S&P Global Inc (SPGI) — Q2 2015 Earnings Call Transcript

Good morning and thanks for joining the 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 announcing our acquisition of SNL Financial and a separate release regarding second quarter results. If you need a copy of the releases and financial schedules, they can be downloaded at www.mhfi.com. In today's earnings release and during the conference call, we'll provide 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 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-K's, 10-Q's and other periodic reports filed with the U.S. Securities and Exchange Commission. I would also like to call your attention to a European regulation. Any investor who has or expects to obtain ownership of 5% or more of McGraw Hill Financial should give me a call to better understand the impact of this legislation on the investor and potentially the company. In addition, we recently published the company's new 2015 Investor Fact Book, which can be downloaded from our website. If you'd like a hardcopy, let us know. We're 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. We have two topics to cover with you on this call, the SNL Financial transaction announced this morning and our second quarter earnings. We're creating a compelling combination with the addition of SNL. So let's start with the transaction. Before I go into more detail, let me first give you some history. Shortly after I became CEO, we conducted a rigorous analysis of the markets we serve to define investment priorities and an acquisition wish list. For potential acquisitions, we analyzed quantitative factors such as financial performance and market size, as well as qualitative factors such as strategic fit, strength of management team, and cultural alignment. Our assessment identified SNL as a leading potential partner for MHFI and we began to explore the possibility of purchasing the company. Once we started interacting with SNL, we were quickly impressed with the people at SNL, in particular its talented and dynamic senior leadership team, led by Mike Chinn. We became even more convinced that a combination of the two companies offered a very attractive opportunity to create long-term shareholder value and with S&P Cap IQ and Platts, we are in a unique position to add SNL to our portfolio in a very complementary way. As many of you know, SNL is a leading provider of sector-specific market data, news, and analytics for the financial institutions, real estate, insurance, media, energy, and metals and mining sectors. The company has increased organic revenue in the low-to-mid teens each year over the past decade. Its subscription business model, coupled with its strong renewal rates, is a great fit for McGraw Hill. We see exceptional opportunity for this combined company to further penetrate core customer segments, expand into new geographies, and strengthen common core capabilities in data, technology, and market approach. This is a compelling acquisition for five key reasons. There's a unique fit with clear synergies with S&P Capital IQ and Platts. There is a common industry footprint especially in areas like banking and insurance where we can deepen our expertise. There's a proven growth engine, having delivered organic revenue growth in the low-to-mid teens. There are clear revenue and cost synergies, and there are sound transaction fundamentals. Jack and I will cover all five in more depth today. SNL has a well-diversified customer base, including investment banks, commercial banks, insurance companies, asset managers, corporations, and government entities. Through this acquisition, we add two newer information businesses in adjacent sectors, real estate and media. SNL's products are commonly cited as best-in-class and must-have by its customers due to the combination of differentiated content, proprietary analysis, and deep sector coverage. Their products are embedded in the workflow of their user base with tools that have been customized to users' needs over time. For example, over the past 28 years, SNL has built strong relationships with over 75,000 users and its 5,000 customers. You'll note in the pie chart on the top right of this slide, that 91% of SNL's revenue is in the Americas. We believe that expanding SNL's global reach is one of the most attractive immediate opportunities. SNL has sector-specific expertise in five different industries: financial institutions, energy, metals and mining, real estate, and media and communications. Currently, financial institutions and energy are the two largest sectors. SNL's well-diversified customer base gives MHFI a stronger presence in banking and insurance. The company has expanded usage outside of its traditional investment banking customer base in recent years. Users leverage SNL for traditional M&A analysis. For example, the company has a widely used bank merger model, but their capabilities run far deeper. Additional popular use cases for the FIG product include branch mapping and competitive benchmarking. In the energy space, SNL monitors over 9,000 power plants, 100 gas utilities, 120 interstate pipelines, and 2,500 renewable energy plants. SNL tracks ownership and production data in over 80,000 mines across 60 countries in the metals and mining group. And in real estate, SNL has data on 140,000 commercial and residential properties globally. With each new market that SNL has entered, they deployed the same model of combining differentiated analytics with unique content and deep sector coverage. This timeline depicts SNL investments over the last decade. From its roots in providing sector-specific information and data on financial institutions, it has expanded into new sectors. In 2004, SNL entered the energy information market through an acquisition and has built an incredible franchise in power, coal, and natural gas. Between 2012 and 2014, they launched their metals and mining platform with two acquisitions, and are beginning to get traction on those investments. They added especially valuable mine-level production data to its metals and mining practice with the acquisition of IntierraRMG in 2014. SNL started developing its European financials product in 2009. The product was launched in 2011 and is showing strong growth rate. This, in addition to similar FIG products for Asia and Latin America, represent an attractive opportunity for future value creation given the large and growing market. SNL added depth and diversification to its financial institutions platform when it acquired the insurance specialty company Highline Data in 2011. The company has a number of investments underway, and it's best to think about their businesses falling into two buckets; established businesses and developing businesses. On the left of this slide are a set of businesses with low-to-mid teens organic growth rates and margins in the 30s. On the right are developing businesses, which are in investment phases and expected to turn a profit by 2017. This results in an aggregate margin in the 20s. We believe SNL has the ability to continue to grow revenue and expand margins on its own, but together we think that the opportunity for growth is more substantial. The combination of SNL and McGraw Hill Financial will slightly modify our revenue mix. Adding SNL to our portfolio will increase the analytic, data, and research revenue of McGraw Hill Financial from 33% to 36% and increase our recurring revenue from 60% to 62%. It wasn't that long ago that SNL's customer base was concentrated in the investment bank sector. They've systematically built products and verticals to provide attractive and compelling data solutions. In the pie chart in the upper left-hand side of this slide, you can see SNL's customer diversification. SNL now serves all leading bulge bracket, regional, boutique investment banks in the United States, over 600 investment managers around the world, all of the largest 75 U.S. commercial banks, all 25 of the largest P&C and life insurance companies in the United States, and an array of the largest and most prestigious consulting companies, media companies, power utilities, and mining companies. One of the most impressive qualities of SNL is its laser focus on data quality. SNL has a stellar reputation for sector-specific data accuracy and fast turnaround. And they have leveraged this successful operational model, as they've expanded into each new industry vertical. Now before I hand it to Jack, let me tell you again how impressed we've been with SNL overall with Mike Chinn and the leadership team specifically. The team has built an impressive company with a lot to be proud of, and we look forward to working together to build an even brighter future for McGraw Hill Financial. And now, let me turn it over to Jack, who will provide more details on the transaction.

