Good morning, welcome to McGraw Hill Financial's third quarter 2015 earnings conference call. I'd like to inform 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 mcgrawhillfinancialincorporated.com, click on the link for the quarterly earnings webcast. If you are listening by telephone, please note that there is a live phone option available to synchronize the timing of the webcast slides to the audio from your telephone. To do so, log into the webcast. After completing the guestbook screen, you will see two windows in the webcast viewer. Along the bottom of the left-hand window, click on the gear icon and select Live Phone from the list.
A line will appear with a sound icon, the slides will synchronize to the audio from your telephone. If you need any additional technical assistance, please press star zero and 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.
Thank you. Good morning, thank you for joining us for McGraw Hill Financial's third quarter 2015 earnings call. Presenting on this morning's call are Douglas Peterson, President CEO, Jack Callahan, Chief Financial Officer. This morning, we issued a news release with our third quarter 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 during the conference call, we're providing adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the corporation's operating performance between periods and to view the corporation's business from the same perspective as management's. The earnings release contains exhibits 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 this 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% or more of McGraw Hill Financial stock 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. 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 Douglas Peterson. Doug?
Thank you, Chip, good morning, everyone, welcome to the call. This is a significant quarter for the company. We made excellent progress with our strategic initiatives, including some very important decisions regarding our portfolio, while at the same time delivering solid top-line and bottom-line results. Before I go into the strong results, let me cover some of the more strategic highlights from the quarter. We added SNL to our portfolio, which was funded with $2 billion of new notes and closed on September 1st. We merged our S&P Capital IQ business with SNL and made several leadership changes, we commenced a process to explore strategic alternatives for J.D. Power. We have a great collection of assets. It's a portfolio that's now more focused on scalable, industry-leading, interrelated businesses in the capital and commodity markets.
With the closing of the SNL transaction, work is underway to take advantage of the capabilities of both firms. The combination of S&P Capital IQ's broad data and powerful analytics with SNL's deep sector intelligence gives users unrivaled insights into the markets. As we execute our integration plans and learn more about SNL, we're identifying opportunities for additional synergies and are increasingly enthusiastic about the potential SNL brings to our company. On this slide, you can see, as previously announced, Mike Chinn will lead S&P Capital IQ and SNL. Mike is building a unified organization that drives creativity and innovation and delivers best-in-class performance. He's built a team which is made up of key leaders from the former SNL and S&P Capital IQ organizations, Mike will manage the business from Charlottesville, Virginia. The integration of SNL is well underway.
I head a steering committee that closely reviews key metrics to assess integration and synergy progress versus our plans. We've established a dedicated integration management office to support and accelerate our efforts to bring the two companies together with a mandate to deliver synergies that exceed the original deal thesis. 12 integration work streams have been created, such as data, technology, and product and commercial strategies. We have more than 100 people across the organization working on the integration program. We believe S&L is a great asset and will unlock tremendous revenue opportunities and cost synergies, we're on track to deliver or exceed our targeted synergies. Moving on to the next slide. Recently, we made a number of management changes. John Berisford, who has been one of the architects of the transformation of McGraw Hill Financial, is now president of Standard & Poor's Ratings Services.
John is well-suited to lead the ongoing transformation of the business in an increasingly regulated environment. Mike Chinn is leading S&P Capital IQ and S&L, as I just mentioned. He's well-suited for this expanded role, having led S&L through a decade of consistent growth. Martina Cheung, who headed up our global strategy and business development area, is now Executive Managing Director of Global Risk Services. This is a business that's part of the intersection of Standard & Poor's Ratings Services and S&P Capital IQ and S&L. Imogen Dillon Hatcher was just named President of Platts. Imogen has been instrumental in positioning S&P Capital IQ for both growth and margin expansion. Now we're looking forward to bring her significant leadership experience to Platts.
France Gingras is now the Executive Vice President of Human Resources. France has a distinguished background in human resources with particular expertise in compensation and benefits. Last, David Goldenberg serves as acting general counsel. Prior to joining the company earlier this year, he held general counsel roles at Muzinich & Co., Mercer, and Lazard Asset Management. Last week, we announced that we recently commenced a process to explore strategic alternatives for J.D. Power. This business is a household name in the U.S. It's a trusted source for new car quality and reliability ratings. It's headquartered in Westlake Village, California. The business is currently estimated to have revenue of approximately $350 million in 2016, not only from the auto industry, but from other sectors, financial services, insurance, travel, and healthcare. The business has roughly 800 employees globally. As MHFI has continued to evolve, we believe that J.D.
Power could be more valuable as part of a market research and consumer analytics platform than by remaining in our portfolio. The recent NADA Used Car Guide will add to that value. We haven't set a timetable because we want to run through a thoughtful, thorough, disciplined process to find the best fit for this business and its employees. Morgan Stanley will act as a financial advisor. We'll provide an update at the appropriate time. As a result of this, as you'll see on this slide, our portfolio is now increasingly focused on businesses with a common set of attributes. The businesses are scalable, they're global, all have market-leading positions and fantastic brands and serve growing markets. These businesses are increasingly interrelated and serving the capital and commodities markets. Together, it's this unique collection of great assets with these world-class brands that distinguishes McGraw Hill Financial.
Now, building on our solid first half, we continued to deliver strong financial results in the third quarter while simultaneously adding to our portfolio. During the quarter, the company delivered increased revenue driven by the strength of the broad portfolio, continued margin expansion with 230 basis point improvement in our adjusted operating profit margin, a 16% increase in adjusted diluted EPS to $1.19. Excellent cost control as our efficiency initiatives, combined with lower legal expense, have enabled the company adjusted expenses to increase less than 1% year-over-year. Strong year-to-date free cash flow of $776 million, excluding after-tax payments associated with legal and regulatory settlements and insurance recoveries. An increase of our 2015 adjusted diluted EPS guidance to a range of $4.45-$4.50. A meaningful return of capital, with share purchases of 2.3 million shares in the quarter.
