標普全球 (SPGI) 2015 Q1 法說會逐字稿

Good morning, and welcome to McGraw Hill Financial's first quarter 2015 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.

Good morning. Thank you for joining us for McGraw Hill Financial's first quarter 2015 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 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 of management. 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 certain 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's, 10-Q's 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 we do have some media representatives with us on the call. However, this call is intended for investors, and we would ask that questions from the media be directed to Jason Feuchtwanger in our New York office at 212-512-3151. Subsequent to this call.

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

Thank you, Chip. Good morning, everyone, and welcome to the call.

I'm pleased to report that were off to a good start for 2015. Let me begin by reviewing some of the highlights from the quarter.

The Company reported strong revenue growth of 6% despite a negative impact from foreign-exchange rates that reduced the growth rate by 2%. Every business unit delivered growth in both revenue and adjusted operating profit. Revenue growth combined with progress on our productivity initiatives led to a 380 basis point improvement in our adjusted operating profit margin.

We resumed our share purchase program, with 1.1 million shares repurchased in the quarter. We made changes to our compensation programs, aligning them more closely with investor interest by eliminating employee stock option grants and instead utilizing restricted stock grants and deferred cash. Our legal team continue to resolve legacy litigation matters, including receiving a dismissal of the [court de decont] matter in Italy. You'll recall this was a potential EUR234 billion claim from an Italian prosecutor that we referred to on our fourth quarter 2013 earnings call.

And finally, Ashu Suyash was named as the Managing Director, CEO of CRISIL, effective June. Ashu brings her strong professional track record in the financial services sector and proven leadership skills, and we look forward to having her join CRISIL.

As we look to 2015, we are encouraged by the economic landscape before us. The US economy continues to strengthen, albeit in fits and starts. The labor market showing solid momentum, and we expect continued job creation coupled with lower oil prices to enable consumer spending to fuel additional GDP growth.

In Europe, we expected GDP to expand 1.1% due to lower oil prices, quantitative easing, and the strong US dollar. And finally, we expect Asia Pacific investment and borrowing activity to remain sound.

Caution is warranted, however, for a number of reasons. The US dollar is strong, interest rates are volatile, with negative rates appearing in Europe. And markets in US are on a rates increase watch. Geopolitical concerns continue in Greece and the Ukraine, and emerging markets' credit conditions could weaken due to lower commodity prices, sharp declines in currency value, and the strong dollar.

Overall we expect global GDP to grow 3.5% this year; a positive environment overall for our businesses.

Now let's turn to our first-quarter results. Revenue increased 6%. Adjusted operating profit increased 18%. Adjusted operating margin increased 380 basis points, and adjusted diluted EPS increased 25%.

Despite the challenge of a strong US dollar, the Company delivered healthy revenue growth, with 10% domestic growth and 1% international growth. Jack will discuss the impact of the Company from foreign-exchange in his remarks. Adjusted segment costs were well contained in the quarter due to tight cost control and progress on our productivity initiatives.

All of our business units delivered revenue growth and increased adjusted operating profit. Only S&P Dow Jones indices did not report improved margins, and that was due to a difficult comparison with a one-time revenue increase recorded in the year ago quarter.

Now let me turn to the individual businesses, and I'll start with Standard & Poor's Ratings Services. In the first quarter, revenue increased 6%. Adjusted operating profit grew 19%, and the adjusted operating margin increased to 480 basis points to 47%. While revenue was negatively impacted by foreign-exchange, it had a negligible impact on operating profit.

S&P rating services continue to make progress in improving margins. Reduced headcount from recent restructuring was the primary contributor to this quarter's improvement. Partially offsetting this progress were costs associated with efforts related to Dodd-Frank implementation and other regulatory requirements.

Moving onto the next slide. Transaction revenue increased from 43% to 48% of total revenue. Non-transaction revenue decreased, due to the strong US dollar and a decline in entity credit rating revenue and slower client acquisition than in Q1 2014. Transaction revenue grew, resulting from increased corporate public debt finance issuance, offset somewhat by weakness in bank loans. The leveraged loan market experienced a 51% decline in new issue volume versus the first quarter of 2014.

One of the causes of the decline in bank loans is the decrease in leverage buyouts. LBO related activity was the lowest since 2009, with market participants discouraged by the regulatory environment.

If we turn to issuance, the recent trends in US and Europe European issuance have been benefited our businesses. First-quarter issuance in the US was quite strong across all sectors. Investment grade increase increased 24%. In the US, the improvement in corporate issuance was largely was due to a 45% increase in industrial issuance, as financial services only increased 2%.

Large debt-financed M&A transactions also contributed to the list in issuance. In addition, a continued thirst for yield has enabled corporate issuers across the rating spectrum to tap the capital market, extending maturities at beneficial pricing and terms. High-yield increased 39%. Public finance was up 61% over an unusually weak first-quarter in 2014. Sequentially, public finance -- public issuance was flat, albeit at an elevated level as local governments continue to refinance maturing debt.

Structured finance issuance, while up 21% versus the first quarter 2014, is consistent with levels seen throughout most of 2014. Of particular note was strength in ABS as auto securitization levels remain robust.

