Welcome. I'm Chip Merritt, Vice President, Investor Relations for McGraw Hill Financial. And I'd like to welcome you all to our inaugural Investor Day. For those of you on the webcast, we're broadcasting here from the Hilton in Midtown Manhattan. London, 2 from Hong Kong, but the winner of the most traveled London, 2 from Hong Kong, but the winner of the most traveled investor goes to Rob Pointer from Australia.
So thank you, Rob. We hope we put together a really informational Good day for you. For the newer investors out there, you'll get a chance to understand how the businesses work. For those who follow us Weil. We hope that each of the presentations will reveal some things that you didn't know before.
So that's really the intent of today's session to get a Sense for the businesses and the growth opportunities that we have before us. A couple of logistical things, restrooms out the door there in this hallway or out the back, President. And we are sharing this adjusted information with you, so you can get a chance to see how management views and manages our operations. If you want a reconciliation and of those adjusted numbers to the GAAP numbers, please look at any of our quarterly press releases with the on the earnings days for that reconciliation. Now I'm of Eliation.
Now I'm sure a lot of our speakers will make forward looking statements, things like, I hope, we expect, You need not to place undue reliance on our forward looking statements and to see our SEC filings for other risks associated with investing in the company. And lastly, this may be new to some Chip. We're at 10% ownership of our company. 1st, I thank you. But secondly, please give me a call, because there's some obligations you may have and you need to Stand.
So if you're approaching 5% or 10%, please give me a call. Now the schedule today, we have Anticipated that we've got lots of sell side guys in the room who can't sit long without asking a question. So we've broken it up for you. Doug Peterson, our President and CEO will speak first. Then we'll have 2 businesses.
We'll have a Q and A then for just those two businesses. Two more businesses, Q and A for those 2, 2 more Q and A of those 2. And at the end, we'll have a wide open Q and A for all the businesses and legal questions and questions for Doug and Jack, or CEO and CFO. Okay? So lots of chances, but let's save those individual Q and As for the 2 businesses that just presented.
Not on the agenda, but joining us is Paul Sheard, our Chief Economist. Paul can stand up. If any of you guys have any questions that you'd like to discuss with Paul. He'll be available in the other room afterwards. But just want to introduce you to Paul.
Thanks, Paul. Of Operations. We'll continue after this main session. So from 4:30 to 5:30 roughly, we can go back over there, have a cocktail Lee Guiness, if that's available, if you didn't get enough yesterday. And I get a chance to meet not only with the executives who've spoken and presented today, but also with more importantly the folks who are behind the panels to be giving deep dives in some of the products that we
President. We are the architects of financial intelligence in a world under construction. We are Standard and Poor's rating services, 1400 dedicated analysts covering 127 countries, turning knowledge into insight. President. The McGraw Hill Construction providing actionable intelligence for more than 1,000,000 industry professionals.
Combined, President. Our insights help emerging markets emerge stronger. Our essential intelligence not only informs the world,
President. Thank you for joining us for of Royal Investor Day. It's great to see everybody here. I'm going to start with Act 1 and talk to you briefly about the last And throughout the day, you're going to hear from us in the second chapter of our discussions today about creating growth and driving performance. Of Made It.
As we went through the last three years, we announced a growth and value plan in 2011 and that growth and value plan had President of the company's office being managed and held by somebody else. We completed the divestitures of Education, Broadcasting and Aviation Week for 2 point of $7,000,000,000 And of that cash along with the cash we generate from operations, we returned 4 point Welcome. I'm Chip Merritt, Vice President.
And we reached a
goal above it and we reached $175,000,000 in cost saves. And all throughout that team of Small Tuck in Acquisitions. And while the time that we did that, this chart shows you what did that mean for the business. By taking the slower growth, more Welcome. I'm Chip Merritt, Vice President, Higher Capital Intensive Businesses.
If you look at 2011, including the Education business and the Broadcasting businesses, our growth rate was of 2.9%. By taking those out, our growth rate was 8.6%, which helped fuel through our new position businesses of Directors, an 11% compounded annual growth rate from 2011 to 2013. And through that period, we began our journey of delivering of the business. 22% in fact, but our operating profit increased by 7% to $1,600,000,000 in 2013. Our operating margin at 24% increased 9 points to 33% across our entire portfolio.
Our EPS grew 14% over that time period. And as you can see, our CapEx President and our asset intensity to our business has decreased the requirements for capital investments. Over that time period, our total shareholder The return was over 140% with the share price itself going up 114%. And as I said, we returned $4,400,000,000 to our shareholders to you through dividend and of share repurchases including a special dividend of $2.50 a share in 2012. As we completed that program, we had to start thinking about what about the future?
Where are we going to head for the future? And how are we going to take this great portfolio of companies and find a way to generate growth and create value? We took a step back. We thought about the markets. We thought it was important to revisit our vision, our purpose, our core values.
President. Our ratings, our benchmarks, our analytics and the way we serve global capital markets, commodity markets and corporate markets. Our core values, which come from many, many years across all of our legacy companies and are the right thing to do of fairness, integrity and We have great brands. We have deep core of Analytics. We're truly global and we're starting from a position of incredible financial strength.
Our brands are brands that all of you in here know and use every day. The bridges, the of Standard and Poor's. And the gasoline and the fuel that was used to fuel the transport you've got here was probably priced Welcome. I'm Chip Merritt, Vice President from Crude Oil Price Measurements that came from Platts. And if you came in a car, it's highly likely that it was assessed by J.
D. Power in of Quality Survey. And if these were other types of screens that we're watching right now, you would see the S and P 500 and the Dow Jones scrolling across the bottom of the screen all day as key market benchmarks. And at the core of those types of products are deep Analytics. We employ people that use their brains, their intellectual capacity to provide these products and services, keeping up to date of everything going on Welcome.
I'm Chip Merritt, Vice President of Technology and Analytics and Big Data to produce these products. People run Cap IQ models. They run it the 8th I'm the 15th time I've even seen version number 33 when people are doing an M and A analysis and they keep going back to dig and mine more and of the Cap IQ database to do another run to see what's the right price of this acquisition. President. Where did the market close?
And we ask that question, where did the market close? We're asking about the S P500 in the Dow Jones. And there's great intellectual capital behind that through David Blitzer and you'll hear more about this later. President. And we start our new company with compelling financial advantages.
We have President. Our margins are high and improving. We have goals to improve them and if you Welcome. I'm Chip Merritt, Vice President Lee. We generate strong free cash flow.
Now shifting to the second part of our story. Throughout the rest of this Good afternoon. You're going to be meeting our team to talk about creating growth and driving performance. And let me spend a few minutes on this specific slide because these are targets that we're laying out for 1 year 3 year goals that are going to drive of shareholder value focused on our customers in the markets. We're setting annual growth goals of mid to high Single digit revenue growth, sustained margin expansion, mid teens EPS growth and $1,000,000,000 Welcome.
I'm Chip Merritt, Vice President. We have an operating model to get there and we'll talk about that. We will maintain disciplined approach to allocating capital. Welcome. I'm Chip Merritt, Vice President.
We need to have the right approach to managing and measuring our performance.
First of all, we're going
to shift from a holding company approach to management to an actively Production. And we're targeting at least $100,000,000 a year in productivity saves, dollars 100,000,000 in productivity You can see that we're targeting mid to high single digit growth coming off of very strong revenue growth. But what's important here is that over 60% of our revenue in our business model is coming from subscription and recurring revenue, giving us a solid base for growth. It's going on outside so that we can plan for the right investments and have the right resources marked up against the best For example, in the debt markets, debt maturities over a 3 to 5 year, of the bank market, which means that more and more people are having to go to the capital markets to raise debt. In addition, there's questions.
What's happening with the TRO. What's happening with the asset quality reviews that are starting to take place? So there are many trends in the capital markets that we look at very carefully all the time. There's an infrastructure requirement around the world. S and P published a report at the at the end of January, which showed that there's a $57,000,000,000,000 requirement for infrastructure financing over the next 17 years.
Welcome. I'm Chip Merritt, Vice President from Insurance Companies and Pension Funds, but there will be a requirement for analytics and data and ratings in that space. President and Benchmarks in the very fast moving and volatile commodity world, especially after the post LIBOR of the world. As we look at all of these opportunities for our customers taking into account market trends, Our values and our capabilities. We've put in place a strategic planning model, which we're using in our organization that looks at where we're going
to allocate capital and how
we're going to of Kate Capital and how we're going to hold build businesses accountable. Our new model looks at our growth across Welcome. I'm Chip Merritt, Vice President and different product segments. We look at our core markets with our core clients. How can we get more penetration?
How do we think about pricing? How do we think about getting more clients like the ones we have. We look at extending new products into our existing client base. We look at extending into international markets. We want to have a way To understand where we can grow internationally profitably.
And then of course in this day and age with technology moving as fast as it is With the users that we have upgrading their needs and their understanding all the time, we have to look at disruptive innovation and all innovation. But how do we get there? We get there through active management to deliver performance. We're shifting from the operating model A holding company to an actively managed company. That means that there's metrics.
There's a way we drive our business that we allocate capital.
But very importantly, that company which has ways
that we're interrelated across the President. What is operational excellence? For us, it means There is a data flow, a workflow across every one of our businesses that is similar. On this slide, you can see the depiction of that work President that starts with acquiring data, mining it, protecting it, translating it, analyzing it, doing analytics, President. Innovating product development and models and then distributing it and delivering it whether it's through Cap IQ and our own proprietary President or we do it also through 3rd party channels.
But in order to deliver that model, we have key enablers. We have technology. We have a technology and data committee across the entire company that's facilitating our technology growth. Risk management is critical for and becoming more important all the time, especially for our own businesses and also as a business of Opportunity. Don Howard, who's here today is on our Executive Committee and runs our risk management area.
Don has over 30 years of experience in Risk Management as a regulator, as a banker and in Risk Management and Banking, Securities and Insurance. Our global Support network is also important that we leverage that across the group, our media relations, our public affairs, our government relations. Ted Smith runs at Group with over 30 years of private sector experience and public sector experience taking advantage of our knowledge and our scale in that area. But we won't exist without our clients. It's our clients that fuel our business.
And it's our clients President. And I wonder how many of you would have thought before you came here today that over 40% of our revenue comes from the corporate sector. And in order to engage with our clients, we have strong outreach. We have many ways we do that. We deliver our data through data feeds, and you see here.
And one of our key thought leaders is Paul Sheard. Paul Sheard is our Chief Economist and Paul Sheard is an expert in macroeconomics in Japan, in Asia and especially in Central Banking. He can talk to you more about the taper than anybody I know. And Paul leads a team of economists of researchers and quants around the globe to ensure that we are engaged in the most relevant topics in the world as well as Translating that and taking it back to our analytical businesses. And finally, the foundation of our business and what Truly fuels our business is great people and great talent.
And we've taken this business model that we've talked about, which Starts with a vision, a mission and a purpose. Our essential intelligence translated that into a strategy based on the needs of our customers, Changes going on in the market, secular trends, turn those into specific business strategies, taken those into President. We have a great partner in human resources, John Beresford, who has over 25 years Welcome. I'm Chip Merritt,
Vice President, Experience
in Human Resources Management. And in particular, he's putting a major focus on leadership and development, So for the rest of this afternoon, you are going to be meeting our best talent. You're going to be meeting some of our top leaders in the organization. This afternoon you'll have people on the stage who are going to listen to some of their presentations, have an opportunity to do Q and A. I hope everyone has a chance afterwards to step across the hall to learn more about Specific products and capabilities that we have, but also look at the people that are there.
The people that are there are also some of our top of Talent, who will be listening to you and you can be learning and listening to them. And so with that, let me turn it over to the President of Platts,
To refer to the market value we publish for commodities, our price assessments are used as a basis for pricing spot transactions and long term contracts to identify Industry standard benchmarks. A key distinction here is that Platts does not set oil prices. We provide price assessments for the market to make its own judgments as to Oil's market value. As a neutral market observer, our independence means we have no vested interest in the price President. The value of oil or where the market is heading.
Flat's source of revenue comes from subscriptions to our range of market data, assessments,
and have an opportunity to talk to you about the Platts business. At Platts, our focus is to bring transparency to the world's commodity of the Americas, markets that by nature are not inherently transparent. We're a leading provider of benchmark price assessments, news, analysis and Analytics covering 5 major commodity sectors, petroleum and the related refined petroleum products petrochemicals Welcome. I'm Chip Merritt,
Vice President, our entree into the agricultural market.
We published more than 12 of Exchange Traded Futures Contracts. And it's estimated that our price assessment for North Sea Crude Oil, Brent, comprises and is the benchmark for more than 60% of the world's crude oil. In the past Welcome. I'm Chip Merritt, Vice President. Three important acquisitions that extended our capabilities.
In 2011, we acquired Bentek Energy, a leading provider of Analytics in the North American Natural Gas space, strengthening our position in North American Natural Gas and giving us a footprint Welcome. I'm Chip Merritt,
Vice President of Capability
and Analytics to extend into other sectors. Also in 2011, we completed the acquisition of Steel By which to extend further into the agricultural sector. For the discussion today, I'd like to focus a bit on the Price assessment side of the business is that's the major driver of growth for the Platts business. What we have depicted here is the supply chain Welcome. I'm Chip Merritt, Vice President for Petroleum Products.
Similar supply chains exist across all of the commodity sectors. But if we look at the supply chain from points of production Welcome. I'm Chip Merritt, Vice President and Refinement
to Distribution. Ownership of
a commodity as it flows through the supply chain changes hands and changes ownership throughout that process. It's necessary as the ownership changes hands for a market price to be established to facilitate that transfer of ownership. Welcome. I'm Chip Merritt, Vice President's action to occur. The majority vast majority of commodities trade as private bilateral transactions.
So this puts a Desmond to reflect the global complexity of production, distribution and trade flow across these various commodities. Trends of Increased Consumption of Energy and Materials in Asia, particularly in China and India. This is creating demand for price points that reflect the flow of trade into these regions. If we look at the explosion in supply of petroleum, natural gas liquids and natural gas in the of the U. S.
As a result of the technology to extract these materials from shale in North America. This is creating a vast of Source to Supply, which again creates a remapping of the trade flows of commodities and creates demand for price assessments. We serve a variety of customers across these global supply chains from producers to processors to end users. Basically, anyone who has an exposure to the price of a commodity and has a need to manage fluctuations in the price of the underlying commodities. These include integrated major of companies, national oil companies, mining companies, steel mills, all the way through to manufacturers and airlines.