This, combined with the 2.6 million shares in the first half, brings the year-to-date total to 4.9 million shares repurchased. The company accomplished all of this while investing in and encouraging a culture that emphasizes robust risk management and compliance with policies and regulations. Let's dig into the third quarter results. Revenue increased 5%. Excluding the impact of foreign exchange, however, revenue increased 7%. Adjusted operating profit increased 11%. Revenue growth, coupled with productivity initiatives, led to an adjusted operating margin increase of 230 basis points. Our tax rate was favorably impacted by the resolution of prior year tax audits, Jack will elaborate on this in a moment. All of this led to adjusted diluted EPS of $1.19, which is an increase of 16%. During the quarter, we had consistent profit improvement in every business segment.
We did, however, experience a drop in revenue at Standard & Poor's Ratings, which declined due to weak third-quarter bond issuance. Let's look at the individual businesses, let me start with S&P Capital IQ and SNL. Revenue for the segment grew 14%, including the contribution of SNL for the month of September. Organic revenue growth was 7% in the quarter. While this is only one month of data, SNL delivered mid-teens revenue growth versus September 2014, when we did not own the company. Adjusted segment operating profit grew 25%. Solid revenue growth, coupled with headcount declines of 1%, led to growth in adjusted operating margin, which increased 200 basis points to 23.8%. Because so much of the cost base of S&P Capital IQ and SNL is based outside the U.S., operating profit benefited from the stronger dollar.
Excluding the impact of Forex, the adjusted operating margin was 22.2%. Not surprisingly, with the relative strength of the U.S. economy, domestic revenue growth outpaced international growth again this quarter. Let me add a bit more color on growth in the business lines of S&P Capital IQ and SNL. S&P Capital IQ desktop and enterprise solutions revenue increased 9%, primarily as a result of the low teens increase in desktop revenue. The number of desktop users increased at low teens to over 72,000 users. As we continue to leverage the breadth of capabilities within MHFI, S&P Capital IQ platform subscribers can now access Platts Bentek Energy's oil and gas forecast. With this addition, the S&P Capital IQ platform now features proprietary research from S&P Ratings, CRISIL and Platts Bentek Energy, with other MHFI products to follow.
For the month of September, SNL revenue increased 13% versus September 2014, when we did not own the company. The increase was driven by its financial institutions group, both in the U.S. and overseas. S&P Credit Solutions revenue increased 7%, due primarily to the consistent growth in RatingsXpress and RatingsDirect. In the smallest category, S&P Capital IQ Markets Intelligence, revenue decreased 4% overall. Strong growth in global markets intelligence, and to a lesser extent, Leveraged Commentary & Data , was offset by declines in equity research services. Let me turn to Standard & Poor's Ratings Services. In the quarter, despite a meaningful decline in global issuance, revenue only decreased 3%, due in part to relationship-based contracts with our customers. Revenue grew, however, 1%, excluding adverse Forex.
Issuance outside the U.S. was weak as concerns related to China's declining growth, falling commodity prices, and the Fed's impending interest rate hikes hindered issuance activity. For the fourth straight quarter, international revenue lagged domestic revenue growth with a decline of 14%. Adjusted operating profit grew 5%, and adjusted margin improvement continued with a 380 basis point improvement of 47.8%. This improvement was the result of decreased expenses, primarily related to legal, recent restructuring, and efforts to leverage lower cost locations. While revenue was negatively impacted by foreign exchange rates, it had less of an impact on operating profit. Now turning to the next slide, non-transaction revenue reached a quarterly record of $343 million due to an increased demand for rating evaluation services from robust U.S. M&A activity and strength at Crystal.
Non-transaction revenue increased from 55% to 58% of total revenue and was the highest percentage of quarterly revenue that non-transaction has represented since the first quarter of 2012. Excluding the impact of foreign exchange, non-transaction revenue increased 8%. Transaction revenue weakness was driven by a 20% decline in global issuance. Bank loan ratings revenue was also weak, decreasing 16% due to a reduction of leveraged recapitalizations and refinancings, partially due to leveraged lending regulatory guidance on the loan market. Two areas of strength were U.S. investment-grade issuance, led by robust M&A activity and U.S. public finance. Excluding the impact of foreign exchange, transaction revenue decreased 7%. As you can see on this slide, Asia and Latin America issuance decreased by 58% and 72% respectively. This led to a 20% decline in global issuance overall.
To put that in perspective, both Asia and Latin America had their lowest quarterly issuance since 2008. Due to the turmoil in the Asian markets and the devaluation of the Chinese yuan, year-over-year quarterly revenue from China experienced a decline for the first time in the last five years. This was Europe's lowest issuance quarter since the third quarter of 2013. When we look at third quarter U.S. issuance, which increased 1%, the strongest category is U.S. industrial investment-grade companies, which set a third quarter record to a number of jumbo M&A transactions. The other bright spot was a 5% increase in public finance issuance. These gains were largely offset by a 43% decrease in high yield and a 27% decrease in structured finance, which had weaknesses in most asset classes. In Europe, excluding sovereigns, issuance decreased 4%, investment grade declined 31%, and high yield declined 14%.
Structured finance issuance increased 98% with a surge in RMBS and a strength in every asset class except CLOs. Now turning to S&P Dow Jones Indices, the business delivered a 9% increase in revenue, due primarily to a sharp increase in exchange traded derivative volume in the quarter. This growth was supported by ETF mutual funds and data license revenue, which all increased. The only area with a revenue decline was in over-the-counter derivatives, primarily due to the loss of the UBS contract last year. As the volatility of equity markets intensified during the quarter, trading volumes of exchange traded derivatives contracts increased. Importantly, inflows into U.S. equity ETFs resumed this quarter. Adjusted operating profit increased 18%, and the adjusted operating profit margin increased 500 basis points to 68.5%.
