Good morning, and welcome to McGraw Hill Financial's First Quarter 2016 Earnings Conference Call. I'd like to inform you that this call is being recorded for broadcast. All participants are in a listen only mode, and we will open the conference to questions 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 mhfi for mcgrawhillfinancialincorporated.com and click on the link for the quarterly earnings webcast. I would now like to introduce Mr.
Chip Merritt, Vice President of Investor Relations for McGraw Hill Financial. Sir, you may begin.
Good morning. Thank you for joining us for the McGraw Hill Financial's earnings call. Presenting on this morning's call are Doug Peterson, President and CEO and Jack Callahan, Chief Financial Officer. This morning we issued a news release with our Q1 2016 results. If you need a copy of the release and financial schedules, they can be downloaded at www.mhfi.com.
In today's earnings release and during the conference call, we'll provide an adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the corporation's operating performance between periods and to view the corporation's business from the same perspective as management. The earnings release contains exhibits that reconcile the difference between the non GAAP measure and the comparable financial measures calculated in accordance with U. S. GAAP.
In addition, I want to remind you that we now exclude deal related amortization from our non GAAP results. Before we begin, I need to provide certain cautionary 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 Form 10ks, NQs and other periodic reports filed with the U.
S. Securities and Exchange Commission. I would also like to call your attention to a European regulation. Any investor who has or expects to obtain ownership of 5% or more of McGraw Hill Financial should give me a call to better understand the impact of this legislation on the investor and potentially the company. We're aware that we do have some media representatives with us on the call.
However, this call is intended for investors and we would ask that questions from the media be directed to Jason Fleischwanger in our New York office at 212-438-1247
subsequent to this call.
At this time, I would like to
turn the call over to Doug Peterson. Doug?
Thank you, Chip. Good morning, everyone, and welcome to the call. This morning, Jack and I will review our Q1 results. More broadly, however, want to share the progress made at the company as we increasingly focus on providing essential benchmarks, data and analytics to the financial and commodity markets. Let me begin with the highlights of the Q1.
The strength of our portfolio was displayed as we delivered solid EPS growth despite weak global debt issuance. We completed our portfolio refinement with announcements that we have reached definitive agreements to sell J. D. Power for $1,100,000,000 to XIO Group and Standard and Poor Securities Evaluation Inc. And Credit Market Analysis to Intercontinental Exchange.
A top priority in 2016 is the integration of SNL. We made tremendous strides with both the integration and the progress on important synergy targets. We delivered 130 basis point improvement in the company's adjusted operating profit margin. Our share repurchases resulted in a reduction in average diluted shares outstanding of 9,000,000 shares over the past year. And finally, we are prepared for changing the name of the company to S and P Global tomorrow.
This new name better reflects the company's global footprint and premium portfolio. Now let's take a closer look at the Q1 results. While reported revenue grew 5%, organic revenue on a constant currency basis was unchanged. Weakness in S and P rating services revenue was offset by growth in every other business with particular strength in Platts and S and L. The company delivered 130 basis points of adjusted operating profit margin improvement as a result of the addition of S and L and tremendous progress made toward achieving S and L integration synergy targets.
Margin improvement and share repurchases enabled the company to record an 8% increase in adjusted diluted EPS. In the first quarter, every division recorded top line growth and improvement in margins except for Stann and Poor's rating services. What is most notable, however, is the financial improvement in Market Intelligence. Now let me turn to the individual businesses and I'll start with Market Intelligence. For division reporting purposes, we have rebranded S and P Capital IQ and S and L as S and P Global Market Intelligence.
In the first quarter, revenue increased 27%, primarily due to addition of S and L. Excluding S and L revenue, organic growth was 7%. Adjusted operating Adjusted operating profit increased 81% and the adjusted operating margin advanced 900 basis points to 30.3%. In 2016, successful integration of SNL is a top priority for the company. We made a substantial investment with the acquisition of SNL and we recognize that we must achieve our integration synergy targets in order to deliver a return on that investment.
Our Q1 progress demonstrates our resolve to achieve these important targets. Most of the cost savings in the Q1 were the result of decreased staffing levels. Going forward, we will continue to target additional longer lead time synergies. Some of these items will require investments. Let me add a bit more color on 1st quarter revenue growth in the Market Intelligence business line.
In Financial Data and Analytics, S and P Capital IQ Desktop and Enterprise Solutions revenue increased 7%, principally through a high single digit increase in desktop revenue. In addition, SNL revenue increased 13% compared to Q1 20 15 prior to our acquisition of SNL. Global Risk Services revenue increased 8% led by double digit ratings express growth, which is increasingly used by customers to meet their regulatory reporting needs. In the smallest category, research and advisory, revenue decreased 9% due to declines in equity research services. Now let me turn to Standard and Poor's rating services.
During the quarter, revenue decreased 9%. The ForEx impact was negligible. Adjusted operating profit decreased 12% and the adjusted operating margin decreased 160 basis points to 45.6%. The results were driven by a slow start to global issuance in the quarter. While January February had anemic global issuance, however, market conditions improved late in the quarter and March had the largest monthly debt issuance in the past year.
Adjusted expenses declined 6% primarily due to lower incentive compensation and legal expenses. Non transaction revenue in the quarter increased 3% or 5% excluding ForEx with strength in surveillance fees in CRISIL partially offset by declines in rating evaluation service. Weak transaction revenue was caused by a 14% decline in global issuance including a 64% decrease in global high yield issuance, partially offset by mid teens growth in bank loan ratings. The high yield market has been particularly volatile with weak transaction volume since the Q3 last year. Let's take a look at issuance.
U. S. Issuance declined 24%, EMEA declined 10% and the Americas ex U. S. Declined 27%.
Only Asia reported an increase in issuance with an 8% gain. This marks the 4th consecutive quarter of year on year declining global issuance. If we look more closely at the largest markets, 1st quarter issuance in the U. S. Was down across the board year on year.