In fact, we serve more than 10,000 customers across 170 countries, making us the most Global of the McGraw Hill Financial Businesses, with 60% of our revenue being sourced outside of the U. S. And we serve these customers from 20 flats offices around the globe. From 20 Platts offices around the globe. I want to spend a little bit of time on talking about how the use The sub price assessment evolves in the marketplace.
So, I think this sets up an important understanding of the future growth potential for the Platts business. Of You Rewind in time, operated by setting up fixed price agreements for a fixed term and a fixed amount of supply for that commodity, which all works Well and good when there's very little volatility in the market. But this mechanism of having locked in fixed prices does not allow for management of price fluctuations Welcome. I'm Chip Merritt, Vice President and Risk and Exposure Due to Price Volatility. As the market begins to trust published prices and assess of Contracts, where the price that's referenced for settlement of that transaction is a floating price that references a published price from Platts.
This in addition to the creation of a futures product that references that same published price allows for an active derivative market to Welcome. I'm Chip Merritt, Vice President for hedging to occur of any fluctuations in price throughout that supply chain. This provides customers with a ready mechanism to manage price volatility, of Liberty, an ever increasing challenge in the commodity markets today. The other point worth noting is the phenomenon of what happens to price Providers such as ourselves throughout this evolution. It's often characteristic that in the early stages there are many price of Providers offering price assessments to the market.
As the market begins to rely on certain price assessments that they feel best reflect market So if we look at where each market is in its stage of evolution, if you look at the upper left hand corner, you can see that natural gas and petroleum products are very well established and their use of these floating price systems and actively hedge against price risk. This is best reflected if you look at the chart on Welcome. I'm Chip Merritt, Vice President of the of Lime Commodity. In oil, it's 10 times that. Now if we look at some of the other markets that are much earlier in their evolution towards using these of Pricing Systems and we look at iron, ore and steel in particular, you can see that it's a fraction of the underlying production value.
And if we look at the lower half of the chart on the left hand side, you can see that agriculture, coal, iron ore, I would add LNG into that, petrochemicals and of these additional sectors of the business. And our strategy as a result is to establish Platts price assessments as of the Benchmark across the whole variety of physical markets. Increasingly, we deliver our data and our information MERS in the form of market data feeds. These feeds are deeply embedded into the front, middle and back office systems such as risk management systems, invoicing and the largest portion of our product delivery and by far the fastest growing portion of our product set. In addition, we deliver real time information that includes intraday market news and commentary, live bids and offers and intraday So if we look at how the business has performed over the past several years, you can see we've had very strong mid teen of our business is recurring in the subscription base and we have renewal rates in excess of 90%.
On the right hand side, you can see that petroleum continues to be the largest segment, roughly 2 thirds of our revenue mix, followed by power and gas. And while Petrochemicals and Metals and Agriculture are still a relatively small portion of our contribution, the growth rates of these are exceeding the average growth rates of the business and are
White
Healthy. So just to comment on 2 fundamental trends that underlie both the Current growth that we've achieved as well as the future growth that we can expect. Again, price volatility and the need to manage that Price Volatility Based Risk continues to be a major driver. That's evidenced and has existed over time and we certainly fully expect that that trend is likely to And we can see that through the increased use of commodity features that are based on underlying published prices as shown in the upper right of the Q4. In addition, the demand for energy and materials by emerging economies and developing economies combined with increased trade So, as we look ahead, we see significant opportunities for growth.
We're going to focus on continuing to strengthen our emerging benchmarks. Welcome. I'm Chip Merritt, Vice President. We're investing in our web based capabilities to provide even more flexibility and capability for customers to integrate our content and our price assessments Welcome. I'm Chip Merritt, Vice President of these sectors.
In particular, building upon the strength of our position in the sugar market, we will expand into wheat, corn, soy and other agricultural commodities as well as into and be able to manage a truly global business and I will be personally relocating over to London in a few weeks to lead that effort. We're investing in developing world class price reporting systems at data operations to fuel our future growth and capabilities. And we actively engage of Age of Regulators around the globe as their interest in both the commodity markets and the use of benchmarks increases. So to sum up, we're very pleased with the results that we have achieved to date. We feel very good about the We're investing in expanding to additional sectors and to providing additional capabilities of Luxury, the CEO of S&P Down Jones Indices.
Thank you, Larry, and good afternoon, everybody. Today, I'd like to give you a little bit of an overview on S and P Dow Jones Indices. We are the largest index provider in the world. Certainly in terms of both benchmarked products that are used for investment performance, so many of you that are active managers use our benchmarks to measure your own portfolios, but also as importantly as the basis of investment products. There is over a 1,000,000 indices that we calculate on a daily basis.
President. Clearly people know the S and P 500 and the Dow Jones Industrial Average. These are Iconic brands that everybody knows. But our product offering is much broader than that. We actually have offerings both in U.
S. Equities, global equities, President. Strategy indices which people nowadays also refer to as smart beta or alternatively weighted indices. Fixed income Which is an area that we see tremendous growth potential as the market is going to go through some pretty dramatic changes. And also in commodities with the S and P GSCI, which is a leading benchmark used for trading of commodity index products.
And finally, we have of our economic indices. These include the S and P Case Shiller, which really defines prices of housing in the U. S. And most recently we launched the S and P Health Care Cost Index, which we think someday will allow people to hedge health Your cost exposure in the marketplace. Now the S and P 500 alone is clearly one of the most used benchmarks with over $5,700,000,000,000 in indexed in benchmark assets and over $1,600,000,000,000 directly indexed to that.
In addition, we also have the leading volatility traded products with the VIX that trades on the CBOE and of course Futures and options that trade on the CME, which average over 2,000,000 contracts every day. So that's a little bit of what we are about. What about what other people think of our business? As you can see, we win many awards for innovation and innovation is a key Part of our strategy, we need to continue to develop new concepts that investors can use both as benchmarks and also as a basis for investment of Products. As you can see, we have a very global business with customers in 60 9 countries and people on the ground in 18 different offices worldwide.
In any place where there's a financial marketplace, you'll find some of our and staff so that they can be close to our customers, whether they be the product issuers or the asset managers that are using our indices. Also importantly, you'll notice that we have many Exchange relationships, 13 in total, including the CME and CBOE here in the U. S. But just as importantly, in The new emerging markets, we look to use exchanges for two reasons. Number 1, they're a good way for us to commercialize their own content outside of their home market.
Through our distribution platforms, we could actually take their indices and make sure that when people are thinking of how to invest in Canada. Whether they're sitting in Japan or whether they're sitting in South Africa, they're going to think of the S and PTSX60. President. In a global business, it's very easy to manage this sort of flow when you have the right infrastructure. But another important part of our exchange Partnership is that these exchanges also give us the inroads into the local marketplace.
Especially once you get outside of the U. S. And Europe, exchanges are Still the dominant player in the World Capital Marketplaces. If you go to any of these markets, the exchanges are the pillar of the
of the local investment community.
And being associated with them gets us into with the local asset managers, the knowledge of the local regulators, of the local marketplace. And in that case, we're able to cross sell our existing global products into those local markets also. As you will see, our revenue is about 80% in the U. S. And 20% or so internationally.
But that's not really truly Reflective of our actual revenue stream. And the reason is that many products are now accessed all over the world out of U. S. Based customers. So our largest customers in the ETF space, President.
In ETF space for example BlackRock and State Street, they're U. S.-based customers. So regardless of where their ETFs are traded, they're accounted for as of U. S. Based Revenue.
And more and more nowadays investors all over the world have easy access to U. S. Marketplaces, whether they're trading futures on the S and P 500 out of We're accessing ETFs out of Latin America that are traded here in the U. S. So how do we make money?
We make money in several different ways and we look at the world really in terms of how We distribute our indices. The biggest category really is ETFs and mutual funds, where we get paid basis points for assets under management. So as assets grow, our revenues continue to grow. Similarly, in over the counter and derivative structured products, whether they be retail structured of Europe, OTC Trading here in the U. S.
We get paid again based on the assets underlying the notional value of these contracts. In some cases, it's a pure basis points. In some cases, it might be blanket agreements so that dealers could trade of Brazil. Our products trade there and every time somebody trades a derivative contract based on one of our indices, we again earn President. So these three categories account for about 75% of our revenue.
We like this approach because as our customers Become more successful as our assets grow, as our trading volumes grow, our revenues also grow. So it gives us an incentive to be very supportive of our customers. The final categories are what we refer to as data and custom indices. Data is either the terminal charges to receive real time Price feeds on the S and P 500 and then the Dow Industrial Average and some of our other leading real time indices that you'll see in your Bloomberg terminals or also on your of Reuters Terminals, but also the underlying constituent data that becomes necessary for you to measure performance of your portfolios against our indices And this is an area that we think there's going to be a lot of opportunity. Here we can either customize one of our existing indices.
So for example, you could take the S and P 500 and exclude all tobacco stocks, very popular with church groups, for example. But also for people that develop their own ideas, their own intellectual property and they need an independent calculation agent. This is becoming more and more Important as people understand the conflicts of interest that could exist, if it's an asset manager is also calculating their own index for use in Products were worse in the case of things like LIBOR where people were actually trading and manipulating the indices themselves. So as you can see, we've had pretty strong growth over the last few years with a 24% compounded annual growth rate since 2011. Welcome.
I'm Chip Merritt, Vice President. That of course includes the acquisition of the Dow revenue stream, which half came in 2013 and the other half was added in last year in 2014. Even without factoring in Dow, our growth rate over these past 3 years It's been about 8% compounded and our growth rate last year alone on an organic basis would have been about 12%. And we're able to do this At very high margins in the 60% range. As you can see on the right hand side, same product split that I showed you earlier with about 3 quarters of our revenue coming from investment products that again go up and down in line with our customer success.
So what have been some of the underlying drivers of our business? Clearly, we've benefited from the growth of President. In passive investing, the definition of an index has really grown tremendously. And there's still plenty of room for this business to continue to grow. We estimate that there's about 26% of retail mutual funds or institutional mutual funds that are held as either index President.
Funds or ETFs. So again, while there has been a lot of growth there over the last 10 years, still plenty of Tuning to continue to capture market share. Clearly, ETFs have been tremendous success story over the last 10 years with assets under Globally now approaching $2,400,000,000,000 tremendous growth of 27% annually over the past 10 years. And in this market We have over a 30% market share with over $660,000,000,000 in assets under management tied to our indices as of the end of last President. And even here, we see a lot of opportunity for continued growth.
Most of the ETF assets are still sitting in the U. S. In some cases, as I said, it's foreign investors that are investing in U. S.-based products because of the liquidity, the transparency of our marketplaces. President.
The success of ETFs are only starting to develop. And these are all the markets that we're operating in today. So what's going to drive our growth strategy going forward? Importantly, will be the development of additional indices. Last year alone, we Created over almost 400 new indices.
The question might be asked, do people really need that many new indices? But as you can This really was a representation of the market portfolio. Today an index is really anything that can be developed into a quantitative Strategy that has rules based around it that needs to be in a transparent fashion. So even active managers nowadays may be trading sector spiders, they may be investing in thematic new ideas. So again, there's opportunity to continue to Welcome.
I'm Chip Merritt, Vice President, especially in emerging markets, especially in higher growth markets, either through our exchange relationships or with native business growth in those marketplaces. Of Places. Just in this past year, we developed new offices in South Africa and in Mexico City. And we continue to see Latin America as a marketplace that's got potential because again it's still very early days in terms of the sophistication of their investment of Knowledge. And we will continue to look at strategic partnership with exchanges.
As I mentioned, we are the largest provider of exchanges Finally, we will be investing in our brand. The brand, the S and P brand, the Dow Jones Industrial brand are known all over the world. And we have a strategy that we call build from the core, which is to take a core index something like the S and P 500 and continue to build new versions of it. Originally, we had Growth and value versions of the 500 and sector versions of the 500. These all became basis for products and index funds.
But more importantly, We can start up tying up new concepts. Last few years, we've had a lot of success with a low volatility version of of the S and P 500, minimum variance versions of this index. And we can take the same concept and apply it not just to the 500, but to many, many other products that we have both at our own and with our exchange partnerships. Why is this strategy important? Because while many people Marketplace, but it's not going to be the S and P 500.
So we will continue to develop new concepts that we could apply to these brands and to get this network effect that strengthens the core brand. One of the things that has made some of the ETFs tied to our indices very, very successful is that this very liquid futures markets. One of the things that made VIX very successful was that index options traded on the S and P 500 and they in turn became Sesle because there are futures that traded on and people index to it. So this network effect can drive growth going forward. And you'll see us Continuing to advertise and educate the marketplace, we think it's important that people understand the use of indices.
And while we have both active and Massive customers, we think knowledge is very, very important to getting people to understand our products and take us to the next of the business in light of LIBOR. We've always operated very much as if we're regulated with transparency around our methodology President. And governance chaired by David Blitzer and the index committees that are very much walled off from the commercial side of our business. This is going to be more and more important going forward as people have Welcome to appreciate the risks of when you don't have independent indices used in financial products. So with that, this has been a brief overview of our business.
Couple ground rules please. Unlike the investor earnings calls, let's really keep it to one question, if we could. And please for the webcast,
I think it was about a year ago that the EU started a probe on oil pricing. It was sort of unclear The class was a part of the discovery or actually a focus. Any update?
There's been this occurred there was a sort of fact finding and Information gathering that took place May of last year by the EU collecting information from ourselves as well as a handful of Oil Companies that are active in the North Sea. There's been no activity since that. We don't believe we're of Septibit to that investigation, but there's been really no interaction or follow on requests from the EU following that President of Information Gathering.
Okay. Yes, we're here. Manav?
This is Manav Patnaik with Barclays. Alex, you mentioned that your share of the entire indices market you put it was 30%. Could you help us elaborate sort President. The competition out there and what the need for consolidation or just your desire maybe for consolidation in that space President.
Sure. Well, the market share of the entire industry is kind of hard to measure because many customers will take indices from ourselves and certainly some of our of and certainly some of our competitors. The 30% market share that I was referring to was of the ETF marketplace where we're the number one provider. Certainly as As far as consolidation, it's something that we think that over time we'd be interested in looking at potential businesses that become available. But we're looking to grow the
Thank you. Craig Huber, Huber Research. Question on index business. You talked about the opportunity long term for fixed growing more into fixed income. Can you just elaborate
Sure. So the fixed income index business right now is dominated by bank owned index businesses that were set up initially to drive trading to their Trading desks. So if you wanted to measure the index, you wanted to track it exactly, you're forced to trade with that firm's trading desk to get the prices that was used in the index. We think that post LIBOR that model is going to have to change. There's too much As we saw from the LIBOR situation where people could potentially manipulate prices that are used in an index, especially if they're turning President and have a vested interest in products or trading swaps on that same index.
