Welcome. I'm Chip Merritt, Vice President, Investor Relations for McGraw Hill Financial. And I'd like to welcome you all to our inaugural Investor Day. For those of you on the webcast, we're broadcasting here from the Hilton in Midtown Manhattan. London, 2 from Hong Kong, but the winner of the most traveled London, 2 from Hong Kong, but the winner of the most traveled investor goes to Rob Pointer from Australia.
So thank you, Rob. We hope we put together a really informational Good day for you. For the newer investors out there, you'll get a chance to understand how the businesses work. For those who follow us Weil. We hope that each of the presentations will reveal some things that you didn't know before.
So that's really the intent of today's session to get a Sense for the businesses and the growth opportunities that we have before us. A couple of logistical things, restrooms out the door there in this hallway or out the back, President. And we are sharing this adjusted information with you, so you can get a chance to see how management views and manages our operations. If you want a reconciliation and of those adjusted numbers to the GAAP numbers, please look at any of our quarterly press releases with the on the earnings days for that reconciliation. Now I'm of Eliation.
Now I'm sure a lot of our speakers will make forward looking statements, things like, I hope, we expect, You need not to place undue reliance on our forward looking statements and to see our SEC filings for other risks associated with investing in the company. And lastly, this may be new to some Chip. We're at 10% ownership of our company. 1st, I thank you. But secondly, please give me a call, because there's some obligations you may have and you need to Stand.
So if you're approaching 5% or 10%, please give me a call. Now the schedule today, we have Anticipated that we've got lots of sell side guys in the room who can't sit long without asking a question. So we've broken it up for you. Doug Peterson, our President and CEO will speak first. Then we'll have 2 businesses.
We'll have a Q and A then for just those two businesses. Two more businesses, Q and A for those 2, 2 more Q and A of those 2. And at the end, we'll have a wide open Q and A for all the businesses and legal questions and questions for Doug and Jack, or CEO and CFO. Okay? So lots of chances, but let's save those individual Q and As for the 2 businesses that just presented.
Not on the agenda, but joining us is Paul Sheard, our Chief Economist. Paul can stand up. If any of you guys have any questions that you'd like to discuss with Paul. He'll be available in the other room afterwards. But just want to introduce you to Paul.
Thanks, Paul. Of Operations. We'll continue after this main session. So from 4:30 to 5:30 roughly, we can go back over there, have a cocktail Lee Guiness, if that's available, if you didn't get enough yesterday. And I get a chance to meet not only with the executives who've spoken and presented today, but also with more importantly the folks who are behind the panels to be giving deep dives in some of the products that we
President. We are the architects of financial intelligence in a world under construction. We are Standard and Poor's rating services, 1400 dedicated analysts covering 127 countries, turning knowledge into insight. President. The McGraw Hill Construction providing actionable intelligence for more than 1,000,000 industry professionals.
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President.
Thank you for joining us for of Royal Investor Day. It's great to see everybody here. I'm going to start with Act 1 and talk to you briefly about the last And throughout the day, you're going to hear from us in the second chapter of our discussions today about creating growth and driving performance. Of Made It. As we went through the last three years, we announced a growth and value plan in 2011 and that growth and value plan had President of the company's office being managed and held by somebody else.
We completed the divestitures of Education, Broadcasting and Aviation Week for 2 point of $7,000,000,000 And of that cash along with the cash we generate from operations, we returned 4 point Welcome. I'm Chip Merritt, Vice President.
And we reached a
goal above it and we reached $175,000,000 in cost saves. And all throughout that team of Small Tuck in Acquisitions. And while the time that we did that, this chart shows you what did that mean for the business. By taking the slower growth, more Welcome. I'm Chip Merritt, Vice President, Higher Capital Intensive Businesses.
If you look at 2011, including the Education business and the Broadcasting businesses, our growth rate was of 2.9%. By taking those out, our growth rate was 8.6%, which helped fuel through our new position businesses of Directors, an 11% compounded annual growth rate from 2011 to 2013. And through that period, we began our journey of delivering of the business. 22% in fact, but our operating profit increased by 7% to $1,600,000,000 in 2013. Our operating margin at 24% increased 9 points to 33% across our entire portfolio.
Our EPS grew 14% over that time period. And as you can see, our CapEx President and our asset intensity to our business has decreased the requirements for capital investments. Over that time period, our total shareholder The return was over 140% with the share price itself going up 114%. And as I said, we returned $4,400,000,000 to our shareholders to you through dividend and of share repurchases including a special dividend of $2.50 a share in 2012. As we completed that program, we had to start thinking about what about the future?
Where are we going to head for the future? And how are we going to take this great portfolio of companies and find a way to generate growth and create value? We took a step back. We thought about the markets. We thought it was important to revisit our vision, our purpose, our core values.
President. Our ratings, our benchmarks, our analytics and the way we serve global capital markets, commodity markets and corporate markets. Our core values, which come from many, many years across all of our legacy companies and are the right thing to do of fairness, integrity and We have great brands. We have deep core of Analytics. We're truly global and we're starting from a position of incredible financial strength.
