Good morning. 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. We will open the conference to questions and answers after the presentation. Instructions will follow at that time. To access the webcast and slides, go to www.mhfi.com. That's M-H-F-I for McGraw Hill Financial.com, and click on the link for the quarterly earnings webcast. If you need any additional technical assistance, please press star zero. I will assist you momentarily. 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 Chief Executive Officer, and Jack Callahan, Chief Financial Officer. This morning we issued a news release with our first quarter 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 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 remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates, and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and certainties 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 10-Ks, 10-Qs, and other periodic reports filed with the U.S. Securities and Exchange Commission. I would also like to call your attention to a 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. We would ask that questions from the media be directed to Jason Feuchtwanger 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 first quarter results. More broadly, however, we 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 first quarter. 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 $1.1 billion to XIO Group and Standard & Poor's Securities Evaluations 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 million shares over the past year. Finally, we are prepared for changing the name of the company to S&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 first quarter results. While reported revenue grew 5%, organic revenue on a constant currency basis was unchanged. Weakness in S&P Ratings Services revenue was offset by growth in every other business, with particular strength in Platts and SNL. The company delivered 130 basis points of adjusted operating profit margin improvement as a result of the addition of SNL and tremendous progress made toward achieving SNL 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 Standard & Poor's Ratings 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&P Capital IQ and SNL as S&P Global Market Intelligence. In the first quarter, revenue increased 27%, primarily due to addition of SNL. Excluding SNL revenue, organic growth was 7%. 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. We recognize that we must achieve our integration synergy targets in order to deliver a return on that investment. Our first quarter progress demonstrates our resolve to achieve these important targets. Most of the cost savings in the first quarter 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 investment. Let me add a bit more color on first quarter revenue growth in the Market Intelligence business lines. In financial data and analytics, S&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 first quarter 2015, prior to our acquisition of SNL.
Global Risk Services revenue increased 8%, led by double-digit RatingsXpress 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. Let me turn to Standard & Poor's Ratings 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 and 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 third quarter 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 fourth consecutive quarter of year-over-year declining global issuance. If we look more closely at the largest markets, first quarter issuance in the U.S. was down across the board year-over-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. 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 & Poor's Ratings Services issued its annual global refinancing study. This yearly study shows debt maturities for the upcoming five years. This chart illustrates data from the 2015 and 2016 study. The five-year period in the 2016 study shows a $600 billion increase in the total debt maturing versus the 2015 study. We use this study along with other market-based data to forecast and anticipate issuance.
Taking a closer look at data from the study reveals an important trend in high yield maturities. Over the next five 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 & 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 pared back, which should give a boost to speculative grade issuers, though through the remainder of the year. The decline of the previous three months is expected to weigh down global trends. Turning to S&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 derivatives. 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&P Dow Jones Indices increased 29%. Two key products, the E-mini S&P 500 futures and the Cboe Volatility Index options 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 billion in the first quarter. Despite AUM based on S&P Dow Jones Indices reaching $828 billion 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 ETF average AUM, increased volatility has generated sufficient trading-related revenue to enable S&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 and 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 third quarter. 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 Finn 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 Exchange 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 of 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 market volatility and still deliver solid results. With the strength of our portfolio, we are off to a good 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 Financial, 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&P Global with SPGI as our new ticker symbol.
That's SPGI. We'll 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. Now I'm going to hand it over to Jack Callahan, our Chief Financial Officer.
Thank you, Doug. 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. I will update you on the balance sheet free cash flow and return of capital. Wrapping up, I will provide some color on our guidance. Let's start with the consolidated first quarter income statement. There are just a couple 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&P Ratings 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. Once again, thanks to the strength and breadth of our portfolio, combined with the timely addition of SNL Financial, we were able to sustain top-line growth. Our adjusted operating margin increased 130 basis points, led by the outstanding profit growth and margin improvement at Market Intelligence. This division recorded an adjusted margin of 30%, an improvement of nine points versus a year ago. This is driven by strong top-line growth, realized cost synergies, and the addition of SNL 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 three points. Interest expense was up over $24 million 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 fourth quarter. Share repurchases over the past year have resulted in over a 3% decline in average diluted shares outstanding. Overall, sustained top-line growth, margin improvement, and share count reduction delivered an 8% increase in adjusted diluted earnings per share. 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 million in the quarter. The first item consisted of a $24 million technology-related non-cash impairment charge in 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 our internal capabilities.
