Jul 29, 2014
Operator
Good morning, and welcome to McGraw Hill Financial's Second Quarter 2014 Earnings Conference Call. I'd like to inform you that 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 for McGraw Hill Financial's Second Quarter 2014 Earnings Call.
Presenting on this morning's call are Doug Peterson, President and CEO; Jack Callahan, Chief Financial Officer; and also joining us for his final earnings call, Ken Vittor, our General Counsel. This morning, we issued a news release with our results.
I trust you've all had a chance to review the release. If you need a copy of the release and financial schedules, they can be downloaded at www.mhfi.com.
In today's earnings release and during the conference call, we'll provide an adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the corporation's operating performance between periods and to view the corporation's business from the same perspective as management's.
The earnings release contains exhibits that reconcile the difference between the non-GAAP measures and the comparable financial measures calculated in accordance with U.S. GAAP.
Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events.
Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our Form 10-Ks and 10-Qs and other periodic reports filed with the U.S.
Securities and Exchange Commission. I would also like to call your attention to a recent European regulation.
Any investor who has or expects to obtain ownership of 5% or more of McGraw Hill Financial should give me a call to better understand the impact of this legislation on the investor and potentially, the company. We're aware that we do have some media representatives with us on the call.
However, this call is intended for investors and we would ask that questions from the media be directed to Jason Feuchtwanger at our New York office at (212) 512-3151 subsequent to this call. At this time, I would like to turn the call over to Doug Peterson.
Doug?
Douglas L. Peterson
Thanks, Chip, and good morning, and welcome to the call. We are pleased to report another strong quarter of revenue and earnings growth.
Revenue growth was led by Standard & Poor's Ratings Services and J.D. Power, each with double-digit growth.
Platts, S&P Capital IQ and S&P Dow Jones Indices all contributed high single-digit revenue growth. During the first quarter of the year, Platts and S&P Dow Jones Indices delivered double-digit revenue growth, driving the overall MHFI results in that quarter.
All of this speaks to the strength of the businesses we have in our portfolio. For this quarter, adjusted diluted EPS increased 15% to $1.06.
And as you can see, based on this strong year-to-date performance and our outlook for the remainder of the year, the company is raising its diluted adjusted EPS guidance by $0.05 to a range of $3.80 to $3.90. Year-to-date, the company reported free cash flow of $392 million and returned $525 million in dividends and share repurchases.
This continues to demonstrate our commitment to returning capital to shareholders. If we look at the financial performance in more detail, revenue increased 8% year-on-year and 9% from organic growth.
Adjusted operating profit increased 9%. We achieved a 40 basis point improvement in the operating margin.
And what was most impressive about these results is that despite facing the most difficult earnings comparison of the year, second quarter diluted adjusted EPS increased 15%. Our global footprint continues to expand as international revenue growth of 10% continued to outpace domestic growth of 6%.
In this chart, you can see that 3 of our businesses delivered double-digit international revenue growth. Note that excluding the impact from the sale of Aviation Week, Commercial Markets delivered double-digit international growth as well.
Now I'd like to highlight that during the quarter, we announced a couple of key management changes. First of all, I'd like to thank Ken Vittor, who's here in the room with us, for his 33 years of dedicated service to the company.
Ken's leadership and sound advice have been instrumental in guiding the company. Most of you will remember Ken for his clear explanations of complex legal issues on these quarterly earning conference calls.
Thank you, Ken.
Kenneth M. Vittor
Thank you, Doug.
Douglas L. Peterson
And we all wish you the best in your retirement. And we're pleased that you will be here supporting us until the end of the year when you officially retire.
Ken's replacement will be Lucy Fato, who starts next week. Lucy has extensive legal experience, serving most recently as Deputy General Counsel for a premier global professional services firm.
And before that, she was a partner in the capital markets group at a global law firm. The other management change has been at S&P Capital IQ.
Lou Eccleston is moving on to pursue other opportunities. Lou has made significant contributions to the business since joining the company in 2009.
And I want to thank Lou and wish him every success in the future. A search is underway for Lou's replacement.
In the interim, Imogen Dillon Hatcher has been named Acting President of S&P Capital IQ. Imogen is a seasoned executive with a breadth of experience in the industry.
Previously, she was Chief Commercial Officer with responsibility for leading S&P Capital IQ's global sales. I have been working closely with Imogen and feel great about her capability to lead this business during the transition.
And we are fully committed to S&P Capital IQ, which over the past 4 years, has become one of the fastest-growing providers of multi-asset class and real-time data. Now let me turn to the individual businesses.
And I'll start with Standard & Poor's Ratings Services. During the quarter, revenue increased 11%, operating profit increased 15% and the operating margin increased 160 basis points to 46.3%.
Revenue growth is primarily the result of strong market demand for Standard & Poor's Ratings associated with increased debt issuance and bank loan ratings. Expenses increased primarily due to legal expenses.
With the Department of Justice case entering the discovery phase and the State Attorneys General cases remanded back to state courts, our expenses to defend these cases rose during the quarter. In addition, compensation expense increased due to targeted headcount additions and increased incentive comp.
Despite these cost increases, Standard & Poor's Ratings Services delivered solid margin expansion. You will see, moving to this next slide, that non-transaction growth in the quarter, which in aggregate grew 8%, was driven primarily by increased annual fees as we continue to expand our client coverage in Rating Evaluation Service revenue.
Transaction revenue increased 14%, driven by several factors. First, as investors search for yield in a low interest rate environment, their demand for high-yield debt has enabled more corporations to access the debt markets.
Second, financial services firms have actively issued debt, driven primarily by new regulatory requirements. And third, bank loan ratings revenue increased 19% as banks seek to issue new loans that are more liquid.
As you see in these graphs, total issuance increased in the U.S. by 15% and in Europe by 37%.
In the U.S., I'd like to highlight the strength in structured finance issuance, but which is primarily a result of the collateralized loan obligations or called the CLOs and asset-backed securities, ABS. CLO quarterly issuance was the highest since 2007 as banks moved loans off of their balance sheets.
ABS included the largest quarterly issuance of auto debts since 2008 and credit card debt issuances almost doubled the second quarter of 2013. In Europe, I'd like to highlight the 44% increase in corporate issuance and, as part of that, the record high-yield issuance, which increased 109%.