Our brands are brands that all of you in here know and use every day. The bridges, the of Standard and Poor's. And the gasoline and the fuel that was used to fuel the transport you've got here was probably priced Welcome. I'm Chip Merritt, Vice President from Crude Oil Price Measurements that came from Platts. And if you came in a car, it's highly likely that it was assessed by J.
D. Power in of Quality Survey. And if these were other types of screens that we're watching right now, you would see the S and P 500 and the Dow Jones scrolling across the bottom of the screen all day as key market benchmarks. And at the core of those types of products are deep Analytics. We employ people that use their brains, their intellectual capacity to provide these products and services, keeping up to date of everything going on Welcome.
I'm Chip Merritt, Vice President of Technology and Analytics and Big Data to produce these products. People run Cap IQ models. They run it the 8th I'm the 15th time I've even seen version number 33 when people are doing an M and A analysis and they keep going back to dig and mine more and of the Cap IQ database to do another run to see what's the right price of this acquisition. President. Where did the market close?
And we ask that question, where did the market close? We're asking about the S P500 in the Dow Jones. And there's great intellectual capital behind that through David Blitzer and you'll hear more about this later. President. And we start our new company with compelling financial advantages.
We have President. Our margins are high and improving. We have goals to improve them and if you Welcome. I'm Chip Merritt, Vice President Lee. We generate strong free cash flow.
Now shifting to the second part of our story. Throughout the rest of this Good afternoon. You're going to be meeting our team to talk about creating growth and driving performance. And let me spend a few minutes on this specific slide because these are targets that we're laying out for 1 year 3 year goals that are going to drive of shareholder value focused on our customers in the markets. We're setting annual growth goals of mid to high Single digit revenue growth, sustained margin expansion, mid teens EPS growth and $1,000,000,000 Welcome.
I'm Chip Merritt, Vice President. We have an operating model to get there and we'll talk about that. We will maintain disciplined approach to allocating capital. Welcome. I'm Chip Merritt, Vice President.
We need to have the right approach to managing and measuring our performance.
First of all, we're going
to shift from a holding company approach to management to an actively Production. And we're targeting at least $100,000,000 a year in productivity saves, dollars 100,000,000 in productivity You can see that we're targeting mid to high single digit growth coming off of very strong revenue growth. But what's important here is that over 60% of our revenue in our business model is coming from subscription and recurring revenue, giving us a solid base for growth. It's going on outside so that we can plan for the right investments and have the right resources marked up against the best For example, in the debt markets, debt maturities over a 3 to 5 year, of the bank market, which means that more and more people are having to go to the capital markets to raise debt. In addition, there's questions.
What's happening with the TRO. What's happening with the asset quality reviews that are starting to take place? So there are many trends in the capital markets that we look at very carefully all the time. There's an infrastructure requirement around the world. S and P published a report at the at the end of January, which showed that there's a $57,000,000,000,000 requirement for infrastructure financing over the next 17 years.
Welcome. I'm Chip Merritt, Vice President from Insurance Companies and Pension Funds, but there will be a requirement for analytics and data and ratings in that space. President and Benchmarks in the very fast moving and volatile commodity world, especially after the post LIBOR of the world. As we look at all of these opportunities for our customers taking into account market trends, Our values and our capabilities. We've put in place a strategic planning model, which we're using in our organization that looks at where we're going
to allocate capital and how
we're going to of Kate Capital and how we're going to hold build businesses accountable. Our new model looks at our growth across Welcome. I'm Chip Merritt, Vice President and different product segments. We look at our core markets with our core clients. How can we get more penetration?
How do we think about pricing? How do we think about getting more clients like the ones we have. We look at extending new products into our existing client base. We look at extending into international markets. We want to have a way To understand where we can grow internationally profitably.
And then of course in this day and age with technology moving as fast as it is With the users that we have upgrading their needs and their understanding all the time, we have to look at disruptive innovation and all innovation. But how do we get there? We get there through active management to deliver performance. We're shifting from the operating model A holding company to an actively managed company. That means that there's metrics.
There's a way we drive our business that we allocate capital.
But very importantly, that company which has ways
that we're interrelated across the President. What is operational excellence? For us, it means There is a data flow, a workflow across every one of our businesses that is similar. On this slide, you can see the depiction of that work President that starts with acquiring data, mining it, protecting it, translating it, analyzing it, doing analytics, President. Innovating product development and models and then distributing it and delivering it whether it's through Cap IQ and our own proprietary President or we do it also through 3rd party channels.
But in order to deliver that model, we have key enablers. We have technology. We have a technology and data committee across the entire company that's facilitating our technology growth. Risk management is critical for and becoming more important all the time, especially for our own businesses and also as a business of Opportunity. Don Howard, who's here today is on our Executive Committee and runs our risk management area.
Don has over 30 years of experience in Risk Management as a regulator, as a banker and in Risk Management and Banking, Securities and Insurance. Our global Support network is also important that we leverage that across the group, our media relations, our public affairs, our government relations. Ted Smith runs at Group with over 30 years of private sector experience and public sector experience taking advantage of our knowledge and our scale in that area. But we won't exist without our clients. It's our clients that fuel our business.
