and welcome to McGraw Hill Financial's Conference Call. I'd like to inform you that this call is being recorded for broadcast. We will open the conference to question and answers after the presentation and instructions will follow at that time. To access the webcast and slides, go to www.mhfi.com. Listen that's nhfi for mcgrawhillfinancialinc.com and click on the link for the 4th quarter earnings webcast.
Listen. If you are listening by telephone, please note that there is an option available to synchronize the presenter slides After you log in to the guest book, you will see 2 windows side by side in the webcast viewer. Listen. Along the bottom of the left hand window, click the gear icon and select Live Phone from the list. A line will appear over the sound icon indicating that I would now like to introduce Mr.
Chip Merritt, Vice President of Investor Relations for McGraw Hill Financial. Sir, you may
listen. Good morning.
Thank you for joining us for McGraw Hill Financial's 4th quarter 2013 earnings call. Presenting This morning's call are Doug Peterson, President and CEO and Jack Callahan, Chief Financial Officer. Also joining us is Ken Bitter, listen. This morning, we issued a news release with our results. I trust you've all had a chance to review the release.
Listen If you need a copy of the release and financial schedules, they can be downloaded at www.mhfi a listen to the call. In today's earnings release and during the conference call, we provided adjusted listen. This information is provided to enable investors to make meaningful comparisons of the corporation's listen to the operating performance between periods and to view the corporation's business from the same perspective as management's. The earnings release contains exhibits that reconcile the difference between the non GAAP listen to the comparable financial measures calculated in accordance with U. S.
GAAP. Before we begin, I need to provide certain cautionary remarks about forward looking statements. Except for historical information, the matters discussed in the teleconference may contain forward looking Statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, listen only mode. A listen and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated
listen in these forward looking statements.
In this regard, we direct listeners to the cautionary statements contained in our Form 10 ks, 10 Qs listen and other periodic reports filed with the U. S. Securities and Exchange Commission. I would also like to call your attention to a recent European regulation. Any investor who has or expects to obtain ownership of 5% or more of McGraw Hill Financial should give me a call to better understand the impact of this legislation We're aware that we do have some media representatives with us on the call.
Listen. However, this call is intended for investors and we would ask that questions from the media be directed to Jason Feuchtwanger in our New York office at to 12.5123151 subsequent to this call. At this time, I'd like to turn the call over to Doug Peterson.
Doug? Thanks, Chip, and good morning, everyone. I'd like to begin this call this listen. This morning by summarizing the highlights of what was a truly momentous year for the company. We completed the sale of McGraw Hill Education listen in March, probably the most significant change to the portfolio that we could have made.
In addition, we sold Aviation Week in August listen as we continue to prune the portfolio of publishing assets. We launched McGraw Hill Financial with a new name and a new ticker symbol to signify the extraordinary changes listen. We increased our investment in Cristal to roughly 68%. Cristal has proven to be a listen for the year, highlighting what tremendous portfolio of assets this company possesses. Standard Poor's rating services, listen to
the S and P Dow Jones Indices
and S and P Capital IQ all delivered very strong revenue growth. Listen. The company continued its strong commitment to returning cash to shareholders with 1,300,000,000 After exhausting the previous share repurchase authorization, the company announced a new $50,000,000 share repurchase authorization. As you know, Terry McGraw retired as President and CEO after having led this company and served its shareholders so commendably for the past 15 years. Terry, what a tremendous achievement.
As you can see from this slide, earlier this year, we completed the growth and value plan that listen It was announced in 2011. We believe this plan proved to be a considerable success. After shedding over $2,000,000,000 of revenue Predominantly from the sale of McGraw Hill Education, we are a vastly more profitable company with considerably higher adjusted operating margins and lower little expenditure need. More importantly, we unlocked value for our shareholders who've enjoyed a total shareholder return listen of 140% over the last 2 years. Now let's turn to our financial performance during the quarter and for listen for full year 2013.
Revenue increased 10% for the year. Adjusted operating profit increased 16% resulting in a 180 basis point improvement in margin and adjusted diluted EPS increased 21%. 4th quarter revenue tied second quarter revenue as the highest of the year. However, revenue only increased 2% versus the strong Q4 of 2012. Impacting the profitability of the quarter was a $26,000,000 non cash impairment charge listen in S and P Dow Jones Indices and a full year adjusted tax rate that was lower than anticipated.
Jack will elaborate on these and all of our financials With that, let me turn to the individual business segments and I'll start with Standard and Poor's rating The Q4 in 2013, while down versus the very strong Q4 of 2012 was the 2nd listen. The operating profit decline in the 4th quarter was due to both lower revenue as well as listen to 4% increase in costs. For the entire year, revenue increased 12%, adjusted operating profit increased 15% and the adjusted operating margin listen. And For the full year was driven by increased entity credit rating activity, particularly in Europe. In fact, during the Q4, We added more than 60 new clients in EMEA.