This is the second quarterly record in a row. And these issuance levels are a direct result of bank deleveraging.
One of the questions that has been frequently asked is why is U.S. corporate debt issuance so robust when so many corporations have substantial cash on hand?
In April, a Standard & Poor's report entitled 2014 Cash Update: Cheap Debt Fuels Record Cash Growth, this topic was discussed. Essentially, what S&P proposes is as U.S.
companies become more global, they have been generating increasingly higher portion of their cash flow from overseas. This is subject to taxes as high as 35% upon repatriation.
And this is a topic being discussed actively in the press. While many cash uses are domestic in nature, such as share repurchases and dividends, cash flow is increasingly generated overseas, leaving companies with domestic cash deficits even as overseas cash piles up.
The S&P study proposes that companies are issuing debt as a form of synthetic cash repatriation. Moving to the next slide.
Here, we depict a number of European corporate bond issuers by year since 1989. Take a look at the increase of issuers in 2013 as European banks deleveraged and more companies accessed the corporate bond markets.
Also noteworthy is the growing number of high-yield issuers over the past 6 years in Europe. More recently, investors' appetite for high yields in this low interest rate environment has helped fuel an increase in over 100% in high-yield issuance in the second quarter, along with the traditional bank constraints and disintermediations.
Now let me update you on developments on the litigation front. Our case statistics remain unchanged from the first quarter.
That leaves us with a couple dozen nongovernment cases that remain outstanding. During the quarter, IKB Deutsche Industriebank AG filed a suit related to the Rhinebridge structured investment vehicle.
You may recall that in an earlier case related to the Rhinebridge SIV, IKB was a codefendant as the manager of the SIV. We have filed a motion to dismiss this lawsuit.
In the CalPERS case, the California appellate court affirmed the denial of our motion to strike the complaint under anti-SLAPP law. We are seeking review by the California Supreme Court.
In the Department of Justice case, discovery is underway, and we are working through our first wave of documents provided by the government while continuing to seek further discovery from the government and third parties. A hearing will be held later today in California in the DOJ case to address outstanding discovery issues.
And as I'm sure you're all aware, the company received a Wells Notice last week regarding S&P's ratings of certain commercial mortgage-backed securities in 2011. We issued a press release about it.
We're cooperating with the SEC with respect to this matter, and there is little more we can add on this subject today. Now let me move on to S&P Capital IQ, which delivered top line growth of 7% this quarter.
Excluding a lost revenue from ongoing portfolio rationalization of several small products, organic growth was approximately 8%. The largest contributors to the growth were S&P Capital IQ Desktop and RatingsXpress.
Adjusted operating profit increased year-over-year for the fourth straight quarter and the margin increased modestly. Lastly, rollouts continued on a wave of new desktop capabilities, which I'll discuss in a moment.
Here are the 3 business lines within S&P Capital IQ. S&P Capital IQ Desktop & Enterprise Solutions revenue increased 9%.
And this is principally driven by a 12% increase in desktop revenue. S&P Credit Solutions revenue increased 7%.
This was driven by an 11% increase in RatingsXpress. And while the S&P Capital Markets Intelligence revenue only increased 1%, it was driven by double-digit growth in Leveraged Commentary & Data and Global Markets Intelligence.
This was largely offset to get to the 1% level by shutting down of the FMR Europe and declines in Equity Research Services. We have several new products that are scheduled to launch this year.
In the first quarter, we've already discussed the launch of Credit Analytics. And this quarter, I want to share more about PresCenter, which launched earlier this month.
PresCenter is a productivity tool. It embeds Microsoft Office products within S&P Capital IQ Desktops to allow seamless links between data and presentations.
It has customized features like quick keys and autocheck that ensure compliance with corporate design guidelines. And PresCenter streamlines pitchbook creation and ensures consistency with changes in source data.
This is a product that many of you on this call will find very useful. And you can learn more at www.spcapitaliq-prescenter.com or contact your S&P Capital IQ sales rep.
Now let me turn to S&P Dow Jones Indices. The business delivered an 8% increase in revenue with a 6% increase in operating profit.
Revenue growth with increased licensing from ETF and mutual fund customers was partially offset by subdued derivative volume trading. ETF assets under management associated with S&P Dow Jones Indices reached a new record this last quarter.
As discussed, our marketing agreement for the UBS Commodities Indices expired in June and the contract was not renewed. While we'll lose this revenue associated with the commercial arrangement, we expect our recent action with the S&P GSCI index license will largely offset the impact on profits.
Year-on-year expenses increased 10% due to targeted headcount additions and the timing of marketing costs. If we turn to the key business drivers, ETF AUMs associated with our indices increased 32% to a record $719 billion from the end of the second quarter of 2013.
Importantly, 11% of this increase was the result of new inflows. Frequently, when equity markets rise in a low volatility environment, derivative trading volumes decline.
And that was the case this quarter as derivative trading volumes decreased. Two key products, SPX and E-mini S&P 500 Futures, the trading volumes decreased 13% and 26%, respectively.
S&P Dow Jones Indices continues to expand its product offerings and partner relationships around the world. During the quarter, the business introduced the Dow Jones Commodity Index, which will serve as a complement to the S&P GSCI.
In speaking with market participants, it became apparent there was a clear need for a commodity index which is highly liquid, avoids large sector weights, is transparent in its methodology and is independently governed. The S&P Dow Jones Commodity Index meets each of these criteria and fills an important gap in the marketplace.
Witnessing interest in alternatively weighted strategies, S&P Dow Jones Indices launched 2 comprehensive global factor index families. The first, S&P Low Beta indices, and the other, S&P Intrinsic Value Weighted indices.
They're designed to serve as benchmarks or investable solutions. S&P Dow Jones Indices launched the deepest and most extensive suite of African equity indices currently available to investors.
New equity indices covering South Africa and Pan-Africa countries were launched, providing investors in Africa as well as those outside with a comprehensive offering of indices measuring the performance of African equity markets. And licenses for ETFs in South Africa, Nigeria and 11 ETNs in Sub-Saharan Africa have already been launched.
