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McGraw Hill Financial Inc (NYSE:MHFI)

Q2 2013 Earnings Call

July 25, 2013 8:30 am ET

Executives

Robert S. Merritt - Vice President of Investor Relations

Harold Whittlesey McGraw - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Douglas L. Peterson - President

John F. Callahan - Chief Financial Officer and Executive Vice President

Kenneth M. Vittor - Executive Vice President and General Counsel

Analysts

William G. Bird - Lazard Capital Markets LLC, Research Division

Manav Patnaik - Barclays Capital, Research Division

Alex Kramm - UBS Investment Bank, Research Division

Craig Huber

Peter P. Appert - Piper Jaffray Companies, Research Division

Douglas M. Arthur - Evercore Partners Inc., Research Division

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

David Reynolds - Jefferies LLC, Research Division

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Operator

Good morning, and welcome to McGraw Hill Financial's Conference Call. I'd like to inform you this call is being recorded for broadcast. [Operator Instructions] To access the webcast and slides, go to www.mhfi.com -- that's MHFI for McGraw Hill Financial, Inc. dot-com -- and click on the link for the second quarter 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.

Robert S. Merritt

Good morning. Thank you for joining us this morning for McGraw Hill Financial's Second Quarter 2013 Earnings Call. Presenting on this morning's call are Harold McGraw III, Chairman, President and CEO; Doug Peterson, President of Standard & Poor's Ratings Services; and Jack Callahan, Chief Financial Officer. Also joining us is Ken Vittor, our General Counsel.

This morning, we issued a news releases 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. The results also reflect the reclassification of McGraw-Hill Education as discontinued operation.

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 Form 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 new 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're aware that we do have some media representatives with us on the call. However, this call is intended for investors and would ask that questions from the media be directed to Jason Feuchtwanger in our New York office at (212) 512-3151 subsequent to this call.

Now I would like to turn the call over to Harold McGraw III. Terry?

Harold Whittlesey McGraw

Okay. Thank you, Chip. And Chip, you do such a great job representing all our shareholders. I thank you for that. Good morning, everyone, and thanks for being with us, and welcome to today's conference call.

I'd like to begin this call by summarizing the highlights that we will cover today. Our second quarter results contributed to the strong momentum that we have delivered since reporting McGraw Hill Financial results separately. In fact, so far this year, our revenue has increased 15%, and adjusted diluted EPS has increased 30%. We will provide a legal update. I know this is a topic that many are watching closely. We also have our next President and CEO, Doug Peterson, on today's call to make some comments about his new role and discuss the results of Standard & Poor's Ratings Services, the business he is currently running, and to give you a chance to ask him any questions during the Q&A. We will also discuss our plans to take a larger stake in CRISIL. This is India's largest rating agency. We'll also discuss very briefly our recent announcement to sell the Aviation Week group. And lastly, as part of Jack Callahan's financial discussion, we will share our newly increased 2013 EPS guidance.

All right, so let's turn to the financial performance during the second quarter. Our initial full year 2013 guidance called for a high single-digit revenue growth and approximately 15% diluted adjusted EPS growth. However, during the second quarter, we delivered 17% revenue growth and 31% diluted adjusted EPS growth, reaching $0.92 per share. Our 3 strongest benchmark businesses led the growth again this quarter: Standard & Poor's Rating Services, Platts and S&P Dow Jones Indices. Cost control and accelerated share repurchase program also contributed to the EPS increase.

While we're clearly off to a very solid start, keep in mind that comparisons will become a little bit more difficult because of each quarter of 2012, we delivered sequential increases in revenue and diluted adjusted earnings per share. In addition, Doug will discuss recent trends in issuance, of which we need to be mindful of.

We shared this chart with you last quarter but felt that it was important to share it again as the makeup of the company has changed so dramatically. These 2 pie charts should help put into perspective the revenue and operating earnings contribution of each of our business segments. Not surprisingly, Standard & Poor's Rating Services is our largest segment, with each of the remaining 3 contributing a comparable level of operating profit.

This morning, I also want to focus on some of the things that are of interest to everyone. Since our legal issues are attracting some attention of late, I thought we would bring them to the forefront of today's discussion. Let me go through some of this with you. With regard to the Department of Justice case, oral argument was held on July 8 in the Federal Court in California. On July 16, the court denied our motion to dismiss. The decision included the following statement: "The court finds that the government has sufficiently pleaded the intent required to support its fraud claims. Any disputes over the veracity of these claims or contested facts are properly challenged at a later stage of litigation." It also stated, "S&P might disagree with the government's versions of these facts, but the opportunity to challenge such factual allegation comes later in the litigation process." While I'm sure that all of you would like us to discuss our view in great detail and provide additional support for our position, the court has made it abundantly clear that it does not want either party trying this case in the media. Since we will adhere to that request, we will not provide any additional commentary regarding the complaint, except to repeat what we've said all along that it has no merit, and we look forward to demonstrating that in the court.

With regard to the state actions, in June, the Judicial Panel on Multidistrict Litigation, that's JPML, Judicial Panel on Multidistrict Litigation, transferred most of the State AG actions to a single federal judge in Manhattan. The JPML found, "That these actions involve common questions of fact and that centralization of all these actions in the Southern District of New York will serve the convenience of the parties and witnesses and promote the just and efficient conduct of this litigation." The New York Federal Court must now decide whether the State AG actions were properly removed to the federal court. Oral argument on this issue is scheduled to be held on October 4.

Please note that these transferred federal actions involve most of the State Attorney General cases. However, California, Illinois and Connecticut have not been consolidated with the other State AG cases and will remain as separate actions in state courts.