In addition, 4th quarter non transaction revenue increased due to strength in CRYSTAL's Coalition and a revenue analytical businesses. While 4th quarter transaction revenue increased sequentially, it decreased from the Q4 of a listen to the Q4 of fiscal 2020. A listen. Revenue benefited from both healthy issuance and a 42% increase in bank loan ratings. Listen to the full year of total revenue.
This is the highest international percentage since the Q4 of 2,008 and is an encouraging sign as the European economy High yield European corporates drove the outsized international growth for both the 4th quarter and 2013. During the quarter, U. S. Corporate and public issuance were down 18% 19% respectively, listen. Driven by the government shutdown, interest rate volatility and economic uncertainty.
Recall that issuance in the Q4 of 2012 was particularly strong with a rush to market due to the looming fiscal cliff listen and upcoming presidential elections. Conversely, in the Q4 of 2013, October issuance was significantly impacted by the government shutdown and the debt ceiling crisis. Structured issuance in the U. S. Was flat with strength in commercial mortgage backed listen to the call.
Which increased 35%, offset by weakness in residential mortgage backed securities, which decreased 43% listen and CDOs predominantly collateral loan obligations, which decreased 15%. During the listen. The European corporate issuance was flat with weak investment grade issuance offset by very strong high yield, which increased by 71%. Improved economic conditions drove a structured issuance increase of 25% due primarily to strength in asset backed securities and covered bonds. Listen.
European High Yield Editions was benefiting from an improved European Economic Environment. Investors' appetite listen for yield and an increase in the number of companies turning to capital markets for the first time. As for 2014, Standard and Poor's rating Now let me update you on our litigation matters. 3 additional cases were dismissed in the quarter, Past reported earnings. There are now 11 cases that have been voluntarily withdrawn and 13 dismissals by lower courts that have been affirmed by higher courts.
Listen That leaves us with a few non dozen government cases that remain outstanding. In the Department of Justice case, we are in discovery and The next hearing is scheduled for March 11. In the consolidated state's cases, we are waiting a ruling on the state's motion to remand the cases One new constant proportion debt obligation case has been filed in the Netherlands and listen. The presentation has been received of a potential claim from an Italian prosecutor at the Corte de Conti since the company's 3rd quarter earnings call. Listen.
In Italian matter, the prosecutors' potential claim of €234,000,000,000 would allege in essence that by downgrading Italy's listen. S and P, quote, interfered in the institutional independence of Italy as a sovereign state, which caused serious damage to its economic a listen. If any such claim were to be made in the future, We believe it would be frivolous and without merit. S and P Dow Jones Indices delivered the largest revenue growth of any segment during listen quarter delivering 18% growth. This growth was primarily driven by increased licensing fees from ETF listen to AUMs and from exchanges based on increased derivative trading volume.
During the quarter, adjusted operating profit decreased due to $26,000,000 non cash impairment charge associated with an intangible
listen only
mode of credit card debt acquired through the formation of our S and P Dow Jones Indices Joint Venture. Notwithstanding this non cash listen charge. Costs in the quarter were up primarily due to increased royalty payments, marketing and incentives. Listen. By the way, S and P Dow Jones Indices recently marketing campaign was focused on increasing brand awareness, which in turn supports our customers.
Listen Over 10,000 viewers watched over 2,750 hours of our advertising campaign videos. For the full year, organic revenue increased 12% and adjusted operating profit increased 19% despite the non cash charge. Listen. In each quarter of 2013, we established a new record of AUMs in exchange traded funds linked to S and P Dow Jones Indices. Listen.
Year end AUMs increased 43% to $686,000,000,000 from the end of 2012. Listen. Importantly, roughly 1 third of the AUM increase was the result of new inflows into these passively managed ETFs. Listen. We continue to listen to the marketplace and create innovative new indices.
During the quarter, 14 new ETFs listen Based upon our indices were launched providing opportunities for future growth from these new products. 4th quarter licensing revenue from derivative trading increased. This was primarily due to SPX a listen to the PX and VIX trading volumes, which increased 11% 19% respectively. At At the end of the quarter, the company made the final payment to acquire the intellectual property for the S and P GSCI, a listen. The S and P GSCI is the 1st major investable commodity With that, let me now move on to S and P Capital IQ.
In the Q4, this business delivered quarterly revenue with topline growth of 4%. Excluding the lost revenue from ongoing portfolio rationalization of several small products, organic growth was a listenably 5%. Adjusted operating profit increased for the 2nd straight quarter, although the margin was down slightly. Listen For the full year, revenue increased 4% as we continue to build new products and new data sets, however, operating profit decreased for the year. Listen.
It's worth noting that for both the quarter and full year 2013, Desktop Solutions, Enterprise Solutions and Ratings IP all delivered mid single digit revenue growth, while proprietary research revenue declined mid single digits. Listen. During the quarter, we sold the 1st portfolio risk solution with a 5 year contract. This product offers next listen to the next generation risk and scenario analytics to traders, portfolio managers and risk managers for pricing, hedging and capital management of listen to multi asset class portfolios. This is one of several new desktop analytics and capabilities scheduled for launch listen throughout 2014.