Our clients continue to launch ETFs in other emerging markets based on the indices as well. This includes the listing of an ETF which tracks the S&P 500 on the Brazilian stock exchange; an ETF based on the S&P Colombia Select Index that started trading on the Bolsa de Valores de Colombia and is the first ETF launched in the Colombian market; 3 ETFs listed in the Korean exchange, the KRX.
These track the S&P Select Sector Technology index, the S&P Select Sector Industrials index and the S&P Select Sector Financials index, and they represent new exposures offered via ETFs on the KRX. All great product innovation and international diversification from the team at S&P Dow Jones Indices.
With that, now let me turn to Commodities & Commercial Markets. Revenue grew 1% in the quarter.
But excluding the impact of the sale of Aviation Week, organic revenue actually increased 8%. Platts and J.D.
Power both delivered organic growth in the quarter, which was partially offset by softness in McGraw Hill Construction. Overall operating profit was unchanged.
Excluding the sale of Aviation Week, however, operating profit increased approximately 6%. I'd like to note that despite the absence of Aviation Week in our portfolio, Commodities & Commercial Markets was able to deliver identical operating profit as a year ago, which had included the results of Aviation Week.
As you see here, Platts delivered a 9% increase in revenue for the quarter. Platts' price assessment and market data subscriptions continued to deliver double-digit revenue growth.
However, Global Trading Services licensing revenue decreased due to weaker trading volumes for natural gas and petroleum. Trading volumes have been impacted primarily by the lack of price volatility, and secondarily, as a result of certain banks eliminating their commodity trading operations.
With fewer financial players participating in the trading of commodity derivatives, there is less liquidity for physical players. Power & Gas and Petrochemicals, Petroleum all delivered single-digit revenue growth while Metals & Agriculture, building on recent investments, provided the greatest growth at 29%.
Platts continues to launch new valuable products and services, and I'd like to highlight a few. The first relates to Platts' pioneering coverage for U.S.
shale oil assessment for the Williston Basin. The new Platts Bakken offering, announced on April 23, captures an assessment of the value of Bakken crude oil nearest to the wellhead in the Williston Basin.
That's the point where there's a choice of transportation between rail and pipeline. Some 70% of the total back-end production, at least 1 million barrels per day, has moved by rail thus far in 2014.
But the role of pipelines will grow as several projects are coming online by 2016. In addition, pipeline capacity creates the need for price discovery at the point that allows for transportation flexibility in the largest base of Bakken supply.
The second includes enhancements to the Minerals Value Service, MVS. It's an online platform for analytics.
MVS is a Munich-based company providing an innovative and user-friendly solution to value-in-use pricing for iron ore. The MVS value-in-use application enables subscribers to calculate the fair price of their product faster and more accurately than ever before.
And the third was the launch of Dry Freight Wire. The location of commodities is essential to the price discovery process, and shipping information is essential to our customers.
Dry Freight Wire is a daily report that consolidates all of Platts' prices, news and market commentary related to dry commodity shipping. Targeted at shipowners, charters and trading houses, it addresses the market's growing need for an independent source of daily dry freight prices backed by sound methodology.
This expands Platts' portfolio of products dedicated to shipping. Earlier this month, Platts announced the acquisition of Eclipse Energy Group, another acquisition that broadens our capabilities beyond oil.
Founded in 2002 with offices in London, Norway and Singapore, Eclipse Energy Group is a leader in providing market data and analysis for European natural gas, power and LGN markets -- LNG markets. This acquisition enables Platts to help market participants better understand market dynamics and drivers of price.
In the same way that BENTEK bolstered our U.S. natural gas business, we anticipate Eclipse Energy Group will help Platts succeed in a rapidly changing European natural gas market.
Now turning to Commercial Markets. Revenue decreased 7%.
However, excluding the sale of Aviation Week, organic growth increased 7% in the quarter. J.D.
Power achieved double-digit revenue growth, led by the auto business and licensing fees from customer usage of its brand, led by businesses in both North America and Asia Pacific. As we announced earlier this year, we continue to explore strategic alternatives for McGraw Hill Construction.
We've had conversations with a number of interested parties but cannot provide any further update at this time. Summing all of this up.
We delivered another strong quarter as we continued to create growth and drive performance across the company. Total revenue increased 8% and was supported by 10% international revenue growth.
We added another tuck-in acquisition with the addition of Eclipse Energy Group to bolster Platts' European natural gas capabilities. And S&P Capital IQ launched PresCenter, while S&P Platts -- S&P Dow Jones Indices and Platts each launched a number of new benchmarks and products.
Financially, the company delivered 15% adjusted diluted EPS growth over the toughest quarterly in comparison in 2013 and increased 2014 adjusted diluted EPS guidance by $0.05 to a range of $3.80 to $3.90. Lastly, we continue to strengthen the leadership team to better position the company for our future.
I want to thank all of you for joining the call this morning. And now I'm going to hand it over to Jack Callahan, our Chief Financial Officer.
Thank you.
John F. Callahan
Thank you, Doug. Good morning to everyone joining us on the call.
This morning, I want to briefly discuss several items related to second quarter performance. This was a relatively straightforward quarter, so I don't have a great deal to add.
First, I want to recap key consolidated financial results in the quarter. Second, I will provide updates on the balance sheet, free cash flow and return of capital.
And finally, I will review our updated guidance. In the second quarter, revenue grew 8% with organic revenue growing approximately 1 point faster, the difference resulting from the sale of Aviation Week last year as well as the sale of Financial Communications and a small product line closure at S&P Capital IQ.
Segment operating profit grew 10%. Excluding the impact of the sale of Aviation Week, all 4 businesses contributed to operating profit growth.
Most notably, S&P Ratings Services led the way with operating profit growth of 15%. In addition, after cycling through a period of stepped-up investments, S&P Capital IQ has delivered adjusted profit growth in each of the last 4 quarters.
Adjusted unallocated expense increased by $10 million due almost entirely to recent asset sales. During the quarter, the company entered into an agreement to sell the company aircraft at a price in line with its appraised value but did incur a noncash impairment charge associated with this transaction.
In addition, the company incurred a one-time expense associated with the sale of its data center on the company's South Campus in East Windsor, New Jersey. The tax rate was 33.1% in the quarter, bringing the year-to-date tax rate to 33.5%.
