標普全球 (SPGI) 2014 Q1 法說會逐字稿

Good morning and welcome to McGraw Hill Financial's first-quarter 2014 earnings conference call. I'd like to inform you that this call is being recorded for broadcast. (Operator Instructions). I would now like to introduce Mr. Chip Merritt, Vice President of Investor Relations for McGraw Hill Financial. Sir, you may begin.

Thank you and good morning. Thanks to all on the line for joining us for McGraw Hill Financial's first-quarter 2014 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 have 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 are providing 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. This 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 Forms 10-Ks and 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 the 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. It was great to have a chance to meet with many of you during our recent Investor Day and we thank you for your participation and feedback on the event. Amongst the key messages we delivered on Investor Day is our focus on creating growth and driving performance. Setting annual growth goals, maintaining disciplined capital allocation, more actively managing the businesses, completing our portfolio rationalization and driving productivity savings are all part of this focus.

The year is off to a solid start despite the decrease in global bond issuance. This morning, we reported increases in both revenue and earnings for the quarter. Platts and S&P Dow Jones indices delivered double-digit revenue growth driving the overall MHFI growth in the quarter.

During Investor Day, we spoke about our global footprint and the opportunities we see for international growth and during the first quarter, international revenue growth of 7% was more than twice that of domestic growth. And during the quarter, we reported free cash flow of $85 million and returned $246 million in dividends and share repurchases, which continues to demonstrate our commitment to returning capital to shareholders.

If we look at the financial performance during the quarter, revenue increased 5% year-on-year and 6% from organic growth. Adjusted operating profit increased 8%. We achieved a 100 basis point improvement in the operating margin and adjusted diluted EPS increased 12%. The strength of our portfolio was clearly evident this quarter. Weak issuance hindered the growth at S&P Rating Services, but S&P Dow Jones Indices in commodities and commercial markets delivered double-digit operating profit.

This chart shows how our non-ratings businesses comprised 48% of operating profit, up from 41% a year ago. S&P Dow Jones Indices and Platts, once only small parts of our portfolio, have grown into major contributors.

Now let me turn to the individual business segments and I will start with Standard & Poor's Rating Services. During the quarter, revenue increased 1%, operating profit decreased 4% and the operating margin decreased 220 basis points to 42.2%. As is widely understood in the marketplace, bond issuance was erratic during the quarter, but overall it was weak. Bank loan ratings on the other hand continued to show considerable strength. The increase in expense was due to investments in human capital in areas of the businesses where we are seeing increasing volumes, as well as in data and technology. You will note that the methodology for allocating unallocated expenses has changed for every business unit and you will see that on the upcoming charts and Jack will discuss this in a moment.

You will see on this next slide that nontransaction growth in the quarter, which in aggregate grew 9%, was driven by annual fees, which increased by 6%. In addition, Rating Evaluation Service revenue increased 33% as the Europe, Middle East, Africa region realized record revenue in this category due to increased merger and acquisition activity. Lastly, strength in CRISIL's coalition analytical businesses also contributed.

Transaction revenue from bond ratings in structured finance and corporate decreased as a result of lower bond issuance levels. Global bond issuance, excluding sovereigns, on a par basis decreased 10%; however, the number of issues was down 27%. Because of the tiered pricing associated with the larger deals, our total revenue was negatively impacted. Bank loan ratings remained a bright spot, however, with total revenue increasing 19%.

Consistent with 2013 trends, international growth continued to outpace domestic activity. International revenue increased 6% driven by record high yield issuance in Europe influenced by bank disintermediation. In both the United States and Europe, the first quarter will be the most difficult bond issuance comparison we face all year. As you will see in the graphics on this chart, during the quarter, US corporate and public finance issuance decreased 5% and 26% respectively. Importantly, US high yield issuance declined 38%. You will recall that in the first quarter of 2013 high yield issuance was at a record level. Conversely, in Europe, we saw record high yield issuance, which increased 29%. In fact, this is one of the few times when European high-yield issuance exceeded that of the US.

While we are encouraged by the trends in Europe, structured finance issuance remains anemic. Fortunately, the problems of weak issuance and lack of liquidity and capital flows are starting to be noticed by regulators. In the six-page report published earlier this month, the European Central Bank and the Bank of England noted that regulation may be undermining Europe's economic recovery. In particular, they are concerned about the shrinking market for asset-backed securities. The report cited a Standard & Poor's analysis, which showed the cumulative default rate on European structured finance assets between July 2007 and the third quarter last year was only 1.5%.

Now let me update you on developments on the litigation front. 36 cases have been dismissed outright. 13 dismissals by lower courts have been affirmed by higher courts and 11 cases have been voluntarily withdrawn. That leaves us with a couple dozen nongovernment cases that remain outstanding. During the quarter, the Company won a Motion to Dismiss with prejudice in the Space Coast case, which follows the initial dismissal a year ago. As a result of this decision, Space Coast will not be able to refile another amended complaint. Please note that the Space Coast is named by the government as one of the alleged victims in the Department of Justice case.

