標普全球 (SPGI) 2014 Q4 法說會逐字稿

Good morning, and welcome to McGraw Hill Financial's Fourth Quarter and Full Year 2014 Earnings Conference Call. I would like to inform that this call is being recorded for broadcast. All participants are in a listen-only mode. We will open the conference to questions and answers after the presentation, and instructions will follow at that time. To access the webcast and slides, go to www.mhfi.com. That's MHFI for McGraw Hill Financial, Incorporated, dot com, and click on the link for the quarterly 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.

Thank you, good morning. Thanks for joining us for McGraw Hill Financial's Fourth Quarter and Full Year 2014 Earnings Call. Presenting on this morning's call are Doug Peterson, President and CEO, and Jack Callahan, Chief Financial Officer. 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're 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. 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 Forms 10-K, 10-Q, 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. At this time, I would like to turn the call over to Doug Peterson. Doug?

Thank you, Chip. Good morning everyone, and welcome to the call. At the beginning of 2014 during our Investor Day on March 18, we laid out our vision for creating growth and driving performance at McGraw Hill Financial. As you can see, we made great progress.

We completed the rationalization of all of our media assets with the sale of McGraw Hill construction. We also resolved significant legal and regulatory matters. While these settlements resulted in a meaningful loss of net income for the quarter, our businesses are performing very well. Our adjusted results, which are the basis that we use to manage our Company, showed just how well these businesses are doing.

Despite the head winds of a strong US dollar and collapsing oil prices, in 2014 the Company achieved 7% growth in revenue from continuing operations, as clients around the world increasingly seek the essential intelligence we provide. Importantly, every business unit delivered top-line growth and margin improvement.

The Company also delivered a 280-basis-point improvement in adjusted operating profit margin. The combination of increased revenue and improved profitability led to the generation of more than $1 billion in free cash flow for the year.

We also added talented leaders to the Management team. Imogen Dillon Hatcher was named President of S&P Capital IQ, and Lucy Fato appointed Executive Vice President and General Counsel. These are capable leaders who are already making a difference.

One of the most significant developments in the quarter was the resolution of legal and regulatory matters. With the Department of Justice and the attorneys general of 19 states and the District of Columbia, CalPERS relating to three structured investment vehicles, the US Securities and Exchange Commission, and the attorneys general of New York and Massachusetts, and several private litigations stemming from the financial crisis. As a result of these settlements, we recorded a fourth- quarter charge of $1.552 billion.

Now, let me provide more color on our 2014 accomplishments. During 2014, we expanded our global footprint and reach. Platts acquired Eclipse and relocated its head office to London. Standard & Poor's rating services acquired BRC Investor Services in Colombia. S&P Capital IQ added private company financial data for scores of Australian, Brazilian, and Indian companies.

S&P Dow Jones indices continued to partner with important exchanges around the world, reaching or expanding agreements with the Bolsa de Valores de Lima, Bolsa Mexicana de Valores, BOVESPA, and the Korea exchange. J.D. Power launched financial services offerings in southeast Asia and Australia, as well as a digital automotive retail performance improvement platform in China.

As we look at the Company's financial performance over the last three years, you can see consistent improvements in revenue, margin, and EPS. Revenue from continuing operations has grown at a 10% compounded annual growth rate. Our adjusted margins have improved 680 basis points, from 29.1% to 35.9%, and we've achieved a compounded annual growth rate in earnings per share of 24%.

Now let's turn to our 2014 results. Revenue increased 7% year on year, adjusted operating profit increased 17%, adjusted operating margin increased 280 basis points, and diluted adjusted EPS increased 20%. All of our business units delivered revenue growth, increased adjusted operating profit, and improvement in adjusted operating margin. This balanced contribution across all business units is a core strength of McGraw Hill Financial.

As we look at the fourth quarter, we finished the year with strong results. Revenue grew 7%, with all business units contributing mid to high single-digit growth. Meaningful adjusted margin expansion continued, although it should be noted that in the fourth quarter 2013, S&P Dow Jones indices recorded a $26-million non-cash impairment charge impacting those results. Notwithstanding this charge, the adjusted margin would still have increased significantly. Fourth-quarter diluted adjusted EPS increased 23%.