This lower rate is the result of ongoing tax planning. For the full year, we now anticipate an effective tax rate of 33.5%, in line with year-to-date results, a 50 basis points improvement versus our previous guidance.
Adjusted net income increased 13% and adjusted diluted earnings per share increased 15% to $1.06. The average diluted shares outstanding decreased by 2.2 million shares versus a year ago and over 1.1 million sequentially versus the first quarter of 2014.
There were no adjustments to GAAP results this quarter. We continue to maintain an exceptionally strong balance sheet.
As of the end of the quarter, we had $1.6 billion of cash and equivalents, of which almost $1 billion is held outside of the United States. We continue to have $800 million of long-term debt.
Going forward, this strong balance sheet positions us to continue to make investments that strengthen the portfolio, such as Eclipse Energy Group, and as appropriate, sustain our share repurchase program. Our free cash flow during the first half of the year was $392 million versus $145 million a year ago.
The improvement was primarily due to the timing of tax payments and increased income from operations. We continue to expect free cash flow of approximately $1 billion in 2014.
Now let me update you on our return of capital activity. During the second quarter, approximately 2.2 million shares were repurchased at an average price of $79.65 per share.
Year-to-date, we have repurchased a total of 4.4 million shares at an average price of $79.06. That leaves 45.6 million shares available in the current share repurchase authorization.
We anticipate selectively continuing share repurchase activity, subject to market conditions. In addition, we continue to return cash to shareholders through our dividend, which totaled $163 million year-to-date.
Now I'd like to turn to our 2014 guidance. We have made several changes.
First, because of the additional expense incurred that are associated with the sale of the corporate aircraft and the data center, we have increased our adjusted unallocated expense guidance by $10 million. Next, as previously mentioned, we've lowered our full year tax rate guidance from 34% to 33.5% as international growth continues to outpace domestic growth and the benefits of tax planning initiatives are realized.
Finally, we've increased our 2014 adjusted diluted earnings per share guidance by $0.05 to a range of $3.80 to $3.90 based upon strong first half results and a solid outlook for the remainder of the year. This outlook anticipates higher legal expense than we previously expected as well as benefits from ongoing productivity initiatives.
The remaining elements of our 2014 guidance remain unchanged. In closing, we continue to focus on creating growth and driving performance.
We have delivered strong first half results and anticipate similar results in the back half, driven by many of the secular drivers of growth previously discussed. That said, market volatility could impact results as the issuance trends can be volatile.
Again thank you for joining us today on the call. And let me turn it back over to Chip.
Robert S. Merritt
Thanks, Jack. [Operator Instructions] Operator, we'll now take our first question.
Operator
Our first question comes from Hamzah Mazari with Crédit Suisse.
Hamzah Mazari
The first question is just on the cost-cutting initiatives. Could you maybe update us on where we are tracking relative to the $100 million plus cost savings that you folks had outlined?
And also whether within that $100 million, do you have anything baked in, in terms of taking out supervisory labor within the Ratings business?
John F. Callahan
Well, we are very much on track in terms of driving the initiatives that support the over $100 million cost-reduction program. As we've commented earlier, it is going to take us a period of time to ramp up, given the nature of some of these cost-reduction programs.
So as we've mentioned in the past, there is an initiative underway to consolidate our real estate footprint, particularly here in New York City. We are doing a great deal of work in the area of procurement, leveraging the scale of the corporation across a number of different cost areas, including technology and data.
And we're making some choices. I mean, I think an example from today's call is just the decision to sell our corporate aircraft, which is another example of some of the specific decisions that we're making that contribute to this cost-out target.
And then lastly, we are looking at workflow across the businesses to see if we can do things in a more productive fashion and in places that could impact some of the workforce and some of the businesses, including Ratings. Doug, I don't know if you want to add to that.
Douglas L. Peterson
I'd just add that there is a commitment across all of the businesses which goes beyond the $100 million savings to ensure that we're always operating with the highest quality of controls and compliance and with also productivity opportunities that allow us to operate with that level as well as having a good quality savings and better expense management. So this is a philosophy across all the businesses.
You'll hear us talk about opportunities for continuous improvement and how we manage the place. And that's something that we're embedding in the philosophy of the way we work.
Hamzah Mazari
And just a follow-up question on S&P CapIQ. You've done a lot of restructuring within that segment.
There's been a leadership change as well. Could you give us a sense of how we should think about margins within that business?
You talked about product rollouts. Is there a lot of product investment that's rolling through the P&L that's depressing margins this quarter?
Or is the business just becoming much more competitive? How should we think about where we are in terms of margin and where we go?
John F. Callahan
Well, I think we did go through a period of stepped-up investment in that business. There remains a fair amount of investment that's built into the P&L.
But you have seen a return of profit growth in that segment for the last 4 quarters. So on a go-forward basis, we do anticipate some modest continued improvement in margins.
But we're also investing to be sure that we have a great growth vehicle here. So I think some steady margin progression is reasonable.
But again our priority is really to drive growth in the business.
Douglas L. Peterson
The other thing I'd add is that you're seeing some overlaps that included products, FMR and some other research areas that we deemphasized and shrank. So there also are -- some of the margins have also been depressed somewhat by the overlap.
So as we get past those overlaps and we get into the true organic growth, you'll also see some improvements in margin.
Hamzah Mazari
Just a last question, I'll turn it over, Jack. This is a question for Jack.
Is the settlement amount with the DOJ tax-deductible for you guys?
John F. Callahan
We would expect perhaps, more likely than not.
Operator
Our next question comes from Manav Patnaik with Barclays.
Manav Patnaik
First, just to clarify a couple of housekeeping items. So the corporate expenses that you're now guiding to increase $10 million, that's solely because of the aircraft and the data center?
And also just on the free cash flow, just to confirm, that $1 billion is that a calculation that's after dividends or before?
John F. Callahan
I'll take the last one. It is before the dividends.
So you would have to take the projection for the full year dividend off the $1 billion. And then yes, the only change in our view of unallocated expense is solely driven by the impact, the noncash impact of the impairment relative to the corporate aircraft and the incremental costs of closing the sale of the data center.
That's the only change on our unallocated expense guidance.
Manav Patnaik
Okay. And then just on CapIQ as well.
