Q3 2022 S&P Global Inc Earnings Call
Good morning, and thank you for joining today's S&P global third quarter 2022 earnings call.
<unk> on today's call are Doug Peterson, President and Chief Executive Officer, and <unk>, Steenbergen, Executive Vice President and Chief Financial Officer.
We issued a press release with our results earlier today, if you need a copy of the release and financial schedules. They can be downloaded at investor <unk> S. P Global Dot com.
The matters discussed in today's conference call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095, including projections estimates and descriptions of future events.
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.
A discussion of these risks and uncertainties can be found in our forms 10-K, 10-Q and other periodic reports filed with the U S Securities and Exchange Commission.
In today's earnings release and during the conference call, we're providing non-GAAP adjusted financial information.
This information is provided to enable investors to make meaningful comparisons of the companys operating performance between periods and to view the companys business from the same perspective as management.
The earnings release contains exhibits that reconcile the difference between the non-GAAP measures and the comparable financial measures calculated in accordance with U S. GAAP.
I would also like to call your attention to a specific European regulation, any investor who has or expects to obtain ownership of 5% or more of S&P global should contact investor relations to better understand the potential impact of this legislation on the investor and the company.
We are aware that we 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 our media relations team, whose contact information can be found in the press release at this time I would like to turn the call over to Doug Peterson Doug.
Thank you Mark we're pleased to discuss our third quarter results and how we're growing innovating and executing with discipline, even in the face of a challenging macroeconomic backdrop.
With each quarter that passes we see further evidence of the strength of our combined company while no one could have predicted what this year would have looked like we've benefited from the diversification of our revenue and profit streams and that Dallas has provided great resilience as we continue to navigate choppy waters.
It's been nearly two years since we announced the merger and I'm proud of the progress. We've made we continue to put the customer at the core of everything we do and we continue to demonstrate a clear commitment to our people while maintaining a high standard of operational excellence.
We have an incredibly bright future and I'm excited to share more with you about our strategic vision at our Investor Day on December one.
As we look at our third quarter financial highlights I want to remind you that the adjusted financial metrics will be discussing today refer to non-GAAP adjusted metrics in the current period and non-GAAP pro forma adjusted metrics in the year ago period.
Revenue decreased 8% year over year, or 6% ex FX with growth in four of our six divisions being offset by continued decreases in ratings as well as a year over year decline in engineering solutions. This quarter due to the timing impact of a single product that eval will discuss later.
Recurring revenue increased 2% year over year, representing 84% of revenue in the quarter adjusted.
Expenses declined 5% year over year as cost synergies and disciplined expense management offset some of the inflationary impact we're seeing in labor and technology outside of the ratings business. We sold an average of approximately 250 basis points of adjusted operating margin expansion year over year.
We're updating our guidance ranges to reflect continued headwinds in ratings as well as better than expected performance in indices guidance ranges for other four divisions are unchanged from last quarter.
I would also like to share a few other highlights from the third quarter as I mentioned, we're coming up on two years since the merger was announced and nearly eight months since the close.
Our post merger integration efforts are proceeding on track, but very importantly, we're outperforming on both cost and revenue synergies are customer conversations remain encouraging despite the economic environment. We continue to see significant growth in multiple business lines due to secular trends will likely benefit us for years to come like energy.
<unk> as well as the near term benefit we see from volatility and the need for insights and analytics in times of turbulence.
We also remain committed to the capital allocation plan, we laid out for you at the time the merger closed we're on track to deploy the full $12 billion in funds for accelerated share repurchases by year end.
Turning to the commercial success, we're seeing in the business. The merger continues to generate encouraging conversations with our customers about the increased value we offer as a combined company in.
In market intelligence, we developed a strong commercial pipeline in September and we believe we will see a reacceleration of the desktop business in the fourth quarter between market intelligence and commodity insights we've generated well over 3000 cross sell referral since the merger closed and the conversion rates are strong.