Our global footprint continues to expand, as international revenue growth of 8% out-paced domestic growth of 7%. In this chart, you can see that commodities in commercial markets in particular delivered the strongest international revenue growth.

Now let me turn to the individual businesses, and I will start with Standard & Poor's rating services. In 2014, revenue increased 8%, adjusted operating profit grew 13%, and the adjusted operating margin increased 190 basis points to 43.8%. During the quarter, revenue increased 8%. Adjusted operating profit jumped 18%, and the adjusted operating margin increased 380 basis points to 42.2%.

S&P rating services continues to make progress in improving margins. In fact, adjusted expenses in the quarter only increased 1% despite elevated costs related to recently resolved legal and regulatory matters.

Reviewing the next slide, non-transaction revenue growth both in 4Q and for the full year was driven by annual fees derived predominantly from frequent issuer relationship fees and surveillance, and from rating evaluation service revenue. Demand for corporate debt ratings and bank loan ratings drove overall 2014 transaction revenue, while in the fourth quarter, growth was driven by demand for corporate and public finance ratings.

If we turn to issuance, US and European trends diverged in the fourth quarter, with 20% increase in US issuance, and a 12% decrease in European issuance. This mirrors the macroeconomic trends of growth in the US, and uncertainty that we saw in the fourth quarter in Europe.

Fourth-quarter issuance in the US was quite strong across all dimensions. Investment grade increased 22%, high yield increased 17%, public finance was up 23%, and structured finance also rose at 14%, driven by CLOs, ABS, and RMBS.

In Europe, although corporate issuance was very weak, structured finance increased 49%, especially through a surge in RMBS to a re-focusing of United Kingdom funding for lending scheme, away from mortgage lending.

This next chart depicts a number of European corporate issuers, a very important trend that we are watching. You can see the significant increase in our European customer base in the past two years. In order for European companies to meet their borrowing needs, they are increasingly turning to the capital markets. While quarterly issuance volumes ebb and flow, this is a very bullish long-term trend.

Now let me turn to Capital IQ. In 2014, in S&P Capital IQ, organic revenue grew 7%, adjusted segment operating profit grew 18%, and the adjusted margin increased 190 basis points. After two years of investments, the business delivered adjusted operating margin improvement for the year. The fourth-quarter results were largely consistent with the full-year results.

Let me add a bit more color on full-year revenue growth in the three business lines in 2014. S&P Capital IQ Desktop and Enterprise Solutions revenue increased 8%, and this was principally driven by an 11% increase in desktop revenue. S&P Credit Solutions revenue increased 6%, from a 10% increase in RatingsXpress.

In the smallest category, S&P Capital IQ Markets Intelligence, revenue decreased 3% overall. While Leveraged Commentary and Data, and Global Markets Intelligence continued to deliver double-digit growth, declines in equity research services, and the shut-down of FMR Europe more than offset those gains.

Turning to S&P Dow Jones indices, in 2014 this business delivered a 12% increase in revenue, with a 32% increase in adjusted operating profit. Revenue growth was achieved across every dimension of the business, ETFAUM, mutual fund AUM, derivatives, and data subscription.

In 2014, every dollar of incremental revenue growth resulted in $1 of incremental adjusted operating profit. This resulted in a 2014 adjusted segment operating profit margin of 63.6%. The fourth-quarter results generally mirrored the results for the full year, except that the impact from the $26-million impairment charge in the fourth quarter of 2013 had an impact on year-over-year comparisons.

If we turn to the key business drivers, the ETF industry experienced record in-flows of $331 billion in 2014. The trend towards passive investing continues, and S&P Dow Jones Indices, with its broad and innovative array of indices, is at the forefront of this trend. ETFAUM associated with our indices increased 25% from the end of 2013 to $832 billion. Importantly, 15% of this growth was the result of new in-flows.