While there
are many areas of S and P Capital IQ where we have been investing, there are other areas we have shut listen or divested. This quarter we continue to fine tune the portfolio by shutting down Funds Management Research Europe. This was an independent qualitative search service that provided assessments of fund manager investment processes. As a result, we expect that both revenue and adjusted operating profit will increase in listen to the call
for 2019.
Robust equity markets, new product launches and increased customer compliance requirements Also point to improvement in 2014. With that, now let me turn to the Commodities and Commercial Markets segments. Revenues grew 2 a listen to 2% in the quarter. Excluding the impact of the sale of Aviation Week, organic revenue increased 7%. Platts delivered Full digit revenue growth and J.
D. Power delivered high single digit growth. This was partially offset by softness in McGraw Hill Construction. Listen. For the full year, revenue grew 4% with organic revenue increasing 7%.
Adjusted operating profit listen to 41%, resulting in record quarterly adjusted operating profit of $84,000,000 listen In commodities, Platts achieved a 10% increase in revenue for the quarter and a 13% increase for the year. Listen. Platts revenue has doubled in the last 5 years with 2013 revenue setting a new annual record. Listen. During the quarter, subscriptions from metals and agriculture and petrochemical products grew faster than petroleum, driving double digit growth.
Listen. In addition, licensing from revenue from petroleum derivative trading increased more than 30% as volatile oil listen. In commercial markets, revenue decreased 6% in listen to the Q4 and 4% for the year. Excluding the sale of Aviation Week, organic growth increased 4% in the quarter and was little flat for the year. J.
D. Power delivered 2nd year of strong growth in the quarter and for the full year driven by the auto business in China and license listen. Furthermore, the decline in construction revenue moderated compared to recent years listen as our new product launches gain traction and the U. S. Construction industry recovers.
Summing up, 2013 was a great year. We completed the highly successful growth and value listen and launched our new company McGraw Hill Financial. We achieved records in revenue from continuing operations and adjusted diluted EPS. Importantly, we expect to deliver an even better 2014. Today, we introduced 2014 listen to mid single digit revenue growth and diluted EPS of $3.75 to $3.85 per share, representing growth in the mid listen.
During my 1st few months, we have made a number of changes to improve our management structure and drive growth, listen to the performance and productivity. We have appointed Niraj Sahai as President of Standard and Poor's Regan Services. Listen. He brings the right skill set to lead our largest business. We've added Larry Neal, the Head of Platts and Alex Maturi, the The Head of S and P Dow Jones Indices to our Executive Committee.
Many of you already know Larry and Alex, who are excellent managers. In addition, Larry will be relocating listen to London, which is the global hub of our Platts business. Following these moves, Glenn Goldberg, President of Commodities listen to the SEC. Listen to the success running our Commodities and Commercial segment. We thank Glenn for all of the tremendous contributions he's made during his 23 years with the listen.
We've also added the S and P Chief Risk Officer and Chief Economist to the listen. The entire company will now benefit from their insights and expertise. In addition, we initiated a consolidation of our real estate listen to the decision to move our company headquarters to 55 Water Street in New York. Finally, on March 18, we will host an Investor Day in New York. I will provide additional detail on our strategy and each of our business leaders will provide listen to greater insights into our growth plans.
So with that, let me turn the call over to Jack Callahan, our Chief Financial Officer for additional detail for the Q4 and full year.
Jack? Thank you, Doug, and good morning to everyone joining us on the call. This morning, I want to briefly discuss several items related to our 2013 performance and outlook for 2014. 1st, I want to recap key consolidated financial results in the quarter and for the full year. 2nd, listen to the balance sheet, free cash flow and return of capital.
And finally, I will provide additional color on our 2014 guidance. Listen. In our 1st year at McGraw Hill Financial, we delivered very strong financial results. Revenue grew 10%, approaching 4,900,000,000 listen. With organic revenue growing 9% excluding the impact of 6 months of the Dow Jones Indices business, listen to the sale of Aviation Week and Product Closures at S and P Capital IQ.
Adjusted segment operating profit grew 14%, listen. In addition, I would note that S and P Capital IQ returned to profit growth in the last two quarters of the year. Adjusted unallocated expense was essentially flat for the year and the adjusted tax rate decreased 200 basis points, 100 basis points 100 basis points lower than our projected adjusted rate of 35%. This result was primarily due to an listen. Increased proportion of income from international markets and progress on several tax planning initiatives.
Overall, adjusted diluted earnings per share increased 21% to $3.33 per share, a great result for the company. As expected, 4th quarter comparisons were the most challenging of the year, but we were able listen to deliver another solid quarter of growth. Revenue grew 2% to 1,250,000,000
to the strongest quarters
of the year. Organic revenue grew 3% excluding the sale of Aviation Week and product closures at S and P Capital IQ. Listen. Adjusted segment operating profit decreased 3%, driven primarily by the $26,000,000 non cash impairment charge at S and P Dow a listen. Adjusted unallocated expense decreased 7% and the Lower 4th quarter tax rate is the catch up that brings our full year adjusted effective tax rate to 34%.
