Good morning, and welcome to McGraw Hill Financial's First Quarter 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. We will open the conference to question and answers after the presentation and instructions will follow at that time. To access the webcast and slides, go to www.mhfi.com.
That's mhfi for mcgrawhillfinancialinc.com and 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 in to the webcast. After completing the guest book screen, you will see 2 windows in the webcast viewer. Along the bottom of the left hand window, click the gear icon and select live phone from the list.
A line will appear over the sound icon and the slides will synchronize to the audio from your telephone. I would now like to introduce Mr. Chip Merritt, Vice President of Investor Relations for McGraw Hill Financial. Sir, you may
begin. Good morning. Thank you for joining us for McGraw Hill Financial's Q1 2015 earnings call. Presenting on this morning's call are Doug Peterson, President and CEO and Jack Hallahan, Chief Financial Officer. This morning, we issued a news release with our results.
I trust you've all had a chance to review the release. If you need a copy of the release and financial schedules, they can be downloaded at www.mhfi.com. In today's earnings release and during the conference call, we'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. 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 the teleconference may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward looking statements.
In this regard, we direct listeners to the cautionary statements contained in our forms 10ks, 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 recent European regulation. Any investor who has or expects to obtain ownership of 5% or more of McGraw Hill Financial should give me a call to better understand the impact of this legislation on the investor and potentially the company.
We are aware we do have some media representatives with us on the call. However, this is intended for investors and we would ask that questions from the media be directed to Jason Feuchtwanger in our New York office at 212-512-3151 subsequent to this call. At this time, I would now like
to turn the call over to Doug Peterson. Doug? Thank you, Chip. Good morning, everyone, and welcome to the call. I'm pleased to report that we're off to a good start for 2015.
Let me begin by reviewing some of the highlights from the quarter. The company reported strong revenue growth of 6% despite a negative impact from foreign exchange rates that reduced the growth rate by 2%. Every business unit delivered growth in both revenue and adjusted operating profit. Revenue growth combined with progress on our productivity initiatives led to a 3 80 basis point improvement in our adjusted operating profit margin. We resumed our share purchase program with 1,100,000 shares repurchased in the quarter.
We made changes to our compensation programs aligning them more closely with investor interest by eliminating employee stock option grants and instead utilizing restricted stock grants and deferred cash. Our legal team continued to resolve litigation matters including receiving a dismissal of the Corte de Conse matter in Italy. You'll recall this was potential €234,000,000,000 claim from an Italian prosecutor that we referred to on our Q4 2013 earnings call. And finally, Ashu Suryash was named as the Managing Director, CEO of CRISIL effective June. Ashu brings a strong professional track record in the financial services sector and proven leadership skill and we look forward to having her join CRISIL.
As we look to 2015, we are encouraged by the economic landscape before us. The U. S. Economy continues to strengthen, albeit in fits starts. The labor market is showing solid momentum and we expect continued job creation coupled with lower oil prices to enable consumer spending to fuel additional GDP growth.
In Europe, we expect GDP to expand 1.1% due to lower oil prices, quantitative easing and the strong U. S. Dollar. And finally, we expect Asia Pacific investment and borrowing activity to remain sound. Caution is warranted, however, for a number of reasons.
The U. S. Dollar is strong. Interest rates are volatile with negative rates appearing in Europe and markets in the U. S.
Are on a rate increase watch. Geopolitical concerns continue in Greece and the Ukraine and emerging markets credit conditions could weaken due to lower commodity prices, sharp declines in currency value and the strong dollar. Overall, we expect global GDP to grow 3.5% this year, a positive environment overall for our businesses. Now let's turn to our Q1 results. Revenue increased 6%, adjusted operating profit increased 18%, adjusted operating margin increased 3 80 basis points and adjusted diluted EPS increased 25%.
Despite the challenge of a strong U. S. Dollar, the company delivered healthy revenue growth with 10% domestic growth and 1% international growth. Jack will discuss the impact of the company from foreign exchange in his remarks. Adjusted segment costs were well contained in the quarter due to tight cost control and progress on our productivity initiatives.
All of our business units delivered revenue growth and increased adjusted operating profit. Only S and P Dow Jones Indices did not report improved margins and that was due to a difficult comparison with a one time revenue increase recorded in the year ago quarter. Now let me turn to the individual businesses and I'll start with Standard and Poor's rating services. In the first quarter, revenue increased 6%, adjusted operating profit grew 19% and the adjusted operating margin increased 480 basis points to 47%. While revenue was negatively impacted by foreign exchange, it had a negligible impact on operating profit.
S and P Rating Services continues to make progress in improving margins. Reduced headcount from recent restructuring was the primary contributor to this quarter's improvement. Partially offsetting this progress were costs associated with efforts related to Dodd Frank implementation and other regulatory requirements. Moving on to the next slide, transaction revenue increased from 43% to 48% of total revenue. Non transaction revenue decreased due to the strong U.
S. Dollar and a decline in entity credit rating revenue and slower client acquisition than in Q1 2014. Transaction revenue grew resulting from increased corporate public debt finance issuance offset somewhat by weakness in bank loans. The leveraged loan market experienced a 51% decline in new issue volume versus the Q1 of 2014. 1 of the causes of the decline in bank loans is the decrease in leverage buyout.