Despite the issuance environment. Our ratings teams remained highly engaged we remain connected with investors and issuers to maintain relationships and ensure we have the appropriate understanding of their needs in advance of any recovery in the debt markets.
Commodity insights and mobility are both seeing significantly improved retention rates relative to recent history as well as strong competitive wins and new customer growth.
We saw a very important win in our indices business this quarter as a large Japanese asset manager launched the first cross asset ETF in Japan based on both I box fixed income and S&P Dow Jones equity indices, while it's still early in our efforts in cross asset indices. This launches powerful proof of the demand for <unk>.
Such products among global asset managers.
Now to recap the financial results for the third quarter revenue decreased 8% to $2.86 billion or 6% constant currency, our adjusted operating profit decreased 12% to $1 3 billion.
Our adjusted pro forma operating profit margin decreased approximately 200 basis points to 46% as both profit and margin were negatively impacted by the decrease in ratings transaction revenue, partially offset by cost synergies realized in the quarter or.
Our non ratings businesses in aggregate grew revenue, 4% in the quarter compared to prior year.
As you know, we measure and track adjusted segment operating profit margin on a trailing 12 months basis, which is 45, 5% as of the third quarter.
Despite the impact of the issuance environment, we benefited from the resiliency of our businesses as well as disciplined cost management and cost synergies to significantly moderate the impact to adjusted EPS, which declined only 4% year over year.
Looking across the six divisions I'm pleased to report positive growth across four of our divisions with ratings continuing to work through a difficult issuance cycle and engineering solutions entering an off cycle quarter without the sale of the core product that is released once every two years.
Throughout the year, we've seen outsized growth in certain products as customers depend on our data and information to make informed decisions during uncertain times, we saw double digit revenue growth and multiple product lines. As a result within our indices business revenue from exchange traded derivatives outperformed our internal expectations growing near it.
Leased 40% year over year, our C. D. S indices, which include the C D X and Itraxx index families increased 66%.
Markets continue to recognize our leadership in areas like climate in financial data and we provide a consolidated platform on which to access information, whether it's tracking market movements company performance or identifying physical risk from weather events, our customers continue to come to us for help navigating the uncertainty. This is evident in the growth we saw in key.
Product offerings from market intelligence, including Trucost, and equities data and analytics.
I am pleased to Mark the first anniversary of the launch of Platts dimensions Pro a one stop experience across platts benchmark price assessments news and analytics spanning 13 commodities, including energy transition over the last year, we've continuously increased functionality introducing new features on a regular basis.
This unified platform is gaining clear recognition with active user growth nearly doubling in just the last six months.
Moreover, silver newer benchmarks continue to expand their market presence, our low sulfur marine fuel assessment is a great indicator of the trajectory of a successful new benchmark assessments like this often take multiple years to truly scale and become literal market benchmarks in the third quarter approximately 1.3.
Billion barrels of fuel were traded based on our price assessment, representing a 15% increase compared to last year, our iron ore assessment has been the primary physical market pricing reference for seaborne fine iron ore delivered to China for over 10 years, and it's still growing at an impressive rate.
We understand the importance of a reliable market benchmarks to the secular energy transition story, and we're positioning ourselves for long term success.
The chart on the right shows the cumulative number of new assessments, we have launched an energy transition over the last two years. These include a new suite of Australian hydrogen prices covering one of the key producers of this future fuel as well as the methane performance certificate that we believe will be an integral component of low carbon crude trading.
Now turning to issuance.
During the third quarter global rated issuance decreased 40% year over year in the U S weighted issuance in aggregate decreased 47% European rated issuance decreased 19% and in Asia rated issuance declined 47%.
High yield was down by 80% year over year in both United States, and Europe and was down nearly 100% in Asia.
Structured finance in Europe was the only positive regional category in the quarter, increasing 7% year over year.
We've included additional details on the sub components of issuance by region in the slide deck.
