S&P Global Inc. (SPGI) Q4 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to McGraw Hill Financial's Fourth Quarter and Full Year 2014 Earnings Conference Call. I would like to inform that this call is being recorded for broadcast. [Operator Instructions] To access the webcast and slides, go to www.mhfi.com, that's M-H-F-I for McGraw Hill Financial, Inc., dot-com, and click on the link for the quarterly earnings webcast. [Operator Instructions] I would now like to introduce Mr. Chip Merritt, Vice President of Investor Relations for McGraw Hill Financial. Sir, you may begin.

Thank you. Good morning. Thanks for joining us for McGraw Hill Financial's Fourth Quarter and Full Year 2014 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's. The earnings release contains exhibits that reconcile the difference between the non-GAAP measures and the comparable financial measures calculated in accordance with U.S. GAAP. Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in 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 statement 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 that we do have some media representatives with us on the call. However, this call is intended for investors, and we'd ask that questions from the media be directed to Jason Feuchtwanger in our New York office at (212) 512-3151. At this time, I'd like to turn the call over to Doug Peterson. Doug?

Thank you, Chip. Good morning, everyone, and welcome to the call. At the beginning of 2014, during our Investor Day on March 18, we laid out our vision for creating growth and driving performance at McGraw Hill Financial. And as you can see, we made great progress. We completed the rationalization of all of our media assets with the sale of McGraw Hill Construction. We also resolved significant legal and regulatory matters. While these settlements resulted in a meaningful loss of net income for the quarter, our businesses are performing very well. Our adjusted results, which is the basis that we use to manage our company, show just how well these businesses are doing. Despite the headwinds of a strong U.S. dollar and collapsing oil prices, in 2014, the company achieved 7% growth in revenue from continuing operations, as clients around the world increasingly sink -- seek the essential intelligence we provide. Importantly, every business unit delivered top line growth and margin improvement. The company also delivered a 280-basis-point improvement in adjusted operating profit margin. The combination of increased revenue and improved profitability led to the generation of more than $1 billion in free cash flow for the year. We also added talented leaders to the management team. Imogen Dillon Hatcher was named President of S&P Capital IQ, and Lucy Fato appointed Executive Vice President and General Counsel. These are capable leaders who are already making a difference. One of the most significant developments in the quarter was the resolution of legal and regulatory matters with the Department of Justice and the Attorneys General of 19 states and the District of Columbia; CalPERS, relating to 3 structured investment vehicles; the U.S. Securities and Exchange Commission and the Attorneys General of New York and Massachusetts; and several private litigations stemming from the financial crisis. As a result of these settlements, we recorded a fourth quarter charge of $1.552 billion. Now let me provide more color on our 2014 accomplishments. During 2014, we expanded our global footprint and reach. Platts acquired Eclipse and relocated its head office to London. Standard & Poor's Ratings Services acquired BRC Investor Services in Colombia. S&P Capital IQ added private company financial data for scores of Australian, Brazilian and Indian companies. S&P Dow Jones Indices continued to partner with important exchanges around the world, reaching or expanding agreements with the Bolsa de Valores de Lima, Bolsa Mexicana de Valores, Bovespa and the Korea Exchange. And J.D. Power launched financial services offerings in Southeast Asia and Australia, as well as a digital automotive retail performance improvement platform in China. As we look at the company's financial performance over the last 3 years, you can see consistent improvements in revenue, margin and EPS. Revenue from continuing operations has grown at a 10% compounded annual growth rate. Our adjusted margins have improved 680 basis points from 21 -- 29.1% to 35.9%. And we've achieved a compounded annual growth rate in earnings per share of 24%. Now let's turn to our 2014 results. Revenue increased 7% year-on-year, adjusted operating profit increased 17%, adjusted operating margin increased 280 basis points and diluted adjusted EPS increased 20%. All of our business units delivered revenue growth, increased adjusted operating profit and improvement in adjusted operating margins. This balanced contribution across all business units is a core strength of McGraw Hill Financial. As we look at the fourth quarter, we finished the year with strong results. Revenue grew 7%, with all business units contributing mid- to high-single-digit growth. Meaningful adjusted margin expansion continued. Although it should be noted that in the fourth quarter 2013, S&P Dow Jones Indices recorded a $26 million noncash impairment charge impacting those results. Notwithstanding this charge, the adjusted margin would still have increased significantly. And fourth quarter diluted adjusted EPS increased 23%. Our global footprint continues to expand as international revenue growth of 8% outpaced domestic growth of 7%. In this chart, you can see that Commodities & Commercial Markets, in particular, delivered the strongest international