LBO related activity was the lowest since 2,009 with market participants discouraged by the regulatory environment. If we turn to issuance, the recent trends in U. S. And European issuance have benefited our businesses. 1st quarter issuance in the U.
S. Was quite strong across all sectors. Investment grade increased 24%. In the U. S, the improvement in corporate issuance was largely due to a 45% increase in industrials issuance as financial services only increased 2%.
Large debt financed M and A transactions also contributed to the list in issuance. In addition, a continued thirst for yield has enabled corporate issuers across the rating spectrum to tap the capital market, extending maturities at beneficial pricing and terms. High yield increased 39%. Public finance was up 61% over an unusually weak Q1 in 2014. Sequentially, public issuance was flat, albeit at an elevated level as local governments continue to refinance maturing debt.
Structured finance issuance, while up 21% versus the Q1 of 2014, is consistent with levels seen throughout most of 2014. Of particular note was strength in ABS as auto securitization levels remain robust. In Europe, while there was a strong sequential recovery, year over year issuance comparisons were mostly negative. There an increasing universe of government debt trading with a negative yield or fixed rate return of barely above 0. This is due to the European Central Bank's aggressive stimulus policy.
This has resulted in yield hungry European bond investors buying reverse Yankee bonds as a growing number of U. S. Companies turns to the other side of the Atlantic for their financing By the way, reverse Yankee bonds are counted as U. S. Issuance and revenue.
Further in Europe, investment grade decreased 9% and high yield declined 5%. Structured issuance was one of the bright spots however, increasing 23%, thanks to ABS and the surge in United Kingdom RMBS. Note that from a revenue perspective, bond activity was not as positive issuance might suggest as the growth in the number of issues did not keep pace with the growth in the par value of issuance as deal sizes increased in most debt is unusually high and issuance likely unstable. Periodically, we have provided data that suggests otherwise, including that generated in our annual analysis of debt maturities. This chart illustrates data from Standard and Poor's Rating Services annual global debt maturity study.
Each study shows the upcoming 5 years of change to the total debt maturing. Both last year's study and the most recent study depict total debt maturities for the following 5 years totaling $8,900,000,000,000 These data help provide confidence that corporate issuance will continue in the coming years. Now let me turn to S and P Capital IQ. Revenue grew 6%, segment operating profit grew 18% and operating margin increased 200 basis points to 19.5%. This is the 5th consecutive quarter of year over year margin expansion.
Revenue growth was consistent both in the U. S. And outside the U. S. 2 particular highlights during the quarter were continued low teens growth of S and P Capital IQ desktop users and the product retention rates across the segment that reached 92%.
S and P Capital IQ is known foremost for the breadth and consistency of its data. To enhance our data even further, we established a partner with Caylux, a recognized source of Brazilian corporate financial information to offer financial data on more than 10,000 unlisted lines of S and P Capital IQ. S and P Capital IQ Desktop and Enterprise Solutions revenue increased 10%, principally as a result of low teen decrease increase in desktop revenue. S and P Credit Solutions revenue increased 6%, due primarily to single digit growth in Ratings Express. In the smallest category, S and P Capital IQ Markets Intelligent revenue decreased 12% overall.
While Global Markets Intelligence continued to deliver double digit growth, declines in Equity Research Services and the shutdown of FMR Europe more than offset those gains. Turning to S and P Dow Jones Indices. This business delivered a 5% increase in revenue due to derivative, mutual fund and data license revenue, which all increased. Operating profit increased 4%. This quarterly comparison was impacted by a one time revenue increase of approximately $12,000,000 associated with refined revenue recognition for certain ETF products in a year ago quarter.
While the comparison was difficult, the results were still solid with an operating profit margin of 66.6%. Highlights during the quarter included an aggressive expansion of our fixed income business and the establishment of a strategic index agreement with NZX Limited in New Zealand. If we turn to the key business drivers, the ETF industry experienced record 1st quarter inflows of $97,000,000,000 However, much of this was directed to non U. S. ETFs, where our position is not as strong as the U.
S. In the long run, this is still positive. We believe that once investors place funds into passive investments, these funds tend to stay in passive investment and then they shift between various ETFs based on asset allocation models and decisions. ETF AUMs associated with our indices increased 22% to 810,000,000,000 versus the end of Q1 2014. With approximately 3 quarters of this growth, this AUM decreased sequentially from 8 $32,000,000,000 at the end of 2014 as ETF flows moved to products offering European and non U.
S. Exposure. Mutual fund AUMs associated with our indices reached $1,100,000,000,000 an increase of 14% versus Q1 2014. Derivative trading licensing, generally the most volatile portion of revenue, diverged during the quarter with over the counter volumes increasing and exchange traded activity decreased. The fallout from the LIBOR scandal has elevated the importance of both objective and independently governed indices and benchmarks.
We see this as an exceptional opportunity for S and P Dow Jones Indices to build investor confidence in the fixed income markets by developing factor based fixed income benchmarks. During the quarter, we announced an important expansion of our fixed income business. Our objective is clear, to be the premier provider of financial market indices across all asset classes, including all bond types throughout the world. S and P Dow Jones Indices already publishes over 500 fixed income indices globally covering municipal bonds, preferred stock, corporate bonds, credit default swap and senior loans amongst others. We are the 3rd largest provider of fixed income indices for the global ETF market with approximately 30,000,000,000 AUM linked to our indices.