Thanks, Doug, and good morning to everyone on the call. As Doug mentioned, SNL is a proven growth engine that will be additive to McGraw Hill Financial's future performance. The company has delivered mid-teens revenue growth for over a decade, driven by organic growth in the low-to-mid teens, complemented by selective acquisitions. The revenue model is highly stable, as it is a subscription-based business with high renewal rates and clear future revenue visibility, much like our S&P Capital IQ and Platts businesses. Furthermore, the upfront receipt of cash before the subscription period begins results in minimal working capital requirements. In 2015, we expect revenues of around $255 million and margins over 20%, which includes five to six points of investment in the developing businesses that Doug just reviewed. Given the unique fit of SNL into McGraw Hill Financial, we have identified significant synergies, both cost- and revenue-based. We have built $70 million of EBITDA benefit in the financial plan that should be realized over the next four years by 2019. I will provide more detail on these synergies in just a moment. There's also a tax benefit associated with the basis step-up that has an NPV of approximately $550 million, which has an economic impact on the valuation. Relative to the earnings per share, for the first full year of operation in 2016, we anticipate accretion on a cash basis excluding transaction-specific amortization. On a GAAP basis, we expect the transaction to be accretive in 2018. As I just mentioned, SNL was a proven growth engine, delivering mid-teens growth over the last few years. Their established businesses are growing approximately 10% with margins over 30%. Their developing businesses, global expansion of their leading financial institutions product line, the build-out of the metals and mining product line, and selective software for U.S. banks and insurance companies are all expected to be profitable in 2017. As these developing businesses become profitable, overall margins in the business should strongly improve. This attractive margin profile will be further strengthened by synergies. The combination of SNL and McGraw Hill Financial provides significant revenue and cost synergies for SNL, and both our S&P Capital IQ and Platts businesses. With S&P Capital IQ, we see opportunities to deepen penetration in commercial banking, insurance, and corporates. This includes a terrific opportunity to accelerate international growth for SNL's leading financial institutions products, leveraging the commercial reach of McGraw Hill Financial. In addition, we see incremental opportunity by developing new products that leverage capabilities in core sectors including risk management products for banking and insurance. With Platts, the opportunity exists to build out the combined energy and commodity platforms. The SNL products of energy focus largely on utilities and natural gas. In metals and mining, they match up well with Platts' capabilities in these areas. In energy, there is an opportunity to expand internationally, leveraging the recent Platts acquisition of Eclipse. Furthermore, there are clear opportunities to introduce new products, especially in oil, leveraging the deep expertise of Platts. There are also greater opportunities to build out joint capability vertically in these commodity sectors by providing end-to-end information offerings covering price assessments, fundamental research, and supply/demand analytics. Finally, SNL adds scale and leverage to our data and technology operations, which will enable us to drive efficiencies and add new opportunities to enrich existing product offerings. Let me provide a bit more color on the data-related opportunity. SNL adds considerable capabilities in data collection, analysis, and research with the addition of 2,000 employees in key offshore locations. The combined capabilities of both companies will have approximately 7,200 employees primarily in locations that can attract well-trained analytical associates at a reasonable cost. This is a terrific asset to power future growth. The total synergies built into the $70 million of EBITDA by 2019 are roughly half cost-related and the balance revenue-related. The revenue synergies assumed over the medium term are fairly straightforward, as McGraw Hill Financial will work with SNL to extend their global reach. Quite simply, no other billion-dollar-plus acquisition that we have reviewed since the formation of McGraw Hill Financial has offered such a clear synergy opportunity, both over the medium term and longer term in new product development and customer relevance. The clear synergy is a significant consideration in the overall valuation of the business that supported the purchase price. There are several other important items to consider as part of the valuation. As Doug and I have both discussed, the current profitability of the business is impacted by investments in the developing businesses, which are growing rapidly but are not yet profitable. We evaluated these investments in great detail and are comfortable with the ramp rates of profitability by 2017. The valuation needed to provide a return on these investments, which included multiple acquisitions over the last four to five years. There is also considerable value from the tax basis step-up, which on a net present value basis is worth approximately $550 million. Lastly, with the upfront cash receipts exceeding revenue, the cash basis on which evaluation is based is roughly a year ahead of GAAP EBITDA. If you take into consideration the economic impact of a tax step-up, the value of this transaction is approximately $1.7 billion. As we move past the investment cycle that is nearing an end and consider that cash flow is roughly a year ahead of EBITDA, we view the price of this transaction as having a mid-teens multiple on 2017 cash flow before the impact of synergies. Longer term, the synergies across SNL, S&P Cap IQ, and Platts provide a terrific opportunity for significant shareholder value creation. Financing of the transaction should be relatively straightforward given our strong balance sheet and the success of our recent bond offering, which reintroduced McGraw Hill Financial to the fixed income investor. This acquisition will be funded by a combination of approximately $525 million of cash on the balance sheet and $1.7 billion of new debt. A committed bridge financing of $1 billion combined with our existing credit facility of $1.2 billion will provide additional flexibility through closing. Post deal, we anticipate 1.6 times pro forma leverage, which provides ongoing flexibility in returning capital to shareholders through share repurchase and dividends, and pursuing future growth opportunities while maintaining an investment-grade rating. Our approach to integration will be to have SNL's CEO, Mike Chinn, report directly to Doug. Mike and his executive team are based in Charlottesville, Virginia, and we are committed to that location over the long term. Initially for financial reporting purposes, we will report SNL as part of S&P Cap IQ, but that may evolve over time. We expect immediate areas of focus to include pragmatic integration of corporate, data, and technology capability, as well as sales force training on this enhanced product line. Let me summarize by saying that SNL has a unique fit to McGraw Hill Financial, adding sector-specific depth and overall scale. It is a proven growth engine with compelling revenue and cost synergy opportunities across both S&P Cap IQ and Platts. We believe that McGraw Hill Financial is the right owner for SNL. Now, let me hand the call back over to Doug to discuss our second quarter results.

