in the first quarter of 2013.

The second item was the $77-million payment associated with the legal settlement that was also included in our first-quarter 2013 results. And third, as I just discussed, an approximately $60-million payment was made in the fourth quarter in consideration for the early lease termination of our midtown location. With these large items behind us, combined with sustained growth anticipated this year, we anticipate approaching $1 billion of free cash flow in 2014.

Let me now update you on our return of capital activity. During the fourth quarter, approximately 1.9 million shares were repurchased, which completed the existing 50-million share authorization approved by the Board of Directors in mid-2011. For all of 2013, we have spent $989 million and repurchased 16.9 million shares at an average price of $58.52.

In December, the Company announced a new 50-million share repurchase authorization approved by the Board of Directors. We do anticipate selectively continuing share repurchase activity in 2014, subject to market conditions.

In addition, the Company paid out $308 million in dividends, bringing the total return of capital in 2013 to almost $1.3 billion. Demonstrating McGraw Hill Financial's steadfast commitment to the dividend, just last week the Company announced [that it] increased it for the 41st consecutive year. The 7.1% increase brings the annual payout to $1.20 per share.

Now I'd like to provide additional color on our 2014 guidance. At this point, we are targeting mid-single-digit revenue growth in 2014. Over the longer term, we believe the Company has the potential to deliver high-single-digit revenue growth. However, after delivering 13% and 10% during the last two years, we believe it is prudent to guide to mid-single-digit revenue growth in 2014. And as a reminder, the impact of the divestiture of Aviation Week, and the shutdown of several smaller product lines at S&P CAP IQ, reduces our year-on-year growth rate by approximately 1 point.

We are targeting flat unallocated expense, and sustained margin expansion with at least 100-basis-point improvement in adjusted operating profit margin. We believe that the effective tax rate achieved in 2013 is sustainable, and we are targeting a 34% tax rate again in 2014.

On the bottom line, the adjusted diluted earnings per share guidance is $3.75 to $3.85 per share. From a cash perspective, we anticipate investing approximately $125 million in capital expenditures, and approaching $1 billion in free cash flow.

In closing, for 2013 we have delivered excellent results, with 10% revenue growth and 21% adjusted diluted earnings per share growth. We anticipate delivering continued growth in 2014, as long-term secular drivers of growth remain in place. That said, market volatility could impact results. Nevertheless, we anticipate mid-single-digit revenue growth, mid-teen adjusted diluted earnings per share growth, and approximately $1 billion of free cash flow.

And as a reminder, we will be hosting an Investor Day on March 18 at the New York Hilton Midtown. This will be an opportunity to investors to learn more about the Company and meet the leaders of each of our businesses. Reach out to Chip Merritt if you have not already received additional details. We hope to see you there.

With that, let me turn the call over to Chip Merritt.

Thank you, Jack.

(Caller Instructions)

Operator, we will now take our first question.

Our first question comes from Hamzah Mazari with Credit Suisse. Your line is open.

Good morning, thank you.

Could you maybe give us a sense of how you are thinking about M&A? There are couple assets out on the market.

Maybe give us a sense of how aggressive you want to pursue M&A, given there is still some legal risk out there. How do you think about balancing that with keeping cash on the books, as well as levering up the balance sheet to go after some of those assets?

Probably the same answer we would've given you last year or the year before. In any M&A situation, we would look at it in a very disciplined way to be sure that if there was an opportunity that we would have the conviction that we were going to build shareholder value.

Particularly now with the very strong balance sheet that we have, we will selectively look at assets from time to time. But again, we will be very disciplined.

I think we have the flexibility and the balance sheet to both build the business and address any other balance sheet considerations that may be out there.

Let me add -- this is Doug -- that we would very carefully look at price, return, fit. We are not going to just run around and try to look at every single deal that pops up.

It's very important for us to continue with the strategy we've put in place and the type of fit that it creates for our portfolio. And we would highly unlikely be doing anything transformational.

Great, and a follow-up question. You highlighted new cost take-out opportunities, streamlining of some of the management structure, reducing the real estate footprint. Could you give us a sense of how the cost take-out flows through your numbers over time?

I know in your guidance, you talked about 100 bps adjusted operating margin expansion. Is the new cost take-out opportunity you are talking about and highlighting something that comes over the next few years? Or how should we think about the ramp-up of the new cost take-out?

Some of the restructuring actions that we've taken in the fourth quarter will have some impact on 2014. There's probably approximately 2 points of profit growth built into those actions.