The flagship S and P Aggregate Bond Index family will cover over 20,000 individual securities with the ultimate goal of launching 1,000 of maturity and sector based indices. The S and P U. S. Aggregate Bond Index was launched in January. It's a broad comprehensive market value weighted index designed to measure the performance of the investment grade U.
S. Fixed income market. And finally, recognizing the strategic importance of exchange relationship, S and P has formed a number of unique and dynamic alliances with exchanges in various markets since 1998. The latest agreement with NZX Limited puts us at the center of the global profile of the NZX indices with our well recognized marketing and international commercialization capability. On to commodities and commercial market.
As a reminder, McGraw Hill Construction was sold and its results moved to discontinued operations. Thus, our financials for 20152014 do not include these results. Revenue grew 7% at both Platts and J. D. Power delivered high single digit revenue growth.
Segment operating profit grew 23%. Due to solid revenue growth and tight cost control, the operating margin increased 5 10 basis Global Trading Services revenue increased primarily due to license revenue from the steel index derivative at the Singapore Exchange. Platts added petrochemicals to its suite of forward curves in oil, natural gas, coal and power. These new forward curves include a range of aromatic petrochemicals such as benzene and naphtha and can be used as references for valuing contractual assets and liabilities, measuring P and L from changes in market prices and making more informed risk management decisions. We often talk about keeping benchmarks fresh, relevant and delivered in a user friendly manner.
Here are a couple of examples. Platts recently introduced a faster method for delivering real time global commodity prices with historical and reference data via Platts Market Data Direct. The new improved version transfers Platts data straight into subscribers proprietary systems providing need to know prices at the moment of publication. Customers can focus on what's most important to them. Another example is an update to Platts dated Benchmark, one of the world's most important and widely used price assessment, To further strengthen and enhance its long term viability, the cargo loading period was widened, enabling the benchmark to reflect an additional 5 to 6 days of supply, responding to the reality that oilfield decline in supply over time.
Finally, J. D. Power delivered high single digit revenue growth led by strong activity in the U. S. Auto sector.
Global services industry and advertising licensing revenue also contributed to growth. During the quarter, J. D. Power launched a new product, Voice of Experience, a holistic solution enabled by an innovative technology platform designed for businesses to optimize their customer experience and drive financial results. VOX displays interactive data and an intuitive user interface for all levels of an organization to determine how to improve the customer experience and improve loyalty, advocacy, sales and service.
In summary, the company is off to a good start to the year With a focus on creating growth and driving performance, all our businesses achieved revenue and adjusted operating profit growth. This performance resulted in a consolidated 380 basis point improvement in our adjusted operating margin and a 25% increase in adjusted diluted EPS to 1.09 dollars Our company continues to be aligned around very important themes, strengthening customer and stakeholder engagement, accelerating our international growth, sustaining our margin expansion and maintaining discipline in capital allocation and fostering a robust risk and compliance culture to manage and mitigate risk throughout the company. With that, I want to thank all of you 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. Good morning to everyone joining us on the call. I want to briefly add some color on several items related to Q1 financial performance and then we will open it up to your questions. First, I will recap key consolidated financial results and review certain adjustments to earnings that were recorded in the quarter. 2nd, I will discuss the impact of foreign exchange changes on revenue.
And third, I will highlight balance sheet changes, free cash flow and return of capital. So let's start with the Q1 income statement. Overall, these were good results, especially the continuing momentum and margin improvement. Revenue grew 6% despite the challenging headwind from foreign exchange. Adjusted consolidated operating profit grew 16% with all four business units contributing to this growth.
Continued progress on our productivity initiatives fueled this growth. We also realized a benefit from foreign exchange, which impacted expenses from our operations outside of the United States. Within the quarter, the positive benefit to expenses from ForEx offset the negative impact to revenue. The tax rate on an adjusted basis was 32%. We had a one time benefit from a prior year item that impacted the rate.
For the balance of the year, we continue to guide to an approximately 33 percent rate. Adjusted net income increased 24% and adjusted diluted earnings per share increased 25 percent to $1.09 The average diluted shares outstanding decreased by almost 1,000,000 shares versus a year ago as share Now let me turn to adjustments to earnings to help you better assess the underlying performance of the business. Overall, the adjustments in the quarter were limited. In total, pre tax adjustments to earnings from continuing operations resulted
in a gain
of $6,000,000 during the quarter. This consisted of $35,000,000 in settlement related insurance recoveries, partially offset by $29,000,000 of legal settlement charges. Let me provide more color on the impact of foreign exchange on results. The strong dollar is having a pronounced impact on Corporate America. The impact on McGraw Hill Financial is mitigated somewhat since approximately 1 half of our revenue outside the United States is invoiced in U.
S. Dollars. During the quarter, we reported a strong 10% increase in domestic revenue and a 1% increase in international revenue. On a constant currency basis, international revenue increased 6%. In total, our consolidated revenue increased 6%.
On a constant currency basis, the total company revenue increased 8%. The business with the largest impact was Standard and Poor's rating services, which accounted for approximately 80% of the total foreign exchange impact on revenue. Now let's turn to the balance sheet. As of the end of the first quarter, we had almost 1 $200,000,000 of cash and cash equivalents, of which approximately $1,000,000,000 is held outside of the United States. The decrease from the end of 2014 is primarily due to the payment of legal settlements of approximately $1,600,000,000 during the Q1.