Now on the DOJ case, on April 15, the court granted S&P's Discovery Motion to compel the government to produce documents relating to the independence or objectivity of ratings or rating agencies, documents relating to the conduct of mortgage lenders, financial institutions and issuers of the securities and documents relating to Standard & Poor's Ratings Services First Amendment retaliation defense with certain limitations. This ruling will be very helpful to the Company in its defense of the lawsuit. In the consolidated state cases, we're awaiting a ruling by the Federal District Court in New York on the Attorney General's motion to remand the cases back to the states. During the first quarter, no new cases were filed.

With that, let me now move on to S&P Capital IQ, which delivered top-line growth of 4% this quarter. Excluding the lost revenue from ongoing portfolio rationalization of several small products, including Financial Communication, Fund Management Research Europe and ABS Exchange, organic growth was approximately 6%. Operating profit increased year over year for the third straight quarter and the margin increased modestly. Another highlight of the quarter was the rollouts have begun on desktop capabilities, which I will touch on in a moment.

Now let me review the three business segments within S&P Capital IQ. S&P Capital IQ Desktop & Enterprise Solutions revenue increased 4%, principally driven by an 8% increase in S&P Capital IQ Desktop revenue. S&P Credit Solutions revenue increased 5%, driven by an 8% increase in Ratings Express and S&P Capital IQ Markets Intelligence revenue increased 2%, driven by a 26% increase in Leveraged Commentary & Data, which is known as LCD. LCD is the preeminent provider of leveraged finance news and analysis. The increase was largely offset by shutting down of SMR in Europe in the fourth quarter of 2013.

During Investor Day, Lou Eccleston discussed five new capabilities we are building for the S&P Capital IQ Desktop in 2014. Credit Analytics was the first of these to launch. With these tools, users can now measure, monitor and manage the credit risk of companies in mature and developing economies with daily updated credit risk metrics. The new analytic model and workflow tools combine seamlessly with S&P Capital IQ's leading fundamental data and research, addressing needs of credit and financial professionals.

Now we are going to turn to S&P Dow Jones Indices. The business delivered another outstanding quarter with an 18% increase in revenue and a 43% increase in operating profit. This growth was primarily driven by increased licensing fees from ETF customers and from exchanges based on increased derivative trading volume. Approximately one-half of the revenue growth, however, was due to refinement of our revenue recognition for certain products, which Jack will explain shortly.

Our licensing agreement for the UBS commodities indices expires in June and the contract was not renewed. We will lose the revenue that was associated with this product. We expect our recent action with the S&P GSCI index license will largely offset the impact on profits. Quarter-ending AUMs increased 27% to $667 billion from the end of the first quarter 2013. Importantly, 11% of this increase was the result of new inflows.

Contributing to the strong quarter was an increase in licensing revenue from derivative trading. This was primarily due to SPX and VIX trading volumes, which increased 9% and 24% respectively. In addition, our relationship with the CME proved beneficial with an 11% increase in the daily volumes on the CME equity complex. We believe the growth prospects for S&P Dow Jones Indices remain very strong and we continue to make strategic investments such as the following. We acquired the remaining intellectual property for the S&P Global Broad Market Index or the BMI. This is a comprehensive rules-based index. It is designed to measure global stock market performance. The index covers all publicly-listed equities with float-adjusted market values of $100 million and currently includes more than 10,500 constituents.

We also began collaboration with the Korea exchange for global marketing and sales of KRX indices. We will leverage S&P Dow Jones Indices' proven experience in sales and marketing to license and further promote the KRX indices to overseas investors in markets like US, Europe and Hong Kong. This includes the KOSPI 200, the premier gauge of equity market performance in South Korea. And this agreement also paves the way to develop new indices and share knowledge.

Also, we announced a strategic index development and cobranding agreement with the Taiwan Stock Exchange along with the launch of the S&P TWSE Taiwan Low Volatility High Dividend Index. As more investors look to Taiwan, S&P Dow Jones Indices' agreement with the Taiwan Stock Exchange will be a momentous step in creating diversified market indices starting with Taiwanese equities. This agreement is a further sign of our commitment to Asia and to facilitating access to equity market intelligence in the region.

One final note on S&P Dow Jones Indices, on January 24, we announced, along with the CBOE, the successful conclusion of the long-standing ISE index litigation. This litigation demonstrates our resolve in defending our legal rights.

With that, now let me turn to commodities and commercial markets. Revenue grew 6% in the quarter, but excluding the impact of the sale of Aviation Week, organic revenue actually increased 10%. Platts and JD Power both delivered double-digit revenue growth, which was partially offset by softness in McGraw Hill Construction. Overall operating profit increased 27% resulting in a 510 basis point improvement in margin to 30.4%.