revenue growth. Now let me turn to the individual businesses, and I'll start with Standard & Poor's Ratings Services. In 2014, revenue increased 8%, adjusted operating profit grew 13% and the adjusted operating margin increased 190 basis points to 43.8%. And during the quarter, revenue increased 8%, adjusted operating profit jumped 18% and the adjusted operating margin increased 380 basis points to 42.2%. S&P Ratings Services continues to make progress in improving margins. In fact, adjusted expenses in the quarter only increased 1% despite elevated costs related to recently resolved legal and regulatory matters. Reviewing the next slide, non-transaction revenue growth, both in 4Q and for the full year, was driven by annual fees derived predominantly from frequent-issuer relationship fees and surveillance and from Rating Evaluation Service revenue. Demand for corporate debt ratings and bank loan ratings drove overall 2014 transaction revenue. While in the fourth quarter, growth was driven by demand for corporate and public finance ratings. If we turn to issuance, U.S. and European trends diverged in the fourth quarter, with 20% increase in U.S. issuance and a 12% decrease in European issuance. And this mirrors the macroeconomic trends of growth in the U.S. and uncertainty that we saw in the fourth quarter in Europe. Fourth quarter issuance in the U.S. was quite strong across all dimensions. Investment-grade increased 22%, high-yield increased 17%, public finance was up 23% and structured finance also rose at 14%, driven by CLOs, ABS and RMBS. In Europe, although corporate issuance was very weak, structured finance increased 49%, especially through a surge in RMBS through a refocusing of the United Kingdom funding for lending scheme, away from mortgage lending. This next chart depicts the number of European corporate issuers, a very important trend that we're watching. You can see a significant increase in our European customer base in the past 2 years. In order for European companies to meet their borrowing needs, they're increasingly turning to the capital markets. While quarterly issuance volumes ebb and flow, this is a very bullish long-term trend. Now let me turn to Capital IQ. In 2014, in S&P Capital IQ, organic revenue grew 7%, adjusted segment operating profit grew 18% and adjusted margin increased 190 basis points. After 2 years of investments, the business delivered adjusted operating margin improvement for the year. And the fourth quarter results were largely consistent with the full year results. Let me add a bit more color on full year revenue growth in the 3 business lines in 2014. S&P Capital IQ Desktop & Enterprise Solutions revenue increased 8%, and this was principally driven by an 11% increase in Desktop revenue. S&P Credit Solutions revenue increased 6% from a 10% increase in RatingsXpress. In the smallest category, S&P Capital IQ Markets Intelligence, revenue decreased 3% overall. While Leveraged Commentary & Data and 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&P Dow Jones Indices. In 2014, this business delivered a 12% increase in revenue, with a 32% increase in adjusted operating profit. Revenue growth was achieved across every dimension of the business: ETF AUM, mutual fund AUM, derivatives and data subscription. In 2014, every dollar of incremental revenue growth resulted in $1 of incremental adjusted operating profit. This resulted in a 2014 adjusted segment operating profit margin of 63.6%. The fourth quarter results generally mirrored the results for the full year, except that the impacts from the $26 million impairment charge in the fourth quarter of 2013 had an impact on year-over-year comparisons. If we turn to the key business drivers. The ETF industry experienced record inflows of $331 billion in 2014. The trend towards passive investing continues, and S&P Dow Jones Indices, with its broad and innovative array of indices, is at the forefront of this trend. ETF AUM associated with our indices increased 25% from the end of 2013 to $832 billion. Importantly, 15% of this growth was a result of new inflows. Mutual fund AUM associated with our indices reached another major milestone in 2014, surpassing the $1 trillion mark. With volatility roaring back in the fourth quarter, derivative trading volumes picked up with daily activity based on the S&P Dow Jones Indices growing 20%. But for all of 2014, yearly volumes only increased 4% as volatility was very, very low for most of the year. On to Commodities & Commercial Markets. As a reminder, McGraw Hill Construction was sold and its results moved to discontinued operations, thus, our financials for 2014 and 2013 do not include these results. On a continuing operations basis, 2014 organic revenue, excluding the impacts of the Eclipse acquisition and the Aviation Week divestiture, grew 9%. The adjusted operating margin increased 130 basis points to 34.3%. The 130 basis points adjusted margin improvement from continuing operations is only part of the story. Taking into consideration the sale of McGraw Hill Construction, as well as margin improvements for continuing operations, the adjusted operating margin actually increased 370 basis points. Fourth quarter organic revenue from continuing operations increased 7%, and the adjusted operating margin decreased 120 basis points. During the fourth quarter, margins were impaired by timing of investments in J.D. Power to fully operationalize next-gen platforms and extend PIN data. By investing in new global products, global workflow tools and client delivery platforms, [indiscernible] J.D. Power to achieve continued revenue growth. In addition, the acquisition of Eclipse had a modest negative impact