And it's our clients President. And I wonder how many of you would have thought before you came here today that over 40% of our revenue comes from the corporate sector. And in order to engage with our clients, we have strong outreach. We have many ways we do that. We deliver our data through data feeds, and you see here.
And one of our key thought leaders is Paul Sheard. Paul Sheard is our Chief Economist and Paul Sheard is an expert in macroeconomics in Japan, in Asia and especially in Central Banking. He can talk to you more about the taper than anybody I know. And Paul leads a team of economists of researchers and quants around the globe to ensure that we are engaged in the most relevant topics in the world as well as Translating that and taking it back to our analytical businesses. And finally, the foundation of our business and what Truly fuels our business is great people and great talent.
And we've taken this business model that we've talked about, which Starts with a vision, a mission and a purpose. Our essential intelligence translated that into a strategy based on the needs of our customers, Changes going on in the market, secular trends, turn those into specific business strategies, taken those into President. We have a great partner in human resources, John Beresford, who has over 25 years Welcome. I'm Chip Merritt,
Vice President, Experience
in Human Resources Management. And in particular, he's putting a major focus on leadership and development, So for the rest of this afternoon, you are going to be meeting our best talent. You're going to be meeting some of our top leaders in the organization. This afternoon you'll have people on the stage who are going to listen to some of their presentations, have an opportunity to do Q and A. I hope everyone has a chance afterwards to step across the hall to learn more about Specific products and capabilities that we have, but also look at the people that are there.
The people that are there are also some of our top of Talent, who will be listening to you and you can be learning and listening to them. And so with that, let me turn it over to the President of Platts,
To refer to the market value we publish for commodities, our price assessments are used as a basis for pricing spot transactions and long term contracts to identify Industry standard benchmarks. A key distinction here is that Platts does not set oil prices. We provide price assessments for the market to make its own judgments as to Oil's market value. As a neutral market observer, our independence means we have no vested interest in the price President. The value of oil or where the market is heading.
Flat's source of revenue comes from subscriptions to our range of market data, assessments,
and have an opportunity to talk to you about the Platts business. At Platts, our focus is to bring transparency to the world's commodity of the Americas, markets that by nature are not inherently transparent. We're a leading provider of benchmark price assessments, news, analysis and Analytics covering 5 major commodity sectors, petroleum and the related refined petroleum products petrochemicals Welcome. I'm Chip Merritt,
Vice President, our entree into the agricultural market.
We published more than 12 of Exchange Traded Futures Contracts. And it's estimated that our price assessment for North Sea Crude Oil, Brent, comprises and is the benchmark for more than 60% of the world's crude oil. In the past
Welcome. I'm Chip Merritt, Vice President. Three important
acquisitions that extended our capabilities. In 2011, we acquired Bentek Energy, a leading provider of Analytics in the North American Natural Gas space, strengthening our position in North American Natural Gas and giving us a footprint Welcome. I'm Chip Merritt,
Vice President of Capability
and Analytics to extend into other sectors. Also in 2011, we completed the acquisition of Steel By which to extend further into the agricultural sector. For the discussion today, I'd like to focus a bit on the Price assessment side of the business is that's the major driver of growth for the Platts business. What we have depicted here is the supply chain Welcome. I'm Chip Merritt, Vice President for Petroleum Products.
Similar supply chains exist across all of the commodity sectors. But if we look at the supply chain from points of production Welcome. I'm Chip Merritt, Vice President and Refinement
to Distribution. Ownership of
a commodity as it flows through the supply chain changes hands and changes ownership throughout that process. It's necessary as the ownership changes hands for a market price to be established to facilitate that transfer of ownership. Welcome. I'm Chip Merritt, Vice President's action to occur. The majority vast majority of commodities trade as private bilateral transactions.
So this puts a Desmond to reflect the global complexity of production, distribution and trade flow across these various commodities. Trends of Increased Consumption of Energy and Materials in Asia, particularly in China and India. This is creating demand for price points that reflect the flow of trade into these regions. If we look at the explosion in supply of petroleum, natural gas liquids and natural gas in the of the U. S.
As a result of the technology to extract these materials from shale in North America. This is creating a vast of Source to Supply, which again creates a remapping of the trade flows of commodities and creates demand for price assessments. We serve a variety of customers across these global supply chains from producers to processors to end users. Basically, anyone who has an exposure to the price of a commodity and has a need to manage fluctuations in the price of the underlying commodities. These include integrated major of companies, national oil companies, mining companies, steel mills, all the way through to manufacturers and airlines.
In fact, we serve more than 10,000 customers across 170 countries, making us the most Global of the McGraw Hill Financial Businesses, with 60% of our revenue being sourced outside of the U. S. And we serve these customers from 20 flats offices around the globe. From 20 Platts offices around the globe. I want to spend a little bit of time on talking about how the use The sub price assessment evolves in the marketplace.
