Good morning, and welcome to McGraw Hill Financial's 4th Quarter and Full Year 2015 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 is mhfi from agronomfinancialincorporated.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 now begin.
Good morning. Thank you for joining us for 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 Q4 and full year results. If you need a copy of the releases and financial schedule, 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 measures and the comparable financial measures calculated in accordance with U. S. GAAP.
Before we begin, I need to provide certain cautionary remarks about forward looking statements. Except for historical information, the matters discussed in teleconference may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward looking statements. In this regard, we direct listeners to the cautionary statements contained in our forms 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% 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 would ask that questions from the media be directed to Jason Forschwainer in our New York office at 212-438-1247 subsequent to this call.
At this time, I'd like to turn the call over to Doug Peterson. Doug?
Thank you, Chip. Good morning, everyone, and welcome to the call. In the next 20 minutes or so, I want to provide you with an update on how we've positioned McGraw Hill Financial for continued growth and performance. And let me begin with an overview of 2015. Revenue increased 5% year on year with organic revenue increasing 3%.
Adjusted total expenses increased 1%, adjusted operating profit increased 13%, adjusted operating margin increased 2 80 basis points and diluted adjusted EPS increased 17%. Margin improvement was a big story for the year. Our cost reduction efforts and revenue growth combined for a 2 80 basis point improvement in adjusted operating margin for 2nd year in a row. Every business delivered at least 200 basis points of adjusted operating margin improvement. Year over year, our revenue increased $262,000,000 90% of this was pulled through to adjusted operating profit.
I'm proud of this accomplishment as it is a testament to how well our employees controlled costs during the year. This cost efficiency was the main reason we were able to leverage our revenue growth into 17% adjusted diluted EPS growth.
As we look at the
company's financial performance over the last 4 years, the company has delivered consistent improvements in revenue, margin and EPS. Revenue from continuing operations has grown at a 9% compounded annual growth rate. Our adjusted margins have improved 960 basis points from 29.1 percent to 38.7 percent. And we've achieved a global compounded annual growth rate in adjusted diluted earnings per share of 22%. In addition to delivering another year of strong financial performance, we continued to strengthen our franchises during 20 15.
The most important transaction of the year was the addition of SNL. We increasingly believe that the combination of SNL with S and P Capital IQ presents a compelling opportunity to create a powerful data and analytics business. In addition, we acquired Petromedia, strengthening Platts' existing position in the bunker market launched Platts Market Data Direct, a new service that delivers Platts' price assessments historical and other reference data in a matter of seconds, position Capital IQ as a core content provider to Symphony Communications Services so that its customers can seamlessly access S and P Capital IQ company data launched a suite of new fixed income indices anchored by our flagship S and P 500 Bond Index, the first ever index attracts the debt of the S and P 500 companies and the first priced in real time throughout the day, And we entered into newer expanded exchange agreements in New Zealand, Mexico and Brazil. Beyond strengthening our businesses, there were a number of other key accomplishments in 2015. We consolidated the company headquarters into downtown New York, a move that brought corporate employees much closer to our operations, generated $1,200,000,000 in free cash flow, excluding legal and regulatory settlements and insurance recoveries returned $1,300,000,000 through share repurchases and dividends successfully issued debt into the market after an 8 year absence, continue to make investments in compliance and risk management, and last week increased the dividend by 9%, marking the 43rd consecutive yearly increase.
Now let's take a closer look at the 4th quarter results where the company finished 2015 with solid earnings in a difficult debt issuance environment. Revenue grew 7%. Organic revenue, however, only grew 1% as a result of revenue declines in S and P Rating Services. Adjusted operating profit increased 8% and 4th quarter adjusted diluted EPS increased 9%. The strength of our portfolio is evident in the 4th quarter as weak issuance at ratings was offset by solid revenue growth across the rest of the portfolio.
This portfolio strength coupled with progress on productivity initiatives enabled the company to deliver 9% adjusted diluted EPS. Now let me turn to the individual businesses, and I'll start with S and P Capital IQ and S and L. In 2015, reported revenue increased 14%, with organic growth excluding revenue from S&L Acquisition increasing 7%. Adjusted segment operating profit increased 25% and adjusted margin increased 200 basis points. With integration teams in place and synergy opportunities identified, we expect to deliver considerable adjusted margin improvements in this segment over the next few years.
Jack will provide more details in a few minutes. In the 4th quarter, reported revenue increased 27%, primarily due to the addition of S and L. Excluding S and L revenue, organic growth was 7%. Adjusted operating profit increased 22% in the 4th quarter and adjusted operating margin declined 80 basis points. This margin decline was due to deal related amortization.
Excluding that amortization, 4th quarter margin actually increased 200 basis points from 21.3 percent in Q4 2014 to 23.3% in 2015. Let me add a bit more color on 4th quarter revenue growth in the business lines. S and P Capital IQ Desktop and Enterprise Solutions revenue increased 9%, principally through a low teens increase in desktop revenue. SNL revenue increased 10% compared to Q4 2014. Prior to our acquisition of SNL, 2015 revenue was reduced by deferred revenue adjustments required under purchase accounting.
Excluding this adjustment, revenue growth was 14%. Global Risk Services revenue increased 5%, led by Ratings Express, which is increasingly used by customers to meet their regulatory reporting needs. In the smallest category, S and P Capital IQ Markets Intelligence revenue increased 4% overall with growth in Global Markets Intelligence and Leveraged Commentary data exceeding declines in Equity Research Services. Let me turn to Standard and Poor's rating services. In 2015, revenue declined 1%.
However, excluding ForEx, revenue for the year increased 3%. Adjusted operating profit grew 7% and the adjusted operating margin increased 3 40 basis points to 47.2%, a noteworthy achievement. During the quarter, revenue decreased 7%. However, excluding ForEx, revenue decreased 4%. Adjusted operating profit decreased 3% and adjusted operating margin increased 150 basis points to 43.7%.