As you can see in commodities, Platts is off to a great start for the year, delivering a 14% increase in revenue for the quarter. Petroleum, Metals & Agriculture and Petrochemicals all delivered double-digit revenue growth while Power & Gas delivered mid-single digit growth. Due to its size, Petroleum continued to provide the greatest absolute growth, while Metals & Ag building on recent investments provided the greatest growth rate, which was 36%.

I'd like to share an example with you of how McGraw Hill Financial businesses create value across the platform and deliver essential intelligence. Historically, S&P Capital IQ has worked with S&P Ratings to deliver the annual S&P Capital IQ Energy Symposium. This was the first year that Platts and S&P Dow Jones Indices also joined to sponsor and provide speakers for the event. S&P Capital IQ used this event to announce the launch of its new oil and gas estimates, including average and total daily production of oil, gas, natural gas liquids. The team together demonstrated the usefulness of this information.

Furthermore, in commercial markets, revenue decreased 3%. Excluding the sale of Aviation Week, however, organic growth increased 5% in the quarter. JD Power achieved double-digit revenue growth led by the auto business and customer advertising. China continues to significantly contribute to growth in the auto business. Another bright spot is customer advertising, which increased 34%, primarily from the initial quality study in autos and several nonauto studies. As we announced last month, we are exploring strategic alternatives for McGraw Hill Construction, but don't have any updates at this time.

Summing up, we are off to a solid start for 2014 and our guidance remains unchanged. After Investor Day, I hope you have all had a greater appreciation for the quality of our businesses, which was particularly demonstrated by the strength of S&P Dow Jones Indices and Platts, offsetting weak bond issuance that has impacted Standard & Poor's Rating Services. I want to thank all of you for joining the call this morning and now I am going to hand it over to Jack Callahan, our Chief Financial Officer. Thank you.

Thank you, Doug. Good morning to everyone joining us on the call. This morning, I want to briefly discuss several items related to first-quarter performance. First, I want to recap key consolidated financial results in the quarter. Second, I will review some accounting-related changes. Third, I will provide updates on the balance sheet, free cash flow and return of capital and finally, I will review our guidance.

In the first quarter, revenue grew 5% with organic revenue growing approximately a point faster, excluding the impact of the sale of Aviation Week, as well as the sale of Financial Communications and small productline closures at S&P Capital IQ. Segment operating profit grew 9%, driven by the strong results at commodities and commercial markets and S&P Dow Jones Indices. In addition, after cycling through a period of stepped-up investments, S&P Capital IQ has delivered adjusted profit growth in each of the last three quarters.

Adjusted unallocated expense increased by $6 million, primarily due to an increase in unoccupied office space resulting from recent divestitures, as well as the timing of certain professional fees. In addition, the first quarter is the most challenging comparison of the year for this particular expense item. In line with our previous guidance, the tax rate was 34% in the quarter, a decrease of 100 basis points versus the first quarter a year ago. Adjusted net income increased 9% and adjusted diluted earnings per share increased 12% to $0.89. There was a reduction in average diluted shares outstanding of approximately 7 million shares versus the year-ago period.

While there were no adjustments to GAAP results this quarter, there were two accounting-related changes that are noteworthy. The first has to do with unallocated expenses. As part of the transformation to McGraw Hill Financial, a comprehensive review of accounting and reporting practices and policies was undertaken. As a result, beginning in 2014, all shared operating services will be fully allocated to the segments utilizing a methodology that more closely aligns with each segment's usage of these services.

The costs that remain in unallocated expense will be largely corporate center costs, select initiatives and excess real estate. We included Exhibit 8 in the press release schedules to provide a recast of operating profit by quarter for 2013. For 2013 in total, approximately $75 million of these costs have been reallocated to the segments.

The second has to do with refining revenue recognition for certain products. The primary example was for a subset of ETF licensees within S&P Dow Jones Indices. We have incorporated validated data that provides assets under management for a greater portion of ETFs than we have historically had. Therefore, with this new data in history, we can now record revenue when earned. Approximately two-thirds of the ETF-related revenues are already on this methodology. We expect this to be the only quarter meaningfully impacted by this change in revenue recognition.

We continue to maintain an exceptionally strong balance sheet. As of the end of the quarter, we had $1.5 billion of cash and equivalents of which just under 40% 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 portfolio and as appropriate sustain our share repurchase program.

Our free cash flow during the quarter was $85 million versus negative cash flow of $86 million a year ago. The improvement was primarily due to the timing of tax payments. It should also be noted that the first-quarter free cash flow is generally going to be our lowest quarter each year as annual incentive compensation payments are made during this quarter. We continue to expect free cash flow of approximately $1 billion in 2014.