Thank you, Jack. As I've said in the past, we're aligned around four very important themes to drive growth and performance, and create value: strengthening our customer and stakeholder engagement, accelerating our international growth, sustaining our margin expansion, and maintaining discipline in capital allocation, and fostering a robust risk and compliance culture to manage and mitigate risk throughout the company. As you just heard, the acquisition of SNL today fits very well with these themes. Now let's turn to the second quarter and I'm pleased to report solid results. The company delivered increased revenue despite unfavorable foreign exchange rates and decreased issuance outside of the United States, continued margin expansion with a 450 basis point improvement in adjusted operating profit margin, a 17% increase in adjusted diluted EPS to $1.21, strong year-to-date free cash flow of $621 million excluding the payments of legal settlements, issuance of $700 million of new 10-year notes as we re-entered the capital markets for the first time in eight years, increased capital return with the repurchase of 2.6 million shares year-to-date, new additions to the portfolio with purchases of NADA Used Car Guide in J.D. Power and Petromedia in Platts, and continued productivity efforts across the company, which Jack will review later in the call. Now let's take a closer look at the second quarter results. Revenue increased 3%, but excluding the impact of foreign exchange, revenue increased 6%. Adjusted operating profit increased 16%. While geopolitical concerns negatively impacted issuance in our ratings business, adjusted operating profit increased across the entire portfolio. Progress on productivity initiatives resulted in a year-over-year decline in adjusted expenses. These initiatives have been focused on de-layering the organization, driving process efficiencies, and improving productivity. Of note, on Friday, we will close the door on our former Midtown headquarters as the last wave of employees relocates to our downtown Manhattan operating center at 55 Water Street. Productivity actions led to an adjusted operating margin increase of 450 basis points and adjusted diluted EPS increase of 17%. Standard & Poor's Ratings Services reported its second highest revenue ever, but due to unfavorable changes in FX and weak issuance outside the United States, did not exceed the second quarter of last year. Every other business segment delivered year-on-year revenue growth. Now, let me turn to the individual businesses and I'll start with Standard & Poor's Ratings Services. In the quarter, revenue decreased 1%. Excluding the negative impact of foreign exchange, revenue increased 3%. Adjusted operating profit grew 7% and the adjusted operating margin increased 370 basis points to 50%. While revenue was negatively impacted by FX, it has less of an impact on operating profit. S&P Ratings Services continues to make progress improving margin. Reduced head count from recent restructurings and lower incentive costs were the primary contributors to this quarter's margin improvement. In addition, ratings continue to implement a process re-engineering program called The Way We Work. Legal expenses were significantly lower. However, this was offset by costs associated with Dodd-Frank implementation, as we continue to invest in people and technology. Transaction revenue increased from 49% to 50% of total revenue. Non-transaction revenue decreased due to the effects of a strong dollar. Excluding the impact of FX, non-transaction revenue increased 3% due primarily to annual fee growth. Transaction revenue grew 4% excluding the impact of foreign exchange. This is a result of the record U.S. public finance issuance and strong U.S. investment-grade issuance paced by a number of large M&A transactions. When we look at second quarter issuance in the U.S., it was driven by a 20% increase in public finance, as call options on strong 2005 issuance are being refinanced and a 30% increase in investment-grade issuance. U.S. structured finance issuance in total was unchanged with a 53% increase in CMBS and an 18% decrease in structured credit, which is predominantly CLOs. In Europe, issuance decreased in almost every category. RMBS was the notable exception. Concerns about Greek debt, slowing growth in China, and dramatic volatility in German sovereign debt along with a very, very low cost of bank liquidity all combined to dampen bond market activity outside the United States during the quarter. In Europe, investment-grade debt issuance decreased by 33% and high-yield debt declined by 54%. Structured issuance decreased by 7% with RMBS being the primary area of strength. Not depicted on this chart is issuance from other parts of the world, which collectively, excluding sovereigns, declined over 50%. Now let me turn to S&P Capital IQ. Revenue grew 6% with consistent growth globally, adjusted segment operating profit grew 37%, and adjusted operating margin increased 520 basis points to 22.9%. Capitalizing on past investments, the margin improvement is the result of product enhancements to deliver revenue growth coupled with tight cost control. In fact, headcount increased less than 1% year-over-year. And excluding the impact of FX, revenue increased 7% and expenses only 3%. Let me add a bit more color on growth in the three business lines of S&P Capital IQ. S&P Capital IQ Desktop and Enterprise Solutions revenue increased 7% primarily as a result of low-teens increase in desktop revenue driven by a similar increase in users. S&P Credit Solutions revenue increased 6% due primarily to growth in RatingsXpress and RatingsDirect. In the smallest category, S&P Capital IQ Markets Intelligence revenue decreased 4% overall. Strong growth in Global Market Intelligence and Leveraged Commentary & Data, however, was offset by declines in Equity Research services. Turning to S&P Dow Jones Indices, this business delivered an 11% increase in revenue due to ETF, mutual funds, data license, and derivatives revenue, which all increased. Operating profit increased 16% and the operating profit margin increased 250 basis points to 64.6%. During the quarter, we introduced 64 new indices, many in the fixed-income space and the net of new ETFs based upon our indices were launched. ETF's assets under management associated with our indices increased 10% to $792 billion versus the end of the second quarter in 2014. Please note that while our year-over-year growth was meaningful, this AUM decreased from the record $832 billion at the end of 2014, and the ETF flows moved to products offering European and non-U.S. exposure. One of our fastest growing categories has been the products based on our smart data indices. AUM in these products increased 55% year-over-year to $133.6 billion. This next slide depicts two charts that should help you understand year-to-year ETF industry flows. In the chart on the left, you see that the AUM linked to ETFs based on our indices has declined recently. While the year-over-year comparisons are still positive, AUM has declined since the end of 2014. The chart on the right shows that inflows into passively managed ETFs continue to be robust. In fact, while down sequentially, the industry experienced record first half flows of $146 billion. Unfortunately, compared to recent quarters, the percentage of flows directed to products based on our indices has declined. We view this as temporary, as investors move into global products. During the quarter, we launched the flagship of our fixed income indices, the S&P 500 Bond Index. This is the first index that tracks the debt of the S&P 500 companies and the first to be priced in real-time throughout the day. We divide the market value of the bonds and with the maturity requirement of greater than one month, we anticipate that the S&P 500 Bond Index will be liquid enough to also serve as the basis for potential ETF and structured products. The S&P 500 Bond Index currently tracks the debt of 430 S&P 500 companies, reflecting over $3 trillion in debt outstanding. At the launch, we published more than 20 years of daily historical data on the S&P 500 Bond Index. We'll round out this offering with multiple S&P 500 Index variations based on duration, rating, and sector. Examples include the S&P 500 AA Investment Grade Corporate Bond, the S&P 500 Five-Year to Seven-Year Investment-Grade Corporate Bond Index, and the S&P 500 Utilities Corporate Bond Index. And finally, as you know, we have formed a number of unique and dynamic alliances with exchanges in various markets since 1998. This quarter, we signed an agreement with the BM&FBOVESPA, designed to create and launch new co-branded Brazilian equity indices. In addition, we have signed an agreement with the BMV, the Mexican Stock Exchange, incorporating all of BMV's indices, including their flagship index, IPC, the broadest indicator of the BMV's overall performance. In the Commodities & Commercial Markets segment, revenue grew 7%, with organic growth of 6% excluding the Eclipse acquisition. This was led by high-single-digit revenue growth at Platts. Adjusted segment operating profit grew 15%. Adding together the solid revenue growth and tight cost control, the adjusted operating margin increased 270 basis points to 37.8%. J.D. Power delivered low-single-digit revenue growth with double-digit revenue growth from the PIN information network – the Power Information Network, and modest growth in the U.S. auto sector. Revenues in Asia were negative, as growth in the China market moderated and Japan revenue declined. Platts continued to deliver strong results while building for the future. Platts demonstrated resiliency, delivering high-single-digit revenue growth despite continued low commodity prices. Platts' results, while quite strong, would have been even stronger except that several major banks have withdrawn from the commodity space and upselling new products have been difficult in this low oil price environment. Metals, Agriculture, and Petrochemicals continued to deliver the highest revenue growth rates, and Global Trading Services increased primarily due to license revenue from The Steel Index derivative activity and record eWindow trading volumes. Petromedia is a small but interesting tuck-in acquisition for Platts. Through a product named Bunkerworld, Petromedia provides pricing, news, and analytics for the global marine fuel market. Bunker makes up 70% of the cost of chartering a ship and is therefore a critical price component for the industry. The other main product is Ocean Intelligence, which provides credit reports for the bunker industry and adds to Platts risk management offerings. The highlights of the quarter for J.D. Power was the acquisition of the NADA Used Car Guide. This is the premier source of used car value benchmarks. This acquisition fits well with J.D. Power's PIN business, as both generate essential pricing benchmarks and analytics. This subscription-based business with more than 30,000 business customers expands J.D. Power's offerings in the U.S. automotive OEM, retailer, financial services, and insurance markets. This final slide shows examples of how different sectors utilize this reliable used car benchmark data in their businesses. With that, I want to thank you for joining the call this morning and now I'm going to hand it over to Jack Callahan, our Chief Financial Officer.