on margins. For Platts, fourth quarter revenue was the strongest of the year, capping high single-digit organic revenue growth for 2014. With a backdrop of dramatically reduced oil prices, Petroleum, the largest category, delivered high single-digit growth in both the quarter and the year through increased demand for price assessments and market data subscription. By providing transparent pricing data and analysis, Platts assisted customers in managing commodity price volatility. Based on recent investments in Steel Business Briefing and Kingsman, Metals & Agriculture delivered the greatest rate of growth in 2014 at 34%. Global Trading Services' revenue increased in the fourth quarter, primarily in Metals & Agriculture, but was down for the year. Despite increased oil volatility, trading, based upon our price, remains subdued due to regulation and the exit of several financial institutions from the business. Finally, J.D. Power finished the year with its highest revenue quarter, delivering low-single-digit revenue growth in the quarter and high single-digit revenue growth for the year. Asia revenue led the way with 10% growth for the year. Overall, in both the quarter and the year, growth was paced by gains in the auto business, thanks to PIN and our consulting business. The second largest contributor to 2014 growth was advertising licensing revenue from customers' usage of the J.D. Power brand, and this advertising extends well beyond the auto sector. Global Services industry, which is all of our non-auto businesses, delivered low single-digit growth in 2014. In summary, the company delivered solid yearly results, while also completing our portfolio rationalization and resolving significant legal and regulatory matters. It has been gratifying, particularly with all our business units contributing to growth in revenue from continuing operations and significant margin improvement. Thanks to the effort of some 17,000 employees around the world, we delivered continued adjusted operating profit margin improvements of 280 basis points for the company. And the combination of strong revenue growth and adjusted margin expansion yielded strong diluted adjusted earnings per share of $3.88. As we turn to 2015, I want to reiterate our focus on creating growth and driving performance. We're introducing guidance of mid-single-digit revenue growth and adjusted earnings per share of $4.35 to $4.45. As we launch 2015, the entire organization is aligned around key themes, and these include strengthening customer and stakeholder engagement, accelerating our international growth, sustaining our margin expansion and having discipline in capital allocation, and all the while, managing and mitigating risks 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 discuss several items in more detail related to fourth quarter and full year performance. I will recap consolidated income statement results both for the quarter and the year; review the recent charges related primarily to legal regulatory items; I will also review the restructuring actions taken across the portfolio in the quarter, including an update on our progress on the $100 million cost-reduction program that we introduced early last year; discuss the free cash flow results; provide a return of capital update; and finally, I will provide additional color on our 2015 guidance. Let me start by reviewing our fourth quarter results. Please note that these figures are adjusted financials, as our GAAP results were materially impacted by settlements and, to a lesser extent, restructuring actions. I will discuss the GAAP results in just a moment. As Doug noted, our portfolio of businesses is performing quite well and closed out 2014 with solid results. In the fourth quarter, revenue grew 7%. Adjusted segment operating profit grew 25%, with all 4 business units contributing to this growth. Adjusted unallocated expense was flat versus a year ago. Total expenses declined more than 1%, contributing to an adjusted consolidated operating profit growth of 28%, a 570-basis-point increase in the company's adjusted profit margin. The tax rate on an adjusted basis was 32%, as the full year came in a bit better than expected. Adjusted net income increased 22%, and adjusted diluted earnings per share increased 23% to $0.95. The average adjusted diluted shares outstanding decreased by 1%, due in part to share repurchase activity completed in the first half of 2014. The impact of foreign exchange in the quarter was a bit more significant versus previous quarter, although it was relatively modest overall. Revenue was negatively impacted by approximately 1 point of growth. Operating profit benefited by approximately 2 points of growth due to the ForEx impact on non-U.S.-denominated expenses. Now let's turn to the full year results. Revenue grew 7% to well over $5 billion. The impact of ForEx on full year revenue is negligible. Adjusted segment operating profit grew 16%, with all 4 business units contributing to this growth. Adjusted unallocated expense increased 7%, primarily due to an impairment charge associated with the sale of a corporate aircraft and a onetime expense associated with the sale of a data center that we recorded in the second quarter. Total adjusted expenses for the full year increased to less than 3%, contributing to adjusted operating profit growth of 17%, driving a 280-basis-point increase in the company's adjusted profit target. The tax rate on an adjusted basis was 33.1%, a reduction of 80 points versus a year ago. Overall, adjusted net income increased 19%, and adjusted diluted earnings per share increased 20% to $3.88. The average adjusted diluted shares outstanding decreased by 