Good morning, 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 questions and answers after the presentation, and instructions will follow at that time. To access the webcast and slides, go to www.mhfi.com. That's M-H-F-I 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 guestbook screen, you will see two 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. 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.
Good morning. Thank you for joining us for McGraw Hill Financial's first quarter 2015 earnings call. Presenting on this morning's call are Doug Peterson, President and CEO, and Jack Callahan, Chief Financial Officer. This morning, we issued a news release with our 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 US 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 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 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 call is intended for investors, and we would ask that questions from the media be directed to Jason Feuerstein 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 initiative, led to a 380 basis point improvement in our adjusted operating profit margin. We resumed our share purchase program with 1.1 million shares repurchased in the quarter. We made changes to our compensation programs, aligning them more closely with investor interests by eliminating employee stock option grants and instead utilizing restricted stock grants and deferred cash.
Our legal team continued to resolve legacy litigation matters, including receiving a dismissal of the Corte dei Conti matter in Italy. You'll recall this was a potential EUR 234 billion claim from an Italian prosecutor that we referred to on our fourth quarter 2013 earnings call. Finally, Ashu Suyash 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 skills, 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 and starts. The labor market is showing solid momentum, 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. 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. Markets in the U.S. are on a rate increase watch. Geopolitical concerns continue in Greece and the Ukraine, 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. Let's turn to our first quarter results. Revenue increased 6%, adjusted operating profit increased 18%, adjusted operating margin increased 380 basis points, 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 to 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 initiative. All of our business units delivered revenue growth and increased adjusted operating profit. Only S&P Dow Jones Indices did not report improved margins, that was due to a difficult comparison with a one-time revenue increase recorded in the year-ago quarter. Let me turn to the individual businesses, I'll start with Standard & Poor's Ratings 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&P Ratings 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 first quarter of 2014. One of the causes of the decline in bank loans is the decrease in leveraged buyout.
LBO-related activity was the lowest since 2009, with market participants discouraged by the regulatory environment. We turn to issuance, the recent trends in U.S. and European issuance have benefited our businesses. First 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&A transactions also contributed to the lift in issuance. In addition, a continued thirst for yield has enabled corporate issuers across the rating spectrum to tap the capital markets, extending maturities at beneficial pricing and terms. High yield increased 39%. Public finance was up 61% over an unusually weak first quarter in 2014. Sequentially, public issuance was flat, albeit at an elevated level as local governments continued to refinance maturing debt.
Structured finance issuance, while up 21% versus the first quarter 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 is an increasing universe of government debt trading with a negative yield or a fixed rate return of barely above zero. 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 needs. By the way, reverse Yankee bonds are counted as U.S. issuance and revenue. 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 U.K. 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 asset classes. There is a perception among some investors that corporate 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 & Poor's Ratings Services Annual Global Debt Maturity Study. Each study shows the upcoming five years of debt maturities. Over the course of one year, there was no change to the total debt maturing.
Both last year's study and the most recent study depict total debt maturities for the following five years totaling $8.9 trillion. These data help provide confidence that corporate issuance will continue in the coming years. Let me turn to S&P Capital IQ. Revenue grew 6%, segment operating profit grew 18%, and the operating margin increased 200 basis points to 19.5%. This is the fifth consecutive quarter of year-over-year margin expansion. Revenue growth was consistent both in the U.S. and outside the U.S. Two particular highlights during the quarter were continued low teens growth of S&P Capital IQ desktop users and the product retention rates across the segments that reached 92%. S&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 [KLook], a recognized source of Brazilian corporate financial information, to offer financial data on more than 10,000 unlisted private companies in Brazil. Let me add a bit more color on revenue growth in the three business lines of S&P Capital IQ. S&P Capital IQ desktop and enterprise solutions revenue increased 10%, principally as a result of low teen increase in desktop revenue. S&P Credit Solutions revenue increased 6%, due primarily to single-digit growth in RatingsXpress. In the smallest category, S&P Capital IQ Markets Intelligence 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.
We turn to the key business drivers, the ETF industry experienced record first quarter inflows of $97 billion. 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. Turning to S&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 million 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.
