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. [Operator Instructions] To access the webcast and slides, go to www.mhfi.com, that's M-H-F-I for McGraw Hill Financial, Inc., 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 U.S. 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 statement contained in our Forms 10-Ks, 10-Qs and other periodic reports filed with the U.S. 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'd ask that questions from the media be directed to Jason Feuchtwanger in our New York office at (212) 512-3151. At this time, I'd 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. And 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 is the basis that we use to manage our company, show just how well these businesses are doing. Despite the headwinds of a strong U.S. dollar and collapsing oil prices, in 2014, the company achieved 7% growth in revenue from continuing operations, as clients around the world increasingly sink -- 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 3 structured investment vehicles; the U.S. Securities and Exchange Commission and the Attorneys General of New York and Massachusetts; and several private litigations stemming from…

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; 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 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 4 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…

Thanks, Jack. [Operator Instructions] Operator, we will now take our first question.

Alex Kramm, UBS.

I think we'll -- let's start with Jack. Jack, I think you when our appetite a little bit here at the end there with your comment on leverage. You've made some comments in the past in terms of the capacity you think the company could take. So -- but you obviously haven't opened the door yet. So what's holding you back? Where do you think you can go? And what do you need to evaluate to potentially do -- would you do something like an ASR or something like that since you haven't been in the market in a while for buybacks?

Yes, 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 do -- 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. So 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, and so we have ample capacity to consider all those options. And frankly, we're looking forward to having that flexibility to think about those moving forward.

Okay, great. And then maybe secondly, I guess staying on the topic of the legal resolution. I think you've made comments in the past, there's been significant legal costs, obviously, running through the Ratings business. So now that a lot of this is resolved, can you kind of 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's still some ongoing issues, obviously, with some other -- and then in general, maybe just talk about the Ratings efficiency opportunities that exist outside of the legal side a little bit more?

Well, just first on legal. As we have spoken in past calls, legal spend has 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 our legal expense begins to decline, that probably -- particularly as we start or begin to the second quarter and beyond. So 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 0. But we do think it's going to make a meaningful contribution to margin expansion for the year. And then 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 Ratings business, the team has identified -- they have a new program in place, it's called The Way We Work, and it is simplifying and streamlining the work we do every day to produce a rating on a timely fashion in a high-quality way. And we're quite confident that as we continue to drive that program, that can continue further opportunities to improve our quality and improve our turnaround time, and over time, continue to generate efficiencies.

Peter Appert, Piper Jaffray.

So 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're feeling more confident in terms of your ability to get closer to some of these peers from a margin perspective.

Well, 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 points for the whole company. It is a very important focus of ours. And obviously, in order to get it right, it requires both a quarter-by-quarter review as well as a longer-term view. And we've got initiatives 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 market. And some of them, we have better margins than others. We are looking at improving our margins. But this is a very, very big focus of the entire management team.

Understood. And then, Jack, just as my follow-up, can you give us something explicit in terms of what's assumed in terms of buybacks and the EPS guidance?

Peter, we -- 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'll be obviously -- we'll have some opportunities to come back and reevaluate that.

Our next question comes from Manav Patnaik, Barclays.

Just firstly on the guidance as well. The mid-single-digit revenue growth, does that include the negative FX impact? And also, could you help us out with some of your currency exposures on revenue and cost side and how we should try and model there?

Yes, no, our revenue guidance does assume a view of the current ForEx environment, which is quite challenging right now. And we do believe that it -- in terms of our initial assumptions, it's probably costing us, in revenue, about 1 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-sourced customers, we actually bill in dollars for about 80% of our revenue. So we're not that -- the exposure that we have on the revenue side is actually quite limited. And the major currencies there would be the euro, the sterling and the rupee. And then on the other side, we do have some expense exposures that we need to monitor and stay on top of. And just as a reminder, we have close to 8,000 associates in India, and so, obviously, a movement in the rupee can have a significant impact on our expense base.

Okay. And then just coming back to the question on the margins relative to the legal costs. I understand you said you still obviously have some remaining lawsuits and so forth out there on the private side. So just 2 parts to this. One, I guess, can you just give us an update on what's remaining on the legal side? And then if there's any way to just sort of quantify the relative exposure in the cost base on what you've settled and it's going to sort of get out of the cost base versus what's remaining?

Look, there's -- I think right now, relative, we have about 2 dozen cases outstanding, a good number of them outside of the United States. Nothing is really pending for trial right now. So 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 were -- there was a charge that we took for $35 million that addressed settlement-related issues with a good number of cases. So while there may be -- I don't think the financial exposure is quite any way is relative to some of the issues -- other issues that were resolved in the quarter.

Our next question comes from Greg -- or from Vincent Hung, Autonomous.

Just a couple of questions. So the first one, sorry, just to go back on the legal front. Within the full year guidance, can you just give us like a rough sense of like what percentage of legal cost reduction you're baking in, like 50%, 20%, et cetera?

