S&P Global Inc. (SPGI) Q1 2015 Earnings Report, Transcript and Summary

Good morning, and welcome to McGraw Hill Financial's First Quarter 2015 Earnings Conference Call. I would like to inform you that this call is being recorded for broadcast. [Operator Instructions] To access the webcast and slides, go to www.mhfi.com, that's 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.

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

Thank you, Chip. Good morning everyone and welcome to the call. I am pleased to report that we are 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 lead to a 380 basis points 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 continued to resolve legacy litigation matters including receiving a dismissal of the Corte dei Conti matter in Italy. You will recall this was potential Euro 234 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 and CEO of Crisil effective June. Ashu brings a strong professional track record in the financial services sector and proven leadership skill and we look forward to having her join Crisil. As we look to 2015, we’re encouraged by the economic landscape before us. The US economy continues to strengthen albeit in fits and starts. The labor market is 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 expect 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 the US are in a rate [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 to 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 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 will 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 480 basis points to 47%. While revenue was negatively impacted by foreign exchange it had a negligible impact on operating profit. S&P Ratings Services continues 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 a strong US dollar and a decline in entity credit rating revenue and slower client acquisition in Q1 2014. Transaction revenue grew resulting from increased corporate public debt finance issuance offset somewhat by weakness in bank loans. The leverage 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 European issuance did benefit our businesses. First-quarter issuance in the US was quite strong across all sectors. Investment grade increased 24%. In the US the improvement in corporate issuance was largely due to a 45% increase in industrials issuance as financial services only increased 2%. Large debt financed M&A transactions also contributed to the lift 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 issuance was flat, albeit at an elevated level as local government continued 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 remained robust. In Europe, while there was a strong sequential recovery year-over-year issuance comparisons were mostly negative. There is 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 policy. This has resulted in yield hungry European bond investors buying reverse Yankee bonds as a growing number of European companies turned to the other side of the Atlantic for their financing needs. By the way reverse Yankee bonds are counted as US issuance in 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 prices increased in most asset classes. There is a perception among some investors that corporate debt is unusually high and issuance likely unstable. Periodically we have 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 maturities study. Each study shows the upcoming five years of debt maturities. Over the course of the year there was no change to the total debt 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 breath 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 teen 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 intelligence revenue decreased 12% overall. While global markets’ intelligence continued to deliver double-digit growth declines in equity research services and the shutdown of [SMR] in Europe more than offset those gains. Turning to S&P Dow Jones Indices, [Indiscernible] 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 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 ETFs 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 investment, these funds tend to stay in passive investment and then they shift between various ETFs based on asset allocation models and decisions. ETF AUMs 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 AUMs 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 objectives and independently governed indices and benchmarks. We see this as an exceptional opportunity for S&P Dow Jones Indices to build investor confidence in the fixed income markets by developing factor based 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 bond 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 swaps 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 is a broad, comprehensive market valuated 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 centre of a 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. Onto Commodities & Commercial Markets, as a reminder, McGraw Hill Construction was sold and its results moved to discontinued operations. Thus our financial for 2015 and 2014 do not include these results. Revenue grew 7% as both Platts and JD Power delivered 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 have seen in recent quarters the newer areas of metals and agriculture had the highest revenue growth rate. Global trading services revenue increased primarily due to license revenue from the steel index derivative activity at the Singapore Exchange. Platts added petrochemicals to its suite of forward curbs in oil, natural gas, coal and power. These new forward curves include a range of aromatic petrochemicals such as benzene and naphtha and can be used as references for evaluating contractual assets and liability measuring 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 a 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 is most important to them. Another example is an update to Platts dated Brent 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 and 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 displays 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 a 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, free cash flow and return of capital. So let us 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 headwind from foreign exchange. Adjusted consolidated operating profit grew 16% with all four business units contributing to this growth. Continued progress on our productivity initiatives fuelled this growth. We also realized the 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 continued to guide to an approximately 33% rate. Adjusted net income increased 24% and adjusted diluted earnings per share increased 25% to $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, pre-tax 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 on McGraw Hill Financial is mitigated somewhat since approximately one half of our revenue outside of the United States is invoiced in 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 us 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 settlement of approximately $1.6 billion during the first quarter. In order to meet this 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 purchase 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 to selectively repurchase shares under our remaining share purchase 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 remain unchanged with mid single digit revenue growth and adjusted 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’re off to a good start in 2015 and are encouraged by the performance of our businesses, but we’re mindful of the broader macroeconomic challenges that we continue to fit. With that let me turn back the call over to Jeff for the Q&A session. Thanks Jack. [Operator Instructions] The first question comes from Andre Benjamin with Goldman Sachs, you may ask your question.