We believe that once investors place funds into passive investments, these funds tend to stay in passive investments, then they shift between various ETFs based on asset allocation models and decisions. ETF AUMs associated with our indices increased 22% to $810 billion versus the end of first quarter 2014. With approximately three-quarters of this growth, this AUM decreased sequentially from $832 billion 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 $1.1 trillion, an increase of 14% versus first quarter 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 decreasing. 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&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&P Dow Jones Indices already publishes over 500 fixed income indices globally, covering municipal bonds, preferred stocks, corporate bonds, credit default swaps, and senior loans, amongst others. We are the third largest provider of fixed income indices for the global ETF market, with approximately $30 billion AUM linked to our indices. The flagship S&P Aggregate Bond Index family will cover over 20,000 individual securities, with the ultimate goal of launching thousands of maturity and sector-based indices. The S&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. Finally, recognizing the strategic importance of exchange relationships, S&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 a series of initiatives to facilitate greater investor access to the New Zealand market. We are committed to raising the global profile of the NZX indices with our well-recognized marketing and international commercialization capability. On to commodities and commercial markets. As a reminder, McGraw Hill Construction was sold, and its results moved to discontinued operations. Thus, our financials for 2015 and 2014 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 510 basis points to 38%. During the quarter, Platts continued to grow revenue despite low commodity prices. As we have seen in recent quarters, the newer areas of metals and agriculture had the highest revenue growth rates. Global trading services revenue increased primarily due to license revenue from the steel index derivative activity 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&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 assessments. To further strengthen and enhance its long-term viability, the cargo loading period was widened, enabling the benchmark to reflect an additional five to six days of supply, responding to the reality that oil fields 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 the 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 in 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.
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. 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 first quarter financial performance, 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. Second, I will discuss the impact of foreign exchange changes on revenue. Third, I will highlight balance sheet changes, free cash flow, and return of capital. Let's start with the first quarter income statement. Overall, these were good results, especially the continuing momentum in margin improvement. Revenue grew 6% despite the challenging headwinds 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 the benefit from foreign exchange, which impacted expenses from our operations outside of the U.S. Within the quarter, the positive benefit to expenses from Forex offset the negative impact to revenue. Unallocated expenses decreased 3%. 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% rate. Adjusted net income increased 24%, and adjusted diluted earnings per share increased 25% to $1.09. The average diluted shares outstanding decreased by almost 1 million shares versus a year ago. As share repurchase activity offset the dilutive impact of shares granted for equity-related compensation. 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 million during the quarter. This consisted of $35 million in settlement-related insurance recoveries, partially offset by $29 million 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 one half of our revenue outside of the U.S. 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 & Poor's Ratings Services, which accounted for approximately 80% of the total foreign exchange impact on revenue. Let's turn to the balance sheet. As of the end of the first quarter, we had almost $1.2 billion of cash and cash equivalents, of which approximately $1 billion is held outside of the U.S. The decrease from the end of 2014 is primarily due to the payment of legal settlement of approximately $1.6 billion during the first quarter. In order to meet this significant U.S. cash requirement, the company incurred $365 million of short-term debt through commercial paper issuance and by tapping our revolving credit facility. We continue to have approximately $800 million of long-term debt. Our free cash flow for the quarter was a negative $1.4 billion.
While the legal settlements were recorded in the income statement in the fourth quarter of 2014, almost all of the cash was paid out in the first quarter of 2015. In addition, the first quarter has stepped-up cash requirements for annual incentive compensation payments. During the first quarter, we resumed the company's share repurchase program and bought 1.1 million shares. Share repurchase has been and remains an important component of our capital allocation program, and we will continue to selectively repurchase shares under our remaining share repurchase authorization of 44.5 million 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-$4.45. 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 that we continue to face. With that, let me turn the call back over to Chip for the Q&A session.
Thanks, Jack. Just a couple 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. In order to allow time for other callers during today's Q&A session. If you've been listening through a speakerphone but would now like to ask a question, we ask that you lift your handset prior to pressing star one and remain on the handset until your question has been answered. This will ensure better sound quality. Operator, we'll now take our first question.
Thank you. 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 first quarter, 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 a EU capital markets union. That's very important. The banks have been holding more debt on their balance sheets. They're making loans and holding them more than they had in prior quarters. They have a lot of liquidity. They've finished their AQR, and they also see a very inexpensive in financing with the zero interest rate policy. In the U.S., we're seeing a lot of M&A activity, even though LBOs themselves are down. There's a lot of M&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. We're hearing continued M&A activity, U.S. corporate finance activity as corporations continue to take advantage of low interest rates. 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 markets being very attractive for especially industrial companies. 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. Then, in Capital IQ, I was wondering if you could 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 three 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 markets. 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 and from each other, battle from each other. We're very encouraged by the uptake of S&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. We also are finding many new uses for S&P Capital IQ desktop that goes beyond just the analyst desktop. We're seeing new markets and new opportunities grow.