Investment grade decreased 13%, high yield down 61%, public finance was down 9% and structured finance also declined 40% with declines in every asset class. In Europe, investment grade decreased 3%. High yield was down 68%, while structured finance increased 7% with growth in covered bonds. And in Asia, investment grade increased 10%, high yield was down 39% and structured finance increased 4% due to RMBS and covered bonds. During the quarter, Standard and Poor's rating services issued its annual global refinancing study.
This yearly study shows debt maturities for the upcoming 5 years. This chart illustrates data from the 2015 2016 studies. The 5 year period in the 2016 study shows a 6 $100,000,000,000 increase in the total debt maturing versus the 2015 study. We use this study along with other market based data high yield maturities. Over the next 5 years, the level of high yield debt maturing significantly increases each year, which is a potential source of revenue in the coming years.
Yesterday, Standard and Poor's issued their latest global issuance forecast. We still expect overall global issuance in 2016 to finish slightly lower than the level seen in 2015 with a decline of about 2%. Interest rate assumption in the U. S. Have been paired back, which should give a boost to speculative grade issuers, though through the remainder of the year.
However, the decline of the previous 3 months is expected to weigh down global trends. During sorry, turning to S and P Dow Jones Indices, revenue increased 5%. Adjusted operating profit increased 5% and adjusted operating margin improved slightly to 67.7%. During the quarter, strength in revenue associated with exchange traded derivative activity and data licenses was partially offset by weakness in average ETF AUM and OTC derivative. If we turn to the key business drivers, market volatility particularly early in the quarter resulted in increased trading activity of exchange traded derivatives.
The average daily volume of exchange traded derivative products based on S and P Dow Jones Indices increased 29%. 2 key products, the e mini S and P 500 futures and the CBOE Volatility Index, OpEx and Futures known as the VIX had volume increases of 29% and 43% respectively. The exchange traded product industry continues to show strength recording inflows of $70,000,000,000 in the Q1. Despite AUM based on S and P Dow Jones Indices reaching $828,000,000,000 at the quarter end, the highest since year end 2014. Average AUM during the quarter decreased 5% year over year.
It's a testament to our business model and product scope that with the year over year declines in ATF average AUM, increased volatility has generated sufficient trading related revenue to enable S and P Dow Jones Indices to deliver top line growth. On to commodities and commercial markets. Organic revenue increased 8% adjusted for the NADA used car guide in Petromedia acquisition. Adjusted operating profit increased 21% and the adjusted operating margin improved 280 basis points to 42.2%. Strength in Global Trading Services helped Platts deliver revenue growth of 10%.
Clearly, the biggest news is the announcement that we've reached a definitive agreement to sell J. D. Power with an expected close in the Q3. J. D.
Power is an iconic brand and Finn O'Neill and his team have built a strong business over the past decade as part of McGraw Hill Financial. We wish Fin and all of the J. D. Power employees continued success. Turning to Platts, Global Trading Services booked double digit revenue gains primarily due to the timing of license fees and strong license revenue from the Singapore and ICE exchanges.
This license revenue tends to be erratic from quarter to quarter based on trading activity. The core subscription business delivered high single digit revenue growth led by the petroleum sector, which had mid teens growth due to strength in market data for oil price assessments, shipping data and forward price curve products. Metals, agriculture and petrochemicals revenue grew mid single digit primarily to strength in the Singapore Exchange listed TSI iron ore contract. Over the course of the year, we anticipate revenue growth will moderate as low oil prices have led to consolidations and restructurings in the oil and energy industry. On the business development front, we have great news.
Mexico has entered into an exclusive agreement with Platts to utilize its oil and natural gas price data in the nation's pricing formulas as part of the energy reform policy. Mexico is one of the largest exporters of gas globally. It has vast resources of oil and gas and influences flow patterns not just in North America, but around the world. In closing, the breadth of our portfolio enabled the company to weather weaker to weather market volatility 2016 and our adjusted diluted EPS guidance start in 2016 and our adjusted diluted EPS guidance remains unchanged at $5 to $5.15 While we've made progress with the integration of SNL, it remains a top priority for the company with much more to do. The next time I speak with you, we will be named S and P Global with SPGI as our new ticker symbol, that's SPGI.
We will be ringing the opening bell at the New York Stock Exchange on Thursday to mark the occasion. With that, I want to thank you all for joining the call this morning. And now I am going to hand it over to Jack Callahan, our Chief Financial Officer.
Thank you, Doug, and good morning to everyone on the call. First, I will recap key financial results. I also want to discuss the impact from adjustments to earnings and outline a reporting change we made to bring greater clarity to the disclosure of our recurring revenue. Then I will update you on the balance sheet, free cash flow and return of capital. And wrapping up, I will provide some color on our guidance.
Let's start with the consolidated Q1 income statement. There are just a couple of items I want to highlight. As you just heard from Doug, we are off to a good start in 2016 despite weak bond issuance, which resulted in a year on year revenue decline at S and P Rating Services. The balance of the portfolio, excluding ratings, delivered strong 18% top line growth driven by both organic growth and acquisitions. Taken in total, reported revenue grew 5%.
We have faced several quarters in a row of relatively weak global issuance. And once again, thanks to the strength and breadth of our portfolio, combined with the timely addition of S and L Financial, we were able to sustain top line growth. Our adjusted operating margin increased 130 points led by the outstanding profit growth and margin improvement at Market Intelligence. This division recorded an adjusted margin of 30%, an improvement of 9 points versus a year ago. This is driven by strong top line growth, realized cost synergies and the addition of S and L profits.