Listen. Adjusted net income from continuing operations increased 9% and adjusted diluted earnings per share increased 12%. The relatively faster growth was the result of a 2% decrease in the average diluted shares outstanding to 2 listen. The year end basic share count was 270,400,000 down 3 listen. Overall, a solid quarter given the tough comparisons and a good finish to the year.
Listen. There were several one time charges during the quarter associated with cost reduction and efficiency actions as We work to drive productivity across McGraw Hill Financial. We are excluding a $28,000,000 restructuring listen only mode. There is a 30 $6,000,000 non cash impairment charge related to the pending sale of a data center, driven by strategic shift to leverage the scale and capability listen of world class IT partners and a $13,000,000 charge associated with several lease terminations listen as we reduced our real estate footprint in several major U. S.
Cities in part driven by recent divestitures and the shutdown of specific product lines at S and P Capital IQ. Note that we did not have any growth in value plan costs largely professional and consulting fees listen to support separation during the quarter as that plan was completed earlier in the year. Lastly, As Doug mentioned, the company has decided to exit its Midtown New York City office. In order to do so, A payment of approximately $60,000,000 was necessary as consideration for early termination of the lease, listen which ran to 2020. There was no P and L impact for this item as it was offset by deferred gains from the previous listen.
We continue to maintain an exceptionally strong balance sheet. As of the end of the quarter, we had $1,600,000,000 of cash in short term investments, of which about $700,000,000 was domestic cash. Listen. We continue to have approximately $800,000,000 of long term debt. Going forward, this strong balance sheet positions us to continue to make listen to investments that strengthen the business and as appropriate sustain our share repurchase program.
Our free cash flow during 20 listen. 13 was $624,000,000 There were several large items that have negatively impacted results. Listen. As we've discussed before, because of Hurricane Sandy, the IRS allowed 4th quarter estimated tax payments are normally paid in December to be paid in February. This payment was approximately $130,000,000 and was paid in the first quarter of 2013.
The second item was the $77,000,000 payment associated with the legal settlement that was also included to our Q1 of 2013 results. And 3rd, as I just discussed, an approximately $60,000,000 payment was made in the 4th quarter listen in consideration for the early lease termination of our Midtown location. With these large items behind us combined with sustained listen to the same growth anticipated this year. We anticipate approaching $1,000,000,000 of free cash flow in 2014. Let me now update you on our return of capital activity.
During the Q4 approximately 1,900,000 shares were repurchased, list, which completed the existing $50,000,000 share authorization approved by the Board of Directors in mid-twenty 11. Listen. For all of 2013, we have spent $989,000,000 and repurchased 16,900,000 shares at an average price listen of $58.52 In December, the company announced a new $50,000,000 share repurchase listen authorization approved by the Board of Directors. We do anticipate selectively continuing share repurchase activity in 2014 listen subject to market conditions. In addition, the company paid out $308,000,000 in dividends, bringing the total return of capital in 2013 to listen to almost $1,300,000,000 Demonstrating McGraw Hill Financial's steadfast commitment to the dividend, just last listen.
This week, the company announced it and increased it for the 41st consecutive year. The 7.1% increase brings the annual payout to 1.20 listen. Now I'd like to provide additional color on our 2014 guidance. Listen. At this point, we are targeting mid single digit revenue growth in 2014.
Over the longer term, we believe the company has listen to potential to deliver high single digit revenue growth. However, after delivering 13% 10% during the last two years, we believe it is prudent to listen to the slide to mid single digit revenue growth in 2014. And as a reminder, the impact of the divestiture of Aviation Week and the shutdown listen to several smaller product lines at S&Pcap IQ reduces our year on year growth rate by approximately 1 point. We are targeting flat unallocated expense and sustained margin expansion with at least a 100 basis point improvement in adjusted operating profit margin. We believe that the effective tax rate achieved in 2013 is sustainable and we are targeting a 34% tax rate again in 2014.
On the bottom line, the adjusted diluted Earnings per share guidance is $3.75 to $3.85 per share. From From a cash perspective, we anticipate investing approximately $125,000,000 in capital expenditures and approaching $1,000,000,000 In closing, for 2013, we have delivered excellent results with 10% revenue growth and 21% listen to diluted earnings per share growth. We anticipate delivering continued growth in 2014 as long term secular drivers of growth remain in That said, market volatility could impact results. Nevertheless, we anticipate mid single digit revenue growth, mid a listen to the Q1 of 2019 adjusted diluted earnings per share growth and approximately $1,000,000,000 of free cash flow. And As a reminder, we will be hosting an Investor Day on March 18th at the New York Hilton Midtown.
This will be an opportunity to investors to learn more about the company and And meet the leaders of each of our businesses. Reach out to Chip Merritt if you have not already received additional details. We hope to see you there. With that, let me turn the call over to Chip Merritt.