Now let me update you on our return of capital activity. During the first quarter, approximately 2.2 million shares were repurchased at an average price of $78.47 per share. That leaves 47.8 million shares available from December's new authorization. We do anticipate selectively continuing share repurchase activity in 2014 subject to market conditions.

Despite these share repurchases, basic shares outstanding increased modestly from the end of 2013 for two reasons. First, 2.3 million employee stock options were exercised during the quarter. Over the last two years, employees have exercised significantly more stock options than have been granted. In fact, at the end of 2011, there were approximately 27 million outstanding stock options. At the end of the first quarter, there were less than 10 million. Second, each year in the first quarter, restricted stock plans vest. This quarter, 1.7 million shares of stock were issued associated with the 2011 performance stock plan. With this behind us and less stock options available for exercise, we expect share repurchases over the remainder of the year to have more impact on reducing shares outstanding.

Now I'd like to reiterate our 2014 guidance. There have been no changes. We continue to target mid-single digit revenue growth in 2014 and as a reminder, the impact of the divestiture of the Aviation Week, the sale of Financial Communications and the shutdown of several smaller productlines at S&P Capital 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 a 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 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, we anticipate delivering continued growth in 2014 as long-term secular drivers of growth combined with our leading market positions and brands remain in place. That said, market volatility could impact results as issuance trends in Q1 demonstrate. Over the balance of the year, we do anticipate a step-up in performance especially in the second half. Again, thank you for joining us today on the call and let me turn it back over to Chip Merritt.

Thanks, Jack. Just a couple instructions for our phone participants. (Instructions). Operator, we will now take our first question.

Manav Patnaik, Barclays.

Thank you. Good morning, everybody. Just to touch on the ratings side first, in terms of the incremental expenses you are putting in for headcount and technology and so forth, I was just curious how much longer through the quarter should we see that flowing through the numbers? Like when does margins start showing that year-over-year improvement is I guess what I am getting to?

Expense growth was mid-single digit in the ratings business in the first quarter. We are not anticipating some significant step-ups as we go through the year. So I think the margin expansion will be based in part on what we see in terms of perhaps improved issuance trends over the balance of the year, combined with our ongoing cost-reduction programs. But we continue to expect some reasonable sustained margin in this business going forward.

Okay. And then in terms of the structured finance performance, I was just curious if you could comment a little bit more on the dynamics there. I think was it more a case of tougher comps or share losses just because your competitor obviously cited slightly better results in that structured finance line?

This is Doug. It's a combination of both. As you know, the structured finance market overall globally was down a lot. The global decrease in structured finance issuance was actually 13% in number of issues and 9% in terms of par volume and billions of dollars. And that was even down further in the United States; it was down by almost 12% in dollar volumes in the US and 23% in terms of number of issues. So there was a significant decrease. The European structured finance markets, as I said earlier, remain completely anemic with the exception of covered bond and the covered bond issuance is a pretty standardized ongoing set of issuance.

So we saw a combination of very weak structured finance markets. Our marketshare has fluctuated depending on what kind of asset class you are talking about. Recently, we have not been at as high of a marketshare in CMBS, but in other asset classes, we are continuing with the traditional marketshares we've had.

Okay, that's helpful. And just one last housekeeping, Jack, in terms of the flat guidance for unallocated expense, can you just clarify what that 2013 number should be that we should model as flat?

You will see it detailed in Exhibit 8 of the appendix. On a full-year basis, it's $129 million.

All right. Okay, thank you guys.

Alex Kramm, UBS.

Hey, good morning. Maybe just coming back to the guidance, obviously, it remains pretty unchanged here and I don't think I -- maybe I missed it, but maybe like bigger picture, what are the kind of levers, up, down, relative to a quarter ago where you feel stronger or weaker? What businesses do you think are running ahead and where do you see areas of maybe a little bit of concern where you would say the outlook is weaker than before?

Let me start, and just from a strategic point of view, we are very pleased with the new management team we have in place, our approach to how we are managing the business and allocating capital. A lot of our investments that we have been making the last couple years have turned out to be the right ones. So each business has its own opportunities for growth whether it is new asset classes, new products, customer penetration, as well as expansion into international markets. And so those are the ways that we are driving the performance and looking at where we put more emphasis and more growth. Clearly we are subject to, in many of our businesses, to market volatility that we can't control, but what we can control, which is our exposure on where we place our resources and where we are focusing our growth, as well as how we manage our margins and manage our expenses, we are doing all we can to control where we can position ourselves for growth in margin. But obviously we do have some market volatility we always have to live with.

And maybe just carrying on Doug's comments, just back to guidance assumptions, I would tell you across just about all the businesses, I think we are very much in line with our ingoing assumptions with maybe the possible exception of the slow start that we saw on bond issuance within Ratings. The balance of that I think we feel pretty much in line and I think we will be monitoring that obviously over the balance of the year. It is much more favorable now than it was at the start of the year.