Mutual fund AUM associated with our indices reached another major milestone in 2014, surpassing the $1-trillion mark. With volatility roaring back in the fourth quarter, derivative trading volumes picked up, with daily activity based on the S&P Dow Jones indices growing 20%. But for all of 2014, yearly volumes only increased 4%, as volatility was very low for most of the year.

On to commodities and commercial markets. As a reminder, McGraw Hill construction was sold and its results moved to discontinued operations, thus our financials for 2014 and 2013 do not include these results. On a continuing operations basis, 2014 organic revenue, excluding the impacts of the Eclipse acquisition and the Aviation Week divestiture, grew 9%. The adjusted operating margin increased 130 basis points to 34.3%.

The 130-basis-points adjusted margin improvement from continuing operations is only part of the story. Taking into consideration the sale of McGraw Hill Construction, as well as margin improvements for continuing operations, the adjusted operating margin actually increased 370 basis points. Fourth-quarter organic revenue from continuing operations increased 7%, and the adjusted operating margin decreased 120 basis points.

During the fourth quarter, margins were impaired by timing of investments in J.D. Power to fully operationalize next-gen platforms, and extend pin data. By investing in new global products, global workflow tools, and client-delivery platforms, we're enabling J.D. Power to achieve continued revenue growth. In addition, the acquisition of Eclipse had a modest negative impact on margins.

For Platts, fourth-quarter revenue was the strongest of the year, capping high single-digit organic revenue growth for 2014. With a backdrop of dramatically reduced oil prices, petroleum, the largest category, delivered high single-digit growth in both the quarter and the year, through increased demand for price assessments and market data subscriptions. By providing transparent pricing data analysis, Platts assist its customers in managing commodity price volatility.

Based on recent investments in steel business briefing in Kingsman, metals and agriculture delivered the greatest rate of growth in 2014 at 34%. Global trading services revenue increased in the fourth quarter, primarily in metals and agriculture, but was down for the year. Despite increased oil volatility trading, based upon our price remained subdued, due to regulation and the exit of several financial institutions from the business.

Finally, J.D. Power finished the year with its highest-revenue quarter, delivering low single-digit revenue growth in the quarter, and high single-digit revenue growth for the year. Asia revenue led the way, with 10% growth for the year. Overall, in both the quarter and the year, growth was paced by gains in the auto business, thanks to PIN and our consulting business.

The second-largest contributor to 2014 growth was advertising licensing revenue from customers' usage of the J.D. Power brand. This advertising extends well beyond the auto sector. Global services industry, which is all of our non-auto businesses, delivered low single-digit growth in 2014.

In summary, the Company delivered solid yearly results, while also completing our portfolio rationalization, and resolving significant legal and regulatory matters. It has been gratifying, particularly with all our business units contributing to growth in revenue from continuing operations and significant margin improvement.

Thanks to the effort of some 17,000 employees around the world, we delivered continued adjusted operating profit margin improvements of 280 basis points for the Company. The combination of strong revenue growth and adjusted margin expansion yielded strong diluted adjusted earnings per share of $3.88.

As we turn to 2015, I want to reiterate our focus on creating growth and driving performance. We're introducing guidance of mid-single-digit revenue growth, and adjusted earnings per share of $4.35 to $4.45. As we launch 2015, the entire organization is aligned around key themes. These include strengthening customer and stakeholder engagement, accelerating our international growth, sustaining our margin expansion, and having discipline in capital allocation; and all the while managing the mitigating risk throughout the Company.

With that, I want to thank all of you for joining the call this morning. Now I'm going to hand it over to Jack Callahan, our Chief Financial Officer.

Thank you, Doug. Good morning to everyone joining us on the call. I want to discuss several items in more detail related to fourth-quarter and full-year performance. I will recap consolidated income statement results both for the quarter and the year, review the recent charges related primarily to legal regulatory items.

I will also review the restructuring actions taken across the portfolio in the quarter, including an update on our progress on the $100-million cost-reduction program that we introduced early last year. I'll discuss the free cash flow results, provide a return of capital update, and finally, I will provide additional color on our 2015 guidance.