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 and change, I was wondering, within the parameters, if anything has moved around. It seems like the margin expands, especially with S&P, was a lot better than we had expected, maybe revenue growth down. Can you give us a little more color on maybe some of the moving pieces there?
Yeah, sure. Manav, like we said, we think this is a good start to the year. It only is one quarter, keeping our existing guidance in place we think is the prudent move here. In terms of some things, in terms of how they're playing out relative to incoming expectations, I think we are maybe encouraged by the progress we're making on the margin expansion. I think that is a positive relative to incoming expectations. On the other side, I think some of the Forex headwinds may be a little bit more challenging. That we're also encouraged by the sustained organic growth across the businesses. On balance, I think we would call it so far so good, and we're cautiously optimistic about the balance of the year.
Okay, thank you. I guess just touching on your balance sheet, obviously you raised a little short-term debt, but longer term, can you talk about if we should expect your appetite to lever up, increase, or 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, we're going to look to selectively continue that as we go forward. We also now recognize that we have more flexibility in how we manage the balance sheet. We'll 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. 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. Curious about the sustainability here. I know in the first quarter, 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? 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? Again, just overall, just where are the puts and takes on the margins when you think about the remainder of the year?
I would say the benefit that we're seeing primarily in Q1 is some of the restructuring actions that we took in the third and fourth quarter of a year ago. That's having an impact in Q1. We're beginning to see it not have a big impact on margins in Q1, but we are starting to see moderation in legal expense. We do anticipate 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 regulations. We are investing there to make sure that we maintain a very prudent risk in compliance environment. We're selectively looking to also spend in technology to further harden our global processes. On balance, we feel good about the margin progress that we've made.
We are benefiting, I think, from the restructuring from a year ago. I do think the outlook, as I mentioned, for legal expense looks more promising than obviously it did a year ago.
Okay. Very good. 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. Can you just talk about if that's already driving some of the recent growth that we've seen here? Have 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. We have intensive effort to build our sales force, our customer engagement, our service level. 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 along with or at least ahead of most of our major competitors. It's really been a program to, in a way, methodically take a step back and look at the business, look at the customers, look at their needs, look at all of the areas where we serve them best, and how we can serve them better.
Also doing that with a project where we're looking at all of our costs, all of our inputs to ensure that we're doing it in a way that's more productive. 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. At the same time, we've been able to invest and grow our business, and we're seeing improvement in the margin. 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.
Fantastic. Thank you very much.
Our next question comes from Tim McHugh with William Blair. You may ask your question.
Thanks. Platts, 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 or energy industry, have seen customer decisions get weaker, I guess, as you've progressed further and further into seeing oil prices lower. 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.
I'd make two points on Platts. We're pleased with the progress that they've made in the first quarter here. Just as a reminder, while obviously oil and petroleum is their largest business, it only represents two-thirds of the business. We do have, and it's been a conscious decision on our part to broaden out our commodity exposure here. That would be point one. Point two, within the core oil and petroleum market, admittedly, there is profit pressure on the industry. That all being said, we've had very good results in our renewals. I do think it's perhaps costing us a couple points of growth in the market. Maybe it is costing us a couple growth points, but in general, we're still growing. We're highly encouraged with the high single-digit progress that we've made overall in the business so far this year.
I think this is just evidence of these benchmarks entrenched in our customers' business models. 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. 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. This is a classic example of the need for benchmarks
I want to add that one of the reasons you saw a 510 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. We've also positioned ourself with some flexibility to ensure that we continue to manage the business responsibly.
Great. On the index business, in particular the fixed income market, you talked about you launched an aggressive expansion of that with the U.S. Aggregate Index in the quarter. Two parts to that. One, are you more focused on organically expanding in fixed income at this point, or are acquisitions still a possibility there? Secondly, the aggressive expansion, is it something we should notice as we think about the margins for that business going forward? How aggressive does aggressive mean?
I think that what we're looking at is, as you saw, we're number three in that market with a $30 billion position in ETFs. Relative to the larger markets, in 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. Getting that infrastructure in place is critical to being able to have a very active, liquid ETF and fixed-income indices market. 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, we're very encouraged by that. We're also encouraged by the fact that banks are probably struggling, after the LIBOR scandal, with their 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. 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.