In Europe, while there was a strong sequential recovery, year-over-year issuance comparisons were mostly negative. There's an increasing universe of government debt trading with a negative yield or fixed-rate return of barely above zero. This is due to the European Central Bank's aggressive stimulus policies. This has resulted in yield hungry European bond investors buying reverse Yankee bonds as a growing number of US companies turns to the other side of the Atlantic for their financing needs. By the way, reverse Yankee bonds are counted as US issuance and revenue.

Further in Europe, investment-grade decreased 9% and high-yield declined 5%. Structured issuance was one of the bright spots, however, increasing 23% thanks to ABS and the surge in United Kingdom RMBS. Note that from a revenue perspective, bond activity was not as positive issuance might suggest, as the growth in the number of issues did not keep pace with the growth in the par value of issuance, as deal sizes increased in most asset classes.

There's a perception among some investors that corporate debt is unusually high and issuance likely unstable. Periodically, we've provided data that suggest otherwise, including that generated in our annual analysis of debt maturities. This chart illustrates data from Standard & Poor's Ratings Services annual global debt maturity studies.

Each study shows the upcoming five years of debt maturities. Over the course of a year, there was no change to the total maturing. Both last year's study and the most recent study depict total debt maturities for the following five years totaling $8.9 trillion. These data help provide confidence that corporate issuance will continue in the coming years.

Now let me turn to S&P Capital IQ. Revenue grew 6%, segment operating profit grew 18%, and operating margin increased 200 basis points to 19.5%. This is the fifth consecutive quarter of year-over-year margin expansion. Revenue growth was consistent both in the US and outside the US.

Two particular highlights during the quarter were continued low teens growth of S&P Capital IQ desktop users, and the product retention rates across the segment that reached 92%. S&P Capital IQ is known foremost for the breadth and consistency of its data. To enhance our data even further, we established a partner with Klooks, a recognized source of Brazilian corporate financial information, to offer financial data on more than 10,000 unlisted private companies in Brazil.

Let me add a bit more color on revenue growth in the three business lines of S&P Capital IQ. S&P Capital IQ desktop and enterprise solutions revenue increased 10%, principally as a result of low teens decrease -- increase in desktop revenue. S&P Credit Solutions revenue increased 6%, due primarily to single-digit growth in ratings express. In the smallest category, S&P Capital IQ markets intelligent revenue decreased 12% overall. While global markets intelligence continued to deliver double-digit growth, declines in equity research services and the shutdown of SMR Europe more than offset those gains.

Turning to S&P Dow Jones Indices. This business delivered a 5% increase in revenue, due to derivative, mutual fund, and data license revenue, which all increased. Operating profit increased 4%.

This quarterly comparison was impacted by a one-time revenue increase of approximately $12 million associated with refined revenue recognition for certain ETF products in the year ago quarter. While the comparison was difficult, the results were still solid, with an operating profit margin of 66.6%. Highlights during the quarter included an aggressive expansion of our fixed income business, and the establishment of a strategic index agreement with NZX Limited in New Zealand.

If we turn to the key business drivers, the ETF industry experienced record first-quarter inflows of $97 billion. However, much of this was directed to non-US ETF, where our position is not as strong as the US. In the long run, this is still positive. We believe that once investors place funds into passive investments, these funds tend to stay in passive investments, and then they shift between various ETF based on asset allocation models and decisions.

ETF AUM's associated with our indices increased 22% to $810 billion, versus the end of first quarter 2014, with approximately three quarters of this growth coming from inflows. While year-over-year growth was meaningful, this AUM decreased sequentially from $832 billion at the end of 2014, as ETF flows moved to products offering European and non-US exposure.

Mutual fund AUM's associated with our indices reached $1.1 trillion, an increase of 14% versus first-quarter 2014. Derivative trading licensing, generally the most volatile portion of revenue, diverged during the quarter, with over-the-counter volumes increasing, and exchange traded activity decreasing.

The follow-up from the LIBOR scandal has elevated the importance of both objective and independently governed indices in benchmarks. We see this is as an exceptional opportunity for S&P Dow Jones Indices to build investor confidence in the fixed-income markets by developing factor based fixed-income benchmarks.

During the quarter, we announced an important expansion of our fixed-income business. Our objective is clear. To be the premier provider of financial market indices across all asset classes, including all bonds types throughout the world. S&P Dow Jones Indices already publishes over 500 fixed income indices globally, covering municipal bonds, preferred stock, corporate bonds, credit default swap, and senior loans, amongst others. We are the third-largest provider of fixed income indices for the global ETF market, with approximately $30 billion AUM linked to our indices.

The flagship S&P aggregate bond index family will cover over 20,000 individual securities, with the ultimate goal of launching thousands of maturity and sector-based indices. The S&P US Aggregate Bond Index was launched in January. It's a broad, comprehensive, market-value weighted index designed to measure the performance of the investment-grade US fixed-income market.

And finally, recognizing the strategic importance of exchange relationships, S&P has formed a number of unique and dynamic alliances with exchanges in various markets since 1998. The latest agreement with NZX Limited puts us at the center of the series of initiatives to facilitate greater investor access to the New Zealand market. We are committed to raising the global profile of the NZX indices with our well-recognized marketing and international commercialization capability.