Now, on the real estate footprint, that has more longer-term benefits. While, for example, while we are exiting our Midtown location, we will not be leaving in that location until the end of 2015. Those benefits of real estate will feather in over a longer period of time.

We also anticipate discussing some of the longer-term prototype opportunities in a bit more depth when we get together for our Investor Day in March.

Great, thank you very much.

Thank you.

Our next question comes from William Bird with FBR. You may ask your question.

Could you talk a little bit about what the guidance assumes for stock buybacks? And separately, what does the go-forward cost profile look like for Indices?

You highlighted a couple of reasons why the cost were up and a benefit that sounds like it will accrue going forward from the final payment on GSCI. Thank you.

On share repurchases, I think if you look at -- we obviously have been very diligent in that area for the last few years. The Board has approved another 50-million-share reauthorization. We do anticipating continuing that activity into this year.

At this point in time, we don't want to be overly specific in terms of a target for right now. There is some benefit in our guidance. We will update you as we go through the year, depending on overall market conditions.

Let me add that at the March meeting for our investor meeting, we would like to give you some more details about our thinking and our algorithms for capital planning of our allocation between investing in the businesses. We have a very exciting growth story. We want to be able to provide you with that -- how we are allocating capital growth to acquisitions, to dividends, and to stock buyback. That will be one of the themes we address in more depth in March.

In terms of your question about the expenses and growth for Indices. Indices had a great year, had a tremendous year. We look to have another good year of growth as we go into next year.

There's nothing on a full-year basis that, at this point, we'd meaningfully say that would significantly change the very high margins that we have in that business. Obviously, there's always going to be a bit of market volatility depending on what's going on in terms of overall equity capital flows.

Then at a higher level, could you talk about the S&P pipeline and what you are seeing in terms of issuance trend?

Yes, the issuance trend, as you know, in the last quarter of the year was a shift from the US to Europe, generally speaking.

In Europe, the investment-grade corporates in Europe were actually a little bit slow, with the capital markets be driven by mid-market and smaller blue chips in Europe as they need to go to market, as banks are reevaluating the size of their portfolio and their capital positions. So we are seeing the continuation of that same trend.

And then on the structured finance business, you are seeing some resurgence in RMBS on a CMBS market, has had a little bit of volatility but also looks pretty flat compared to last year.

The CDO market, in particular CLOs, have also been quite volatile. It's really only been about a month into the year,; but we are looking carefully at the pipelines and, at least for the near term, are expecting a similar pipeline towards what we saw the end of the year last year.

Thank you.

Our next question comes from Craig Huber with Huber Research Partners. You may ask your question.

Yes, good morning. My first question is, can you update us on your thoughts for price increases throughout the portfolio for 2014, please?

This is, for us, one of the core areas of analysis, business by business, to understand our customer penetration opportunities we have in areas of people that are already not customers. Part of that analysis is also price increases.

In general, we are projecting price increases across the portfolio in a 3% to 4% range. Some of those have already started to take effect; others of them are peppered throughout the year. Our general expectation is 3% to 4% across the portfolio.

Although clearly, are we are looking at to see where we can tweak that can take advantage the most. Clearly another aspect to that is high-quality customer service, our sales processes, et cetera. That's one of the things we are spending a lot of time looking at.

Also within your ratings business, can you talk about the all-important non-transaction? Why a little bit further in the fourth quarter is a very good result there, but what your expectation is that's embedded in your guidance for 2014? I have a follow-up, thank you.

Yes, in the non-transaction line, in addition to the approach we have to pricing, which allows us to have certain aspects less volatility, we also include in there some of the revenues from CRISIL businesses. Irevna and Coalition are two that are doing very well.

As banks, insurance companies and others in the financial service markets are looking to having productivity and streamlining, as well as much more higher-end analytics, they turn to those companies. So the subscription revenue from those also gets built into that non-transaction revenue.

We have a pretty good outlook on those areas, continued analytics there. We do think that in the direct ratings business, we will also benefit from the relationships we have and continue driving issuers towards this subscription, non-subscription model for ratings.

We are actually watching that line quite carefully, expecting that it will be flat to growing throughout the year.

In general, I think the non-transaction line should, our current anticipation, should grow largely in line with the overall guidance for the total Company of mid-single digits for right now.

I know it is hard to forecast this, but the transaction line within S&P ratings, what is your thought? You have some forecast, obviously, internally on that for 2014 to recast guidance. What are you thinking right now?