Thanks, Doug. I know this has been a longer call this morning than our norm, so I just want to briefly add some color on several items related to the second quarter financial performance, the balance sheet, and the impact of the SNL acquisition on our 2015 guidance and then we'll open it up to your questions. First, I will recap key financial results and review certain adjustments to earnings that were recorded in the quarter. Let's start with the second quarter income statement. Overall, these were very good results, especially the continuing progress in margin improvement. Revenue grew 3% despite the continuous headwinds from foreign exchange, which reduced our growth rate by about three points. Adjusted consolidated operating profit grew 16% with all four business units contributing to this growth. Operating margins were over 41%, up 450 basis points from a year ago. This is the highest quarterly margin achieved since the formation of McGraw Hill Financial. Revenue growth combined with progress on our productivity initiatives contributed to this significant step-up. While foreign exchange had a negative impact on revenue, we had almost no impact on adjusted operating profit for the company as a whole due to the offsetting impact on expenses. Adjusted unallocated expenses decreased 22% as the prior period had costs associated with the sales of certain assets. The tax rate on an adjusted basis was 32.3%; for the balance of the year, we continue to guide below a 33% rate. Adjusted net income increased 17%, and adjusted diluted earnings per share increased 17% to $1.21 versus the toughest comparison from 2014. The average diluted shares outstanding decreased by almost 1.5 million shares versus a year ago, as share repurchase activity offset the diluted impact of shares granted for equity-related compensation. Now, let me turn to adjustments to earnings to help you better assess the underlying performance of the business. In total, pre-tax adjustments to earnings from continued operations resulted in a $30 million gain during the quarter. This consisted of $41 million in net settlement-related insurance recoveries, a gain of $11 million related to the sale of a legacy construction business asset, and $22 million of restructuring charges as the company continues to de-layer and streamline operations. Now, I'll turn to cash flow and the return of capital. Our year-to-date free cash flow was a negative $988 million. However, once the payments associated with legal settlements are excluded to get a better sense of our underlying cash generation from operations, year-to-date free cash flow was a positive $621 million. That puts us well on our way to full-year 2015 guidance of greater than $1.1 billion. During the quarter, the company stepped up its share repurchase program and bought 1.6 million shares, bringing the year-to-date total to 2.6 million shares. The share repurchase program remains an important component of our overall capital allocation, and we anticipate continuing to selectively repurchase shares under our remaining share repurchase authorization of 42.9 million shares. Now, let's turn to the balance sheet. As of the end of the second quarter, we had $1.7 billion of cash and cash equivalents, of which approximately 70% was held outside the United States. Our cash position was augmented with the issuance of $700 million of 10-year notes in May. This was the first bond offering by the company since 2007 and we were delighted with the strong interest from investors in the attractive 4% coupon. We used some of the proceeds from these notes to pay down the short-term debt that we incurred during the first quarter. And during the quarter, we completed the refinancing of our $1.2 billion credit facility. At the end of the quarter, we had approximately $1.5 billion in term debt. As a result of the SNL acquisition, as we discussed earlier, we currently anticipate issuing $1.7 billion of long-term debt to fund the transaction, and we anticipate completing the financing ahead of projected closing. Once completed, this would bring our total debt to approximately $3.2 billion or 1.6 times EBITDA. The unique fit of SNL combined with the smaller acquisitions of NADA Used Car Guide by J.D. Power and Petromedia by Platts, all strengthened the McGraw Hill Financial portfolio and will contribute to sustained growth. In the context of 2015 guidance, and assuming that the SNL transaction closes towards the end of the third quarter, we anticipate that the deal to collectively add approximately $80 million to $90 million of revenue over the balance of this year in the second half and SNL specifically will have a dilutive impact on adjusted EPS of approximately $0.05 to $0.07. However, based on the strength of the quarter and our outlook for the remainder of the year, we will leave adjusted EPS guidance unchanged at $4.35 to $4.45. At this point, we would expect performance toward the higher end of this range. In closing, we continue to focus on creating growth and driving performance, building out the portfolio, improving margins, and returning cash to shareholders. And today is truly a special day, as we look forward to welcoming over 3,000 associates of SNL Financial to McGraw Hill Financial. With that, we will now open the call to your questions.