While decreased expenses in the 4th quarter led to margin expansion, the big story during the quarter was weak global issuance. Non transaction revenue in the quarter was flat. However, excluding ForEx, it increased 4% due to strength in CRISIL and in rating evaluation service revenue from elevated M and A activity. This is partially offset by lower revenue associated with fewer new customers that were added in the Q4. Transaction weakness was caused by 26% decline in global issuance, partially offset by growth in bank loan ratings.
Excluding ForEx, transaction revenue decreased 13%. Let's take a look at issuance. The 2 largest markets, the U. S. And Europe, both declined capping a weak second half of the year for issuance.
4th quarter issuance in the U. S. Was down across the board. Investment grade decreased 17%, high yield 41%, public finance was down 21% and structured finance also declined 26% with the only bright spot being RMBS. In Europe, investment grade decreased 15%, high yield down 10% and structured finance increased 11% with declines in every asset class offset by growth in covered bonds.
The rest of the world had even weaker issuance with Asia declining 47% and the Americas outside the U. S. Declining 46%. In total, global bond issuance declined 26%, outpacing the 20% decline in the 3rd quarter. Turning to S and P Dow Jones Indices.
In 2015, this business delivered an 8% increase in revenue, a 12% increase in adjusted operating profit and a 200 basis point of adjusted margin improvement to 65.6%. 4th quarter results were similar with a 7% increase in revenue, a 9% increase in adjusted operating profit and a 100 basis point of adjusted margin improvement. During the quarter, there was a modest decline in revenue from ETFs, offset by revenue from exchange traded derivatives, mutual funds, OTC derivatives and data licenses. If we turn to the key business drivers, the ETF industry surpassed 2014 record inflows, setting a new record of $351,000,000,000 in 2015, a great trend. AUM based on our indices increased 9% sequentially from Q3 2015 to 815,000,000,000 dollars but below peak levels at the end of 2014.
During the quarter, we continued to innovate launching 233 new indices and 26 new ETFs based on S and P Dow Jones Indices. Exchange traded derivatives revenue growth was primarily driven by increased revenues from CME, partially offset by a decrease in exchange traded derivative volumes based on S
and P
Dow Jones Indices.
As you know, S and P Dow Jones Indices impacted by fluctuating markets, but continued inflows into passive investing, innovative new indices and efforts to partner with exchanges around the world bodes well for the long term positioning of this business. On to commodities and commercial markets. The Eclipse, NADA used CarGuide and Petromedia acquisitions impacted revenue comparisons in both the 4th quarter and the full year. Adjusting for these items, organic revenue increased 6% in 2015. Adjusted operating profit increased 17% and the adjusted operating margin improved 260 basis points to 36.9%.
In the Q4, organic revenue increased 8%, adjusted operating profit increased 20% and adjusted operating margin increased 2 40 basis points. Both Platts and J. D. Power delivered high single digit organic revenue growth. J.
D. Revenue Power is powered J. D. Revenue J. D.
Power revenue is powered by its auto business with particular strength in its pin product. The evaluation of strategic alternatives for J. D. Power continues with considerable interest from 3rd parties. Many of our upstream petroleum, natural gas and mining customers are pressured by low commodity prices, and this has impacted the revenue growth of the Platts business.
Nevertheless, Platts delivered high single digit revenue growth in this challenging environment. Organic revenue from the core subscription business grew with both petroleum and metals, ag and petrochemicals revenue increasing high single digits. Global Trading Services revenue increased double digit, primarily due to the timing of licensees and strong license revenue from the Steel Index derivative activity. In summary, the company delivered solid revenue growth in a difficult market environment. More importantly, progress on our productivity initiatives was apparent with outstanding margin expansion delivered by every business in 2015.
For the 2nd year in a row, the company delivered adjusted operating margin improvement 280 basis points. This accomplishment was the primary driver of the 17% adjusted diluted EPS growth for the year. Now let me discuss the outlook for 2016, and I'd like to start with some thoughts from our economists. Major Central Banks moves in December may have disappointed or unnerved markets with the Federal Reserve raising rates and decisions by the European Central Bank and the Bank of Japan that appeared to disappoint or alarm the market. However, monetary policy continues to provide a tailwind to economic expansion.
Recent stock market volatility probably overstates the likelihood of a slump in global growth this year. These market moves appear to be more sentiment than data driven with the exception obviously the fall in spot oil prices, which reflects changing supply fundamentals. In the six and a half years or so since the global economy started to recover from the financial crisis, it has grown in real terms at an average of about 3.5% annually. S and P economists expect that trend to continue with a 3.6% global growth in 2016. Our economies expect real growth in China to continue to trend downward, but to end up at 6.3% this year after growing by 6.9% in 2015.
Growth in most of the developed world and even much of the developing world stands to be a bit higher this year than last, which adds up to a decent outcome for global growth. Excessive pessimism is not is probably not warranted. With this economic backdrop, we expect global debt issuance to decline 1% in 2016 and for spreads to widen. Within the U. S, we expect speculative grade corporate issuers to see increasing borrowing costs in the coming quarters at the back of a Fed interest rate increase.
While most higher rated corporate entities should continue to have a favorable lending environment as investors pursue moderate yields while remaining more risk averse. More favorable lending conditions in Europe supported by continued monetary accommodation by the ECB should result in increased bond and loan issuance in 2016. The Central Bank's recent measures combined with a softening in the regulatory stance may also bode well for higher issuance of securitized products with modest increases in borrowing from the public finance sector. Among emerging markets, most regions are experiencing substantial stress from falling commodity prices, exchange rated pressures from rising dollar, tighter lending conditions and a rising share of non performing loans. 2 of the largest economies, Brazil and China, have been experiencing significant headwinds this year, and their market volatility is unlikely to subside in the near term.