In other litigations, we continue to build upon our positive track record during the quarter. 33 cases have now been dismissed outright, including the June dismissal of the Tolin case by a federal district court in New York City. In the Tolin case, the court stated, "The complaint fails by a wide margin to allege adequately that S&P did not believe the ratings when it made them. The complaint fails entirely to allege, let alone with particularity, what S&P's state of mind was at the time it issued the particular ratings at issue in this case."

Now 11 dismissals by lower courts have been affirmed by higher courts, and 10 cases have been voluntarily withdrawn. That leaves us with a few dozen nongovernment cases that remain outstanding.

Some new cases have been filed very recently and, apparently, in an effort to avert the statute of limitation expirations, which is a possible defense for us after so many years passing since the issuance of the ratings at issue. Some of these new cases include other rating agencies as codefendants as well.

And in our legal and regulatory topic, the United States Supreme Court has denied the International Securities Exchange, the ISE's petition seeking review of the Illinois Appellate Court's ruling that prohibits ISE from listing or providing an exchange market for the trading of the S&P 500 and Dow Jones Industrial Average options and the OCC from issuing, clearing or settling the exercise of such ISE options without permission. This ruling just reinforces the intellectual property rights of the S&P Dow Jones Indices, as well as other index providers. This ruling supports the same legal issue that our General Counsel, Ken Vittor, who is with us this morning, first successfully defended on our behalf back in 1982.

Okay, with that, let's turn to the individual businesses, and I'll start with the S&P Dow Jones Indices. In the second quarter, organic revenue increased 6% to $94 million, and the addition of the Dow Jones Index revenue brought total revenue to $123 million. The principal driver of the organic revenue growth was a 34% increase in quarter-ending assets under management in exchange-traded funds linked to S&P Indices, which reached more than $469 billion. Including the assets under management linked to Dow Jones Indexes, assets under management reached $546 billion at the end of the quarter. It is important to note that the revenue impact is not as pronounced as the growth in assets under management, as the basis points charged are not always linear with asset growth.

Trading volume of exchange-traded derivatives increased 11%. With equity prices at or near record levels, market participants increased hedging activities, thereby driving higher daily contract volume for the S&P 500 Index Options and the CBOE Volatility Index, commonly known as the VIX, at the Chicago Board Options Exchange. This is the last quarter that we will be breaking out the revenue associated with the Dow Jones Indexes as the joint venture was in place for all of the third quarter of 2012.

While the joint venture realized $80 million of adjusted operating profits, $60 million is retained by us as 27% of the profit is forwarded to our partner, the CME. It is critical that we continue to invest in our benchmark businesses to keep the brand prominent and well understood. To that end, the company launched a new advertising campaign in The Wall Street Journal, Financial Times and other print and digital media.

And while we invest in the brand, we are also investing in the product. During the second quarter, we launched 33 new indices. Many of them deviate from our core strength in U.S. equities. Some notable examples of these new indices include non-Shariah-compliant indices, the S&P GSCI Roll Weight Select, the Dow Jones Real Estate Risk Control, Intermediate Duration Muni Yield, Korea and Nordic Low Volatility and the S&P/ISDA U.S. 150 Credit Spread. These new indices and others will help us continue to diversify and grow this important business.

With that, let me now move on to S&P Capital IQ. In the second quarter, this business delivered top line growth of 3%. Two key offerings, Capital IQ Desktop and RatingsXpress, led the revenue growth. These results were offset somewhat by declines in revenue from proprietary research. In a market characterized by customer-employee cutbacks, S&P Capital IQ delivered 16% user growth, excluding government and university users, to more than 54,000. When large enterprise accounts and broad-tiered pricing are excluded, user growth increased mid-single-digit. Adjusted operating profit decreased 7%, and there was a decline in the operating margin, as increased investment in content and technology continued to reduce some profitability. These investments are leading to innovative real time solutions beyond the QuantHouse exchange data feed business that has already been launched. S&P Capital IQ's new Portfolio Risk solution product that I'm going to discuss in a little bit more detail in just a moment, was created from the acquisition of R2, coupled with considerable investment in innovation over the past year.

But before I turn to that, I thought I would take a moment to add some clarity to the S&P Capital IQ business line. This chart depicts the 4 primary categories of the business and the capabilities that each offers. As you can see, Capital IQ is one of numerous capabilities offered within this business line. Lou Eccleston, who runs S&P Capital IQ, and his team have been working to upgrade this portfolio. The more promising pieces are receiving appropriate investment, while the pieces that don't fit are being divested or shut down. For example, we have recently moved ABSXchange, European MarketScope and FMR Australia out of the portfolio. And we expect that as progress is made, this will become a higher-margin, faster-growing business segment.

In June, S&P Capital IQ launched its new portfolio, Risk Solution, available through the Capital IQ Desktop. The product brings together leading risk and portfolio analytics acquired through last year's purchase of R2 Financial Technologies and Capital IQ's extensive market and reference data. This product is the only realtime, multi-asset portfolio risk system that enables internal and external collaboration, click-through transparency and seamless access to the broad range of reference data and functionality offered within the Capital IQ Desktop. This powerful tool provides traders and portfolio and risk managers with the ability to make decisions about pricing, hedging and capital management of multi-asset portfolios, including equities, fixed income and derivatives, all in realtime.

Okay. With that, now let me turn to the Commodities & Commercial Markets segment. Revenue here grew 8% in the second quarter, and operating profit increased 16%, resulting in record operating margin of 31.8%. Platts delivered double-digit revenue growth, while J.D. Power and Aviation Week delivered single-digit growth.

In Commodities, Platts recorded a 14% increase in revenue. Growth in petroleum product subscriptions continued to be the primary driver of this double-digit growth. In addition, licensing revenue from petroleum derivative trading increased more than 50%. Petroleum, petrochemicals, metals, agriculture product subscriptions all delivered double-digit revenue growth, while power and gas revenue were flat.