Let me start by reviewing our fourth-quarter results. Please note that these figures are adjusted financials, as our GAAP results were materially impacted by the settlements, and to a lesser extent, restructuring actions. I will discuss the GAAP results in just a moment.

As Doug noted, our portfolio of businesses is performing quite well, and closed out 2014 with solid results. In the fourth quarter, revenue grew 7%, adjusted segment operating profit grew 25%, with all four business units contributing to this growth. Adjusted unallocated expense was flat versus a year ago. Total expenses declined more than 1%, contributing to an adjusted consolidated operating profit growth of 28%, a 570-basis-point increase in the Company's adjusted profit margin.

The tax rate on an adjusted basis was 32%, as the full year came in a bit better than expected. Adjusted net income increased 22% and adjusted diluted earnings per share increased 23% to $0.95. The average adjusted diluted shares outstanding decreased by 1%, due in part to share repurchase activity completed in the first half of 2014.

The impact of foreign exchange in the quarter was a bit more significant versus previous quarter, although it was relatively modest overall. Revenue was negatively impacted by approximately one point of growth, operating profit benefited by approximately two points of growth due to the ForEx impact on non-US denominated expenses.

Now let's turn to the full-year results. Revenue grew 7% to well over $5 billion. The impact of ForEx on full-year revenue is negligible. Adjusted segment operating profit grew 16%, with all four business units contributing to this growth. Adjusted unallocated expense increased 7%, primarily due to an impairment charge associated with the sale of the corporate aircraft, and a one-time expense associated with the sale of a data center that we recorded in the second quarter.

Total adjusted expenses for the full year increased less than 3%, contributing to adjusted operating profit growth of 17%, driving a 280-basis-point increase in the Company's adjusted profit target. The tax rate on an adjusted basis was 33.1%, a reduction of 80 points versus a year ago.

Overall, adjusted net income increased 19%, and adjusted diluted earnings per share increased 20% to $3.88. The average adjusted diluted shares outstanding decreased by 1% -- overall, a strong year of performance.

Because of the significant legal and restructuring charges, we added this bridge, which I hope will be instructive. During the year, the Company recorded $1.7 billion in charges largely associated with regulatory matters, and to a lesser amount, restructuring. These charges were predominantly recorded in the fourth quarter. The after-tax impact of these items was approximately $1.4 billion. The effective tax rate is approximately 20% in aggregate as a result of all of these charges.

To provide additional clarity, we have broken out all of the second-half charges related specifically to legal regulatory matters, which totaled just over $1.6 billion. We would expect all of these payments to be made by the first quarter of 2015.

I would note that in addition to significant settlements with the Department of Justice, the attorneys generals of 19 states and the District of Columbia, and CalPERS, there was $17 million in additional charges associated with the final settlement with the SEC, New York, and Massachusetts; and $35 million associated with settlements in several private litigation items stemming from the financial crisis.

Because of the strong balance sheet we have maintained, we have ample flexibility to make these payments. Most of the payments will come out of cash on hand and our $1-billion credit facility, which remains untapped at this point in time.

Now let me provide some color on restructuring actions in the quarter. Last year we established a cost-reduction target of at least $100 million by the end of 2016. One aspect of that program was identifying efficiency opportunities in our work processes without compromising the quality and timeliness in how we serve customers.

As a result, there have been restructuring actions across the portfolio. During the second half of 2014, we took restructuring charges totaling $86 million, with $41 million in the fourth quarter. These actions are a meaningful part of our ongoing cost-reduction program to sustain margin expansion.

Now let me provide an update on the progress we are making overall on this cost-reduction program that we discussed in our Investor Day last year. Our goal has been to achieve more than $100 million in cost reduction over a three-year period. The pieces of the pie have been sized to display the actual cost savings that we have identified in restructuring our workforce, streamlining our real estate portfolio, leveraging our procurement scale, and reducing corporate costs.