So, I think this sets up an important understanding of the future growth potential for the Platts business. Of You Rewind in time, operated by setting up fixed price agreements for a fixed term and a fixed amount of supply for that commodity, which all works Well and good when there's very little volatility in the market. But this mechanism of having locked in fixed prices does not allow for management of price fluctuations Welcome. I'm Chip Merritt, Vice President and Risk and Exposure Due to Price Volatility. As the market begins to trust published prices and assess of Contracts, where the price that's referenced for settlement of that transaction is a floating price that references a published price from Platts.
This in addition to the creation of a futures product that references that same published price allows for an active derivative market to Welcome. I'm Chip Merritt, Vice President for hedging to occur of any fluctuations in price throughout that supply chain. This provides customers with a ready mechanism to manage price volatility, of Liberty, an ever increasing challenge in the commodity markets today. The other point worth noting is the phenomenon of what happens to price Providers such as ourselves throughout this evolution. It's often characteristic that in the early stages there are many price of Providers offering price assessments to the market.
As the market begins to rely on certain price assessments that they feel best reflect market So if we look at where each market is in its stage of evolution, if you look at the upper left hand corner, you can see that natural gas and petroleum products are very well established and their use of these floating price systems and actively hedge against price risk. This is best reflected if you look at the chart on Welcome. I'm Chip Merritt, Vice President of the of Lime Commodity. In oil, it's 10 times that. Now if we look at some of the other markets that are much earlier in their evolution towards using these of Pricing Systems and we look at iron, ore and steel in particular, you can see that it's a fraction of the underlying production value.
And if we look at the lower half of the chart on the left hand side, you can see that agriculture, coal, iron ore, I would add LNG into that, petrochemicals and of these additional sectors of the business. And our strategy as a result is to establish Platts price assessments as of the Benchmark across the whole variety of physical markets. Increasingly, we deliver our data and our information MERS in the form of market data feeds. These feeds are deeply embedded into the front, middle and back office systems such as risk management systems, invoicing and the largest portion of our product delivery and by far the fastest growing portion of our product set. In addition, we deliver real time information that includes intraday market news and commentary, live bids and offers and intraday So if we look at how the business has performed over the past several years, you can see we've had very strong mid teen of our business is recurring in the subscription base and we have renewal rates in excess of 90%.
On the right hand side, you can see that petroleum continues to be the largest segment, roughly 2 thirds of our revenue mix, followed by power and gas. And while Petrochemicals and Metals and Agriculture are still a relatively small portion of our contribution, the growth rates of these are exceeding the average growth rates of the business and are
White
Healthy. So just to comment on 2 fundamental trends that underlie both the Current growth that we've achieved as well as the future growth that we can expect. Again, price volatility and the need to manage that Price Volatility Based Risk continues to be a major driver. That's evidenced and has existed over time and we certainly fully expect that that trend is likely to And we can see that through the increased use of commodity features that are based on underlying published prices as shown in the upper right of the Q4. In addition, the demand for energy and materials by emerging economies and developing economies combined with increased trade So, as we look ahead, we see significant opportunities for growth.
We're going to focus on continuing to strengthen our emerging benchmarks. Welcome. I'm Chip Merritt, Vice President. We're investing in our web based capabilities to provide even more flexibility and capability for customers to integrate our content and our price assessments Welcome. I'm Chip Merritt, Vice President of these sectors.
In particular, building upon the strength of our position in the sugar market, we will expand into wheat, corn, soy and other agricultural commodities as well as into and be able to manage a truly global business and I will be personally relocating over to London in a few weeks to lead that effort. We're investing in developing world class price reporting systems at data operations to fuel our future growth and capabilities. And we actively engage of Age of Regulators around the globe as their interest in both the commodity markets and the use of benchmarks increases. So to sum up, we're very pleased with the results that we have achieved to date. We feel very good about the We're investing in expanding to additional sectors and to providing additional capabilities of Luxury, the CEO of S&P Down Jones Indices.
Thank you, Larry, and good afternoon, everybody. Today, I'd like to give you a little bit of an overview on S and P Dow Jones Indices. We are the largest index provider in the world. Certainly in terms of both benchmarked products that are used for investment performance, so many of you that are active managers use our benchmarks to measure your own portfolios, but also as importantly as the basis of investment products. There is over a 1,000,000 indices that we calculate on a daily basis.
President. Clearly people know the S and P 500 and the Dow Jones Industrial Average. These are Iconic brands that everybody knows. But our product offering is much broader than that. We actually have offerings both in U.
S. Equities, global equities, President. Strategy indices which people nowadays also refer to as smart beta or alternatively weighted indices. Fixed income Which is an area that we see tremendous growth potential as the market is going to go through some pretty dramatic changes. And also in commodities with the S and P GSCI, which is a leading benchmark used for trading of commodity index products.
And finally, we have of our economic indices. These include the S and P Case Shiller, which really defines prices of housing in the U. S. And most recently we launched the S and P Health Care Cost Index, which we think someday will allow people to hedge health Your cost exposure in the marketplace. Now the S and P 500 alone is clearly one of the most used benchmarks with over $5,700,000,000,000 in indexed in benchmark assets and over $1,600,000,000,000 directly indexed to that.