1%. Overall, a strong year of performance. Because of the significant legal and restructuring charges, we added this bridge, which I hope will be instructive. During the year, the company recorded $1.7 billion in charges largely associated with regulatory matters and, to a lesser amount, restructuring. These charges were predominantly recorded in the fourth quarter. The after-tax impact of these items was approximately $1.4 billion. The effective tax rate is approximately 20% in aggregate as a result of all of these charges. To provide additional clarity, we have broken out all of the second half charges related specifically to legal/regulatory matters, which totaled just over $1.6 billion. We would expect all of these payments to be made by the first quarter of 2015. I would note that in addition to significant settlements with the Department of Justice, the Attorneys Generals of set 19 states and the District of Columbia and CalPERS, there was $17 million in additional charges associated with the final settlement with the SEC, New York and Massachusetts, and $35 million associated with settlements in several private litigation items stemming from the financial crisis. Because of the strong balance sheet we have maintained, we have ample flexibility to make these payments. Most of the payments will come out of cash on hand and our $1 billion credit facility, which remains untapped at this point in time. Now let me provide some color on restructuring actions in the quarter. Last year, we established a cost-reduction target of at least $100 million by the end of 2016. One aspect of that program was identifying efficiency opportunities in our work processes without compromising the quality and timeliness in how we serve customers. As a result, there have been restructuring actions across the portfolio. During the second half of 2014, we took restructuring charges totaling $86 million, with $41 million in the fourth quarter. These actions are a meaningful part of our ongoing cost-reduction program to sustain margin expansion. Now let me provide an update on the progress we are making overall on this cost-reduction program that we discussed in our Investor Day last year. Our goal has been to achieve more than $100 million of cost reduction over a 3-year period. The pieces of the pie have been sized to display the actual cost savings that we have identified in restructuring our workforce, streamlining our real estate portfolio, leveraging our procurement scale and reducing corporate costs. We are very much on track with this cost-reduction program and now target exceeding initial target, as $140 million in opportunities have been identified. We expect that more than 3/4 of these savings will be realized by the end of 2015. Let me remind you that some of our cost reduction will be reinvested in growing our business. For example, while Platts is reducing its workforce in some areas, it is adding it into others, namely its Metals & Agriculture business. Now let me update you on free cash flow. Our guidance was to achieve free cash flow of approximately $1 billion, and we achieved that. Our cash balance at the end of 2014 was approximately $2.5 billion. In 2014, our return of capital in dividends and share repurchases was $688 million. 2014 share repurchases totaled 4.4 million shares. We did not repurchase any shares during the fourth quarter. Next, I'd like to provide you with a broader view of our return of capital. The company has an outstanding record of returning cash to shareholders. We have returned approximately $3.3 billion in the last 3 years in share repurchases and dividends. We announced today that for 2015, the Board of Directors has authorized a 10% increase in the dividend to an annual payout of $1.32 per share. This marks the 42nd year of sustained dividend increases. As we look forward, we will remain disciplined in our capital allocation strategy. But now that we have addressed the most significant legal/regulatory matters facing the company, we can put more focus on driving shareholder value. Just to remind you on our priorities on the allocation of capital: first, we will invest in organic growth; second, continue to pursue attractive acquisitions to expand the portfolio; third, sustain growth in our dividend, as today's announcement demonstrates; and finally, continue to selectively repurchase shares. We currently expect to resume your share repurchase program subject to market conditions. As a reminder, we have 45.6 million shares remaining under our existing share repurchase authorization. Furthermore, we will also consider additional leverage in the balance sheet, as appropriate, to both create growth and drive shareholder value. Finally, I'd like to provide more detail on our outlook for 2015. Guidance is as follows: Mid-single-digit revenue growth. We are mindful that the strong U.S. dollar will likely negative our revenue growth a bit. We are targeting more than 125 basis points of adjusted profit margin improvement, a tax rate on an adjusted basis of approximately 33%, adjusted diluted earnings per share of $4.35 to $4.45. You should assume approximately $100 million of capital expenditures. And we are targeting free cash flow of greater than $1.1 billion, excluding the payments related to these legal and regulatory settlements. In closing, our businesses are performing very well, as clearly demonstrated in our 2014 adjusted operating results and this 2015 guidance, in line with our longer-term financial goals. Overall, we remain focused on creating growth and driving performance. Thank you for joining us this morning for the call. Let me turn it back over to Chip Merritt to open up the Q&A session.

