Good morning, and welcome to McGraw Hill Financial's Conference Call. I'd like to inform you that this call is being recorded for broadcast. All participants are in a listen only mode. 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.
That's mhfiformcgrawhillfinancialinc.com and click on the link for the Q3 earnings webcast. If you are listening by telephone, please note that there is an option available to synchronize the presenter slides to your telephone instead of the computer. After you log into the guest book, you will see 2 windows side by side in the webcast viewer. 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 Sound has been disabled through your computer speakers.
I would now like to introduce Mr. Chip Merritt, Vice President of Investor Relations for McGraw Hill Financial. Sir, you may begin.
Good morning. Thank you for joining us from McGraw Hill Financial's Q3 2013 Earnings Call. Presenting on this morning's call Are Harold McGraw III, Chairman, President and CEO Doug Peterson, President and CEO designate And Jack Callahan, Chief Financial Officer. Also joining us is Ken Vitter, our General Counsel. This morning, we issued a news release with our results.
I trust you've all had a chance to review the release. If you need a copy of the release and financial schedules, they can be downloaded at In today's earnings release and during the conference call, We are providing adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the corporation's operating performance between periods and to view the corporation's business from the same perspective as management's. The earnings release contains exhibits to reconcile the difference between the non GAAP measures and the comparable financial measures calculated in accordance with U. S.
GAAP. Before we begin, I need to provide certain cautionary remarks about forward looking statements. Except for historical information, the matters discussed in the teleconference May contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward looking statements. In this regard, We direct listeners to the cautionary statements contained in our Forms 10ks, 10 Qs and other periodic reports filed with the U.
S. Securities and Exchange Commission.
I would also like to
call your attention to a new European regulation. Any investor who has or expects to obtain Ownership of 5% of McGraw Hill Financial should give me a call to better expand the impact of this legislation on the investor and potentially the company. We are aware that we do have some media representatives with us on the call. However, this call is intended for investors, and And we would ask that questions from the media be directed to Jason Feuchtwanger in our New York office at 212-512 3,151 subsequent to this call. At this time, I would like to turn the call over to Harold McGraw Third.
Terry?
Okay. Thanks, Chip, and good morning, everyone. And let me quickly begin this Morning by saying just how pleased we all are with the effort and the care that Chip Merritt demonstrates each and every day. And for those of you who have followed us for quite some time, you'll remember the great Don Rubin. Well, Chip is in that category now and that's pretty high praise.
So thanks for all that you're doing Chip. And again, thanks for all of you for being with us Good morning, and welcome to today's conference call. I'd like to begin this call by summarizing the highlights that we will cover today. First and very importantly, after a very successful transition, Doug Peterson will become our President CEO on November 1, we increased our investment also in CRISIL, India's largest rating agency and that's up to 67 point 8%, a fine use of some of our ex U. S.
Cash. Also the sale of Aviation Week was We delivered several records during the Q3. Both S and P Capital IQ and S and P Dow Jones Indices delivered record quarterly revenue and Commodities and Commercial Markets reported a record adjusted operating margin. Despite difficult Comparisons and lower issuance than the Q3 last year, Standard and Poor's rating services grew its revenue 8% and and its adjusted operating profit at 5%. The company repurchased 5,700,000 shares during the quarter bringing the year to date total to 15,000,000 shares.
We reported 13% diluted adjusted EPS growth despite challenging year over year debt issuance comparisons. And lastly, as part of Jack Callahan's financial discussion, We will share our newly increased 2013 EPS guidance, guidance that has now been increased 2 quarters in a row. We recently launched a brand awareness advertising campaign and the purpose This is to generate greater awareness among customers, the financial community, regulators and the media about the McGraw Hill Financial brand. The primary message is that we have combined the leading brands in ratings, benchmarks and analytics to become the world's foremost provider of financial intelligence. This is an example of one of the posters, Combined We Are is the theme that permeates this campaign.
Okay. Let's turn now to the financial performance during the Q3. Revenue Increased 7%. Adjusted operating margin increased 130 basis points to 33 point 2% and diluted earnings per share grew 13%. Standard and Poor's Dow Jones Indices delivered the strongest revenue growth, But both Commodities and Commercial Markets and S and P Dow Jones Indices delivered the greatest adjusted operating Topic growth of 24% 23% respectively.
A reduction in shares outstanding from our continuing share repurchases Also contributed to the EPS increase and these two pie charts should help put into perspective the revenue and operating earnings Contribution of each of our business segments. Each of our segments is a major contributor to both revenue and operating profit. We'd like to keep you current on various litigation matters, but there is not a great deal new to Report at this time, 33 cases have been dismissed outright and that's no change from last quarter. 2 dismissals by lower courts have been affirmed by higher courts bringing the total to 13 dismissals And ten cases have been voluntarily withdrawn. That leaves us with just a few dozen non governmental cases that remain outstanding.