We continue to make significant progress in our sustainability products ESG revenue increased nearly 40% year over year to nearly $50 million in the quarter. We saw continued innovation of our ESG indices and market recognition of our strength.
We launched the S&P net zero 2050 carbon budget indices, and we ended the quarter with ESG E. T. F E M F $35 billion, an increase of 7% year over year in a down market.
Within market intelligence, we launched enhanced physical risk exposure scores and financial impact datasets to support clients as they seek to understand and manage the physical and financial exposure to climate change.
Our ratings division continues to see success here as well completing 13, ESG evaluations and twenty-three sustainable financing opinions in the quarter.
One of the most important competitive advantages in our ESG efforts is the corporate sustainability assessment, which is an annual comprehensive assessment completed in partnership with participating companies.
The S&P global brand and everything it stands for continues to drive growth in the number of companies seeking to partner with US in this assessment process year to date, we've seen more than 2300 companies opt in a more than 25% increase from the same time last year.
Now turning to the outlook for the remainder of the year.
Beginning with our issuance forecast our ratings research team is expecting an approximately 19% decline in global market issuance, including both rated and unrated issuance for the full year. This compares to the previous forecast of down 16%.
Importantly, our financial results and guidance are more closely tied to build issuance, which can differ materially from market issuance. As we described last quarter year to date market issuances declined approximately 14% while build issuances declined approximately 42% based on the trends we saw in September and October we now expect bill.
The issuance to be down approximately 45% to 50% for the full year.
When we look to the broader macroeconomic environment for the rest of 2022, we continue to see further deterioration from what we expected in August in addition to the downward trend in issuance our expectations for GDP growth inflation and the commodities markets have all lowered.
With only two months left in 2022 we wanted to provide what will likely be the final update on some of the macroeconomic indicators, we're using to help inform our financial guidance for the year.
We will not be discussing our expectations for 2023 on this call, but we will be closely monitoring both the internal and external indicators of our business over the coming months and we'll plan to provide our initial 2023 outlook at the customary time when we report our fourth quarter results early next year.
Before I turn the call over to eat out I want to thank the incredible people, we have at S&P global our people have executed well in a challenging environment. This year and have delivered great value for our customers in the organization, while managing a complex integration I'm confident that we're well positioned to drive long term growth and create long term value.
For our shareholders.
With that I'll turn the call over to Eva to walk through financials and guidance is out.
Thank you Doug Doug has already discussed our headline financial results and I would like to cover a few other items as Doug mentioned, the adjusted financial metrics, we will be discussing today refer to non-GAAP adjusted metrics for the current periods and no mcgough pro forma adjusted metrics in the year ago period, unless explicitly called out Scott.
Adjusted results also exclude the contribution from divested businesses in all periods.
Adjusted corporate unallocated expenses improved from a year ago, driven by a combination of synergies and reduced incentive costs. Our net interest expense decreased 17% as we benefited from lower average rates due to refinancings following the merger.
Adjusted effective tax rate was up modestly but towards the low end of the guidance range. We expect for the full year as most are aware, we exclude the impact of certain items from our adjusted diluted EPS number among dose items for the third quarter were approximately $108 million and merger related expenses.
The details of which can be found in D. Appendix, we generated adjusted free cash flow, excluding certain items of $965 million. We remain committed to returning the majority of this cash flow to shareholders through dividends and share repurchases year to date, we have deployed $11 billion to work share.
Birch Asus and we expect a final $1 billion of our previously announced ASR program to be completed by year end.
We note that the U S. Dollar remained strong against many foreign currencies and we've seen a corresponding impact on both our revenue and expenses as a reminder, approximately three quarters of our international revenue is invoiced in U S dollars, which provide some protection to revenue against FX volatility. In addition to the natural hedges that exist.
Due to the global footprint of our people we have a hedging program in place that further mitigates the ultimate impact on our earnings.
For the third quarter, we saw a <unk> <unk> favorable impact to EPS from foreign exchange and hedging programs.