Looking forward, we anticipate Market Intelligence adjusted margins to generally continue in this new range. Adjusted margins across commodities and commercial also improved almost 3 points. Interest expense was up over $24,000,000 due to our highly successful bond offerings last year. This stepped up level of interest expense will continue to create a difficult year over year comparison until the Q4. Share repurchases over the past year have resulted in over a 3% decline in average diluted shares outstanding.
So overall, sustained top line growth, margin improvement and share count reduction delivered an 8 percent increase in adjusted diluted earnings per share. Now let me turn to adjustments to earnings to help you better assess the underlying performance of the business. Pre tax adjustments to earnings totaled $15,000,000 in the quarter. The first item consisted of a 24,000,000 technology related non cash impairment charge and market intelligence. This write down is based on a change in strategy.
The division was working towards sourcing certain data internally. Now we have secured this data more economically from an outside source and are shutting down incurred to sell J. D. Power. Also, as Chip pointed out earlier in the call, our adjusted results now exclude deal related amortization.
All adjustments are detailed on Exhibit 5 of today's earnings release. In Exhibit 6 of today's press release tables, we have modified the way that we report recurring revenue to provide investors with more granularity in understanding our revenue mix. In the past, we reported ETFs and mutual fund assets under management based licensing revenue in S and P Dow Jones Indices as non subscription revenue. Because of the ongoing nature of this revenue, we are now classifying it as asset linked fees. Admittedly, there volatility in assets under management, but the nature of this revenue stream is not as transaction oriented as bond issuance.
With this modified classification, more than 70% of our revenue is largely recurring in nature. Now let's turn to the balance sheet. At the end of the quarter, we had $1,600,000,000 of cash and cash equivalents, of which approximately 90% was held outside of the United States. We also had $3,500,000,000 of long term debt and $472,000,000 of short term debt in commercial paper and from a drawdown on our credit facility. Going forward, our level of short term debt will fluctuate as we periodically tap into the short term debt market to fund our share repurchase program and meet other corporate needs.
Our first quarter free cash flow was 84,000,000 dollars However, to get a better sense of our underlying cash generation from operations, it is important to exclude the after tax impact of legal and regulatory settlements in related insurance recoveries. On that basis, 1st quarter free cash flow was $192,000,000 As a reminder, the Q1 free cash flow is seasonally weak due to the payment of annual incentives. Now I want to return review our return of capital. During the quarter, the company bought approximately 2,200,000 shares for $200,000,000 These purchases combined with our dividend totaled to approximately $296,000,000 of cash returned to shareholders in the quarter. The share repurchase program remains an important component of the company's overall capital allocation.
In addition, we anticipate leveraging repurchases to help mitigate the dilution from our recently announced asset sales subject to market conditions. Now I'll provide some additional guidance on perspective on our 2016 guidance. At this time, we are leaving all of our 2016 guidance unchanged and is summarized on this slide. This guidance continues to include the full year results of J. D.
Power, S and P Securities Evaluation and Credit Market Analysis, all of which are pending sale. We will update guidance as necessary once these transactions are closed. While we will likely need to adjust our revenue guidance based on the timing of the divestiture of these assets, we anticipate using cash proceeds and ongoing share repurchase activity to mitigate the earnings per share dilution. So in summary, we are off to a good start in 2016. The strength of our portfolio with its high proportion of recurring revenue combined with the continued progress on our cost reduction programs positions us well to manage through these volatile market conditions.
So with that, let me turn the call back over to Chip for the Q and A session.
Thanks, Jack. Just a couple of instructions for our phone participants. Please press star 1 to indicate that you wish to enter the queue to ask a question. To cancel or withdraw your question, simply press star 2. If you've been listening through a speakerphone, but would now like to ask questions, we ask that you lift your handset prior to pressing star 1 and remain on the handset until your
Thank you. This question comes from Manav Patnaik of Barclays. You may ask your question.
Thank you. Good morning, gentlemen. First question was just on the sale of J. D. Power and the S and P Securities Valuation and so forth.
I'm surprised you guys didn't already exclude it. Is there any risk to the closing? Or is this just a procedural decision? If you could give us some estimate of how much dilution that is before the buybacks?
First of all, the first part of your question Manav, it's Jack. I don't think there's anything unusual about the closing conditions in these transactions. I suspect I think I do anticipate that perhaps J. D. Power may close a bit sooner.
I would point to the middle or early Q3. The sale of the pricing businesses may be a little bit more late in the 3rd, early 4th. That would be sort of the timing that we're currently considering. In terms of the dilution for this year, for J. D.
Power, if you assume sort of a mid year close, the EPS dilution is it would probably be roughly a dime. And at this point, I think our assumption we could use ongoing share repurchase activity combined with proceeds from sale to largely mitigate the dilution within the year. And again, I think because the other the pricing businesses will be a bit more back end loaded, I don't think it's going to be a big issue for at this point in time in terms of what we see for 2016.
Okay, fair enough. And then just on the Ratings business, obviously, March window opened up and we'll see what happens there. But in terms of the expense control, can you talk about some of the initiatives you took this quarter to have that expense decline and what you can do for the rest of the year as well?
Let me start with that. First of all, during the quarter, we have continued with programs we've put in place for the last 2 or 3 years related to ensuring that we have the right effective approach to managing our expenses, staffing levels, etcetera. So during the quarter, we've continued to invest for the long run-in the business. It's very important for us to continue to invest in technology to ensure that we're meeting all of the global regulatory requirements. But we at the same time have also been able to ensure that we have the right level of staffing for the level of transactions that are coming out.
We have an opportunity to look at the our accrual for our bonuses at the end of the year. In addition to that, if you remember last year in Q1, we were still in the final negotiations on settlements with the DOJ and the SEC. So we did not have that same level of legal expenses.
All right. Fair enough. Thanks a lot. Thanks.