Thank you, good morning. First I was wondering if you can may be discuss how your client conversations are making you feel about the pipeline and outlook at this point in the quarter, we all know what some of the risks are and you spoke with them, maybe you can help handicap maybe arrange or how you’re thinking about the service there?

Thank you Andre, this is Doug. 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 quarter have been recently there was lot of different components, as I mentioned in my comments, the U.S. industrials was up 45% although the number of issues themselves was basically flat. Public finance was up dramatically where financial institution, financial services was quite low. In Europe as you know the financial services was down, Severance 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 market it’s one of the priority that the [indiscernible] they have a capital markets initiative which is underway it’s to develop the capital market union. That’s very important but the banks have been holding more depth on their balance sheet they’re making loans on holding them more than had in prior quarters. They have a lot of liquidity, they’ve finished their AQR and they’ve also seen a very, very inexpensive financing with the zero interest rate policy. In the U.S. we’re seeing a lot of M&A activity even though LBOs are down there is a lot of M&A activity and if you have seen there is 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 forecast but we’re hearing continued M&A activity, U.S. corporate finance activity as corporations continue to take advantage of low interest rates and in addition to that the U.S. market even as we’ve said it’s fits and starts and starting that picked up with the financial, with the markets being very attractive for especially industrial company. So net, net early near for us to give you guidance but we’re seeing a lot of very promising aspect to the market especially in the U.S. and especially with the market in the Europe and banking of financial market there.

Thanks. And then capital like you, I was wondering if you could maybe talk about where you believe you’re taking share to support the strong growth in desktop – is it coming from the stub side of the other three desktop players or some of the ones that are small in themselves or you actually seeing some growth in the bottom market?

The broader aspect is just growth from the market there is a lot of penetration internationally from banks that have not been customers before. There is a little bit of share battle going on that most of that per share battle for new installations as opposed to people wining in from each other battle, from each other bid. We’re very encouraged by the uptick of S&P capital like you, it’s an incredible valuable tool, one of the other areas that we’re excited about is that the Desktop is more and more people uses and it’s – let’s say junior bankers start to grow in their careers they take it with them as they expand it to more senior roles. And we’re also planning 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 growth so it’s not just taking share it’s also expanding into international market.

Thank you.

Our next question comes from Manav Patnaik with Barclays, your line is open.

Yes, good morning gentlemen. My first question, Jack I know you like to be conservative but around, with the guidance being unchanged I was wondering within the parameters if anything has moved around I mean it seems like the margin expand especially with S&P with a lot better than we’ve expected maybe revenue growth down. Can you give us a little more color on maybe some of the moving pieces there?

Like we said we think this is the very – this is the good start to the year, but it only is the one quarter so it’s – we’re keeping our existing guidance in place we think it’s a prudent move here. In terms of things of how they’re playing out relative in going expectations I think we’re maybe encouraged by the progress we’re making on the margin so I think that is a positive relative incoming. Expectations on the other side I think some of the ForEx headwinds maybe of a little bit more challenging but that we’re also encouraged by the sustained organic growth. On balance side I think we would call it so far so good and we’re optimistic about the balance of the year.

Okay, thank you. On your balance sheet I mean obviously you raise the short term that’s longer term can you talk about like if we should expect like appetite lever up – buyback comment on the pipeline how it should be?

Look, we initiate our share repurchase program and we look to – we’re going to look to selectively continue that as we go forward and we also recognize that we’ve more flexibility and how we manage the balance sheet. And we’ll look to consider other options in terms of perhaps raises and capital from time to time to lock into very attractive conditions that remain up there. So, we’re encouraged by the fact that we’ve more flexibility in terms of how we manage the balance sheet going forward.

Okay, thanks a lot.

Thank you.

Our next question comes from of Alex Kramm with UBS, you may ask your question.

Hi good morning, just wanted to come back to the impressive margin expansion on the ratings business, curious about sustainability here, I know the first quarter obviously had the legal resolution, so to some degree our legal cost 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 out over the course of the year. So again, just we’re the puts and takes on the margins when you think about the remainder of the year?

I think 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 the year ago that’s having impact in Q1. We’re beginning to see not having a big impact on margins in Q1 but we’re 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. On the other hand we’re spending a bit more money in areas of compliance particularly with the new regulations, so we’re investing there to make sure that we maintain a very prudent risk in compliance environment. And we’re selectively looking to also spend in technology to further harden our global processes. On balance we feel good about the margin progress that we’ve made and we’re benefitting I think from the restructuring from year ago and I do think the outlook as I mentioned for legal looks more promising than obviously a year ago.