Firms like ourselves and certainly we're not the only one, we're independent providers of Indices. So we think that there's going to be a movement. And again, it's been in the papers, rumored in the papers that we think some of the banks President. We may choose to get out of the index business, which will allow firms like ourselves to continue to expand. Right now, we actually generate not an Substantial amount of revenue from fixed income indices and products, but we think that that's one of the areas in terms of our asset class coverage
Thanks. Alex Graham, UBS. This is for Larry. And sorry, it's a 2 part question on natural gas. 1 in the and basically the Look for that part, which I think is 25% of Platts business.
In the near term, I think natural gas has been super volatile. So maybe you can President. I'll just elaborate what that means in the near term. Do you see a lot of new subscriptions coming in? Are people really interested in the market?
And do you see something coming out of that? And In the long term, I think there's a lot of different prices around the world, very cheap in the U. S, very expensive in Asia. We're talking about LNG and things like What does that mean for Platts long term? I mean, that looks to me like a big long term more prices, more new benchmarks So you would just maybe elaborate on that trend in particular.
Sure. I think I may have counted 3 parts. So let's see how well I do it, remembering what part. I think overall, we're a A couple of things about the business and volatility in general. We're not really impacted by short term swings and volatility, right?
We're a subscription model, so we generate recurring revenues on at Basis. But it does speak to the underlying health of the industry. So when we see periods of low volatility and low price For decent periods of time, as we've seen in the U. S. Natural gas market, it does start to impact the industry.
There's less trading. There's fewer players. There's players that are So what we look for is kind of the long term health of volatility. I think the main point though that you pointed out that we CEO as well, is the price discrepancy for natural gas around the globe between the U. S, Europe and Asia is very significant.
And that's creating what we believe will Relatively soon be an export market for the U. S. And that should begin to move prices in the U. S. To reflect a better balance of supply and demand and Mobility of Gas Around the World.
It's going to be a period of time before the volumes are significant. But even once marginal delivery starts to occur, we believe that will start to Delivery starts to occur. We believe that will start to equalize prices and probably introduce some volatility into the market, but an exciting long term trend, I for the market and for the U. S. In natural gas.
Did that get all four parts there? I can see the front row. Peter?
Yes. So Larry sort of related to that the it's Peter Appert at Piper Jaffray, sorry. The how do we think about the Gale, the market opportunity. How big is the market for Platts? How do you get there?
Do you have to do more big acquisitions? And I'm particularly interested in the ag market if that could be as big as the Oil market is currently
thanks. It's
a great question. It's a tricky thing to assess, Peter. It's because there's a couple of different factors. I mean, we can look at the aggregate value of what's produced. But it's also what's transported and shipped.
If it's put on a ship and move the farther it's moved, the more sort of supply and demand dimensions come into it and the more the need for price assessments from that occur. So what the fact is we tend to look at are what's the underlying production Value relative to other commodities. How many players are active in it? How active are the derivative markets now and likely to be? These are dimensions that allow us to get a sense for But I would just say all of these markets are large complex global markets that we see over time evolving But to put a real dimension on it is tough.
The second part of your question around acquisitions, we're always looking I'm very interested in acquisitions, particularly those that can tuck in that where someone's got a benchmark position established. There's a big first mover Advantage in this market that if once you get the share of mind and you're embedded, as I described, into the contracts and into the fabric of the way the industry trades. That's a difficult position to unseat. So wherever we can work with a firm or acquire a business where they've established that foothold. We're real excited about pursuing that type of opportunity as a way to continue to President, the presence of the business.
Thanks.
Jane The Backner.
A follow-up question on from Alex Cram.
With the Shell
Gas Revolution,
I think it's a bit soon to tell. I think both you take natural gas liquids, you take petroleum and you take natural gas as well coming out of shale. I think as we see those flows But I think for now, Henry Hub's pretty well established as a highly liquid available benchmark. But Things are changing. So we're certainly watching the space carefully.
We're very active in producing investments that reflect these shifts. But whether or not the He fully adopts these. That's something we have to wait and see how the market evolves on these. But our view is we always want to be there with a solution for the If that's where the market wants to move in terms of their use of a price assessment. Okay.
Yes. Bill?
Hi, Bill Bird from FBR. Alex, can you talk about what you're seeing competitively on pricing and how you see pricing developing in your market. Thank you.
Sure. Well, I think really this relates to what's happened in the ETF business. I mean, I don't think there's a lot of businesses nowadays that don't see very competitive environment. We've always had pretty, Details involves things like price breaks as assets continue to grow. So in terms of how the price providers I'm Sorry, how the ETF providers are looking at it.
Certainly, we see the world as kind of premium branded products and lesser branded products. And premium branded Products again continue to get very, very high pricing. These are products that are not substitutable, where there is a little bit more competition, I think it's more on generic type products. But I think a lot of the brands that we have, a lot of the products that we have fit squarely into that Premium category.
Way in the back.
Yes. Tim McHugh with William Blair. I guess two questions On Platts, one is, I guess, directionally speaking, what type of growth is still achievable in your most mature part of that business, I guess, in petroleum, if We wanted to think of it that way. And then if we thought about either historical or kind of future growth in terms of number of customers versus growth with existing customers. Can you help us how we should think about that?
Sure. And the second part of your question is again with the core business? Overall. Overall, okay. What I would say is we've continued to see the core set of customers and the core business of petroleum to be a major source of growth.
And that's really reflected by the Welcome. I'm Chip Merritt, Vice President, but just in general, embedding all of this data into the various systems that they utilize. This is just broadening usage. So many of the large customers are the same customers. We're not Welcome.
I'm Chip Merritt, Vice President, new major integrated oil companies popping up, but we are seeing increased use of our assessments in various forms and our ability Welcome. I'm Chip Merritt, Vice President, to capture revenue growth as a result of that increased use. So that we're quite encouraged by. In terms of overall market expansion, Welcome. I'm Chip Merritt, Vice President.
We continue to bring on a significant number of what we call new logos and new customers that are new trading houses, various players President. Our not major producers are consumers necessarily, but are intermediaries in the business in one form or another. I mean that continues to be a source of growth from a new client set. And then certainly when we get out of the more mature markets like oil, those are much more of a green space for us in terms of customer that we haven't penetrated before.
So we'll take one more question from Hamzah in this session. These 2 folks will be back at the very end. So of Hamzah.
A question for Alex. You spoke about consolidation in the market within indices. Maybe help us I understand how we should think about synergies from an indices deal? How is equity President. How much incremental capacity do you have in the JV before you need to add headcount?
Maybe help us understand of Dynamic. Thanks.
Sure. Well, for someone like ourselves, we're already calculating fixed income indices and equity indices. We think we have the platform in place that's Necessary to grow organically. In the equity space depending on the types of indices, it is a very, very scalable business. So we went through when we went through the Dow acquisition, We literally took all of the Dow indices and brought them on to our platform.
Our platform has been fairly it's fairly new, It's very robust. It allows us to handle multiple, multiple numbers of indices both in real time and on an end of day basis. At At some point, you do start needing to add people. It's index managers that will manage the actual daily process. But also as you continue to add customers, You need to have the customer relationships.
When you get into some of the other asset classes, again, the technology is a little bit different. The customer base is a little bit different. So something like a fixed President. And
Great. Alex, Larry, thanks. Next up is going to be Finn O'Neill,
the President of J. D. Power. Dean Ryan Keyes in and member satisfaction among commercial health plans
in the Minnesota Wisconsin region
by JD Power and Associates
not once, not twice, but 4 years in a row.
Of Quality in the U. S.
President. I say family because we've been blessed with this honor for 3 years in a row.
So it's no wonder that American consumers have an aided awareness of the J. D. Power brand of over 80%. But the question we ought to ask Well, really it's about the trust that's been built up over 46 years. Our Core business is not the commercials.
Our core business is what we call syndicated studies. We design, we field, the founder of the business is sitting watching the 1984 Super Bowl. The screen goes black We've dedicated research in 16 countries and 4 continents around the world. In fact, it may surprise you that we are the largest business for McGraw Hill in China. And we have become the benchmark in many industries.
Our metrics Around customer satisfaction not only allows companies to compare themselves to how their competitive set is doing but also to How much KPIs within the industry within the company I should say and tie compensation to that. So a great example is from the of Steel Industry. Some of you may in fact have taken the IQS or initial quality survey here. What we do is survey new car owners Welcome. I'm Chip Merritt, Vice President.
You go to Mercedes Benz where they build the S Factory in East London, the S Model in East London, South Africa or Hyundai. Welcome. I'm Chip Merritt, Vice President of the Economy. What do companies need to know? They need to know what motivates the consumer, what Drives their loyalty, what makes them advocates of the brand.
I personally can't think of more essential intelligence than that. The first and biggest is research. It consists of the syndicated research which we fund directly, which I talked The ad claims which come from those clients that choose to promote the fact that they were number 1 in our surveys and then something we call proprietary or Tracking Research. Essentially, that's a business where clients come to us and say, we want you, JD How are you to do the research because of your benchmarks or because of your expertise? And we take the sample from them.
We do the analysis and we provide the results to them. That's not published. That is contractual with the client. It's a sizable business of the Gen Network and we have a sample outside if you'd like to see it later. JD Power and to understand pricing with incentives.
So imagine that you are a Toyota executive and you've been so rash Just to say that the Camry is going to be number 1 in the midsize segment. And sales velocity is slowing. Inventory is piling up. Let's You got 60 days. For the Camry that's about 60,000 units on the ground.
And in the automobile industry decisions are made in 5 $100,000 or $1,000 increments when it comes to incentives. So you're looking at a $60,000,000 decision. You don't want to make that based on some of the Automotive Industry. The 3rd category is data driven consulting. Essentially, we've built domain knowledge around what drives of Consumer Satisfaction.
And that allows us not only to help our clients measure and understand, but to integrate these benchmarks Schmark, the one that I gave you the example of. That's integrated, it becomes part of the fabric of how they do business. All of this has led to some solid growth and the top line would even be higher if we hadn't exited Certain businesses that were for us unprofitable like forecasting, but we have changed the product mix. It's a much richer higher margin of our business. About 60% comes from the automotive market globally, another 15% or so from financial services and insurance etcetera.
So global growth is important to J. D. Power. President. We are situated and do our syndicated research in economies that are critical to the automotive industry.
China, the United States, Brazil, India, Germany, Japan, we're right there with the metrics. And that's important because it gives Automotive Industry by all accounts has recovered. Transaction prices are at all time highs, rebates or incentives are Under control, inventories are well managed. Europe is now starting an upturn. It's leveled and it's returning to health.
But the center of gravity in the automotive market has clearly shifted to Asia and the big story there is China. You can see that China is growing at about a 7% CAGR over the rest of the decade compared to 4% for the United States. By the end of the decade, China is going to be twice the size of the United States in terms of automobiles sold. Past 3 years you can see from the CAGR, great growth. And that's not based on some negligible starting point.
As I mentioned to you, we are McGraw Hill's largest business in China. We have consistent profitable double digit growth in of China. And it's based on basically the same model as the United States. We do syndicated research, proprietary research and data driven advisory of Services. We're well positioned we think to grow with the Chinese automotive market.
We've got global credibility with the foreign managers of the joint ventures. We've been there 15 years. We've got credibility with the Chinese. In fact, the Managing Director of our business over there has 1,500,000 followers on his tweet, Tweedie. It's amazing.
So we think there's a tremendous future there. So we're about growth. To strengthen our studies. We're going to scale them globally. We see that now with IQS Welcome.
I'm Chip Merritt, Vice President. In the global auto
market, auto manufacturers want to look at their platforms globally. We're going to invest in our power Information Network, I talked about pricing information, demand assessment. It applies in a variety of areas. You can look at your competition. You can look at your competition in terms of how effective their new car launches are.
This is detailed granular information You can think about combining pin data which is real time real car purchasers with other datasets, household datasets or online behaviors. Think of perhaps the impact that that could have and the knowledge it could give in the advertising ecosystem. The growth in China also is not just an auto story. In the larger scheme of things, it's about a growing middle class. It's about growth not just in the Tier 1 Eastern Cities but in the West and the Tier 3 and Tier 4 of Insurance as that middle class grows.
We also see an opportunity to deepen our penetration of Financial Services and Insurance here in North America. We get further penetration to go with our benchmarks. We see opportunities for In Wealth Advisory, the industry has no shortage of transactional data, but understanding what motivates in Insurance. We're also confident about our ability to execute. So we're Quite a while away along now our efforts to standardize and automate our research process.
What we've been able to do is drive efficiencies, Lower costs and in the process improve the quality of the deliverable to our clients. So when we engage with a client in a proprietary engagement and we are surveying an ongoing rolling basis, their customers, that same customer is probably on social media rating the client. And they may be calling the 800 number and there may be unstructured data in the client's of it. And at the same time closed loop resolution so they can recover a customer gone bad. That's a great opportunity for us.
We have the ability to do that. We see more and more of We can execute on that. Another thing that is important I think and be a future opportunity for us where we can on his experience in a particular vertical. What she's likely to think about is the sum of all the experiences. So if you Our Mercedes Benz executive, you certainly want to keep your eye on Lexus and BMW if you want to be best in class in the luxury segment.
Right? Or the Ritz Carlton, where do they shop? Neiman Marcus or Nordstrom? What influences their Customers expectations are rising and what do you need to do to raise the bar. We think there's great opportunity and we can execute there.
President. A leading and very strong data mining franchise and company research. It's built in a new design application language President. And it makes what's possible now the ability to really drive technology driven product innovation, And not just make it possible, but actually allows us to set a new standard in doing that. And if you didn't get a chance to take a look at some of these offerings out in the other room, please do so Information Industry, we see opportunity in a few really clear ways.
Particularly in recent history, there hasn't been a lot of what Doug referred to as Debt change or disruptive innovation in the business. If you look at the larger players in the business, what you see is incremental improvements, enhancements to a of Product and Offering. But really what they've done is try to protect revenue. Then you look down at the lower end of the marketplace and you see lots of good ideas President. And some of the early stage companies, but very hard to get impact to have impact and to get a foothold and grow without scale President.