Two new price assessments for China and Greater Asia were launched during the quarter. They are designed to complement each other by providing a quick and straightforward way for traders and other interested parties to compare the prices of domestic and imported thermal coal in the Chinese market and immediately determine whether there's a price arbitrage advantage favoring one type or the other.

Over the past few years, the natural gas, oil and liquids markets have been transformed and revitalized by extraction innovations such as horizontal drilling and hydraulic fracturing. Deposits of gas and oil that were once cost-prohibitive or difficult to assess have now become cost effective and are having a profound effect on energy markets around the globe. The United States and Canada are at the center of this revolution, and the Platts North American Shale Plays Map presents a holistic view of an industry that profoundly altered our energy landscape. I cite this map because it provides a quick visual example of the breadth of data that Platts provides beyond pricing. That capability is increasingly important with the growing Marcellus Shale production of natural gas.

Commercial Markets revenue increased 2% in the second quarter, with J.D. Power and Aviation Week both delivering single-digit revenue growth. Within J.D. Power, the Asian business drove a double-digit revenue increase in automotive, which was partially offset by reduced licensing from past award recipients. McGraw Hill Construction revenue continues to be pressured by the weak U.S. commercial construction market, with growth of new products unable to overcome declines in base business. And Aviation Week revenue increased, primarily due to the MRO Americas Show and the biennial Paris Air Show, which took place in the second quarter of 2013.

As an example of the importance of the J.D. Power brand, GM is running numerous advertisements depicting the 8 recent J.D. Power Initial Quality Study awards that it received. As part of their advertising, last week, they wrapped a banner around their entire world headquarter with a picture of the 8 awards. We're very proud of that and very proud of them.

And here, J.D. Power received its own award. It is celebrating its 45th year anniversary. In 1968, a wonderful individual, J.D. Power III, Dave, established J.D. Power from his kitchen table, with a primary focus on the automotive industry. Since that time, the company has successfully influenced the everyday lives of consumers and industries worldwide and has expanded to include offices throughout North America, Europe and Asia Pacific. And all of us here are so very, very proud of all of these accomplishments, so congratulations goes out all of our J.D. Power employees. Well done, everyone.

And finally, as I mentioned previously, I'd like to again introduce McGraw Hill Financial's next President and CEO. After serving as President for 20 years, I can't believe it, after 20 years, and CEO for 15 years, it's great to have a successor of the caliber of Doug Peterson. Doug is not only a talented leader with profound industry knowledge, regulatory experience and, most importantly, unquestionable integrity. The transition is well underway. Doug and I are working through many issues, and Doug will officially begin his new position in November. And of course, after this transition, I will continue as Chairman of the Board.

So let me, at this point, turn it over to Doug to make some remarks, and then after that, we can go in any direction anybody would like. Doug?

Douglas L. Peterson

Thank you, Terry. I'm honored to be asked to lead this great company. Terry's passion, optimism and exceptional management of the company has positioned us to succeed going forward. Over the last 20 years, Terry has led this company with great success and consistent record of delivering shareholder value. Terry and the board had the vision to create McGraw Hill Financial with a focus on benchmarks, ratings and analytics. And now I look forward to leading this new, fast-growing financial intelligence company.

Before I talk about this change in leadership, let me first review Standard & Poor's Rating Services results for the quarter and then take a few moments to share some thoughts about McGraw Hill Financial and my new role.

After a strong first quarter, the business delivered an even stronger second quarter. Revenue for this segment grew 24%, setting a new all-time record for any quarter of $599 million, surpassing the previous mark set in the second quarter of 2007. Segment operating profit increased 34%, and the corresponding operating margin increased 330 basis points to more than 46%. The incremental revenue growth was the primary driver of the margin expansion.

We note that issuance declined notably after Federal Reserve statements regarding consideration of changes to current stimulus policies were made in June. While the company expects global issuance to remain generally robust, interruptions in issuance could occur as markets contemplate possible interest rate increases.

On our third quarter call last November, we shared a slide with you that showed high levels of corporate maturities that were coming due over the next several years and should support continued strong issuance, and we continue to publish research showing that information. On our fourth quarter call in February, we shared a slide with you that showed the European disintermediation opportunity. Today, I would like to share an interesting slide that depicts the correlation or, actually, lack thereof, of interest rate changes to global issuance. This slide shows 10 years of global issuance, with corporate issuance in blue, structured finance in green. The dash line is the average corporate issuance over this time period. The solid line depicts the average 10-year Treasury yield for each year. As interest rates rise, issuance actually increased. Then as interest rates declined, corporate issuance showed little change. This data and other research that we've performed shows that issuance in the last decade has not been correlated to changes in interest rates, and the issuance was more robust when interest rates were considerably higher than they are today. Frankly, there are many other forces that impact issuance, including spreads, liquidity, consumer sentiment, government policy and expected growth rates, to name just a few. We believe that if interest rates rise due to improvements in GDP growth and lower unemployment, it could be positive for issuance. However, that doesn't mean issuance won't be choppy as markets adjust to new rates. Therefore, due to upcoming corporate maturities, the European bank deleveraging opportunity and emerging market expansion, we remain optimistic about issuance levels over the next few years.

Turning back to the quarter. Non-transaction revenue grew 12%, driven by increased entity credit rating and ratings evaluation services. Excluding the acquisition of Coalition, non-transaction revenue grew 9.9%. Growth in these products is an encouraging sign that new issuers could be coming to market.

Transaction revenue increased 41% as a result of improved investment-grade and high-yield issuance, increased bank loan ratings and growth in U.S. CMBS and CDOs. Globally, growth was balanced. In fact, the revenue in each major region of the world that we track increased over 20%.