Turning to expenses, we are committed to disciplined expense management in this current environment and similar to last quarter. We highlight the levers we continue to pull to protect margins wherever we can while still preserving our investments to drive future growth action stay can include pull forward in synergies era.
<unk> in incentive accruals adjustments to the timing of certain investments and bossing select hiring and limiting consulting spend in some areas.
Through cost synergies and other management actions, we have taken so far this year, we expect to generate more than $400 million in expense savings for 2022.
Now I would like to provide an update on our synergy progress into third quarter, we achieved $165 million in cumulative cost synergies and our current annualized run rate is $311 million I am pleased to report we continue to outperform our initial timeline on both revenue and cost synergies year to day.
It's the cumulative integration and cost to achieve synergies through the end of the third quarter, a $641 million given the outperformance on the timing of our synergies. We now expect to achieve slightly more than the 35% to 40% of total cost synergies in 2022 that we were targeting previously.
Now, let's turn to the deficient results and begin with market intelligence market intelligence revenue increased 4% with strong growth in data and analytics offset by slower growth in desktop and flat growth in enterprise solutions for this quarter recurring revenue accounted for approximately 96% of market.
Intelligence total revenue expenses were roughly flat this quarter with increases in compensation expense cloud spend and outside services being offset by cost synergies and lower incentive compensation market intelligence remains the biggest driver of cost synergies from the merger and the synergy outperformance we have seen year to date.
Segment operating profit increased 13% and the segment operating profit margin increased 260 basis points to 33, 9% on a trailing 12 month basis adjusted segment operating profit margin was 34, 9%.
The all stride joint venture that complements the operations of our market intelligence deficient contributed $19 million in adjusted operating profit to the company as a reminder, because the JV is a 50% owned joint venture operating independent of the company, we recognize dare results on an after tax basis and do.
Not include the financial results of Australia in the market intelligence deficient.
Looking across market intelligence, there was growth in most categories and on a pro forma basis desktop revenue grew 3% data and advisory solutions revenue grew 7% enterprise solutions revenue was flat and credit and risk solutions revenue grew 7% for desktop we saw slower growth this quarter driven impart by the.
Timing of certain revenue recognition items, and we expect desktop to reaccelerate in the fourth quarter for enterprise solutions to business line continued to see headwinds in several of our volume driven products that rely on equity and debt capital markets activity under variable subscription terms, excluding the impact of <unk>.
Effects and decent volume driven products growth across market intelligence would have been approximately 7% year over year, while we remain confident in the long term growth of all these product lines, we expect deceleration in categories outside of desktop to persist in the fourth quarter.
Now turning to ratings ratings continue to face difficult market conditions. This quarter as issuance volumes remains muted with revenue decreasing 33% year over year transaction revenue decreased 56% of the continued softness in issuance, we highlighted earlier non transaction revenue decreased 6% on the.
Reported basis, and 2% on a constant currency basis, primarily due to lower rating evaluation services and initial issuer credit ratings, partially offset by increases in Crystle ICR and rest revenue are historically correlated with a relative strength of the issuance environment and M&A activity respectively.
And the declines we are seeing here are purely indicative of dose market conditions expenses decreased 19%, primarily driven by disciplined expense management, including lower incentive expenses, partially offset by increased salary and fringe expenses. This resulted in a 41% decrease in segment.
Operating profit and a 750 basis points decrease in segment operating profit margin to 55, 9% on a trailing 12 month basis adjusted segment operating profit margin was 57.9%.
Now looking at ratings revenue by its end markets the largest contributor to the decrease in ratings revenue were a 44% decrease in corporates and a 31% decrease in structured finance driven predominantly by structured credits. In addition financial services decreased 20% governments deep.
<unk>, 33% and a crystal and other category increased 9%.
And now turning to commodity insights revenue increased 5% driven by strong performance of subscription products, including dose within price assessments and energy and resources data and insights lines. However that growth was impacted by the Russia, Ukraine conflict as noted on the slide revenue related to Russia.