That in fact gave us some really interesting opportunities for acquisitions in 2012. On top of that, you have not Prevalent in the financial information industry, things like gamification or really using data science or visualization, things that really drive new capabilities. The foundation that we put in place, the investments we've made, what are the opportunities we see in the marketplace and what will be the drivers of that So we put everything together in 2011 in what we like to call a $1,000,000,000 startup called S and P Capital IQ. We immediately got to work saying, what are those needs in the marketplace? Where can we focus based We built the foundation.
We looked at technology. We looked at data. We invested in strategic acquisitions, 3 in the first Presidents. President. And you see this in a lot of other industries today where a lack of talent actually slows product innovation
and growth ultimately. At the
same time, we've been
working over the last
few years to The most important business that are going to drive growth and we've worked hard to get a very simple business model. President. We're still working through some of that rationalization, but we've made a lot of progress in simplifying our business model. If you look at this slide, what this represents is the breakdown of the business mix in both the line of business President. But if you look at the Investment Management segment, for example, you see that we've already got a big chunk of our business sitting in of Management.
And this is important for several reasons. As we build analytics and applications on top of that data mining franchise, President. It's very important that the stronger the data franchise you have, the more likely you are to get quicker growth in that of IQ. But we also that's the strongest growing segment that we've got along with corporates actually. So you've got a big segment, you've got a strong foothold and you've got a lot of Growth potential in that marketplace, that's about we think about an $8,000,000,000 spend or so in addressable market in the Investment Management segment.
So you'll see more of this as we go forward on the presentation. So you take that another step and this President. Shows at least illustratively this Investment Management segment relative to the other segments. But more importantly, this starts to get to the opportunity that we President. And this is probably one of the most frequent questions I get when Chip and I do a meeting with all of you is, how are you going to grow?
How are you going to grow against these big guys? It's going to be the method and the strategy. Well, if you look at that chart on the right hand side, what you see is Something that I think is revealing to folks who think of the business as it's all owned by the big guys. It's all owned by the names you know. When in fact the reality is that less than 60% of our addressable marketplace and by the way as you notice here that's off Trading floor.
We don't view ourselves as playing in the trading floor market at this point in time. So about an $18,000,000,000 market and somewhere around 40 The percent of it is actually in the hands of a smaller number, a large number of smaller players. And that's a really interesting point because We'll that in a minute. So those bullet points and summary on the bottom are really important about the opportunity we see in the marketplace and then how we're going to look Get unmet needs and I'll give you an example of that and then use technology driven product innovation to go get that market share. We are in a large Smaller players and the growth is possible without having to displace the largest competitors.
We obviously compete with them and we compete in different with different kinds of competitors, but this is not an outright one to one head on competition for us to grow. And that's especially important when you think about being able to hold points and generate more value in your products. So we have been able to President. Not just grow or build for the future, but grow as well. And when you look at this, you see 7% on the top line.
President. But what's really important here is not just that top line 7%, but if you look along the side, you look at some of the growth rates and it gives you some insight into the business, Particularly when I talk about having to rationalize the business and focus on those areas of growth going forward. And in particular, look at the 9 At hold for the future, we've had good growth in S and P Credit Solutions, which has been the sale of ratings intellectual property. And I'm going to talk about that some more in a President. So let me spend a minute now talking about the 3 major lines of business to give you some insight into that.
When you think about markets intelligence, there's 3 components to it. The first component is global markets intelligence President or GMI. That business is a market analysis and commentary business that provides content for the Capital IQ platform, lots of branding. You'll see them on CNBC, President. So it's not like it's not the index business, but it's similar in a sense that It's intellectual capital driven and it's got very high margins.
It's very small today, but it's growing. They have today about a $30,000,000,000 pool of assets that are against the portfolios that they create. So keep that in mind because it will be important in a minute when I talk about what we've done with equity research. The second component of this is of Bridge, Commentary and Data. They are the leaders in leverage loan commentary, data and analysis.
So those two Business together are high growth and high margin and we're investing in those. Our challenge has been in Equity Research, which has been a traditional of stock picking business. And what we've just done, if you noticed our announcement a couple of months ago, is we combine that with GMI or Global Markets It's intelligence. What we got out of that is we took all those portfolios, all that quantitative modeling and work that was done to create GMI and give a qualitative President. And so we have not moved away.
Very importantly, we haven't moved to a Morningstar model or anything like that, but we have not moved away President. From qualitative analysis, but we've given a qualitative underlay with a foundation that looks at quant modeling first. That has allowed us to reduce our analyst pool by about 50 headcount. And that's a giant step in getting the Equity Research business into line where we want to B profitability wise. So I think we're in the process of turning around that line to high growth, high margin Mine's there already and then Equity Research bringing that in the same.
Secondly, let me talk a little bit about S&P Credit Solutions. And by the way, as I mentioned, doing things like bringing GMI and Equity Research together and leveraging all Capabilities. That's a great example of when Doug talks about active management and leveraging MHFI and all the capabilities of MHI, that's a great example of And here's another good example of it. When we talk about evolving what has been IP sales of ratings information into S and P Credit of Solutions. If you think about that concept taking that to the next step, now what we're saying is we're going to dedicate existing resource.
We're not going out and adding a a headcount to do this, but really focusing in a dedicated way on the monetization of Ratings IP, but even more So really focusing more than ever before on how do we leverage the IP from ratings and the IP from of IQ together. And so the goal here, the headline on this is that we're trying to take advantage of one of the we I think ratings has in MHFI and that's the power of S and P Capital IQ. So we're going to really focus on this, really dedicate this in Our goal is to drive not just growth in ratings IP, but also growth in revenue for MHFI. The third line is our biggest part of our business and probably the biggest area of growth and that's the desktop and enterprise solutions. And I said you've looked at this Business growing 9% in the last 3 years, very strong relative to our competitors.
I think one of our main competitors announced a 7% growth rate today in one of their sessions. And so you can get a feel for the kind of growth rates we've achieved as we start to roll out some of the new solutions. Again, this is about analytic innovation. This is not about retooling. This is about technology driven product Innovation based on needs that are not out there in the marketplace.
And let me just give you two examples that are bullets on here. The first one is an acquisition we did which was Quant That's a black hole. That's a way to get yourself in a lot of trouble. We pick the best technology we could find out there and we migrate our data to that of Superior Technology. So when you've got the ability to come in with a web based feed, which can deliver all sorts of data at all sorts of speeds, you actually lower the cost of ownership and increase the value that a client gets out of it.
And therefore, you'll see us with wins against major feed players like IDC or like of Bloomberg. And the way we're doing it is with our proprietary data and superior technology and with a sales organization that really knows how President. So that was a need we saw in the marketplace, lots of old technologies in the feed world out there. The second one was around Portfolio risk. We said there's an issue out here in the marketplace and many of you live with this in your organizations.
Risk is no longer a back office operation, obviously. It's not even just a middle of this operation. It's got to be in the front office. It's got to be real time. It's got to be along with your portfolio decisions and your buy and We don't want to compete with risk metrics and risk management.
So what do we do? Well, we looked all over and we found the most talented group we We actually have the only true commercial solution out there that is both portfolio and risk management and Credit analytics as well, in real time multi asset class and web deliver. So there's 2 versions of it. There's a version that That is the firm wide version, which will integrate throughout the entire firm or what you can see next across the hallway is a desktop version, which took some of the best Applications of portfolio risk and put it into the Cap IQ desktop all nourished by Cap IQ data. So just some examples of how we've really focused on not just the market, what are the opportunities to go after that fragmented market and the key then was to offer things that others Full user interfaces were obsolete.
You can't just keep adding tabs and lengthening your navigation bar. It gets very clear as you keep Adding data and adding content and that's what a lot of our competitors do, we actually make your problems worse because we add more stuff percentage of what they offer makes up for the maximum amount that people use. That's a problem. It's a problem with retention. It's a problem with cost, What you can charge.
And so we said we've got to make this change. So we immediately set up an innovation lab and started building What we think will be the language of the future, the application design of the future. We actually ran a very large RFP process and worked with Frog Design, Which by the way happens to be the firm that wrote the Apple design language. So swipes and double fingers and all those things and that's what Not a user interface. It's not what some other folks have done.
We actually changed the way we build applications, which will change the way clients President. We believe this not only is going to create some great new capabilities, but it will create some barriers of entry in certainly the next We think couple of years. I don't know, maybe somebody's working on one of these as well, but we know we're out with it first. And it literally will change as you and you'll See, especially if you're a user of Capitec today, you're going to start to look at some of these new applications and this new design language and realize there are Things you can do in one view that would have taken you many pages to do otherwise. So this idea of exposing more data, managing data, Okay, build it.
So for example, Create you see up here focuses on collaboration. So all of a sudden you're going to see things like live President. Video chat, building teams dragging from outlook over, things you've never seen in Capital IQ by the way and you don't And that's been the goal, but it's existing technology, right? If any of you read the Steve Jobs book, the quote by Salvador Dali that says good artists copy, great artists President. The technology is there.
It just hadn't been used in this way. And so that perspective we think is going to give us a real edge and we've been working on this stuff Close to 2 years now and are on target rolling it out as we go through this year. And we think that again is going to give us an edge and also Allow us to raise average price per user as we go forward. We'll have to wait and see, but that's going to be one of the things that we'll target. Value is where we want to We're never going to be the most expensive.
We don't want to be the cheapest, but we don't want to compete on price. We want to compete on value and offering things that others don't have. So you'll see a lot of these If you walk next door, we're always open to stopping by or having you stop by and showing you these. These things are live. It's not just a These actually work and we can give you demonstrations and would love to show it to you.
And we're very excited about being on target to roll these things out as we move through the Converging capabilities and talent is very important. And I think you see it in other industries. You'll see it in And so we're not the biggest player by any means, but we have scale. And you've heard the position we're in. So these are things we're really going We've expanded our position around the world.
We've got some really interesting partnerships we've built out. I talked about driving the monetization of ratings, very important to us. To us. IQ Language is launched and then we're investing in proprietary cross asset class of Research, which I talked about with Markets Intelligence. On the right hand side, the infrastructure has been a big focus for us President for 2 years.
You can see people we compete with if they don't get the infrastructure right, it causes you a lot of problems. You can't build on a house of cards. You got to Solid infrastructure, it's got to scale. And the last point is just we've got to foster a culture of innovation. We believe and I referred to us This is a $1,000,000,000 startup that you really need to be an incubator of innovation.
It can't just come from small companies that start up because ultimately they need to They need to scale and get big. So you have to be big and you have to be innovative as well. And so we build that into our DNA And the way we think about the business. So with that, I appreciate your time. And I'm going to invite Fin and Chip to come back up for Q and A.
Thanks.
All right. Thank you, Lou.
As we get the microphone on the
Yes, here it comes.
So Lou you outlined a lot of exciting stuff. And I'm wondering how you can if you can help us translate that into financial for Profitability Metrics. And I ask this in the context of understanding that your margins are depressed because of all the investment As I look at your performance versus peers, your operating margins do lag pretty significantly some of the pure play. So what's the opportunity to close that gap? What's the time of Rim to Closet.
Yes. Thanks. Well, I mean, I think the way to think about what we've done the 1st few years is the investment we've made President. So the fact that we went out and did 3 dilutive acquisitions in 6 months on our base of business and have really focused heavily on building and still got 7% President. And still got 7% on top of the fact that we've had an equity research business that has really dragged down our earnings.
So I think if you put all those things together and think about where we can go in the future, if you look at the size of the President. And you think about we're just rolling these things out now. And I think 2014 is kind of an inflection point, but maybe not the President. But maybe not the point because you got to get these things out in the marketplace. So if we have everything out commercially available, call it, by September of this year is our target and all things will come out at various President.
September of this year is our target. I know things will come out at various times. 2015 will be your first real full year of having those things out in the But I think you need to add all those things together and take a look at the market and understand what else is going on out there. The fact that we've been able to achieve some of the highest growth rates in desktop and enterprise before we've rolled out IQ Language and the new solutions,
Get the microphones around.
In the back. And remember name and company please in the back.
Craig Hubert, Hubert Research. A question on JD Power. For your Chinese operation, can you just ballpark for us How much of your revenues come from China? And also what the margins there look like versus your consolidated margins? And then just a corollary question is outside of China, why has your revenues and lagging at J.
D. Power. Is it economic driven or is it something else? Thank you.
Just whatever color you feel comfortable.
Okay. With regard to China, it's in the high teens in terms of percentage of our business. With regard to the revenue lagging, actually, maybe I didn't make the point as clearly as I might otherwise had. We have also exited certain businesses and engagements that might have made sense at a certain time, but we couldn't drive the kind of profitability that we need. And so the consequence would be Our organic growth, if you discounted that would be in the very high single of
Fidgets.
Doug Arthur, Evercore. Fin, just as a follow-up on China. I mean, you talked about the great growth opportunities. What are you seeing there In terms of who's in the market and what kind of share do you have? Or is it sort of disparate at At this point.
And then actually if you could then back up and talk about kind of the competitive dynamics of the U. S. Market as well that would be great.
Okay. With regard to China, certainly Ipsos and Nielsen are there. We see them in some of the proprietary work. We do not Have any direct competitor in terms of benchmarks, indigenous Chinese. There was a company that Companies that do tracking such as Sinotrust and they do it at a low cost, but they don't bring the benchmarks or the analytics that are required by the executives of the OEMs in order to make the kinds of decisions on allocation of resources to customer satisfaction that they need.
So we provide the superior value President. Here in the United States, we have competitors in niches. With regard to our benchmarks, there are no direct of Directors. But you all know NPS out there, Net Promoter Score. In retail banking, it's big.
The challenge of course with NPS Welcome. I'm Chip Merritt, Vice President. You need in order to do something about the drivers. That's where we compete effectively against NPS. In tracking proprietary work, there There are some SaaS based platforms like Medallia out of Mountain View, California that compete with us.
But again, we believe we have the benchmarks of Analytics. We run into Nielsen in some places, but effectively it's not a full on Competitor that offers and there's no competition, we believe, for Penn. David?
Yes. Question for Lou.
Name and firm, please.
David Reynolds here from Jefferies. Sorry, Chip. No worries. Question for Lou. Lou, I think you mentioned you who did 50 Equity Research Heads.
How many does that leave you in the business today? And do of those guys. Feel safe.
One question at a time. We actually The size of the group, if you look at it that way, once you combine it with GMI is not 50 heads down, it's Maybe 15 heads down, right? So we tried to leverage into a new operating model. That was the whole point, not just the cost I mean, this is a business that we've got a lot of very important clients for. There's a lot of reliance President.