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 2015 and 2014 do not include these results.

Revenue grew 7% at both Platts, and JD Power delivered for high single digit revenue growth. Segment operating profit grew 23%. Due to solid revenue growth and tight cost control, the operating margin increased 510 basis points to 38%.

During the quarter, Platts continued to grow revenue despite low commodity prices. As we've seen in recent quarters, the newer areas of metals and agriculture had the highest revenue growth rates. Global trading services revenue increased primarily due to license revenue from the Steel index derivative activities at the Singapore exchange.

Platts added petrochemicals to its suite of forward curves in oil, natural gas, coal, and power. These new forward curves include a range of aromatic range of petrochemicals, such as benzene and NAPTA, and can be used as references for valuing contractual assets and liabilities, measuring the P&L from changes in market prices and making more informed risk management decisions.

We often talk about keeping benchmarks fresh, relevant, and delivered in the user-friendly manner. Here are a couple of examples. Platts recently introduced a faster method for delivering real-time global commodity prices, with historical and reference data via Platts' Market Data Direct. The new, improved version transfers Platts data straight into subscribers proprietary systems, providing need to know prices at the moment of publication. Customers can focus on what's most important to them.

Another example is an update to Platts' dated benchmark, one of the world's most important and widely used price assessments, to further strengthen and enhance its long-term viability. The cargo loading period was widened, enabling the benchmark to reflect an additional 5 to 6 days of supply, responding to the reality that oilfields decline in supply over time.

Finally JD Power delivered high single digit revenue growth, led by strong activity in the US auto sector. Global services industries and advertising licensing revenue also contributed to growth.

During the quarter, JD Power launched a new product, Voice of Experience, a holistic solution enabled by an innovative technology platform, designed for businesses to optimize their customer experience and drive financial results. VOX displayed interactive data in an intuitive user interface for all levels of an organization, to determine how to improve the customer experience and improve loyalty, advocacy sales, and service.

In summary, the Company is off to a good start to the year. With a focus on creating growth and driving performance, all our businesses achieved revenue and adjusted operating profit growth. This performance resulted in the consolidated 380 basis point improvement in our adjusted operating margin and a 25% increase in adjusted diluted EPS, to $1.09.

Our company continues to be aligned around very important themes: strengthening customer and stakeholder engagement, accelerating our international growth, sustaining our margin expansion, and maintaining discipline in capital allocation, and fostering a robust risk and compliance culture to manage and mitigate risk throughout the Company.

With that, I want to thank all of you for joining the call this morning, and 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 briefly add some color on several items related to first-quarter financial performance, and then we will open it up to your questions.

First, I will recap key consolidated financial results and review certain adjustments to earnings that were recorded in the quarter. Second, I will discuss the impact of foreign exchange changes on revenue. And third, I will highlight balance sheet changes to free cash flow and return of capital.

So, let's start with the first quarter income statement. Overall, these were good results, especially the continuing momentum in margin improvement. Revenue grew 6% despite the challenging headwinds from foreign exchange. Adjusted consolidated operating profit grew 16%, with all four business units contributing to this growth. Continued progress on our productivity initiatives fueled this growth.

We also realized a benefit from foreign exchange, which impacted expenses from our operations outside of the United States. Within the quarter, the positive benefit to expenses from ForEx offset the negative impact to revenue.

Unallocated expenses decreased 3%.

The tax rate, on an adjusted basis, was 32%. We had a one-time benefit from a prior-year item that impacted the rate. For the balance of the year, we continue to guide to an approximately 33% rate.

Adjusted net income increased 24%, and adjusted diluted earnings per share increased 25% to a $1.09. The average diluted shares outstanding decreased by almost 1 million shares versus a year ago, as share repurchase activity offset the dilutive impact of shares granted for equity related compensation.

Now, let me turn to adjustments to earnings to help you better assess the underlying performance of the business. Overall, the adjustments in the quarter were limited. In total, pretax adjustments to earnings from continuing operations resulted in a gain of $6 million during the quarter. This consisted of $35 million in settlement related insurance recoveries, partially offset by $29 million of legal settlement charges.

Let me provide more color on the impact of foreign exchange on results. The strong dollar is having a pronounced impact on Corporate America. The impact to McGraw Hill Financial is mitigated somewhat, since approximately one half of our revenue outside of the United States is invoiced in the US dollars.

During the quarter, we reported a strong 10% increase in domestic revenue, and a 1% increase in international revenue. On a constant currency basis, international revenue increased 6%. In total, our consolidated revenue increased 6%. On a constant currency basis, the total company revenue increased 8%. The business with the largest impact was Standard & Poor's Ratings Services, which accounted for approximately 80% of the total foreign-exchange impact on revenue.

Now let's turn to the balance sheet. As of the end of the first quarter, we had almost $1.2 billion of cash and cash equivalents, of which approximately $1 billion is held outside of the United States. The decrease from the end of 2014 is primarily due to the payment of legal settlements of approximately $1.6 billion during the first quarter.

In order to meet the significant US cash requirement, the Company incurred $365 million of short-term debt through commercial paper issuance and by tapping our revolving credit facility. We continue to have approximately $800 million of long-term debt.