The trend from active to passive investing has continued in 2015, with year-to-date ETF industry inflows setting a record of $230 billion. It is very encouraging that after a brief pause, inflows into U.S. equity turned positive in the third quarter, totaling $28 billion. ETF assets under management associated with our indices increased 2% to $749 billion versus the end of the quarter of 2014, but remains below peak levels of $832 billion at the end of 2014. During the quarter, S&P Dow Jones Indices introduced 107 new indices as it continues to expand its index families. Over the past year, the number of ETFs based upon our indices increased by 45 to 660. Market volatility led to a surge in exchange traded activity, with exchange traded derivative volumes based on S&P Dow Jones Indices increasing 32%. You know the key products driving this increase.
The E-mini, the VIX, and the SPX, all which had in volume increases of 27%, 42%, and 36%, respectively. This slide depicts two charts that we've shown you before. They should be instructive in understanding year-to-year ETF industry flows. In the chart on the left, you see the AUM linked to ETFs based on our indices has declined recently. While the year-over-year comparison is still positive, AUM has declined since the end of 2014. The chart on the right shows that inflows into passively managed ETFs continue to be robust. In fact, the industry experienced record first nine months inflows of $230 billion. In the first half of this year, unfortunately, ETF flows moved to European and non-U.S. products where we have less exposure. In the third quarter, inflows into products based upon our indices fortunately resumed.
While it's encouraging that inflows into our AUM increased, as you can see in the bar chart on the left, AUM was down sequentially due to a decline in equity prices. In the commodities and commercial market segment, revenue grew 9%, with organic growth of 5%, excluding revenue from Petromedia and NADA Used Car Guide acquisition. This was led by high single-digit revenue growth at Platts. Adjusted segment operating profit grew 11%. Adjusted operating margin increased 60 basis points to 37.3%. Excluding the NADA Used Car Guide acquisition, J.D. Power revenue declined primarily due to weakness in China. Platts continues to deliver strong results with high single-digit revenue growth despite the negative impact of continued low commodity prices. In fact, petroleum products recorded low teens revenue growth. Through the recent investments, metals, agriculture, and petrochemicals continued to deliver the highest revenue growth rates.
Global Trading Services revenue increased primarily due to the timing of licensees from revisions to pricing terms on existing agreement and license revenue from The Steel Index derivatives activity. In summary, this was an important quarter. We've built a portfolio of scalable, industry-leading, interrelated businesses in the capital and commodity markets. The addition of SNL contributes nicely to the portfolio. We announced the realignment of S&P Capital IQ and SNL businesses and several leadership changes. We continued progress on productivity efforts across the company. We delivered increased revenue, adjusted operating profit margin, and adjusted diluted EPS. We increased 2015 adjusted EPS guidance to a range of $4.45-$4.50. We generated considerable year-to-date free cash flow, excluding after-tax payments associated with legal and regulatory settlements and insurance recoveries. And we maintained our commitment to meaningful capital returns with increased share repurchase activity.
As announced, we are initiating a process to explore strategic alternatives for J.D. Power. With that, I want to thank you for joining the call this morning. I am now going to hand it over to Jack Callahan, our CFO.
Thank you, Doug, and good morning to everyone on the call. As you just heard from Doug, there has been a great deal of continued progress building an ever more focused and capable McGraw Hill Financial, while continuing to deliver strong financial performance. Today, I want to add some color to several items related to our financial performance. Then we will open the call up for your questions. First, I will recap key financial results and review certain adjustments to earnings that were recorded during the quarter. Next, I will clarify the impact from acquisition-related amortization and foreign exchange. After that, I will review important changes to the balance sheet and progress year to date on free cash flow and return of capital. Finally, I will update our 2015 guidance. Let's start with the consolidated third quarter income statement.
Overall, these were solid results, particularly the continuing progress in margin improvement. Revenue grew 5%, as the balance of the portfolio offset a modest decline at Standard & Poor's Ratings and the continued headwinds from foreign exchange, which reduced our growth rate by about two points. Adjusted consolidated operating profit grew 11%, with all four businesses contributing to this growth. Adjusted operating margins approached 40%, up 230 basis points from a year ago. Revenue growth, combined with the continued progress on our productivity initiatives, resulted in this improvement. Adjusted unallocated expenses did increase 11%, largely due to professional fees in support of several enterprise-wide initiatives. The tax rate on an adjusted basis was 28.8%. This was unusually low due to favorable outcomes from the resolution of certain prior year tax audits, which generated a positive impact to adjusted diluted earnings per share of approximately $0.06.
We now expect a full year adjusted tax rate of approximately 31.5%. Finally, both adjusted net income and adjusted diluted earnings per share increased 16%. EPS was $1.19. The average diluted shares outstanding decreased by 1 million shares versus a year ago. 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 $118 million. This consisted of $86 million in net accruals for potential settlements, offset in part by insurance recoveries, and approximately $32 million for acquisition-related costs associated with the SNL transaction. We recognize that investors use different methods for valuing McGraw Hill Financial. That understanding the amount of acquisition-related amortization can be important in these evaluations. Going forward, we intend to provide you with the clear detail to assist you in the analysis.