Now turning from macro factors to those items inside the company that we control, there are several areas of focus in 2016. Our revenue guidance for 2016 is for mid to high single digit growth. While tepid issuance limits S and P rating services growth, we'll benefit from 8 additional months of S and L in 2016. Beginning in 2016, we will report our financial results using a newly defined adjusted diluted EPS that excludes deal related amortization that Jack will discuss in a moment. Incorporating this change, our 2016 adjusted diluted EPS guidance is a range of $5 to $5.15 In 2016, we expect to generate considerable free cash flow and our guidance is for approximately $1,300,000,000 Please note that this cash flow guidance doesn't include the proceeds from the potential sale of J.
D. Power. We are actively pursuing the sale of this business and have received considerable interest from a number of parties. The top operational priorities in the corporation will be the integration of S and P, Capital IQ and SNL. 10 work streams are in place and now that we have an inside look at SNL and the collective knowledge from both businesses, additional synergies have been identified.
We have a goal to transform global risk services into a market leader. We have risk capabilities within S and P rating services, S and P Capital IQ and S and L and CRISIL that we brought to bear to create new credit products and services. I've challenged the organization to continue to expand our international footprint through better customer focus as well as collaboration across the company. And I've also challenged the company to deliver additional process improvements from automating elements of the ratings process to improving data collection, there is ample opportunity to drive performance with process improvements and reengineering. We will also continue to invest in compliance and risk management as well as firm wide technology and data roadmap.
Technology is at the heart of each business and we need to evolve our technology in a thoughtful and coordinated manner. And now I'd like to conclude with some big news. The Board of Directors has proposed renaming the company S and P Global. This name better leverages the company's rich heritage and our powerful financial data and analytics brands, while signaling that we have a strong global footprint and broad portfolio. The change will be effective pending a shareholder vote on April 27.
In addition to changing the name of the company, we'll also be changing the names of some of our divisions. For example, S and P Capital IQ and S and L will be renamed S and P Global Market Intelligence. With that, I want to thank you all for joining the call this morning. And now I'm going to hand it over to Jack Callahan, our Chief Financial Officer.
Thank you, Doug, and good morning to everyone on the call. As you just heard, we made great progress in 2015, expanding our portfolio and product capabilities, while simultaneously streamlining the cost base. Today, I want to provide additional clarity around several items that impact our financial performance and then we will open up the call for your questions. First, I will recap key financial results. As part of the review, I want to highlight the impact of deal related amortization and discuss our new approach to key performance metrics.
I will also review the impact from adjustments to earnings and update you on the balance sheet, free cash flow and return of capital. After that, I will provide updates on our productivity initiatives and S and L integration. And finally, I will provide 2016 guidance. Let's start with the consolidated 4th quarter income statement. As Doug already commented on these items, there are just a couple items I want to highlight.
First, reported revenue grew 7%, benefiting in part from the 1st full quarter of S and L contribution. On a constant currency basis, organic revenue grew 3%. Delivering overall top line growth was thanks to the strength and breadth of our portfolio as revenue from our largest business Standard and Poor's rating services was lower than last year due to the impact of weak global debt issuance. 2nd, expenses and margins were impacted by the step up in deal related amortization. I will discuss this item in more detail in just a moment.
3rd, the tax rate was considerably lower than a year ago, largely due to improved profitability in several lower tax jurisdictions outside the United States and favorable tax benefits from the ongoing resolution of prior year tax audits. Turning now to the full year. Both reported revenue and organic revenue on a constant currency basis increased 5%. This was consistent with our guidance of mid single digit growth. The most impressive result is that total adjusted expenses increased only 1%.
This is a direct result of the tangible progress on our 3 year cost reduction plan, which I will discuss in a moment. As a result of cost productivity and the solid revenue growth, adjusted operating margin increased 280 points to 38.7%. The tax rate for the full year on an adjusted basis was 30.5%. As I just mentioned, this was due to improved profitability in lower cost jurisdictions and the ongoing favorable outcomes from the resolution of certain prior year tax audits. And finally, adjusted net income and adjusted diluted earnings per share increased 16% 17%, respectively.
Adjusted earnings per share of $4.53 is a couple of pennies ahead of our latest guidance. The average adjusted diluted shares outstanding decreased by over 1,000,000 shares versus a year ago. The full impact of the 10,000,000 shares that we repurchased during 2015 will be more evident in the 2016 share count. Now I want to highlight the impact of deal related amortization. As a result of the SNL acquisition, the company's deal related amortization expense has increased significantly.
It will be approximately $98,000,000 in 2016, just over half of which is related to the SNL SNL acquisition. In the top section of this slide, you can see that we reported a 4th quarter 2015 adjusted operating margin of 24.8% as deal related amortization more than doubled. On the other hand, if deal related amortization expense were excluded, we would have reported Q4 2015 adjusted operating profit margins of 36.8%. The difference is not as pronounced on the full year results, which includes only 4 months of S and L deal related amortization expense. Here, the reported 2015 adjusted operating margin is 38.7%.
However, if deal related amortization expense were excluded, we would have reported 2015 adjusted operating profit margin of 39.9%. On this slide, we lay out the earnings per share impact of fuel related amortization expense on the Q4 and the full year. For the Q4, there is an $0.08 per share difference between the reported adjusted diluted earnings per share of $1.04 and the adjusted diluted earnings per share excluding deal related amortization of 1.12 dollars For the full year of 2015, the difference is $0.16 Now going forward, beginning in 2016, we will be excluding this deal related amortization from our non GAAP results. We think that this will enable investors to view our results in the same manner as management. In today's earnings release, we have provided the impact of this change to 20.15 adjusted earnings by quarter, so you can adjust your models accordingly.
Now let me turn to adjustments to earnings to help you better assess the underlying performance of the business. In total, pre tax adjustments to earnings from continuing operations totaled $54,000,000 in the quarter. This consisted of $33,000,000 of restructuring charges in S and P Capital IQ and S and L, corporate and Standard and Poor's rating services. It was $15,000,000 in accruals for potential legal settlements and $6,000,000 for acquisition related costs associated with the S&L transaction. As you have seen in the past, these restructuring actions are targeted to produce tangible cost reductions.