In addition, we also have the leading volatility traded products with the VIX that trades on the CBOE and of course Futures and options that trade on the CME, which average over 2,000,000 contracts every day. So that's a little bit of what we are about. What about what other people think of our business? As you can see, we win many awards for innovation and innovation is a key Part of our strategy, we need to continue to develop new concepts that investors can use both as benchmarks and also as a basis for investment of Products. As you can see, we have a very global business with customers in 60 9 countries and people on the ground in 18 different offices worldwide.
In any place where there's a financial marketplace, you'll find some of our and staff so that they can be close to our customers, whether they be the product issuers or the asset managers that are using our indices. Also importantly, you'll notice that we have many Exchange relationships, 13 in total, including the CME and CBOE here in the U. S. But just as importantly, in The new emerging markets, we look to use exchanges for two reasons. Number 1, they're a good way for us to commercialize their own content outside of their home market.
Through our distribution platforms, we could actually take their indices and make sure that when people are thinking of how to invest in Canada. Whether they're sitting in Japan or whether they're sitting in South Africa, they're going to think of the S and PTSX60. President. In a global business, it's very easy to manage this sort of flow when you have the right infrastructure. But another important part of our exchange Partnership is that these exchanges also give us the inroads into the local marketplace.
Especially once you get outside of the U. S. And Europe, exchanges are Still the dominant player in the World Capital Marketplaces. If you go to any of these markets, the exchanges are the pillar of the
of the local investment community.
And being associated with them gets us into with the local asset managers, the knowledge of the local regulators, of the local marketplace. And in that case, we're able to cross sell our existing global products into those local markets also. As you will see, our revenue is about 80% in the U. S. And 20% or so internationally.
But that's not really truly Reflective of our actual revenue stream. And the reason is that many products are now accessed all over the world out of U. S. Based customers. So our largest customers in the ETF space, President.
In ETF space for example BlackRock and State Street, they're U. S.-based customers. So regardless of where their ETFs are traded, they're accounted for as of U. S. Based Revenue.
And more and more nowadays investors all over the world have easy access to U. S. Marketplaces, whether they're trading futures on the S and P 500 out of We're accessing ETFs out of Latin America that are traded here in the U. S. So how do we make money?
We make money in several different ways and we look at the world really in terms of how We distribute our indices. The biggest category really is ETFs and mutual funds, where we get paid basis points for assets under management. So as assets grow, our revenues continue to grow. Similarly, in over the counter and derivative structured products, whether they be retail structured of Europe, OTC Trading here in the U. S.
We get paid again based on the assets underlying the notional value of these contracts. In some cases, it's a pure basis points. In some cases, it might be blanket agreements so that dealers could trade of Brazil. Our products trade there and every time somebody trades a derivative contract based on one of our indices, we again earn President. So these three categories account for about 75% of our revenue.
We like this approach because as our customers Become more successful as our assets grow, as our trading volumes grow, our revenues also grow. So it gives us an incentive to be very supportive of our customers. The final categories are what we refer to as data and custom indices. Data is either the terminal charges to receive real time Price feeds on the S and P 500 and then the Dow Industrial Average and some of our other leading real time indices that you'll see in your Bloomberg terminals or also on your of Reuters Terminals, but also the underlying constituent data that becomes necessary for you to measure performance of your portfolios against our indices And this is an area that we think there's going to be a lot of opportunity. Here we can either customize one of our existing indices.
So for example, you could take the S and P 500 and exclude all tobacco stocks, very popular with church groups, for example. But also for people that develop their own ideas, their own intellectual property and they need an independent calculation agent. This is becoming more and more Important as people understand the conflicts of interest that could exist, if it's an asset manager is also calculating their own index for use in Products were worse in the case of things like LIBOR where people were actually trading and manipulating the indices themselves. So as you can see, we've had pretty strong growth over the last few years with a 24% compounded annual growth rate since 2011. Welcome.
I'm Chip Merritt, Vice President. That of course includes the acquisition of the Dow revenue stream, which half came in 2013 and the other half was added in last year in 2014. Even without factoring in Dow, our growth rate over these past 3 years It's been about 8% compounded and our growth rate last year alone on an organic basis would have been about 12%. And we're able to do this At very high margins in the 60% range. As you can see on the right hand side, same product split that I showed you earlier with about 3 quarters of our revenue coming from investment products that again go up and down in line with our customer success.
So what have been some of the underlying drivers of our business? Clearly, we've benefited from the growth of President. In passive investing, the definition of an index has really grown tremendously. And there's still plenty of room for this business to continue to grow. We estimate that there's about 26% of retail mutual funds or institutional mutual funds that are held as either index President.
Funds or ETFs. So again, while there has been a lot of growth there over the last 10 years, still plenty of Tuning to continue to capture market share. Clearly, ETFs have been tremendous success story over the last 10 years with assets under Globally now approaching $2,400,000,000,000 tremendous growth of 27% annually over the past 10 years. And in this market We have over a 30% market share with over $660,000,000,000 in assets under management tied to our indices as of the end of last President. And even here, we see a lot of opportunity for continued growth.
Most of the ETF assets are still sitting in the U. S. In some cases, as I said, it's foreign investors that are investing in U. S.-based products because of the liquidity, the transparency of our marketplaces. President.