Thank you.
Thank you. And the next question is from Andre Benjamin from Goldman Sachs. You may ask your question.
Thank you. Good morning. I was wondering if you can maybe talk a little bit about the selling environment for your Market Intelligence business, whether you're starting to hear I know you put up some pretty strong growth for the desktop business, but just what people are saying about the environment both for buying now and how you're thinking about renewals into next year?
Yes. So first of all, we've been looking very carefully at the broader set of demands and information requirements from our customers going out to meet with banks, with buy side, sell side, in addition digging deeper into different classes of people within those organizations. So portfolio managers, investment bankers, risk managers, CFOs, treasurers, etcetera. We generally see that there is a high demand for data across the financial institutions and increasingly as well as corporates. Corporates also are managing kinds of to ensure that the kinds of products and services that we provide, whether it's our ratings information that goes through our risk services business or more importantly the S and P, Capital IQ and S and L products that are used in many different ways are tied and linked to the needs of the different constituencies that we're working with.
So we've been forecasting there's a combination of volume growth that we're continuing to see in a positive sense as well as pricing and different ways that we can increase our growth. Remember that when we bought SNL, one of the deal thesis for us was that we were also going to be able to see more international growth for the SNL product. We're in the very early stages of that. We're seeing some pilots here and there that are starting to pay off, but it's part of our integration plan is to pursue the international aspect of S and L and it's very early days of that, but that's another component that we're driving for growth.
Thanks. And then I would just say from a competitive standpoint, I know that it's always priced a little bit below some of your competitors and you've been looking to close that gap as you enhance the product. Could you maybe talk a little bit about where that initiative stands today and whether you expect that to continue to be a growth driver going forward or is it more just the number of desktops itself that should be driving growth?
It's a combination of both. The desktops and penetration is very important for us. We want to have a commercial organization that is understanding the needs of our customers and targeting where we can place more services, whether it's desktops or it's overall enterprise wide services. Pricing is something that obviously we look at across the board to see how we can always get better price realization. But for us, it's more important is to ensure that we have the right customer acceptance and that's what's driving our growth principally.
And just to clarify, there is no goal to close a gap, okay. We
want to
ship price our products appropriately.
Understood. Thank you.
Thanks.
Thank you. And our next question is from Alex Crown from UBS. Sir, you may ask your question.
Hey, good morning, everyone. Just coming back to the Ratings business for a little bit here. One of the things you've been talking about for a little bit, but not today, has been kind of the work you've been doing on the frequent issuer programs, kind of some of those been pretty outdated and I think you're tweaking them a little bit. So just wondering if you could give a little bit more color and numbers around this in particular as we think about the next couple of years, how can that, I guess, repricing kind of add to the top line in that segment in terms of percentages?
As I've mentioned on prior calls, the way we think about this is we want to ensure that we have the appropriate commercial and sales organization in place in ratings. We have through the last few years, we've put in place all of the different requirements of Dodd Frank and the CRA 3 in Europe, which means that we've segregated our sales force and our commercial activities. Part of our commercial activities are to understand how we can best price for our customers. We can have yield for our ability to price for them for what they need in the services at the time. We have been looking at our frequent issuer programs.
It is potentially a growth area for us, but it's not something that we're giving a lot of details on at this point in time.
All right. Fair enough. And then I guess moving to Jack, on the buybacks, dollars 200,000,000 this quarter, I mean certainly bigger number than we saw a year ago, but in the context of a low share price fairly soft, I'd say. And in particular, if you think about J. D.
Power and the businesses you sold to ICE and all the free cash flow you generate, I mean, you can easily buy back $1,500,000,000 $2,000,000,000 this year. So, I mean, should we expect a big pickup here? Or how are you thinking about the pace of buybacks as we look at the remainder of the year? And was there anything going on that prevented you from buying back, either the J. D.
Power sales and things like that?
No, I think we are pretty active in the market in the Q1. It was a step up relative to the Q1 a year ago. And as sort of as we've alluded to in terms of our comments around guidance, it is our current assumption that from what we see right now, we'll largely use the cash proceeds from the asset sales to largely offset any dilution that we anticipate from the sale of what we're profitable businesses. So to that end, as we do start to receive or in anticipation of cash received on sales, we do anticipate some pickup in our share repurchase activity, particularly more I would say in the back half of the year.
All right. Very good. Thanks.
Thank you. Thanks, Austin.
Thank you. And our next question is from Joseph Foresi of Cantor Fitzgerald. Sir, your line is now open.
Hi. Just to go back to the ratings business for a second. I was wondering, you gave sort of your preliminary thoughts, I think, on the last earnings call about what your outlook for that business would be for 2016. Has that changed at all? I assume no because of guidance and anything you could share on the margin front from a forecasting perspective would be helpful as well for 2016?
Let me give you start by just a little bit of an outlook. We gave you a quick slide on that in our earnings slides we just gave you. We have looked at the forward approach to what we think 2016 issuance is going to be. When we did our last call, we said that we thought it'd be down about 1% for the year. We've adjusted that now that it should be down about 2% for the year.
In terms of components, industrials or we want to call them non financials should be down about 6% to 10%. Financial Services is one of the bright spots. There are a lot of needs for TLAC or total loss absorbing capacity for banks around the globe as well as some different programs, which is attracting financial services issuance. Structured finance is likely to be down 4% to 9% and public finance in the U. S.
Is also going to be down 8% to 12 percent. International public finance will be up a little bit 3% or 4%, but net net, we expect that the total year issuance will be down about 2% to 2.3% for the entire year and that's after a very, very weak Q1 as you know. We've seen in April so far issuance that stayed similar to the March, especially on investment grade. Investment grade has stayed quite strong. Non investment grade issuance is still fairly weak into this Q2.