The majority of the actions were taken in S and P Capital IQ and S and L as this division begins the realization of its cost synergy plans. I will provide an update on these synergies in just a moment. Now let's turn to the balance sheet. As of the end of 2015, we had $1,500,000,000 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 $143,000,000 of short term debt in commercial paper.
Going forward, we intend to tap into the short term debt markets periodically to fund our share repurchase program and meet other corporate needs. Our full year free cash flow was a negative $48,000,000 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 and related insurance recoveries. On that basis, year to date free cash flow was a positive $1,200,000,000 This is consistent with our guidance of greater than 1,100,000,000 dollars Now I want to review our return of capital. During the quarter, the company stepped up its share repurchase program and bought approximately 5,000,000 shares, bringing the year to date total to approximately 10,000,000 shares. These purchases combined with our dividend totaled to approximately $1,300,000,000 of cash returned to shareholders in 2015.
This overall return of capital is in line with the past several years. Overall, we have returned approximately $6,400,000,000 over the last 5 years. The share repurchase program remains an important component of our overall capital allocation, and we anticipate continuing to repurchase shares subject to market conditions. As most of you know, we initiated a 3 year productivity program that will conclude by the end of 2016. The target was initially $100,000,000 when introduced in early 2014 and was increased to $140,000,000 last year.
As of the end of 2015, approximately 80% of that productivity target has been realized. Our progress is clearly evident in the margin progress that we have delivered over the past 2 years. We currently expect to complete these initiatives and deliver on the full $140,000,000 target by the end of this year. Now let me provide an update on the integration of SNL. This was the 1st full quarter of our ownership of SNL.
And given its importance, the integration has become a primary area of focus for the company. It is imperative that we combine S and P Capital IQ and S and L rapidly to capture synergies while minimizing disruption to the business and most importantly our customers. As Doug mentioned, 10 integration work streams are in place and efforts are well underway. We have a centralized integration management office that provides detailed tracking by initiative, identification of key issues and monitoring of these synergies. Both Doug and I work closely with Mike Shannon and his team to help ensure that these efforts receive the appropriate priority and support across the company.
More importantly for investors, we are now on track to exceed the initial $70,000,000 synergy target ahead of our original timeline. When we announced the acquisition of SNL, we cited a target of $70,000,000 of run rate EBITDA synergies by 2019. This was an estimate we arrived at by looking at S and L from the outside in. We now have had the opportunity to work directly with the new leadership team to consider what can be accomplished as we build an integrated S P Capital IQ and S and L organization. With this more informed inside look, we are now targeting $100,000,000 of synergies by 2019.
This increase is almost entirely cost related as we now expect about $70,000,000 of cost synergies by 2018 and the balanced revenue related. Furthermore, we expect that more than 1 third of the synergies will be realized in 2016. Taking in total, these synergies, the sustained growth across both legacy businesses and the positive 8 month overlap from the acquisition should generate approximately 20% revenue growth in 2016 with profits excluding the impact of deal related amortization growing twice as fast. Now let me provide some additional guidance going into 2016. Overall, the strength and breadth of our portfolio better positions us to weather the volatility that we have experienced over the last couple of quarters, which has intensified a bit since the start of 2016.
The promising outlook for recipe Capital IQ and S and L and continued growth at Platts supports our current assumption of mid to high single digit revenue growth despite the weak start in debt issuance in the overall capital markets. We anticipate maintaining the approximately 31% effective tax rate generally in line with 20.15. As I mentioned earlier, our adjusted earnings per share guidance exclude the impact of deal related amortization. On this basis, we are introducing adjusted earnings per share guidance of $5 to $5.15 7% to 10% growth of our 2015 adjusted earnings per share once the impact of deal related amortization is excluded from both years. Despite the strong adjusted margin expansion expected at S and P Capital IQ and S and L, we are a bit cautious about further consolidated margin expansion in 2016.
This caution is primarily based on the challenging market conditions, which may impact revenue growth and our 2 highest margin business units, Ferrant and Poor's Rating Services and S and P Dow Jones Indices. And as a reminder, we have already made great progress on margins with the realization thus far of the $140,000,000 productivity target. As a result, we would currently point to an overall margin expansion of approximately 50 basis points above the 39.9 percent adjusted operating margin, excluding deal related amortization in 2015. Capital investment is expected to be largely flat in line with 2015. Company announced a 9% increase in our annual dividend to $1.44 per share.
Our guidance considers continued share repurchases, although the timing can be impacted by market conditions. One clarification. This guidance assumes the inclusion of J. D. Power for the full year.
As you can see in today's release, we have moved J. D. Power to an asset held for sale. As such, J. D.
Power's results will be included until a sale is closed. Upon close, we currently anticipate using cash proceeds to repurchase shares and offset dilution. At that time, we will update you on any impact to our current outlook. Finally, we anticipate 2016 free cash flow of approximately $1,300,000,000 which excludes any additional impact from asset sales. In summary, we look for another year of growth in 2016.
The strength of our portfolio, now augmented with S and L, positions us well to manage through these volatile market conditions. Now, let me turn the call over to Chip Merritt to open it up for your questions.
Thanks, Jack.
Just a couple instructions for our phone participants. If you've been listening through a speakerphone, we 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.
Thank you. This question comes from Manav Patric with Barclays. You may now ask your question.
Yes. Good morning, gentlemen. So just first on the 2016 guidance, I was hoping you could just clarify 2 things on the revenue line. And one is, what is the organic growth expectation embedded in that total mid to high single digit that you've given? And then within that as well, like I think you said you expect global issuance to be down 1%.
So what is sort of the anticipated offset to the ratings business on the top line there?
The organic growth is more in the go back to our guidance of mid single to high single digit revenue growth. Organic growth is sort of in the mid single digit range at the lower end of that. So that's the organic growth assumption then plus the benefit of the SNL acquisition. More specifically for Ratings, we do have, the issuance outlook down a bit, down 1%. With that down volume, but maybe a bit of pricing, we would like to see some revenue growth in that business.