The success of ETFs are only starting to develop. And these are all the markets that we're operating in today. So what's going to drive our growth strategy going forward? Importantly, will be the development of additional indices. Last year alone, we Created over almost 400 new indices.
The question might be asked, do people really need that many new indices? But as you can This really was a representation of the market portfolio. Today an index is really anything that can be developed into a quantitative Strategy that has rules based around it that needs to be in a transparent fashion. So even active managers nowadays may be trading sector spiders, they may be investing in thematic new ideas. So again, there's opportunity to continue to Welcome.
I'm Chip Merritt, Vice President, especially in emerging markets, especially in higher growth markets, either through our exchange relationships or with native business growth in those marketplaces. Of Places. Just in this past year, we developed new offices in South Africa and in Mexico City. And we continue to see Latin America as a marketplace that's got potential because again it's still very early days in terms of the sophistication of their investment of Knowledge. And we will continue to look at strategic partnership with exchanges.
As I mentioned, we are the largest provider of exchanges Finally, we will be investing in our brand. The brand, the S and P brand, the Dow Jones Industrial brand are known all over the world. And we have a strategy that we call build from the core, which is to take a core index something like the S and P 500 and continue to build new versions of it. Originally, we had Growth and value versions of the 500 and sector versions of the 500. These all became basis for products and index funds.
But more importantly, We can start up tying up new concepts. Last few years, we've had a lot of success with a low volatility version of of the S and P 500, minimum variance versions of this index. And we can take the same concept and apply it not just to the 500, but to many, many other products that we have both at our own and with our exchange partnerships. Why is this strategy important? Because while many people Marketplace, but it's not going to be the S and P 500.
So we will continue to develop new concepts that we could apply to these brands and to get this network effect that strengthens the core brand. One of the things that has made some of the ETFs tied to our indices very, very successful is that this very liquid futures markets. One of the things that made VIX very successful was that index options traded on the S and P 500 and they in turn became Sesle because there are futures that traded on and people index to it. So this network effect can drive growth going forward. And you'll see us Continuing to advertise and educate the marketplace, we think it's important that people understand the use of indices.
And while we have both active and Massive customers, we think knowledge is very, very important to getting people to understand our products and take us to the next of the business in light of LIBOR. We've always operated very much as if we're regulated with transparency around our methodology President. And governance chaired by David Blitzer and the index committees that are very much walled off from the commercial side of our business. This is going to be more and more important going forward as people have Welcome to appreciate the risks of when you don't have independent indices used in financial products. So with that, this has been a brief overview of our business.
Couple ground rules please. Unlike the investor earnings calls, let's really keep it to one question, if we could. And please for the webcast,
I think it was about a year ago that the EU started a probe on oil pricing. It was sort of unclear The class was a part of the discovery or actually a focus. Any update?
There's been this occurred there was a sort of fact finding and Information gathering that took place May of last year by the EU collecting information from ourselves as well as a handful of Oil Companies that are active in the North Sea. There's been no activity since that. We don't believe we're of Septibit to that investigation, but there's been really no interaction or follow on requests from the EU following that President of Information Gathering.
Okay. Yes, we're here. Manav?
This is Manav Patnaik with Barclays. Alex, you mentioned that your share of the entire indices market you put it was 30%. Could you help us elaborate sort President. The competition out there and what the need for consolidation or just your desire maybe for consolidation in that space President.
Sure. Well, the market share of the entire industry is kind of hard to measure because many customers will take indices from ourselves and certainly some of our of and certainly some of our competitors. The 30% market share that I was referring to was of the ETF marketplace where we're the number one provider. Certainly as As far as consolidation, it's something that we think that over time we'd be interested in looking at potential businesses that become available. But we're looking to grow the
Thank you. Craig Huber, Huber Research. Question on index business. You talked about the opportunity long term for fixed growing more into fixed income. Can you just elaborate
Sure. So the fixed income index business right now is dominated by bank owned index businesses that were set up initially to drive trading to their Trading desks. So if you wanted to measure the index, you wanted to track it exactly, you're forced to trade with that firm's trading desk to get the prices that was used in the index. We think that post LIBOR that model is going to have to change. There's too much As we saw from the LIBOR situation where people could potentially manipulate prices that are used in an index, especially if they're turning President and have a vested interest in products or trading swaps on that same index.
Firms like ourselves and certainly we're not the only one, we're independent providers of Indices. So we think that there's going to be a movement. And again, it's been in the papers, rumored in the papers that we think some of the banks President. We may choose to get out of the index business, which will allow firms like ourselves to continue to expand. Right now, we actually generate not an Substantial amount of revenue from fixed income indices and products, but we think that that's one of the areas in terms of our asset class coverage
Thanks. Alex Graham, UBS. This is for Larry. And sorry, it's a 2 part question on natural gas. 1 in the and basically the Look for that part, which I think is 25% of Platts business.
In the near term, I think natural gas has been super volatile. So maybe you can President. I'll just elaborate what that means in the near term. Do you see a lot of new subscriptions coming in? Are people really interested in the market?