Just a couple of instructions for our phone participants. Please press star, one to indicate that you wish to enter the queue and ask a question. To cancel or withdraw your question, simply press star two. I would kindly ask you to limit yourself to two questions, that's two questions, in order to allow time for other callers during today's Q&A session. If you've been listening through a speakerphone but would like to now ask a question, we ask that you lift your handset prior to pressing star one and remain on the handset until your question has been answered. This will ensure better sound quality. Operator, we'll now take our first question.

Yeah, hey, good morning, everyone. Hopefully you can hear me okay. I'm remote. But anyways, Doug, I guess, for you, I mean, you often described McGraw Hill Financial as a collection of benchmark businesses. So obviously, those are hard to purchase or hard to expand. So maybe can you just summarize to us how you think SNL can be one of those benchmark businesses or not? And then maybe specifically, you said part of this business will be part of Platts, or could be part of Platts over time. When I look at the customer base, it's really just financial companies and not really the core user base of Platts. So can you maybe talk about this a little bit because a benchmark company, I would assume some corporate users as well?

Well, thank you for the question. First of all, let me just mention that as we've been looking at our overall strategy, we focus on a combination of benchmarks, data, analytics, and research. And all of these are different sorts of products which get embedded into the workflow of the users that we work with. So first of all, SNL really is a benchmarking business at heart. If you look at how they produce the information, the proprietary data, and the focus and attention to detail that they provide, it's very similar to what you would look at for a benchmarking business. They're not a traditional price or index or credit benchmark, but they serve as financial performance and operating performance benchmarks for companies and assets in our space. We do look at them in addition to – as your second part of your question about how they would enhance our business related to Platts. They've been building verticals in the mining space, in the energy market analysis. As an example, they've got industry forecast curves and proprietary daily spot market prices in the energy market. They have operational statistics on over 5,000 electrical utilities. They've got power plant unit level data. On the mining world, they've got profiles of statistics on all mining projects globally. They've got customized maps. They've got location data, company primary, commodity information, ownership information, et cetera. All of that is very similar to what Bentek does, and very complementary to Bentek and Eclipse in the natural gas space. And so we see a lot of excellent fits in ways that we'll be able to leverage their database and their relationship. So I think that we want to make sure that you get more and more data about who they are and who their customers are, but you'll see over time as you get a chance to learn about them, that they've diversified incredibly well beyond their traditional investment banking portfolio.

Okay. Thank you. That's helpful. And then really just secondly for Jack. Maybe you can talk a little bit more about the – I guess the accretion as we think about 2016, and to some degree also from a mechanical and technical perspective. So if you're saying it's accretive on a cash basis, are you actually going to adjust your earnings next year to exclude amortization? Or will we still find this dilutive on a reported basis? And if so, how much dilution do you think you could expect next year from an EPS perspective? Thanks.