In order to meet this significant U. S. Cash requirement, the company incurred $365,000,000 of short term debt through commercial paper issuance and by tapping our revolving credit facility. We continue to have approximately $800,000,000 of long term debt. Our free cash flow for the quarter was a negative $1,400,000,000 While the legal settlements were recorded in the income statement in the Q4 of 2014, almost all of the cash was paid out in the Q1 of 2015.
In addition, the Q1 has stepped up cash requirements for annual incentive compensation payments. During the Q1, we resumed the company's share repurchase program and bought 1 point 1,000,000 shares. Share repurchase has been and remain an important component of our capital allocation program and we will continue to selectively repurchase shares under our remaining share repurchase authorization of 40 4,500,000 shares. Going forward, we believe we have the balance sheet capacity to continue to make investments that strengthen the portfolio, including acquisitions, maintain our long history of dividend growth and as appropriate continue our share repurchase activity. In closing, I would like to reiterate that our 2015 guidance remains unchanged with mid single digit revenue growth and adjusted diluted earnings per share of $4.35 to 4 point $4.5 The specific elements of our guidance can be seen on this slide.
We continue to focus on creating growth and driving performance. We are off to a good start in 2015 and are encouraged by the performance of our businesses, but we are mindful of the broader macroeconomic challenges Just
a Just a couple of instructions for our phone participants. In order to allow time for other callers during today's Q and A session. If you've been listening through a speakerphone, we would now like to ask better sound quality. Operator, we'll now take our first question.
Thank you. The first question comes from Andre Benjamin with Goldman Sachs. You may ask your question.
Thank you. Good morning. First, I was wondering if you can maybe discuss how your client conversations are making you feel about the pipeline and outlook for debt issuance at this point in the quarter. We all know what some of the risks are and you spoke to them, but I was hoping maybe you can help handicap maybe a range around how you're thinking about the upside versus downside risk there?
Thank you, Andre. This is Doug. Just wanted to give you a little bit of feel for issuance overall, if you don't mind. The Q1, as many of the quarters have been recently, there was a lot of different components. As I mentioned in my comments, the U.
S. Industrials was up 45%, although the number of issues themselves was basically flat. Public finance was up dramatically where financial institution, financial services was quite low. In Europe, as you know, the financial services was down, sovereigns was down and both European corporate investment grade and non investment grade high yield were also down. What we're hearing is that the impact in Europe, let me start there.
In Europe, we're expecting that there will be continued long run development of the capital markets. It's one of the priorities of the Juncker government in Brussels. They have a capital markets development initiative, which is underway. It's to develop the EU Capital Markets Union. That's very important.
But the banks have been holding more debt on their balance sheet. They're making loans and holding them more than they had in prior quarters. They have a lot of liquidity. They've finished their AQRs and they've also see a very, very inexpensive financing with the zero interest rate policy. In the U.
S, we're seeing a lot of M and A activity. Even though LBOs themselves are down, there's a lot of M and A activity. And as you've seen, there's a lot of very large transactions which have hit the market. Generally speaking, it's very early in the year for us to give any kind of a forecast, but we're hearing continued M and A activity, U. S.
Corporate finance activity as corporations continue to take advantage of low interest rates. And in addition to that, the U. S. Market, even as we've said it fits and starts, is starting to grow, we're seeing that picked up with the financial with the markets being very attractive for especially industrial companies. So net net early in the year for us to give you guidance, but we are seeing a lot of very promising aspects to the markets, especially in the U.
S. And especially with the markets in Europe and the banking and financial markets there.
Thanks. And then in Capital IQ, I was wondering if you maybe talk about where you believe you're taking share to support the strong growth in desktop, enterprise and credit solutions. Is it coming from a subset of the other 3 top desktop players or some of the ones that are smaller than yourselves? Or are you actually seeing some growth in the broader market?
The broader aspect is just growth from the market. There's a lot of penetration internationally from banks that have not been customers before. There is a little bit of a share battle going on, but most of that's for share battle for new installations as opposed to people winning battles from each other. But we're very encouraged by the uptake of S and P Capital IQ. It's an incredibly valuable tool.
One of the other areas that we're excited about is that the desktop as more and more people use it and as let's say junior bankers start to grow in their careers, they take it with them as they expand into more senior roles. And we also are finding many new uses for S and P Capital IQ desktop that goes beyond just the analyst desktop. So we're seeing new markets and new opportunities grow. So it's not just taking share. It's also expanding into international markets as well as new users inside of our traditional companies.
Thank you.
Our next question comes from Manav Patnaik with Barclays. Your line is open.
Yeah. Good morning, gentlemen. My first question, Jack, I know you like to be conservative, but around with the guidance being unchanged, I was wondering within the parameters, if anything has moved around. I mean, it seems like the margin expansion especially with S and P was a lot better than we had expected maybe revenue growth dynamic. Can you give us a little more color on maybe some of the moving pieces there?
Yes, sure. Look Manav, we're like we said, we think this is a very this is a good start to the year, But it only is 1 quarter. So it's we've I mean, it's we've keeping our existing guidance in place, we think is a prudent move here. In terms of some things in terms of how they're playing out relative to in going expectations, I think we are maybe encouraged by the progress we're making on the margin expansion. So I think that is a positive relative in coming expectations.