Our free cash flow for the quarter was a negative $1.4 billion. While the legal settlements were recorded in the income statement in the fourth quarter of 2014, almost all of the cash was paid out in the first quarter of 2015. In addition, the first quarter has stepped up cash requirements for annual incentive compensation payments.

During the first quarter, we resumed the company's share repurchase program and bought 1.1 million shares. Share repurchase has been, and remains, an important component of our capital allocation program, and we will continue selectively repurchase shares under our remaining share repurchase authorization of 44.5 million shares.

Going forward, we believe we have the balance sheet capacity to continue to make investments that strengthen the portfolio, including acquisitions, maintain our long history of dividend growth, and as appropriate, continue our share repurchase activity.

In closing, I would like to reiterate that our 2015 guidance remains unchanged, with mid-single-digit revenue growth and adjusted diluted earnings per share of $4.35 to $4.45. The specific elements of our guidance can be seen on this slide. We continue to focus on creating growth, and driving performance.

We are off to a good start in 2015 and are encouraged by the performance of our businesses, but we are mindful of the broader macroeconomic challenges that we continue to face.

With that, let me turn the call back over to Chip for the Q&A session.

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

(Operator Instructions)

Operator, we will now take our first question.

Andre Benjamin, Goldman Sachs.

Thank you. Good morning.

First, I was wondering if you could maybe discuss how your client conversations are making you feel about the pipeline and outlook for debt issuance at this point in the quarter? We all know what some of the risks are, and you spoke to them, but I was hoping maybe you could help handicap maybe a range for how you're thinking about the upside versus downside risks, there?

Thank you, Andre. This is Doug. I just wanted to give you a little bit of feel for issuance, overall, if you don't mind.

The first quarter, as many of the quarters have been recently, there was a lot of different components. As a mentioned in my comments, the US industrials was up 45% although the number of issues themselves was basically flat. Public finance was up dramatically, where financial institutions -- financial services was quite low. In Europe, as you know, the financial services was down, sovereigns was down, and both European corporate investment-grade and non-investment-grade high-yield were also down.

What we're hearing is that the impact in Europe -- Let me start there. In Europe, we're expecting that there will be continued long run development of the capital markets. It's one of the priorities of the Juncker government in Brussels. They have a capital markets development initiative, which is underway. It's to develop an EU capital markets union. That's very important.

But the banks have been holding more debt on their balance sheets. They're making loans and holding them more than they had in prior quarters. They have a lot of liquidity, they finished their AQR's, and they've also seen a very, very inexpensive financing with the zero interest rate policies. In the US, we're seeing a lot of M&A activity. Even though LBO's themselves are down, there is a lot of M&A activity, and as you've seen, there's a lot of very large transactions which have hit the market.

Generally speaking, it's very early in the year for us to give any kind of a forecast, but we're hearing continued M&A activity, US corporate finance activity as corporations continue to take advantage of low interest rates, and in addition to that, the US market even as we said in fits and starts, it's starting to grow. We're seeing that picked up with the financial -- with the markets gaining very attractive for, especially, industrial companies.

So, net-net, early in the year to give you guidance, but we are seeing a lot of very promising aspects to the markets, especially in the US and especially in with the markets in Europe and the banking and financial markets there.

Thanks. And then in Capital IQ, I was wondering if you could maybe talk about where you believe you're taking share to support the strong growth in desktop enterprising credit solutions? Is it coming from a subset of the other three top desktop players, or some of the ones that are smaller than yourselves, or are you actually seeing some growth in the broader market?

The broader aspect is just growth from the markets. There's a lot of penetration internationally from banks that have not been customers before. There is a little bit of a share battle going on, but most of that's for share battle for new installations as opposed to people winning from each other, battles from each other, but we're very encouraged by the uptake of S&P Capital IQ. It's an incredibly valuable tool.

One of the other areas that we're excited about is that the desktop, as more and more people use it and as, let's say, junior bankers start to grow in their careers, they take it with them as they expand into more senior roles. And we also are finding many new uses for S&P Capital IQ desktop that goes beyond just the analyst desktop.

So we're seeing new markets and new opportunities to grow. So it's not just taking shares. It's also expanding into international markets, as well as new users inside of our traditional companies.

Thank you.

Manav Patnaik, Barclays.

Good morning, gentlemen.

My first question, Jack, I know you like to be conservative, but around the guidance being unchanged, I was wondering within the parameters, if anything has moved around?

I mean, it seems like the margin expansions, especially with S&P, was a lot better than we had expected. Maybe revenue growth's down. Can you give us a little more color on maybe some of the moving pieces, there?

Sure. Manav, like we said. We think this is a good start to the year.

But it only is one quarter, so it's -- keeping our existing guidance in place, we think, is the prudent move here. You know, in terms of some things -- in terms of how they are playing out relative to ingoing expectations, I think we are maybe encouraged by the progress we're making on the margin expansion. So I think that is a positive, relative incoming expectations. On the other side, you know, I think some of the ForEx headwinds may be a little bit more challenging.

That, we're also encouraged by the sustained organic growth across the businesses. So you know on balance, I think we would call it so far so good, and we're cautiously optimistic about the balance for the year.