I mean, it seems like at least the CapIQ Desktop and RatingsDirect and so forth, they seem to be doing pretty well. I was just wondering if you could maybe give a little bit more color in terms of the change of leadership there.
And what -- I guess, you wrote in the presentation, search is underway. Like what characteristics you'd be looking for?
Douglas L. Peterson
Yes. So first of all, as I said before, we wanted to thank Lou for his service to the company and wish him the best as he moves on to new opportunities.
CapIQ is a business that has incredible growth opportunities when you look across the landscape of financial services with all of the different disintermediation going on, new players entering the market in the shadow banking world, non-regulated world. In addition, within the regulated world, all of the new requirements for capital, capital modeling, for pricing, for liquidity purposes, et cetera, and then portfolio management, liquidity management, et cetera.
So we have different types of tools across that entire suite of needs and are focusing our areas in the Desktop & Enterprise Solutions. We recently hired Neil Smith to help us lead the Credit Solutions, which is a nexus point between our credit ratings intellectual property as well as our Capital IQ delivery channels.
And Neil is off to a great start as well to bring more focus and more drive to the growth in the Credit Solutions area. So in a way, what we're doing is with Imogen, who is a great leader and our interim leader there, she's really helping the team focus on delivering what we already have in our pipeline and making sure that we have crisp delivery over the rest of the year of all our different new projects and in addition to that, having a strong strategy to address all of the needs going forward.
So really you won't see a lot of changes from what we've already been doing with CapIQ. We really see that this business is on a great track already, and we will continue to focus on where we're headed.
And we'll keep reporting out how things are going, all of the launches of our new products. But what we see is a great opportunity.
In terms of leadership, this is a role that requires somebody to have a combination of knowledge of the markets, technology expertise and experience, especially when it comes to delivering complex product to the market as well as leadership and management skills. So we're looking for a broad set of leadership, management, technology and market skills for this role.
Manav Patnaik
Okay. And I just wanted to congratulate Ken Vittor as well.
And maybe if I can ask him 1 last question, which is just regarding this new IKB case. I was just curious maybe you can refresh us in terms of the statutes of limitations and if -- I guess, I was a little surprised that a new case was filed pretty recently.
Kenneth M. Vittor
Thank you for your comments. We have moved to dismiss the IKB lawsuit on statute of limitations grounds.
We are arguing that, that case is governed by German law. And under German law, there is a 3-year statute of limitations, which we believe has long since expired since these events predate by more than 3 years the subject of the lawsuit.
So we have filed that motion, and it should be heard and decided sometime in the fall.
Operator
Our next question comes from William Bird with FBR.
William G. Bird
Doug, I was wondering if you could just discuss how you see the S&P Ratings pipeline shaping up right now. And also on guidance, what does it assume for S&P Ratings in the back half?
Douglas L. Peterson
Well, thank you, Bill. The S&P Ratings, as you know, has been off to a fantastic start this year but with a different mix than we've seen in a couple of prior years.
First of all, we continue to see an increasing demand from bank loan ratings as well as what you saw in the European -- the slides we showed with the European bank disintermediation. So there is a -- continued to be a growth in areas that are tied to market needs.
For example, as banks disintermediate and manage their capital more tightly, they shrink their loan positions, which means that they go to ABS markets. They're securitizing credit card loans or securitizing car loans.
They're selling loans into CLOs. All of that goes into the structured finance market.
In Europe, what this means is their traditional borrowers are packaging bonds instead of going for bank loans, and they're going to the markets with what you saw on one of our charts, Chart 13. You also see in the U.S.
as well as in Europe an increase in financial institutions raising capital in the markets, both hybrid-type bonds as well as other senior bonds, which are required for part of their living wills and OLA in the U.S. So you see a mix shift compared to a year ago, when it was a very heavily corporate -- high-yield U.S.
corporate-driven market. So we're continuing to watch markets very carefully to see how the trends continue.
We do see some of these continuing through the year, and we've built that into our guidance. And so that's the type of analysis that we're doing for the rest of the year for the capital markets and the impact on Ratings.
William G. Bird
And I was wondering, as you look at how S&P is performing versus Moody's, for example, are there any observable differences that you see that might explain some of the growth differences?
Douglas L. Peterson
There's a couple that we see. One is obviously related to the structured finance markets in the U.S., in particular, the CMBS market.
That's 1 very specific area where we have a weaker business. We are addressing that and looking carefully at it.
So that's 1 area. Secondarily, there are markets like the European markets.
They were slower to have a business there last year. First quarter last year, we had a stronger business than they did.
They played catch-up and they've had strong growth. On fees, there's some shift quarter-by-quarter how you can see the growth, comparing ours to Moody's.
And then on the transaction services, as you know, we have a larger non-transaction business portfolio than they do, which sometimes also has to do with the overall growth at the top line. In addition, it's a very competitive market.
We have other new entrants into the market, and we see a lot of demand from the markets now for other players in the structured finance markets in the U.S. So many, many different factors for that, but we're very pleased with our growth and with our coverage of the markets.
And we will continue to have this very broad global coverage across all asset classes and we will be competitive across all of them.
Operator
Our next question comes from Tim McHugh with William Blair.
Timothy McHugh
Just on Capital IQ, I know you've been asked a few things about it. But in general, I guess, some of your competitors, such as FactSet, have had better numbers like we as well.
Do you see the demand environment changing? Or I guess, how much do you attribute to internal product development that's hitting the market versus an external market that's getting better for that sector?
Douglas L. Peterson
Well, first of all, I think that there's different elements of what's apple and oranges. So comparing a straight FactSet to the segment of CapIQ is, as I said, a little bit of an apple, oranges.
We have in our segment different products and services, which range from research, fundamental research, our Credit Solutions, our distribution of Ratings IP, which are not necessarily in the FactSet business model. We also have a different type of enterprise solution.
So comparing them apples-to-apples for the whole group is not necessarily the way to look at it. When we look at it, we think we're very competitive with FactSet.
We are both introducing new products. As I mentioned in the Ratings area, there's a lot of excellent competition.
We have great respect for our competitors, and we see great things coming out from them. But we are also ourselves developing and delivering very innovative products that are driven by demand from investors and from financial services players in the markets.