Contributes it's $12 million into third quarter of last year and made no contribution in the third quarter. This year. Excluding this impact commodity insights would have grown approximately 8% in the third quarter. There's no change to the expected impact from this conflict, but as a reminder, on an annualized run rate basis, we expect.
Insights revenue and operating income to be lower by approximately $52 million and $51 million respectively. For this quarter recurring revenue contributed 91% of commodity insights revenues expenses increased 1%, primarily due to salary and fringe and an increase in tea.
<unk> expense, partially offset by merger related synergies lower consulting spent a lower real estate costs segment operating profit increased 9% and the segment operating profit margin increased 190 basis points to 45.8%. The trailing 12 months adjusted segment operating profit margin was four.
<unk>, 3.8%.
Looking across the commodity insights business categories price assessments grew 8% compared to prior year, driven by continued commercial momentum and strong subscription growth for market data offerings energy and resources data and insights also grew 8% in the quarter driven by strength in gas power and renewables.
And in petrochemicals advisory and transactional surfaces decreased 1% into third quarter.
The upstream business was down 2% compared to prior year, mainly driven by higher comps for software and analytics products offerings as well as the impact of Russia, excluding that impact and the impact of FX upstream ACP growth would have been positive in the quarter.
In our mobility deficient revenue increased 8% year over year, driven primarily by continued high retention rates and new business growth in car fix for this quarter recurring revenue contributed 78% of mobility total revenue expenses grew 5% year over year as we have yet to lap blend increases.
Head counts and we saw continued cloud expense growth, which were partially offset by lower data costs and favorable FX. This resulted in a 14% growth in adjusted operating profit at 200 basis points of margin expansion year over year on a trailing 12 month basis. The adjusted segment operating profit margin.
It was 40%.
[noise] dealer revenue increased 10% year over year, driven by strong demand for car facts S. Dealerships profitability remain at elevated levels manufacturing grew 4% year over year, driven by strength in subscriptions and an uptick in the recall business inventory shortfalls continued to temper growth as OEM spent on marketing.
Initiatives powered by mobility products remains muted financials and other increased 9% primarily driven by continued strength in our insurance underwriting products and new business.
S&P Dow Jones indices revenue increased 3% year over year with strong margin expansion, despite lower assets under management for the third quarter recurring revenue contributed 84% of the adult all four indices during the quarter expenses were roughly flat as strategic investments and higher information surfaces cost were.
Offset primarily by lower incentives and other expenses segment operating profit increased 5% and the segment operating profit margin increased 100 basis points to 74, 3% on a trailing 12 month basis. The adjusted segment operating profit margin was 68 point to 8%.
Asset linked fees were down 5%, primarily driven by lower AUM and Etfs exchange traded derivative revenue increased 37% on increased trading volumes across key contracts, including a more than 60% increase in S&P 500 index options volume data and custom subscriptions increased 10.
<unk> percent driven by new business activities.
Over the past year market depreciation totaled $472 billion E. T. F. E. M. Net inflows were $194 billion. This was sold in quarter ending E. T. S. E. O M of 2.3 trillion dollars, which is an 11% decrease compared to one year ago Our E T.
<unk> revenue is based on average AUM, which decreased 4% year over year as a reminder, revenue tends to lag changes in asset prices given the declines across equity markets. So far in the back half of this year, we continue to expect softness in asset linked fees as we close out 2022.
Engineering solutions revenue declined 8% in the quarter, driven primarily by the negative impact of the timing of the boiler pressure vessel code or P. P. P. C, which was lost released in August of 2021, the BPC contributed approximately $1 million in revenue this quarter compared to approximately $8 million.
In the year ago period for this quarter, 94% of engineering solutions revenues were classified as recurring adjusted expenses decreased 7% due to favorable impact on V. P. P. C royalties on a trailing 12 month basis. The adjusted segment operating profit margin was 19, 1%.