At this point in time I don't anticipate that we would exclude the amortization specifically relative to the transaction. However, we will point you towards to let you know what it is such that you can judge the cash accretion that we're forecasting for next year. So we will connect the dots there. I think we have some work to do to close this deal. We have to finalize some purchase accounting, so I would say on a GAAP basis next year the dilution for 2016, please this is the first pass view of it, it's somewhere between $0.15 to $0.20. And we'll tighten up that range as we integrate this into our 2016 financial planning and future guidance.

Yeah. Good morning. The synergy numbers are quite large relative to EBITDA. I was wondering if you could just give us a sense of what's included in the synergies. Also, what's not included? And then how do you expect synergies to phase in between now and 2018? Thank you.

Let me start, Bill. This is Doug. Well first of all, one of the things we've been impressed with at SNL as we've gotten to know them is their ability to run a very tight operational shop and how they've got ways that we can work together, as Jack showed on that map, in their operating centers around the globe. And then second, as you saw from the chart, they've got 91% of their sales today in the United States. And we have a sales force and penetration globally that we think that we can get a lot of synergies from there. But let me hand it over to Jack for some more detail.

Yeah. Two points, and maybe let me address maybe cost synergies first and then come back on revenue because the case is built roughly 50-50. First on cost, I would say we came at the analysis not just looking at the costs of SNL, we looked at the costs across SNL, S&P Capital IQ, and Platts. I think when you look across that cost base, the cost synergies that we assumed here are actually quite modest, and there's a lot of overlapping capability as it relates to technology, in some cases data, et cetera. So I think you need to say from a cost point of view take a more holistic view of it. Secondly in terms of revenue, there's both near term, what's called medium term, and longer-term revenue synergies. Some of the more medium term are taking the great products they've already developed, like their global FIG product, and we just have a much greater sales force coverage than what SNL has today. In collective, we just have more feet on the street to kind of expand that, to accelerate their global build-out. And then longer-term, we gave and we talked. There's a lot of new product development opportunity that's quite exciting both maybe in a more traditional S&P Capital IQ space but also as Doug was just mentioning with Platts in terms of the mutual areas of capability that we built out there.

And then a question on the phasing in, how it may phase in between now and 2018.

I mean traditionally, as you'd expect, the cost synergies are a little bit more forward weighting between now and – we have pointed to $70 million by 2019. We may get a little bit more benefit on the revenue side a little earlier because of the opportunities to just kind of take their existing product line through our sales force. And in terms of the specifics for 2016, we'll give you more guidance on that when we do it in the context of our full outlook for next year, towards the end of this year or early next.

Thank you. Good morning. First question. I know you're just getting your hands around this large deal, but I was thinking, what does this mean for incremental M&A, which you mentioned you may continue to do. How we should think about areas of focus? Should we expect you to do some other things like continue to build the index business more organically like you've been doing? Then if you were to do a deal, how high a leverage you would be temporarily willing to go for that deal.

Andre, good morning. Thank you for the question. We continue to believe we have flexibility to pursue what we've always described before as our asset allocation between investing in organic growth, smaller tuck-in acquisitions, continuing to pay our dividend, and also repurchase shares. We, as I mentioned earlier, we're focused on benchmark businesses, in particular, how we can also enhance those with high-quality data and research businesses. So we hope that we can continue to do small transactions like the other ones that we announced this quarter with Petromedia and NADA Used Car Guide. And so it's our goal to continue to add to the portfolio high-quality properties over time, but in the sense we also want to keep a level of leverage so we're also able to always pay our dividend and repurchase shares.

And then on the core business, I know you mentioned that you were having some challenge in the Platts business from some banks pulling back. Any color on exactly how much of a headwind that was, just color, I apologize if I missed it. And more importantly, do you have any visibility into how many more may follow that trend going forward?

Yeah, I wouldn't refer to it as a challenge. I mean Platts had a great quarter, so I would not put it in that context at all. We probably lost a point or two of growth off of what we otherwise would have had because of some of the banks pulling out of the commodity space, and a couple of small factors going out of business. But great quarter, and with oil prices the way they've gone so directly south, it's kind of amazing how little Platts has been impacted.

Hi. I was wondering if you could talk about the pricing structure of the SNL acquisition and how you feel pricing power there relates to what you're seeing in Capital IQ?

You know I think we've been very impressed with the must-have capability of what SNL offers its customer set and the very sector specific data and analytics that they provide. I think they, over time, they have realized reasonable pricing improvements over time and I suspect that will continue. But I think that – I wouldn't point to anything unusual about pricing. I think it's more what we work on across both our S&P Cap IQ business and Platts. So I think it's very similar.