We are very much on track with this cost-reduction program, and now target exceeding the initial target, as $140 million in opportunities have been identified. We expect that more than 75% of these savings will be realized by the end of 2015.

Let me remind you that some of our cost reduction will be reinvested in growing our business. For example, while Platts is reducing its work force in some areas, it is adding it into others, namely its metals and agricultural business.

Now let me update you on free cash flow. Our guidance was to achieve free cash flow of approximately $1 billion, and we achieved that. Our cash balance at the end of 2014 was approximately $2.5 billion.

In 2014, our return of capital in dividends and share repurchases was $688 million. 2014 share repurchases totaled 4.4 million shares. We did not repurchase any shares during the fourth quarter.

Next I'd like to provide you with a broader view of our return of capital. The Company has an outstanding record of returning cash to shareholders. We have returned approximately $3.3 billion in the last three years in share repurchases and dividends.

We announced today that for 2015, the Board of Directors has authorized a 10% increase in the dividend, to an annual payout of $1.32 per share. This marks the 42nd year of sustained dividend increases. As we look forward, we will remain disciplined in our capital allocation strategy. But now that we have addressed the most significant legal regulatory matters facing the Company, we can put more focus on driving shareholder value.

Just to remind you on our priorities on the allocation of capital, first we will invest in organic growth; second, continue to pursue attractive acquisitions to expand the portfolio; third, sustain growth in our dividend, as today's announcement demonstrates; finally, continue to selectively repurchase shares.

We currently expect to be resuming the share repurchase program subject to market conditions. As a reminder, we have 45.6 million shares remaining under our existing share repurchase authorization. Furthermore, we will also consider additional leverage in the balance sheet, as appropriate, to both create growth and drive shareholder value.

Finally, I would like to provide more detail on our outlook for 2015. Guidance is as follows: Mid-single-digit revenue growth. We are mindful that the strong US dollar will likely negative our revenue growth a bit. We are targeting more than 125 basis points of adjusted profit margin improvement. A tax rate on an adjusted basis of approximately 33%, adjusted diluted earnings per share of $4.35 to $4.45. You should assume approximately $100 million of capital expenditures, and we are targeting free cash flow of greater than $1.1 billion, excluding the payments related to these legal and regulatory settlements.

In closing, our businesses are performing very well, as clearly demonstrated in our 2014 adjusted operating results, and this 2015 guidance in line with our longer-term financial goals. Overall, we remain focused on creating growth and driving performance.

Thank you for joining us on this morning for the call. Let me turn it back over to Chip Merritt to open up the Q&A session.

Thanks, Jack. Just a couple of instructions for our phone participants.

(Caller Instructions)

Operator, we will now take our first question.

Alex Kramm, UBS.

Let's start with Jack. Jack, I think you whet our appetite a little bit here at the end with your comment on leverage. You've made some comments in the past in terms of the capacity you think the Company could take. But you obviously haven't open the door yet. What's holding you back? Where do you think you can go? What do you need to evaluate to potentially do -- would you do something like an ASR, something like that, since you haven't been in the market for a while for buy-backs?

Alex, first of all, we do anticipate resuming the share repurchase program, as we commented. But it is a new time for us, right? We've moved past this moment in time. We have more flexibility now that we've addressed some of the largest legal and regulatory issues facing the Company. Yes, we could and will contemplate selectively adding leverage as appropriate, either to appropriate acquisitions and/or to accelerate share repurchases -- and we have ample capacity to do that. Our goal is to remain investment grade. We have ample capacity to consider all those options. Frankly, we're looking forward to having that flexibility to think about those moving forward.

Okay, great. Secondly, I guess staying on the topic of the legal resolution. I think you made comments in the past there's been significant legal costs obviously running through the ratings business. Now that a lot of this is resolved, can you give us a flavor of how much that was at the end here, how quickly some of these costs are going to come down, given that there is still some ongoing issues, obviously, with some other? In general, maybe just talk about the rating efficiency opportunities that exist outside of the legal side a little bit more?