The guidance that we've been giving, which is the mid-single digits for the entire growth, is similar to where we come out. It is a whole blend of what we see going on in the corporate markets.

I mentioned earlier that there's a trend towards, if you look at the last quarter and where we are seeing in January, (technical difficulty) finance in sovereigns have been lower. You've seen higher European, high-yield and mid-markets going to the market.

There's really a story that it is hard to tell for the all year so far. But we do see covered bond issuance, RMBS, others that are motoring along pretty well. So that's why we are continuing on a blended the basis to stick to the 0% to 6% for the entire portfolio.

Great, thank you.

Our next question comes from Peter Appert with Piper Jaffray. You may ask your question.

Thanks, good morning.

Jack, can you give us any incremental color on your expectations for margins by segment in 2014? I'm asking specifically if we should anticipate the S&P ratings business as relatively flat. And if so, where do the margin increases come from?

Peter, at this point in time for today at least, I don't want to get overly precise on a business-by-business basis. That all being said, we are pointing to overall consolidated margin expansion across that portfolio of at least 100 basis points.

And I will say that each of the businesses, our expectation is that each business will contribute to that. And ratings, give it a size and magnitude.

We are pointing to some sustained margin increase in that business. We will probably have a little bit more detail for you when we get together in March.

Fair enough. Can you give us any quantification in terms of the savings associated with some of these initiatives you've taken recently and some of the incremental initiatives you plan for next year?

As I mentioned earlier, some of the restructuring actions that we have taken in the fourth quarter here should deliver approximately 2 points of all-in operating profit growth as we go into 2014.

Some of the longer-term real estate actions that we've taken, we have some more work to do to really fully impact the full economic cost, which should add to lower our cost footprint as we go into 2015 and 2016 and beyond.

Does that mean that the corporate expense side and corporate overhead item could actually go down a little bit potentially in the out years?

In the out years. Right now, we will call it flat for next year. But it is a place where we would look to continue sustained some year-on-year reductions, once we get past 2014.

Got it. Last thing, any comment on the litigation costs and regulatory costs, whether that is an incremental expense in 2014? Or maybe that's a benefit to you in 2014?

For right now, I would view both those costs as largely flat going into next year. That's been our assumption overall going into 2014.

Got it. And actually one more last question, please. For Doug, your thoughts on the competitive dynamics in the ratings business.

There's a lot of noise always about new players in the market. Anything interesting you are seeing from that perspective?

As you see, the markets have continued to move around in terms of what are the different areas that are active right now.

It clearly, in the US structured finance markets, there is a very competitive market with some niche players that have started to gain traction. That's actually quite welcome by the issuers and by regulators and others to see that competitive market.

On a global scale, however, there are only a few truly global players. Around the world we see other players coming into the market.

But we do think that in addition to the competition keeping everybody on their toes and ensuring that they have high-quality analytics, it is also part of the opportunity set that people see out there as the capital markets actually increase.

The size of the markets overall, we expect in the longer run, will continue to grow as you see bank disintermediation, you see infrastructure projects requiring longer-term capital.

You see aging populations and the requirements the requirements that are put on governments to actually finance their healthcare programs, their Social Security programs -- again infrastructure.

We look at the long-term trends and feel that there is space for a robust analytical community, including ratings. We do see more competition. We are up to that challenge and feel that it actually keeps everybody on their toes.

Great, thank you.

Our next question comes from Tim McHugh with William Blair. You may ask your question.

Yes, thanks. I wanted to first ask about Capital IQ.

You talked about having one new customer sign up for the new product. How does that compare to what you would expect? How does that reflect the general reaction to clients to some of the new products you've been rolling out?

I would say it's still very, very early days. So we are still introducing the new product's capabilities to customers.

We are pleased to have one relationship in place. But we view it as very early days and an area where we are going to continue to build out, throughout 2014 and into next.

So far so good is how, I think, would be our point. But a lot more work ahead of us.

And there is a very robust pipeline of new products and services that have excellent analytical tools, as well as the interfaces are compelling. These have a long lead time on sales. These are the types of products that we are working, with sophisticated organizations and sophisticated buyers.

In addition to our development and beta testing, we are using that as an opportunity to get ahead of this long lead on the sales cycle. These are clearly areas where we will be providing ongoing updates on the rollout and how these products are doing.

Given the sales cycle, is it more likely that it is 2015 or 2016 before you really see the growth rate of that segment improve from some of the new product rollouts? Can you see an impact this year?