Okay. Thank you, and I guess just on the -- touching on your balance sheet. You raised a little short-term debt, but longer-term, can you talk about what we should expect your appetite to lever-up to increase those buybacks? How many, and so forth? I don't know if you can comment on the pipeline, and how we should expect that?

Look, we reinitiated our share repurchase program, and we're going to look to selectively continue that as we go forward. And we also now recognized that we have more flexibility on how we manage the balance sheet, and we'll look to consider other options in terms of perhaps raising some capital from time to time to lock in the very attractive conditions that remain out there.

So, we are encouraged by the fact that we have more flexibility in terms of how we manage the balance sheet, going forward.

Okay. Thanks a lot.

Alex Kramm, UBS.

Good morning. Just wanted to come back to the impressive margin expansion on the ratings business. I'm curious about the sustainability here.

I mean, I know in the first quarter, obviously you have the legal resolution. So to some degree are legal costs already coming out? Or what else can we expect here over the course of the year? And then same thing goes for maybe some of the initiatives on the cost-cutting in that business in particular? Where are we on that end, and what else is playing over the course of the year? So again, just overall, just where are the puts and takes on the margins when you think about the remainder of the year?

You know, obviously the benefit that we're seeing primarily in Q1 is some of the restructuring actions that we took in the third and fourth quarter of a year ago. That's having an impact in Q1. We're beginning to see, it did not have a big impact on margins in Q1, but we are starting to see moderation in legal expense. We do anticipate that will bake a larger contribution as we go across the balance of the year.

You know, on the other hand, we are spending a bit more money in areas of compliance, particularly with the new regulations. So, we are investing there to make sure that we maintain a very prudent risk and compliance environment.

And we're selectively looking to also spend in technology to further harden our global processes. So on balance, we feel good about the margin progress that we've made, but we are benefiting, I think, from the restructuring from a year ago, and you know, I do think the outlook is, as I mentioned, for legal expense looks more promising than obviously it did a year ago.

Okay very good. And then secondly, maybe go on to Capital IQ for a minute. Obviously doing well as well. I think you've said in the past, not so long ago when there was a change in management, that you might be a little bit more focused on driving results sooner, versus just building a big platform.

So could you just talk about if that's already driving some of the recent growth, as we've seen here? Have there been changes of really focusing to getting results now, or is this still more to come in terms of restructuring some of the way you're interfacing with clients and how your offering product?

The answer is actually all of the above. We have put a very important emphasis on our profitability and our margin in that business to drive productivity. But not at the expense of investing in covering customers.

So we have intensive efforts to build our sales force, our customer engagement, our service levels, and we're also investing in a multi-year project to upgrade our technology, so that we can continue to have state-of-the-art technology and delivery, and stay ahead with our -- stay along with or at least ahead of most of our major competitors.

So it's really been a program to, in a way, methodically take a step back and look at the business, look at customers, look at their needs, look at all of the areas where we serve them best, and how we can serve them better. But also doing that with a project where we're looking at all of our costs, all of our inputs, to ensure that we're doing it in a way that's more productive, and I think you can see it's paying off.

We're having excellent retention rates, we've been growing our sales in desktops and in enterprise fees, and at the same time, we've been able to invest and grow our business, and we're seeing improvement in the margins. So I think it's a good story. Imogene Dillon-Hatcher has been an excellent leader, and is managing all of that, and I'm very, very please with her performance.

Fantastic. Thank you very much.

Tim McHugh, William Blair.

Thanks. Platts, I was just wondering if you could elaborate a little bit more, in terms of the weakened oil prices, in particular maybe as you went on in the quarter?

I know some businesses that are -- not completely like the price assessment, but somewhat tied to information services for the oil or energy industry, have seen kind of customer decisions get weaker, I guess, as you've progressed further and further into seeing the oil prices lower, but it doesn't seem to be showing up for you, for Platts? I'm just curious if you could elaborate a little bit more what the conversations are like with clients?

Two points on Platts. We are pleased with the progress that they've made in the first quarter, here.

Just as a reminder, while obviously oil and petroleum is their largest business, it only represents two thirds of the business. So we do have, and it's been a conscious decision on our part, to broaden out our commodity exposure, here. So that would be point one.

Point two, within the core oil and petroleum market, admittedly there are a lot of -- there is profit pressure on the industry. That all being said, we've had very good results in our renewals, and I do think it's perhaps costing us a couple points of growth in the market.

So, maybe it is costing us a couple growth points, but in general, we're still growing. And we're highly encouraged with the high single-digit progress that we've made overall in the business, so far this year.

And I think this is just evidence of these benchmarks entrenched in our customer's business models. These prices that we put out, are buried in their invoicing systems. These customers can't invoice without these prices in many cases; they can't value inventory in many cases.

So if a small fracker goes out of business, we may lose that customer, but that's a very, very, very tiny portion of the business. So this is a classic example of the need for benchmarks.

I want to add that one of the reasons you saw 510 basis point improvement in the margin -- in the commercial and commodities margin is that we've also proactively positioned ourselves for potentially weaker markets. We wanted to be very cautious about certain investments.

That doesn't mean that we're not investing in the business, but we felt that we needed to get ahead of potential slowdown in the market. So, we've also positioned ourselves with some flexibility to ensure that we continue to manage the business responsibly.