Throughout the year, we're going to continue to follow all of the same management disciplines we've talked about in the past having to do with being having a very aggressive commercial strategy, managing our costs in a way that are very prudent, while meeting all of our goals risk and compliance standard. As you see, we've kept our guidance at the same level despite having started off with a weak Q1, because we believe that in addition to what we've seen across all of our businesses that we've got conditions to maintain that same level of guidance.
Got it. Okay. And then on the Market Intelligence business, obviously, we've seen a slowdown in IPOs and M and A start the year and particularly capital markets. What portion of that business is exposed to that capital market slowdown? And how do you offset or how do you think about the growth trajectory and the margins in that business for 2016 going forward?
I think we've been talking about slowdown in capital markets now for a couple of years. So I mean, I don't know if we'd point to anything fundamentally a change in that in the overall market environment for Market Intelligence. It is a competitive marketplace out there. Legacy S and P Cap IQ businesses, we think over time we'll have a much more compelling product offering, particularly as we move forward. On the margin question, we obviously were very, very pleased with the step up to approximately 30% margins in the business.
I think that's generally the new range for the business for 2016. But I would think over the long term as we continue to realize synergies, which we are obviously made good progress on, but we continue to have a good number ahead of us, we think that there is some upside to the margin as we go into 'seventeen and beyond.
Thank you.
Thank you. And our next question is from Warren Gardner of Evercore. Sir, you may ask your question.
Great. Thanks. Good morning. So you guys mentioned structured products is down, I think about 41% year to date. And I think the guide, I think you just said assumed about 4% to 9% decline for the year.
So I was just kind of wondering where you see sort of the most rebound sort of coming from in terms of maybe product specific to sort of products for the balance of the year?
Yes, a couple of things. So, first of all, there have been we've continued to see very strong covered bond market in Europe and in Asia. There is also what I would call bank originated securitization, which are traditional ABS products, it's credit cards, it's auto loans, things like that. Those continue to be very strong. Banks are all actively managing their balance sheets to have the optimal level of capital.
So those types of issuances, bank specific have been very, very busy, very, very important. The areas where we're seeing more, I guess I'd use the word volatility in issuance, which means it's going up and down as in traditional RMBS, which has been quite weak as well as CMBS. We do see a robust pipeline of CMBS deals right now, but we didn't see that 3 weeks ago, 6 weeks ago and 12 weeks ago. So the CMBS market is a little bit more volatile. It's one of the swing factors.
There has been some tightening of the spreads on CMBS deals in the United States over the last couple of weeks and we do think that we're seeing because of that we're getting a stronger pipeline. Anyway, so just to give you a view again, bank issuance, covered bonds, bank oriented securitizations should be stronger, more steady and then things like RMBS, CMBS around the globe, we're seeing more volatility in that. But we expect towards our expectations on this forecast also take into account refinancing and there are certain refinancing of securitizations as well that are coming in the second half of the year that we think will also come to the market.
We just updated our forecast, it was released yesterday. I mean Chip, maybe after this call you can make the new forecast available, so people can see on which our assumptions were based.
And subscribers of Ratings Direct, we already have it.
I got to sign up then. Okay. So I guess just one more question. So I mean, you guys kind of touched on it a little bit, but it hasn't quite been a year yet. But obviously, when you announced the SNL deal, you kind of highlighted Europe and Asia as kind of key areas of potential upside or for revenue synergies.
So I was wondering if you guys could just dig into that a little bit more and give us an update on some of the progress you've seen there so far?
I don't have any detailed numbers on that. What I'd tell you is that it's been September is when we closed the transaction, so it's not quite a year yet. We have a very robust integration program, which has 10 work streams. Those work streams include the classic areas you'd imagine things like technology and ensuring that we have the right computer systems in place, etcetera. And there is a work stream on commercial opportunities where we have pilots across the globe.
The team under Mike Chen have done a fantastic job of identifying an optimal sales force, taking into account people from both of the businesses that know the markets really well. And we have a pilot programs in Asia and in EMEA that we started launching. Just you didn't ask the question, but to just you didn't ask the question, but to talk a little bit about what that progress is, we mentioned in our remarks that a lot of that progress has been around initial cost reductions based on people leaving the organization and there is other synergies which will start coming through that have longer tails and maybe require some investments in areas like technology operations. And then the top line, as we've said, will probably take a little bit longer overall. And when we gave our guidance in the last quarterly call, we updated it and we said that the revenue synergies were going to probably take a little bit longer, more along the original thesis that we had produced, which was around between now and 2019.
Great, great. Thank you.
Thank you. And our next question is from Tim McHugh of William Blair. Sir, you may now ask your question.
Yes, thanks. Maybe just following up on that last question. You mentioned and digging into the Cap IQ or sorry, Market Intelligence margin improvement, it was people leaving the organization. Where are those people coming from? Was it data collection?
Is it client service? I guess, more specifically, what did you become more efficient at than you were doing previously?
That was mainly from management. This is one of the biggest advantages of moving really fast on a decision about how to integrate businesses and by making a decision to put Mike Chin in charge of the division within a week of the acquisition, we were able to move very quickly on the management structure. So that's principally where the roles came from.
Okay, great. And then on the C and C segment, the margins there, can you talk about what drove that? Was that J. D. Power or is that flat?
And I know it's going to change once we sell J. D. Power, but was that is that level of margin sustainable, I
guess? That's mostly Platts and it's one of the nice things about having a business that grew almost 10% on the top line. So, the very large percentage of that drop to the margin, drop
to the bottom line. Yes, add though that there could be some fluctuation because we did have, as we mentioned, an unusually strong quarter in sort of Global Trading Services, which is more transaction side of the business. So that's a nice growth business for us, but it was really high growth in the Q1, kind of given the volatility that was there. So I'm not sure that will be there every quarter, but we're quite heartened by the progress. There was a bit of ForEx benefit to the margin improvement, so I'd say about a third of margin improvement was we did get some ForEx benefit, but in general, where we think that we're I think there's that's very solid right now.