The second item is a net gain from insurance recoveries. The last item is primarily disposition-related costs 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 five of today's earnings release. In Exhibit six 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 ETF and mutual fund assets under management-based licensing revenue in S&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 was some volatility in assets under management. 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. Let's turn to the balance sheet. At the end of the quarter, we had $1.6 billion of cash and cash equivalents, of which approximately 90% was held outside the U.S. We also had $3.5 billion of long-term debt and $472 million 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 million. 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 and related insurance recoveries.
On that basis, first quarter free cash flow was $192 million. As a reminder, the first quarter free cash flow is seasonally weak due to the payment of annual incentives. I want to review our return of capital. During the quarter, the company bought approximately 2.2 million shares for $200 million. These purchases, combined with our dividend, totaled to approximately $296 million 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 share repurchases to help mitigate the dilution from our recently announced asset sales subject to market conditions. We provide some additional 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&P Securities Evaluations, 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 divesture of these assets, we anticipate using cash proceeds and ongoing share repurchase activity to mitigate the earnings per share dilution. 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. With that, let me turn the call back over to Chip for the Q&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. I would kindly ask that you limit yourself to two questions. That's two questions in order to allow time for other callers during today's Q&A session. If you've been listening through a speakerphone but would now like to ask a question, we ask that you lift your handset prior to pressing star 1 and remain on the handset until your question has been answered. This will ensure better sound quality. Operator, we'll now take our first question.
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&P Securities Evaluations 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, is Jack. I don't think there's anything unusual about the closing conditions in these transactions. I do anticipate that perhaps J.D. Power may close a bit sooner. I would point to the middle or early third quarter. The sale of the pricing businesses may be a little bit more late in the third, early fourth. That would be the timing that we're currently considering.
In terms of the dilution for this year f or J.D. Power, if you assume sort of a mid-year close, the EPS dilution. It would probably be roughly $0.10. 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. Again, I think because the price of businesses will be a bit more back-end loaded, I don't think it's going to be a big issue at this point in time in terms of what we see for 2016.
Okay. Fair enough. Then just on the ratings business, obviously, March window opened up, and we'll see what happens there. 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 two or three years related to ensuring that we have the right effective approach to managing our expenses, staffing levels, et cetera. 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 our accrual for our bonuses at the end of the year.
In addition to that, if you remember last year in the first quarter, 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, guys.
Thank you.
Thank you. 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 the people are saying about the environment, both for buying now and how you're thinking about renewals into next year.
Yeah. 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, et cetera. We generally see that there's a high demand for data across the financial institutions and increasingly as well as corporates. Corporates also are managing balance sheets and have more and more requirements for data and analytics.
There are a lot of different tools which are available, and one of our goals is to ensure that the kinds of products and services that we provide, whether it's our risk services business, or more importantly, the S&P Capital IQ and SNL products that are used in many different ways are tied and linked to the needs of the different constituencies that we're working with. 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 SNL. It's very early days of that, but that's another component that we're driving for our growth.
Thanks. 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. 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.
Just to clarify, there is no goal to close a gap. Okay?
Okay.
We want to make sure to price our products appropriately.
Understood. Thank you.
Thanks.
Thank you. Our next question is from Alex Kramm 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. 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. Through the last few years, we've put in place all of the different requirements of Dodd-Frank and the CRA3 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. I guess, moving to Jack. On the buybacks, $200 million this quarter. Certainly a bigger number than we saw a year ago, but in the context of a low share price, fairly soft, I'd say. In particular, if you think about J.D. Power and the businesses you sold to ICE and all the free cash flow you generate, you can easily buy back a billion and a half, $2 billion this year. 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? Was there anything going on that prevented you from buying back, i.e. the J.D. Power sales and things like that?
I think we were pretty active in the market in the first quarter. It was a step up relative to the first quarter a year ago. 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 were profitable businesses. 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 [inaudible].
Thank you. 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. 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 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 you want to call them non-financials, should be down about 6%-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%-9%, public finance in the U.S. is also going to be down 8%-12%. International public finance will be up a little bit, 3% or 4%. Net-net, we expect that the total year issuance will be down about 2%-2.3% for the entire year. That's after a very weak first quarter, as you know. We've seen in April so far, issuance that stayed similar to March, especially on investment grade. Investment grade has stayed quite strong. Non-investment-grade issuance is still fairly weak into this second quarter.