And we think we tried to morph the whole operating model in. So the fact that they're still together with GMI means we didn't just cut that line of business to leave it out there. That's Important point in your comfort question, right? The second part of it is really around what can they now do and how President. They performed.
So if you think about the core that's there, all the team leaders, all the leaders that were the ones that had the meetings with clients, That did the media work. They're all still there. So what we really changed was the artisan bottom up fundamental data Element by element work and gave them that quantitatively. And remember, it's all Cap IQ driven, right? So what we really did, I mean, we had equity analysts that weren't even using Cap Welcome.
I'm Chip Merritt, Vice President, to do the work. And so what you've done is mobilized all of Cap IQ, all the modeling work that was done in GMI So we actually think we've enabled that core group that's left to do a lot more than they ever could. And over time, we would not be the slightest bit surprised that See the return out of the STARZ models not only maintains the same, but improves. So we've actually tried to create a better model, ultimately a better product and all we've eliminated It's the artisan component of building a model step by step by each individual.
Great. In the middle?
Sure. Andre Benjamin here of Goldman Sachs. Just a question for Lou. Hopefully, I heard you correctly, but on the and Buy Side Product for Capital IQ. I thought I heard you say that you weren't looking to go head to head with FactSet and RiskMetrics.
We're more trying to carve out your Specialty area there. If the market's not going to grow that dramatically and you're not taking share from them, where is the revenue opportunity You're going to come from who is actually going to be paying you more and why not try to go head to head with them?
Yes. No, I mean, Andre, What I meant was I didn't say we don't compete with them. But what I don't want to do is go head to head by replicating their product and competing on Price, that was really my point. And so while we obviously do wind up competing with them and a lot of others in certain areas, the key to the whole Thing is to have something that they don't have, because in the end that's going to be the difference. If I only come in, if I look at FactSet or anybody else And all I want to do is replicate what they've got.
The cost of switching or the pain of switching is so high that you've got to be a lot cheaper. So the only way you She can come in and win business and it could be from a competitor. It could be from others. I mean, for example, in the firm wide risk management Welcome. I'm Chip Merritt, Vice President, System.
When we go into there, we're competing with probably 6, 7 firms. None of them will be big names. On the other hand, you could go into an investment President. Where you competing head to head with Thomson Reuters or FactSet. So we're not afraid to compete head to head.
We do all the time, but it's not your business Strategy is to go replace them. Your business strategy is to have something that they can't get anywhere else that's going to make a client money even if they keep fact That's your ultimate win. But that's but the reality is, of course, you do compete head to head with them, but it's not your strategy.
In the back, last question for this for I guess it's Tim.
Yes. Tim McHugh, William Blair. I guess two questions, Lew. One is you kind of talked about not wanting to replicate or just copycat what But it seems the market for everyone copycats what someone else is doing. So I guess just from a multiyear perspective, How long until you have to go through another round of innovation to try and stay ahead before others just copycat what you've talked about today?
And secondly, I Yes, along those lines, how critical is eventually getting price or getting price increases for For some of the innovation to margins eventually climbing here.
Yes. Well, the innovation is the need is perpetual, It's not next cycle. It's not like we rest now, right? I mean, the first version, there's a software element to this thing now, So the next the first version is only as good until the next release. You're constantly going to be doing that.
And if you go into our innovation lab today, you'll see innovations that will be rolled out in 2015 2016 already in the process. That's what I meant by incubator of innovation. It's got to be there. But I think your firm did a really Testing survey, right, where you went out and interviewed 1900 users. And we were really happy to see where we came out, which was the winner on return on investment for value.
That's where you have to stay, right? That's where we need to be. For value, that's where you have to stay, right? That's where we need to be. Not cheap and not really expensive, but in that value So the second part of your question is as we add all these things in, we clearly have to get paid for the new capabilities.
But you want to get Based on value provided, not just price increases. I mean, the strategy of a price increase over time without And so there's not just increased market share, but there's also increased price points in the existing and
Client Base.
Okay, great. Now we're on to
the next round of companies. There's refreshments in the back if you need to take a break and run back there real quick. But we're going to continue with the with Niraj Sahai from Standard Poor's Rating Services.
Good afternoon. I don't have a video, but I promise I have a good story. Over the next 15 minutes, I'm going to give you an overview of our ratings franchise. I've been in this job now for just over 2 months. And I'm even more excited about it today than when I started.
Why is that the case? Because Standard and Coors has an incredible platform. And its investors. Let me elaborate. At the end of 2013, we had over 1,000,000 credit ratings outstanding that covered virtually every category of issuer, virtually every fixed income asset class.
Because of that, our expertise is unquestioned. Our brand has instant recognition. Independent research which has been carried out by us clearly shows that agency selection It's based on investor preference, it's based on sector and industry knowledge, and it's based on agency Presentation. Against all those criteria, we stack up very well, and this is one element of that. We are global.
There are 2 aspects of our globality that I would like to highlight. First, we cover issuers and products in over 125 markets across the world. Rich, gives us earnings diversification. It allows us to establish connections and discern trends that would otherwise be less evident. And because of our coverage model, Our analysts have deep local knowledge, and they're able to service their customers in their language and in their time zone.
That's a very important aspect to keep in mind, not just for today, but as we think about the future and the ability of this franchise to grow across the demonstrate that our people are well known. They are resident in all major markets across the world. They are extremely seasoned, and you see them on television all the time. Betten Bovino, for example, was recognized by Wall Street Journal as the most accurate economic forecaster for 2013. And they are not just great individual talent.
Through our processes, they talk to one another, they connect with one another, but we don't rest on our laurels. Just because we have a great platform, we continue to innovate. Hopefully some of you saw our credit scenario builder, which was being demonstrated in the room next to us. That tool of the Analysis and see how things would change should their assumptions be different from ours. Of Aging on public finances across 50 markets.
At the end of the day, a great platform If you look at our performance from 2011 to 2013, our revenue grew at a CAGR of 13%. During that same time period, we expanded our margin by 2 50 basis points. Another interesting aspect to note is that in 2013, our revenues exceeded our Welcome. I'm Chip Merritt, Vice President, Crisis Peek. Our 2013 revenues were at a historical high.
Within this, there is however one important attribute to Note that the mix has changed over the years and the slack that came from structured finance was taken up by corporates and that's something I will talk about a little later. Why we've grown revenues? We've grown them keeping productivity in mind. If you look at the same time period, our revenue per employee has grown by nearly 14 of Cent. And our margin per employee has grown by 17%.
Now productivity is going to be a very important part of my business model. I plan to focus on it. I plan to leverage technology. I plan to use data Mining Tools. I want to streamline workflows and I want to leverage all of them to become even more productive going forward.
Another interesting aspect of our earnings
of Diversification.
So does the fee mix over here between transaction and non transaction. For instance, in 2008, the issuance market dropped by 70%, but our revenues just dropped by 20 XPressant. That gives you some idea that during bad times, this gives us good cushion. If you look on the left Welcome. I'm Chip Merritt, Vice President of International and Non International Revenues.
Like any enterprise, we are not immune to market of Changes in Market Volatility, but hopefully this diversification gives our earnings and our revenues a lower beta. A great platform and a good track record don't guarantee future success. They are just necessary conditions. Why should we be optimistic about the future? One of the questions I asked myself early when I started in this role is in the backdrop of the great recession, what's happened to the demand and appetite for ratings?
Research through Greenwich Associates shows that actually the demand for ratings have gone up 2x from 2011 to 2014. And these ratings are used in a variety of ways. Another research showed us that actually the quality and demand As its debt matured, it really didn't have the need for ratings. However, its real estate group realized that ratings help M, negotiate better leases. Because of that, they decided to retain ratings, but just from one agency, and that agency was Standard and Poor's.
Standing of the marketplace. Now let's look at some macro variables. The demand for debt continues to be high. Why? Because still it's a borrower's market as interest rates are relatively low and there's a thirst for yield.
You can see that FAG borne out in the 24% increase in new corporate issuers we saw over this time period. Similarly, we expect refinancings to grow both in investment grade and spec grade. However, because a lot of Since we brought forward towards the second half of twenty thirteen, we expect that growth to be tempered during this period, but there will be growth. Similarly, another important aspect is actually deleveraging and disintermediation. Now deleveraging is happening.
It's happened obviously in the U. S. It's happening in Europe. And that will drive the structured market. It will drive traditional debt and it will obviously drive the syndicated loan market.
I think in today's Financial Times, and several news about the fact that a lot of the growth in the high yield bond market in Europe has been driven by the lack of supply from bank of Credit. And I think the demand for credit is unabated, but the supply from the banks will continue to come down and the demand and supply I'm Chip Merritt, Vice President. I'm Chip Merritt, Vice President. I'm Chip Merritt, President for us. Having said that, there are risks on the horizon, and we can't ignore We know the risk trade is on.
All of us have been seeing that covenant light loans have gone up, 2nd lien in loans have gone up, PIKs have gone up, total PIKs have gone up and the spread is not as wide as it can be. So if there's a hiccup in the economic environment that will have that could and will have an impact. However, the diversity I talked about earlier should give us more cushion than others. And secondly, there are legal things on the horizon, and they are unpredictable. Ken later on will cover of them, and give you more color on that.
So in summary, we have a great platform, a great track record, Welcome. I'm Chip Merritt, Vice President. An excellent environment to operate in, and we plan to use all of them to actually create growth and drive Our growth will come from growing our core, which should do a good job in any case, of expanding across asset class, Excellence. We'll focus on productivity. And at the end of the day, we'll do it with the highest level of integrity and the highest level of Thank you.
With that, I would like to welcome my colleague, Rupa, who will give you an insight into our franchise in CRISIL. I've had the opportunity to be in India a short while ago and Rupa runs an incredible franchise Not only is she a great manager, she's renowned in the Indian marketplace and is very well known as the top rated CEO in that market. So with that, Rupa, welcome.
Thank you, Neeraj, and good afternoon. I'm very pleased to be here today and to have the opportunity to introduce in India and listed on the Indian Stock Exchanges. McGraw Hill Financials has a 68% shareholding in the We are a company with a unique business model. We are deeply embedded in the local markets in India And we also have a range of global research and analytics offering, which actually leverage the India advantage. We are India's largest credit rating agency.
We rate rupee denominated debt. Our ratings cover India's largest financial of the National Institutions and Corporates and go down all the way to the smallest of enterprises. We are also India's largest independent research house. We provide research and analysis on the Indian economy, on Indian Capital Markets, Industries and on companies. And of Your support to the world's leading global banks.
What does all this add up to? It adds up to a Since the time McGraw Hill Financial acquired a majority stake in Cryfil in 2,005, our revenues We have grown at a compound annual growth rate of 32%, and we have operating margins now approaching 30%. This chart shows you how CRISIL has grown since McGraw Hill acquired a majority stake in 2000 President. In that year, we had revenues of US21 $1,000,000 and we ended the year 2013 with revenues of $189,000,000 Our market capitalization too has grown significantly at a compound annual growth rate of 30 President. In 2005, we had a market cap of less than US100 $1,000,000,000 that increased to US1 $1,000,000,000 by 20 of Ten and is currently at the level of US1.3 billion dollars From being an India focused credit and Trading Agency.
Chrystal embarked on a strategy to diversify our business. Consequently, today, We are a globally diversified analytical platform with a significant proportion of our revenues coming from within India and also from Site of India. The first piece of our business is rating. Here we have 3 offerings. For India's largest of 200 companies.
We provide them with bond and commercial paper ratings. Today, 65% of the bonds
President. Sending in India are rated by CRISIL.
For the next year of 15,000 companies, they mainly approach us for getting their Bank loans rated. Banks use these ratings to decide how much to lend to these companies and at what rate to lend to these companies. Banks also use these ratings in order to calculate their capital requirements under Basel II. And then we have the simple credit assessment, which we provide to 50,000 small and medium enterprises in of India. 20,000 of these firms have a sales turnover of less than US1 million dollars Today, a small and medium enterprise in India can come and get a rating from CRISIL by paying as little as 175 President.
30 banks in India have announced interest rate rebates to SMEs linked to these and Chief. We believe that these ratings are playing a very important role in enabling better access to funding for small and medium enterprises. Let's now look at the 2nd piece of our business, which is the global offshoring business. In the Global Research and Analytics business, we have research centers in India, in Argentina, in Poland and in China. Firstly, we support them in their equity research.
Today, CRISIL supports equity research on 2,400 Stocks which represent 88% of global market cap. We also support the banks in their trading activities, for instance, sales of restructuring and also middle office support. By way of example, Crystal annually reviews 20% of the Ending Exotic Derivatives globally every year. Under the Coalition brand, Coalition is a firm which is based in the UK and which we acquired Recently, under this brand, we provide analytics to global investment banks on their competitors and on their clients. So for instance, we would Provide revenue analytics, we would provide risk weighted asset related analytics and we would provide analytics to the bank on the spends or the wallets of their clients.
The The Global Analytical Center, which you see referred For 2 in the box here, comprises 800 analysts who exclusively support Standard and Poor rating of Analyst and help them carry out their activities and analysis relating to ratings, research and data Our 3rd piece is the India Research Business. Here we provide research on 72 different of the field sector and we are also India's largest provider of valuations for fixed income securities. Our customers here Include the bank, the corporate, the mutual funds, insurance companies, foreign investors into India. Today, 90% of the banks in India of Energy for three main reasons. Firstly, we believe this is very important for us to have revenue streams other than ratings in order to ensure That business pressures did not get in the way of the independence and rigor of our analysis.
Secondly, diversification provided for our talent pool. Consequently, from a situation in 2,003, which you can see displayed at the bottom of this chart, President. We've moved to a situation where 60% of our revenues come from outside of India. However, on a secular basis, as the Indian Economy picks up from the relatively lower growth that we've seen in the last couple of years. We believe that this mix will be a more balanced fifty-fifty over a longer Within India, CRISIL is present in 180 locations.
Beyond the top 6 or of China. And we also have sales offices in the U. S, the United Kingdom and in Singapore. This chart shows you how our revenues have grown Between 2011 2013, they've grown at the CAGR of 16% and U. S.
Dollar denominated revenues in 20 13 were $189,000,000 Looking ahead, we believe that there are several structural features in the Indian economy that will be important drivers for CRISIL's Welcome. I'm Chip Merritt, Vice President. Firstly, the economy itself. Despite the fact that expectations of growth of the Indian economy Somewhat more muted compared to what they were a few years ago, there is no doubt about the fact that India will continue to be amongst the fastest growing economies in President. With average growth rates well above the overall averages.