Okay. Great. And on the index business, in particular the fixed income market. You talked about you launched kind of an aggressive expansion of that with US Aggregate Index in the quarter.

I guess two parts to that. One, I guess, does that make you -- are you more focused on organically expanding in fixed income at this point, or our acquisitions still a possibility there? And secondly, I guess the aggressive expansion. Is it something we should notice, as we think about the margins for that business, going forward? I guess, how aggressive does aggressive mean?

I think that what we're looking at, as you saw, we're number three in that market with a $30 billion position in ETF's, and so relative to the larger markets and the equity markets, even commodity markets, ETF's and fixed income indices are actually still a very small portion of the overall financial markets.

Bonds are difficult to necessarily get prices for, we've been working on a lot of ways to ensure that we have continuous bond pricing, whether they are from market prices or evaluated prices. And getting that infrastructure in place is critical to being able to have a very active liquid ETF and fixed income indices market. So we're in this for the long haul.

We look at the big trends of, when you meet with asset distributors and asset allocators, they all talk about the need to have certain types of fixed income solutions that aren't just individual bonds, and so we're very encouraged by that. We're also encouraged by the fact that banks are probably struggling with their -- after the LIBOR scandal, with their ability to continue to manage benchmarks inside of their businesses. They might be non-core, or they might not really be a business that makes a lot of sense for them to be in.

So to answer your first question then, we are going to grow this on our own, we see this as a very important organic activity. Although, as I said, starting from a very small base. But if there are opportunities for us to buy businesses and buy assets, we would definitely be interested as we have always been, in ways that we can do tuck-ins or fill in our capabilities.

And one more point on your question on the margin aspects of this, is some of this investment's already in the margins. It's already in the results. We've kind of built out this team, we've spent some money on information sources, that's going to build up over some period of time. So, I think some of that capabilities already in place.

Okay. Thank you.

Bill Bird, FBR.

Just two questions. One, are you considering any strategies for tapping the value of your under-earning non-US cash? And then second, I guess along the lines of M&A, could you just refresh us on kind of the criteria you apply, and your appetite to do something larger? Thank you.

First of all, we're always looking for opportunities to deploy our offshore cash. The first priority offshore, which is maybe a little bit different than cash that's held domestically, is for offshore acquisitions.

And we continue to look for those sorts of opportunities, and we completed Eclipse last year for Platts, which was in the -- which was to complement an earlier move we had made in North America with BENTEK. Eclipse built out our European position in natural gas, and were continuing to look for those opportunities, and that would be our first choice in terms of ways to deploy that cash.

From time to time, there are some relatively efficient ways, perhaps, to access some of that cash and bring it back, we look at that consistently. But like I said, our first priority is growth.

In terms of your question about M&A, I think our track record demonstrates we are disciplined when we look at particularly larger M&A sorts of opportunities. First thing we're looking for is growth. We are looking for growth that is accretive to our existing position.

But at the same time, we're highly disciplined in being sure that we're also going to be able to deliver the synergies that would deliver incremental shareholder value that would justify the investment. And that can get a bit challenging these days, given the somewhat high valuations that appear to be out there for some of the more attractive properties. But you know, we continue to do the hard work to look for the right sorts of choices for us going forward.

Thank you.

Craig Huber, Huber Research.

Yes, good morning. A few questions. My first one, a house keeping question. Maybe I missed this, but what do you guys' budgeting impact on a revenue and cost for foreign exchange rates, for the full year, please?

Look, I think the impact on -- the impact, year on year, that we saw in Q1, which was about to 2 growth points from a revenue point of view. We anticipate going forward, maybe it gets, year on year, a bit more challenging in the second and third quarter, and then the year on year sort of impact starts to moderate a bit.

That's built into our forward guidance. So, we do think we have our exposure -- it's pretty well covered. And how we've thought about our outlook for the balance of the year.

And what about on the cost side, given how much of your revenue overseas is in the US dollar?

I do think, there was not a lot of bottom-line impact. In fact it was a modest benefit from foreign exchange, all-in in the first quarter. We're not anticipating that sort of positive impact over the balance of the year. There were some balance sheet movement that produced that in Q1.

So, I think we would look to have a modest negative over the next few quarters. But very manageable, overall, in terms of our outlook.

And then also, you touched on this briefly, but on the share buybacks. Just curious here, your updated thoughts and how much leverage if you wanted to put more debt behind your buybacks here? Could you add roughly a couple turns of leverage here and not impact your investment grade rating?

Well, certainly we have a lot of flexibility in our balance sheet, right now. And we're, as a mentioned earlier, it's nice to have the flexibility to consider those options.

And as we go forward, we would look to leverage our balance sheet, both to broaden out our portfolio and add attractive assets, and if we can't find those that add shareholder value, we would look to sustain and perhaps increase our share repurchase program, but I think if you look on a multi-year basis, we've been pretty aggressive in that area, and we continue to look at that going forward.

Thank you.

Vincent Hung, Autonomous.

Good morning. First question is, can you quantify how much progress you've made on the cost initiative against the $140 million target?

Yes, I would say so far, on the run rate, we've realized well over half of that. So, in that run rate, and I think by the end of the year, we will end our run rate have achieved 75% by the end of 2015.