Okay, very good. And then secondly, maybe just going to capital Q4 minute obviously doing as well, I think you said in the past not so long ago when there was a change in management that you might be little bit more focused on driving results sooner versus just building a big platform. So, can you just talk about if that’s already driving some of the recent growth that we had, have there been changes of really focusing to getting results now or is there still more to come in terms of some of the way you interfacing with client and how you’re offering products?

The answer is actually all of the above, we’ve put a very important emphasis on our profitability on our margin in that business to drive productivity but not at the expense of investing and covering customer, so we have intensive effort to build our sales force, our customer engagement, our service level and we’re also investing in a multiyear 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 our most of our major competitors. So it’s really been a program to in a methodically take a step back and look at the business, look at the customers, look at their needs, look at all of the areas where we serve them best and how we can 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 in a way that’s more productive and I think you can see it’s paying off. We have 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 in growing and we’re seeing improvement in the margin. So, I think it’s a good story [indiscernible] answered has been an excellent leader and is managing all of that and I’m very, very pleased with her performance.

Fantastic thank you very much.

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

Thanks. I was just wondering if you could elaborate a little bit more I guess in terms of the weekend oil prices and I guess in particular maybe as you went on in the quarter I know some businesses that are not completely like the prices as meant, but some of like tier 2 information services for the oil and energy industry. I’ve seen customer decisions get weaker I guess as you progress further into oil prices lower but it doesn’t seem to be showing up for you for plat, so just curious if you could elaborate a little bit more what the conversations are like with client?

I think the point on the plat we’re pleased with the progress that we’ve made in the first quarter here. Now just as a reminder while obviously oil and petroleum is there, is our largest business it only represents two-thirds of the business, so we do have and it has been decision on our decision to broaden out our commodity exposure here, so that would be point one. You know 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 and maybe just costing us a couple of 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. I think this is just evidence of these benchmarks in trench in our customers’ business models. These prices that we put out are buried in their invoicing systems, these customers can’t invoice without these prices, they can’t value inventory in many cases. So, if the small frac goes out of business we may lose that customer but that’s a very, very, very tiny portion of the business, so this is the classic example of the need for benchmarks. I want to add that one of the reason you say 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 a potential slowdown in the market so we have also positioned ourselves with some flexibility to ensure that we continue management business responsibility.

Okay great and then on the index business in particular the 16 commodity talked about new launch kind of an aggressive expansion of that with the U.S. aggregate index in the quarter. 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 acquisition still 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 are looking at is you saw the we are at number three in that market with $30 billion position in ETF so relative to the larger market and the equity market even commodity market ETF and fixed income industries are actually still very small portion of the overall financial markets. Bonds are difficult and this really get prices for we have been working on 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 industries market. So we are in this for the long haul, we look at the big trends of when you meet with asset distributor 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 are very encouraged by that. We are also encouraged by the facts that banks are probably struggling with their after the LIBOR scandals 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 it makes a lot of sense for them to be in. so to answer you first question then, we are going to grow this on our own. We see this is 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 we can do tuck-ins or filling our capabilities.

And one more point on your question on the margin aspect of this is that some of these investments already in the margin that’s’ already in the result, so we have kind of built out this team. We have spent some money on information towards this, build over some period of time. So I think some of that capabilities already in place.

Okay, Thank you.

Our next question comes from Bill Bird with FBR, you may ask your question.

Yes, 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 line of M&A could you just refresh us on kind of the criteria you apply and you appetite to do something larger thank you?

Yes, first of all we are always looking for opportunities to our offshore cash, the first priority offshore which has been little different than cash that's how domestically is for offshore acquisition. And we continue to look for those sorts of opportunities. We completed clips last year for plat which was in the north America which was the complement and earlier move we have made in north America with [indiscernible] kind of built out of European position in natural gas and we are continuing to look for those opportunities and that will be our first choice in terms of delays 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 back to 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 are looking for is growth. We are looking for growth that is accretive to our existing position but at the same time we are highly disciplined to ensure that we are also going to be able to deliver the synergies that would deliver incremental shareholder value that would justify the investment. And that got a bit of challenging these days given the somewhat high evaluation that appeared to be out there for some of the more attractive properties but we continue to do the hard work to look for the right sorts of choices for us going forward.

Thank you.