Efforts by the plaintiff and the Restockdrop litigation to reopen this dismissed case have been denied. And by the way, in the court's decision, it stated and I'll quote this, and quote, at bottom, the Fact remains that plaintiffs have not convinced the court that it should alter its conclusion that Standard and Poor's statements about the integrity and independence of its ratings Are not specific enough to amount to a guarantee that its ratings were made without regard to profits, market share or client feedback. In the Department of Justice case, we are awaiting a supplemental disclosure from the plaintiff relating to the claims. In the consolidated states case, we're waiting on a ruling on the state's motion to remand the case back to the state. And only one new case, the New Jersey state case has been filed since the 2nd quarter earnings call.
With that, let me turn to the individual businesses and I'll start with the S and P Dow Jones Indices. Beginning this quarter, all data is now comparable as we have lapped the anniversary of the joint venture formation. In the Q3, revenue increased 14% to a quarterly record of $124,000,000 The principal driver of the The driver of the revenue growth was a 29% increase in quarter ending assets under management in exchange traded funds Linked to our indices, which reached more than $585,000,000,000 The continued rise in Equity prices of approximately 14% and strong fund inflows of approximately 13% drove 3rd Quarterly record for assets under management, again, in exchange traded funds linked to the S and P Dow Jones Indices. It's important to note that the revenue impact is not as pronounced as the growth in assets under management as the basis points charged are not always linear with asset growth. With equity prices near record levels, Esters increasingly utilize derivatives that are based upon our indices such as the S and P 500 Index options or the SPX and the CBOE Volatility Index or the VIX to hedge their positions.
Volume at the Chicago Board Options Exchange for the SPX and VIX increased 18% and 26% during the quarter. While the joint venture realized $80,000,000 of adjusted operating profit, dollars 58,000,000 retained by the company as 20 percent of the profit is forwarded to our partner, the CME. What is truly remarkable is that the entire incremental revenue of $15,000,000 dropped to operating profit. That is just a testimony to what a fabulous, Thank you, sir. During the Q3, we created 26 new indices and 10 new exchange traded funds based With that, let me move on to S and P Capital IQ.
In the Q3, this business delivered quarterly revenue with top Organic growth was approximately 5%. This was the highest quarterly revenue for the segment. Adjusted operating profit returned to growth with an increase of 10%. Last quarter, we highlighted the 4 key categories that Make up the segment, 3 of these Desktop Solutions, Enterprise Solutions and Ratings IP Delivered mid single digit revenue growth, while the 4th, proprietary research reported a mid Single digit decline in revenue. While we have made meaningful investments in S and P Capital IQ over the Last year, we have also continued to fine tune the portfolio.
Most recently, we completed the sale of Financial Communications and are exploring options For Fund Management Research Europe or FMR Europe, an independent qualitative research service that provides Investments of fund manager investment process and operational consistency. We expect that as the portfolio This will become a higher margin faster growing business segment. We like to highlight new Product launches whenever we can and Capital IQ had yet another. During the quarter, Enterprise Solutions leveraged QuantaUse Credit watch announcements and credit outlook changes. While this is not likely to be a major revenue Generator, we cite this today as an example of how S and P Capital IQ worked with Standard and Poor's rating services to leverage new technology to create this offering.
And we will see even more of this kind of collaboration and coordination across business units in the same period time periods ahead. We're very proud of this. We call it the Power of 1, working together smart and focused. With that, let me turn to Commodities and Commercial Markets segment, revenue grew 7% in the 3rd quarter excluding the impact of the sale of Aviation Week, which closed on August 1st, Organic revenue increased 10%. Platts delivered double digit revenue growth while mid single digit growth at J.
D. Power Record adjusted operating margin of 32.3 percent. Similar to our index business, the conversion of revenue to operating margin was remarkable. Here $16,000,000 of incremental revenue resulted in $15,000,000 of incremental operating profit. In commodities, Platts recorded a 17% increase in revenue.
Growth in petroleum product subscriptions Continue to be the primary driver of this double digit growth. In addition, licensing revenue from petroleum derivative trading increased more than 90% As volatile oil prices increase trading activity, Metals and Agricultural Products subscriptions delivered double digit revenue growth, While petrochemicals and power and gas revenue reported single digit revenue increases. Building on our recent acquisition of Kingsman, Platts launched Platts Market Data Sugar, A user friendly means of receiving the latest and historical sugar price assessments from Platts Kingsman. It provides prices for all of the for most commonly traded grades and locations. Fall Sugar has been the latest commodity that we have been developing.
In June of 2011, we moved more deeply into the iron ore market with the acquisition of Steel Business Briefing. Historically, iron ore prices were established during annual negotiation among the world's largest iron ore miners and steel producers. By 2,008, large gaps had emerged between spot markets and the annual contracts. This volatility created the need for benchmarks from Proud of that. The need for benchmark pricing has evolved from physical prices to derivative prices as market participants have a need to hedge their Now this chart depicts monthly iron ore derivative activity and I might add that more than 99 Percent of the activity settled against the steel index, one of our primary iron ore benchmarks.