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

Okay. And just on the cost reductions. So 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 cost 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. So just to kind of simplify the message, there were places and areas of technology where we had some opportunities to leverage our scale to reduce the number of the supplier -- of some suppliers who are using some key areas of software development. And that's providing some savings. So they -- we see -- 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. And now that we have done more of the work, I think this -- what the slide today gives you a better representation of what we actually expect to realize.

And our next question comes from Craig Huber, Huber Research Partners.

My first question has to do with the Indices business. Can 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?

Well, part of it was the -- Craig, we -- this is related a little bit to that impairment charge we took a year ago in the third quarter and in the fourth quarter of '13. So we did lose a license. So that did -- and that really did not start to impact the P&L at all until the third quarter, and then more meaningfully in the fourth. And 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. And assets under management actually ended up a bit ahead of our expectations.

And then also on the debt side, could you just help investors understand how much leverage, on a relative EBITDA, can you put on the balance sheet if you want to buy back stock or through acquisitions and then not hurt your investment-grade credit rating? I mean, how far can you go here, please? And which -- along those lines, what's your debt target ratio forecast?

Well, I mean, I think -- let's put this in terms of -- as a leverage multiple. So somewhere between 2.5x to 3x EBITDA. So I think that would be sort of the range, I think, that we can comfortably stay solidly investment grade.

Our next question comes from Robert Simmons, Janney Montgomery Scott.

I'm stepping in for Joe Foresi. I was wondering if you could give us just any indication of what you're expecting on the margin front across all businesses, but in particular, in the Ratings business?

We don't historically give such business-by-business margin on 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 Ratings particularly does not make some contribution, just kind of given its overall size in the portfolio. On the other hand, if you'd like to go maybe to the other extreme, it's kind of hard to really challenge our Indices business to kind of significantly expand their margins when they're already at 63% or 64%. So I do think there's -- I think there is sort of a range of opportunity that we're mindful as we start to build our overall margin expectations for the business.

Okay, great. And can you give me color on your decision-making process on how you decided to settle all of these big issues that are out there?

Well, 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 the -- 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.

Our next question comes from Bill Warmington, Wells Fargo Securities.

So 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? And then 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 the -- 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 and CalPERS, the effective tax rate on those charges is a little less than 20% or high teens, roughly in that area. So there is some tax deductibility. It's not total. The -- right now, we don't see a need, and we're not confident the most -- the best economic choice is to use offshore cash, even though that cash is available. Just kind of 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. So that's probably more -- that's probably the path we're going to go down.

And 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 that this is a secular trend. It's one that we should be heavily focused on. And that also includes building relationships with exchanges around the world. And then another area that we believe is going to be growth is in fixed income indices. So 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. And 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.

Our next question comes from Tim McHugh, William Blair.

I just want to ask about the comment about seeing 3/4 of those -- that $140 million, I guess, by the end of 2015. I guess, just to clarify. Do you expect that to flow through the income statement or, I guess, actions taken and I guess to eventually realize that? Just trying to get how -- a sense of whether we're going to -- we've seen that in your numbers for '15 or it's more future years?

Yes. No, look, I think we will -- of the $140 million, we'll realize 75% of that by the end of 2015. So to be clear, we started -- as we started to work these programs, we started to get some benefits last year in '14. And so there's a bit of a benefit that we've already realized in our numbers. We do think in '15 -- and '15 is probably the year we'll get the most benefit, so we do think we'll get approaching half, maybe not quite, of the benefit in this year. And that ties very much to the guidance that were given on ongoing margin expansion. And we expect we'll continue to get some additional benefit as we go into '16. And some of these things are timing. Just to give you 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. So we started to feather some of these savings in. And we think what will -- we're in good shape to both exceed the target and to make this a meaningful contribution to our margin expansion plan.

Okay. And then just I heard the comments about the quarter, but I guess thinking for -- on Platts, just given the price of oil, can you elaborate at all on kind of the -- 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. But we believe that we're well positioned to serve the markets and serve their information needs. But at the same time, we're building flexibility into our workforce and into our planning for 2015, in case there is any sort of downturn in volumes in the business that we see.

And our final question comes from Ed Atorino, Benchmark.

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

Ed, well, 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 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 a best-in-class control, and that this is the kind of platform that'll allow us to continue to grow the company and deliver results. So this is really what we're all about. It's being about our customers, having great engaged employees and delivering for our shareholders. Well, let me thank everyone for joining us. We are very excited about our prospects for 2015. As you've heard us, we think that 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, very importantly, focused on our margin expansion. That's something we've got a track record over the last couple 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 2 hours. The replay will be maintained on McGraw Hill Financial's website for 12 months from today and for 1 month from today by telephone. On behalf of McGraw Hill Financial, we thank you for participating, and we wish you a good day.