First, on legal. As we have spoken in past calls, legal spend had grown significantly, and it was probably the most significant area of expense growth in the ratings business. As we go through 2015, our guidance does assume that legal expense begins to decline. That probably -- particularly as we start to get into the second quarter and beyond. We do think it begins to add to margin expansion.

That all being said, while I think we have addressed some of the major issues facing the Company from a legal point of view, there will be -- there continues to be some legal issues that we have to continue to monitor, so it's not going to go to zero. But we do think it's going to make a meaningful contribution to margin expansion for the year.

Back to your other question about efficiency opportunities, I think as you can see in the restructuring actions that we've taken, both in the third and fourth quarter across the ratings business, the team has identified them. They have a new program in place that's called The Way We Work. It is simplifying and streamlining the work we do every day to produce a rating on a timely fashion and in a high-quality way. We are quite confident as we continue to drive that program that can continue further opportunities to improve our quality, improve our turn-around time, and over time, continue to generate efficiencies.

All right. Very good. Thank you very much.

Peter Appert, Piper Jaffray.

Doug, given the great success you've had here early on in terms of narrowing the margin gap at both ratings and some of the other units relative to peers, I'm wondering if you are feeling more confident in terms of your ability to get closer to some of these peers from a margin perspective?

Thank you, Peter, for the question. That's a valuable focus that we're talking about. As you can see from our guidance that we just gave, we're looking at increasing our adjusted operating profit margin by another 125 basis point for the whole Company. It is a very important focus of ours. Obviously in order to get it right, it requires both a quarter-by-quarter review as well of the longer-term view.

We've got initiative to grow our top line, and we've talked about a few of them with you. Our focus on customers, which includes how we can have better penetration. Our coverage, our segmentation, our pricing, and in addition to that, other ways that we can increase our jaws to get also a much more efficient focus on expenses. We do benchmark against other peers in the markets, and some of them we have better margins than others. We are looking at improving our margins, but this is a very big focus of the entire Management team.

Understood. Thank you. Jack, just as my follow-up, can you give us something explicit in terms of what's assumed in terms of buy-backs in the EPS guidance?

Our guidance does assume -- let's call it more of a foundational amount of share repurchases, nothing let's call it terribly heroic. However, I think as we go through the year, we will be obviously -- we'll have some opportunities to come back and re-evaluate that.

Okay, thank you.

Manav Patnaik, Barclays.

First thing on the guidance, as well. The mid-single-digit revenue growth, does that include the negative FX impact? Also, could you help us out with some of your currency exposures on revenue and cost, and how we should try to model that?

Our revenue guidance does assume a view of the current ForEx environment, which is quite challenging right now. We do believe that it, in terms of our initial assumptions, it's probably costing us, in revenue about one point to 1.5 points in growth as we go into the year.

A few interesting things. While about 40% of our -- a little over 40% of our revenue is from foreign-source customers, we actually bill in dollars for about 80% of our revenue. We're not that -- the exposure we have on the revenue side is actually quite limited. The major currencies there would be the euro, the sterling, and the rupee. On the other side, we do have some expense exposures that we need to monitor and stay on top of. Just as a reminder, we have close to 8,000 associates in India. Obviously a movement in the rupee can have a significant impact on our expense base.

Okay. Just coming back to the question on the margins relative to the legal costs. I understand you said that you still obviously have some remaining lawsuits and so forth out there on the private side. Just two parts to this. One, can you give us an update on what's remaining on the legal side? If there's any way to quantify the relative exposure in the cost based on what you've settled and is going to get out of the cost base versus what's remaining?

Look, there's -- I think right now, relative -- we have about two dozen cases outstanding, a good number of them outside of the United States. Nothing's really pending for trial right now. We'll continue to monitor and work through those. But if there's opportunities to pragmatically resolve those issues, I would just point to today's release. There was a charge that we took for $35 million that addressed settlement-related issues with a good number of cases. While there may be -- I don't think the financial exposure is quite anyways relative to some of the other issues that were resolved in the quarter.

Okay. All right, thanks guys.

Vincent Hung, Autonomous.