In the table on the top, we show pre-tax amortization expense of $17 million and adjusted EBITDA of $565 million for the third quarter. In the lower table, we show after-tax amortization expense of $11 million and adjusted earnings per share excluding amortization expense of $1.22 for the third quarter. We are now further along in the purchase price accounting for SNL. The annualized amortization expense due to the SNL acquisition is anticipated to be approximately $53 million. During the third quarter, we recorded just one month of amortization expense related to SNL, so the overall impact is negligible. The level of amortization expense will become more pronounced in the fourth quarter as we record three months of SNL-related acquisition expense. Please note that our guidance for the balance of 2015 does include the impact of this amortization. Let me turn to foreign exchange.
Foreign exchange continues to have a negative impact on the company's revenue. Reported international revenues decreased 5%. On a constant currency basis, international revenue actually increased 1%. The majority of this impact was realized within Standard & Poor's Ratings Services. Overall, on a constant currency basis, total company revenue increased 7%, two points faster than the reported results. Expenses incurred outside the U.S. also decreased, providing a modest positive impact on adjusted operating profit, totaling less than $0.01 of EPS. Let's turn to the balance sheet. As of the end of the third quarter, we had $1.4 billion of cash and cash equivalents, of which approximately 90% was held outside of the U.S. In August, the company issued $2 billion of notes of various maturities at a weighted average interest rate of 3.6%.
We were quite pleased with the strong execution behind this financing and the strong response from investors, given the ongoing volatility in the market. This increased our outstanding long-term debt to approximately $3.5 billion, all of which is rated investment grade. Our gross debt to adjusted EBITDA is now approximately 1.6 times. Let's turn to cash flow and the return of capital. Our year-to-date free cash flow was a negative $497 million. To get a better sense of our underlying cash generation from operations, excluding the after-tax impact of legal and regulatory settlements and related insurance recoveries, year-to-date free cash flow was a positive $776 million. We remain on track with our full year 2015 free cash flow guidance of greater than $1.1 billion. During the quarter, the company stepped up its share repurchase program and bought 2.3 million shares, bringing the year-to-date total to 4.9 million shares.
The share repurchase program remains an important component of our overall capital allocation, and we anticipate continuing to repurchase shares under our remaining share repurchase authorization of approximately 40.6 million shares, subject to market conditions. Through nine months of 2015, the total capital return was $775 million, surpassing the $607 million at this time last year. I would like to close by updating our 2015 guidance. We anticipated that our productivity programs would have a clear impact on margins this year. Our strong performance year to date leads us to increase our adjusted operating margin guidance to an improvement of more than 200 basis points. As I discussed earlier, due to the favorable benefit from the resolution of prior year tax audits, we are lowering our adjusted tax rate guidance to approximately 31.5%.
Based on the strong results in the quarter, we are increasing our 2015 adjusted earnings per share guidance to a range of $4.45-$4.50. We are cautious given the uneven trends in bond issuance as we close out the year and the volatility across the capital markets. In closing, we continue to focus on creating growth and driving performance. Our actions demonstrate our commitment to building upon an extraordinary portfolio of assets, improving margins, and returning cash to shareholders. Thanks for joining us on the call this morning, and I'll turn it back over to Chip for the Q&A session.
Thanks, Jack. Just a couple of instructions for our phone participants. Please press star one to indicate that you wish to enter the queue to ask a question. To cancel or withdraw your question, simply press star two. I would kindly ask you to limit yourself to two questions. That's two questions each, in order to allow time for other callers during today's Q&A session. If you've been listening through a speakerphone and would now like to ask a question, we ask that you lift your handset prior to pressing star one and remain on the handset until your question has been answered. This will help ensure better sound quality. Operator, we'll now take the first question.
Alex Kramm, UBS, your line is open.
Hey, good morning, everyone. Just want to start with J.D. Power. I think this doesn't come as a total surprise. Want to ask about the timing a little bit here. You just completed the NADA acquisition recently, or N-A-D-A, and it seems like that's kind of part of that business. Just want to ask what changed in the commitment, considering that you just did an acquisition there, and now you're looking to potentially divest this business. It seems like a little bit of a flip-flop. Then maybe just in terms of the numbers from J.D. Power, EBITDA around $50 million. Is that fair? What would you do with the proceeds?
Hi, Alex. It's Jack. First, back to you about the used car guide. Look, that was a great addition to the J.D. Power portfolio. It's been in discussions for quite some time. It really adds and broadens the capability of the PIN business that sits within J.D. Power, which just may be one of the most valuable assets within it. It was a great opportunity, and we're pleased with the progress that we've seen so far in the integration and a great addition to the organization. Relative to timing, we don't have a strict timetable. We are just beginning the process. We have engaged an advisor. We do anticipate that we'll be reaching out to various parties in the coming weeks. We have no gun to our head to get it done overnight. At the same time, we don't want this process to linger.
We hope to move it forward as we get into the early part of next year. Relative to your question on margins, next year in 2016, our current view is that the business on revenue basis will be approaching $350 million in revenue. We still have some work to do to get to stand up EBITDA margins, but I do think we'll have stand-up EBITDA margins of approximately approaching 20% as we get into next year. We look this will be a nice inflow to U.S. cash, which is something that we're tightly managing the balance sheet right now. Using that available U.S. cash, if there's not tuck-in acquisitions available, returning that cash to shareholders.
All right. Fantastic. Thanks for the detailed answer. Then secondly, I want to go back to the slide of the leadership reorganization. Unfortunately, the slide is not up anymore, but it looks to me like you created a new position sitting between Capital IQ and ratings. Maybe you can just talk a little bit more about what you're doing there. In particular, as it seems like relative to your primary competitor, your revenues of reselling ratings information through Capital IQ is much lower than theirs. Any goals of bringing this up substantially in the next one, two, three years? Thank you.