And our next question is from Peter Appert of Piper Jaffray. Sir, you may ask your question.
Thanks. Good morning. So Jack, I'm wondering if
you could just give us
an update on how you're thinking about appropriate leverage ratios? And I think last quarter you said $500,000,000 of buyback was in the guidance. Is that still how we should be thinking about it?
Well, that's a general range, Peter, in terms of base plan assumptions. I think that has to be based on our current view, I think going back to what we said earlier, I think it has to be we have to flex that upwards. As we certainly get at least into the back half of the year, kind of given the proceeds from the asset sales that we see coming. And we do we know obviously we need to do something to reduce the dilution from the sale of those businesses. So we do anticipate some pick up at this point in time as we look to the back half of the year.
And then in terms of the leverage question, I think you've seen over the last year that we are methodically putting a little bit more debt into the balance sheet. We had 2 very successful bond raises last year. You've seen that we have used our short term borrowing capabilities to flex to continue to buyback relatively heavy in the Q1 timeframe, which is a time that we're a little we tend to be a little bit short U. S. Cash, but we know we have that flexibility on using short term debt to sustain the program.
And we're going to we're not we can we actually when we acknowledge that we still have more borrowing flexibility that we'll consider in terms of the pacing of future activity.
Got it. Thank you. And then on the sticking with the S and L margins for a second, the performance is quite extraordinary relative to I think the expectations maybe you had initially laid out. And I think if I heard what Doug just said, you were indicating it was mainly due to sort of senior staff restructuring. So it's not a function yet of this change in strategy about the around the data sourcing.
Is that correct? So there's still opportunity associated with that?
There's a couple of components of and this is a big obviously a big improvement in the margin. So, it is maybe it's important to comment on a couple important pieces here. 1, if you look at just the performance of the legacy S and P Cap IQ business last year in 2015, the lowest margin
point of the year was Q1. And the legacy S
and P Cap IQ business did improve their margins to sort of the mid-twenty range and when you looked into the second and third. So the run rate of the legacy Cap IQ business was getting better. Then you overlay the profits from the those 2 those were those are significant and combined with both businesses growing very nicely on the top line. Then you start to layer in the synergies. And the synergies, we had given guidance earlier that we thought about a third of the $100,000,000 of total synergies would be achieved in 2016.
And I can tell you we're very much on pace to deliver that based on what we've seen in the Q1. So synergies did have a role in the expansion here, but it wasn't the only driver. And then in terms of the nature of what we saw in the Q1, it was more G and A related. And I think these longer term cost opportunities around data, technology, commercial, etcetera, are more down the line. So that's some of the work that we have ahead of us.
Got it. Thank you.
Thank you. And our next question is from Craig Huber of Huber Research Partners. Sir, you may ask your question.
Yes. Good morning. Couple of questions. I understand that you guys have been working to change out your improve your sales forces throughout the organization. Maybe you'd like to get an update on that, how much further there is to go in terms of the management and just general upgrades and processes and all that?
Thank you.
Yes. So, first of all, we have a corporate wide initiative to look at our overall data and analytics related to customers. This is something that we want to improve. We want to have the right kind of culture around the organization of understanding the importance of customers and customer data and analytics. In addition to that, we have a buy in and approach for each of our businesses to hire new organizations or upgrade or promote people within the organization to have these commercial organizations that are focused on the markets, they're doing a new approach or an upgraded approach to market sizing, to market segmentation, etcetera.
Each of the businesses now are very far along with those processes, although, I'd say that we don't necessarily have all of the people in place. I do think it's part of our ongoing approach to growing the business. We think that top line growth is the best way to improve our margins and to improve the business overall and as well as having a portfolio now, which has very scalable global businesses. So we are making a lot of progress in that area. We have very strong sales heads and ratings in our indices business.
We have a person named Will Pappas, who's leading the sales and commercial organization in market intelligence. And then in Platts, we also have a new person who's just joining us to run that organization.
Okay. And then also if
you could just update us on your ratings business. I mean, obviously the margins and ratings are extremely high on an absolute basis. They do lag your main competitor out there. I just what's your updated thoughts in terms of what's left to do on the cost front, the margin front of moving margins more towards Moody's level? Understand, of course, you're pulling up everyone to get to their level maybe, but what's just sort of holding that back relative to your main peer out there?
Thank you.
Well, we as we've always said and Chip just said before, we don't necessarily target our competitor in that sense. We want to ensure that we have the best business that we run that's compliant as well as providing excellent service to the market. We have continued to invest in technology. If I were going to say there's any major area that we want to have at a very high quality level, it's going to be on technology. It's giving us the ability to have better workflow tools.
It also gives us an opportunity to simplify the way we work and at the same time improve controls across the organization. So, I think you will see over time, it's our goal and our target to have a steady progress on improvement in our margins, but also in a way that we run the business with the right kind of approach to customers and control.
And then I would just add that I think what we saw in Q1, it's not just about cost management. I mean revenue year on year was down over $50,000,000 So I think the organization did that the reins business did a very good job controlling their expenses overall as they work through that moment of volatility.
And our next question is from Bill Warmington of Wells Fargo. Sir, you may now ask your question.
Thank you. Good morning, everyone.
Good morning.
So first of all, congratulations on the sale of J. D. Power. And I wanted to ask my first question on Platts. And again, we've had a Q1 was a very volatile quarter for oil, sort of a blinding glimpse of the obvious going from the mid-30s to the mid-20s to the mid-40s.
But I wanted to ask if you've seen any improvement now or change in other way in the selling environment there in terms of renewals and selling cycle and pricing?