Okay, great. And then maybe just to dig in a little bit on the Ratings side again, one of the things I think that stood out was the strong -- continues to stand out is the nontransaction fees, 9% growth this year. I mean that's -- I think that's almost like a fantastic number considering that that is recurring, right? What are the levers that can drive this up or down when we think over the next couple of years? I mean is this a sustainable growth rate or could this accelerate through whatever you are seeing out there or what are the reasons that could slow this down to maybe something like the mid-single digits?

Well, there are various aspects to this that drove it during the quarter. If you recall, there was a lot of M&A activity in Europe and so our Rating Evaluation Services are one of those areas, which was quite attractive for the markets during the quarter. We have seen over time 9%, 7%, 6%. We have seen steady growth in this area. It hasn't been always as robust as the 9%, but over the last four quarters, it has been over 6% every quarter. It has averaged over 7% and so we think it is a combination of shifts in capital markets, the kind of work that financial institutions and corporates need to look at their ongoing long-term capital raising, also as large issuers around the globe, especially in Europe and other markets, become much more frequent issuers, they shift from a transaction model to a nontransaction model. So there are a lot of secular trends, which help us on this, but obviously we are not going to project out that it is always going to be 9%.

And Alex, one thing I will add, this is Chip. If you look at the strength we've had in issuance over the last couple of years, that then leads to better surveillance numbers in the years that follow.

Yes, very helpful. Thanks.

Hamzah Mazari, Credit Suisse.

Hi there. This is Flavio; I am standing in for Hamzah today. How are you guys? Just a quick question first on the indices business. I am assuming that this big margin expansion, a big part of it is due to the revenue recognition issue and that is falling at 100% incremental margin. Can you help us understand how the margins will look like without that change?

Well, I mean obviously we benefited from that one-time catch-up in the revenue recognition, but, as you mentioned, this will probably be the only quarter where we are going to -- where we will have that impact. So if you were just to back out basically half the revenue from this quarter, that would give you --

Half the revenue increase.

Half the revenue increase, that would give you a better judge of what more run rate may look like going forward.

And then take it out of the operating profit as well.

Correct. (multiple speakers). I did the calculation the other day; it was just a few percentage points when you do the math.

Perfect.

3% is the difference.

That's very helpful. And you guys talked about the structured finance market a little bit. I just wanted a little, if you could, a little more color on your commercial MBS market. That market has been giving some strength recently and are you guys seeing that and how do you think your position is within that specific market?

Are you talking about the CMBS market?

Yes.

Actually the CMBS market has been weak. Its strength has been in the last few weeks. But, in the quarter, it was down 15%, actually 15.8% on in terms of par value dollars and it was -- number of issuers were down almost 12%. The market has been -- it has been quite volatile. There is a very different quality of properties coming into the CMBS market, so there is a lot more variability into what the asset class is and what type of assets are in it whether it's higher quality properties, lower quality properties, how diversified the portfolios are. So we have a very competitive criteria, which is understood by the markets. We are -- it's a competitive market. We have a very good team there and it is one that, as you can see from the new entrants into the market and the rating agencies, it is a very competitive part of the market now. But we are very well-positioned and we have been capturing some of the volumes and it is an area that we have a major focus on.

That's very helpful, guys. That is all I had on my end. Thank you for taking my questions.

Andre Benjamin, Goldman Sachs.

Hi, good morning. First wanted to dig into the margins in a little more detail. I know Manav touched on ratings margins, but I was wondering if you could spend a bit of time addressing how you think the margins for some of the other businesses may progress through the year, particularly Capital IQ and then Commodities and Commercials given the investments you are making in growth.

Andre, we are not trying -- we are trying to avoid getting too detailed into specific margin expansion by business. We are trying to manage a portfolio here. That all being said, if I just comment on some of the dynamics of the specific businesses in addition to earlier comments on ratings, I think in Capital IQ I think you've seen now with a couple quarters that we are largely cycling through those investments and we are going to look to kind of sustain some reasonable margin expansion going forward, particularly as we gain the benefits and we are quite encouraged by some of the early indications, some of the new functionality in products that are coming into the marketplace.

Across Commodities and Commercial, we have had stellar margin expansion in those businesses over the last few quarters. I would think we would look to have some continued maybe modest expansion there, but our primary focus there is really driving the top-line growth of Platts and JD Power, which are both double digit right now. So our focus there is growth.

Let me just add that one of the things that we want to make sure that you follow carefully throughout the year is year-on-year comparisons in what we call an organic sense. It sounds strange to talk about organic growth and you see margins going up from that, but we've exited lower margin or slow growth businesses or underperforming businesses and so one of the other aspects of our margin expansion is going to be as we look at comparisons of our operating businesses without those slower growth and slower driver businesses that are included. So that is part of the business was repositioning the portfolio and rationalizing it towards businesses we want to invest in.