Thanks, Jack. [Operator Instructions] Operator, we will now take our first question.

Alex Kramm, UBS.

I think we'll -- let's start with Jack. Jack, I think you when our appetite a little bit here at the end there with your comment on leverage. You've made some comments in the past in terms of the capacity you think the company could take. So -- but you obviously haven't opened the door yet. So what's holding you back? Where do you think you can go? And what do you need to evaluate to potentially do -- would you do something like an ASR or something like that since you haven't been in the market in a while for buybacks?

Yes, Alex, first of all, we do anticipate resuming the share repurchase program, as we commented. But it is a new time for us, right? We do -- we've moved past this moment in time. We have more flexibility now that we've addressed some of the largest legal and regulatory issues facing the company. So yes, we could and will contemplate selectively adding leverage as appropriate, either to appropriate acquisitions and/or to accelerate share repurchases. And we have ample capacity to do that. Our goal is to remain investment grade, and so we have ample capacity to consider all those options. And frankly, we're looking forward to having that flexibility to think about those moving forward.

Okay, great. And then maybe secondly, I guess staying on the topic of the legal resolution. I think you've made comments in the past, there's been significant legal costs, obviously, running through the Ratings business. So now that a lot of this is resolved, can you kind of give us a flavor of how much that was at the end here? How quickly some of these costs are going to come down, given that there's still some ongoing issues, obviously, with some other -- and then in general, maybe just talk about the Ratings efficiency opportunities that exist outside of the legal side a little bit more?