However, I do suspect that maybe a bit more weighted to the back half of the year, just kind of given issuance trends that we've seen in the Q4 that now appear to be continuing as we go into the first. Okay.
And then if I could just follow-up on the rating side, just in terms of your visibility, can you remind us of how much visibility you guys really have based on your pipelines? And then just I'm just trying to think, it's maybe I'm interpreting this wrong, but correct me. Like it sounds like you're negative 1% issuance. It feels like you still potentially see downside to that. And I was just wondering if that's correct and how you would frame that maybe going into the next couple of years?
Thank you. This is Doug. Just a couple of points. In terms of issuance, let me just give a few of the statistics from what we saw in the Q4 and a couple of the general trends. Clearly, as we reported, there was a large decrease in total corporate and governance that decreased 29 point 3% in the Q4.
And there were some of the different categories, for instance, in Latin America, it was down 60%, 68% overall. In January, we saw a continuation of that trend. The total corporate governance issue was down about 26%. Financial Institutions were down about 56%. But we put together our forecast, which you saw on Slide 26, which shows about a 1% decrease in 2016.
We put that together with a combination of looking at the markets, what we expect to see from market issuance, scanning the market with investment banks and corporate banks, etcetera. We also look at the what is the maturity profile of debt that's already on balance sheets that's coming due. So we do this forecast looking historically as well what we see are the trends. If you look at that chart, you can see that 2014 was a peak year at $6,000,000,000,000 of total issuance. And there's been a level almost every year 2012, 2013, 2015, a little bit over the $5,000,000,000,000 level.
The mix changes here and there. But we still believe that there would be somewhere in that range. It's just as Jack mentioned, it might be more in the second half of the year. There's another part of the markets, which you didn't ask the question, but I just want to mention as well, which is very important, which has to do with spreads. Spreads have recently widened significantly, especially in the lower end of the credit spread.
CCC type credits, obviously more distressed credits and below have increased by over 400 basis points. They're at a twelve-twenty five spread range, whereas the AAA, AA level is still around 100, 110 basis points. It barely budged over the year. In fact, as you've seen U. S.
Treasuries have tightened. So the spread issue that where we see spreads going, there's a lot of volatility right now. We think that also plays into it, people's appetite for going out. It's not really related to the base rate, it's related to the spreads. Anyway, long answer to your question, we are prepared in the business as necessary to manage our costs tightly through things like delaying hiring, looking at our bonus accruals as well as other investments that we might be making in things like technology and systems, etcetera.
So we have certain flexibility we can build into our plan if we need to go through what could be a tough period. And one final comment, as you've heard me say many times in the past, we have a long term optimism in this business, in fact, in all of our businesses. But we've always said that quarter by quarter, we could see some shaky quarters as markets respond to certain conditions.
Thanks
a lot guys.
Thank you. This question comes from Andrea Benjamin with Goldman Sachs. You may now ask your question.
Andre?
Yes, sorry about that. I was on mute here. So I know you talked a bit about margins for the year and the hope that you would really control things with hiring and other things if things got tough. I guess based on your base case of what you've just spoke to and the 50 basis points for the total corporation, how should we assume that the margins in the ratings business specifically move during the year relative to the rest of the company? And I guess as you look at things over time, do you still expect to increase the margin towards your closest competitor, Moody's, as you execute some of the other initiatives that you've been talking about over the last couple of years?
Andrea, we don't want to get too overly specific in guidance of margin by the business unit level. And then let me make a few maybe a few comments about ratings and then one broader point just on the math of the margins for 2016. I think our caution maybe the cautionary view we're taking a margin expansion is not really based on cost management. I think our track record over the last few years would demonstrate that we're on that one. It's really more on the revenue side and particularly kind of given the issuance trends that we're seeing right now on ratings.
And we know how to manage costs in that business. Just to think about it last year in 2015, we were actually able to expand margins with revenue down. That doesn't happen all too often. So from a longer term point of view, we do think margin expansion is certainly possible with revenue growth and continued cost control within the ratings business. I just want to be clear that we are not targeting any magical outside goal here.
We're just trying to manage our business in terms of what we think is right for the ratings business. But just one overall point on the margins itself. We said 50 basis points, but you also have to kind of remember the math in terms of the addition of S and L this year. S and L is going to add to the portfolio about $200,000,000 It's coming in sort of around the mid-20s margin. You just do the math, that's dilutive to the overall company margins of about 50 basis points.
So if you were just to kind of look at like to like and exclude the impact of the SNL acquisition, our full year our margin guidance is really more in the range of a full point, which frankly is not that different than what we did in 2014. I think we were 150 basis points last year. So I think it's not as different as it may look kind of looking when you really factor in the math of the acquisition.
I guess my follow-up would be in terms of the indices business, I know we spent a lot of time talking about capital allocation and ratings, but you do have a couple of offsetting factors that you talked about in the prepared remarks. Any directional color on just based on the conditions that we're seeing today, how you would expect that business to grow? Is it simply just AUM or are there other things that you could see benefiting that business going forward?
Well, the one I mean, beyond just assets under management, the one other thing that helps drive that business is volatility. And we have certainly seen a step up in volatility. So to some degree, that has been a bit of an can be and a bit of an offset to assets under management. So we are in total, there hasn't been a big change in terms of asset flows. Really what it is, it's been the overall market performance that's really has kind of changed assets under management here.
So we're looking at both what's going on with asset flows and we're also closely watching volatility. But so we'll have to see how the years plays out. I think right now, we're certainly look at it with a bit of caution. But at the same time, we can it's not just flows into ETFs that drive the business. There's multiple ways in which we can drive revenue.
And Andre, this is Chip. I just want to add in. The flows is a great long term trend and that continues. So earlier this year, we saw some outflows and things like that. When the year is said and done, we had 4% or 5% inflows into AUM associated with our indices.