This is Doug. We have created a new business which is underneath the S&P Capital IQ group, which is called Global Risk Services. The woman who's going to be leading it is named Martina Cheung. She is going to continue to report to Mike Chinn. She is going to be part of our executive committee. We have an executive committee that meets almost weekly, three to four times a month, that talks about all of our key strategic initiatives, how we're going to be investing in the company, where we're going to be growing, et cetera. Martina is reporting to Mike Chinn, but she's joining our executive committee because this is such an important growth initiative for us.
The way we look at this, there is a very large demand for increased information inside of financial institutions as well as corporates for risk components, risk data, in some cases liquidity information, et cetera. We're pulling together all of the different assets that we have that are related to that type of information and putting them under Martina Cheung. That's basically what the role is that she's going to be taking on.
Okay. Very helpful. Thank you.
Our next question comes from Craig Huber with Huber Research. Your line is open.
Yes, good morning. A few questions, if I could. First one here. The synergy you talk about here of $70 million plus by 2019 for SNL. Can you just give us further update on how that breaks down between costs and revenue? Why 2019? It just seems like an eternity here. Why can't this get done within, say, 18 months? I have some follow-ups, too. Thank you.
I think for today, just going back to the original assumptions that we put out there, to your point, it's $70 million in EBITDA by 2019. We are pointing currently to sort of an even mix between cost and revenue that support that assumption at the time of the acquisition. All being said, I think both Doug and I are enormously encouraged by the enthusiasm by which collectively both the legacy S&P Capital IQ and the SNL team are working together to forge a new and integrated organization. We announced that very soon after the closing of the acquisition. They are deep at work detailing and updating that synergy case, and we hope to have a more complete update for investors when we get to our next call. I would say at this time, we're highly encouraged that we have great confidence in the $70 million.
We are pointing to an upside to that number, both in terms of aggregate amount and timing. I think with the decision we've made to move towards an integrated organization, I think there should be some upside, particularly as it relates to cost synergies.
Also, what is holding you guys back? I get this question a lot from investors. What's holding you back from buying a lot more stock than you bought back here the last three quarters, particularly your stock trade in the low double digits on EBITDA basis, then you go out and do a, with a lot of people, your investors perceive as a very expensive acquisition at a few times that multiple. Why aren't you buying back stock a lot more aggressively, particularly at these price levels?
Well, I would just point to, we did step up our share repurchase activity in the third quarter, despite the fact at the same time that we were completing the SNL acquisition. I think we agree with investors that we do have balance sheet flexibility as we go forward. We do believe that continued share repurchase will be an important part of our capital allocation in the fourth quarter and as we move forward into next year.
My last question, please. What is your outlook for the bond ratings business for the transaction revenues here for say the next three months? Are you seeing any green shoots here or anything?
This is Doug. Just in terms of the mix that we've seen over the last year, as you saw on the slides and all of you know because you track it very carefully, the story of issuance has been very mixed this year. As you know, total global issuance was down 20% in the third quarter with different puts and takes in terms of how they came out. So far, October started off very weak. It was a weak month with issuance, we're cautious about the fourth quarter overall. There were some large issuance related to M&A, as well as some, what I call synthetic repatriations, where corporations have a lot of offshore cash they don't bring back, but they do borrow domestically. In the last week or so we saw Microsoft, ACE.
There's continued to be a robust pipeline of municipal and public finance issuers like Texas and Florida. We're not projecting anything right now. It's hard to see. Some of the same conditions which made the third quarter very volatile, like the questions about what's going to happen to the U.S. interest rates, when is Yellen going to increase interest rates, what kind of impact that's going to have, what are some of the emerging markets volatility factors, China, Brazil, et cetera. What's happening with the banking market. There's a new initiative which was released last week from the Fed for U.S. banks about resolution and recovery planning, which has new guidance about TLAC. In addition, in Europe, they're looking at TLAC, which is the total loss-absorbing capacity of the large financial institutions. Depending on where that comes out, that might drive more issuance.
We're looking at a lot of different factors. I don't want to give you a forecast, but I'd tell you that we saw a slow start to October, a very robust end of October. Generally speaking, the fourth quarter, we are going to be watching interest rates, inflation numbers, TLAC, China, Europe, et cetera, and we're cautious.
Okay. Thank you.
Doug Arthur, Huber Research, your line is now open.
Yeah, thanks. Jack, it looks like adjusted costs at S&P or the ratings group was down 9% in the quarter. Can you just sort of break that down in terms of whether you had a currency benefit? How much of that is year-over-year drop in legal costs, and how much of it is productivity? Thanks.
Yeah. Sure, Doug. A good part of it is related back, as you may remember, back in the third and fourth quarter of 2014, we had a couple restructuring actions at Ratings. Those restructuring actions are making a significant contribution to this expense management that you're seeing this year. We have seen some benefits from reduced legal expense, but to a large part, a good part of that benefit has been offset with some selective investments in areas of compliance as we are working to tighten up some of our processes there. It's been a couple of moving pieces. Overall, in terms of
In terms of forex impact on Ratings, there's not a big part. There is a benefit, but actually on a profit basis, forex within Ratings, forex was actually caused a modest hit profits of $2 million. That's also the business where we have the most significant forex impact on the top line, and the savings that we get on the expense side are not enough to offset that.
Just as a follow-up, in terms of total costs year-over-year for the company in the quarter, you may have said this, but how much did FX benefit or not benefit the year-over-year relationship? Thanks.
As I mentioned, the total profit impact of forex was a modest positive, less than $0.01 of EPS. In large part, the revenue hit that we took, which is about two points of growth, was to a large part offset by the impact on expenses.
Great. Thank you.
Toni Kaplan, Morgan Stanley, your line is open.
Hi there. I wanted to delve a little bit more into ratings. Your numbers were a little bit worse than your big competitor. I wanted to understand if you guys had more exposure to LATAM and Asia, where you saw some weakness in your global peer. They also called out CMBS as an area of strength. Did kind of a lag in CMBS hurt the numbers as well?