Just a couple of headlines on that. In my remarks, I referenced that we have seen a difficult environment because there have been a lot of restructurings. There are a set of companies which have defaulted or going through restructurings. We expect over time there could be some challenges in the towards the end of the year on some of the renewals coming up. So we do we're very aware that we're not in an environment that's a robust high growth, high investment environment in the oil and petroleum industry overall.
As Jack mentioned, one of the reasons that our earnings were so robust is because of our trading, our transaction services businesses in that area. So, Platts has been a fantastic growth business for us. We like the business. We continue to invest in it aggressively, but we are also looking very cautiously at what kind of trends we're going to see in the industry overall. Just as an unrelated information in the defaults in the from the information from the ratings business, there has been 67 defaults so far this year, of which most of those, there were 16 of those were in the oil and gas industry and there were 9 from metals, mining and steel industry.
So, it's been a large number of those, the defaulters have been in that industry. Something that we also watch carefully to see any kind of correlation across our businesses that we can use to pick up for our forecasting.
Got you. And then just a clarification question on the S and P, Dow Jones Indices, recurring revenue. My understanding was you have benchmark data about 20% of that division, derivatives sales being about 25% and then the AUM being the remaining 55%. The AUM piece previously was treated as transaction that's now going to be treated as recurring. The derivatives is going to remain as transaction and the benchmark was recurring, is going to remain recurring.
Is that the right way to look at that?
Yes, it is right. The information, the benchmark side has always been recurrent in classified and recurring revenue. The derivative trading remains in the transaction side, because that can be very volatile. As we just looked at at the revenue stream we have from assets under management, while there is some volatility there, it's not like it goes to 0, like nothing ever it's not as long
as that
you ever see in bond issuance. So we just so that's why we broke it out as a 3rd category, because it does we do believe that it has sort of different revenue characteristics. And in general, we think that's clearly more than the transaction side. So we think that gives better investors a better sense to better appreciate the more recurring side of our future revenue flows.
And that's going to include the AUM associated with ETFs, that's going to include the AUM associated with mutual funds and it also includes we've got some kind of steady contracts, if you will, that are associated with over the counter derivatives that are not based on volatility, if you will, but are set for a year, if you will, and that's very steady basis. That's for the category as well.
One more housekeeping item if I could. The is Platts going to be reported on a standalone basis going forward after the sale of J. D. Power or is it going to be folded into another division?
Right now, our current assumption is that Platts will be reported as a standalone entity.
Excellent. All right. Well, thank you very much.
Bill, just I want to just correct something. I said 67 defaults. There's actually 51 defaults so far this year. Sorry, I just wanted to give you the right.
Thank you.
Thank you. And our next question is from Jeff Silber of BMO Capital Markets. Sir, your line is now open.
Thank you so much. Just going back to the Global Market Intelligence business, I know there's been some speculation of some potential debundling where folks maybe use cheaper or web based products to gain certain aspects of their analysis, so the overall cost comes down. Are you seeing any of that or inklings of that at all in your business?
No. So, I mean, the notion that people want to buy from 5 different sources doesn't really make a lot of sense to us. What we really see exactly the opposite is that purchasers like the simplicity of being able to purchase from as few vendors as possible. So, yes, we don't see that.
The only thing I would add though is I do think it puts we were very mindful of some of the new competition that could be out there. I think it just raises the game in terms of ever better quality data and increased analytic capabilities and the ability to link into a customer's workflow. So I mean, I think it just kind of we have to continue the journey we're on to maintain clear differentiation in the marketplace.
All
right, great. And then just going back to the business that you plan to divest this year, you gave some color on the potential impact to EPS depending on the timing. How about the impact to revenues and EBITDA either for this year or maybe what those businesses contributed last year? Thanks.
I don't want to jump into next year quite yet. But J. D. Power, which will be sort of at let's just if we assume it closes at midyear, that could be approximately somewhere between about 175,000,000 dollars of revenue. And then on the pricing business, if we assume the end of third quarter close, that could be around $30,000,000 That's so and taken in total roughly $200,000,000 if you assume the timing of close on both those transactions.
Got it. And on the EBITDA or margin side?
I would say that between J. D. Power alone at midyear is roughly a dime. If you assume the Q3 close for the other business, you're probably talking about $0.13 $0.14 in total for the year.
All right. That's very helpful. Thanks so much.
That's prior to any share purchase, correct? That will
be prior to share repurchase and that's going back to our earlier comments that our current anticipation is that we would leverage share repurchase activity to offset the dilution from these businesses. And we can tighten that up once we know the timing. Both of the close of these transactions and the pacing of our share repurchase activities. But again, our current assumption is any adjustment we have in terms of our outlook for 2016 is going to be more around revenue, not EPS.
Okay. That's very helpful. Thanks so much.
Thank you. And our next question is from Denny Galindo of Morgan Stanley. Sir, you may now ask your question.
Hi there. I just had a quick question on ratings. It seems like the maturities, especially in high yield are increasing as we look forward. But you mentioned that the ratings evaluation services and kind of the disintermediation driver has been decreasing. So I was curious if this ECB announcement about purchasing corporate bonds is having any impact on either one of these, maybe it's starting to drive rating evaluation services or maybe it's causing some of these upcoming maturities and high yield to be pulled forward into this year, just any thoughts on that topic?
Yes. On the first one, I'm going to answer the second part of your question first to the ECB. We've seen that the ECB's approach to being able to purchase very large portions of new bonds issuance. We expect that that could have some positive impact on issuance. At the same time, there's the ECB also has some liquidity programs it's providing the banks that make it actually attractive for them to keep assets on their balance sheet.