Non subscription revenue in engineering solutions decreased 63% year over year for the reasons I mentioned on the previous slide both subscription revenue increased 3% over the same period.
Now moving to our guidance.
This slide depicts our new GAAP guidance.
And this slide depicts our updated 2022 adjusted pro forma guidance due to the continued softening of the issuance environment. We now expect revenue to decrease mid single digits compared to our prior guidance. Some of that impact is offset by the outperformance in indices, the net impact of our lower raw.
<unk> revenue expectations combined with the cost measures and capital allocation measures. We've outlined today result in our slightly lower margin outlook and a new adjusted EPS range of $11 to $11.15. This margin outlook reflects our continued expectation for approximate.
180 basis points of margin expansion outside of our ratings business.
Interest expense is expected in the range of $345 million to $355 million slightly lower than our previous guidance due to a higher interest on our cash deposits and positive impact from currency hedges were also reducing our outlook for capital expenditures to $115 million due to intense.
Delays in real estate investments adjusted free cash flow, excluding certain items is now expected to be approximately $4 billion.
The following slide illustrates our guidance by deficient based on this past quarter's performance, we're updating our expectations for adjusted revenue growth and adjusted operating profit margin for ratings and indices the guidance ranges for our other divisions are unchanged.
In closing despite the geopolitical tensions and a challenging macroeconomic environment weighing on the markets our portfolio of strong businesses continued to prove resilient. Furthermore, I'm pleased with the progress our teams have made since the closing of the merger earlier. This year, we look forward to providing you with a deep dive into our businesses.
And the longer term outlook of the company at our Investor Day on December 1st and with that let me turn the call back over to Mark for your questions.
For those on the line if you would like to ask a question. Please press star one and record your name to cancel or withdraw your question simply press star two.
Please limit yourself to one question and one follow up in order to allow time for other callers during today's Q&A session. Operator, we will now take our first question.
Thank you.
First question comes from Owen Lau from Oppenheimer.
Your line is open.
Okay.
Good morning, and thank you for taking my questions.
For the.
M I credit risk solutions, and data and advisory solutions could.
Could you please unpack a little bit on the products and services driving that growth in current backdrop.
Are they new customers because based on my understanding many of these products are subscription base.
I'll get a better sense of how you can further monetize it and drive that growth. Thank you.
Tayo this is Doug and thanks for joining US today, let me start first of all by mentioning that within market intelligence credit and risk solutions as is always been a long term outperformer. It's an area that we see very high demand from the markets for information about credit risk and other types of risk, especially in this market as you know that.
Core products in this area are the basic products that are providing information from the ratings business. So things like ratings direct trading express.
We also have a suite of products like credit analytics, and we do see a lot of growth now related to credit climate analytics. This is an area, where we're seeing increased interest in demand, especially from financial institutions, especially large global banks. In addition, we're seeing some other growth from areas like traded market risks.
Names of I'll say X V. A C. C. R. We have a bar product et cetera, and then we have some additional buy side risk opportunities for clients to look at for market risk and stress scenarios. So if you look at the entire suite of products, we're able to provide the market information in the time, when they really want to understand risk.
Got it that's very helpful. And then my follow up it's somehow related to the ratings business.
Could you. Please talk about your view on how private credit market might have impacted S&P global rating business and and how S&P can pull vice emphasis in this area. Thank you.
Yeah. Thanks on the private markets as we saw earlier this year there was a retreat of institutional investors and retail investors from credit funds. So there was really no liquidity at the beginning part of this year. It was a combination of people that we are risk averse and also looking at the shift between fixed and floating there were a lot of moves in interest rates.
So we saw retreat from the traditional loan funds and in high risk investors that left the market that left an opportunity for the private credit funds that had traditionally been focusing on mid market credit. So SME credit was their expertise on many of them also had started moving into the higher quality.
Higher a higher level of risk and large cap companies. So they were there to fill the gap the gap was filled by private credit at the beginning of the year and we know that they've also been able to take on loans without with a faster also with a higher risk level and so we've seen that increase during the year now how do we think about that.