On the other side, I think some of the ForEx headwinds maybe a little bit more challenging. But that we're also encouraged by the sustained organic growth across the businesses. So on balance side, I think we would call it so far so good and we're cautiously optimistic about the balance of the year.
Okay. Thank you. And then I guess just on the touching on your balance sheet. I mean, obviously, you raised a little short term debt. But longer term, can you talk about like if we should expect your appetite to lever up to increase for buybacks, how many and so forth?
I don't know if you can comment on the pipeline and how we should maybe expect that?
Look, we reinitiated our share repurchase program and we'll look to we're going to look to selectively continue that as we go forward. And we also now recognize that we have more flexibility in how we manage the balance sheet. And we will look to consider other options in terms of perhaps raising some capital from time to time to lock in the very attractive conditions that remain out there. So we are encouraged by the fact that we have more flexibility in terms of how we manage the balance sheet going forward.
Okay. Thanks a lot. Thank you.
Our next question comes from Alex Kramm with UBS. You may ask your question.
Hey, good morning. Just wanted to come back to the, I guess, impressive margin expansion on the Ratings business. And curious about sustainability here. I mean, I know in the Q1, obviously, you had the legal resolution. So to some degree, are legal costs already coming out?
Or what else can we expect here over the course of the year? And then same thing goes for maybe some of the initiatives on the cost cutting in that business in particular. Where are we on that end? And what else is playing out over the course of the year? So again, just overall, just where are the puts and takes on the margins when you think about the remainder of the year?
I'd say the benefit that we're seeing primarily in Q1 is some of the restructuring actions that we took in the 3rd Q4 of a year ago that's having an impact in Q1. We're beginning to see it did not have a big impact on margins in Q1, but we are starting to see moderation in legal expense. We do anticipate that that will make a larger contribution as we go across the balance of the year. On the other hand, we are spending a bit more money in areas of compliance, particularly with the new regulation. So we are investing there to make sure that we maintain a very prudent risk in compliance environment.
And we're selectively looking to also spend in technology to further harden our global processes. So on balance, we feel good about the margin progress that we've made and we but we are kind of are benefiting I think from the restructuring from year ago. And I do think the outlook as I mentioned for legal expense looks more promising than obviously it did a year ago.
Okay, very good. And then secondly, maybe just going to capital IQ for a minute, obviously doing well as well. I think you've said in the past not so long ago when there was a change in management that you might be a little bit more focused on driving results sooner versus just building a big platform. So can you just talk about if that's already driving some of the recent growth that we've seen here? Has there been changes of really focusing to getting results now?
Or is there still more to come in terms of restructuring some of the way you're interfacing with clients and how you're offering product?
The answer is actually all of the above. We have put a very important emphasis on our profitability and our margin in that business to drive productivity,
but not at the expense of investing and
covering customers. So we have intensive expense of investing and covering customers. So we have intensive effort to build our sales force, our customer engagement, our service level. And we're also investing in a multi year project to upgrade our technology so that we can continue to have state of the art technology and delivery and stay ahead with our stay along with or at least ahead of most of our major competitors. So it's really been a program to, in a way methodically take a step back and look at the business, look at customers, look at their needs, look at all of the areas where we serve them best and how we can serve them better, but also doing that with a project where we're looking at all of our costs, all of our input to ensure that we're doing in a way that's more productive.
And I think you can see it's paying off. We're having excellent retention rates. We've been growing our sales in desktops and in enterprise feed. And at the same time, we've been able to invest and grow our business and we're seeing improvement in the margin. So I think it's a good story.
Imogen Dillon Hatcher has been an excellent leader and is managing all of that and I'm very, very pleased with her performance.
Our next question comes from Tim McHugh with William Blair. You may ask your question.
Thanks. Platt, I was just wondering if you could elaborate a little bit more, I guess, in terms of the weakened oil prices, I guess, in particular, maybe as you went on in the quarter, I know some businesses that are not completely like the price assessment, but somewhat tied to information services for the oil and energy industry have seen kind of customer decisions get weaker, I guess, as you progress further and further into seeing oil prices lower, but it doesn't seem to be showing up for you for Platts. Just curious if you could elaborate a little bit more what the conversations are like with clients?
John made two points on Platts. We are look, we're pleased with the progress that they've made in the Q1 here. Now just as a reminder, while obviously oil and petroleum is their largest business, it only represents 2 thirds of the business. So we do have and it's been a conscious decision on our part to broaden out our commodity exposure here. So that would be point 1.
Point 2, within the core oil and petroleum market, admittedly, there are a lot of there is profit pressure on the industry. That all being said, we've had very good results in our renewals. And I do think it's perhaps cost us a couple of points of growth in the market. So maybe it is costing us a couple of growth points. But in general, we're still growing.
And we're highly encouraged with the high single digit progress that we've made overall in the business so far this year.
And I think this is just evidence
of these benchmarks entrenched in our customers business model.
These prices that we put out are buried in their invoicing systems. These customers can't invoice without these prices in many cases. They can't value inventory in many cases. So if a small fracker goes out of business, we may lose that customer, but that's a very, very, very tiny portion of
the business. So this is a
classic example of the need for benchmarks.