So we're watching our competitors closely, but we think that we've got in our pipeline and also in our delivery things which are just as interesting and just as innovative.
Timothy McHugh
Okay, great. And then Platts, the petroleum type of products, which I believe is still the majority of the revenue, I guess, single-digit growth versus I think it was still double-digit growth last quarter.
Is that purely the trading-related revenue? Or I guess, if we looked at subscription revenue just for the oil or petroleum area, was there any change or, I guess, something to note?
Douglas L. Peterson
Yes. Petroleum, in the petroleum group, that's our largest, and significantly in the first quarter, grew very quickly and had a strong quarter.
This quarter was weaker principally because of the trading services. And as I mentioned, this lack of volatility and lack of liquidity is a big theme.
It's not just one, as you saw with the Platts, it's also something that had an impact on S&P Dow Jones Indices in our SPX and E-mini trading on CBOE. So you can see that there is a trend, as you have things like the Volcker Rule and the new capital and the commodity rules coming into banks on their trading books, you're seeing lower levels of trading liquidity and you're also seeing lower volatility.
So in our business, it impacted S&P Dow Jones Indices. It also impacted Platts.
And that's the major explanation for the slower revenue growth in the Platts petroleum business in this quarter.
Operator
Our next question comes from Joseph Foresi with Janney Montgomery Scott.
Joseph D. Foresi
My first question is on the Ratings business. I think you had given us a rough idea what your expectations for that business were for this year.
Is there any update to that? And how should we think about the early-year strength versus what you're expecting for the full year?
Douglas L. Peterson
Yes, we just gave for the total company.
John F. Callahan
Yes. We didn't give on specific business-level guidance.
But I mean, just given the importance of Ratings to the overall mix both in terms of revenue and profit, it's not inconsistent with our overall company, that guidance of mid-single-digit revenue growth and sustained margin expansion. And I think it was nice to see the very strong second quarter for the business up against a very tough comp versus a year ago.
And we look forward to the balance of the year that right now looks to be sort of in line with first half results.
Joseph D. Foresi
Okay. And then in the Commodities business, remind us what percentage, I think, it might have been 10%, but correct me if I'm wrong, is linked to trading?
And what are your thoughts on that as we head to the back half of the year?
Douglas L. Peterson
Do you know the actual...
John F. Callahan
Yes. The non-subscription part of Platts, which is largely the trading volume, is around 10%, so it's a small piece.
So it goes back to Doug's earlier comments about we still can see strong double-digit growth on the subscription side of the business. And it's hard to predict the trading volumes.
I think it's going to continue to remain volatile. So our current guidance does not anticipate a great rebound.
But that being said, it's only 10% of the business, so I think it's manageable in the overall context of the total Platts business.
Douglas L. Peterson
And one of the things to think about is, as these banks shut down their trading operations, where do these people go? Do they spring up elsewhere and begin trading on other platforms?
So that's something to keep an eye out for.
John F. Callahan
The other thing we keep an eye out for are broad macro trends. There's a lot of uncertainty right now is with what's happening in the Ukraine, what you see happening in the Middle East and also the new production coming on around the globe of shale gas, et cetera.
So we watch these trends as well to see what sort of volatility will come back into the market potentially.
Operator
Our next question comes from Craig Huber with Huber Research Partners.
Craig A. Huber
My first question, I guess, to put it this way, the most significant question or concern I get from investors in recent years is asking me what is the right capital structure for your company? Why do you not -- why will you not add 1 to 2 turns of leverage to buy back a lot more stock?
John F. Callahan
Yes, Craig. You get the question a lot and we get the question a lot.
I think there's -- I think we should view where we are as a moment in time. We have maybe a little stronger balance sheet today because of the sale of Education, which gave us some additional inflows.
We also, I think, for this moment in time, until some of the legal issues sort of are resolved as we move forward, we believe it's prudent to have maybe a little bit extra flexibility in the balance sheet because we don't want these issues getting in the way of us making decisions to build this business. So we also want the room to do an acquisition if we think that's also the right thing to do to build the business.
So I think it is fair to acknowledge, we may have a bit more flexibility than we would need over the long term. But as some of these issues are resolved, I think we can kind of come back and take a fresher look at the balance sheet at the appropriate time.
Craig A. Huber
Then my other question, if I could ask. Could you just talk a little bit further about what you're seeing in structured finance here in the first month or so, the second half of year just on top of the comments you talked about before?
I mean, does any of these trends you're seeing -- you saw in the second quarter structured finance sustainable? Or do you think it's more of a blip?
Douglas L. Peterson
I think that this -- from what we see in structured finance market, sustainable, whether it's sustainable over, is it looking at a quarter, 2 quarters, 3 quarters, et cetera, there are trends right now with the way that banks are managing their balance sheets that they are shifting liquidity into their balance sheet by securitizing assets, which are easily securitizable with very strong traditional markets, like credit cards. Two years ago, there were no credit card deals being done.
They started creeping back to the market. They were up over 100% year-on-year compared to last year.
So you do see kind of those shifts moving around within the securitized markets. Probably the most curious securitized markets though aren't in the U.S., they're in Europe.
The securitization markets in Europe have continued to be incredibly anemic for the last 5 years despite the interest from regulators and policymakers to see stronger securitization market. Mario Draghi, about 2 months ago, and the EBS published a report that if they wanted to undertake more aggressive quantitative easing in Europe, they would have to do that by buying up government bonds and municipal bonds, which is actually not allowed in their mandate or they'd have to have some sort of new interpretation to their mandate.
So he's actually been trying to ask markets to become more active in the structured finance markets, so there are more types of assets to give more flexibility to banks to manage their balance sheet, to the EBS to have more tools in case they did want to take on programs like quantitative easing more aggressively. So I know in Europe, there's a lot of interest from different market players to try to have much more active and new markets in the structured finance area.
So if we look at Europe, if we are able to see a return to structured finance markets that's not just covered bonds, which is really the only strong sector in Europe of structured finance is government bonds -- I mean, sorry, covered bonds, we should see some sort of return to structured finance there. In the U.S., my general outlook and what we've looked at with the business is continued strength in structured finance, although the mix might shift between credit cards, car loans.
It might shift into more real estate. It might shift into more traditional corporate receivable assets, et cetera.