So, I think we're very -- we feel very encouraged with progress so far. As I mentioned, I think margin performance has been a very positive development as we come into the year.

Okay. And last question is, so the subscription revenues and rating's business are down 2% year on year, and part of that is due to less new entities being added. Is the lack of new customer growth due to the slowdown in leverage lending?

Its mostly due to the European, the circumstances of first-quarter in Europe. As you know, there was a lot less capital markets activity, you could see it from the decrease in Europe. Let me find a number here, exactly, again. There was a decrease of 9% of Europe Corporate, and European high-yield was down 5%.

The total number of deals, if you look at it on deals themselves, is down over 15% in Europe in the first quarter. So there's a lot of liquidity in Europe, and the banks themselves were lending, as opposed to companies going into the capital markets. That was the major reason why the entity credit ratings were down.

Okay. The lot.

Peter Appert, Piper Jaffray.

Thanks. So Doug, the margin performance of S&P ratings is very impressive, obviously, so wondering how much more there is to do in terms of driving the margin, and if you thought about what an appropriate level of margin is for that business.

Well, we haven't necessarily targeted a specific level of margin, but we've been looking for margin improvement. As Jack mentioned earlier, we are continuing to invest in our regulatory risk and control processes and environment, we been looking at ways to enhance some of our product delivery, our process improvements, which require technology investments.

But at the same time, we're doing it in a way that we're more and more efficient all the time. We're looking at ways to have the right sort of teams, the right sort of geographic balance, et cetera. So we continue to hope that we can drive the margin even better than it is now, but this is really something that we're actively managing and pursuing to continue to deliver better margin.

Okay. And same thing on the Cap IQ side. I think you've talked in the past about mid-20% margins.

Could you remind me if that's correct? Is that the kind of target you're thinking about in that business, longer-term?

That's a longer-term target.

If we were to look at -- we still have a lot of investments that we're making right now that will play out over time, but when we look at what we think would be kind of a natural rate for that business, remember that we still have a couple of research businesses that are in that third bucket of products that are losing money or have not been profitable.

And so we're looking at ways to peel some of them out. As I mentioned, Imogene Dillon-Hatcher's doing a fantastic job to go through the businesses and look at them one by one, product by product, and we do feel encouraged with this progress and the direction that we're heading with the margins.

In fact, it's good across all of our businesses, and we're very please with that progress.

All right. Thank you.

Doug Arthur, Huber Research.

Yes, thanks. Doug, you mentioned the one-time revenue benefit in the indices business a year ago. I'm just not used to seeing AUM up 22% year over year. You mentioned it was sort of down, sequentially and at sort of mid-single-digit revenue growth. So in your assessment, nothing structurally has changed in this business in terms of pricing at this point?

No. No. Not at all. I think if you recall, last year we shifted some of our -- in the first quarter, we had some of our ETF revenues were being recognized on, in a sense, on a cash basis. And we looked at them, and because of the performance, and the predictability, and the volumes, we shifted them to being now on accrual basis, that moved them all, basically had a one-time gain up-front of that $12 million.

So that's the main difference in the first quarter. But structurally speaking, the businesses still continues to perform as it has been in the past.

Okay. Great. Thank you.

Danny Galindo, Morgan Stanley.

Good morning. I just want a little bit more color on the fixed-income rollout in indices. You mention $30 billion in AUM, but I wondered if you could give a little color on how fast that's growing?

And also, the expenses related to the rollout, is sales and marketing the most important expense? How would you expect the index expenses to trend, as you rollout these fixed income indices? I mean it was actually down, quarter over quarter, in the first quarter.

Yes. So, let me start, and then Jack will also jump in.

So we think that this fixed-income rollout is one that -- we think that it's going to require a couple of years to build. This isn't something that just builds from a quarter to a quarter. But as I mentioned before, we're seeing a lot of demand from this when we speak with, especially, asset allocators and people that are asset management managers, and people who are actually in the sales side of this business. Because they need products for retirement, for insurance, et cetera. That they really don't have today.

So this will be something, if you look at the growth of the equities indices, you'll see that they grew very slowly for maybe 15 or 20 years, and then they just boomed and started taking off. So, I don't have any specific projections.

We're in this for the long run. We think that we have the brand, we have the access to investors, we have the right kind of controls and processes to manage this business professionally. And so, we're in this for the long run, and it's something that we're willing to invest in so that we can have a dominant position.

And as I mentioned earlier, from an expense point of view, a good base of that expense for this initiative is already in the P&L. We have a fixed income team; we've spent the money to have, and have had for some time, the data necessary to deliver the products.

So some of that is already in the run rate. As we move forward and as this business expands, I do suspect that we will add to that team over time. You know, particularly in areas like channel management, as we start to go out and impact the marketplace.

But you know, I wouldn't at this point in time, I wouldn't -- we wouldn't give any forward-looking thoughts that there's any significant change in the margins of the business, at this moment in time.

But let me just add, from the point of view of our overall strategy, that this is a business that really makes sense for us to invest in.

Okay. Thank you. And then moving on to Platts.