I want to add that one of the reasons you saw 5 10 basis point improvement in the margin, in the commercial and commodities margin is that we've also proactively positioned ourselves for potentially weaker markets. We wanted to be very cautious about certain investments. That doesn't mean that we're not investing in the business, but we felt that we needed to get ahead of a potential slowdown in the market. So we've also positioned ourselves with some flexibility to ensure that we continue
manage the business responsibly.
Okay, great. And then on the index business, in particular, the fixed income market you talked about you launched kind of an aggressive expansion of that with the U. S. Aggregate Index in the quarter. Guess, two parts to that.
1, I guess, does that make you are you more focused on organically expanding in fixed income at this point? Or are acquisitions still a possibility there? And secondly, I guess the aggressive expansion, is it something we should notice as we think about the margins for that business going forward? I guess how aggressive does aggressive mean?
I think that what we're looking at is as you saw the we're number 3 in that market with a $30,000,000,000 position in ETFs. And so relative to the larger market than the equity markets, even commodity markets, ETFs and fixed income indices are actually still a very small portion of the overall financial markets. Bonds are difficult to necessarily get prices for. We've been working on a lot of ways to ensure that we have continuous bond pricing whether they're from market prices or evaluated prices. And getting that infrastructure in place is critical to being able to have a very active liquid ETF and fixed income indices market.
So we're in this for the long haul. We look at the big trends of when you meet with asset distributors and asset allocators, they all talk about the need to have certain types of fixed income solutions that aren't just individual bonds. And so we're very encouraged by that. We're also encouraged by the fact that banks are probably struggling with their after ability to continue to manage benchmarks inside of their businesses. They might be non core or they might not really be a business that it makes a lot of sense for them to be in.
So to answer your first question then, we are going to grow this on our own. We see this as a very important organic activity, although as I said starting from a very small base. But if there are opportunities for us to buy businesses and buy assets, we would definitely be interested, as we have always been, in ways that we can do tuck ins or fill in our capability. And one more point on your question on the margin aspect of this is, some
of this investment is already in the margin, it's already in the results. So we've kind of built out this team. We've spent some money on information sources that's going to build up over some period of time. So I think some of that capability is already in place.
Okay. Thank you.
Our next question comes from Bill Byrd with FBR. You may ask your
Just two questions. 1, are you considering any strategies for tapping the value of your under earning non U. S. Cash? And then second, I guess, along the lines of M and A, could you just refresh us on kind of the criteria you apply and your appetite to do something larger?
Thank you.
First of all, look, we're always looking for opportunities to play our offshore cash. The first priority offshore, which is maybe a little bit different than cash that's held domestically is for offshore acquisition. And we continue to look for those sorts of opportunities. We completed Eclipse last year for Platts which was in the North America which was the complement an earlier move we had made in North America with Ventec. Eclipse kind of built out our European position in natural gas.
And we're continuing to look for those opportunities and that'd be our first choice in terms of ways to deploy that cash. From time to time there are some relatively efficient ways perhaps to access some of that cash and bring it back. We look at that consistently. But like I said, our first priority is growth. In terms of your question back to M and A, we I think our track record demonstrates we are disciplined when we look at particularly larger M and A sorts of opportunities.
First thing we're looking for is growth. We are looking for growth that is accretive to our existing physician. But at the same time, we're highly disciplined in being sure that we're also going to be able to deliver the synergies the investment. And that can get a bit challenging these days given the somewhat high valuations that appear to be out there for some of the more attractive properties. But we continue to do hard work to look for the right sorts of choices for us going forward.
Thank you.
Our next question comes from Craig Huber with Huber Research. You may ask your question.
Yes. Good morning. I have two questions. My first one a housekeeping question. Maybe I missed this, but what are you guys budgeting the impact on revenue and cost in the foreign exchange rates for the full year please?
Look, I
think the impact on look, the impact year on year that we saw in Q1, which is about 2 growth points from a revenue point view. We anticipate going forward maybe it gets year on year a bit more challenging in the second and third quarter and then the year on year sort of impact starts to moderate a bit. That's built into our forward guidance. So we do think we have our exposure. It's pretty well covered in how we've thought about our outlook for the balance of the year.
And what about on the cost side, just given how much of your revenue overseas is in U. S. Dollar?
I do think we there was not a lot of bottom line impact. In fact, there was a modest benefit from foreign exchange all in, in the Q1. We're not anticipating that sort of positive impact over the balance of the year. There was some balance sheet move in that produced that in Q1. So I think we would look to have a modest negative over the next few quarters, but very manageable overall in terms of our outlook.
And then also you touched on this briefly, but on the share buybacks, just curious here your updated thoughts on how much leverage if you wanted to put more debt behind your buybacks here. Could you add roughly a couple of turns of leverage here and not impact your investment grade?
Well, certainly we have a lot of flexibility in our balance sheet right now. And as I mentioned earlier, it's nice to have the flexibility to consider those options. And we're as we go forward, we would look to leverage our balance sheet both to broaden out our portfolio and add attractive assets. And if we can't find those that add shareholder value, we would look to sustain and perhaps increase our share repurchase program. But I think if you look on a multiyear basis, we've been pretty aggressive in that area.
And we continue to look at that going forward.
And then lastly
thank you guys.
That's correct. That was 2. Thank you.
Thank you.
Our next question comes from Vincent Hung with Autonomous. You may ask your question.
Hi, good morning.
Good morning.