There is a great article that describes the changes to the iron ore market that have taken place and the link to that article is at the bottom of this slide. I hope you have a chance to take a look at it. We think that the evolution of pricing that has taken place in iron ore is instructive for other commodities as well. Commercial Markets revenue decreased 4% in the 3rd quarter, excluding the sale of Aviation Week organic growth was 1 We anticipate that McGraw Hill Construction's revenue decline may be nearing an end as new data and analytic along with an increase in the U. S.
Commercial construction starts bode well for the business. Historically, we have not spent much Time discussing McGraw Hill Construction Business. So I thought today that I'd take a few moments to do exactly that. Now, According to economic research from Standard and Poor's Rating Services, the U. S.
Commercial real estate sector continues to slowly recover from its worst slump obviously in decades. Construction starts in the commercial sector are on track to jump 15% this year. And while there is a long way to go to make up for the 58% plunge from 2,007 to 2010 when the country was mired in the Great session. The recent increase is very encouraging. During the recession, McGraw Hill Construction streamlined its operations, Eliminated low margin legacy print products and publishing assets, gaining operational efficiencies without sacrificing quality.
At the same time, the business invested in its Dodge Analytics business to be solidly positioned This investment produced new database driven analytic products like Dodge spec share, market share and build share that support the business premium market position. Today and most importantly, approximately 75% of the revenue of the business is from data and analytics, very similar to the rest of the company. Simultaneously, the business took the difficult steps to dramatically reduce costs. In fact, its contribution to earnings has improved as Decreases in costs have outpaced the rebalancing of the portfolio. Shifting now to J.
D. Power. The auto business in China and the telecommunications business in Canada delivered the strongest revenue growth. Economic Growth and growing consumer demand have led to the rapid expansion of a domestic Chinese automotive industry and consequently strong strong demand for J. D.
Power's analysis and insights into consumer preferences and behaviors. This This chart shows global light vehicle sales from 2006 to projected 2020. The most telling data on this chart is that approximately one half of the growth is expected to come from China and J. D. Power Okay.
So that concludes a Relatively quick review of the business units and their achievements in the quarter and we're very proud of those. And we mentioned a little bit The results in terms of the S and P rating services, but let me turn that over now to get a little bit more detail on that from Doug Peterson to handle that. And as I We are all very pleased and thrilled to be introducing Doug Peterson not only as President of Standard Poor's Rating Services, but as our next President and CEO as of November 1. So with that,
Doug, over to you. Thank you, Terry, and good morning all. We noted on our last earnings call that comparisons And Poors' rating services segment would become much more difficult in the second half of twenty thirteen and you can see that in the reported numbers. Revenue for the segment however grew 8%. Adjusted operating profit increased 5%.
The corresponding adjusted margin and decreased 120 basis points to 42%. While 3rd quarter expenses decreased Sequentially, year over year they increased approximately 10% primarily due to technology related investments, modest increases and compliance expenditures. However, headcount remained relatively unchanged year over year. We were able to increase both revenue and profit despite issuance that actually decreased year over year. The increase in revenue was not driven by issuance, but rather by increased bank loan ratings, entity credit ratings and rating evaluation services.
Bank loan ratings were particularly strong increasing 73% driven by a tripling in Europe, primarily As a result of the refinancing of existing bridge loans, maturing debt and recapitalizations. In the near term, we expect the levels of issuance to be impacted by the continuing market reaction to the U. S. Debt ceiling, Federal Reserve tapering and interest rate levels overall. You'll see that non transaction revenue grew 9 Driven by increased entity credit ratings and ratings evaluation services.
Despite a decrease in issuance, transaction revenues increased 6% as a result of a 73% increase in bank load ratings. 15% growth in our European revenues driven primarily by corporate activity States and Europe of 3% 18% respectively. In the U. S. Corporate issuance was flat and public issuance was Down 19% as municipal issuers shied away from the markets after Detroit's bankruptcy.
Structured issuance was strong in the CMBS sector up 47%, RMBS up 26% And CDOs predominantly CLOs that were up 88%, albeit all of these were off smaller bases And these offset the weaknesses in the larger ABS market which dropped 14% overall. In Corporate issuance decreased 20%, but high yield issuance increased 82%. This was due to record low spreads and diversification of funding from banks. Structured issuance decreased 9% due primarily to the ECB's Long term refinancing offering known as the LTRO and its impact on covered bonds. Since this will be Terry's last earnings conference call, we thought it only appropriate to highlight a few of the major accomplishments that have taken place under his leadership.
Terry became CEO April 29, 1998. In his first letter to shareholders, he wrote, Our commitment to our shareholders is to increase shareholder value by serving our markets aggressively and ethically and like our customers striving to reach Since 1998, the company has delivered a total return of Approximately 300% versus only 97% for the S and P 500. The company returned more than Continued yearly increases to a dividend that began in 1937 and has been increased every single year since 1973. But more importantly, under Terry's leadership, he has transformed the company. In 1998, The company is predominantly a collection of publishing assets.