Thank you and I guess one more housekeeping question, on the litigation, I know you mentioned at the Analyst Day I believe you said the judge was pushing for both sides in the DOJ case to come to trial by September 2015. That is obviously a moving target. But could you remind us what some of the next key milestones are and whether there are any kind of tangential trials like the one you mentioned this morning that could have some read across in the meantime?

Ken Vittor is here with us and he can answer that question.

Yes, there is no scheduled trial date. The judge has asked the parties to submit and we have a joint statement as to what would be an acceptable trial date and subject to certain caveats, the parties have indicated a September 2015 trial date, but the judge has not ordered that. There is no scheduling order yet as to a specific trial date.

In terms of the next dates to be looking at, the judge has a hearing in May on May 27 where he will resolve issues relating to the process by which privilege issues associated with the documents that he has ordered to be produced to S&P in response to our Motion to Compel how that will be handled either through a special master or a magistrate. So that will be the next hearing in the case.

And in terms of the Space Coast case, which you are referencing, that is a very helpful ruling in granting our Motion to Dismiss. The court issued a ruling which said that it is not enough to claim that there are generalized concerns about rating agencies or the business model or the issuer-paid model, that you have to tie whatever your generalized concerns are about rating agencies to the specific CDOs that the plaintiffs claim they lost money on. And that failure to allege with specificity led to the second dismissal in the Space Coast case and we will be using that precedent in the DOJ case and other cases because there is a similar defect in many of the complaints filed against S&P in that they have generalized concerns about how the rating agencies operated during the financial crisis, but they don't tie them to the specific CDOs that are at issue either in the DOJ case or the other case. So we think that is a very helpful precedent for us.

Joseph Foresi, Janney Capital Markets.

Hi, so I wanted to understand what is built into guidance at this point from a bond issuance perspective for the remainder of the year and how do you think about the trajectory of the business, what are your thoughts behind that?

I think we are still going to have -- while we are seeing a step-up in issuance, certainly saw that in March continuing into April, there is a very difficult comp on issuance in the second quarter, so we think that is going to be a tough comparison. But then I think you get into the third and fourth quarter, I think we see some nice -- we are anticipating some solid growth and that is in part what is pointing to strong second-half performance.

Okay. And then I think earlier you had talked about margins being up in all businesses this year. I might have that incorrect, but I think you had mentioned that maybe in your last call. How should we think about the margin profiles of the different businesses? Is this more of a portfolio effect this year? Has that changed at all?

Well, I think what we are trying to point to is overall our guidance is assuming at least a 1 point margin improvement overall across the entirety of our businesses. And I think that has been sort of the guidance that we've given. But that all being said, building on our comments earlier in both Ratings and Capitals and Commodities and Cap IQ, we do think we should have some sustained margin improvement as we cycle through the year.

If you look at the first quarter, I mean we had margin improvement in all the businesses with the exception of the ratings business and that is understandable with the issuance environment. So with a better issuance environment, you could see margin improvement there.

Sure. And then just to fully understand the accounting change, any impact to guidance from that change on an annual basis and does that offset the businesses that were shut down? I think you said there was a 1% impact from those businesses being shut down.

There is no change in guidance because this accounting change was fully considered in both our financial plans and our initial guidance, so there is no impact to where we were a quarter ago.

All right, thank you.

Peter Appert, Piper Jaffray.

Thanks. So Jack, I want to make sure I fully understand the accounting change to the Index business in the first quarter. Should we assume that the incremental revenue you got from the change basically all flows through to operating income?

Yes, largely it does, but just remember that, from a bottom-line point of view, only 73% gets to EPS, so it has about a $0.02 EPS impact on the quarter.

Okay. So what do you think the right run rate for operating margins within the Index business is on a sustainable basis?

Well, I mean we have been over -- I think we are approaching 60% and maybe a bit better. But one of the things we are benefiting from here is that we have picked up -- building on Doug's comments, we've picked up some additional licensees that are also benefiting the portfolio. So I think we are in obviously a very enviable position in that business.

Got it. And then could I ask just two other things? One, Jack, can you talk a little bit about how you are thinking about the timing of repurchase activity over the balance of the year? And then secondly any color on traction in terms of new asset classes in the Platts business? Thanks.

In terms of share repurchases, we are going to stay flexible on that one. As you saw, we were pretty active in Q1 and we have a lot of flexibility relative to our authorization, so we will update the market as we go through quarter by quarter.

And on Platts, we are looking at expanding -- we have a -- if you think about the Platts business, it has got a large concentration in petroleum and petrochemicals is fairly related to that. So we are seeing a lot of interest in getting more transparency in the markets, using more benchmarks as these markets become more global and there is more complexity, more information floating around, more at stake on what happens with countries and companies, etc. So we are looking at expanding into further expansion into metals, ag, power and gas, so we are going to be looking at organic/inorganic opportunities, but specifically we have a lot of interest in growing in the other -- diversifying into other types of commodities beyond just petroleum.