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 having a very aggressive commercial strategy, managing our costs in a way that are very prudent while meeting all of our goals and objectives related to investments in technology and more efficiency in our business, as well as meeting all of our risk and compliance standards. As you see, we've kept our guidance at the same level despite having started off with a weak first quarter 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. Then on the Market Intelligence business, obviously we've seen a slowdown in IPOs and M&A to start the year, and particularly capital markets. What portion of that business is exposed to that capital market slowdown? 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. I don't know if we'd point to anything fundamentally a change in the overall market environment for Market Intelligence. It is a competitive marketplace out there. Particularly now, as we now have the benefits of bringing together the scale benefits of SNL with our legacy S&P Capital IQ businesses. We think over time we'll have a much more compelling product offering, particularly as we move forward. On the margin question, obviously we're 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. 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 2017 and beyond.
Thank you.
Thank you. Our next question is from Warren Gardiner of Evercore. Sir, you may ask your question.
Great. Thanks. Good morning. You guys mentioned structured products is down, I think, about 41% year-to-date. The guide, I think you just said, assumed about 4%-9% decline for the year. 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.
Yeah. A couple things. First of all, we've continued to see a very strong covered bond market in Europe and in Asia. There's 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. Those types of issuances, bank specific, have been very busy. They're 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, is 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 three weeks ago, six weeks ago and 12 weeks ago.
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 U.S. over the last couple weeks. We do think that we're seeing because of that, we're getting a stronger pipeline. Just to give you a view again. Bank issuance, covered bonds, bank-oriented securitization should be stronger, more steady. Things like RMBS, CMBS around the globe, we're seeing more volatility in that. Our expectations on this forecast also take into account refinancing. There are certain refinancing of securitizations as well that are coming in through the second half of the year that we think will also come to the market.
Okay.
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.
Subscribers of RatingsDirect will already have it.
I got to sign up then. Okay. I guess just one more question then. 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. 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, et cetera. There's a work stream on commercial opportunities where we have pilots across the globe. The team under Mike Chinn 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. We have pilot programs in Asia and in EMEA that we started launching.
I think that it would be better if you gave us a few more months before we started thinking about what kind of disclosure and what kind of progress we would talk about on that. 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. There's other synergies which will start coming through that have longer tails and maybe require some investments in areas like technology operations. The top line, as we've said, will probably take a little bit longer overall.
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. Thank you.
Thank you. 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 in digging into the Capital IQ, or sorry, S&P Global 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. By making a decision to put Mike Chinn in charge of the division within a week of the acquisition, we were able to move very quickly on the management structure. That's principally where the roles came from.
Okay, great. On the C&C segment, the margins there, can you talk about what drove that? Was that J.D. Power or is that Platts?
I know it's going to change once we sell J.D. Power, is that level of margin sustainable? I guess.
That's mostly Platts, it's one of the nice things about having a business that grew almost 10% on the top line. The very large percentage of that dropped to the margin and dropped to the bottom line.
Yeah. I would just add, though, that there could be some fluctuation because we did have, as we mentioned, an unusually strong quarter in sort of the Global Trading Services, which is more transaction side of the business. That's a nice growth business for us, but it was really high growth in the first quarter, kind of given the volatility that was there. I'm not sure that'll be there every quarter, but we're quite heartened by the progress. There was a bit of Forex benefit to the margin improvement. I'd say about a third of the margin improvement was, we did get some Forex benefit, but in general, where we think that's very solid right now.
Okay, great. Thanks.
Thank you. Our next question is from Peter Appert of Piper Jaffray. Sir, you may ask your question.
Thanks. Good morning. Jack, I'm wondering if you could just give us an update on how you're thinking about appropriate leverage ratios. I think last quarter you said $500 million 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 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. We know obviously we need to do something to reduce the dilution from the sale of those businesses. We do anticipate some pickup at this point in time as we look to the back half of the year. 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 two very successful bond raises last year.
You've seen that we have used our short-term borrowing capabilities to flex, to continue to buy back relatively heavy in the Q1 timeframe, which is a time that we tend to be a little bit short U.S. cash. We know we have that flexibility on using short-term debt to sustain the program. 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. Then, sticking with the SNL margins for a second, the performance is quite extraordinary relative to, I think, the expectations maybe you had initially laid out. I think if I heard what Doug just said, you were indicating it was mainly due to sort of senior staff restructuring. It's not a function yet of this change in strategy around the data sourcing. Is that correct? There's still opportunity associated with that?
There's a couple components of this is obviously a big improvement in the margin. Maybe it's important to comment on a couple important pieces here. One, if you look at just the performance of the legacy S&P Capital IQ business last year in 2015, the lowest margin point of the year was Q1. The legacy S&P Capital IQ business did improve their margins to sort of the mid 20 range, and we looked into the second and third. The run rate of the legacy Capital IQ business was getting better. You overlay the profits from the SNL acquisition. Those were significant, combined with both businesses growing very nicely on the top line. You start to layer in the synergies.