This chart shows second quarter year-over-year increases in both the United States and Europe of 10% and 25%, respectively, in issuance. Total corporate issuance reflects an 85% increase in high yield and a 24% increase in investment grade. U.S. structured issuance increased, driven by a resurgence in CMBS and CDOs, and the CDO were primarily CLOs, which grew 70% and 48%, respectively. This chart also makes clear the fact that in both the United States and Europe, second quarter issuance declined, yet despite this decline, our revenue actually increased sequentially. This is due to growth in bank loan ratings, which are not included in issuance in this chart, entity credit ratings, ratings evaluation services and CRISIL.

Some of you will have noticed that Standard & Poor's Ratings Services launched our first major advertising campaign in our history targeting U.S. markets. As part of the broader McGraw Hill Financial launch, our efforts are aimed at supporting our brand and educating stakeholders through outreach, thought leadership and strategic media placement, including print, online and radio. It's important that we proactively educate all our constituencies about our role and importance in the capital markets. Capital allows people to start and grow businesses, cities and states to build highways and hospitals and manufacturers to build factories, all of which lead to job creation.

Now I'll make a few comments about McGraw Hill Financial and my upcoming role as President and CEO. McGraw Hill Financial promotes sustainable and orderly growth in the capital and commodity markets as the foremost provider of ratings, benchmarks and analytics to financial professionals and investors worldwide. The company has built an incredible set of businesses with iconic brands and leading-market positions. With such a great collection of assets, our solid balance sheet and our strong cash flow, I don't expect to need to make any major changes to our current strategy of portfolio. However, there can be no complacency for any business in this fast-changing world. We'll need to continue to upgrade the portfolios necessary and, most importantly, ensure that we invest cash wisely.

First and foremost, before embarking on any changes, we will continue with a smooth and seamless transition. We need to put in place a new head of the Standard & Poor's Rating Services business. We have some excellent internal candidates and are looking outside the company as well. In the meantime, I will be meeting with investors, clients, public officials and employees in the coming months to discuss how McGraw Hill Financial can even better serve the financial markets.

Some particular areas of focus will be on strategy and innovation, both at the business and enterprise level. We'll look at corporate governance, our regulatory environment and, very, very importantly, capital allocation.

As we prepare for 2014, there are several key priorities to address. I need to make sure that we have a well-understood corporate vision and that our individual business strategies are aligned. There are important opportunities, both on the revenue and the cost side, for the businesses to work more closely together, and I'd like to ensure we understand and deliver these benefits.

We are all committed to the core values of McGraw Hill Financial: fairness, integrity and transparency. Most importantly, I understand that we are the stewards of shareholders' assets and must maximize the return on their investment. To the people on this call, your investment.

With that, let me now hand the call over to Jack Callahan, our Chief Financial Officer, for additional details on the financials. Thank you.

John F. Callahan

Thank you, Doug, and good morning to everyone joining us on the call. This morning, I want to briefly discuss several items on our performance and the outlook for 2013. First, I want to recap key financial metrics in the quarter and review the modest onetime costs that were incurred. Second, I will provide some additional detail related to the balance sheet and year-to-date cash flow. And finally, I will discuss share repurchase activity, our intent to increase our ownership of CRISIL and the recent divestiture of Aviation Week.

As Terry just discussed, while our first quarter was strong, our second quarter was even better. Revenue grew 17% to $1.25 billion, with organic revenue growing 13%. Adjusted operating profit grew 29%, driven primarily by the strong results in Standard & Poor's Rating Services and Commodities & Commercial Markets. Adjusted unallocated expense increased 4%. Overall, the margin expansion was significant year-on-year, as consolidated adjusted operating profit margins increased over 300 basis points to 35.7%.

The tax rate declined 250 basis points to 35%, while noncontrolling interests grew $20 million, both primarily due to the impact of the S&P Dow Jones Indices joint venture. The tax rate also benefited from certain ongoing tax planning activities.

Adjusted net income from continuing operations increased 28%, and the impact of our accelerated share repurchases can be seen in the adjusted diluted earnings per share growth of 31%.

Our Growth and Value Plan costs continue to wind down. During the second quarter, we reported $10 million of costs related to professional fees and outsourcing.

We continue to maintain an exceptionally strong balance sheet. At the end of the quarter, we had $1.9 billion of cash and approximately $800 million of long-term debt. We intend to maintain a strong balance sheet going forward, balancing investments targeted at building the business and, as appropriate, returning cash to shareholders.

Our free cash flow during the first 6 months was $145 million. This was negatively impacted year-on-year by 2 large items. First, because of Hurricane Sandy, the IRS allowed fourth quarter estimated tax payments that are normally made in December to be paid in February. This payment was $130 million and was paid in the first quarter. The second item was the $77 million payment associated with the legal settlement that was included in our first quarter results. Including the impact of these items, our operating cash flow guidance remains $650 million to $700 million.

I am pleased to announce that the $500 million accelerated share repurchase transaction was completed earlier this week. As we noted in our first quarter conference call, we received 8.6 million shares at the end of March. This week, we received an additional 700,000 shares to close out the transaction. In total, we repurchased 9.3 million shares at a volume weighted average price of $53.80 per share. And right now, approximately 7.6 million shares remain under our existing share repurchase authorization, and we plan to continue to repurchase shares in the open market as appropriate.

During the quarter, we also announced plans to purchase up -- to purchase an additional 22% of the outstanding shares of CRISIL. CRISIL is the leading rating agency in India, and we currently own approximately 53% of the company. Earlier this week, on July 24, the company initiated the voluntary tender offer for up to 15.7 million shares. The tender will close on August 6. If the tender is fully subscribed, this would represent an additional investment of approximately $320 million at current exchange rates.

And lastly, just yesterday, we announced the sale of Aviation Week to Penton, further increasing our focus on high-growth, high-margin benchmark businesses. The sale of Aviation Week will reduce the company's annualized revenue by almost $50 million per year. The bottom line impact will be minimal.