Yeah. So Europe has continued to be incredibly weak. There's a combination of factors that I mentioned earlier, the volatility that we saw earlier in the year with the German yields. We also saw some of the negative interest rate issuance, et cetera. We haven't seen too much of a rebound in Europe in this July, although there have been a few reserve Yankee bonds, which have gone to the market in a few financial institutions. But overall, Europe investment grade was down 33% and the investment-grade corporates were down 33% in the second quarter. Financial institutions were down 40%. Total Europe was down over 40% and the rest of the world was down 54%. So we saw very strong issuance in the U.S., and investment grade was up almost 30%, although non-investment grade in the U.S. was down 8.9%. So as I've already said every quarter when we have these calls and when I meet with investors is that we don't know what each quarter is going to bring and we have a longer term forecast that, I think, was a combination of refinancing with global growth, with a belief that we have – that Europe will continue to move from a banking market to a capital market overall. In the long run, we will see growth in issuance, but we do see quarter-by-quarter a lot of volatility.

Yeah, thanks. Jack, I think you mentioned or Doug that the organic growth trend at SNL has been low-to-mid teens. Can you break that down between sort of how much of that growth is a function of the new verticals they've gotten into? Or another way of asking the question is, what's the organic growth of the very established products? Are they slowing or are they also growing at a mid-teens level? Thanks.

Chart in the deck.

There's a chart in the deck that, I think, kind of lays it out over the last few years, I think back to 2012. So on a compounded basis, including the forecast for 2015, the established businesses have been growing around 10%. And then the developing businesses have been growing, I think it's 70%... 70%, yeah. CAGR over the last few years for an all-in CAGR of around 16%. Now on the established side, it's really a combination of both organic investment combined with selective acquisitions. So you should view the developing business as a combination of both internal investments that they've made combined with some of these acquisitions. And if you look at the timeline, you can see they've been pretty active the last few years adding to the mix.

Hi there. Good morning. I had a quick one just on the quarter on Capital IQ margins were very strong – it looks like the best since 2012 or so. And I wanted to get a feeling for whether there was any kind of one-time-ish benefit from here, whether it was kind of mix-driven. I know that some of your lower profit pieces of that segment have been declining whereas some of the other ones are growing. Or any other kind of one-time issues that might have driven that margin expansion and can we expect it to continue?

Yeah. First of all, in terms of we have been doing some selective restructuring in that business and also the team there has done a nice job of sort of re-sequencing on, I think, some of the investments that were underway in the business. And I think that's starting to have some real benefits. I would say though, the margin, close to – there is a little bit of an impact in their margins in Cap IQ from forex. Just about all of their revenue is dollar-denominated. Based on an expense point of view, we are benefiting from forex particularly in the pound and the euro. So a little less than half is forex, but the rest is just good performance in terms of expense management.

Well, let me – from the point of view of the trend, I think that what – we find what our users and customers are looking for is depth, and depth of knowledge, depth of data, time series, being able to go back for a long time to be able to understand the kind of data needs. As an example, not related to SNL, but when we launched the S&P 500 Bond Index, we put in 20 years of back data on this kind of transaction. So what I would look at is that the type of data and analytics that are required more and more in the market is sophistication. And to have that kind of sophistication, we need to have depth and data and industry-specific information that something like SNL has. So I think SNL has been a leader in this area as well as some of the other McGraw Hill Financial businesses, and you should expect to see this kind of activity from a lot of different companies.

Operator?

Thanks. So, Doug, it looks like S&P's revenue growth maybe is lagging a little bit relative to some of the peers or relative to the overall industry. Do you have any bridge in terms of why that differential may exist?

So when I've looked at this in a couple of different ways, the main driver of differential in growth is in the United States and it's in the structured finance markets, specifically. If you look at the issuance during the second quarter, as I went through them, the largest growth in the United States was in the investment-grade corporates and in public finance, which we continue to perform very well in. And then the only sector where there was growth in the United States in structured finance was in CMBS. And as you know, we are temporarily not involved in conduit/fusion in CMBS and that's the main differentiating factor that we've seen when we look at our competitors.

Hey. So a question on the tax benefit that you guys are going to be getting. Can you talk a little bit about the nature of that benefit and then how are you going to realize it? Is your GAAP tax rate going to be lower going forward or how do you actually benefit from that?

It's basically just a step-up from the basis. So it will provide us some tax benefits within the United States, which is just – in a large part, which is our highest tax jurisdiction. And it will collectively give us a couple of tenths of improvement in our overall effective tax rate, which is helpful, so that's how it will come in over the next few years.

That plays out over a number of years.

Oh, it's a number of years and this will stay, and that's why you really need to think about it on an NPV basis. I mean this benefit will be with us for about 15 years.

Great. Well, thank you, everyone. I know this has been a very long call and you might have some more questions, you can get to Chip later. We've covered a lot this morning on our acquisition announcement on SNL Financial. We also were able to go through the quarter, which we think was a very strong quarter from the point of view of margin improvement and continued for us to deliver what we've been talking about in the past. So thank you again, everybody, and good morning.