Doug Arthur, Evercore.

Yes, two follow-ups. On the loss of the UBS commodity business, is that -- I mean obviously that is built into guidance and your general sense is that other products will -- that are coming on strong are going to nullify the impact on revenues. Is that a fair assessment?

I think that is a fair assessment from a profit point of view. There could be a little bit of revenue impact more in the back half of this year and going into the first part of next. But from a bottom-line point of view, I think we have it offset.

Okay. And then just as a follow-up with Ken on the line, Ken, what is your sort of timeline expectations in the CalPERS case through the end of 2015 at this point? (multiple speakers). I know there has been a lot of back and forth.

Yes, we appealed the denial of a Motion to Dismiss, oral argument was held and the appeal is pending. So the timing will depend on when the Court of Appeals issues a ruling on our appeal of the Motion to Dismiss.

And that was based on anti-SLAPP?

Yes, exactly. And our argument in the motion is that in order to have a negligent misrepresentation claim in California, it has to relate to a past or present fact and we argued that the court below got it wrong by treating an opinion as a fact when all of the courts across the country have treated ratings uniformly as opinions, future-looking opinions, forward-looking opinions. So our argument is there can be no negligent misrepresentation claim by CalPERS because the predicate is missing. There is no present or past fact that has been misrepresented when you have a ratings opinion.

And any expectation on timing of the ruling?

No, it's totally subject to the court's calendar. As I said, the oral argument was held and the case is pending.

Okay, thanks.

Tim McHugh, William Blair.

Yes, thanks. Most of my questions have been answered, but two quick ones I guess. One, on the UBS commodity contract, I know you said it is not much of an impact to profits, but more so to revenue. Can you size that at all for us, I guess more so for the second half of the year in terms of what to expect?

We want to be -- we try and stay away from being overly explicit about our existing contracts, but let's just call it a couple points of revenue growth, but very manageable.

And that is a couple points to that business or to the overall business?

Just to that business.

Okay. And then within Capital IQ, you talked about Desktop growing 8%, but I guess even Desktop and Enterprise Solutions only grew 4%. I guess what is offsetting that and can we see I guess that overall part of the business creep up towards that high single digit growth rate that you described just for the Desktop part of the business?

There is a set of different products that we have under the S&P Capital IQ Desktop & Enterprise Solutions. We have got Portfolio Risk, we have got Compustat in there, we have got consolidated feed. We are investing in that business and recently we acquired a business in Europe called QuantHouse that we are doing investments in there and we think those will be obviously paying off at some point in the future. But what is really important for us right now is to drive the Desktop growth. This is critical because it gets our key product into people's offices and we are investing in the new capabilities in the Desktop, which we think are very clearly targeted at the needs of credit analysts and portfolio analysts and others so that this will help us drive our growth in the future. But that is one of the reasons we wanted to highlight the 8% specifically in Desktop.

How would that 8% compare to last year or the last couple years? I can't recall if you have broken it out in that much detail.

Well, we really haven't broken it out in that much detail, but I mean the Desktop business has been growing kind of 5%, 6%, 7%-ish for the last couple years. We have been pretty pleased and we will talk about this that our Desktop business is certainly gaining share, let's put it that way.

But the growth this quarter, it's basically a continuation of the trend or did the growth pick up is what I was trying to understand?

Yes, I mean we don't really quibble over a percent or two.

Okay. All right. Thank you.

Craig Huber, Huber Research Partners.

Yes, good morning. Just can you talk a little bit further about your outlook here for the transaction-based revenues within Ratings here? The second quarter you alluded to how strong the year -- how tough the year-over-year comp is there, but are you expecting that to be flat to down in the second quarter? I'm just curious what your backlogs are you are seeing over the next couple months.

I think our guidance is sort of based -- can manage to exactly what you said, flat to modestly down, and then we do then -- over the balance of the year. Then we do anticipate in part driven by much, in some sense, easier comps, particularly in the third quarter. We would see a return to solid growth in the back half of the year.

And also you guys have been very good on rationalizing your portfolio in recent years. I am just curious if you think there is much left to go on that front going forward aside from what you have already announced on the Construction side?

I think Construction is the most significant. There might be a few small products here and there, but nothing that I would mention as significant. (multiple speakers)

Our focus right now, Craig, is much more about what we can do to build the portfolio and add to growth.

Shifting to the unallocated expenses back down to the operating units, I am just curious will that change the mindset at all with your managers of the various business units to be more cognizant of those expenses or were they already very well-contained anyhow and they were already embedded in what their metrics are based on compensation every year?