I think it depends little bit, I think. In some areas the investments, for example, what we are doing in terms of exchange level of latency information, I think will get some sustained growth as we go through this year. I think some of the portfolio risk products had better growth this year, but probably feather in more back in 2015 and beyond.

I think it depends a little bit by which product line we are really focusing on right now.

Okay, and then last question on Platts, though, some of the revelatory stuff that came up earlier this year. Is there any development or news on that front?

There's no new news on that front, so nothing to report on Platts.

Okay, great. Thank you.

Our next question comes from Doug Arthur with Evercore. You may ask your question.

Yes, thanks, two questions.

Jack, on exhibit 5, where you provide the adjustments, the non-GAAP adjustments by segment, you did not add back the impairment charge, seemingly, in the Indices business. My question is, had you done that, are we talking about the 50 going to 76 adjusted in terms of op profit for Indices?

And then what would the minority interest look like if that had flowed through? Or does the minority interest reflect that?

Let me first comment on why we did not call it out as an adjustment. We've taken an approach to be very pure or chose to be very clear about what we're going to call an adjustment to earnings.

It really related -- everything we've identified over the last few years has really been about what was necessary to separate McGraw Hill Financial from McGraw-Hill Education and/or a cost relative to driving productivity to basically restructure our cost structure. In this case; this is different; and therefore, we did not call it out as an adjustment to income.

That all being said, we have isolated it; so each investor can view it as they would like. You are exactly right -- if that $26 million charge, that would be, could be added back; that certainly is probably a better judge of the ongoing performance of the business.

If that had flowed all the way to the bottom line, that would've added about another $0.04 of earnings per share to the bottom line. Because it would then, we have the tax effect of $26 million; and then it is our share of 73% of that post-tax impact. So it is about $0.04.

Great, that's very helpful.

Then on the legal front, I'm curious on your comment about that there's ongoing discovery with the DOJ case. Because my understanding was that the hearing on the 11th, in March, was really to come to an agreement on exactly the scope of the case from the government's point of view, which then would allow for a better definition in terms of discovery.

I didn't think you were really at that point where you knew what the scope of the case was. The question is, what are you hoping to accomplish at the March 11 meeting?

I'm going to ask Ken Vittor to answer that question since he can give us more precise details.

Thanks, Doug.

Yes, there is a hearing on March 11. That hearing is addressing the Motion to Compel that we filed to compel the government to provide us with documents relating to three categories that relate to our defenses in the case.

There were numerous other categories and other defenses where the government has provided us, and will be continuing to provide us, with documents. So there is discovery going on even as we speak in those areas where the government has not resisted production of documents and where there are witnesses.

While the discovery goes on, there are these three categories of documents, which the government has objected to, which we have filed a Motion to Compel.

At the March 11 hearing, the judge will hear our Motion to Compel, review the government's response to our Motion to Compel; and then either at the hearing or afterwards, will issue a ruling determining whether we will be given access to the documents, which so far have been denied to us.

So there is discovery going on while we have the Motion to Compel on the three categories that have been objected to.

Got it. Thank you.

Our next question comes from Manav Patnaik with Barclays. You may ask your question.

Thank you. Good morning, gentlemen.

To focus a little bit on the C&C businesses, clearly it seems like Platts continues its momentum; and it should grow in the double digits as it has been.

Could you help us understand some of the dynamics with J.D. Power and then the construction asset as well? What your outlook is for those two businesses?

Let me start and then I'm going to hand it over to Jack.

J.D. Power is a business that has done a great job of focusing on core analytics and products which are delivering value to their customers. One of the key ones is the initial quality survey. They also have another key product of pin data.

As the auto market in the US, which is one of their large markets, has recovered, they've seen benefits from that. In addition, they have a very strong position in China, which is a very high-growth auto market.

Then the company has been diversifying into other essential consumer areas such as bank products, insurance products, cell phones, et cetera.

So J.D. Power has a broad platform of analytics for consumer experience. They are growing and expanding and looking in particular at international opportunities.

Construction has, over the last three years, done a fantastic job to reposition the business in light of a very difficult secular construction market and real estate US commercial real estate market.

They have repositioned the business and looked very carefully at their cost base, which they've managed incredibly tightly. And also repositioned towards new analytical and products which are allowing them to provide forward-looking information, analytics and forecasts on the construction market.

So they are able to start selling those products. The business is really starting back.