Financial services represented only 31 Percent of the $3,700,000,000 annual revenue and the operating margin was 18.5%. During the last 15 years, the company has divested the publishing assets to others who can make the most with those businesses. And it has reshaped the Financial Services segment into the leading portfolio of brands we have today. A portfolio with an Adjusted operating margin that has more than doubled since 1998 and a portfolio that provides essential intelligence. That's essential intelligence through leading ratings, benchmarks and analytics to its customers.
While Terry is stepping down as President and CEO, he will remain as Chairman of the Board providing his guidance and insights to me and the rest of the management team. Now, I'd like to turn the call back to Terry and thank you all.
Okay. Yes. Thank you, Doug and thank you for the kind words. The bottom line is very simple that McGraw Hill Financial is a very, very special place with very special people who are dedicated to making a very positive impact in the markets that we serve. And Clearly, as Chairman of the Board, I look forward to continuing to work with Doug and the management team and the rest of the Board to continue to build this great company.
So, with that, let me turn the call now over to Jack Callahan, our Chief Financial Officer for additional details on the Q3 full year and on our financials. Jack?
Thank you, Terry. This morning, I want to briefly Close out this call with a discussion of several items on our performance and our outlook for the balance of 2013. First, I want to recap key financial results in the quarter. 2nd, I will review recent changes to the portfolio and the associated one time largely gains that were incurred during the quarter. 3rd, I will provide updates on the balance sheet year to date free cash flow and share repurchase activity.
And finally, I will comment on the increase to our 2013 earnings per share guidance. As expected, 3rd quarter comparisons proved more challenging in the first half, but we were able to deliver another solid quarter of growth. Revenue grew 7 percent to $1,190,000,000 with organic revenue growing 8% excluding the sale of Aviation week, which occurred during the quarter and the divestiture and selected product closures at S and P Capital IQ. Adjusted segment operating Profit grew 11%, driven primarily by the strong results at S and P Dow Jones Indices and Commodities and Commercial Markets. In addition, I would note that S and P Capital IQ returned to profit growth in the quarter.
Adjusted unallocated expense increased 10%, primarily due to an increase in excess office space. Overall, the margin expansion was significant as Consolidated adjusted operating profit margin increased 130 basis points to 33.2 percent Despite a modest decline in year on year margin performance in S and P ratings, our largest and most profitable business unit. The tax rate came in at our guidance level of 35%. This was an increase of 160 basis points from the Q3 of 2012. The Q3 a year ago was low due to the impact of S and P Dow Jones Indices Joint Venture that was created that quarter.
Adjusted net income from Continuing operations increased 11% and the impact of the share repurchase program can be seen in relatively faster growth in Adjusted diluted earnings per share at 13% as average diluted shares outstanding declined approximately 2% to 278.8 1,000,000 shares. The ending basic share count was 270,600,000 down 2.5%. Overall, another Strong quarter demonstrating the strength and breadth of our portfolio. There were a number of changes to our portfolio during the quarter. As Terry mentioned earlier, the company did invest $214,000,000 to increase its ownership of Cristal from approximately 53% to 68.
Cristal has earned approximately $185,000,000 in revenues during the last 12 months. It has a leading position in India, a broad product line serving global customers and is an essential partner working closely with the S and P ratings business. Our previous Crystal Investments have delivered tremendous returns and we are pleased to be able to increase our ownership even further. S and P Dow Jones Indices and the Bombay Stock Exchange completed the formation of Asia Index Private Limited, a fifty-fifty joint venture. It is hoped that the new company will raise the profile of the Sensex and other S and P Bombay Stock Exchange Indices as S and P Dow And in Financial Communications, Financial Communications is a small non core asset that was within the S and P Cap IQ segment.
Crystal also exited its equity investment in India Index Services and Products Limited. As a result, there were a number of one time items that need to be adjusted to better evaluate the ongoing performance of the business. In our adjusted earnings, we are excluding a $16,000,000 gain on the sale of India Index Services, And we are also excluding $10,000,000 of growth and value plan costs, which have largely wound down. There was also some limited and restructuring actions. In total, we excluded a net gain of $11,000,000 We continue to maintain an exceptionally strong balance sheet.
As of the end of the quarter, we had $1,600,000,000 of cash and approximately $800,000,000 of long term debt. Going forward, this strong balance sheet positions us to continue to make investments like CRISIL that are targeted at building the business and as appropriate sustaining our share repurchase program. Our free cash flow during the 1st 9 months of 2013 was $388,000,000 As we discussed previously, there were 2 large items that have negatively impacted year to date results. First, because of Hurricane Sandy, the IRS allowed 4th quarter estimated tax payments that are normally paid in December to be paid in February. This payment was approximately $130,000,000 and was paid in the Q1.
The second item was a $77,000,000 payment associated with the legal settlement that was also included in our Q1 2013 results. Including the impact of these items, our free cash flow guidance remains 6 During the Q3 approximately 5,700,000 shares were repurchased. So far in 20 13, we have spent $850,000,000 and have repurchased 15,000,000 shares at an average price of $56.70 Approximately 1,900,000 shares remain under our existing share repurchase authorization and we completing this authorization before the end of the year. Of note, this $50,000,000 share authorization was approved by the Board of Directors in mid-twenty 11. So summing up, we have delivered excellent year to date results with 12% Revenue growth and 24% adjusted earnings per share growth.