Well, just first on legal. As we have spoken in past calls, legal spend has grown significantly. And it was probably the most significant area of expense growth in the Ratings business. As we go through 2015, our guidance does assume that our legal expense begins to decline, that probably -- particularly as we start or begin to the second quarter and beyond. So we do think it begins to add to margin expansion. That all being said, while I think we have addressed some of the major issues facing the company from a legal point of view, there will be -- there continues to be some legal issues that we have to continue to monitor. So it's not going to go to 0. But we do think it's going to make a meaningful contribution to margin expansion for the year. And then back to your other question about efficiency opportunities. I think, as you can see in the restructuring actions that we've taken, both in the third and fourth quarter across Ratings business, the team has identified -- they have a new program in place, it's called The Way We Work, and it is simplifying and streamlining the work we do every day to produce a rating on a timely fashion in a high-quality way. And we're quite confident that as we continue to drive that program, that can continue further opportunities to improve our quality and improve our turnaround time, and over time, continue to generate efficiencies.

Peter Appert, Piper Jaffray.

So Doug, given the great success you've had here early on in terms of narrowing the margin gap at both Ratings and some of the other units relative to peers, I'm wondering if you're feeling more confident in terms of your ability to get closer to some of these peers from a margin perspective.

Well, thank you, Peter, for the question. That's a valuable focus that we're talking about. As you can see from our guidance that we just gave, we're looking at increasing our adjusted operating profit margin by another 125 basis points for the whole company. It is a very important focus of ours. And obviously, in order to get it right, it requires both a quarter-by-quarter review as well as a longer-term view. And we've got initiatives to grow our top line, and we've talked about a few of them with you. Our focus on customers, which includes how we can have better penetration, our coverage, our segmentation, our pricing. And in addition to that, other ways that we can increase our jaws to get also a much more efficient focus on expenses. We do benchmark against other peers in the market. And some of them, we have better margins than others. We are looking at improving our margins. But this is a very, very big focus of the entire management team.

Understood. And then, Jack, just as my follow-up, can you give us something explicit in terms of what's assumed in terms of buybacks and the EPS guidance?

Peter, we -- our guidance does assume, let's call it, more of a foundational amount of share repurchases. Nothing, let's call it, terribly heroic. However, I think as we go through the year, we'll be obviously -- we'll have some opportunities to come back and reevaluate that.

Our next question comes from Manav Patnaik, Barclays.

Just firstly on the guidance as well. The mid-single-digit revenue growth, does that include the negative FX impact? And also, could you help us out with some of your currency exposures on revenue and cost side and how we should try and model there?

Yes, no, our revenue guidance does assume a view of the current ForEx environment, which is quite challenging right now. And we do believe that it -- in terms of our initial assumptions, it's probably costing us, in revenue, about 1 point to 1.5 points in growth as we go into the year. A few interesting things, while about 40% of our -- a little over 40% of our revenue is from foreign-sourced customers, we actually bill in dollars for about 80% of our revenue. So we're not that -- the exposure that we have on the revenue side is actually quite limited. And the major currencies there would be the euro, the sterling and the rupee. And then on the other side, we do have some expense exposures that we need to monitor and stay on top of. And just as a reminder, we have close to 8,000 associates in India, and so, obviously, a movement in the rupee can have a significant impact on our expense base.

Okay. And then just coming back to the question on the margins relative to the legal costs. I understand you said you still obviously have some remaining lawsuits and so forth out there on the private side. So just 2 parts to this. One, I guess, can you just give us an update on what's remaining on the legal side? And then if there's any way to just sort of quantify the relative exposure in the cost base on what you've settled and it's going to sort of get out of the cost base versus what's remaining?

Look, there's -- I think right now, relative, we have about 2 dozen cases outstanding, a good number of them outside of the United States. Nothing is really pending for trial right now. So we'll continue to monitor and work through those. But if there's opportunities to pragmatically resolve those issues, I would just point to today's release. There were -- there was a charge that we took for $35 million that addressed settlement-related issues with a good number of cases. So while there may be -- I don't think the financial exposure is quite any way is relative to some of the issues -- other issues that were resolved in the quarter.

Our next question comes from Greg -- or from Vincent Hung, Autonomous.

Just a couple of questions. So the first one, sorry, just to go back on the legal front. Within the full year guidance, can you just give us like a rough sense of like what percentage of legal cost reduction you're baking in, like 50%, 20%, et cetera?