As we mentioned earlier, they've had a quarter which was difficult. But compared to where they've been, it is definitely on the upswing.

And let me ask Jack to give a few more comments on those.

On J.D. Power, I would simply add that the year we had this year in 2013 was an all-time record year for J.D. Power. And we are continuing to benefit from not just good growth in North America, but also the very strong position we have across Asia Pacific, which is now about 30% of the business. And we do anticipate another record year in 2014 in sustained growth.

On Construction, in terms of 2014, we are targeting a transition year. We are looking for the business, and we've seen this evidence, particularly as we've gone through the fourth quarter, that the business is turning the corner. And we are projecting modest growth for that business as we go into next year.

I think building on Doug's comments, the team's done a fantastic job of really changing the product. It is much more digital and analytic today than where it was many years ago. We believe it is well-positioned, as it turns the corner, for growth moving forward.

Okay, and on the entire division, in terms of margins, it seems like for the last three quarters at least you guys have run around that 32% rate. Is that a good base to start off for what the full year should look like?

Obviously, incremental revenue should have high-margin of the business? Is that a fair way to think about it?

I think if you were to look at some projected modest growth off the full-year margins of 2013, I think we can continue to show some modest improvement off this space.

Okay. One last one for me.

It sounds like we will get a lot more of this color on the upcoming Investor Day, but you've highlighted before in Capital IQ certain areas that you are looking to rationalize, divest, et cetera.

I was wondering if across the portfolio of McGraw Hill Financial, based on Doug's initial strategic review, if there were any other areas that you've highlighted that could potentially be in that camp where it is not core to the financial umbrella here?

You are right. This something we will talk more about in March.

The way I think of it right now is that that's a lot less important than taking advantage of the portfolio of brands and products and capabilities, and in particular the talent that we have to grow the business. That will be our main focus. We will talk about the along the way.

Clearly with any type of growth, you want to prune unnecessary activities or unnecessary businesses.

The core of what we've done after the separation of the publishing and education business is to really have a growth machine now that we will be looking at to employ across the globe with new products, with new product segments, with new markets. That will be the main focus.

But as you mentioned, along the way there probably are capabilities and assets here and there that we will need to prune.

Okay. Thanks a lot, guys.

We'll now take our final question from Andre Benjamin with Goldman Sachs. You may ask your question.

Hi, good morning.

I may have missed the portion of the call, so I apologize if you're repeating yourself. I was first wondering any color you can give on expectations for growth in the Indices business, given we may probably won't see what we saw again in 2013 in the index. But you could see some equity AUM benefit from a rising interest rate environment.

And the second half of that would be any thoughts on new product development going forward, relative to what you've done in the last couple pf years.

All right, look, Indices just had a fantastic year, a fantastic year. I would say for right now, our outlook for Indices as we go into next year, it is probably very much in line with our overall Company guidance of mid single-digit revenue growth. But obviously there's going to be some volatility based on capital flows in that.

That the going-in assumption for right now.

And the team is always at work with our major customers trying to develop new products. That's just part of our everyday operation for right now.

A similar question about Platts. I know you talk a bit about J.D. Power and Construction.

How much of the growth should we expect to be from the core energy customer versus that you've made a lot of progress that you highlighted in the press release, from metals, agricultural and some of the other products? How should we think about what's going on in the emerging markets and the ability to continue to push that up a little going forward?

I think you saw that in the progress that's already starting to come through on the numbers of diversification into petrochemicals, into other metals, and mining and energy, non-petroleum energy. This is part of the growth model of Platts, is to diversify into other commodity segments.

This is one of the opportunities that we will outline more fully in March because it is a very exciting one as we see the need for transparency and benchmarks that can be used in a way that will help growth and investment around the globe.

We are very pleased with the progress that Platts has already made. They've got a proven track record now of diversifying away from just Petroleum.

That doesn't mean that Petroleum isn't also a very high-growth field, given what's happening with fracking and non-traditional methods of extracting oil and gas around the globe. There's a lot of activity in petroleum and petrochemicals and in metals and mining and other commodities.

We are very excited about this opportunity.

Thank you.

That concludes this morning's call. A PDF version of the presenter's slides is available now for downloading from www.MHFI.com.

A replay of this call, including the Q&A session, will be available in about two hours. The replay will be maintained on McGraw Hill Financial's website for 12 months from today and for one month from today by telephone. On behalf of McGraw Hill Financial, we thank you for participating and wish you good day.