And do you see something coming out of that? And In the long term, I think there's a lot of different prices around the world, very cheap in the U. S, very expensive in Asia. We're talking about LNG and things like What does that mean for Platts long term? I mean, that looks to me like a big long term more prices, more new benchmarks So you would just maybe elaborate on that trend in particular.
Sure. I think I may have counted 3 parts. So let's see how well I do it, remembering what part. I think overall, we're a A couple of things about the business and volatility in general. We're not really impacted by short term swings and volatility, right?
We're a subscription model, so we generate recurring revenues on at Basis. But it does speak to the underlying health of the industry. So when we see periods of low volatility and low price For decent periods of time, as we've seen in the U. S. Natural gas market, it does start to impact the industry.
There's less trading. There's fewer players. There's players that are So what we look for is kind of the long term health of volatility. I think the main point though that you pointed out that we CEO as well, is the price discrepancy for natural gas around the globe between the U. S, Europe and Asia is very significant.
And that's creating what we believe will Relatively soon be an export market for the U. S. And that should begin to move prices in the U. S. To reflect a better balance of supply and demand and Mobility of Gas Around the World.
It's going to be a period of time before the volumes are significant. But even once marginal delivery starts to occur, we believe that will start to Delivery starts to occur. We believe that will start to equalize prices and probably introduce some volatility into the market, but an exciting long term trend, I for the market and for the U. S. In natural gas.
Did that get all four parts there? I can see the front row. Peter?
Yes. So Larry sort of related to that the it's Peter Appert at Piper Jaffray, sorry. The how do we think about the Gale, the market opportunity. How big is the market for Platts? How do you get there?
Do you have to do more big acquisitions? And I'm particularly interested in the ag market if that could be as big as the Oil market is currently
thanks. It's
a great question. It's a tricky thing to assess, Peter. It's because there's a couple of different factors. I mean, we can look at the aggregate value of what's produced. But it's also what's transported and shipped.
If it's put on a ship and move the farther it's moved, the more sort of supply and demand dimensions come into it and the more the need for price assessments from that occur. So what the fact is we tend to look at are what's the underlying production Value relative to other commodities. How many players are active in it? How active are the derivative markets now and likely to be? These are dimensions that allow us to get a sense for But I would just say all of these markets are large complex global markets that we see over time evolving But to put a real dimension on it is tough.
The second part of your question around acquisitions, we're always looking I'm very interested in acquisitions, particularly those that can tuck in that where someone's got a benchmark position established. There's a big first mover Advantage in this market that if once you get the share of mind and you're embedded, as I described, into the contracts and into the fabric of the way the industry trades. That's a difficult position to unseat. So wherever we can work with a firm or acquire a business where they've established that foothold. We're real excited about pursuing that type of opportunity as a way to continue to President, the presence of the business.
Thanks.
Jane The Backner.
A follow-up question on from Alex Cram.
With the Shell
Gas Revolution,
I think it's a bit soon to tell. I think both you take natural gas liquids, you take petroleum and you take natural gas as well coming out of shale. I think as we see those flows But I think for now, Henry Hub's pretty well established as a highly liquid available benchmark. But Things are changing. So we're certainly watching the space carefully.
We're very active in producing investments that reflect these shifts. But whether or not the He fully adopts these. That's something we have to wait and see how the market evolves on these. But our view is we always want to be there with a solution for the If that's where the market wants to move in terms of their use of a price assessment. Okay.
Yes. Bill?
Hi, Bill Bird from FBR. Alex, can you talk about what you're seeing competitively on pricing and how you see pricing developing in your market. Thank you.
Sure. Well, I think really this relates to what's happened in the ETF business. I mean, I don't think there's a lot of businesses nowadays that don't see very competitive environment. We've always had pretty, Details involves things like price breaks as assets continue to grow. So in terms of how the price providers I'm Sorry, how the ETF providers are looking at it.
Certainly, we see the world as kind of premium branded products and lesser branded products. And premium branded Products again continue to get very, very high pricing. These are products that are not substitutable, where there is a little bit more competition, I think it's more on generic type products. But I think a lot of the brands that we have, a lot of the products that we have fit squarely into that Premium category.
Way in the back.
Yes. Tim McHugh with William Blair. I guess two questions On Platts, one is, I guess, directionally speaking, what type of growth is still achievable in your most mature part of that business, I guess, in petroleum, if We wanted to think of it that way. And then if we thought about either historical or kind of future growth in terms of number of customers versus growth with existing customers. Can you help us how we should think about that?
Sure. And the second part of your question is again with the core business? Overall. Overall, okay. What I would say is we've continued to see the core set of customers and the core business of petroleum to be a major source of growth.
And that's really reflected by the Welcome. I'm Chip Merritt, Vice President, but just in general, embedding all of this data into the various systems that they utilize. This is just broadening usage. So many of the large customers are the same customers. We're not Welcome.
I'm Chip Merritt, Vice President, new major integrated oil companies popping up, but we are seeing increased use of our assessments in various forms and our ability Welcome. I'm Chip Merritt, Vice President, to capture revenue growth as a result of that increased use. So that we're quite encouraged by. In terms of overall market expansion, Welcome. I'm Chip Merritt, Vice President.