So that continues in the trend that's been there for several years. So regardless of market volatility, which we love the volatility, when the market goes down that hurts our AUM, but we continue to benefit from inflows from active passive.
Thank you.
Thank you. This question comes from Danny Galindo with Morgan Stanley. You may now ask your question.
Hi, good morning. Another couple of questions on the guidance. On the rating slide, you talked about the 1% down on issuance. I think you actually did the calculation, but I couldn't tell what you're expecting for the corporate piece of issuance versus, say, the structured products? It seems like corporate maybe is a little weaker with the high yield loans and maybe structured products a little bit stronger with some of the RMBS, CMBS covered bond type stuff that you guys did.
Just maybe you could just comment on what you're thinking about those two pieces of the ratings revenue growth or issuance growth?
Yes. There's you basically described generally what we our expectations are. In terms of broad themes, we expect that over time in Europe, there's going to be increased structured finance. This is something that ECB is trying to foment. They want to have a more active capital markets.
There's also the EU has what they call the Capital Markets Union. And one of the things they want to do is have more credit flow to SMEs and small financial institutions. So they think that the structured finance market is one of those. We agree that that is going to be a slight growth area in 20 16. In addition, there's another very important global trend about financial institutions there.
They're all looking at the optimal capital structure in addition to the new rules related to capital. And there's this TLAC, which is total loss absorbing capacity, which is basically senior bonds, which have a certain level of subordination to other senior debt and depositors that we expect that banks are going to be issuing. So in general, we think that there will be increases in structured finance, increases in financial services and financial institutions, likely decrease in overall corporate issuance globally, but probably a larger increase in non investment grade overall, especially at the spread levels, which I mentioned earlier. But net net, that comes out at about a 1% decline.
You said a larger decrease or a larger increase in the non investment grade, larger decrease, right?
Yes, non investment grade would probably decrease.
Right. Okay. And then kind of going in a different direction. On index, the expenses went up quite a bit quarter over quarter. And I know that's a business that the top line is great and has very high incremental margins, and you kind of manage the expense base.
Is that expense level, the kind of quarterly amount that you'd expect through next year? And since it's a little bit elevated, what's driving that? Is that new products and fixed income indices and that sort of thing? Or any thoughts just on where that what you're expecting for that kind of index expense line to do over the next year?
I would just view it
as this would be some timing of expenses that were largely less headcount related. There's no we're not in the midst of any significant step up in an investment program in indices or anything like that. So I think we in a normal growth year, we wouldn't expect anything we would expect the maintenance to maintain if or maybe even improve a bit the high margins we have in that business. But that's the only other thing that maybe because it's the Q4, sometimes depending on how an individual business is projecting, Sometimes there is in the Q4 an impact on incentive compensation depending on how individual business is doing up against targets. And I suspect there could also have been there also may have been a catch up in incentive comp, which would just impact that quarter.
So kind of so it's maybe a little bit higher on a run rate basis, but you're kind of expecting flattish margins there for the next year?
We wouldn't signal any big change in margins at this point.
Okay. Thanks.
Thank you. This question comes from Craig Huber with Huber Research. You may now ask your question.
Yes, good morning. My first question is on Platts. Roughly a year ago, you guys thought Platts would grow high single digits revenues. Looks like that's what it came in at based on your press release. I'm curious what your outlook is here for 2016 just given the oil price issues out there right now?
I think it did come in at that level in the quarter. However, it did pick up a few points of growth from some of the acquisitions that we've done. I think we'd be more right now in sort of the mid single digit sort of ranges of the 2. We'd like to think maybe we can get back into the high single. But I do think kind of given the pressure that's on a lot of the customer base in Platts, it's going to cost us, I think, a couple of points of growth.
I think we were saying that last year, I think, probably but again, the business is pretty resilient. It is over 90% subscription based. And our renewals are doing fine. And we have pretty good visibility in turn renewals going into this year. So we feel pretty good about continued growth in Platts.
The only other one thing that in particular quarter can drive growth up or down a couple of points is we do have we are linked to some of the trading activity with the market on closed process. And depending on what's going on with volatility in the oil space, there can be a little movement, a point or 2 up or down on that too.
And then also my second question, please. In the ratings business, just given your outlook here for debt issuance down 1% globally. Can you comment upon what you're looking for the non transaction piece or ratings for your revenues there? I mean, I guess, including a price increase of roughly 3% to 4%, your outlook for issuance, do you think that number could actually be up a few percentage points, non transaction?
Yes. I think just generally our assumption is sort of in that mid single digit range. The one thing that number has been impacted a bit by ForEx. We'll have to see how that plays out how it plays out in 2016. Thank you.
Thanks, Craig.
Thank you. This question comes from Alex Kramm with UBS. You may now ask your question.
Yes. Hey, good morning. Only a couple of, I guess, weedy numbers questions here. So first of all, for Jack, can you just go back to the deal amortization impact? When you look at this quarter, it was $0.08 EPS.
Looks like a much lower tax rate on those. So is the tax rate going forward going to be lower? So basically what I'm asking is what's the EPS impact of that 98,000,000
dollars
The 98,000,000 I'm sorry, dollars 98,000,000 amortization expense?
Yes, after tax. EPS terms because it seems like the tax rate is different than your general tax rate.
$0.24 roughly.
Okay, perfect. Thank you. And then just secondly, again another one in the weeds. There was an 8 ks a couple of days ago that you put out in terms of some changes the board announced. Basically, if I read this correctly, makes it a little bit easier for long term shareholders or potentially maybe even activists to nominate people to the Board or independent Board members.
Can you comment on that at all? Like what was the Board thinking there? Anything we should read into? So maybe just comment on that one. Thank you.
Yes, this is Doug. There has been a movement in the United States in terms of governance and business practices related to boards to allow long term shareholders have access to the proxy for electing board members. There's a movement, there are certain shareholders activists who have been trying to have board take a look at this. So we took a very careful look at it. We looked across.