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

Yes good morning. Few questions. My first one housekeeping question maybe I missed this, but what are you guys budgeting the impact and the revenue in cost for foreign exchange rate for full year please?

Look I think the impact the impact year-on-year that we saw in Q1 which is about two growth point from the revenue point of view. We anticipate going forward maybe get year-on-year a bit more challenging in the second and third quarter and then the year-end-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 have thought about our outlook for the balance of the year.

What on the cost side given how much your revenue obviously in U.S. dollar?

I do think we – there was not a lot of bottom line impact. In fact there was a modest benefit in foreign exchange all in, in the first quarter. We are not anticipating that sort of positive impact over the balance of the year although there was some balance sheet that produced that in Q1. I think we would love 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 how much leverage if you wanted to put more debt behind your buyback share, could you add roughly couple terms of leverage you are not impact investment grid?

Well certainly, we have lot of flexibility in our balance sheet right now and we are – as I 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 our portfolio and add attractive asset and if we can't find those that add shareholders value we would love to sustain and perhaps increase our share repurchase program but I think if you look on a multi-year basis we have been pretty aggressive in that area and yes we continue to look at that going forward. Thank you.

Thank you.

Our next question comes from Vincent Hung with Autonomous. You may ask your question.

Hi, good morning.

Morning.

First question is can you quantify how much progress you have made on the custom initiative against the one 40 million target?

Yes, I would say so far in the run rate we have realized well over half of that so in that run rate and I think by the end of the year our run rate will have achieved 75% with so by the end of 2015 so I think we are very encouraged with the progress so far as I mentioned I think margins performances has been a very positive development as we come into the year.

Okay. And last question is so the subscription revenues and the ratings expenses are down 2% year-over-year and [indiscernible] due to less new entities being added. Is the lack of new customer growth due to the slowdown in leverage lending?

It's mostly due to the European the circumstances of the first quarter in Europe there was a lot less capital markets activity you could see it from the decrease in Europe. Let me find the numbers here exactly again. Yes 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 is 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 entities you credit ratings were down.

Okay. Thanks a lot.

Our next question comes from Peter Appert with Piper Jaffray. Your line is open.

Thanks. So Doug the margin performance of the ratings is very impressed obviously so I am wondering how much there is to do in terms of driving the margin and if you thought about what at an appropriate level of margin is that business?

We haven't necessarily targeted a specific level of margin but we have been looking for margin improvement. As Jack mentioned earlier we are continuing to invest in our regulatory and with control processes and environment we have been looking at ways to enhance some of our product delivery, our process improvement which require technology investments. But at the same time we are doing in a way that we are more and more efficient all the time. We are looking at ways to have the right sort of teams, right sort of geographic balances etcetera. So we continue to hope that we can drive the margin even better than it is now but this is really something that we are actively managing and pursuing to continue to deliver better margin.

Okay. And same thing on the CapEx Q side. I think you talked in the past about mid 20% margin. Can you remind if that's correct, is that the kind of target you are thinking about that business in long term?

That's a longer term target. If we were to look at with we still have a lot of investments that we are making right now that we will play out overtime but when we look at what we think could be kind of a natural rate for that business remember that we still have a couple of research businesses during that third bucket of products that are losing money or have not been profitable and so we are working on ways to peel some of them out. As I mentioned [indiscernible] doing a fantastic job to go through the businesses and look at them one by one product by product and what we do feel encouraged with the progress and the direction we are hitting there with the margins in fact its good across all of our businesses and we are very pleased with that progress.

Thank you.

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

Yes thanks. Doug you mentioned the one time revenue benefit in the industries business a year ago. I mean I am not just 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. not at all. There was 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 in the sense on a cash basis and we looked at them because of the performance and the predictability and the volumes we shifted them to being now on a accrual basis to move them all basically had one time gain of upfront at that $12 million so that's the main difference in the first quarter but structurally speaking the business is still continues to perform as it has been in the past.

Okay great. Thank you.

Our next question comes from [indiscernible] with Morgan Stanley. You may ask your question.

Morning. Yes, I just wanted a little bit more color on the fixed income rollout in the industries. You mentioned 30 billion AUM but I wondered if you can give us 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 fixed income industries. I mean it’s actually down quarter-over-quarter in the first quarter.