But generally speaking, we see a continued robustness in the structured finance market with the exception of Europe, which needs to have some pretty fundamental changes in attitude as well as banks and others thinking about how they want to make that business come back to life.
Craig A. Huber
My final quick question, please. In your Ratings business, how much was non-legal costs up, if the overall costs were up 7.5%?
I just want to get a sense how it's trending. Was it up like low single-digits?
John F. Callahan
Let's just say, the most significant driver of increase in expenses was legal. But let's leave it at that for right now.
Operator
Our next question comes from Peter Appert with Piper Jaffray.
Peter P. Appert
So Doug, you've got a new senior management team at S&P Ratings. It looks like they're making some structural changes in the business.
Can you highlight some of the changes that are going on there and talk about how you see the opportunity to close the margin gap versus Moody's?
Douglas L. Peterson
Well, there's a couple things about the structural changes. First of all, they're not driven necessarily to close the structural gap with Moody's.
They're driven by doing the right thing for markets, to have the right type of approach to continuous improvement, which means that we're looking at the right mix of talent across different markets, where we can be close to where customers and where markets are, so we're on top of trends and patterns and activities taking place, whether it's in the U.S., the international markets. So that, first of all, we're looking carefully at how will we spread our talent and our people around.
And what that means is it sometimes it means that we're going to have to rebalance. We're also looking at the rebalance of skills and to make sure that we have the right level of more junior analysts that are number crunchers and are coming up in their career, along with -- balanced with masters, who have very long careers and are known as experts in their field.
So we're looking at different mixes of talent and different mixes of market coverage. And we're also looking at how we can ensure that we have the right type of technology.
But all of this is founded on a foundation of control, of compliance, of ensuring that we're always doing the right thing for the markets. And as part of that, one of the results in my long career has been that when you focus on quality, you focus on process management, you focus on engaged, talented people, you usually also get some productivity opportunities.
And out of that result would be potentially some cost savings. So there is an opportunity for us to, through a structural way, have potentially some savings to look at the margin gap with Moody's.
But it's being driven from a different direction. Second of all, we do have significant legal expenses.
That is, probably along with CMBS, the 2 major differences in the margin gap with Moody's. And clearly, we're looking at both of those.
We have, as you know, an active program to actively manage our litigation with the DOJ and the states. This is not something that we're passive about, and we look at that very carefully.
The 2 things that would close the margin gap with Moody's the fastest would be having no or kind of normalized legal expenses and getting a recovery in our CMBS business. So those are 2 things we're looking at carefully.
But in the broader sense of operating, Neeraj Sahai is doing an absolutely fantastic job thinking about how we work, how we do our workflow, how we have the right resources in the markets, et cetera, that I mentioned before. But I'm very pleased with our progress there.
Peter P. Appert
That's helpful. On the legal cost front, is the current quarter a good run rate number?
Or are there further step-ups to anticipate as the DOJ thing continues?
John F. Callahan
I think the current step-up is probably appropriate to get us through the year. But we're watching it carefully.
Peter P. Appert
Okay. And then just 1 last thing.
Doug, you highlighted increased competition in the structured finance area. Are you seeing changes to the competitive dynamic in other asset classes as well?
Or is it really just in structured finance?
Douglas L. Peterson
There are, in the e U.S., it's primarily in the structured finance area. And then internationally, in the emerging markets, almost every emerging market that has new emerging capital markets has local rating agencies.
They're cropping up around the world. They're in Indonesia, in Malaysia, in the Middle East, in China, et cetera.
So we do face a lot of local competition around the globe, and it's something that we also see. So you have that type of competition around the globe, and then you've got in the U.S., in particular, it's in structured finance.
John F. Callahan
And I'm going to have Ken comment on the phases quickly because I think it's helpful for folks in terms of expense discovery.
Kenneth M. Vittor
Yes. I mean, we are in the early stages of active discovery in the DOJ case so that obviously adds to the level of expense that we previously had.
And then in the State AG cases, they have now been remanded to the state courts. And in each of those state courts, we are in the process of filing motions to dismiss on a number of grounds, including jurisdictional grounds.
So that has added a level of expense this quarter.
Operator
Our next question comes from Alex Kramm with UBS.
Alex Kramm
I guess, Doug, first of all, you mentioned the CMBS area a couple of times. So maybe you can give a little bit more detail what's going on, and how you see that moving around.
I mean, there were some headlines that there are some shifts in where people are or people essentially leaving. And I think talking to some DCM [ph], some people say you essentially exited the market now.
So I mean, is this a business that you actually want to continue to be in? I mean, when I look at your numbers, I think this maybe is like a $0.02 per year kind of business at this point, if I've got my math right.
So are you still very committed? Or is this something that you just pack up and focus resources elsewhere?
Douglas L. Peterson
We are very committed to the CMBS business. As I said before, we are a global rating agency with multi-asset class coverage.
And so if we're retooling the business because we want to have resources closer to where the actual real estate markets are as well as some leadership changes, that doesn't mean that we're pulling back. So we are looking at some retooling of resources, but this is a market that we're committed to.
Alex Kramm
Okay, fair enough. And then secondly, also on the ratings agency, I think Janet Yellen, a couple weeks ago, made some comments around the leveraged loan business.
And obviously, you highlighted it as an area of strength. And I think what she said is that the quality of that business has been deteriorating or the quality of debt in that business has been deteriorating.
So just wondering how you see that business continuing to play out, if you agree with some of the things that she's saying, if that could change the kind of like dynamics in terms of what banks or players are involved in the business and obviously, how you fit in there.
Douglas L. Peterson
Yes. I think that there are questions in the market, and we're actually seeing some of those.
And we do have some research reports that Chip could get to you that we've been issuing recently about covenants, about leverage levels, things like that, that we've been seeing recently. Now one of the things that is different, so to speak, from the financial crisis is that the types of securities that could be linked to these loans as well as these loans themselves are not AAA-rated loans.
They are loans that we're rating in the deep. Many of them are rated deep in the noninvestment-grade scale.
They're B, CCC-type securities. And so some of the risks that what I see taking place in these securities isn't necessarily on the assessment of the credit quality, it's on the pricing.