The synergies, we had given guidance earlier that we thought about a third of the $100 million of total synergies would be achieved in 2016. I can tell you we're very much on pace to deliver that based on what we've seen in the first quarter. Synergies did have a role in the expansion here, it wasn't the only driver. In terms of the nature of what we saw in the first quarter, it was more G&A related. I think these longer-term cost opportunities around data technology, commercial, et cetera, are more down the line. That's some of the work that we have ahead of us.
Got it. Thank you.
Thank you. Our next question from Craig Huber of Huber Research Partners. Sir, you may ask your question.
Yes, good morning. A couple questions. I understand that you guys have been working to change out and improve your sales forces throughout the organization. Maybe I'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.
Yeah. 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, that are doing a new approach or an upgraded approach to market sizing, to market segmentation, et cetera. 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, as well as having a portfolio now which has very scalable global businesses. We are making a lot of progress in that area. We have very strong sales heads in ratings in our indices business. We have a person named Will Pappas, who's leading the sales and commercial organization in Market Intelligence. Then in Platts, we also have a new person who's just joining us to run that organization.
Also, if you just update us on your Ratings business. Obviously, the margins in Ratings are extremely high on an absolute basis. They do lag your main competitor out there. 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 probably not ever going 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, 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 markets. 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.
I think you'll 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.
I would just add that I think, what we saw in Q1, it's not just about cost management. Revenue year-over-year was down over $50 million. I think the organization did, the Ratings business, did a very good job controlling their expenses overall as they worked through that moment in the volatility.
Great. Thanks, Craig.
Great. Thank you.
Thank you. Our next question is from Bill Warrington of Wells Fargo. Sir, you may now ask your question.
Thank you. Good morning, everyone.
Morning.
First of all, congratulations on the sale of J.D. Power. I wanted to ask my first question on Platts. Again, we've had a first quarter 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. I wanted to ask if you've seen any improvement now or change another 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 are going through restructurings. We expect over time, there could be some challenges towards the end of the year on some of the renewals coming up. 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. Platts has been a fantastic growth business for us. We like the business. We continue to invest in it aggressively.
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 from the information from the Ratings business, there's 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 nine from metals, mining, and steel industry. It's been a large number of those that the defaulters have been in that industry. That's 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. Just a clarification question on the S&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?
Yeah, it is right. The information, the benchmark side has always been classified in recurring revenue.
Right.
The derivative trading remains in the transaction side because that can be very volatile. As we just looked at the revenue stream we have from assets under management, while there is some volatility there, it's not like it goes to zero. It's not as volatile.
We know.
that you ever see in bond issuance. That's why we broke it out as a third category because we do believe that it has sort of different revenue characteristics, and in general, we think that's clearly more sticky than the transaction side. We think it gives investors a better sense to better appreciate the more recurring side of our future revenue flows.
That's going to include the AUM associated with ETFs. That's going to include the AUM associated with mutual funds. 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. That's very steady business.
Oh, okay.
That's for the category as well.
One more housekeeping item, if I could. 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, 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. Our next question is from Jeffrey 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 de-bundling 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. The notion that people want to buy from five different sources doesn't really make a lot of sense to us. What we really see is the exact opposite. Is that purchasers like the simplicity of being able to purchase from as few vendors as possible. Yeah, we don't see that.
The only thing I would add, though, is I do think 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. I think we have to kind of continue the journey we're on to maintain clear differentiation in the marketplace.
All right. Great. Just going back to the businesses 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. J.D. Power, if we assume it closes at mid-year, that could be approximately somewhere between about $175 million of revenue. On the pricing business, if we assume the end of third quarter close, that could be around $30 million. Taken in total, roughly $200 million, if you assume the timing of close on both those transactions.
Got it. On the EBITDA or margin side?
I would say that J.D. Power alone at mid-year is roughly $0.10. If you assume the third quarter 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 would be prior to share purchase. 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. 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. 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. Our next question is from Toni Kaplan 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. You mentioned that the Rating Evaluation Services and kind of the discrimination driver has been decreasing. 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 in high yield to be pulled forward into this year. Just any thoughts on that topic?
Yeah. 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, 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 sheets, there might be some increase in loan activity. We're not quite sure where all of these different initiatives are going to land.