Thank you, Jack. Just a couple
of instructions for our phone participants.
Listen
Operator, we will now take our first question. Listen.
Our first question comes from Hamzah Mazari with Credit Suisse. Your line is listen.
Good morning. Thank you. Could you maybe give us a sense of how you're thinking about listen. There are a couple of assets out on the market. Maybe give us a sense of how aggressive you want to pursue M and A, listen.
Given there's still some legal risk out there, how do you think about balancing that with keeping cash on the books listen. As well as maybe levering up the balance sheet to go after some of those assets.
Well, I think the same answer We would have given you last year or the year before. In any M and A situation, we would look at it in a very disciplined way listen to be sure that if there was an opportunity that we would have the conviction that we were going to build shareholder value. And Particularly now with the very strong balance sheet that we have. We are we will selectively look at assets listen from time to time. But again, we'll be very disciplined.
And I think we have the flexibility in the balance sheet to both build the business listen
And let me add, this is Doug, that we would very carefully look at price, return, fit. We're not going to just run around and try to look at every single deal that pops up. And it's very important for us to continue with the strategy we've put in place and the type fit that it creates for our portfolio and we would highly unlikely be doing anything transformational.
Listen. Great. And just a follow-up question. You highlighted new cost takeout opportunities, listen. Streamlining of some of the management structure, reducing the real estate footprint.
Could you give us a sense of listen. How the cost takeout flows through your numbers over time? I know in your guidance you talked about 100 bps listen. Adjusted operating margin expansion, is the new cost listen Takeout opportunity, you're talking about and highlighting something that comes over the next few years? Or how should we listen.
Think about the ramp up of the new cost takeout.
Well, there's some of the restructuring listen. Actions that we've taken in the Q4 will have some impact on 2014. There's probably approximately Two points of profit growth built into those actions. Now on the real estate footprint that listen. There's more longer term benefits.
While for example, while we are exiting our Midtown location, we will not be leaving that listen to the end of 2015. So that those benefits of real estate will feather in over a longer period of time. And we also anticipate listen. Discussing some of the longer term prototype opportunities in a bit more depth when we get together for our Investor Day in March.
Listen. Great. Thank you very
much. Thank you.
Our next question comes from William Byrd with FBR. You may ask your question.
Could you talk a little bit about what the guidance assumes for stock buybacks? And separately, what does the go listen.
And then the forward cost profile look
like for indices.
You highlighted a couple
of reasons why the costs were up and a benefit that Sounds like it will accrue going forward from the final payment on GSEI. Thank you.
On On share repurchases, I think if you look at we obviously have been very diligent in that area listen. For the last few years, the Board has approved another $50,000,000 share authorization. We do anticipating continuing that activity into this year. At this point in time, we don't want to be overly specific in terms of a target for right now. There is some benefit in our guidance and we'll update you as we go listen to the year depending on overall market conditions.
Let me add that at the March meeting listen for our investor meeting. We would like to give you some more details about our thinking and our algorithm for capital planning of our allocation listen. Investing in the businesses. We have a very exciting growth story. We want to be able to provide you with that and how we're allocating listen.
Growth to acquisitions, to dividends and to stock buybacks. So that will be one of the themes we addressed in more depth in March. Listen.
In terms of your question about the expenses on a listen And then in growth for indices, look, we indices had a great year, had a tremendous year. And we look to have another good year of growth as We go into next year. There's nothing on a full year basis that at this point would meaningfully say that would significantly change the very high listen that we have in that business. And obviously, there's always going to be a bit of market volatility depending on what's going on in terms of overall equity capital flows.
Listen. And then just at
a higher level, could you talk about just the S and P pipeline and what you're seeing kind of in terms of issuance trend? Listen. Yes. The issuance trend, as you know, in the last quarter of the year was a shift from the U. S.
To Europe, generally speaking. In Europe, listen. Corporates have been and again, the investment grade corporates in Europe were actually a little bit slow with the a listen. Capital markets being driven by mid market and smaller blue chips in Europe as they need to go to markets as banks are reevaluating the size of listen. So we're seeing the continuation of that same trend.
And then on the structured finance business, listen. You're seeing some resurgence in RMBS. So the CMBS market has had a little bit of volatility, listen But it also looks pretty flat compared to last year. The CDO market, in particular CLOs, have also been little bit volatile. It's really only been about a month into the year, but we are looking carefully at the pipelines.
And at least for the near term, we're little bit of a similar pipeline towards what we saw at the end of the year last year.
Thank you.
Listen.
Our next question comes from Craig Huber with Huber Research Partners. You may ask your question.
Yes. Good morning. My first question is can you just update us on your thoughts listen. There are price increases throughout the portfolio for 2014 please.
Well, this is a
this is for us one of the listen to the core areas of analysis and business by business to understand our customer penetration opportunities we have in areas of listen to people that are already not customers and part of that analysis is also price increases. In general, we are projecting price increases across the portfolio In the 3% to 4% range. Some of those have already started to take effect. Others of them are peppered throughout the year. But our general expectations is 3% to 4% across the portfolio.