First question is, can you quantify how much progress you've made on the cost initiatives against the $140,000,000 target?
Yes, I would say so far in the run rate, we've realized well over half of that. So in sort of in that run rate and I think by the end of the year, we will in our run rate have achieved 75% and with so by the end of 2015. So I think we're very feel very encouraged with the progress so far. As I mentioned, I think the margin performance has been a very positive development as we come into the
year. Okay. And last question is, so the subscription revenues and the rating expenses are down 2% year on year and part of that is due to less new entities being added. Is the lack of new customer growth due to the slowdown in leverage lending?
It's mostly due to the European, the circumstances of the Q1 in Europe. As you know, there was a lot less capital markets activity. You could see it from the decrease in Europe. Let me find the number here exactly again. Yes, there was a decrease of 9% of Europe corporate and European high yield was down 5%.
The total number of deals if you look at it on deals themselves, is down over 15% in Europe in the Q1. So there's a lot of liquidity in Europe and the banks themselves were lending as opposed to companies going to the capital markets. That was the major reason why the entity credit ratings were down.
Okay. Thanks a lot.
Our next question comes from Peter Appert with Piper Jaffray. Your line is open.
Thanks. So Doug the margin performance at S and P ratings is very impressive obviously. So I'm wondering how much more there is to do in terms of driving the margin and if you've thought about what an appropriate level of margin is in that business?
Well, we haven't necessarily targeted a specific level of margin, but we've been looking for margin improvement. As Jack mentioned earlier, we're continuing to invest in our regulatory and risk and control processes and environment. We've been looking at ways to enhance of our product delivery, our process improvements which require technology investments. But at the same time, we're doing in a way that we're more and more efficient all the time. We're looking at ways to have the right sort of teams, the right sort of geographic balance, etcetera.
So we continue to hope that we can drive the margin even better than it is now, but this is really something that we're actively managing and pursuing to continue to deliver better
margin. Okay. And same thing on the Cap IQ side. I think you've talked in the past about mid-twenty percent margin. Can you remind me if that's correct?
Is that the kind of target you're thinking about in that business longer term?
That's a longer term target. If we were to look at we still have a lot of investments that we're making right now that will play out over time. But when we look at what we think would be kind of a natural rate for that business, remember that we still have As I mentioned, Imogen Dillon Hatcher is doing a fantastic job to As I mentioned, Imogen Dillon Hatcher is doing a fantastic job to go through the businesses and look at them 1 by 1, product by product. And we what we do feel encouraged with the progress and the direction that we're heading there with the margins. In fact, it's good across all of our businesses and we're very pleased with that progress.
Thank you.
Thank you.
Our next question comes from Doug Arthur with Huber Research. You may ask your question.
Yes. Thanks. Doug, you mentioned the one time revenue benefit in the indices business a year ago. I mean, I'm just not used to seeing AUM up 22% year over year. You mentioned it was sort of down sequentially and at sort of mid single digit revenue growth.
So in your assessment, nothing structurally has changed in this business in terms of pricing at this point? No, no, not at all. There was I think if you recall last year we shifted some of our in the Q1 we had some of our ETF revenues were being recognized in a sense on a cash basis and we looked at them and because of the performance and the predictability and the volumes, we shifted them to being now on accrual basis that moved them all being upfront of that 12,000,000 So that's the main difference in the Q1. But structurally speaking, the business is still continues to perform as it has been in the past. Okay, great.
Thank you.
Our next question comes from Denny Galindo with Morgan Stanley. You may ask your question.
Good morning. Good morning. Yes, I just wanted a little bit more color on the fixed income rollout in indices. You mentioned $30,000,000,000 in AUM, but I wondered if you could give us a little color on how fast that's growing. And also the expenses related to the rollout, is sales and marketing the most important expense?
How would you expect the index expenses to trend as you roll out these fixed income indices? I mean, it was actually down quarter over quarter in the Q1.
Yes. So let me start and then Jack will also jump in. So we think that this fixed income rollout is one that will we think that it's going to require a couple of years to build. This isn't something that just builds from a quarter to a quarter. But as I mentioned before, we're seeing a lot of demand from this when we speak with especially asset allocators and people that are asset management managers and people who are actually in the sales side of this business because they need products for retirement, for insurance, etcetera, that they really don't have today.
So this will be something if you look at the growth of the fixed in of the equities indices, you'll see that they grew very slowly for maybe 15 or 20 years and then they just boomed and started taking off. So I don't have any specific projections. We're in this for the long run. We think that we have the brand. We have the access to investors.
We've got the right kind of controls and processes to manage this business professionally. And so we're in this for the long run and something that we're willing to invest in so that we can have a dominant position.
And just as I mentioned earlier from an expense point of view is a good base of that expense for this initiative is already in the P and L. We have fixed income team. We've spent the money to have have had for some time the data necessary to deliver the product. So some of that's already in the run rate. As we move forward and as this business expands, I do suspect we will add to that team over time, particularly in areas like channel management as we start to go out and impact the marketplace.
But I wouldn't at this point in time, I wouldn't we wouldn't give any forward looking thoughts that there's any significant change in the margins of the business at this moment in
time. But let me just add that from the point of view of our overall strategy, this is a business that really makes sense for us to invest in.
Okay. Thank you. And then moving on to Platts. We're starting to hear about some M and A in the energy space. And I was wondering if that has impacted Platts in any way so far?