Yes, so let me start Jack will also jump in so we think that fixed income rollout is one that we will – we think that it’s going to require a couple of years to build. This isn't something which is built from a quarter-to-quarter but as I mentioned before we are seeing a lot of demand from when we speak with especially after allocators and people that are in asset management managers and people who are actually in the sale side of this business because they need products for retirements, for insurance that they really don't have to date. So this will be something if you look at the growth of the fixed of the equity -- you will see that they grew very slowly for maybe 15 or 20 years and then they just boomed and started to taking off. So I don't have any specific projections. We are in this for the long run. We think that we have the brand. We have the access to investors, we have got the right kind of controls and processes to manage this business professionally and so we are in this for the long run and something that we are willing to invest in so that we can have a dominant position.

I just meant that as I mentioned earlier from an expense point of view is that good days of that expense for this initiative is already in the P&L. We have fixed income team. We spend the money to 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 as this business expand I do suspect we will add to that team over time particularly in areas like channel management as we start to run impact the market place but I wouldn't – at this point in time I wouldn't we wouldn't give any forward looking thought that is any significant change in the margins of the business at this moment on.

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

Okay. Thank you. And then moving on to plat we are starting to hear some M&A in energy space. And I was wondering if that has impacted plats in any ways so far or do you anticipate M&A affecting plats in terms of maybe customers merger and buy less products or maybe you can just address that idea of M&A in the commodity segment.

Yes, that's always something that we are going to be watching out carefully. We have not seen any major impact on that from 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 market and so far we haven't seen that impact but it is something that we are watching for. Just two things I would add to that is – plat actually has very, very broad customer coverage so our exposure to any one or two customers in that business is actually what we have big customers our exposure is somewhat limited to any one or two particular customers and also to it a lot of some of these field that you may see is that sometimes there is also a curve out or skin out to create a new entity and that then create a new opportunity for us to go self so there is always the a bit of dynamic marketplace here and we are used to it.

And these acquisitions are actually if you think about it the concern out there in the street is that these fracs, and small folks lot of business we lose this 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 tend to flow somewhere else because the walls don't necessarily get shake down – they may be dormant but they are not actually shut down.

Okay and then one just last one on repurchases, you repurchased for the first time since [Cross Talking] okay sorry about that.

We’ve a question from William Warmington with Wells Fargo. Your line is open.

Good morning everyone. So one follow up for you on plats, your renewals on plats are they spread out fairly evenly over the year or do they tend to be concentrated like some of your competitors sort of the Q4 and Q1 space? Yes, in 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 budge.

And many with multi-year. Second and larger ones.

Got it. And I can’t resist given you balance sheet capacity you have got another M&A question. But you were talked about fixed income market potentially and I just wanted to ask about international specifically given your comments around the strong non-U.S. AUM growth.

Yes, so when we look at the M&A generally and also you mentioned fixed income industry our interest in the S&P industries for growth is international you have 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 are small but we really enjoyed the position with those relationship. So international expansions whether it’s through exchange relationships M&A, organic growth it’s something that is very important to us and fixed income investment in the industry business both organic and non-organic again those are top priorities for us.

Thank you and congratulations on a solid quarter.

Our final question comes from [Indiscernible] you may ask your question.

Hi its Jamie, thanks for taking my question. I will start up with couple of percent, if you are wondering I will just ask my two up front. I know you are there when I am here so, yes, I will just ask my two up front both about rating. So is there any seasonality Jack to call out in the public sector I know public sector has stayed local as June fiscal year and federal has September so is there any state in local seasonality am I saying questions about T-lack the total loss absorption capacity. Now can we just share couple of one liners about your expectations about T-lack. Thank you.

Okay. Yes, I will take this is Doug. On the seasonality there really is not any seasonality in the fundraising in the public finance sector. What has been a bigger impact on the public financing sector has been as you know there are couple of bankruptcies there are 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 issuance have a very attractive call provision in them and given where rates are there is a lot of public finance entities that have been taking advantage of that call and refunding at lower rate. So the lower rate has been probably the biggest driver not anything seasonal. On T-lack we expect even though finances services issuance was flat in the U.S. and down in Europe in the first quarter on more of a structural basis because of precisely the point that you just raised T-lack is going to be – going to require the largest banks although 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 T-lack and living wells 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 are very pleased that the first quarter had a strong beginning. It was a good start to the year. All of our business unit achieved revenue and adjusted profit growth. The margin improvement of 380 basis points or something that we want to keep working towards overtime to sustain. We achieved the adjusted diluted EPS of $1.09 and we are 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 have been communicating them so people understand them about dealing with our customers in a way that we have got very good relationships accelerating our international growth, sustaining our margin expansion, maintaining our discipline and capital allocation and very importantly also fostering our robust risk and compliance culture and managing our mitigating throughout the entire company. So we are 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 shareholders throughout the year and thank you very much.

That does conclude this 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.