Yeah, this is Doug. The main sources of differences of the top line are related to CMBS and a little bit of CLOs and CDOs on the structured finance business. There was a slight difference to what we could see in Europe. Generally speaking, those are the main differences.
Okay. I wanted to talk about margins a little bit. With the shift in the leadership and the ratings division, margins have been doing really well, especially with revenue down. Will there be any differences in your approach to margin improvement? Will there be more reliance on pricing or any changes at all there to what you've been doing in margin expansion for ratings?
There's no expectation that we're changing any of our approaches, although we are watching very carefully what's the outlook for issuance. I don't know what kind of top-line growth we're going to have. As I mentioned before, I'm cautious about expectations on what's going to be happening in the markets with issuance, generally speaking. We do have a continued focus on margins on efficiency, and the new president of Standard & Poor's Ratings Services is committed to continuing to manage the business in a way that does look at the bottom line. We are looking at ways that we can improve some of our workflow, have more automated approaches to some of the ways that we deliver information to the markets.
It's possible that we will be investing in technology and automation to improve our overall performance, but maybe we'll see some investments in that. Generally speaking, let me say that for ratings in all of our businesses, we're committed to continuing to drive a margin improvement. Over time, that's something we're going to look at, but I can't guarantee you that we're always going to get that if the markets themselves are not going up and our growth is not delivering.
Okay, that's helpful. Switching gears to index. I've never really thought of index as a place where the margins could go even higher. It's usually Capital IQ and ratings. Your competitor recently released margins, and they were a little bit higher than yours. I've always thought of you as more innovative, more investments in new products like fixed income indices. Is that what at least the difference between your margins and your big competitor? Is there something else, maybe the mix of subscription revenue versus trading revenue? Maybe just any thoughts on the difference between your margins and theirs.
Toni, one thing you may want to check, and I don't have it in front of me, you may just want to check. I think when that particular competitor talked about their margins, I think they excluded the impact of D&A. I think they were EBITDA margins. I'm not sure it's quite apples to apples.
That's probably like 1% or so, right?
Well, I think it's enough to close the gap. I think that's part of the story.
Okay. Last one. With energy markets declining and customers cutting back, are you seeing anything new in the acquisition pipeline that you could add in terms of energy? It seems like there must be some assets that you can get a little bit cheaper than usual at this time.
When it comes to our acquisition pipeline, we have a disciplined process to keep our eyes on different opportunities in the U.S. and around the globe. We are always obviously looking at ideas. We have nothing that we've said before. We have a lot of work to do right now with SNL. That's our top priority is integration, as well as working to ensure that we have a very smooth process with J.D. Power. Right now our top priorities are to shape the portfolio in the direction that we've discussed today.
That's it for me. Thanks.
Thank you.
Peter Appert, Piper Jaffray, your line is now open.
Thanks. Good morning. Doug, just continuing on the margin theme, the results have been very impressive, obviously, across the portfolio. I'm wondering if you're rethinking what the upside might be longer term, and if you can quantify for us in terms of the various segments where you see the upside.
Well, I think that that's one of the things that we're working on right now. As typically you might hear from a lot of corporations in our fourth quarter, we're looking at a 3-5-year strategic plan, very importantly, now going to come up with a 1-year approach. In February next year, when we do our full-year earnings, we'll also be presenting our guidance for 2016. If you don't mind, I'd rather defer my thinking on that question until we've had a chance to put in place our 2016 expectations. Jack wants to add something.
Peter, just one obvious point though I just want to add to Doug's comment is we do see the newly integrated S&P Capital IQ, SNL business segment as a business unit that we would anticipate some sustained margin expansion going forward. Back to Doug's comment, I think we'll put some more specifics and guardrails on that when we get into our guidance view for 2016.
Got it. Understood. Unrelated, in the structured finance market, I think your exclusion from the CMBS market ends in the beginning of 2016. Should that have some measurable impact on your operating results next year?
As of right now, I don't know. It's not something I can really talk about yet.
Can't talk about it because you don't know how it's going to play out, or?
Because of the agreements that we have with the government on our ability to talk about that business.
Oh, I see. Okay. Thank you.
Tim McHugh, William Blair, your line is open.
Thanks. I guess, just coming back to SNL, you had hinted at potential for upside. I guess it was something you feel better about, and I think it was more about the cost. Can you elaborate more on it? Is it about the cost of SNL and ability to improve their margins, or are you feeling better about the synergies with S&P Capital IQ? I guess, what makes you feel better about enough to hint at upside in terms of the timing and size of the profit contribution from that business?
Let me start. I'm going to hand it over to Jack. First of all, this is literally only about a month, two months since we've been working with Mike Chinn. As we did the due diligence and got to know the business very well over a period during the second and third quarter this year, we were always impressed with SNL and their operating capacity, as well as what we saw as the ways to merge these businesses and get a lot more out of both of them. Through that, now that we've got this very thorough integration management office in place, where we're tracking 12 projects with some of them with other sub-projects, and driving that very intensively, faster than anybody expected.
I can guarantee you that people did not expect that we were going to put Mike Chinn in charge of both businesses within eight days of closing the transaction. We are really serious about this, and we're driving it fast and hard. You already answered the question in your question itself by where we're finding the opportunities. We're finding them both in cost in both businesses, ways we can do things more efficiently. We're finding them in revenue opportunities. We're also able to work more closely with some other projects Jack is driving about how we manage the corporate center. Let me see what else Jack wants to add.
I think the thing that gives us the confidence, Tim, more than anything, is the speed at which, to Doug's point, that we've moved to integrate the organization, building sort of the best from both organizations. When you move away from the outside in evaluation synergies to the inside out, and you're starting to see the detail behind it and the clear accountability, and a better sense of the timing to realize, I just think today, two months post-close, we feel better than ever about the synergy case. We hope to have more insight for you in our next call.