We're starting to hear about some M&A in the energy space. And I was wondering if that has impacted Platts in anyway so far? Or do you anticipate M&A affecting Platts, in terms of maybe customers merge and buy less products? Or maybe you could just address that idea of M&A in the commodity segment?

Yes. That's always something that we're going to be watching out for carefully.

We have not seen any major impact on that so far, but as I mentioned earlier, we have positioned ourselves to have some flexibility with expenses. We want to be very attentive to what are the developments in the markets, and so far we haven't seen that impact, but it is something that we're watching for.

And then -- (multiple speakers)

The two things that I would add to that is, Platts actually has very, very broad customer coverage. So our exposure to any one or two customers in that businesses is actually, while we have big customers, our exposure is somewhat limited to any one or two particular customers.

And also two, in a lot of some of these deals that some of use you may see, is that sometimes there's also a carve-out or a spin-out to create a new entity. And that then creates a new opportunity for us to go sell. So there's always a bit of dynamic marketplace, here, and we're used to it.

And these acquisitions are, if you think about it, the concern out there in the street is that these frackers and small folks go out of business and we lose these small customers. Well, the assets don't go away. They end up being purchased by someone else.

So while we may lose the customer in one area, that business tends to flow somewhere else, because the wells don't necessarily get shut down. They may be dormant, but they're not necessarily shut down.

Okay. And then one just last one, on repurchases. You've repurchased for the first time since --

Denny, we're trying to keep it two for everybody, please. Thank you.

Bill Warmington, Wells Fargo.

Good morning, everyone. One follow-up for you on Platts. Your renewals on Platts, are they spread out fairly evenly over the year, or do they tend to be concentrated, like some of your competitors, in the Q4 and Q1 space?

Yes, generally speaking, we have a couple of bulges in the fourth quarter and first quarter. But a lot of them are spread out through the year, but we do have a fourth and first quarter bulge.

And many of these are multi-year. Some of the larger ones.

Okay. And then I can't resist, given your balance sheet capacity, yet another M&A question. But you are talked about the fixed income market, potentially, and I just wanted to ask about international, specifically, given your comments around a strong non-US AUM growth?

Yes, so when we've looked at the M&A generally, and also if you mentioned fixed income indices. Our interest in the S&P Dow Jones indices for growth is international. You've seen that almost every quarter we highlight some sort of a new exchange relationship; this quarter we highlighted our relationship with New Zealand.

Those are very attractive deals for us. They're small, but we really enjoy the position with those relationships.

So, international expansion, whether it's through exchange relationships, M&A, organic growth, is something that is very important to us. And non-fixed-income investment in the indices business, both organic and non-organic, again those are top priorities for us.

Thank you, and congratulations on a solid quarter.

Thank you.

Jamie Friedman, Gary [We] with Susquehanna.

Hello, it's Jamie. Thanks for taking my question. Stocks up a couple of percent, if you were wondering.

(Laughter).

I know, you're there, and I'm here. So I'll just asked my to upfront. Both about ratings.

So, is there any seasonality, Jack, to call out in the public sector? I know public sector has a -- state and local has a June fiscal year, and federal has a September, so is there any state and local seasonality? And my second question is about TLAC, the total loss absorption capacity. If you could just share a couple of one-liners about your expectations about TLAC.

Okay. Yes. I'll take this. This is Doug.

On the seasonality there really is not any seasonality in the fund-raising in the public finance sector. What had a bigger impact on the public finance sector has been, as you know, there were a couple of bankruptcies, there's some issues going on with pension funds. Those are much more important issues.

What's really been interesting, and what's been driving a lot of the public finance issuance in the last six months, has been the rates environment. There was a lot of refinancing and refunding, which came up. A lot of public finance issuances have a very attractive call provision in them. And given where rates are, there's a lot of public finance entities that have been taking advantage of that call and refunding at lower rates. So the lower rates have been probably the biggest driver, not anything is seasonal.

On TLAC, we expect even though financial services issuance was flat in the US and down in Europe in the first quarter, on more of a structural basis, because of precisely the point of you just raised, TLAC is going to be going to require the largest banks, all those with more than $50 billion of assets, to do some sort of a capital raise of senior debt.

So we are expecting that there will be, over time, more financial services issuance to meet the requirements of TLAC and living wills, and some of the other areas that are now being discussed in the regulatory environment.

So, let me just conclude the call, and first of all, thank everyone for your questions and for being on the call. We're very pleased that the first quarter had a strong beginning, it was a good start to the year. All of our business units achieved revenue and adjusted operating profit growth. The margin improvement of 380 basis points is something that we want to keep working towards over time to sustain.

We achieved the adjusted diluted EPS of $1.09, and we're pleased that we have a lot of very important themes across the Company which are driving our growth and performance, that are well understood across the entire Company. We've been communicating them so people understand them, about dealing with our customers in a way that we've got very good relationships, accelerating our international growth, sustaining our margin expansion, maintaining our discipline in capital allocation, and very importantly, also fostering a robust risk and compliance culture, and managing or mitigating risks throughout the entire Company.

So we're pleased that we had a good beginning to the first quarter of the year, and we look forward to working with all of you, and speaking with you and our shareholders throughout the year, and thank you very much.

That does conclude this morning's call.

A PDF version of the presenters slides is available now for downloading from www.mhfi.com.

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