That's well put, Craig. No, I think part of this change is to have more visibility, more alignment on the total cost of doing business. So yes, I do anticipate that collectively we will have a lot more focus on what we can do to manage these shared costs and make them a contributor to ongoing margin enhancement going forward. So I think there's some real benefits of having everyone working off the same set of numbers.

And what I'd say is that you answered your own question in the question.

And with that, I do have one more quick question, please.

Do you have an answer for it?

Your share buyback, the 2.2 million shares you guys bought back, is the DOJ case in your minds holding you back from picking up the share buybacks you need from these levels?

Look, I think as we have said before, I think we have an extraordinarily flexible and strong balance sheet I think that gives us a lot of flexibility going forward. So is the -- it may be a consideration in the sense that we want to reserve some flexibility, but I think we have adequate flexibility to have a lot of choices, be it either share repurchase and/or additions to the portfolio.

Thank you.

Bill Warmington, Wells Fargo Securities.

Good morning, everyone. So one question for you, a follow-up on the S&P Dow Jones Indices, with 18% year-over-year growth in Q1, you have mentioned that half of that growth was from the revenue recognition. I just wanted to ask about how we should think about the growth rate for that division going forward, high single digit, low double digit or where should we think about it?

Well, it is kind of highly dependent on what is going on with overall what your view of the market is going forward because it is so based on capital flows, particularly into EPS and mutual funds. It could also be impacted by volatility. So it is hard to kind of point to a steady-state sort of growth rate going forward. I think right now I think for the first half of the year, growth probably is in the -- similar to what we saw in Q1, less the impact of the accounting change and maybe not quite so strong in the second half because of the modest impact of some of the loss on revenue on UBS. But then I think you have got to overlay what is your view of the equity markets going forward.

I would add though that clearly we have this impact from markets that Jeff mentioned, but, on the other hand, we are investing for growth in markets like Korea and Taiwan. Last quarter, we invested in Mexico and Colombia. We bought out the BMI and the GSCI. So we are investing in areas of the markets where we think there will be growth like the emerging markets like Asia. And so we don't want to have a one trick pony and just be dominated by the S&P 500. We want to take advantage of that brand and the expertise and the platform that we have, add more product and more capacity into it. So you should be hearing from us over time a lot of these types of partnerships and investments, which also are going to help drive growth. They might not drive growth next quarter or the quarter after that. They might take a while to see the growth coming through, but we think with the type of globalization markets we want to be using that as also a place where we play.

And if I could add just one last thing, with ETFs being the dominant portion of that business, even in a flat market environment, you are still seeing inflows into passive investing and about 12% of the increase in AUM came from inflows and so we think that trend will continue.

Now continuing on that theme, there has been talk about index properties potentially on the block and I wanted to ask about your thoughts about M&A opportunity in that business.

We don't comment on speculation or things that are being discussed in the market.

Okay. Then one housekeeping question. If you happen to have the fully diluted shares outstanding exiting the quarter if I can take into account the buyback?

I think it is 277.

277. All right, thank you very much.

Ed Atorino, Benchmark.

Hi, thank you. You mentioned the CMBS down 13%. Any other big categories you would like to highlight as either up or down in the ratings in the quarter?

Well, from the point of view of market issuance overall, the quarter was -- as I said earlier, it was a choppy quarter. It began with incredibly low issuance in January and February. There was a lot of discussions about what was happening with the Fed, with tapering -- with interest rate movements, etc. so the first two months of the quarter were very slow. March picked up the pace and there was a lot more issuance. So when you look across all of the asset classes generally speaking, they were down for -- total worldwide issuance was down, in terms of number of issues was down 25% and in par value, it was down 4%. So as I mentioned earlier, that also impacted some of our earnings because some of the deals were so large. Structured finance was down 9.4% in a par value and down 13.1% on number of issuance globally. So you start looking at market by market. Generally speaking, the first quarter, there was a lot of volatility. Chip could provide you more details on --

Okay.

-- it market by market off-line on that.

Second question, I don't mean to be a wise guy. You are buying a lot of shares and then you issue a lot of shares. Is there a strategy there? I mean it looks -- it sounds like it just spins the wheels.

Well, I mean they are two different things, right? Buying back shares is the allocation of capital in terms of the choices that we have. The issuance of shares has all to do with compensation. So I would think it's appropriate, particularly for a company like ours, which is made up of relatively higher paid executives, to have some of their incentive compensation based in equity-related vehicles such that we have aligned interests between our value creation and that of our shareholders.

And if you look over time you can see a steady decrease of our shares outstanding.

That's true. It is a net decline. Thanks.

You have particular quarters like a first quarter where you are rolling out more compensation, so you have the offset and that is why we kind of highlighted that in one of Jack's slides.

Terrific. Thanks, much.

Thank you.

All right. That concludes today's call. So we'd like to thank you for joining us and we will talk to you in the future. Thanks.

That concludes this morning's call. A PDF version of the presenters' 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.