We did a scan of the industry. We did a scan of best practices. And our Board decided that we should adopt what we call the threethreetwentytwenty rule, which is that 20 investors up to 20 investors that own up to that own 3% of the shares or more for at least 3 years would be allowed to elect or to not elect, but to propose up to 2% or up to 20% of the Board directors in a proxy. So we felt it was a good practice and something that is becoming consistent in good governance across the corporates in the United States and we decided to adopt that.
All right. Very good. Thank you.
Thank you. This question comes from Tim McHugh with William Blair. You may now ask your question.
Yes, thanks. Just want to ask on
CapEx or I'm sorry, S and L. Can you elaborate at all, I guess, where you're finding the additional synergies? What is driving that number up, I guess?
One of the things that one of the very simple decisions we've made was to move quickly to integrate S and P Capital IQ and SNL. So I think what some of the that has allowed us to really kind of be more to get more into some cost synergies that relates to the G and A structure of the business. And we started to kind of then look as we start to combine each of the core functions, it's leading to an opportunity over time to make the business overall more efficient, also driven by the fact that we just have enhanced scale as we bring these businesses together. Just as a reminder, I mean, the S and L business system and the S and P Cap IQ business system are pretty similar. It's designed pretty similar products that leverage a great deal of data, some of which is common to both systems and leveraging some common technologies.
So we're pleased with some more the opportunity to step up the synergies on the cost side and also the timing in which to bring some into 2016. But we're actually and we're even more encouraged from a longer term point of view about our ability to build a more efficient and more effective organization for the long term.
Okay, thanks. That's all I had.
Thank you. Our next question is from Wendell Warmington with Wells Fargo. You may now ask your question.
Good morning, everyone. So a question for you on J. D. Power first, in terms of the contribution that you're expecting in 2016 in terms of revenue, EBITDA and EPS, so we can model that. And then some thoughts, if you would, on range of proceeds and tax impact potentially on those proceeds?
For the I mean, obviously, in terms of how it's going to impact the year really comes on timing of close, just to kind of keep it super simple. Maybe why don't we just assume a midyear close. Whether or not we get there is a separate question. But let's just kind of keep it simple. That would probably be depending on timing, dollars 150,000,000 to $175,000,000 in revenue and probably $30,000,000 to $35,000,000 in EBITDA.
So just to give you some sense of what that could look like at midyear if indeed that's when close happened. Maybe that gives you some magnitude of
it. It does. And then in terms of the just the proceeds and the potential tax impact on the proceeds? We can assume a multiple, but I just always like to ask about the tax impact.
Yes. No, there will be there will be some tax leakage in the transaction. But I think between we have some basis to work with. So we're still we don't want to be overly specific about what we have out there in basis, but there's enough to make a sale financially attractive at this point in time.
And then on one housekeeping question on S and L. You had talked about the synergies of $100,000,000 and realizing a third by the end of 2016. I just want to be clear, it was a third of the 70 or a third of the 100. And I'm assuming that's all cost synergies that you're going to be achieving by the end of 2016?
That's a good clarification. It's a third of the total synergies. So it's a third of the 100. However, within that, I think it's fair to say 80% to 90% of the synergies that will be realized in 2016 are cost related.
Got it. And the balance, I take it, is going to be some revenue synergy?
That is right. Now that will be a longer build.
Okay. All right.
Well, thank you very much.
And Jack, just for clarification for folks, are you saying that by the end of the year, those costs will be gone? Or are you saying we'll actually realize that full amount in savings over the year?
We'll realize that full amount in savings during the course of the year. Okay. Thank you.
Thank you. This question comes from Bill Berg with FBR. You may now ask your question.
Good morning. I was wondering if you could just give us your current perspective on your M and A strategy. And then separately, I was wondering if you could talk a bit about kind of the CMBS market. Have you reentered? Anything you can tell us in terms of early progress?
Thank you.
Yes. Thanks for the questions. On the M and A strategy, clearly, we had undertaken last year the largest acquisition in the history of the company with SNL. We are totally focused on this. As you heard, when I talked about our company priorities for 2016, it's the top of the list.
We believe that we need to execute on that and that's where we decided to allocate our capital. In addition, we have our portfolio rebalancing with the J. D. Power, a potential transaction. So right now that is where our focus is when it comes to M and A.
It's on what we already have on our plate. Clearly, we are watching carefully what's happening in the landscape of the data and analytics space. If there was something that was a very small tuck in acquisition, you might hear us talk about something like that during the year. But that's our main focus right now. S and L, doing something with obviously with J.
D. Power and then keeping our eyes open what's happening in the market, but no necessarily looking at anything that would be significant. In terms of the CMBS market, on January 22, we reentered the CMBS market. We have been clearly working to ensure that on that date we were able to speak again with institutions that are either issuers or the financial institutions that do the underwriting and marketing of CMBS transactions. We have hired over the last year a new team to ensure that we have the right resources in place and we're ready to go as soon as we start hearing from people that would like to use us.
Thank you.
Thank you. This question comes from Peter Appert with Piper Jaffray. You may now ask your question.
Possibility of using short term debt to fund repurchases. I'm wondering, might that imply some willingness to think about dialing up the level of leverage? And then related to that, can you
just talk a little bit about how we
should think about the pace of buyback activity in 2016?
Yes, sure, Peter. No, we're not trying to signal any intent to add leverage at this point. The only point is that one of the issues we do have, it's just a practical matter, just in terms of cash management is just the availability of U. S. Cash.
And we have a good deal of flexibility in our borrowing capacity. So if we think we want to continue to buy back shares and we need to borrow short term, we're going to be quite willing to do that and you've seen that with our year ending results. So we're not going to limit our buyback activity just to the availability of U. S. Cash.
And then at this point in time, we do take sort of there is some repurchase of shares that is built into our overall guidance. We're also benefiting from the significant repurchase activity that we had in 2015. I would say at this point in time, you should assume that maybe about half the amount that we actually did in 2015 sort of generally is implied in our existing guidance and we may choose to flex that as we go through the year.