Just a couple questions. First one, sorry, just to go back on the legal front. Within the full-year guidance, could you just give a rough sense of what percentage of legal cost reduction you are baking in, like 50%, 20%, et cetera?

No. All I'd like to say is we do believe it's going to make a solid contribution to the ongoing margin expansion within ratings. That all being said, it's quite likely we are going to spend a little bit more money in the area of compliance and risk management. Net-net, we do overall believe it's going to make a significant contribution to future margin expansion.

Okay. Just on the cost reductions, if I'm comparing the slide that you gave versus the slide that you gave at Investor Day, I don't see anything on data acquisition costs anymore, or technology leverage. Is that just now baked into restructuring, or has that already been taken?

There was -- in the area of technology, there is some savings that's baked into procurement. To simplify the message, there were places in areas of technology where we had some opportunities to leverage our scale to reduce the number from some suppliers we were using, some key areas of software development, and that's providing some savings. As a reminder, back on Investor Day the purpose of that slide was to lay out the target and to inform investors the various different places where we were going to look for savings. Now that we've done more of the work, I think what this slide today gives you a better representation of what we actually expect to realize.

Okay, thank you.

Craig Huber, Huber Research Partners.

My first question has to do with the indices business. Could you just explain, if you would, why the indices revenue growth slowed in the fourth quarter versus the trend you saw in the third quarter, and also why it was down sequentially, if you would?

Part of it, was -- Craig, it's related a little bit to that impairment charge we took a year ago in the third quarter. It was in the fourth quarter of 2013. We did lose a license, and that really did not start to impact the P&L at all until the third quarter, and then more meaningfully in the fourth. I suspect it's also going to be a bit of a drag as we go into the first part of next year. Overall, in terms of the underlying performance of the business, we were actually quite pleased with the way the business finished the year. Assets under management actually ended up a bit ahead of our expectations.

Also, on the debt side, can you help investors understand how much leverage on the relative EBITDA can you put on the balance sheet if you want to buy back stock, or to acquisitions, and not hurt your investment-grade credit rating? How far can you go here, please? Along those lines, what's your debt target ratio forecast?

Let's put this in terms of a leverage multiple, somewhere between 2.5 to three times EBITDA. That would be the range that we could comfortably stay solidly investment-grade.

Okay, thank you.

Robert Simmons, Janney Montgomery Scott.

Thanks for taking my question. I'm subbing in for Joe Foresi. I was wondering if you could give us any indication what you're expecting on the margin front across all businesses, but in particular in the ratings business?

We don't historically give business-by-business margin guidance at this point. I would point back that overall, on a consolidated basis, we do expect margin expansion at the consolidated level of at least 125 basis points. But just to put a little bit more color on it, it's hard to achieve that if rating, particularly, does not make some contribution, given its overall size in the portfolio

On the other hand, to go to maybe the other extreme, it's hard to really challenge our indices business to significantly expand their margins when they are already at 63% or 64%. I do think there's -- I do think there is a range of opportunity that we are mindful as we start to build our overall margin expectations for the business.

Okay, great. Can you give any color on your decision-making process, and how you decided to settle all these big issues that are out there?

We don't normally give a lot of details about our negotiation strategies. But as we've said in our materials that we issued, this was a time when given where we were in the discovery process and the overall litigation process, it was to the benefit of all parties to resolve these issues and move on.

Operator?

Bill Warmington, Wells Fargo Securities.

A couple of questions. First was I wanted to ask if there was something that you could do to -- or you're working on to lessen the impact of the settlement in terms of tax deductibility, insurance, use of overseas cash. On the index business, I was going to ask if you could comment on the M&A environment and potential opportunities there that you are thinking about?

Just on -- if I was going to limit my comments more narrowly in terms of the legal regulatory settlements to just the Department of Justice, the items with the 19 states, in CalPERS, the effective tax rate on those charges is a little less than 20% -- high teens, roughly in that area. There is some tax deductibility, it's not total.