First of all we look at that as an opportunity for us going forward. We believe that the private credit funds, we will be looking over time to have some sort of risk transformation, whether it's related to fixed floating or it has to do with the securitization or syndication. We think at that time, they're going to be wanting some estimate services potentially rating services in.
We've identified private credit is one of our most important strategic growth drivers, we already have a base of private credit businesses that were part of IHS market and related to that we have a strong starting point with products like high levels that.
That provides information to portfolio managers, so we've identified private.
Credit is a growth area for us for ratings as well as for market intelligence going forward.
We're walking watching the trend very carefully we know at some point.
<unk> will come back to the markets and we'll see a broadening of the market again, but we've been watching this very closely and are actually interested in this as a growth area for us.
That's very helpful. Thanks, Doug Thanks Ellen.
Our next question comes from Ashish Ashish <unk> from RBC capital markets Ashish Your line is open.
Thanks for taking my question I wanted to drill down further on the the 18th and the issuance guidance I believe my back of envelop math suggests that you're assuming a similar growth in fourth quarter as third quarter for transaction.
Revenues I just wanted to see if I'm in the right ballpark and I was just wondering if you could provide any color on what your expectations are for issuance for the rest of the year are you assuming any rebound and what how are the conversations with the issuers are coming along tax.
Ashish Good morning, if you look at the outlook as you know, we're not really providing quarterly guidance. So we're not really speaking about the court and the outlook, while our financial results or some of the input variables like like issuance, but of course, if you look at the numbers that we put out today.
Then if you would do a back backwards calculation you would assume that the most recent trends we're seeing in terms of issuance is what we expect to continue also in the in the fourth quarter. So definitely that's the main reason why we took our guidance down I would say that's the only reason because.
Overall, the impact on our allowance Schultz from a top line perspective is about 200 million reduction in revenue outlook for the ratings business. So about 50 cents of EPS and then there were a couple of smaller things, but net net I think that's the main driver for why do your EPS outlook is down for the full year.
That's very helpful color and maybe just switching gears on mobility are pretty strong momentum there. Despite what we're seeing in the in the auto lending space or in the auto space and so I was just wondering as we start to see the demand for autos slow down how should we think about the growth in the businesses is there some counter cyclical.
He is well here in the business.
Yes. She is thank you for your questions. When it comes to mobility, we see that Theres a V.
Interesting shift going on over the last couple of years as you know when the market started slowing down from the pandemic in the supply chain interruptions. We saw the used auto market really start expanding and we benefited from the car facts products in the <unk> suite of products, especially at the dealer level, we know that there's some counter cyclicality as you say.
That is the market returns to new autos coming into the market and inventories rise that we will benefit from our products and services to the Oems as well as the dealers are going to start having a different type of relationship again with the with the manufacturers and suppliers. So we're watching right now very closely three.
Some electric based with a drivetrain as opposed to internal combustion. So a lot of trends, which are all play to our advantage because we have a data analytics and research products that we can serve all of the users in these markets.
Yeah, Hey, good morning, everyone understand that you don't really want to comment much on 2023 quite yet I guess, we'll wait until December .
As you say, we have produced a report and what we're looking at right now is understanding what are going to be the main factors driving us towards the end of the year. We've given you those in that report as well that showed that issuance was expected to be down by 19% for the full year, which compared to 16% from our last report as you know we will.
To provide guidance for 2023 until February when we provide our full our full issuance report as well as our guidance for the year.
That what you saw from the report from our team our credit research team is product research and its not necessarily geared directly to how we're going to find build issuance as you recall last quarter. We explained very clearly what is included and build issuance. We take the we take the what would be expectations for issuance.
Overall, we add in leveraged loans and then we extract some data some dead areas like unrated categories, such as MTN are most of the domestic debt from China and we also exclude the international public finance from those calculations to come up with our expectations, but maybe more importantly to your question we're always.