We have seen corporate investment grade issuance in Europe. Even though it was weak, it seems to be picking up a little bit. 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 Evaluation Services that are done for M&A transactions. What drives Rating Evaluation Services is not necessarily issuance. It's much more related to IPOs, to M&A activity. Those are the links that are more important on that. As you know, during the quarter, both IPOs and M&A, there were some big M&A headline deals, but there was not as much smaller M&A deals.
In addition to that, the IPO activity was very weak. Some of those correlation factors were weak. We watch RES. It's a business for us that we actually use sometimes as a leading indicator for M&A activity itself.
Okay, that's helpful. 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 the quarter has tracked or how quickly you expect to gain some traction in that CMBS market.
Yeah, we're back in the CMBS market. We're working with the marketplace. We have not done any issuance so far. We have not rated any deals. We are working closely to understand the dynamics of that marketplace and get our name back out there.
Okay, that's it for me. Thanks.
Thank you.
Thank you. Our next question is from Vincent Hung of Autonomous. Sir, you may now ask your question.
Hi, good morning. Can you disclose what the revenues were for the four buckets of Market Intelligence, please?
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 SNL revenue numbers specifically.
Okay.
Right?
I mean, yes, we just routinely don't do that. I can generally size it for you if you'd like, but we don't give the exact numbers.
Okay. 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? What can you tell us about the revenue growth profile of that business historically?
First of all, let's take a step back. Why are we selling those businesses? They're nice, sticky businesses. I wouldn't classify them as high growth, but I would say solid growth, very sticky, good margins. At the end of the day, they are not something that was a core focus in terms of investment, in terms of growth. Given their size, we thought it was prudent to really focus Market Intelligence going forward, particularly with the SNL transaction, that we had more than enough things to work on where we had larger, more strategic scale positions. That was sort of the logic of it. In total, on an annualized basis, they're roughly $100 million in revenue.
That's why in terms of the dependence, depending on the timing of the close, we'll see what the impact is to 2016. We're just working through all the final closing conditions and regulatory approvals. That's why we do anticipate a close a little bit later in the year.
Great. Thanks.
Thank you. 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?
You're talking about the $140 million cost reduction program?
Yes.
Well, I think we're largely on pace right now as we enter 2026 to, on the original assumptions of achieving on the $140 million cost reduction program that we anticipate to achieve by the end of 2016. I would, though, need to overlay because this was subsequent to the announcement of that target back in early 2014. Subsequently on top of that, we have the incremental cost synergy target of the SNL transaction which we anticipate to achieve by the end of 2016 also. That synergy target is $100 million, a third of which to be achieved in 2016. If you called that $35 million, that'd be $35 million on top of the $140 that we think we'll achieve by the end of 2016. $175 in total.
Okay, great. Thank you. If we not thinking about the SNL, just thinking about a program that you already had in place. After you finish this, should we expect that you will continue work on a new program to have some further cost reduction?
The question is after we're done with all these programs, will there be other cost reduction programs?
Right. Thanks.
That is a key question on which we are asking ourselves as our three-year strategic planning. Yeah, I think it's fair to say companies always have some ongoing productivity activities.
Great. Thank you so much.
Thank you. We will now take our final question from Doug Arthur from Huber Research. You may now ask your question.
Yeah, just specifically on the $24 million technology impairment charge in Market Intelligence. As the SNL team gets deeper into the process, should we expect to see more of these kind of charges and related benefits as the year unfolds?
Not of this nature, I don't think, Doug. We didn't have any restructuring charges in the quarter. Going to go forward, I think there's likely to be some restructuring activity from time to time. I would say this issue is a little bit more specific. The reason why the number was as high as it was, part of it, about half of it, relates to an acquisition that was done several years ago. Part of that technology intangible was put up at the time of the acquisition, and the other half related to ongoing software development since that point. That's why it was a little bit larger than normal for us. At this point in time, I don't anticipate an ongoing stream. We don't capitalize that much as it relates to software development in general.
I think the magnitude here, it will be fairly modest as we look forward.
Got it. Thank you.
Doug, any more questions from you?
No, I'm good. Thank you.
Great. Okay. 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 SNL. We're also very excited about being able to launch the company as S&P Global starting on Thursday morning. Thank you again for your support, and we look forward to talking to you again soon. Thank you.
That concludes this morning's call. A PDF version of the presentation slides is available now for downloading from www.mhfi.com. A replay of this call, including the Q&A session, will be available in about two hours. The replay will be maintained on McGraw Hill Financial's website for 12 months from today, and for one month from today by telephone. On behalf of McGraw Hill Financial, we thank you for participating and wish you a good day.