So there might be some increase in loan activity. We're not quite sure where all of these different initiatives are going to land, but we have seen corporate investment grade issuance in Europe, even though it was weak, it seems to be picking up a little bit. So we expect there could be some pickup there. When it comes to rating evaluation services, Rating Evaluation Services is more linked to activity of IPOs, companies that are going to be going to the market for the first time and want to have a benchmark or some sort of an ability to know how they rate. We also see rating valuation services that are done for M and A transactions.
So what drives rating valuation services is not necessarily issuance, it's much more related to IPOs to M and A activity. Those are the links that are more important on that. And as you know, during the quarter, both IPOs and M and A, there were some big M and A headline deals, but there was not as much smaller M and A deals. And in addition to that, the IPO activity was very, very weak. So some correlation factors were weak.
So we watch RES. It's a business for us that we actually use sometimes as a leading indicator for M and A activity itself.
Okay, that's helpful. And then just lastly, another one on ratings. Can you talk a little bit more in detail about the CMBS market? You kind of mentioned it as being down, but it's been very volatile. You've been out of that market in the conduit side for a while, but you've recently reentered.
And I was wondering if you can give us any color about how market share in quarter has tracked or how quickly you expect to gain some traction in that CMBS market?
Yes, we're back in the CMBS market. We're working with the market place. We have not done any issuance so far. We have not rated any deals. And but we are working closely to understand the dynamics of that marketplace and get our name back out there.
Thank you. And our next question is from Vincent Tang of Autonomous. Sir, you may now ask your question.
Hi, good morning. So can you disclose what the revenues were for the 4 buckets of Market Intelligence, please?
The absolute what we give you the no, on the slide that we give you, we give you the change year over year for the various buckets. We don't provide the absolute number
within that. We did disclose the S and L revenue number specifically. Okay, right.
But I mean
the credit yes, so yes, we don't we just we clearly don't do that. I can generally size it for you
if you'd like, but we don't give the exact numbers.
Okay. And just lastly, on the two businesses you're selling to ICE, just a little bit more color there. Why is it closing later in 3Q or 4Q? And what can you tell us about the revenue growth profile of that business historically?
First of all, I mean, let's take a step back. Why are we selling those businesses? They're nice sticky businesses. They are not I wouldn't classify them as high growth, but I would say solid growth, very sticky, good margins. But at the end of the day, they are not something that we were was a core focus of in terms of investment, in terms of growth.
So given their size, we thought it was prudent to really focus market intelligence going forward, particularly with the S and L transaction, that there was that we had more than enough things to work on where we had larger, more strategic scale positions. So that was sort of the logic of it. They are in total on an annualized basis, they're roughly $100,000,000 in revenue. So that's why in terms of the dependent depending on the timing of the close, we'll see what the impact is to 2016. And we're just working through all the final closing conditions and regulatory approvals and that's why we do anticipate a close a little bit later in the year.
Great. Thanks.
Thank you. And our next question is from Gary Wei of Susquehanna Financial Group. Sir, you may now ask your question.
Good morning. Thank you. Can you just remind us about where are we in terms of the cost reduction program right now?
So you talked about the $140,000,000 cost reduction program?
Yes, yes.
Well, I think we're largely on pace right now as we enter 26 to on the original assumptions of achieving on the $140,000,000 cost reduction program that we anticipate to achieve by the end of 2016. I would then though need to overlay because this was subsequent to the announcement of that target back in early 2014 is then subsequently on top of that, we have the incremental cost synergy target of the S and L transaction, which we anticipate to achieve by the end of 2016 also. So that synergy target is $100,000,000 a third of which to be achieved in 'sixteen. So if you call that $35,000,000 that'd be $35,000,000 on top of the $140,000,000 that we think will achieve by the end of 'sixteen. So $175,000,000 in total.
Okay, great. Thank you. So if we're not thinking about the S and L, just thinking about the program that you already had in place, After you finish this, should we expect that we'll be like you will continue to work on a new program to have some further cost reduction?
So the question is, after we're done with all these programs, will there be other cost reduction programs?
Right, right.
Thanks. That is a key question on which we are asking ourselves as we go into our 3 year strategic planning. But yes, I think it's fair to say, companies always have some ongoing productivity activities.
Great. Thank you so much.
Thank you. And we will now take our final question from Doug Arthur from Huber Research.
Yes. Just specifically on the $24,000,000 technology impairment charge in Market Intelligence, I mean, as the S and L team gets deeper into the process, should we expect to see more of these kind of charges and related benefits as the year unfolds?
None of this nature, I don't think, Doug. I think it's part that we didn't have any restructuring charges in the quarter. I think going to go forward, I think there's likely to be some restructuring activity from time to time. I would say this issue was a little bit more specific. And the reason why the number was as high as it was, part of it, about half of it kind of relates to an acquisition that was done several years ago.
So part of that technology intangible was put up at time of the acquisition and the other half related to ongoing software development since that point. And so that's why it was a little bit larger than normal for us. But I don't at this point in time, I don't anticipate an ongoing stream of these sort of we don't capitalize that much as it relates to software development in general. So I think the magnitude here, it will be fairly modest as we look
forward.
Doug, any more questions from you?
No, I'm good. Thank you.
Great. Thank you everyone. We appreciate that all of you joined the call. We are pleased that we were able to start the year with a very solid quarter, especially with the progress on the integration with S&L. And we're also very excited about being able to launch the company as S&P Global starting on Thursday morning.
So thank you again for your support and we look forward to talking to you again soon. Thank you.
And that concludes this morning's call. A PDF version of the presenters' slides is available now for downloading from www.mhfi.com. A replay of this call, including the Q and A session, will be available in about 2 hours. The replay will be maintained on McGraw Hill Financial's website for 12 months from today and for 1 month from today by telephone. On behalf of McGraw Hill Financial, we thank you for participating and wish you a good day.