Summing up, we have delivered an excellent first half, with 15% revenue growth and 31% adjusted diluted earnings per share growth. We are a bit cautious about the balance of year growth due to issuance volatility and challenging second half year-on-year comparisons, especially in the fourth quarter. That being said, we are maintaining our free cash flow guidance of $650 million to $750 million, and we are raising our 2013 adjusted diluted earnings per share guidance by $0.05 to $3.15 to $3.25 per share. The first year of McGraw Hill Financial continues to look very promising.

With that, let me now turn the call back over to Terry.

Harold Whittlesey McGraw

Okay. Thanks, Jack. And again, we have indeed delivered excellent first half results. We're deploying cash into global ratings opportunities, as well as share repurchases. And we're continuing to refine our portfolio of high-growth, high-margin businesses.

With that, let me end it there, and let's go to Q&A. We can go in any direction you'd like. And to give some instructions on how to ask your questions, let me turn it over to Chip to provide that. Chip?

Robert S. Merritt

All right, just a couple of instructions for our phone participants. [Operator Instructions] And now, operator, we'll take the first question.

Question-and-Answer Session

Operator

Our first question comes from William Bird with Lazard.

William G. Bird - Lazard Capital Markets LLC, Research Division

First, Terry and Doug, congratulations to each of you. A question on the outlook, what does guidance assume for stock buybacks and macro top context, particularly as it relates to S&P Ratings?

Harold Whittlesey McGraw

Okay. Thanks, Bill. Let me come over to Jack on share repurchases. We obviously completed what we said we were going to do in terms of the $500 million in the first half. And as Jack was saying, we fully intend to complete the year continuing share repurchases, and we still have an authorization level out there and we'll go back to the board for more as seen fit. And just in terms of the ratings guidance in terms of an outlook, again, issuance, albeit that slowed a little bit in June, was awfully strong in April and May. We see no abatement in terms of the drive for capital demand, and therefore, issuance will be strong. Again, comparisons to last year are going to be a little bit of an issue, so we'll see how that goes from that standpoint. Let me ask Jack. Jack, do you want to add anything on the share repurchase?

John F. Callahan

Bill, we still have about 7.6 million shares under our existing authorization. That's about $400 million. We will selectively work through that over the balance of the year. Some part of that is included in our guidance but particularly starting to get in the back half of the year. Most of that has a bigger impact as you get into 2014.

Harold Whittlesey McGraw

Yes, we've got a very strong commitment, Bill, to that. Let me -- Doug, do you want to add anything more in terms of issuance?

Douglas L. Peterson

On issuance, I've mentioned 2 additional factors. As we mentioned before, between the first quarter and second quarter, this had been very robust issuance. Although there are certain asset classes, an example is the European structured finance market has been down and with very, very low issuance, with the exception of covered bonds. The last few days into last week and this week, we've seen a resurgence of volume and a strong pipeline coming up, but that's a short-term view. With a longer-term view, we've published different works over the last 3 or 4 months looking at the longer-term pipeline of refinancing and growth needs. In the corporate issuance alone, between now and 2017, there's an $8.3 trillion of debt maturities that is outstanding. And whether that we see choppiness and how that comes into the markets, we'll have to watch carefully. But between the overall corporate financial institutions, government refinancing pipeline, which is large, the need for new capital and new investment, we see that there will be, in the medium term, a very robust issuance going into the markets.

Operator

Our next question comes from Manav Patnaik with Barclays.

Manav Patnaik - Barclays Capital, Research Division

I’d also like to first congratulate Terry and Doug on their new roles. If I can start off on the C&C side, clearly, Platts continues to perform well, and I just wanted an update on the sort of the inquiries going on in Europe, like what was the latest that you guys have heard in terms of how that was proceeding.

Harold Whittlesey McGraw

Okay. Let me -- again, all of that is, as you say, proceeding, and we're very much on top of that. The fact that Ken Vittor, our General Counsel, is here, let me ask Ken. Would you talk on the Platts issue for a second?

Kenneth M. Vittor

Sure, Terry. We were a party to an inspection by the EC in May, as were many other parties. No allegations of wrongdoing have been made against Platts. We are cooperating with the regulators, and this is the initial stage of this proceeding. We are planning to make a presentation to the EC early in the fall, probably in September, to lay out the Platts MOC process and how we go about assessing prices and doing our reporting activities. So it's very early stages, and that matter will go on for some time.

Manav Patnaik - Barclays Capital, Research Division

Okay, fair enough. And then in the margin performance, the division was obviously very impressive. Was that driven mainly by, I guess, the transactional increase on the Platts side? And then looking forward, like how sustainable is that level? And also, I guess, taking into account Aviation Week, which seems like it didn't have much of a margin contribution there, like balancing those 2, like how should we think about what's the sustainability of that margin is?

Harold Whittlesey McGraw

Well, I mean, at this point, Manav, I think it's very sustainable. Platts business is very strong. We're getting increased contributions from McGraw Hill Construction and J.D. Power as well -- J.D. Power, especially, in terms of its success in China. And as we expand into more geographic regions with that, I think that's going to be very sustainable with not as much investment dollars as some other areas. So I think it's very supportable at that level.

Manav Patnaik - Barclays Capital, Research Division

Okay. And if I can just sneak in one last on the rating agency side and sort of margin related as well, it seems like, sequentially, it was about the same, year-over-year, improved nicely. Is it fair to characterize most of that year-over-year improvement due to the sort of the reentrance into the CMBS market based on last year?

John F. Callahan

Manav, I think that's a contributor. I think it certainly helps as we get some stepped-up revenue on that part of the business. But I would also -- we've also had very strong growth on the corporate side. So the revenue is -- being as robust as it is, it's certainly incrementally profitable. But the business has also done a very good job in controlling year-on-year expense growth, particularly as it relates to headcount additions. So I would say it's a combination of very strong top line fundamentals, combined with prudent management of costs.