Or do you anticipate M and A affecting Platts in terms of maybe customers merge and buy less products or maybe you could just address that idea of M and A in the commodity segment?
Yes, that's always something that we're going to be watching out for carefully. We have not seen any major impact on that from that so far. But as I mentioned earlier, we have positioned ourselves to have some flexibility with expenses. We want to be very attentive to what are the developments in the market. And so far, we haven't seen that impact, but it is something that we're watching for.
And then lastly,
two things I'd add to that is we Platts actually has very, very broad customer coverage. So our exposure to any 1 or 2 customers in that business is actually while we have big customers, our exposure is somewhat limited to any one or 2 particular customers. And also too in a lot of some of these deals that you may see is that sometimes there's also a carve out or a spin out to create a new entity and that then creates a new opportunity for us to go sell. So there's always a bit of dynamic marketplace here and we're used
to it. And these acquisitions are actually if you think about it, the concern out there in the street is that these frackers and these small folks go out of business, we lose these small customers. Well, the assets don't go away. They end up being purchased by someone else. So while we may lose a customer in one area, that business tends to flow somewhere else because the wells don't necessarily get shut down.
They may be dormant, but they're not necessarily shut down.
Okay. And then one just last one on repurchases. You've repurchased for the first time since
2018. We're trying to keep 2 for everybody please.
Okay.
Sorry about that.
All right.
We have a question from Bill Warmington with Wells Fargo. Your line is open.
Good morning, everyone. So one follow-up for you on Platts. Your renewals on Platts, are they spread out fairly evenly over the year? Or do they tend to be concentrated like some of your competitors in sort of the Q4 and Q1 space?
Yes. And generally speaking, we have a couple of bulges in the Q4 and Q1, but a lot of them are spread out through the year. But we do have a 4th and first quarter bulge.
And many of these are multi year, thinking of the larger ones.
Got it. Okay. And then I can't resist given your balance sheet capacity yet another M and A question. But you had talked about fixed income market potentially and I just wanted to ask about international specifically given your comments around a strong non U. S.
AUM growth?
Yes. So when we've looked at the M and A generally and also if you mentioned fixed income indices, our interest in the S and P Dow Jones Indices for growth is international. You've seen that almost every quarter we highlight some sort of a new exchange relationship. This quarter we highlighted our relationship with New Zealand. Those are very attractive deals for us.
They're small, but we really enjoy the position with those relationships. So international expansion whether it's through exchange relationships, M and A, organic growth is something that is very important to us and fixed income investment in the indices business both organic and non organic, again, those are top priorities for
us. Our final question comes Jamie Friedman, Gary Wu with Susquehanna. You may ask your question.
Hi, it's Jamie. Thanks for taking my question. Stock is up a couple of percent. If you were wondering, I'll just ask my 2 upfront. I know you're there and I'm here.
So yes, I'll just ask my 2 upfront, both about rating. So is there any seasonality, Jack, to call out in the public sector? I know public sector has state and local as a June fiscal year and federal as a September. So is there any state and local seasonality? And my second question is about TLAC, the total loss absorption capacity.
Now if you could just share a couple of one liners about your expectations about Thank you.
Okay. Yes. I'll take this. This is Doug. On the seasonality, there really is not any seasonality in the fundraising in the public finance sector.
What has been had a bigger impact on the public finance sector has been, as you know, there were a couple of bankruptcies. There are some issues going on with pension funds. Those are much more important issues. What's really been interesting and what's been driving a lot of the public finance issuance in the last 6 months has been the rates environment. There was a lot of refinancing and refunding which came up.
A lot of public finance issuances have a very attractive call provision in them. And given where rates are, there's a lot of public finance entities that have been taking advantage of that call and refunding at lower rates. So the lower rates have been probably the biggest driver, not anything that's seasonal. On TLAC, we expect even though financial services issuance was flat in the U. S.
And down in Europe in the Q1, on more of a structural basis because of precisely the point that you just raised, TLAC is going to be going to require the largest banks, all those with more than $50,000,000,000 of assets to do some sort of a capital raise of senior debt. So we are expecting that there will be over time more financial services issuance to meet the requirements of TLAC and living wills and some of the other areas that are now being discussed in the regulatory environment. So, let me just conclude the call. And first of all, thank everyone for your questions and for being on the call. We're very pleased that the quarter had a strong beginning.
It was a good start to the year. All of our business units achieved revenue and adjusted We achieved the adjusted diluted EPS of 1.09 We achieved the adjusted diluted EPS of $1.09 and we're pleased that we have a lot of very important themes across the company, which are driving our growth and performance that are well understood across the entire company. We've been communicating them so people understand them about dealing with our customers in a way that we've got very good relationships, accelerating our international growth, sustaining our margin expansion, maintaining our discipline and capital allocation, and very importantly also fostering a robust risk and compliance culture and managing or mitigating risk throughout the entire company. So we're pleased that we had a good beginning to the Q1 of the year and we look forward to working with all of you speaking with you and our shareholders throughout the year and thank you very much.
That does conclude 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 and A session, will be available in about 2 hours. The replay will be maintained on McGraw Hill's Financials website for 12 months from today and for 1 month from today by telephone. On behalf of McGraw Hill Financial, we thank you for participating and wish you a good day.