Secondly, we believe that the infrastructure The funding requirements of the country create opportunities for us. Crystal has estimated that infrastructure fund requirements or investments in the Next 5 years alone will be about US400 $1,000,000,000 of this about US100 $1,000,000,000 will require to be funded by the debt capital markets. The bond markets themselves I would say are at a fairly nascent stage in India and that again creates Opportunities for us over the longer term. The total corporate bond market in India is barely US220 $1,000,000,000 or 14% of GDP, which offers opportunities for growth when you consider the fact that in recent times, regulatory changes have made issuance of bonds They have liberalized the investment norms for large investors like pension funds and insurance companies in the bond market And also greater foreign participation has been permitted in the bond markets. All this we believe augurs well for future growth of the bond of SME ratings is something we are very positive about.
I talked about the fact that we've rated 50,000 President. Consider the fact that there are 24,000,000 such small and medium enterprises in India and that gives you a sense of the And finally, we believe the middle class will be an important driver of growth for us. And that is because out of the 800,000,000 working age population, we are seeing an increasing mobility into the middle class with greater levels of President. And that we believe will increase the demand for financial services, asset management services and the like, which creates opportunities in And I'll turn for CRISIL to provide benchmarks, tools and analysis. So that is how we see the environment within India.
What about our business Outside India. For our business outside India, we believe that the structural changes that we are seeing in Global Investment Banking President. Investment banking revenues have actually declined from a level of about 3 $150,000,000,000 in 2,009 to $260,000,000,000 in 2013. Banks today are feeling greater pressure from Regulation, which is both restricting their activities and also asking them to do a lot more analysis. Banks are also Facing tremendous pressures on pricing as technology is reshaping their business.
All this means that these banks are looking for greater levels of And they are looking to ratchet up offshoring in traditional areas, be it research, be it COO functions or areas like collateral of Management. But they are also looking at targeting a certain proportion of offshoring in newer areas like front office, sales and structuring, quant and risk President and the like. And this again creates opportunities for us. So I've talked about the fact that we've Created a great platform. We see several opportunities for growth.
So what is our growth strategy all about? Chris' growth strategy has 2 Within India, grow the market and outside of India expand the range Customer base in small and medium enterprise ratings with simple credit assessment and grading products and then migrate these customers up the value chain. President. So as an SME grows, offer them bank loan ratings. As they grow even more and become even more sophisticated, offer them corporate bonds and commercial of Paper Ratings.
I talked about the fact that we work with all the top 14 global investment banks. We are seeing an increasing demand for And that forms an element of our growth strategy. The whole area of data analytics, we believe provides Tremendous opportunities for firms like Priscilla and we have created a separate vertical to tap into this opportunity. And finally, we have developed New offerings to meet banks' new needs arising from regulation, be it capital calculation, be it model documentation, model validation and be it stress testing. President.
As we pursue our growth strategy, we believe that three things will be important. Firstly, it will be critical for us to continue to maintain our strong focus on excellence and execution as we scale up the President. Secondly, it will be important for us to enhance the quality of our communication with all stakeholders, but Particularly with customers, as we explain to them how in every business line, CRISIL is different from our competitors President. And what the value proposition of Cristal's offerings is. And we will, of course, maintain our focused thought leadership, which not only creates differentiated position for us, but also forms the basis of our credibility, which is the bedrock on which the Cristal brand has been of Bilt.
Thank you very much. I would now like to invite Chip and Neeraj to take the Q and A.
Your ability to narrow the margin gap to Moody's. Thank you.
I wish I could say I'm surprised by that question. But the way I can't speak for my competitors, but what I can do is give you more color into what we do, how we do and what our numbers look like. So firstly, if you look at the period between 2,007 to 20 team. About a third of our expense growth was due to risk, legal, compliance. That expense growth slowing down.
So if you look at 12% to 13%, that expense growth was only 2%. Secondly, during the same period, we virtually doubled at Expense on CRISIL because of certain investments and we were investing in the high growth business. Thirdly, there are certain differences in market shares in different aspects of asset classes where there are different margins. And we continue to choose how we Lee, where we play based on how we see is the quality of our work, and we don't often want to compromise that just to gain of Market Share. Having said that, we also have a difference in the architecture.
I talked about in my globality slide the fact that we have analysts across of World. Now there's a trade off between that model and a centralized model. We choose that model and we choose that trade off because I think we get better Quality Insight. We have more expertise. And more importantly, I think we have a platform to grow into that domestic market as and when the time President.
And the opportunity comes up. And that architecture, we are not going to change. I don't fundamentally believe that we will we should look at Expenses in isolation. So if expenses create growth today or in the future, we'll fund those expenses. But I definitely will focus on productivity to make sure we tracked more dollars out of every expense we make.
That's our approach and that's the theory behind it.
Okay. Microphone ready anywhere. Yes, in the back, right
Loading category for ratings recently anyway. How do they rank in profitability compared to say the traditional bonds? And your name and firm Ed? Ed Aderino, Benchmark.
Thank you. Yes, bank loans did have an explosive growth and we continue to see the growth in is here, probably not as high as the 14% we saw. In terms of pricing, It depends, right? Because you can get the I would say it's about 50% of the pricing one would get from a traditional bonder note, but then one has to be careful whether one is comparing an investment grade versus a non investment grade versus this asset class. So there are
And we've got a table full of folks here in the front who can Raj can phone a friend here. So he's in the job 2 months. So feel free to phone a friend if you need to on anything. In the right corner there.
It's Doug Arthur from Evercore. Rupa, President. When you in terms of your international growth strategy, I mean, what competitively, what are you out You're offering to the global market that President. Your parent or others aren't. So I mean what is your competitive edge and how are you gaining share out there outside of India?
The first important thing to highlight in the work that we do outside India for global banks is that by and With the exception of coalition, it is non IP based, which means that all the work we do is actually the intellectual property of our clients. So in that manner, it's differentiated. It is we are taking on work, which otherwise the banks themselves would have to do. 5 years ago, if you had asked our clients, what is the main reason that you work with CRISIL, they would have said cost of the contract. Today, all our clients tell us that costs would not rank in the top three reasons why they work with us.
And the top three reasons they would work with Thanks for your work with us. I think over time, we have managed to move what was traditionally We'll forward more to a relationship based on expertise and value add. And that's the basis on which we compete with our competitors.
Okay. Thank you.
Hi. Marla Sims from Brown Brothers Harriman. Just Continuation on the productivity question from before. Your revenue per employee has gone up significantly. And if you think back over the last 1 of the biggest sort of complaints about S and P was that your analysts were overworked, that they weren't spending enough time I'm looking at each credit.
So as you grow, how do you manage the efficiency versus the need to make sure that your analysts
So a lot of our work and analytical work can be done, just actually same quality, if not better quality, at a much cheaper price point because we have the benefit Crystal, and we have a global analytical group there that does a lot of the work. So the first thing to keep in mind is that as we are sort of making sure our people don't have quality time. The second important aspect is what I referred earlier in my presentation about workflow, about technology, data mining technology, workflow technology, Our reports are published, our sensitivity analysis is done, and we are leveraging a lot of those tools. Some of them, I think, you I'll Lou talk about in general on the Cap IQ presentation. So similar analogy on our site.
So it's a combination of Technology and workflow and processes and combination of the benefits we have from CRISIL. Actually, Rupa can give you a little more color on the work she does for us and the group does for us and how we've gained from those workflow and that outsourcing.
Yes. I think very, very briefly, we have 800 Analysts which are based in Mumbai and Pune, supporting S and P analysts around the world. I think 2, 3 major benefits of the The association, 1, I think the association with GAC has helped meet of the United States. Secondly, I would highlight the importance of global consistency that having a centralized analytical center brings to global analysis. And in several of the new analysis that and new criteria that President.
And in several of the new analysis that new criteria that S and P has brought to market, a lot of the global consistency was ensured by having one Group in one location working with units across the globe. And the third, I think, is time to market. So whether it be with Rating changes or whether it be with new types of analysis, I think the association with GAC has resulted in benefits on that front as
Thank you, Rupert. Hey, who's got a microphone that's ready? On the back, ready?
Craig Huber at Huber for Research. Question for the U. S. Ratings business, if I could. You charge roughly 5.5 basis points for the run of the mill investment of Rating upfront.
I'm curious when you speak to our treasurers out there or CFOs, how much can you do you think you Save them in terms of annual interest rate savings on that bond versus if they get a rating from you versus if they don't get a rating from you and or Moody's. Thank you.
Yes. Jay, have we done research on the subject that shows that that we can share.
So J. Drew, following a friend.
Actually that is something that we've been focusing Quite a bit about how much the ratings actually save. We have Bruce Shaknee here also who's our Chief Marketing Officer For the Americas. Anecdotally, we hear it ranges anywhere from 25 to 50 basis points, but it depends on what kind of market conditions We're seeing so in a borrower's market, it would be probably on the lower side. And this is really anecdotal that we're hearing, but it's in The 25 to 50 basis points range.
Great.
Thank you. In the middle there, Bill?
On the issuance side, if you could give us some of your thoughts on to the U. S. And international of Issuance Pipeline. And then for Crystal, I wanted to ask if your 30% operating margins now, what you thought The limit to that was likely to be and where you thought you could get to in the next 3, 4 years.
So on the issuance side, obviously, we as everybody knows, we had a slow start to the year. And if you look at issuance year to date February, it was down about 16 and then it varies depending on whether you're looking at the U. S, which was down 19%, Europe, which was slightly down. And then within that, high yield was down much more and Investment Grade, I think 35% high yield, 9% investment grade. But the 1st 2 weeks of March.
We saw strong issuance. So and if we look at the underlying fundamentals of the economy, nothing seems to have changed drastically. The crisis we see on the horizon, the Ukraine, Crimea, the initial start volatility to the emerging markets, All that sort of the markets have taken in their stride. The risk on trade still seems to be on. So we just now don't feel any need to change the original assumptions we had of growth this year, but obviously slower than last year because as I talked about earlier, the refinancings that were brought in early in the second half of twenty thirteen.
We were conservative about the structured finance market growth, which we still sort of hold on to that growth. The public finance market has been slow. So I would say low to mid single digit growth on the issuance varying across asset classes and geographies.
On the question regarding margins of CRISIL, I think a 30% margin given the mix of our business And given the increasing proportion of bank loan ratings and SME ratings in our portfolio is an excellent place to be. As far as the The tight potential of this is concerned. I think the important thing to highlight here is that we've achieved these margins despite seeing no activity in the
bond markets now for 5, 6, 7 years
in a row. And It's now for 5, 6, 7 years in a row. And when you do see that bond market activity, practically everything that goes into the Top line has the potential to flow into the bottom line because we already have ratings on those 1200 companies. It's tough to give a number because it would And on the number on the activity level in the bond market, but I would say that as the bond market Sure. And as we see greater amounts of issuance, it will provide an upside to this number.
Very good. Thanks, Rupert. Peter, in the front row.
It's Peter Appert, Piper Jaffray. So, Neeraj, one of the differences between Moody's and S and P
is you guys are more relationship based
in terms of pricing. They're more relationship based in terms of pricing. They're more focused on transaction based pricing, which I think might be a fairly significant factor in terms of the differentials and profitability between the company. Wondering if you would rethink that pricing model number 1. And number 2 as the new guy coming in, are there other structural things that you're looking at that you think might be
Yes, Peter, that's a great question and thanks for pointing it out. I should have mentioned it earlier, but I think I did mention it on the volatility side when you looked at of Transaction and the Non transaction. So our relationship based pricing definitely does affect the margin, but it depends on which way the economy is going and which way is going. So it gives low elasticity, but it gives you low elasticity also on the downside. So it does cut down on the volatility.
So I think it has played out well for us, especially if you think there is choppiness ahead. So I'm not sure we necessarily need to rethink at. What we do need to do is can we leverage more of our research and more of the value we are creating and how do we sort of monetize that Research and Get More Value Out Into the Marketplace. For instance, in Asia, we are very big in the cross of Market. But we really if you look at the domestic issuance market, we are obviously good in India, but there's a lot of the markets in Asia as well as in Latin America, where we are not doing ratings in the domestic marketplace.
So how do we get into those marketplace at the right time? What's the right opportunity to in there. How do we actually leverage some more of our research and thought leadership and monetize it? How do we work more closely with Cap IQ and Get More Value, which may sort of from an economic point either lie on their side or our side, but it will be of you to MHFI. But the relationship pricing, I think, has held us in good stead, and we plan to stay with it.
Thanks, Niraj. So last question for the final short Q and A round. In the back.
Hi, Tim McHugh, William Blair. Just I guess people have touched around this, but just on your comment earlier about driving productivity in the ratings business, Having come in with a fresh set of eyes, is there something that you I mean, is there areas where you see that aren't as productive as you think? Or is I had a comment just about long term driving more productivity through the business. So I guess I just want to understand when you come in and you see that and you described that opportunity, Are you seeing overhead expense or lower productivity in areas? And I guess what exactly would you have you to kind of have
Yes, I would think of it less as a problem. I would think of it more as an opportunity. And that opportunity at Life. In my opinion, from what I've seen, we can leverage more technologies because over the last few years, a lot of our focus has gone on risk management and compliance and building that framework out. Now we can think of how do we leverage artificial intelligence, Welcome.
I'm Chip Merritt, Vice President, Data Mining, improve our workflow, how do we move we moved a lot of the work to India, can we move more. It's attributes like that definitely give us an opportunity for productivity gain. So it's not a problem we are trying to solve, it's an opportunity we are trying to exploit.
As you've heard on several conference calls. He's the person that many of you have asked to meet over the years and we refuse to allow you to meet
Good afternoon. I will be providing you with a brief update today regarding the lawsuits that have been brought against S and P since 2000 and of 7. We have been aggressively defending each and every one of these lawsuits and we will continue to do so. I think as you will see through my presentation, of Management. And it is our belief that they will continue to be manageable in the future.
I think it's helpful for you to think about our lawsuits if we divide them into 5 categories. The first category is a category Welcome. I'm Chip Merritt, Vice President that I call the underwriter category. Purchases of securities claimed that when S and P issued its ratings opinions, they were acting of Play in the Markets. Happily, courts have uniformly rejected these claims.
There are no current underwriter or seller of Securities Claims currently pending against S and P. The courts have quite easily concluded that S and P has no Financial interest in these transactions. They don't sell the securities. They are not underwriters under the federal securities of Laws. And this is a significant legal victory for S and P because these are strict liability laws under the federal securities of Laws.