No. We -- all I'd like to say is that we do believe it's going to make a solid contribution to the ongoing margin expansion within Ratings. But that all being said, it's quite likely we're going to spend a little bit more money in the area of compliance and risk management. But net-net, we do overall believe it's going to make a significant contribution to future margin expansion.

Okay. And just on the cost reductions. So if I'm comparing the slide that you gave versus the slide that you gave at Investor Day, I don't see anything on data acquisition cost anymore or technology leverage. Is that just now baked into restructuring or has that already been taken?

There was -- in the area of technology, there is some savings that's baked into procurement. So just to kind of simplify the message, there were places and areas of technology where we had some opportunities to leverage our scale to reduce the number of the supplier -- of some suppliers who are using some key areas of software development. And that's providing some savings. So they -- we see -- as a reminder, back on Investor Day, the purpose of that slide was to lay out the target and to inform investors the various different places where we were going to look for savings. And now that we have done more of the work, I think this -- what the slide today gives you a better representation of what we actually expect to realize.

And our next question comes from Craig Huber, Huber Research Partners.

My first question has to do with the Indices business. Can you just explain, if you would, why the Indices revenue growth slowed in the fourth quarter versus the trend you saw in the third quarter? And also, why it was down sequentially, if you would?

Well, part of it was the -- Craig, we -- this is related a little bit to that impairment charge we took a year ago in the third quarter and in the fourth quarter of '13. So we did lose a license. So that did -- and that really did not start to impact the P&L at all until the third quarter, and then more meaningfully in the fourth. And I suspect it's also going to be a bit of a drag as we go into the first part of next year. Overall, in terms of the underlying performance of the business, we were actually quite pleased with the way the business finished the year. And assets under management actually ended up a bit ahead of our expectations.

And then also on the debt side, could you just help investors understand how much leverage, on a relative EBITDA, can you put on the balance sheet if you want to buy back stock or through acquisitions and then not hurt your investment-grade credit rating? I mean, how far can you go here, please? And which -- along those lines, what's your debt target ratio forecast?

Well, I mean, I think -- let's put this in terms of -- as a leverage multiple. So somewhere between 2.5x to 3x EBITDA. So I think that would be sort of the range, I think, that we can comfortably stay solidly investment grade.

Our next question comes from Robert Simmons, Janney Montgomery Scott.

I'm stepping in for Joe Foresi. I was wondering if you could give us just any indication of what you're expecting on the margin front across all businesses, but in particular, in the Ratings business?

We don't historically give such business-by-business margin on guidance at this point. I would point back that overall, on a consolidated basis, we do expect margin expansion at the consolidated level of at least 125 basis points. But just to put a little bit more color on it, it's hard to achieve that if Ratings particularly does not make some contribution, just kind of given its overall size in the portfolio. On the other hand, if you'd like to go maybe to the other extreme, it's kind of hard to really challenge our Indices business to kind of significantly expand their margins when they're already at 63% or 64%. So I do think there's -- I think there is sort of a range of opportunity that we're mindful as we start to build our overall margin expectations for the business.

Okay, great. And can you give me color on your decision-making process on how you decided to settle all of these big issues that are out there?

Well, we don't normally give a lot of details about our negotiation strategies. But as we've said in our materials that we issued, this was a time when given the -- where we were in the discovery process and the overall litigation process, it was to the benefit of all parties to resolve these issues and move on.

Our next question comes from Bill Warmington, Wells Fargo Securities.

So a couple of questions. First was, I wanted to ask if there was something that you could do to -- or you're working on to lessen the impact of the settlement in terms of tax deductibility, insurance, use of overseas cash? And then on the Index business, I was going to ask if you could comment on the M&A environment and potential opportunities there that you are thinking about.

Just on the -- if I was going to limit my comments more narrowly in terms of the legal regulatory settlements to just the Department of Justice, the items with the 19 states and CalPERS, the effective tax rate on those charges is a little less than 20% or high teens, roughly in that area. So there is some tax deductibility. It's not total. The -- right now, we don't see a need, and we're not confident the most -- the best economic choice is to use offshore cash, even though that cash is available. Just kind of given the cost of funding that we can access through our credit facility, that's probably the more pragmatic solution for us if we need a bit of funding here. So that's probably more -- that's probably the path we're going to go down.