Although clearly we're looking at to see where we can tweak that and take advantage the most, but clearly another aspect to that is high quality customer service, our sales processes, Etcetera. And that's one of the things we're spending a lot of time looking at.
And also within your ratings business, can you just talk The all important non transaction line, a little bit further what happened in the 4th quarter is a very good result there, but what your expectation is that's embedded in your guidance
listen. Yes. So in the non transaction line, in addition to our approach we have to pricing, which allows us to have certain listen. We also include in there some of the revenues from Crystal Businesses, a revna and coalition are 2 that are listen. Doing very well as banks, insurance companies and others in the financial service markets are looking to having productivity and streamlining As well as much more higher end analytics, they turn to those companies.
So the subscription revenue from those also gets built listen to that non transaction revenue. So we have a pretty good outlook on those areas, continued analytics there. Listen. And we do think that in the direct ratings business, we will also benefit from the relationships we have and continue driving Issuers towards this subscription, non subscription model for ratings. So we're actually watching that line quite carefully,
listen. Yes. In general, I think the non transaction line should our current anticipation should grow largely in line with the overall guidance for the total company of mid single digits for right now. And then I know
it's hard to forecast this, but the transaction listen. Within S and P ratings, what is your thought that's on you have some forecast obviously internally on that for 2014 your EPS guidance.
Listen. Well, the guidance that we've been giving, which is the mid single digits for the entire growth is similar to where we listen now. It's a whole blend of what we see going on in the corporate markets. I mentioned earlier that there's a trend towards if you look at the last quarter And what we're seeing in January, our finance and sovereigns have been lower. You've seen the higher European high low yield and mid markets going to the market.
So there's really a story that it's hard to tell for the whole year so far. But we do see covered bond issuance, listen to RMBS, others that are motoring along pretty well. So that's why we're continuing to blended basis
listen.
Our next question comes from Peter Appert with Piper Jaffray. You may ask your
listen. Thanks. Good morning. Zach, can you give us any incremental color on your expectations for margins by segments in 2014? I'm asking If we should anticipate the SP ratings business is relatively flat.
If so, where do the margin increase come from?
Listen. Well, Peter, at this point in time for today, at least want to get overly precise on the business by business basis. Listen. That all being said, we are pointing to overall consolidated margin expansion across the portfolio of at least 100 basis listen point. And I will say that in each of the businesses, our expectation is that each business will contribute to that and ratings, just kind of given its size and magnitude, We are pointing to some sustained margin increase in that business listen and we'll probably have a little bit more detail for you when we get together in March.
And can you give us any quantification in terms of the listen. Savings associated with some of these initiatives you've taken recently and some of the state panel initiatives planned for next year?
Well, as
I mentioned earlier, some of the restructuring listen to the actions that we have taken in the Q4 here will should deliver approximately 2 points of all in operating profit growth listen as we go into 2014 and some of the longer term real estate actions that we've taken. We have some more work to do to really fully impact the full economic cost, but we should add to lower our cost listen as we go into 2015 2016 beyond. Does that mean that
the corporate expense item Corporate overhead item could actually be down a little bit potentially in the out years?
In the out years. Right now, we will Call it flat for next year, but it is a place where we would look to continue to sustain some year on year reductions once we get past 14.
Got it. And last thing, any comment on litigation costs and regulatory costs, whether that is an incremental expense in 2014 or maybe that's a
listen. For right now, I would view both those costs as largely flat going into next year. That's been sort of our assumption overall going into 2014.
Got it. And actually one more last question please listen. Doug, just your thoughts on the competitive dynamics in the ratings business. There's a lot of noise always about new players in the market. Listen.
Anything interesting you're seeing from that perspective?
Well, as you see the markets have continued to move around in terms of what are the list of different areas that are active right now. Clearly in the U. S. Structured finance markets, there's a very competitive Market with some niche players that have started to gain traction. And so that's actually very quite welcome by the issuers and by regulators and others listen to that competitive market.
On a global scale, however, there's only a few truly global players. And around the world we see other players coming into the market, but we do think that in addition to the competition keeping everybody on their toes and ensuring that they have high quality analytics. It's also part of the listen. The opportunity set that people see out there is that as the capital markets actually increase. So the size of the markets overall, we listen.
In the longer run, we'll continue to grow as you see bank disintermediation, you see infrastructure projects requiring longer term listen capital. You see aging populations and the requirements that are put on governments to actually finance their healthcare programs, Their Social Security programs, again infrastructure, we look at the long term trends and feel that there is space listen for a robust analytical community including ratings. And so we do see more competition and we're up to that challenge listen. And feel that it actually keeps everybody on their toes.
Great. Thank you.
Our next question comes from Tim McHugh with William Blair. You may ask your question.
Yes, thanks. I just wanted to first ask about Capital listen. You talked about selling 1 new product or having 1 new customer sign up for the new product. I guess how does that compare to what you would expect? And listen.