And we continue to fine turn the product portfolio as evidenced by activity during the quarter. Now looking forward, we know that year on year comparisons in the 4th quarter will be Nevertheless, we are on pace for a strong full year results and are raising our 20 13 adjusted diluted earnings per share guidance From a range of $3.15 to $3.25 per share to $3.25 To 3.30 dollars per share, up a nickel on the high end of the range. So now with 3 quarters of the Year end, we are on pace for a terrific first year for McGraw Health Financial. And today, we've delivered a great last quarter for Terry McGraw as President and CEO. With that, let me now turn the call back over to Terry.
Okay.
Thanks, Jack. And again, We are well on our way to delivering excellent 2013 results. And as Jack said, we have Based our EPS guidance for the 2nd time in as many quarters and are harnessing the earnings power of our leading brands by providing essential intelligence to our customers and And we're obviously very proud of this record and a lot more to come. So thank you all for being with us on the call. And now let me turn it back Chip Merritt, who will provide instructions for the question and answer session.
Chip? Thanks, Terry. Just a couple of instructions through our phone participants. We will now take our first question. Operator?
Thank you. Our first question comes from Alex Kramm with UBS. You may ask your question.
Hey, good morning, everyone. Just starting, I guess, on the Ratings business real quick. I think Doug, you did a decent job Running through some of the items that impacted the margin, which surprised a little bit with the decline. Can you just maybe go back and just parse out what exactly there was that you would call necessary investments that might have been one time Or what really is or if all of this is ongoing, basically the question I'm asking is how does this impact the margin outlook or the operating leverage going forward?
Go ahead, Doug. Yes. Let me start and then I'm going to hand it over to Jack. So we see first of all as you notice compared to sequential, We were able to decrease our expenses sequentially quarter on quarter, although you see an increase year on year. The year on year increase is primarily driven as I mentioned by a combination of technology expenses.
We are increasing Our modernization of our workflow processes, our publishing as well as compliance and control We always modernize and update and have continuous improvement in our businesses. In addition, as I mentioned, we've had some other increase in compliance expenses, which is partially headcount and partially related to those systems. We see on the top line as well What you saw was a decrease significantly in corporate issuance across the globe, but we were able to make up for that and continue to growth compared to last year at the top line based off of very strong bank loan ratings, ratings evaluation services and Other areas that are allowing us to diversify our business processes and continue to maintain relevance in the credit markets. For the Q4, I'm going to ask Jack to provide a little bit more update on what we're seeing there.
And I would just The Q3 was our lowest revenue quarter to quarter of the year. And so I mean some of these expenses Having feathered in during the course of the year. Moving forward into the Q4, it's going to be a Tough overlap for the ratings business in the 4th quarter. We just had a spectacular finish to 2012. But that all being said on the expense side, we do not anticipate expense growth of this magnitude at all as we go into the 4th quarter as the overlaps also change there.
So we'll we acknowledge the tough overlap in the Q4 on the top line and But remain diligent in managing the expense growth as we go into the balance of the year to prepare for the next.
Okay. Does that do it Alex?
I think that was Maybe just Doug if I may ask you another question and I appreciate that you still have a couple of weeks until you Really take over as CEO, but obviously, last time we heard from you was on the last earnings call 3 months ago. And I assume that since then in preparation to get ready for the new job, you've met with all the business leaders more and more. So As you've done that, any early indications of things that have surprised you over the last few months? Maybe any sort of items that you Where you can accelerate integration, work on the margin profile for the business, anything on that end yet?
Well, you almost I answered the question in the question itself. But let me tell you first of all, I'm really thrilled by this opportunity and thank Terry and the Board for the opportunity Pete to take this on. The biggest surprise I've had is that I continue to be really overwhelmed and amazed by the quality of our brands, the quality of our people, To markets and our customers and it's premature for me to give you any specific answers. But I do want to reiterate something that I I said before which is in Terry's letter to the shareholders in 1998, he reiterated a Commitment to the shareholders to increase shareholder value to serve the markets aggressively and ethically. And I look forward to continuing with that legacy in that approach and in particular focusing on our customers and our people.
All right. I guess I'll stay tuned for Bigger update next quarter then. Looking forward to that. Very briefly, just lastly on Platts, And maybe you've talked about it in the past, but obviously the growth is just outstanding right now. But one of the In particular on the energy side, we hear more and more large banks exiting energy trading businesses, funds shutting down.
It doesn't seem to be impacting you today, but do you think the addressable market in that area could make an impact? And And if so, any sort of box you can put around that for us?
Well, Alex, this is Terry. I wouldn't Put a box around anything with Platts on that one. One of the things that we've been able to do is really expand upon the whole commodity base. And one of the things that we reported here was some of the continuing initiatives that are going on both in terms of sugar, iron ore and the like. And we will be continuing to adding commodities and broadening out that base in terms of price discovery and price assessment.