Operator

Our next question comes from Alex Kramm with UBS.

Alex Kramm - UBS Investment Bank, Research Division

Just maybe starting, going back to the product portfolio, I guess it sounds like, Doug, you'll give us a little bit more detail going forward, but obviously, Aviation Week is getting -- you're leaving that business, I guess. What else is in the product portfolio right now? Is anything more non-core that you're looking at a little bit harder to maybe not as good of a fit anymore? And then on the other side, I think you said there might be still room for some tuck-in acquisitions. So first of all, in terms of tuck-in, what do you mean in terms of size? And then secondly, what kind of areas do you think interests you in particular?

Harold Whittlesey McGraw

Okay. Well, Alex, first of all, we don't comment on any aspect within the portfolio pending or anything like that. We're very committed to the businesses that we're in. The nice aspect for Aviation Week is that I think it's a particularly strong strategic fit and an excellent home with Penton Media. And of course, they have an aviation business as well. So there's a very nice fit there. But no, we obviously are always looking at the portfolio and -- but there's nothing further at this point to discuss that way. In terms of tuck-in acquisitions, remember now, for the most part, and we're very proud of this because of the talent that we have, the majority of our businesses are organic businesses. And we've taken them in terms of changes in market and have been able to transform certain aspects and the like. But for the most part, they're there. Now we will always continue to be active in the market for tuck-ins, small -- smaller acquisitions in size, that bring new skill sets or capabilities to us. And I mentioned a couple of them, QuantHouse, R2, CMA for Capital IQ. But Jack was talking about the additional tendering opportunity in CRISIL. We like those opportunities a lot. And through globalization and the expansion of capital markets around the world and the introduction of new bond markets and the like, we plan to be very aggressive in terms of being able to expand our global footprint. So tuck-in acquisitions that give us new skill sets or capabilities are always important to us. But -- and for the most part, our businesses are organically driven.

Alex Kramm - UBS Investment Bank, Research Division

All right, fair enough. And secondly, maybe just talk a little bit more about the outlook for Capital IQ. Yes, I don't think there has been a lot of focus here in the prepared remarks. So first of all, I think client user growth continues pretty nicely. I think the organic growth is decent, but maybe you can talk a little bit more about the outlook there in terms of the hiring market seems to be looking a little bit better, both on the sell side and the buy side. And then obviously, with the new product offering on the risk analytics, maybe just a little bit of color of what you've heard so far in terms of early interest in the product and then also how you think you can compete with your competitors there.

Harold Whittlesey McGraw

Yes. We're obviously very excited about the prospects of Capital IQ going forward. And we took a little bit of a step-back in terms of the acquisitions of those 3 capabilities, QuantHouse, R2 and CMA, from the -- from last year in all of that. But all of that was done to accelerate the top line. And you're exactly right, customer acquisition is what it's all about. And we have been able to provide some tremendous traction there, and that will accelerate the top line. We still have a little bit of year-over-year comparisons to get through in terms of the second half, but we fully expect that the investments that we've made and the continued customer acquisition will get us to a much higher level.

John F. Callahan

Yes, sort of in looking forward, it is our hope, with the benefits from these new product introductions, by the time we at least get to the fourth quarter, we'll see maybe some modest pickup in top line growth and would set us up for a stronger year of top line growth as we get into 2014. We're in the midst of -- we've been planning around, but more of the specifics of that next year.

Alex Kramm - UBS Investment Bank, Research Division

Great, great. And just maybe lastly, on the ratings side, maybe this is a little bit too detailed, but when I look at market share in high yield, it looks like you lost a little bit of ground in the last few months here. And I think there were a couple of high-profile deals that you weren't actually on as far as we can tell. So just wondering, I mean, is there anything different in the competitive environment that you're seeing, in particular, as it relates to high yields that we should be aware of?

Harold Whittlesey McGraw

No, Alex, we're not losing any market share in high yield. In fact, it's pretty aggressive. But given that Doug is here, Doug, do you want to add anything to that?

Douglas L. Peterson

The only thing I'd add is we have -- we've not seen any specific slip in market share. We have very strong issuance throughout the quarter. And as you've seen, our pickup back into the Structured Finance market, in particular with CMBS and CLOs, has been quite successful. So I don't have any additional comments on that.

Harold Whittlesey McGraw

No, and bank loan ratings as well...

Douglas L. Peterson

Bank loan ratings as well.

Harold Whittlesey McGraw

Yes, bank loan ratings has been very good on that part.

Alex Kramm - UBS Investment Bank, Research Division

Again, it's fair enough. And we can follow up on the specific deals as we go on. Just to squeeze in one for Jack real quick, just want to make sure I've heard you correct on your response on the share buybacks earlier. You basically said that 7.6 million should be extinguished by the remainder -- by the end of the year. Is that -- did I hear that right?

John F. Callahan

We have that possibility. I wouldn't be -- we'll work that in as we go through the year, depending on market conditions. But unless we get an additional authorization, that would certainly be the maximum we could do this year.

Harold Whittlesey McGraw

That would be the plan.

Operator

Our next question comes from Craig Huber with Huber Research Partners.

Craig Huber

Want to focus first on your non-transaction revenue within your Ratings business, up about 11.5%. I'd be curious to hear what drove that. And also, could you talk about this change in billing that your press release talked about, like can you quantify that for us and when did that part start, that change start?

John F. Callahan

Could you repeat the second part of that question, Craig?

Craig Huber

You mentioned in your press release that there was a change in the billing of your non-transaction revenue in Ratings. I'd be curious when that actually started, and can you quantify that positive impact against ...?