Okay, thanks. On Platts, can you elaborate? Obviously, it's good performance in the face of a tough environment. Is it the pricing initiatives you had talked about maybe a year or so ago? That or what else, I guess, is really contributing to the growth, in particular, I guess, in the petroleum sector right now?
Yeah. A couple of things. Clearly, it's a matter of many different factors. It's a much more concerted effort on the commercial side, where we've got with the combination of Larry and now Imogen in place, looking at how we can be very customer-focused, have a good approach to sales, pricing discipline, et cetera. It's also something that is maybe a little bit counterintuitive, but even though the price of oil is down very low, there still are a lot of winners. It's not just the losers that are hit by the market. You have people that are also consumers downstream in the environment of oil industry, airlines, the travel leisure industry, et cetera, that are big consumers of data and analytics and pricing from commodity space that are beneficiaries of the lower prices that also have a lot of demand for the data.
We're finding that the demand is not necessarily dropping as dramatically as you would expect, given the volatility and the lowering of the prices. We are very carefully, obviously, watching the number of seats, the kind of cost initiatives that could be going on in a lot of the firms to ensure that we're prepared for potentially a weaker environment. Through many different initiatives, we're pleased that we're still driving the growth.
Okay, thank you.
Vincent Hung, Autonomous, your line is now open.
Hi, good morning. I'll keep it to two questions. Firstly, can you talk about what John has already done in his short time as president of the ratings business, and what his priorities as president will be going forward?
Just to tell a little bit more about John, since you asked the question. John has been with us for over five years. He was instrumental in helping drive the transformation of McGraw Hill Financial and the sale of the publishing and non-core assets. He knows all of our leaders across the firm. He's a very strategic manager with excellent project management and executional capabilities. John's main focus has been to continue the programs and progress that Neeraj Sahai had been making in how we're managing the workflow, managing the business, ensuring that we are responsive to the markets and our customers, and very importantly, that we have in place regulatory and risk programs that meet the requirements of all of the new regulations that have been coming up around the world. John's priorities have not changed from Neeraj's.
In terms of how he's managing the place, he's spending a lot of time in the field, walking the floors, learning the business as quickly as he can. Although he was able to hit a running start because he already knows the business well. John, as I said, priorities haven't changed, but maybe his style and how he's getting it done is a little bit different, and he's getting a lot of visibility with the troops and energizing the organization.
Okay. Just lastly, what is going so right in Capital IQ Desktop in light of the strength in user growth?
Well, there's nothing really new there. In the last three years, if you look at the user growth on the Desktop, it's basically most quarters been a low teen growth number. We're just continuing to penetrate a marketplace that is increasingly appreciative of the additions we've made to that product. It's a great price point, and it's an ever better product.
I'd add to that there's also continued international growth, so that there's more penetration, as always, continuing overseas. When you look at a lot of the customers, there's a lot of them who are trying to understand what are the requirements of their internal data needs and which is the product that best serves those needs, looking at some of the competitors. We're also winning out a lot of those reviews against some of the other, maybe more expensive competitors or those that have different products and services that don't necessarily meet the needs of the users on the floors.
Great. Thanks a lot.
Andre Benjamin, Goldman Sachs, your line is open.
Thank you. I wanted to know if you could maybe talk a little bit about where you stand in terms of continuing to add fixed income indices. I know you called out indices in the business up quarter-over-quarter. I didn't know how much of that was fixed income and how much that business is contributing to the overall revenue pie today.
We continue to have This is one of our key growth areas. When we look at the index business, if I were to oversimplify our growth approach, it's to the international expansion, which we talk about a lot, and we had some recent wins there in Chile and some other markets where we're growing out our international expansion. The second is fixed income indices. The fixed income indices today represents a-
About $30 billion of the AUM.
$30 billion of the AUM. It's not a significant factor in our top line growth. Today, our top line results. It's an area that we think that if you go to the wealth managers in particular and you look at the secular trends of the baby boomers retiring, the needs for different types of products beyond just the buying bonds directly and other sorts of benchmarks. We continue to see this as a top priority for us, even though it has not produced a lot of growth right now or a lot of income. It is something that we're positioning for because we want to get ahead of that opportunity.
I guess a little bit more specifics to follow up on the S&P Capital IQ question you just answered. In terms of the growth, is it really broad-based across both fixed income and equity products? Who are you finding that you're taking share from? I mean, the markets are not up double digits, and your competitors have generally talked about a more benign environment. I guess, where are you seeing that you're getting the most share gains?
We're getting the most share gain in analytical type role. It's both fixed income and equities, and it's also risk management. These are areas that we're continuing to see growth. I can't tell you directly if we're taking share from somebody else, but we're finding that we can penetrate those areas, analytical roles, mid-level and junior level analytical roles at banks, investment banks, asset managers, some corporations, et cetera. We're pleased with the growth we're seeing, and we've got an aggressive sales program out to call on our customers and identify where they can use our products.
Thank you.
Bill Warmington, Wells Fargo, your line is open.
Good morning, everyone. Just a couple of housekeeping items for me, I think. Just double-checking the organic constant currency growth. Looked like about 5% reported, 7% constant currency, three points from acquisitions would give you about 4%. Am I doing that right?
Pretty close. I think it rounds closer to five.
Five. Okay.
The general approach you're going at is about right.
Okay. If I could, the share count exiting Q3, because it looked like you bought back a bunch later in the quarter.
Yeah, we did. We were buying. Basic share count as we ended Q3 was $271 million.
Okay. With the dilution?
On a fully diluted, it was $274.