Again, with spot markets cropping up all over the world, again, the ability to have prices That can solve the gap between long term annual contracts and spot market activity It's exactly what we're about and that's what we're benefiting from. Thanks for your questions, Alan.
All
right. Take care. Thank you.
Our next question comes from Andre Benjamin with Goldman Sachs. You may ask your question.
Hi, good morning. Just wanted to follow-up a little bit more on the ratings agency. I know that early in the year you actually gave some Guidance for what you expected the actual segment to grow that would be embedded in the updated EPS I was wondering if you had any update to that. I think it was previously high single digits. And then any color on kind of how you think we should be thinking about this 4th quarter dip versus maybe going into 2014 would be helpful.
Okay, Andre. First of all, welcome to the team. And I know This is new for you and we're delighted that you're with us. Let me turn it over to Jack here and we can go through the guidance for you.
Sure.
Andres, I think that your point is a fair one. We initially did give full year guidance of high Single digit for both revenue and profit growth. On a full year basis, kind of given the very strong Results that we've had so far this year. I think we'd see revenue growth for the year to be in the low teens And operating profit growth to be in the mid teens for right now. I'd like to shy away Some quarter specific guidance, but I think that that thinking shows that and obviously we're having a very good year and ahead of what we initially had given guidance on back in the Q1.
Okay, Andre?
Yes, that's helpful. And then I guess for my follow-up, on capital allocation priorities going forward, you've clearly highlighted A willingness to return a fair amount of capital to shareholders. Should we expect kind of more of the same in term of run rate or and just assume that You're probably not going to take much of a deviation from that until some of the litigation and other matters unfold or I guess this would be more for Doug, if there's anything that we could see cause a change in that before we get some regulatory clarity?
Yes. Andre, again, this is Terry. I mean, if history is anything prologue, again, in terms of all of the four Commitments for capital allocation, we've been very strong in terms of increasing the dividend every year for Quite some time and also in having a very active share repurchase program. We are also going to be as we have in terms of talking about Investments and acquisitions and the like, both on the transaction and on the organic side, have focused on that as well. But without making any predictions about what tomorrow's bring, share repurchase has been a very important part of our capital allocation program and I Expect that to continue.
Thank you.
Thanks, Andre.
Our next question comes from Doug Arthur with Evercore. You may ask your question.
Yes. Thanks. First, Doug, great summary of the Terry McGraw years. Congrats to everyone. Great accomplishment.
Just on the numbers and this is really more I guess for Jack. You noted a couple of times in the call the leverage you got Outside of the ratings industry in the quarter, I mean, for instance, Capital IQ costs were almost Flat year over year and they've been up quite a bit in the first half. So you are investing in new products. So I'm just kind of curious as to What was behind really the terrific cost performance in all the non rating segments in the quarter And how you're kind of weighing that against new product investment? And then secondly, it's been pretty quiet on the EU of the oil market, trading market in Europe.
Any updates there and how it pertains to Platts would be appreciated. Thanks.
It's Jack. Why don't I take the margin point? And Doug, I think your point that we did get great margin leverage across the balance The portfolio outside of ratings, I'll give you just a little color on each. First of all, in terms of S and P Cap IQ, our level of investment And new products really kicked up in the Q3 a year ago. And so that step up in investments has been lapped to some degree.
And so it's a little bit more of a steady state going forward. We did signal going into this year that we hope that we'd return to profit growth by At the end of the year, we were pleased to see it in the Q3. On index, the flow through It was tremendous as Terry noted in his comments. And I think we're still benefiting there from some of the merger And the benefits of putting Dow Jones and S and P together, which I think was just wonderful for the margins in that business. And within commodities and commercial, it's prudent cost management on the for J.
D. Power and Construction, but we're also getting The very strong growth we're seeing at Platts that comes in at a modestly higher margin that from an overall mix really contributes to the tremendous performance that particular
Okay. Thanks Jack and Doug always good to hear from you. Again, in terms of all of our businesses, clearly given the relevance that they play, regulatory setups One of the things that we have done and Doug has supported and Beefed up in a big way. It's the entire risk compliance and regulatory side. Platts is going to get a lot of attention in a lot of different ways, not Europe.
But let me ask Ken Vitter as General Counsel to comment specifically on Europe for Platts.
Thanks, Terry. There really have been no significant new developments in the EU investigation. We continue to cooperate It's on that front.
Okay.
Okay, great. Thank you.
Thanks, Doug.
Our next question comes from Peter Appert with Piper Jaffray. You may ask your question.
Thanks. And First, Terry, thanks for a great run. You set the bar high here obviously for Doug. So I assume he's targeting the same outperformance Reacts the
Thank you for that Peter, but Doug's up to it.