We continue to bring on a significant number of what we call new logos and new customers that are new trading houses, various players President. Our not major producers are consumers necessarily, but are intermediaries in the business in one form or another. I mean that continues to be a source of growth from a new client set. And then certainly when we get out of the more mature markets like oil, those are much more of a green space for us in terms of customer that we haven't penetrated before.
So we'll take one more question from Hamzah in this session. These 2 folks will be back at the very end. So of Hamzah.
A question for Alex. You spoke about consolidation in the market within indices. Maybe help us I understand how we should think about synergies from an indices deal? How is equity President. How much incremental capacity do you have in the JV before you need to add headcount?
Maybe help us understand of Dynamic. Thanks.
Sure. Well, for someone like ourselves, we're already calculating fixed income indices and equity indices. We think we have the platform in place that's Necessary to grow organically. In the equity space depending on the types of indices, it is a very, very scalable business. So we went through when we went through the Dow acquisition, We literally took all of the Dow indices and brought them on to our platform.
Our platform has been fairly it's fairly new, It's very robust. It allows us to handle multiple, multiple numbers of indices both in real time and on an end of day basis. At At some point, you do start needing to add people. It's index managers that will manage the actual daily process. But also as you continue to add customers, You need to have the customer relationships.
When you get into some of the other asset classes, again, the technology is a little bit different. The customer base is a little bit different. So something like a fixed President. And
Great. Alex, Larry, thanks. Next up is going to be Finn O'Neill,
the President of J. D. Power. Dean Ryan Keyes in and member satisfaction among commercial health plans
in the Minnesota Wisconsin region
by JD Power and Associates
not once, not twice, but 4 years in a row.
Of Quality in the U. S.
President. I say family because we've been blessed with this honor for 3 years in a row.
So it's no wonder that American consumers have an aided awareness of the J. D. Power brand of over 80%. But the question we ought to ask Well, really it's about the trust that's been built up over 46 years. Our Core business is not the commercials.
Our core business is what we call syndicated studies. We design, we field, the founder of the business is sitting watching the 1984 Super Bowl. The screen goes black We've dedicated research in 16 countries and 4 continents around the world. In fact, it may surprise you that we are the largest business for McGraw Hill in China. And we have become the benchmark in many industries.
Our metrics Around customer satisfaction not only allows companies to compare themselves to how their competitive set is doing but also to How much KPIs within the industry within the company I should say and tie compensation to that. So a great example is from the of Steel Industry. Some of you may in fact have taken the IQS or initial quality survey here. What we do is survey new car owners Welcome. I'm Chip Merritt, Vice President.
You go to Mercedes Benz where they build the S Factory in East London, the S Model in East London, South Africa or Hyundai. Welcome. I'm Chip Merritt, Vice President of the Economy. What do companies need to know? They need to know what motivates the consumer, what Drives their loyalty, what makes them advocates of the brand.
I personally can't think of more essential intelligence than that. The first and biggest is research. It consists of the syndicated research which we fund directly, which I talked The ad claims which come from those clients that choose to promote the fact that they were number 1 in our surveys and then something we call proprietary or Tracking Research. Essentially, that's a business where clients come to us and say, we want you, JD How are you to do the research because of your benchmarks or because of your expertise? And we take the sample from them.
We do the analysis and we provide the results to them. That's not published. That is contractual with the client. It's a sizable business of the Gen Network and we have a sample outside if you'd like to see it later. JD Power and to understand pricing with incentives.
So imagine that you are a Toyota executive and you've been so rash Just to say that the Camry is going to be number 1 in the midsize segment. And sales velocity is slowing. Inventory is piling up. Let's You got 60 days. For the Camry that's about 60,000 units on the ground.
And in the automobile industry decisions are made in 5 $100,000 or $1,000 increments when it comes to incentives. So you're looking at a $60,000,000 decision. You don't want to make that based on some of the Automotive Industry. The 3rd category is data driven consulting. Essentially, we've built domain knowledge around what drives of Consumer Satisfaction.
And that allows us not only to help our clients measure and understand, but to integrate these benchmarks Schmark, the one that I gave you the example of. That's integrated, it becomes part of the fabric of how they do business. All of this has led to some solid growth and the top line would even be higher if we hadn't exited Certain businesses that were for us unprofitable like forecasting, but we have changed the product mix. It's a much richer higher margin of our business. About 60% comes from the automotive market globally, another 15% or so from financial services and insurance etcetera.
So global growth is important to J. D. Power. President. We are situated and do our syndicated research in economies that are critical to the automotive industry.
China, the United States, Brazil, India, Germany, Japan, we're right there with the metrics. And that's important because it gives Automotive Industry by all accounts has recovered. Transaction prices are at all time highs, rebates or incentives are Under control, inventories are well managed. Europe is now starting an upturn. It's leveled and it's returning to health.
But the center of gravity in the automotive market has clearly shifted to Asia and the big story there is China. You can see that China is growing at about a 7% CAGR over the rest of the decade compared to 4% for the United States. By the end