$274. Great. That does it for me. Thanks a lot.
Thank you, Bill.
Our next question comes from Manav Patnaik, Barclays. Your line is now open.
Thank you. Good morning, gentlemen. The first one, just on Platts, in the context of some of your peers reporting sort of the divergence between the subscription and non-subscription performance of the business. I apologize if I missed it, can you talk about sort of the growth on subscription and non-subscription and how that tallied to the total that you talked about?
There's really very little of that business that's non-subscription. Roughly 90% of that business is a subscription business. We're not impacted by reduction in consulting fees of that nature. The other 10% is really on the derivative trading side. That's going to be the contracts that are traded at the major exchanges, like the ICE exchange and the Singapore exchange, which in the quarter did quite well. As you know, volatility bodes well for that business.
I think that's what I was trying to get to, though. Sometimes that number can be really high and obviously skew that total result. That's what I was just trying to understand. Is it fair to say that the subscription was at par with the total that you talked about?
Subscriptions are hard to really talk about.
Look, I think we did see relatively faster growth in the non-transaction part of the Platts business, but the fact that that's only approaching 10% of the overall mix, there's limits to how much it can impact the overall number. In balance, we saw pretty good growth in the subscription business. It was high single digits.
Okay. Fair enough.
The derivative side increased double digits, but to Jack's point, it's only 10%. It's nice growth, but can only move the needle so far.
Yeah. Okay. I understood. Doug, just sort of bigger picture, the management slide that you had out there, and I think you sort of had a similar slide when you first began with another team. I was just trying to understand, in terms of the evolution of your few years as CEO now, are there more changes to be coming? Just on the departure of Lucy, I was just curious if we should take that as an indication of there's not a lot more legal work left to be done.
I think that, first of all, I believe that this is a young company, even though we have a very long legacy, over 125 years in McGraw Hill and 150 with S&P businesses. We think that it is a young company. We've only been in this configuration for two years, and it's only been eight months since the time of the Department of Justice settlement. I'm very pleased with the team that we're building. I think team is the right word. People get along very well. We're aligned on what our purpose is and what our goals and objectives are going forward. I don't have any expectations that we have management changes underway. We have a lot of people in new jobs.
If there's one thing that I'm spending a lot of time on with the team is to ensure that the people in new jobs have the resources that they need, that they've got the approach to leading and managing their teams that's going to be successful. I really think that it's a great team with no changes in place. On the legal department's role, I do think that we have a meaningful shift in what would have been a year ago versus today's approach to the legal department. As you know, we used to include in our earnings releases every month, a list of all of the legal cases. We had very significant litigation with the Department of Justice and the states, et cetera.
As we settle into more of a BAU approach with a little bit of legacy litigation, we're pleased that we have a legal department that is an advisory department helping us grow the businesses and looking more forward with a future approach as opposed to a legacy approach. That doesn't mean that we're not going to ensure we have all of the best resources available and the best minds to settle the final little pieces of litigation here and there. Really team-focused across the entire team, want to make sure everybody's successful, and that we're focused now on growth and performance.
Okay. Thanks a lot, guys.
Thank you.
We will now take our final question from Bill Bird, FBR. Your line is open.
Good morning. Thank you. I have two questions related to S&P Ratings. One, how much cost flexibility do you have should the operating environment change and should you need to reduce costs quickly? Second, you had great growth in non-transaction revenues. Could you just speak to kind of the durability of that growth? Thank you.
Yeah. First of all, on the cost flexibility, this isn't just a question for Ratings. We actually look at this for every business. There's obviously opportunities which any company has when they're approving their budgets, which relate to headcount. Do you have, for instance, growth areas that you would slow down the growth? Do you have the opportunity if people left, if there's attrition, not to replace the attrition? These are traditional and typical tools that you use to address any sort of opportunities if you need to slow down your expense growth. Another one could be if you have any major initiatives which you're undertaking, can you also slow them down or delay them or cancel them?
In addition, we have, if the performance is not going very well, obviously, you're not going to be accruing the same level of compensation and bonus accruals and things like that, which is another opportunity. We also have other projects, which we're obviously always looking at. I mentioned in my comments that we're looking to see how we can leverage lower cost operations in the U.S. and around the globe to make sure that we're also finding the best mix of costs so we can still support all of our businesses and our customers. There's a lot of those tools, and I say it's not just ratings. That goes for every business we've got, that we're always looking for that kind of flexibility. As I've said before, we always feel like we need to be prepared, and we want to be able to control what we can control.
Thanks. The other question was just related to the strong growth you had in non-transaction revenues.
Yeah, non-transaction. There were a couple of reasons for that. One was, because of all the M&A activity around the globe, we had a large increase in ratings evaluation services. Those are coming from the M&A activity you see in the U.S. and Europe, et cetera. That was one of the main drivers of the increase in that area.
Also too, that's also where our Crystal results are largely in Crystal, while it had very nice growth in sort of mid-teens area. That was another good contribution.
Would you characterize the growth in that line as maybe elevated above normal and likely to moderate, or is there anything else going on?
If you look historically, most of the time, that line is kind of in the mid-single digits. We've had periods where we're a little below it, last couple of quarters. Mid-single digits in the long run is kind of a reasonable area for that line item.
Okay, thank you.
Thanks, Bill. Let me thank everyone for joining us on the call today. We were very pleased with our results. Obviously, as I said, going forward, we're going to be focusing the company on these four pillars of scale businesses that are very interrelated, that have excellent brands, focused on global growth. We look forward to speaking with you at the end of the year when we have our next quarter. Clearly, there's a few questions that we need to get back to you on when we launch our 2016, we give you our guidance. We really appreciate all of your questions and your support, and we look forward to seeing you soon. Thank you very much.
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 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 wishing you a good day.