Absolutely. We'll expect no less. And Terry, we're missing you already. So in terms of the S and P business, I was hoping Doug maybe you could give us just a bit more color in terms of what you're In the Q4, I understand October started slow, but can you just talk a little bit in terms of the what you're seeing on backlog of issuance? And In particular, I'm interested in what you're seeing in the structured finance market in terms of trends there, which seems to be showing some signs of life and how you're feeling about Market share trends in particular.
Thank you.
What we're seeing right now on the overall markets are Continued volatility and choppiness. We have seen an increase in issuance recently. And what I mentioned in the Q4 there had been a decrease in Some of the other traditional ABS markets, we've recently seen the U. S. Banks in particular given their access Capital and their need to diversify and interest in diversifying funding sources returning to the credit card and auto loan securitization markets.
CMBS has been particularly strong. Although our market share in the CMBS area, we've been focusing on Using our criteria which is very transparent and has a focus on the quality of the assets. So despite some of the surge of the TMBS market, our market share has not been that high. It's in the 30% range, but higher than it had been in a year ago. So overall, we're seeing corporate issuance a little bit slower and as I said choppy after the government slowdown.
Many of the issuers and banks that we've been speaking with are looking carefully at the interest rate environment, Which means that on the one hand you've got people cautious about entering markets and on the other hand in particular high yield corporate issuance picking up to continue to take advantage of the very interesting and attractive markets. In Europe, we continue to see the deleveraging of the bank environment Overall, which means that the capital markets are strong. Corporate issuance despite dropping in the Q3 continues to see high Yield issuance and smaller global corporates in Europe are tapping the capital markets. So without giving any To the guidance for the Q4, we do know that we have a tough overlap from last year and we are watching The pipelines very closely and as we said the beginning of the month was quite choppy because of the U. S.
Government shutdown.
That's helpful. Thanks Doug. Thinking ahead, the comp obviously is going to be fairly tough going into 2014 given how strong this year has And wondering if you're thinking preliminarily at least that the signs of life in structured finance, some of the good things you're seeing out of Europe, maybe the pricing action you're Is that going to be sufficient do you think to continue to sustain revenue growth for S and P in the 1st part of next year?
I don't have a full blown projection for the first half of next year, but I would tell you that we are carefully targeting our investments and our expenses to match What we expect to see in the markets, we have certain expenses we can flex one way or the other depending on what we see. But as you heard earlier in the call and you can see in our numbers, we have also undertaken a plan to find other sources Revenue, one of those being the bank loan ratings product, which we had identified last year as an area That we wanted to target specifically. We knew that having bank loan ratings would allow banks to have more liquidity for their loans. It also makes those Loans easier to put into securitizations and CLOs. And so we're finding ways whether it's in it's Europe With the deleveraging taking place in the bank loan markets in Europe as well as our growth in Asia, which It doesn't hit the bottom line as much, but we see that as a very critical long term area for us to continue to grow.
So we will be responsive to what we see in the markets With our products and services, we continually try to find other areas that we can grow and leverage our expertise and our knowledge. At the same time, we're also ensuring that we're flexible on expenses. As I mentioned earlier, despite some of the investments in Technology and compliance related expenses. As you know, the CRA 3 came into effect, which meant that we had Some people that were working very hard to meet all of those compliance areas there. We've been able to provide service All of our clients to the markets without appreciable increase in headcount.
So as I said, we will be watching the markets carefully And we will be very, very cognizant of our expense base and flex where possible.
Thanks, Doug.
Thanks, Peter.
Our next question comes from Craig Huber with Huber Research Partners. You may ask your question.
Yes. Good morning. Thanks. And Terry and Doug, congratulations on your new roles. I guess a few questions.
First, can you talk about your margin outlook long term here for Ratings business and I ask this partly in the context. Do you think you could over time close the margin gap relative to Ratings in your Ratings business?
Well, I'm going to give you a first part of the answer and then hand it over also to Jack who studied this very carefully. First of all, we've been targeting Our margins in the mid-forty percent range is our operating margins. This is the target that we've been consistently looking at. We believe that there's a combination of on the revenue side diversification of revenues as we've mentioned Things like bank loan ratings, regional and geographical expansion and ensuring that we are covering all the relevant markets where capital market Activities are increasing. So we're focused heavily on the top line growth and in addition to that on the bottom line.
But on the other hand, we're going to continue to operate at a very high level of quality of assurance with our Compliance requirements around the globe and we want to make sure that we have the best quality of delivery of our services of our publishing and Our data and our other types of standards. So we're targeting a level of margins in the mid-forty percent range and That's really quite important for us. Let me hand it over to Jack. Yes.
I don't have a lot to add Doug. I mean I think building on your point earlier about the tight Management of expense particularly around headcount that's we had to be very diligent the way we add cost to this business Kind of given the volatility that we have in the top line. And just as note, the revenue for this business for the ratings business in the 3rd quarter It's the lowest we've seen now in 4 quarters. So and so it does when you have a little bit of that volatility in the top We do tend to have a little bit of compression in margins and I think that's manageable and we will pace any investments we make in Technology and or compliance related activities as tight as we can given the near
I think that's well said Jack. Craig anything else?