And so there's a lot of discussion going on. If you're seeing a CCC, CC, B securities which are being issued, but they are being priced as if they were AA securities, people could be taking more risk.
And so later on, let's make sure that if something goes wrong, they're not blaming rating agencies for that. So we're looking carefully at that.
But importantly, one of the very important changes or modifications we made to our overall Ratings business is what we call a Credit Conditions Committees. We have a quarterly team that gets together around the globe, first, regionally, and then at a global level, to look at trends and patterns and different signals that we get from the markets.
We do this with our economists. We do it with different practice leaders, covering areas like energy, financial services, industrial, so that we can get a view.
And we look for credit bubbles. And we have identified some in markets like China, like Canada.
We're looking carefully at areas like leveraged loans so that we can also have an opinion about those. So I would say that Janet Yellen is seeing some of the measures that are important for us.
We actually listen very carefully to everything that Janet Yellen says, like everybody else does, for any signals on interest rates or any signals that she's seeing in markets. The Fed has systemic-wide macro data, which is incredibly valuable for us to hear from her on those signals.
And we've incorporated what she said into our business and our feedback. And as I said, Chip can get you some of the reports that we've recently done on this topic.
Operator
Our next question comes from Andre Benjamin with Goldman Sachs.
Andre Benjamin
First, on Capital IQ, I just wanted to follow up on the topic of changes in the competitive dynamic. I know in the past, you've talked about using new product innovation to add seats but also allow you to increase pricing to narrow some of the gap between you and competitors.
So I was just wondering, is that something you're seeing today? And how much of the 8% organic growth that you talked about is more of that pricing dynamic versus adding seats and products?
Douglas L. Peterson
Well, first of all, we're doing both of these. It's too early to tell right now from some of the new products which ones are going to drive the growth because the newest products that we have are in launch right now, and they're still with new clients.
They're not out at a volume scale level yet. But in terms of what's ongoing, we're looking at a combination of seats of overall enterprise pricing or by seat pricing, and then we're also looking at feature pricing.
Some of the services that we deliver, as an example, in the Credit Solutions area, are certain models, certain data that's delivered in a way that there's a lot of value for the users in just paying for that data alone and not necessarily buying an entire seat. So we're looking at all the different elements of features of what we're delivering, what's the pricing level, and then what is the suite of products that we're actually delivering and how are we pricing for that because we think that, in some cases, we have more upside to price specifically for product features instead of delivering an entire suite that people might not even need.
So this would be a great topic for us to have more discussion on going forward. Imogen is looking in depth at this topic right now.
And it's something that we're looking at in depth, and it would be a great topic for future conversations.
John F. Callahan
But just 1 more thing I'd add is just, and there's always a challenge of trying to think through the actual market growth, given the broad areas in which this business competes in. But in general, we probably are benefiting more from growth in either the market or market share.
[indiscernible] all being said, pricing realization is making some contribution to the overall revenue growth rate. But I think the market and share are the primary drivers right now.
Andre Benjamin
And 1 quick follow-up, if I may. In the J.D.
Power business, I apologize if missed this in the remarks before I joined, can you talk about where you're specifically seeing growth contributions, given the auto market has been pretty strong? How much of it is the Asia expansion versus strength in the U.S.
or Europe?
Douglas L. Peterson
It's both. Well, it's both Asia and it's the U.S.
Both markets have very strong auto businesses. So there's really 3 contributors.
The first is the auto business in the U.S. Second is the auto business in Asia, especially in China.
And the third is investments that have been made in other non-auto or other industries in the U.S. that have also started seeing some growth.
So this has been a widely distributed growth story for J.D. Power.
And it was double-digit this last quarter. So we are very pleased with the results from J.D.
Power.
Operator
We will now take our final question from Bill Warmington with Wells Fargo Securities.
William A. Warmington
I have a capital allocation question for you here as we are at the midpoint for 2014 and with very strong free cash flow. Just asking in terms of if you have any thoughts about how you want to deploy that as you head into the second half in terms of buyback and M&A activity.
And then as an add-on to that, if there's any way to tap that $1 billion offshore either through M&A or some other way.
John F. Callahan
Well, let me start. I mean, going to the second part of your question, I mean, 1 easy way is to do an offshore acquisition.
So I mean, that's 1 way. It doesn't help much in terms of share repurchase directly but in terms of international acquisitions.
And I think while only a medium-sized deal, the Eclipse Energy deal is an example, it is 1 based in the U.K. and Norway.
And I think if you kind of look at our track record of more recent acquisitions, I think you'll see a bias to acquisitions to build out our international footprint. I think it'd be a little bit premature to comment on going-forward capital allocation right now.
We're always looking -- we'd always prefer to do value-creating acquisitions. That all being said, we have a great cash flow and we have a lot of balance sheet flexibility.
So I think balancing the acquisition pipeline with share repurchases as we have is probably how we'll continue to work through the balance of the year.
Douglas L. Peterson
I would add to that, that this is a great problem to have.
William A. Warmington
It is a high-class problem, I agree.
Douglas L. Peterson
Yes. So it's a high-class problem, as you say.
But we also are very conscious that we're not going to just throw this money away. We have standards that we want to apply to how we manage our capital.
We'd never just run out and do international acquisitions just to do international acquisitions. They need to be high-quality.
In particular, they have to have high-quality management. They've got to be able to perform over the long term.
They have to fit with our business. An example of one, which is not necessarily given a lot of exposure, is Coalition, which was done by CRISIL 1.5 years ago.
Coalition has performed incredibly. It's a business that provides market share analytics and solutions to large global investment banks.
It has been growing very well. It has a fantastic management team.
So we look at -- we're not looking just to deploy the cash to deploy the cash. We have to do it in a way that is very thoughtful, it's meaningful and we work with the board closely on our philosophy about how we think about capital allocation.
So we really appreciate the questions on that because it's something that we spend a lot of time and we take very seriously.
Operator
That concludes this morning's call. A PDF version of the presenter slides is available now for downloading from www.mhfi.com.
A replay of this call, including the Q&A session, will be available in about 2 hours. The replay will be maintained on McGraw Hill Financial's website for 12 months from today and for 1 month from today by telephone.
On behalf of McGraw Hill Financial, we thank you for participating and wish you a good day.