I guess, how does that reflect the general reaction to clients to some of the new products you've been rolling out?
I would say it was still very, very early days. So we're still introducing the new products capabilities to listen. So we're pleased to have one relationship in place, but we view it as very early days and in an area where we're to continue to build out throughout 2014 and into next. So far so good is how I think would be our appointment, But a lot
more work ahead of us. And there's a very robust pipeline of new products and services that have excellent analytical listen to the tools as well as the interfaces are compelling and these have a long lead time on sales. These are the types of products that we're working with a list of sophisticated organizations and sophisticated buyers. So in addition to our development and beta testing, we're using that as an opportunity listen to get ahead of this long lead on the sales cycle, but this is clearly areas where we will be providing ongoing updates on the rollout and how these products are doing. Given the sales cycle, is it more likely that it's 15% or 16% before you really see listen.
The growth rate
of that segment improved from some of the new product rollouts. So I guess can you see an impact this year?
Listen. Well, I think it depends a little bit. I think in some of the areas of investments, for example, listen. What we're doing in terms of exchange level or latency information, I think we'll get some sustained growth as we go through this year. I think some of the Portfolio risk products, a bit of growth this year, but probably feather in more back in 2015 and beyond.
So I think it depends a little bit by which product line we're really focusing on right now.
Okay. And then last question just on Plattsville with some of the regulatory stuff that Came up earlier this year. Is there any development or news on that front?
There's no new news on that
listen. Our next question comes from Doug Arthur with Stifel. You may ask your question.
Listen. Yes, thanks. Two questions. Jack, on Exhibit 5 where you provide the adjustments, the non GAAP adjustments by segment, you did Not add back the impairment charge seemingly in the indices business. So I guess my question is, Had you done that, are we talking about the 50 going to 76 listen in terms of op profit for indices.
And then what would the minority interest look like if that had flow through or does the
listen. Let me first comment on why we did not call it out listen. We've taken an approach to be very pure or those terms would be very clear about what we're going to call an adjustment to earnings. Listen. And it really related to everything we've identified over the last few years has really been about what was necessary to separate McGraw Hill Financial from Education and or a cost relative to driving productivity to basically restructure are on a Our cost structure, in this case, this is different a listen And therefore, we did not call it out as an adjustment to income.
That all being said, we You're exactly right. If that $26,000,000 charge that would be it could be added back. That certainly is Probably a better judge of the ongoing performance of the business. And if that had flowed all the way to the bottom line, that would have added about another $0.04 of earnings per share to the listen to the bottom line because it would then we have the tax effect of $26,000,000 and then our share of 73% of that post tax impact. So it's about $0.04
listen. Great. That's very helpful. And then on the legal front, I mean, I'm curious on your comment about There's ongoing discovery with the DOJ case, because my understanding was that the hearing on 11th listen in March was really to kind of come to an agreement on exactly the scope of the case from the government's point of view, Which then would allow for a better definition in terms of discovery, but I didn't think you were really at the listen point where you knew what the scope of the case was. So I guess the question is, what are you hoping to accomplish
listen I'm going to ask Ken Vitter to answer that question since he can give us some more precise details.
Thanks, Doug. Yes. There is a hearing on March 11. That hearing is addressing the motion to compel We filed to compel the government to provide us with documents relating to 3 categories that relate to our defenses in the case. Listen.
There are numerous other categories and other defenses where the government has provided us and will be continuing to provide us listen with documents. So there is discovery going on even as we speak in those areas where the government has not resisted production of documents and where there are witnesses. So while the discovery goes on, there for these 3 categories of documents, which the government has objected to, which we have filed a motion to compel. At the March 11 hearing, the judge will hear our listen to compel. We view the government's response to our motion to compel and then either at the hearing or afterwards, We'll issue a ruling determining whether we will be given access to the documents, which so far have been denied to us.
So So there is discovery going on while we have the motion to compel on the 3 categories that have been objected to. Got it. Thank you.
Listen. Our next question comes from Manav Patnaik with Barclays. You may ask your question.
Thank you. Good morning, gentlemen. And just little bit on the C and C businesses. Clearly, it seems like Platts continues its momentum and should grow in the double digit as listen. It has been, but could you maybe help us understand some of the dynamics with JD Power and then the construction asset as well, what your
Let me start and then I'm going to hand it over to Jack. J. D. Power is a business that has Done a great job of focusing on core analytics and products which are delivering value to their customers on there. Listen.
One of the key ones is the initial quality survey. They also have another key product of pin data. And as the auto market in the U. S, which listen to one of their large markets as we covered. They've seen benefits from that.
In addition, they have a very strong position in China, which is a very high growth auto market and the company has been diversifying into other essential consumer areas such as bank products, a list of insurance products, cell phones, etcetera. So J. D. Power has a broad platform of analytics for consumer little experience and they're growing and expanding and looking in particular international opportunities. Listen.