John F. Callahan

Okay, going back to the high level, first of all, there is impact in there from the Coalition acquisition at CRISIL. This, I think, is about 2 points of growth. Another major driver of the growth is the strong growth in new entity ratings, new companies coming to market for a rating. And there's been some -- the point in terms of the release, there's been, over time, some restructuring in terms of some of -- the ways certain things are built between that impact, the non-transaction. I believe that worked its way into the market -- worked our way into about a year ago. So I think this is essentially the last quarter where we'd have a significant year-on-year benefit. Obviously, we have that now, change, moving forward, but I doubt it will make a significant a contributor to growth in future quarters.

Harold Whittlesey McGraw

Yes, and again, Craig, as the release stated, non-transaction revenue increased 12% and represented 52% of S&P Ratings' total revenue. And I'd compare that 52% to 58% from the same period last year.

Craig Huber

Did this billing change -- sorry to belabor this, but did it add a few percentage points of growth year-over-year here?

John F. Callahan

It made a contribution.

Craig Huber

Okay. For the whole company, what was the incentive compensation for the second quarter, and what was it in the first quarter, please?

John F. Callahan

Craig, we really haven't gone in the past to be that explicit in the past. It's not a -- I would say, though, in terms of year-on-year comparisons year-to-date, it's modestly up this year, so it is a bit dilutive to growth. But...

Robert S. Merritt

But Jack, you might want to put it in the context of last year, how we'd calendarize this over the quarters as this year seems to be a little bit more upfront.

John F. Callahan

This year is a bit more balanced than last year. Last year was -- because our performance really kind of zoomed up in the third and fourth quarter, the timing of incentive compensation year-on-year kind of fettered in more in the third, particularly the fourth quarter of 2012. This year, kind of we're off to a stronger start than anticipated. I think -- I do suspect the year-on-year accruals right now may be a bit more front-end loaded, and we don't anticipate as significant an increase in incentive accruals in the third and fourth quarter that we saw last year.

Harold Whittlesey McGraw

Craig, if you want to circle back with Chip, we'll give you some specific numbers on that for what we've got.

Craig Huber

So if I could just ask on the DOJ case, is your sense if this thing does actually go to trial, if you're thinking roughly 3 years out from when it first became public knowledge in early February?

Harold Whittlesey McGraw

Well, the only thing that I would say on DOJ -- and again, remember, the judge was very explicit, and he didn't want this going back and forth in media circles or public circles and all of those things, so we, obviously, are going to honor that -- let me just say that we look forward to getting our side of the story out there and the facts and figures on this thing, and we feel very confident and comfortable with that.

Kenneth M. Vittor

Let me just add that...

Harold Whittlesey McGraw

This is Ken Vittor, General Counsel.

Kenneth M. Vittor

Thanks, Terry. The time is not clear yet because the government still has to decide what case it will be bringing. It needs to narrow and specify the case in its current form. We are unable to advise the court, and the court would be unable to set it as firm trial date because we don't know yet what the case is going to look like. As it is, we find and narrowed, and there's a status conference on Monday, the 29th, to begin that process of how to shape the pretrial phase of the case. We'll be better able to give you a timeline. But right now, it's still dependent on the government refining its allegation.

Operator

Our next question comes from Peter Appert with Piper Jaffray.

Peter P. Appert - Piper Jaffray Companies, Research Division

Jack, in the last couple quarters, or at least last quarter, I think you talked about some orphaned cost leftover from the Education divestiture. I'm wondering what the -- what's left there with the magnitude of that overhang might be. And then on the growth and value costs, restructuring costs, you noted that those numbers are going down. Should we continue to expect some costs in the third and fourth quarter?

John F. Callahan

Yes, Peter, in terms of -- look, we came into the year of Education with stranded costs in the range of $20 million to $25 million. They're still in our run rate, so we have yet -- but we are working on those. But I suspect that we'll -- it'll take us some time as we get into 2014 to really address those more fully. So we're still overcoming those stranded costs right now in our performance. And in terms of relative to Growth and Value Plan costs, I'd probably right now point you towards some continuation of those costs, but I would keep them at the more modest stand like we've seen here now in the second quarter of approximately $10 million as we're working through the final stages of some of our outsourcing activities that relate to some of the decisions that we took last year.

Peter P. Appert - Piper Jaffray Companies, Research Division

Got it. And Terry or Doug, the decision to increase the ownership of CRISIL, I understand the appeal of that business given its very rapid growth. But what are the strategic benefits to you of going from the roughly 50% to 70-ish percent? And is there a road map that could take you to 100%?

Harold Whittlesey McGraw

Well, I mean, again, it's a public company. And as a public company, once you start getting above 75%, you're going to be in issues of delisting and things like that. So we are very, very excited about CRISIL, and it is performing extremely well in a marketplace that is going to be we're adding, what, $1 trillion of infrastructure over the next 5 years and all the financing mechanisms associated with that. It also represents a launchpad for other geographic expansion outside of India. So we are very excited about it. And we're in a tender offer period at this point and probably shouldn't comment any further on that, but very excited about it.

John F. Callahan

Just for context, Peter, this -- our previous -- our last investment of CRISIL, probably, if you look at it, it probably has delivered a 10x return when we went from about 9% ownership to over 50%. It may be one of the best investments this company has ever made. So that's just a little bit of historical context. But beyond sort of this -- the financial criteria, increasingly, we're just doing more working together. And I think with the increased ownership, it just gets easier as we kind of work together to broaden up the business, both within India and more broadly. But right now, it's very clear, it is our long-term intent to maintain it as an independent, public company in India, which means our ownership is maxed out at that 75% level. So that's what we're targeting.

Peter P. Appert - Piper Jaffray Companies, Research Division

Got it. And last thing, the -- if I've done this calculation correctly, I think the full year EPS guidance would suggest that you're going to be up somewhere between 0% and 7% in the second half. I obviously understand the comp issue with S&P. Are there any other things you would call out in terms of variables here in the second half in terms of year-to-year comps that would drive some slower growth?