And on the overall environment, if you want to talk about the business environment of the Index business and potential M&A. As we've mentioned in our prior disclosures, as well as our discussions about the Index business, we continue to focus on international expansion. As you know, we set up deals last year in Mexico, Peru, Colombia, Brazil, Korea, Taiwan and then across many African nations. We think that this is a secular trend. It's one that we should be heavily focused on. And that also includes building relationships with exchanges around the world. And then another area that we believe is going to be growth is in fixed income indices. So our major growth focus is on international expansion and on fixed income indices. Our base case is based on organic growth and investments using our own platform. And clearly, if there were opportunities or different properties were available, we would always like to take a look. But we don't comment on any speculation about our acquisition activities.

Our next question comes from Tim McHugh, William Blair.

I just want to ask about the comment about seeing 3/4 of those -- that $140 million, I guess, by the end of 2015. I guess, just to clarify. Do you expect that to flow through the income statement or, I guess, actions taken and I guess to eventually realize that? Just trying to get how -- a sense of whether we're going to -- we've seen that in your numbers for '15 or it's more future years?

Yes. No, look, I think we will -- of the $140 million, we'll realize 75% of that by the end of 2015. So to be clear, we started -- as we started to work these programs, we started to get some benefits last year in '14. And so there's a bit of a benefit that we've already realized in our numbers. We do think in '15 -- and '15 is probably the year we'll get the most benefit, so we do think we'll get approaching half, maybe not quite, of the benefit in this year. And that ties very much to the guidance that were given on ongoing margin expansion. And we expect we'll continue to get some additional benefit as we go into '16. And some of these things are timing. Just to give you one real good example, we already have started to get some savings from our exit of our headquarters building at 1221 Sixth Avenue. But we still have employees there. We won't be in a position to shut that down until later this year. Once we do that, then we'll have completed that program. So we started to feather some of these savings in. And we think what will -- we're in good shape to both exceed the target and to make this a meaningful contribution to our margin expansion plan.

Okay. And then just I heard the comments about the quarter, but I guess thinking for -- on Platts, just given the price of oil, can you elaborate at all on kind of the -- how you think about that and what you're hearing back from customers, given some of them are probably pressured right now?

Yes, that's one of the areas we're spending a lot of time looking at. In the Platts business, we're looking obviously at the different parts of the entire value chain. We have a very small portion of our business is with people that are wildcatters and in the fracking and shale activity industry that represents about 3% of our total business. But what we're also seeing during this period is that we are having very high retention rates of our services as we normally do. There is a lot of demand for information about oil prices and oil fundamentals, petroleum products, et cetera, in this kind of environment. But we believe that we're well positioned to serve the markets and serve their information needs. But at the same time, we're building flexibility into our workforce and into our planning for 2015, in case there is any sort of downturn in volumes in the business that we see.

And our final question comes from Ed Atorino, Benchmark.

I just want to congratulate you for sort of cleaning the slate. Any little pieces left that remain to be resolved? Or is it basically done?

Ed, well, thank you for being on the call, and thank you for the question. What we're really looking for is now taking advantage of the excellent work that's been done the last couple years to rationalize the portfolio, to put in place a culture of high-quality customer engagement, of focusing on growth, of ensuring that we have a best-in-class control, and that this is the kind of platform that'll allow us to continue to grow the company and deliver results. So this is really what we're all about. It's being about our customers, having great engaged employees and delivering for our shareholders. Well, let me thank everyone for joining us. We are very excited about our prospects for 2015. As you've heard us, we think that we're well positioned for growth and that we've got a great focus on providing superior customer engagement, looking at international opportunities and very, very importantly, focused on our margin expansion. That's something we've got a track record over the last couple years. We want to continue to deliver that. I look forward to updating all of you throughout the year, and thank you again very much.

That concludes today's 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 we wish you a good day.