So that category of lawsuits has been entirely eliminated. The second category are the stock drop President, who claimed that when McGraw Hill stock declined during the financial crisis, it declined not because of the of Financial Crisis, not because of the global recession, but rather because McGraw Hill made statements about S and P's financial President and S and P's independence and objectivity. Again, all of these stock drop lawsuits have been dismissed by the of Courts. And in a leading case in this area, the Reiss case, the courts have found that statements about independence and Activity are simply too indefinite, too vague to be actionable as a matter of law. Now let me make it clear, S and P was independent during this period of time.
S and P was objective during this period of time, but the courts have said that statements about independence and objectivity and about S and P statements regarding independence and objectivity. We will use these precedents in these pending and future President. The 3rd category of cases are cases involving state law claims. These are cases brought by purchasers of Securities who claimed that F and P either was negligent or fraudulent in assigning the ratings to the securities that these purchases bought during the relevant period. There is a threshold issue in many of these cases in the negligence area and that goes to the duty of S and P towards these purchasers of Securities.
Absent a contractual obligation or absent other special circumstances that are not present in any of our cases, it is our position I happen to have read about a rating or happen to have seen it on our website. Unless we have a contractual obligation to a specific purchaser lawsuits that have been brought against S and P outside the United States. Many of these lawsuits have risen out of the ratings by S and P of Lehman prior to the bankruptcy. And many of the claims in these lawsuits outside the United States are in effect that S and P should have predicted did the bankruptcy. Contrary to the fact that no one else predicted Lehman's bankruptcy, S and P should have predicted the bankruptcy and therefore we are being sued in many jurisdictions and outside the United States.
Now here we have a very powerful argument that has been very successful in a case in Italy that was decided at the end of 2013 in December. That argument goes to jurisdiction. And the simple argument is Lehman ratings were issued by S President and Key not in Europe, not in London, not in Italy, but in New York City. And the courts in Italy have agreed with our argument that given the fact that the ratings were out of New York City, the Italian courts do not have jurisdiction over claims by purchases of Lehman bonds in Italy. We will be using this very favorable President, not only in Italy, but across Europe to attack jurisdictional claims by purchases of Lehman Bonds.
And the final category of this lawsuits brought by the Department of Justice and the State Attorneys General. And let me turn to discuss those for you briefly. As many of you know in February of last year the Department of Justice brought a civil action of fraud against S and P for ratings that
Welcome. I'm Chip Merritt,
Vice President, particularly relating to its independence and objectivity. Our response at the time the lawsuit was brought and our response today is First, all of the ratings that were issued that have been challenged in the DOJ case were issued in good faith by ratings committees, which believe that the ratings that were issued at the time they were issued were entirely appropriate. I should remind you that ratings are issued by S that the DOJ will be able to establish that in over 150 CDOs that are at issue in the DOJ case, ratings committees across S and P uniformly engaged in fraudulent ratings and issued ratings that they did not believe were appropriate at the time they were issued. This is not a hindsight of Operations. You do not look at the ratings today and look back and say were they wrong or they were right.
These are opinions that you have to look at the time they were issued and the ratings were appropriate at the time they were issued. The second point that's a weakness of the DOJ case is that Ratings that S and P issued that are challenged in the DOJ case were virtually identical to every rating issued by the other major rating agencies. How will the DOJ be able to prove that S and P's ratings were fraudulent when the ratings of other major of rating agencies were virtually identical. And similarly, the statements made by the other rating agencies about independence and objectivity were identical for the statements made by S and P during this period. How will the DOJ prove that S and P statements were fraudulent when they were identical to the other rating agencies.
Now, the 3rd weakness in the defense the DOJ's case is that these opinions are Forward looking opinions about the economy. They were based in part about S and P's understanding of what the housing market was going to do going forward. What the economy in general was going to do going forward. These opinions were entirely President with the opinions issued at the same time and based on the same data by U. S.
Government officials and the Federal Reserve. And a good illustration Welcome. I'm Chip Merritt, Vice President of this is if you look at the minutes that were just issued by the Federal Reserve going back to 2,008 and in particular the minutes of the meetings that were Welcome. I'm Chip Merritt, Vice President of Health. After the Lehman bankruptcy in September of 2,008, here you have Federal Reserve officials looking at the economy, looking at the housing Market and still not knowing what direction the housing market was going to go, still not knowing the severity of the economic crisis that was about to happen to us.
And this was in September of 2,008 more than a year after S and P downgraded many of the ratings Presidents that are challenged in the DOJ case and more than 4 years after the initial ratings from 2,004 that are at issue in this case. How will the DOJ be able to say that it was fraudulent for S and P to fail to predict the housing market, the severity of the housing market will be able to sustain that level of proof. And finally, the alleged victims in this case are the very institutions that put together the securities that were rated by S and P. These are sophisticated financial institutions that knew exactly what was going into each one of the CDOs, which mortgages were in, which mortgages were not. How were these financial institutions Demise by S and P.
When S and P issued ratings, how is the DOJ going to prove that these victims lost anything as a result of these ratings when many of these CDOs We're warehoused by these institutions. We're never put into the market. S and P is not responsible for a decision by an institution to warehouse of CDO that it rated. So again, we do not believe the DOJ will be able to meet the stringent level of proof required in a fraud case against S&P. Now what is the status of this case?
It is in pretrial discovery, the early stages Welcome. I'm Chip Merritt, Vice President of Pretrial Discovery. We will be taking depositions of government officials to establish what the economists and the government were saying to the people who were talking about the economy in the U. S. Government.
We will be asking what the government knew about financial institutions during this period and whether they made misrepresentations to S and P in connection with the ratings process. We will also be asking what did the government know about what other rating agencies were saying Welcome. I'm Chip Merritt, Vice President of the Government have not been produced by the government. And so we have been compelled to file a motion to compel the production of these three categories. They relate to financial institutions that the Welcome.
I'm Chip Merritt, Vice Presidential Institutions
that the government has
been investigating. They relate to rating agencies that the government has been investigating. And finally, and the one you've We've been reading about it relates to one of our 19 affirmative defenses, the retaliation defense. What is the retaliation It is unconstitutional as a matter of First Amendment law for the government to punish a speaker about government, which it disagrees with, which was critical of the of the government. S and P unlike any of the other rating agencies was the only rating agency to downgrade the U.
S. In 20 And it's an objectivity. We're identical to what S and P. If you look back at the congressional investigations that predated the down of Trade. You will find that the other rating agencies were under the same investigatory scrutiny as S and P.
The other rating agencies have been sued by state attorney The only reason we contend why S and P was picked and not the other rating agencies is because S and P downgraded the U. S. There was a hearing held last week on March 11 and a decision is pending by the judge in that case. And we are hopeful we will get documents to support our defense. In federal courts, President.
And the District of Columbia that have filed lawsuits against S and P. 17 of those cases have been consolidated in federal court here in New Citi before Judge Herman. The state claims generally say that S and P engaged in misrepresentation in violation of consumer Protection Laws, where they made statements about independence and objectivity. These cases are now subject of State Court. That motion has been fully briefed and argued as of October of last year and we are awaiting a decision.
A decision is pending. If S and P prevails and the state motion to remand is denied, all pretrial activities in the case will take place here in New York Citi before Judge Furman in federal court. And then we'll go back to the federal court in each state where the case is pending. If the remand motion President is granted, then all of the cases will go back to state court and the case will be handled in state court. Regardless of what happens on the remand motion.
We will immediately move to dismiss all of the state AG cases and we have very strong of Business in New York. Unless that out of state corporation is at home in the state that's suing and at home means place of incorporation, Welcome. I'm Chip Merritt, Vice President, place of principal place of business. The courts of that state do not have jurisdiction. This is a matter of due process under the U.
S. Constitution, deeply rooted in the Constitution. Because of the importance of this threshold issue, we have asked Judge Furman and he has agreed that if he keeps the case and does not remand the cases back to state court, he will take on an expedited basis, briefing on the Smiths on that basis as soon as we have the opportunity following Judge Furman's decision on the remand motion. Let me finally turn to our track record. We've had an excellent track record since 2007.
As you'll see from the cases. 13 were appealed to higher courts. All 13 were affirmed. All the dismissals were because of the success we've had in the dismissed cases. But it's not only the numbers that are impressive or important.
It's the precedents that We have received very important precedents from the courts dismissing the S and P cases, which we will use in the pending cases and in any future cases brought against us. For example, the courts are very clear. The plaintiffs have desperately tried to say that a rating is a fact and we got the opinions about creditworthiness. There is no such thing as a false opinion. The only way you can succeed in an action against of S and P and challenging the rating is to prove that at the time the rating was issued, the rating committee S and P did not believe the rating was appropriate at that time.
We do not believe that At that time, we do not believe that either in the pending cases or any future cases that will be brought that they will be able to prove that the ratings committees of S and P knowingly issued inaccurate false ratings. There's simply no evidence that we have seen to demonstrate that if that ever happened during the relevant period. So in closing, I should also point on the left you see the record of Welcome. I'm Chip Merritt, Vice President of 2,009. The only slight uptick you'll see is in 2013.
We think that is likely caused by the expiration of applicable statutes of limitations. That was a 6 President. We think we will continue to see a steady decline if not elimination of cases being filed against S and P arising out of the of Financial Crisis. So in closing, let me reiterate, we will continue to aggressively defend these cases. We have made significant of progress and we continue to believe that these legal risks are clearly manageable.
I will be happy to take questions at the end of President. Presentations during the final Q and A period both on these cases and any of our other outstanding cases that I haven't touched upon. And with that, let me turn the podium over to our last presenter, Jack Callahan, the Chief Financial Officer.
A great deal of material this afternoon. I hope for all of you that you found President. This deep dive into McGraw Hill Financial very, very helpful. And I hope you better appreciate just What a great terrific group of leaders that we have across the company. What I want to do to close out all of our prepared remarks Before moving to the final question and answer session, I want to recap some of the high points of creating growth and and Driving Performance.
First, I wanted well, I will discuss in some detail the financial growth goals that we We have set out. I do want to discuss and outline our approach to the allocation of capital. And I want to To view with you the initiatives underway to deliver on the at least $100,000,000 growth target that we have This was a difficult decision to consider strategic of Alternatives for Construction. The business has a great position in the industry with leading brands like Dodge President of the company's business. We're very pleased with the progress we made in the quarter.
We're very pleased with the progress we made in the quarter. We're very pleased with
the progress we
made in the quarter. We're very pleased with the progress we
made in the quarter. We're very pleased with the progress we made in the quarter.
We're very pleased with the progress we made in
the quarter. We're very pleased with the progress we made
in the quarter. We're very pleased
with the progress we made in
the by our construction team over the last few years. And also with the construction industry beginning to pick up, this business is well There is and we looked at it. There is clearly an opportunity for greater consolidation in this President. We considered investing additional capital to participate in this consolidation opportunity. But in the end, the management team and the Board of Directors chose another path.
Therefore, we are looking actively looking for strategic alternatives such as partners or to exit the business President. Completely work is already well underway and we will update you on our progress as we go through the year. Now let me turn to discuss Our growth goals in some detail. Now over the last three years we have added over $900,000,000 in revenue growing 11%
President. I feel
more confident of our go forward prospects
now that you've had the opportunity to hear from each one of the business leaders. Please note for 2014 we are guiding President. To a mid single digit growth rate in part due to selected divestitures such as Aviation Week last year and small product line President. Shutdowns at S and P Capital IQ which have impacted our year on year growth rate by about 1 point. At the same time, we are focused on continuing to expand overall margins.
Consolidated operating margins improved 5 points over the last three President. To 33% in 2013 and we are guiding to at least another one point improvement this year. Going forward, we have President. As a goal to sustain margin expansion driven in part by continued top line growth across the businesses and ongoing productivity initiatives. To aid overall margin improvement, we intend to continue the momentum in driving productivity.
After delivering $75,000,000 in productivity across both McGraw Hill Financial and Education as part of the growth and value plan, we are targeting at least Our $100,000,000 cost out opportunity over the next 3 years. While our first priority is always going to be invest to drive top line growth. We do have specific initiatives already in place to contribute on this productivity goal As evidenced by the restructuring actions that we took in the Q4 to streamline our management operating structure and to reduce our real estate footprint most notably in New York City where we're moving from 3 locations to 2. There are also initiatives underway in procurement, of Technology, Data Acquisitions and Share Costs to ensure we have enough ideas initiatives in place to deliver on this $100,000,000 our cost out target. To give you greater insight this is just one example, one area that We're looking at very deeply.
Let me give you a little peek into one part of our cost structure that you frequently Skibow. Unallocated costs. In 2013, unallocated costs were just about were just over $200,000,000 The primary driver of the increase over the last few years was the impact of stranded costs Presidents created by multiple divestitures most notably McGraw Hill Education. To be clear, only about half of these unallocated costs are related to the corporate center. Over a third of the unallocated costs are shared costs that historically have not been allocated back to the individual Stranded costs reduce our real estate footprint, streamline our corporate costs.
Reducing these unallocated costs will contribute in Some small part on this $100,000,000 cost out target, maybe not so small, but it will contribute. So we bring that President. All in all, these productivity initiatives combined with continued top line revenue growth should generate sustained of margin expansion and growth in operating profits. Below operating profit, we are working on more effective tax planning and we do anticipate continuing share However, volatility in debt issuance or equity markets could impact performance in a given year, but on a 3 year view We believe this goal is achievable. Consistent with this promising outlook in earnings growth, we also anticipate Strong cash flow.
Now that the largely one time costs of the growth in value plan are behind us, we are guiding to a step up in free cash Cash flow in the range of $1,000,000,000 for 2014 and we anticipate that free cash flow should exceed $1,000,000,000 for 2015 President. Furthermore, given that our reinvestment requirements are limited, capital expenditures for example last year were For just $117,000,000 we have significant financial flexibility. That flexibility is clearly enhanced by the strength of the balance sheet. We have approximately $1,600,000,000 in cash President. I'm Chip Merritt, Vice President.
In addition, we want to be sure that we have the dry powder to consider attractive acquisitions as they come here just to outline how we think about how we want to allocate capital. The first priority will be to fund organic growth President. Ratings, Index, Platts in a largely organic manner. The second priority will be value creating acquisitions. Welcome.