Right now, we don't see a need, and we are not confident the best economic choice is to use offshore cash, even though that cash is available. Just given the cost of funding that we can access through our credit facility, that's probably the more pragmatic solution for us, if we need a bit of funding here. That's probably the more -- that's probably the path we're going to go down.

On the overall environment, if you want to talk about the business environment of the index business and potential M&A, as we've mentioned in our prior disclosures, as well as our discussions about the index business, we continue to focus on international expansion. As you know, we set up deals last year in Mexico, Peru, Colombia, Brazil, Korea, Taiwan, and then across many African nations. We think this is a secular trend, is one we should be heavily focused on. That includes building relationships with exchanges around the world.

Another area that we believe is going to be growth has been fixed-income indices. Our major growth focus is on international expansion and on fixed-income indices. Our base case is based on organic growth and investments using our own platform. Clearly, if there were opportunities or different properties were available, we would always like to take a look; but we don't comment on any speculation about our acquisition activities. Excellent. Thank you for the insight.

Tim McHugh, William Blair.

I just want to ask about the comment about seeing 75% of that $140 million, I guess, by the end of 2015. Just a clarification. Do you expect that to flow through the income statement, or action's taken and to eventually realize that. Trying to get a sense of whether we've seen that in your numbers for 2015, or it's more for future years?

Look, I think we will -- of the $140 million, we will realize 75% of that by the end of 2015. To be clear, we started -- as we started to work these programs, we started to get some benefits last year in 2014. There's a bit of a benefit we've already realized in our numbers. We do think -- and 2015's probably the year we'll get the most benefit. We do think we'll get approaching half, maybe not quite, of the benefit in this year. That ties very much to the guidance that we're giving on ongoing margin expansion. We expect we will continue to get some additional benefit as we go into 2016.

Some of these things are timing. To give one real good example, we already have started to get some savings from our exit of our headquarters building at 1221 Sixth Avenue. But we still have employees there. We won't be in a position to shut that down until later this year. Once we do that, then we'll have completed that program. We started to feather some of the savings in. We think we're in good shape to both exceed the target and to make this a meaningful contribution to our margin expansion plans.

Okay, thanks. I heard the comments about the quarter, but thinking forward on Platts, given the price of oil, can you elaborate at all on how you think about that, and what you're hearing back from customers, given some of them are probably pressured right now?

Yes, that's one of the areas we're spending a lot of time looking at. In the Platts business, we're looking obviously at the different parts of the entire value chain. We have a very small portion of our business is with people that are wildcatters and in the fracking and shale activity industry. That represents about 3% of our total business.

But what we're also seeing during this period is that we are having very high retention rates of our services, as we normally do. There is a lot of demand for information about oil prices and oil fundamentals, petroleum products, et cetera, in this kind of environment. We believe that we are well-positioned to serve the markets and serve their information need. But at the same time, we're building flexibility into our work force and into our planning for 2015, in case there is any sort of down-turn in volumes in the business that we see.

Okay, great. Thank you.

Our final question comes from Ed Atorino, Benchmark.

I just want to congratulate you for cleaning the slate. Any little pieces left that remain to be resolved, or is it basically done?

Ed, thank you for being on the call and thank you for the question. What we're really looking for is now taking advantage of the excellent work that's been done the last couple of years to rationalize the portfolio, to put in place a culture of high-quality customer engagement, of focusing on growth, of ensuring that we have best-in-class controls, and that this is the kind of platform that will allow us to continue to grow the Company and deliver results. This is really what we're all about. It's thinking about our customers having a great engaged employees, and delivering for our shareholders.

Great job. Thank you. Good luck.

Thanks Ed. Let me thank everyone for joining us. We are very excited about our prospects for 2015. As you've heard us, we think we're well positioned for growth, and that we've got a great focus on providing superior customer engagement, looking at international opportunities, and very importantly, focused on our margin expansion. That's something we've got a track record over the last couple of years. We want to continue to deliver that. I look forward to updating all of you throughout the year, and thank you again very much.

That concludes today's morning's call. A PDF version of the presenter 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 we wish you a good day.