Yes. I do have a follow-up there and a couple of other
Just one more question, Craig. We'll try to keep it 2 for everybody.
All right. Just can you just hit on though why do you think your margins are lower in your S and P ratings business And then also could somebody just give us a further update on the DOJ case please?
Jack and I have looked carefully at Moody's margins and we think that there are a couple of reasons. One of them has to do with the inclusion of CRISIL in our ratings segment. Chrystal has a slightly different business mix. It is a combination of an Indian rating agency. They also provide outsourcing services or if you want to call it in sourcing where they do an excellent quality of support work and analytical and data input work for the ratings business.
And then they have a third business line which is global analytical research They support investment banks and insurance companies around the globe with their analytical processes. Crystal operates at a lower margin and that's one of The factors which if you look at is about 120 basis points to 150 basis points differential in the margin between Moody's and S and P. Another key differential is the level of market share and penetration in the structured finance business. And as you know, in 2011 2012 S and P had withdrawn for period of time from the CMBS market and was operating at a much lower penetration of the CMBS markets. So there was a significant difference in the Revenue levels in the CMBS area, which was another 250 to 300 basis point differential in the So in the Moody's margin between theirs and ours.
And additionally, there was another level of Difference that we believe that we operate in a slightly different business model with some of our regional offices and the infrastructure that we think is very important To support our businesses, to be responsive to the regulators and local constituencies, we don't know what the difference is of the margin there, but It's critical for us to have a strong global franchise and we invest in that because it gives us presence in the market and allows us to support our activities. So that's really something that we see as 3 of the key different components in our margin differential. And I'll hand it over to Ken to give us an update on the DOJ. Yes.
And Craig, Terry, just on of those three points As Doug mentioned, that first one is very, very important. As you know, this is a very global business and we're all over the world. But the Indian market is It's going to be a spectacular market for us and we started early on with the development of our relationship with And we couldn't be more pleased, the way this has turned out and now that we're up to 68% And we'll continue to focus on this. So we're very excited about what that business is going to mean to on that one. Ken, do you want to quickly make a comment on DOJ?
Sure. Thanks, Terry. We are in an initial discovery period in the DOJ case during which the government is required to identify with specificity those securities that they will be litigating on in the case in which S and P will be required to defend. So we will know and the deadline for that specification by the government is November 18, we will know on that date precisely what securities are at issue in the case, precisely what ratings are being challenged by the DOJ, So that we can then go ahead and aggressively defend each of those ratings. At the same time, S and P is engaged in a very broad discovery effort on the government to discover those documents and those witnesses that bear on a variety of our defenses.
So For example, we are asking the government to provide us with all documents supporting all of the government official statements about the housing market during the relevant period, because those statements were exactly the same as S and P statements about the housing market. So we are interested in learning From the government's files, what were the documents and supporting information that led to Bernanke and Paulson and Geithner and others Speaking about the economy in the same way that S and P spoke about the economy. So those document requests are The next status conference will be held on the schedule on December 16 by Judge Carter in California. And at that point, the next phase of the case will be scheduled.
Okay, Craig.
Yes. Thank you, guys.
Yes. Thank you.
Our next question comes from Tim McHugh from William Blair. You may ask your question.
Yes, Thanks. Just want to ask about Capital IQ. I think last quarter you had talked about some optimism that growth might start to pick up late this year and into next year based on some of the new products and hopefully a better environment. I guess just wanted to get an updated sentiment on that and the response to some of the new products.
Yes. Well, Tim, first of all, again, it's a work in progress. And as we broke out the 4 That make up S and P Capital IQ last time. We have shown strength in all three of those areas. The 4th area In terms of proprietary solutions, we have been making some acquisition and development efforts there.
And this had to do with the quant house technology. And so we would expect going forward that again this is going to be a Higher margin, higher growth business and we wish to continue to do that. And by the way, Tim, for you as well, welcome on board. It's nice to have your representation with us.
Hey, Tim. I would just add. It's Jack. Look it's tough competitive marketplace for those products. We recognize that.
But I think the overall growth rate It is being impacted because we have closed down a couple of smaller businesses. We exited Financial Communications. So Then there'll be a drag of a point or so of the growth kind of going forward. And but underneath that, the core Cap IQ Business, some of the ratings IP businesses are as we mentioned earlier have been growing more in sort of the mid a little bit stronger. And But and we may remain a little bit more optimistic as we get deeper and leveraging the innovation that's now just now coming into the Good place.
Does the end market or the health of the demand feel any better than there's some view that The improving stock market and so forth should drive a healthier customer base for that, but I guess we don't see it yet in the numbers. Are there any signs of it as you hear commentary?
There may be a little bit. Maybe some segments doing better than others. So Investment Banking may be a bit more Challenge then, investment management may be a little bit stronger. So it's not maybe plateauing The play will be the best way to say it for right now.
Okay. And then just one the other question on McGraw Hill Construction, You talked about the you're starting to see some data points that give you a little bit more optimism. But I guess are you seeing signs of that in the business activity itself? Or is More external, just