I'm Chip
Merritt, Vice President. Over the
last three years, we have a good track record in adding tuck in acquisitions to add breadth and capability to the portfolio. From time to time, we may take a look at larger Acquisitions in a highly disciplined manner. We will only move forward if we have clear synergy and implementation plans in place to create shareholder value. The next priority is continuing to grow the dividend year on year. This company has paid a dividend since 1937 and has increased of the last 41 years.
We are one of fewer than 25 companies in the S and P 500 today who can claim a similar Track record. You can assume that we're going to maintain that record going forward. With regards to let me back up There you go. With regards to increased leverage, we are open to having additional debt if there is of Financing Requirement. Over the long term, we do believe it is important to remain investment grade.
But as I just mentioned, we do believe it is important to have some President. Finally, we will continue to repurchase shares to both cover any dilution from equity related of CADE Capital. Let's review acquisition activity. These are the 9 acquisitions in the one joint venture that we have completed over the last 3 years. The most significant This action was the formation of the exciting joint venture with CME to combine S and P and Dow Jones Indices where we now
Welcome. I'm Chip Merritt, Vice
President, CMA for pricing, Quantaus for high speed exchange level information. For Platts, we had a capability with Bentec and North American Natural Gas, Steel Business Briefing for Iron Ore and Steel and Kingsman as our initial foray into Welcome.
I'm Chip Merritt, Vice President of Culture with a
focus on sugar and ethanol. And in ratings we increased our ownership of President. In total over the last 3 years we have spent $650,000,000 approximately in acquisitions. These were all great additions to our of Portfolio and we look to leverage our current financial strength to add to our portfolio going forward. President.
During the same time period, we have returned significant cash to shareholders both in terms of dividends and share repurchases close to 4.4 of $1,000,000,000 over the last 3 years. Going forward as I stated just a moment ago we are committed to President. And our Board of Directors approved another 50,000,000 share authorization just of September last December, which should sustain the program for the next few years subject to market conditions. So let me sum up. You have now heard directly this afternoon from Doug, Ken and all the business leaders.
We are all focused President. And we believe McGraw Hill Financial is well positioned to deliver on our longer term financial goals President and CEO of Growth and $1,000,000,000 plus of free cash flow. I hope that you agree that these goals for McGraw Health Financial represent exceptional performance. Personally, I'd like to thank you all for coming today. This is an important day for all of us.
President. And now that we are going to move to the final Q and A session, I would invite all of the presenters back to the podium.
Thank you for spending the afternoon with us. We hope that you were able to get a good broad view of our great senior management team as well as understanding the types of businesses that we have. Many of you have been familiar in the past from the work that you did in the company of S and P ratings and you've also been familiar with Cap IQ maybe because you know President. The business or you actually are a client. But not many of you knew a lot before about J.
D. Power or about indices, about Platts, and especially, Crystal. So it's great to have Rupa here with us today as well. As we talked through the day, there's many factors which are positioning our in our company and driving it for growth. We have a strong track record of delivery.
Our last growth and and delivered value and positioned us for growth. We are seeing trends in the markets, in the capital markets, with the markets and they have high value. We have global growth. We have a globally well positioned company that will grow. And as you saw here today.
And as you know, we have incredibly talented people. So with that, let me open it up for questions, our last Shin, before we head over to have demonstrations of some more talented people and some of our great products. So questions
I think you mentioned optimizing the balance sheet a couple of times and I obviously hear you on the conservatism and the legal overhang. So but if we exit this in the next couple I mean, what are the metrics you will be looking at in terms of leverage ratios, gross net basis, and obviously, With the business mix and also obviously if you could use that for share repurchases actively.
Yes. I think the only Constraint we have on where we can go with the balance sheet is we do want to retain strong investment grade quality in our President. But even if let's say over a period of time, the legal overhang went away, even if that With ZARN 10, we're happy about what's the right path to kind of get a little bit more leverage into the over the P and L over a period of time. It's It's not something we could address, I don't think overnight. But clearly we have a fortress balance sheet right now.
We think it's prudent to keep for right now for both the legal issues and to let the businesses grow if there's an idea that comes along. So but I look forward to A day when we can use the balance sheet a little bit more proactively than we are today.
Let's go back there.
Hey, this is Andrew Rosenfeld from Meritage. I had a legal question for Ken. In the negligent misrepresentation cases, what are the legal merits In your opinion of the argument that S and P did have a duty of care if the group that could purchase the rate of securities at issue was limited By something like a QIV rule.
We have taken the position in cases that have raised just that point that we do not have a legal duty that that's It's too big a group. The whole point of the duty doctrine is to avoid unlimited liability. We say we don't give investment advice. That's Clear on our website and all of our publications. So no one should be of the opinion that S and P is giving investment advice to anybody.
But even in a group like that, The courts generally find that that's too large a group that that's not a 1, 2, 3, 4, 5, that's hundreds of people that could for that kind of investment. So our position is we have no legal duty in that context.
Let's go back here to the
Sure. It's Hamzah Mazari, Credit Suisse. Jack, just a clarification. Would you lever up for the right acquisition Even if their DOJ case is not settled, that's just part one of the question.
It's hypothetical Question, but I mean it comes back to if we thought the transaction created shareholder value I still think we have adequate flexibility to There are acquisitions of a certain size. I don't want to comment on what size, but I do think we have a fair amount of flexibility and still leave I think of enough dry powder for other issues.
Fair enough. And just last question. On the productivity initiatives of 100 How much should we be reading into at least $100,000,000 A lot of it is coming from real estate. It seems that number is pretty conservative. And what does the ramp
I'd like to I think some of the real estate benefits as you noted was Probably will be pretty significant. That may be a little back end loaded. But across some of the others it would be I would say once we Have hit sort of the middle part of this year. I would say it would be sort of even over the next two and a half years. It would be the way I think we could sort of think about it.
Let's go back to the all over here.
Yes. Doug Arthur, Evercore. Ken, I was under the impression that the March 11th hearing was going to provide and maybe it will when there's a ruling some clarity on the government's attempt to increase the That might be an issue. And your comeback that discovery time, if The case was expanded, would be elongated. So where are we in that or if we're anywhere?
And is it still
I have more than 150 CDOs that they say they will be using at the trial, if there is a trial, Position that in order to have a manageable trial in a manageable amount of time and in order to have a manageable discovery period, We need to take a selective number of those 150 plus CDOs and use those for purposes of the trial As a first phase, so we've suggested to the judge and we will be filing a motion to the effect that judge we ask you to make a President. A subset of the 150 CDOs so that we don't have a 6 plus month trial and that we don't have years of discovery because each CDO requires knowing what that Rating committee said and what the issuer said, the arranger, what mortgages went into each CDO. They're claiming that each CDO was a fraudulent rating. So we're going President. Each one of them.
So we're going to go to the judge and we're going to ask the judge and we've already told the judge that we would like to reduce the number of CDOs in the first trial. Now in terms of the trial date, the judge has suggested subject to what I just said that he would like to schedule a trial sometime starting around September 2015. And he's asked the parties to submit this week a proposed discovery schedule leading up to of the trial in September 2015. And we will do that subject to expressly reserving our right to ask President. To reduce the number of CDOs so that we can have discovery in a time that would allow for a trial in 2015 in September.
If we have 150 plus CDOs, we don't see how we can finish discovery in time for that trial date. So there is no trial date yet, but the judge has signaled he would like to start
How much is the DOJ case holding you back in terms of how much you're budgeting to buy back software over the next couple of years? And then also more near term for 20 And your EPS guidance for the year, how much are you baking in there for share buyback in terms of number of shares, please? Thank you.
Well, Craig, the
first part of your question, I don't think it's held us President. So I think if you look at the last 3 years we've been fairly aggressive. We're a little reluctant to be overly specific In terms of what's exactly baked into our guidance, but our guidance does include continued share repurchase activity. We I have repurchased shares in this quarter and we would continue to, depending on market conditions, President. And continue to see that opportunity as we go through the year.
Right back there.
Thank you. Andre Benjamin of Goldman Sachs again. To come back to the cost savings point, glad we touched on the timing, but we did stop a little bit short The margin goal, I wanted to know if there was any margin goal attached to that cost savings and how we should think about potentially Even though it's cut on a headline basis, you may then take some of those savings and reinvest it in other parts of the business, so it doesn't of the Bottomline.
Andrea, we're reluctant to be overly specific about a margin goal at absolute number much beyond 2020 President. Beyond this year, as a reminder, we've had said for 2014, we do believe that we will improve our margins by at least President. And moving beyond that we do look to continue to sustain margin improvement in 2015 and But I think it'd be a little bit too early to be overly prescriptive. Obviously there needs to be also If we're doing a little better on revenue there may be an opportunity to reinvest back in the business. So but we are focused on sustaining
I'm Manav Patnaik with Barclays. I have Two questions. One is for Platts and the other is on J. D. Power.
On Platts, I understand sizing the market is tough, but just to get us a little more In terms of the double digit long term growth rates, how should we think about the mix between volume and pricing, maybe if that's a A better way to try and ask the question. And then just on J. D. Power, in the context of active management and trying to lever every other Sort of division you have in McGraw Hill. How much do you currently benefit from being part of McGraw Hill?
And or how much can you do Better like how much more can you use of them to benefit your business or even vice versa?
So I'll take the Platts one first. Unfortunately, it is a bit difficult to deconstruct that fully. What I can offer is that if you look at unit price increases for a given unit of product. Those are relatively modest in the low single digits, oftentimes around 2% to 3%. But it's the combination of aggregate usage and volume within existing customers.
So as I mentioned earlier, just expanded usage of our services, whether they be existing benchmarks or some of the new benchmarks. We've done, for example, a big move over the last 2 years toward an President licensing structure where that affords clients much broader usage of the services within their enterprise. We're able to elevate license levels to reflect President. But it makes it difficult to fully deconstruct, I think, the answer to your question. But for us, it brings a lot of value to the customer.
It brings of Lyft in the business and we like those kind of strategies and customers like them as well.
So with respect to the benefits of belonging to of McGraw Hill Financial. First, there's obviously scaled support that such as of Key that is important to us because we are moving in the market research world to a digitized world. And they've been supportive in helping us make that transition. So that's important. The second is the support and we think we're a much stronger company for that.
Let's go right up here.
It's Peter Appert at Piper Jaffray. So apologies to Chip starting out because I have a 3 part question. Number 1, Doug, I'm wondering what are the financial metrics that you're most focused on in terms of evaluating the company's performance, What you think we should be looking at? Number 2, and maybe related to this, what drives the management compensation President. And then thirdly, where Doug do you think the biggest opportunity is for margin improvement within this portfolio?
Thanks.
Great. Our financial metrics are those which we presented to you today. We're looking at growing our top line growth and having what's the mix of Domestic versus International. We're looking at our margin expansion, which is another measure that we're looking at and we're at EPS. So a very simple measure that we're looking at today.
Those are built into all of the compensation of everyone on this of the table and everybody that's up here also has, with the exception of me and Jack and Welcome. I'm Chip Merritt, Vice President. Our performance goals are based off of total McGraw Hill Financial goals. Everybody else on this table has a combination President of their business goals along with McGraw Hill Financial goals. So by having combined goals, we have an alignment of our senior management team.
And across our senior Management team. As you go deeper into the organization, it's more likely that your compensation goals are driven only by your business unit. But at this most senior President. There's a lot of margin leverage. There is margin leverage from the point of view of what we looked at at real estate.
There's margin leverage from expanded Costs from you call them stranded costs. There's margin leverage from doing things at EDTR. Generally speaking, we believe that just by being more actively managed company, which means that we're all going to be at 55 Water, Welcome. I'm Chip Merritt, Vice President. Most of us will be together in the same building.
That will create a sense of team. It will create a lot more knowledge, day to day contact interaction amongst the management
The
question he asked was are there any business to take a look at their margins, but be at the same time that we're asking the businesses to take a look, it's absolutely critical that the Corporate Center Also take a look and a very hard deep look at our expenses. Let's go Jack you want to add something?
Just to remind everybody
that Margin expansion, we're going to work on cost very diligently. I think you heard that from me. You certainly heard that from Niraj. But it also has a lot to do with revenue growth and mix. And each one of these operators is very diligent about as they they're all running businesses that have top Growth potential, but they're very diligent about how they plan their expenses.
So there's operating leverage that they're looking to build into their P and Ls. And then we're looking to drive Some of these cross business initiatives to get give us further oomph going forward.
Preside Lead Counsel has always really impressed me and given me a lot of comfort on the legal side. And I think he's maybe 77 Do you have any ideas if he plans to keep on representing McGraw Hill Financial? Thank you.
You're referring Floyd Abrams and he has no plans of stopping. He will continue to represent us and we have excellent co counsel on the DOJ case with Floyd John Kecker in California. So between the two, we're very well represented.
Zack Over from Gates Capital. Jack, a question on the guidance for revenue for the next 3 years. You've mentioned mid High single digits. I was wondering what percent of that you saw from organic versus acquisitions? And on organic, what percent of that's coming from price?
Well, in terms of mid high single digit, the view is be all organic. I think if we do acquisitions that would I mean on top of that, just as I look back on history, the last 3 years, we've grown 11% overall and 9% Organically. So the guidance is really more based on what we think we can do pretty much with the portfolio that we have The price realization varies. I think you've heard that from Larry. We talk about pricing a lot in ratings.
I really don't have a great company wide number to share with you quite honestly because it varies. And if you look at our index business there's not a lot of pricing Leverage built into that. It's all based on growth in the marketplace. So I'd be hesitant to speculate. I would guess it's probably in the for 2% to 3% range.
Let's go to the back.
Yes. Tim McHugh, William Blair. Just the commentary around McGraw Hill Construction, I think It was phrased as you've completed your review of businesses, I guess. Just to clarify, does that mean at this point we're not looking or you're Kind of most likely done divesting anything or is there still the potential that you're reviewing things either smaller businesses or of Goran's over the next year.
We want to grow. We want to grow. I think we have really solidified of Portfolio. I think we had I hope as you heard today we have an outstanding lineup of businesses and we would like to want to we want to really get our focus on and building off this space.
And let me complement that by going back to where we started that we've got this core group of businesses here and everything you want. So Jack has an excellent capital allocation model. We work together to ensure that we're I'm Chip Merritt, Vice President. I'm Chip Merritt, Vice President. I'm watching very carefully what are the best opportunities because even though we are very well capitalized and have a strong balance That doesn't mean that we treat capital as if it's free.
We make sure that we are allocating it in a way that we're going to get Excellent returns from it. We have time for one more question. Do we have any more questions?