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 capabilities.
One more point on your question on the margin aspect of this is, some of this investment's already in the margin. It's already in the results. We've built out this team. We've spent some money on information sources. That's going to build up over some period of time. I think some of that capability's already in place.
Okay, thank you.
Our next question comes from Bill Bird with FBR. You may ask your question.
Yeah, just two questions. One, are you considering any strategies for tapping the value of your underearning non-U.S. cash? Second, I guess along the lines of M&A, could you just refresh us on the criteria you apply and your appetite to do something larger? Thank you.
First of all, we're always looking for opportunities to deploy our offshore cash. The first priority offshore, which is maybe a little bit different than cash that's held domestically, is for offshore acquisition. We continue to look for those sorts of opportunities. We completed Eclipse last year for Platts, which was the complement, an earlier move we had made in North America with Bentek. With Eclipse, kind of built out our European position in natural gas. 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. Like I said, our first priority is growth.
In terms of your question back to M&A, I think our track record demonstrates we are disciplined when we look at particularly larger M&A sorts of opportunities. First thing we're looking for is growth. We are looking for growth that is accretive to our existing position. At the same time, we're highly disciplined in being sure that we're also going to be able to deliver the synergies that would deliver incremental shareholder value that would justify the investment. 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. We continue to do the 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. A few questions. My first one, a housekeeping question. Maybe I missed this, 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 year-on-year that we saw in Q1, which was about two growth points from a revenue point of view, we anticipate going forward, maybe it gets year-on-year a bit more challenging in the second and third quarter, then the year-on-year impact starts to moderate a bit. That's built into our forward guidance. 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.
What about on the cost side? Just given how much of your revenue overseas is in U.S. dollar.
I do think there was not a lot of bottom-line impact. In fact, there was a modest benefit from foreign exchange all in the first quarter. We're not anticipating that sort of positive impact over the balance of the year. There was some balance sheet movement that produced that in Q1. I think we would look to have a modest negative over the next few quarters, but very manageable overall in terms of our outlook.
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 rating?
Well, certainly we have a lot of flexibility in our balance sheet right now. As I mentioned earlier, it's nice to have the flexibility to consider those options. As we go forward, we would look to leverage our balance sheet both to broaden out our portfolio and add attractive assets. If we can't find those that add shareholder value, we would look to sustain and perhaps increase our share repurchase program. I think if you look on a multi-year basis, we've been pretty aggressive in that area, and we continue to look at that going forward.
Thank you, guys.
That's great, that was two. Thank you.
Thank you.
Our next question comes from Vincent Hung with Autonomous. You may ask your question.
Hi. Good morning.
Morning.
First question is, can you quantify how much progress you've made on the cost initiatives against the $140 million target?
Yeah, 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. 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. I think we feel very encouraged with the progress so far. As I mentioned, I think the margin performance has been a very positive development as we've come into the year.
Last question is, the subscription revenues and the ratings business are down 2% year-over-year, part of that is due to less new entities being added. Is the lack of new customer growth due to the slowdown in leveraged lending ?
It's mostly due to the circumstances of the first quarter 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. 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 first quarter. There's a lot of liquidity in Europe. 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.
Doug, the margin performance of S&P Ratings is very impressive, obviously. 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.
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 some of our product delivery, our process improvements, which require technology investments. At the same time, we're doing it 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, et cetera. We continue to hope that we can drive the margin even better than it is now. This is really something that we're actively managing and pursuing to continue to deliver better margin.
Same thing on the Cap IQ side. I think you've talked in the past about mid-20% 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. 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 a couple of research businesses that are in that third bucket of products that are losing money or have not been profitable. We're working on ways to peel some of them out. As I mentioned, Imogen Dillon Hatcher is doing a fantastic job to go through the businesses and look at them one by one, product by product. 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.
All right. Thank you.
Thanks.
The next question comes from Doug Arthur with Huber Research. You may ask your question.
Yeah, thanks. Doug, you mentioned the one-time revenue benefit in the indices business a year ago. 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. In your assessment, nothing structurally has changed in this business in terms of pricing at this point?
No, not at all. I think if you recall, last year in the first quarter, 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 upfront of that $12 million. That's the main difference in the first quarter. Structurally speaking, the business still continues to perform as it has been in the past.