Construction has over the last 3 years done a fantastic job to reposition the business in light of a very difficult secular construction market listen and real estate U. S. Commercial real estate market. They have repositioned the business and looked very carefully at their cost base, which they've managed a listen to the call. Incredibly tightly and also repositioned towards new analytical and products which are allowing them listen to provide forward looking information, analytics and forecasts on the construction market.
So they're able to start listen. Selling those products, the business is really starting back as we mentioned earlier. They've had a quarter which was difficult, but compared to where they've been, it's It's definitely on the upswing. And let me ask Jack to give a few more comments on those.
Just on J. D. Power, I would just simply add listen. The year we had this year in 2013 was an all time record year for J. D.
Power. And we are continuing to benefit from not just good growth in North America, but also the very strong position we have across Asia Pacific, which is now about 30% of the listen. And we do anticipate another record year in 2014 in sustained growth. On construction, listen. In terms of 2014, we do we are targeting sort of a transition year.
We are looking for the business and we've seen this evidence particularly as we've gone to the Q4 that the business is turning the corner and we are Projecting modest growth for that business as we go into next year. So and I think based building on Doug's comments, the The team has done a fantastic job of really kind of changing the product. It's much more digital analytic today than where it was many years ago. Listen and we believe it's well positioned for as it turns the
corner for growth moving forward.
Okay. And just on a On the entire division just in terms of margins, I mean it seems like for the last three quarters at least you guys have run around that 32% rate. Is that a good base to start off for what the full year should look like and then obviously incremental revenue obviously should listen.
I think if you were to kind of look at some projected modest growth off listen to full year margins of 2013. I think we can continue to show some listen.
Okay. And then one last one for me and maybe it sounds like we'll get a lot more of this color on the listen. But you've highlighted before in Capital IQ certain areas that you're looking to rationalize divest I was just wondering if across the portfolio of McGraw Hill Financial based on maybe Doug's initial strategic review. If there were any other sort of areas that you've highlighted that could potentially Be in that camp where it doesn't is not core to I guess the financial umbrella here?
Well, as you're right, this is something we will listen. I'll talk more about in March, but the way I think of it right now is that that's a lot less important listen. And taking advantage of the portfolio of brands and products and capabilities and in particular the talent listen that we have to grow the business. And that will be our main focus. We'll talk about that along the way clearly with any type of growth you want little prune unnecessary activities or unnecessary businesses.
But the core of what we've done after the separation of the Publishing and Education businesses listen to really have a growth machine now that we will be looking at to employ across the globe with new products, with new product segments, with new markets listen. And that will be the main focus. But as you mentioned along the way, there probably are capabilities and assets here and there that we'll need to prune. Listen.
Okay. Thanks a lot guys.
We'll now take our final question from Andre Benjamin with Goldman Sachs. You
Hi, good morning. Good morning.
Good morning, guys.
Good morning. I may have missed a portion of the call, so I apologize if you're repeating listen. But I was first wondering any color you can give on expectations for growth in the indices business given listen. We may probably won't see what we saw again in 2013 in the index books, but you could see some equity AUM benefit from a rising interest rate environment. Listen.
And the second half of that would be any thoughts on new product development going forward relative to what you've done in the last couple of years?
Listen. I mean look as the indices just had a fantastic year, fantastic year. Listen. I would say for right now, I mean our outlook for indices as we go into next year, it's probably very much in line listen with our overall company guidance of mid single digit revenue growth. But obviously, there's going to be some volatility listen Based on capital flows, that's sort of the going in assumption for right now.
And the team is always at work listen with our major customers trying to develop new a listen. And that's just part of our every of just everyday operation
listen. And I guess a similar question about Platts. I know you talked a bit about J. D. Power and Construction.
How much of the growth should we expect to be from the core energy customer versus that you've made a lot of progress that you highlighted in listen to the press release from metals, agriculture and some of the other products and how should we think about what's going on in the emerging listen
And I think that you saw that in the progress that's already starting to come listen to the numbers of diversification into petrochemicals into other metals listen And Mining and Energy, Non Petroleum Energy, this is part of the growth model of Platts is to diversify listen Into other commodity segments and there is a this is one of the opportunities that we will outline more fully in March because It's a very exciting one as you see the need for transparency and benchmarks that can be used in a way that will help growth on a little bit and investment around the globe. So we're very, very pleased with the progress that Platts has already made. They've got a proven track record now listen Of diversifying away from just petroleum. That doesn't mean that petroleum isn't also a very high growth field given what's happening with fracking listen And nontraditional methods of extracting oil and gas around the globe. So there's a lot of activity in petroleum and petrochemicals and listen.
In metals and mining and other commodities that we're very excited about this opportunity.
Okay. Thank you.
Listen. That concludes this morning's call. A PDF version of the presenter slides is available now for downloading from www listen.mhfi.com. A replay of this call, including the Q and A session, will be available in about 2 hours. The replay will be maintained on McGraw Hill Financial's website listen for 12 months from today and for 1 month from today by telephone.
On behalf of McGraw Hill Financial, we thank you