John F. Callahan

Well, it's just the math impact of now it was the end of the third quarter when we will now have the JV and will now have been formed for over a year, so that will now -- you'll get, I think, a more complete view of the JV. It'd be more apples-to-apples comparison, obviously, because it's -- it was only -- it was formed in the early third quarter of a year ago. So that's just -- but that's just the math impact of it. I think you're raising the big point, which is just the extraordinarily difficult overlap that we have, particularly in the fourth quarter, led by ratings. So I think that's -- in the current environment, that just gives us some caution as we look at the balance of the year.

Harold Whittlesey McGraw

And as always, Peter, as we go, we'll be looking at it very hard, and we'll give you any kind of guidance that we see as we go.

Operator

Our next question comes from Doug Arthur with Evercore.

Douglas M. Arthur - Evercore Partners Inc., Research Division

Yes, just on Dow Jones Indices, I'm trying to reconcile the sort of pro forma growth of 6% with the -- you cite assets under management, x Dow Jones Indices, up 34% and trading volume up -- of derivatives up 11%. So where -- what's missing in that puzzle?

John F. Callahan

Yes, that's a good question. Just a couple points. One, as it relates to assets under management, in our contracts, there is let's call them some break points. As more assets under management are returning, it goes down a little bit. As you'd expect, there's sort of a volume discount. That's one. Two, we -- these -- we are paid not on assets under management end of the quarter but how it builds, how it averages in over the course of the quarter. And also, see, there's some noise in the second quarter, and I think you'll see that -- it'll be clearer as we get into the third. There was some benefits of some contract negotiations a year ago that we were able to retrospectively recognize some revenue a year ago. That's suppressing the year-on-year growth rate. As you get into the third and fourth quarter, based on, at least right now, what we're seeing on assets under management, we think this business is going to have pretty strong balance of your top line growth in aggregate of double-digit growth in both the third and fourth quarter if assets under management stay in this range. So I think we'll get this noise behind us, and it'll be a bit clearer as we move forward.

Operator

Our next question comes from Patrick O'Shaughnessy with Raymond James.

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

So my first question is on CRISIL. Can you just talk about how you think of using cash to increase your stake in CRISIL versus other options, whether that's share repurchases or anything else that you might look at and, obviously, keeping in mind that, I think, the cash that you are going to use for that is held from your non-U.S. subsidiaries?

Harold Whittlesey McGraw

Well, it's always, obviously, a balancing of considerations in all of that. And Patrick, I can't state any more clearly how enthusiastic we are and excited about the share repurchase program we have in place and what we've been able to accomplish to date in all of that. But the opportunity for CRISIL using offshore cash was particularly welcoming because of what we wanted to do and what we want to represent in that marketplace.

John F. Callahan

Look, I would just add, the first place you want to deploy capital is building up our core business. And at our core, CRISIL is a rating agency and with a global business. And so the first place we're going to deploy capital is to build out that network. And I would just reiterate a point I made earlier, our last investment CRISIL, which was, I think, only 8 years ago, to date has delivered from -- at the expansion -- relative to the expansion of the market capitalization of CRISIL, it has delivered roughly a 10x return. So those -- we'll do those all day long, and you should expect us to continue if there's not that many opportunities where we can deploy capital of this magnitude in the Ratings business. I wish there were more, but we saw this as a great opportunity, particularly kind of given the formation of the new company.

Patrick J. O'Shaughnessy - Raymond James & Associates, Inc., Research Division

Understand. And then last one for me, and I apologize if you already talked about this. But with the record quarter for S&P Ratings, I would've expected a little bit of operating margin expansion, but it's pretty much flat quarter-over-quarter. Can you kind of talk about the margin in that business and what drove cost sort of higher this quarter and kind of what we should expect going forward?

John F. Callahan

Well, I mean, we're actually quite pleased. We've had now 2 conservative quarters of mid-40s margins, which has been pretty good expansion relative to where we were. Our overall expense control relative to headcount adds has been quite good, particularly kind of given the amount of business that has come in. And so I think there is -- maybe there -- the business is doing so well. There is some impact year-on-year as it relates to incentive compensation. But all in all, the business is doing a very good job of managing its costs. And we continue to both -- we hear the opportunity and margins going forward, but that is the balance of both top line growth and managing of the overall cost base.

Operator

Our next question comes from David Reynolds with Jefferies.

David Reynolds - Jefferies LLC, Research Division

Just one question from me. I wondered if you could talk about Capital IQ and the proprietary research business. There seemed to be some comments suggesting that it was a difficult quarter. I just wondered what you saw in that domain in terms of the longer-term view.

John F. Callahan

We did lose a bit of business there, so it was dilutive to the growth rate to some degree. But we like that business, and we are trying to like -- are trying to rethink a little bit how we did this on a global business. So we don't have all the answers right now, but it's an area of some focus for us right now as we start to get ready for 2014. But we do think it's an interesting piece of our overall portfolio, not a big one, but an interesting little piece.

Operator

Our final question comes from Ed Atorino with Benchmark.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Terry, you may have covered this circumventionally, something like that. You're getting to be a good size in financial services. You are concentrated in a couple of areas. Do you see the need to sort of diversify and make some acquisitions to sort of broaden the base in the financial service area?

Harold Whittlesey McGraw

Yes, Ed, again, in terms of the whole notion of data content, benchmarks, analytics, we obviously are looking at all things that could be constructive to the portfolio. At this point, I would suggest that if we are doing any acquisitions, they're going to be relatively small, and they're going to give us different skills or capabilities that would enhance our portfolio. The portfolio now is largely organic-driven, and we're very excited about that because of the talent that we have and those kind of capabilities. There are no plans at this point for expansion. We are very focused on share repurchase. We're very focused on strategic things, like the tender opportunity with CRISIL.

Operator

That concludes this morning's call. A PDF version of the presenters' 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.

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