Okay, great. Thank you.
Thanks, Doug.
Our next question comes from Denny Galindo with Morgan Stanley. You may ask your question.
Morning.
Morning.
I just wanted a little bit more color on the fixed income rollout and indices. You mentioned $30 billion 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? It was actually down quarter-over-quarter in the first quarter.
Yeah. Let me start, Jack will also jump in. We think that this fixed income rollout is one that 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. 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, et cetera, that they really don't have today. This will be something, if you look at the growth 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. 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. 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.
Just as I mentioned earlier, from an expense point of view, a good base of that expense for this initiative is already in the P&L. We have a fixed income team. We've spent the money to have, and have had for some time, the data necessary to deliver the product. 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. At this point in time, we wouldn't give any forward-looking thoughts that there's going to be any significant change in the margins of the business at this moment in time.
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. Moving on to Platts. We're starting to hear about some M&A in the energy space, and I was wondering if that has impacted Platts in any way so far, or do you anticipate M&A affecting Platts in terms of maybe customers merge and buy less products? Maybe you could just address that idea of M&A in the commodity segment.
Yeah, that's always something that we're going to be watching out for carefully. We have not seen any major impact from that so far. 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. So far, we haven't seen that impact, but it is something that we're watching for.
Lastly, just two things I'd add to that is Platts actually has very broad customer coverage. Our exposure to any one or two customers in that business is actually, while we have big customers, our exposure is somewhat limited to any one or two particular customers. 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. There's always a bit of dynamic marketplace here, and we're used to it.
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, and we lose these small customers. Well, the assets don't go away. They end up being purchased by someone else. 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, one just last one on repurchases. You've repurchased for the first time since 2014.
Denny, we're trying to keep it two for everybody, please. Thank you.
Okay. Sorry about that.
All right.
We have a question from Bill Warmington with Wells Fargo. Your line is open.
Good morning, everyone. 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?
Yeah. Generally speaking, we have a couple of bulges in the fourth quarter and first quarter, but a lot of them are spread out through the year, but we do have a fourth and first quarter bulge.
Many of these are multi-year, particularly the larger ones.
Got it. Okay. I can't resist, given your balance sheet capacity, yet another M&A question. You had talked about the fixed income market potentially, I just wanted to ask about international specifically, given your comments around a strong non-U.S. AUM growth.
Yeah. When we've looked at the M&A generally, also if you mentioned fixed income indices, our interest in the S&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. International expansion, whether it's through exchange relationships, M&A, organic growth, is something that is very important to us. Fixed income investment in the indices business, both organic and non-organic, again, those are top priorities for us.
Well, thank you, congratulations on a solid quarter.
Thank you.
Thanks, Bill Warmington.
Our final question comes from James Friedman, Gary Wei with Susquehanna. You may ask your question.
Hi, it's James Friedman. Thanks for taking my question. Stock's up a couple of percent, if you were wondering. I'll just ask my two upfront. I know you're there and I'm here. I'll just ask my two upfront, both about ratings. Is there any seasonality, Jack Callahan, to call out in the public sector? I know public sector has state and local has a June fiscal year, federal has a September. Is there any state and local seasonality? My second question is about TLAC, the total loss absorption capacity. If you could just share a couple of one-liners about your expectations about TLAC. Thank you.
Okay. Yeah. I'll take this. This is Doug Peterson. On the seasonality, there really is not any seasonality in the fundraising in the public finance sector. What has 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 six 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. 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.
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 first quarter, on more of a structural basis because of precisely the point that you just raised, TLAC is going to require the largest banks, all those with more than $50 billion of assets, to do some sort of a capital raise of senior debt. 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. 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 first quarter had a strong beginning.
It was a good start to the year. All of our business units achieved revenue and adjusted operating profit growth. The margin improvement of 380 basis points is something that we want to keep working towards over time to sustain. We achieved the adjusted diluted EPS of $1.09, 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, very importantly, also fostering a robust risk and compliance culture and managing our mitigating risks throughout the entire company.
We're pleased that we had a good beginning to the first quarter of the year, and we look forward to working with all of you and speaking with you and our shareholders throughout the year. 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&A session, will be available in about 2 hours. The replay will be maintained on McGraw Hill Financial's website for 12 months from today and for 1 month from today by telephone. On behalf of McGraw Hill Financial, we thank you for participating and wish you good day.