Great. Thank you. And then just one other thing on the Platts business, any comments in terms of changes in the competitive dynamics there or any implications in terms of pressure on pricing that you're seeing?
In terms of the competitive dynamics, clearly there's Opus and there's certain other properties that Opus changed and there's a couple of others that might. We haven't seen any discussion about pricing pressure. That's not an issue. I've seen in the market that people that are in the consulting business as opposed to subscription businesses have announced that they're going to have more impact than we've been seeing in the market. But I do think, as I mentioned, in terms of competitive dynamics, there's a lot of changes going on in all of the different areas that we play and we're watching those dynamics very carefully.
Okay. Thanks, Todd.
Thank you. This question comes from Joseph Foresi with Cantor Fitzgerald. You may now ask your question.
Hi. I was wondering, could you tell us how much the slowdown in revenue cost you on the margin expansion front?
It's kind
of an impossible question to answer, right? I mean, what's yes, I mean, it's not impossible to answer. You're talking about the magnitude of the slowdown, what would have been, what
should have been, what couldn't have been, and how
you could really Let me
just repeat something I said in my comments upfront. Because of our ability to control our expenses last year, 90% of our increase in revenues dropped through to the bottom line. So we were we really had a major focus on cost control and all of our businesses in the corporate center all kicked in and we're going to continue with that mindset. But, I can't quantify what that would have been, but 90% of our revenue did drop through last year. Yes.
And any incremental revenue that if we had any revenue beyond what we had in many of our businesses, the vast majority would have fallen down into a margin business. Okay. And then just one other one. As you look at the ratings business, it's going to be down 1%. How is that what's your view on interest rates?
What's built in there from an interest rate M and A sort of macro perspective? I'm just it's a very high level question. I'm just trying to get a sense of sort of how you're looking at those three factors headed into next year.
Yes. So we're looking so if you look at different markets around the world, we're assuming that the U. S. Will increase interest rates probably 2 more times this year, but unlikely to raise them again in March. We're also looking at Europe where we think that interest rates are going to be either down or flat.
Japan has just lowered their interest rate. We think China is going to also lower their interest rate. So our view is that from in terms of the base rate, it's going to be accommodative during the year. And we think is a headwind, I mean a tailwind to economic activity and one of the areas that we feel a little bit positive about. We do see as you know, as you've seen in especially November, December January, a lot of volatility at the deeper end of the credit curve with spreads widening incredibly up into the over 1200 basis points for spread on the CCC, CCC level.
So we do think that spreads have still widened out that they're likely at some point to come back in. We do think that at least for a while that the spreads are going to stay out until you see some settling down of oil prices and other credit conditions. But in terms of overall interest rate environment, we do think that base rates are accommodative, spreads have widened and we think eventually they'll come back in.
Thank you.
Thank you. This question comes from Vincent Hung with Autonomous. You may now ask your question.
Hi, good morning.
So maybe I missed this. Could you give us a bit
of color around the Chief Commercial Officer hire you made at the
end of last year in
the ratings business? What does he bring to the table? What's his remit? And what kind of impact should we expect in that business from that hire and when?
Yes. Last year at the end of the
year, we hired a new Chief Commercial Officer, Chris Heusler from HSBC. We have a view that our business, in fact, all of our businesses, we want to increase our focus on commercial activities, on customer relationships. We think it's part of our customer focus as well as part of our growth strategy. So Chris and the team are focused on doing 2 things. 1st of all, ensuring that we have high quality relationships with all of our investors as well as our issuers, identifying markets where we could find new issuers or new pockets that credit services could be increased.
In addition to that, we have another mandate, which is to look at other products and services that we could be providing to our issuers and to investors that could be coming out of the ratings business. So things like rating evaluation services and other types of analytical tools that might be valuable to the market. So Chris has a mandate to build out a sales team and a commercial team. He's absolutely 100% totally on the other side of the firewall from our analytical teams. And that was one of the other reasons we wanted to bring in somebody new to reinforce that firewall between our commercial activities and our analytical activities.
So, we have high expectations of that team and we're very pleased that he came on board. I think we might have a last question.
Operator, is there any other questions?
Thank you. We will now take our final question from Doug Arthur. Sir, you may now ask your question.
Yes, thanks. Just going back to Capital IQ, I guess ex S and L, the growth in the group was 7%. In terms of the desktop business, was that a function of market conditions, sell through or just picking up share? I'm wondering if you could just elaborate a little
It was a combination of a good combination of volume and a little bit better price realization. So it was a combination of both. So more seats and a little bit better price realization.
But consistent what we've seen.
Very consistent, nice growth.
We're seeing desktop users and desktop revenue kind of grow in that low teens for the last few years and again this year.
What I would say on a maybe a broader level is that we increasingly see the demand for data and analytics growing because of the heightened need for regulatory reporting for the I don't want to use a cliche, but big data needs of corporations. So banks, insurance companies, asset managers, pension funds, other financial institutions, oil companies, large industrial companies that are managing huge credit books that they used to not have to manage. There's increasing demand for tools and solutions and data for them to manage their risk and make business decisions. And we find that what we're providing is really essential for those decisions. And we're seeing increasing demand.
Now that requires us to have data and high quality and being able to identify those pools with customers, etcetera. But that's really part of our future growth plans and how we're trying to position the entire company.
Great. Thank you.
Well, let me just end the call by thanking everyone for joining us this morning. We're pleased that we had a very solid finish to 2015, but more importantly, excited about the change of our name to S&P Global and how we're going to be continuing to provide great services and products and analytics to the markets as they grow and as they transform. So thank you again. We look forward to speaking to everybody next quarter and also in between. So thank you very much.
Thank you. That concludes this morning's call. A PDF version of the presenter slides is available now for downloading from www.mhfi.com. A replay of this call, including the question and answer session will be available in about 2 hours. The replay will be maintained on McGraw Financial's website for 12 months from today and for 1 month from today by telephone.
On behalf of McGrath Financial, we thank you for participating and we wish you a good day.