And the market as you saw we talked about having had 3000 interactions with the markets. During the quarter. We are all over the market to understand what are the factors that are going on that are driving issuance and will drive issue until we do provide our guidance going forward, but we're looking at the issuance forecast GDP growth macroeconomic factors like <unk>.
Inflation interest rates, we're looking at spreads which had been quite high over the last few quarters.
Maturity schedules, which are quite encouraging going forward into 'twenty 'twenty three 'twenty four 'twenty five et cetera, M&A pipeline. So as you know at the time, we come out with our guidance. We will have looked at all of these factors, but maybe the most important point is that we're not just standing around waiting we're very actively engaged with the markets.
Alright fair enough, then maybe just going to market intelligence I think since the since the deal was announced or closed.
I think.
We have had the expectation that more and more of the I guess the subscriptions on their mark on the IHS Markit side will be moving on to our S&P kind of enterprise umbrella. So just wondering if that's still true if there's a timeline.
Four of them moving more and more of that that that legacy markets.
Our subscription.
And under that S&P umbrella and how far we along if you're if you're able to pick up any sort of incremental pricing as you do that or how should we think about about that transition over time. If that is if that is the plan.
Yeah, Alex it's very very early for that for us to talk about it but what I will tell you is going back to the last comment I made that were incredibly linked into the markets right. Now we have all of our commercial teams are out speaking with our customers. What we're finding is that there's a lot of opportunities for us to start with cross sell so.
Our initial early wins have been with cross sell across selling different products across the within the divisions and sometimes across the divisions, but we aren't hearing opportunities for moving data into our into the desktop or finding some products, where data and research and analytics fit together so to your point.
It's a vision that we have but it's really early for us to give you any kind of detailed analytics about it.
Alright, thank you.
Thanks, Alex.
Our next question comes from Toni Kaplan from Morgan Stanley Tony Your line is open.
Thank you.
Wanted to ask about ratings margins they were down sequentially, but they were still really resilient just given.
<unk>, especially relative to one of your big competitors just wanted to ask you. If you could talk about some drivers that enabled you to flex cost.
Outside of incentive comp.
Good morning, Tony Youre right. We are quite pleased with the overall expense discipline of the company in the third quarter, you have heard us announced last quarter that we're taking additional actions to deal with the macro environment and we're actually really pleased how that is playing out and you may continue to see that kind of a result from us going forward.
Our work across the company and of course, we take the benefit also far from the cost synergies that we can implement and accelerate during this period. So if you look specifically at the ratings business. It is a mix on the one hand, we continue to make sure that we invest in future growth, making sure that we stay competitive from a compensation perspective, we want to pursue.
The capacity, we have on the analytical side, but the only other hand. There are also discretionary costs that we are bringing down the allocated costs that are benefiting from the synergies that we're realizing across the company and then also incentive compensation is down year over year. So it's actually a balance off but different elements that go into the mix, but definitely.
As you have seen in the past, we're always focusing in terms of trying to preserve margins in our business businesses as much as possible, particularly in a more challenging macro environment.
Great.
This is a little bit of a broad question and you could take it where you want but just could you talk about any changes in customer behavior.
Last six months and this kept the elongation.
Elongation of the sales cycle in some places or maybe it's just different products that have been more.
And just.
Just wanted to get a sense of.
Changes in the business.
Yes.
Over the last.
Yeah.
Yes, Toni Thanks for that question and as you know the markets are going through a lot of uncertainty and turmoil. We've never lived through a period, where you have end of a pandemic a war inflation interest rates going up all sorts of different impacts I mentioned earlier on the mobility discussion what kind of impact that's had on the markets overall.
We've seen this interest into talking about risk. It's a it's a topic, which has increased dramatically when we meet with customers. They want to talk about the external environment. They want the expertise of S&P global that comes from our entire company to understand what's happening with risk with markets with credit as.
As well as equities commodities. So we start with very broad dialogues and then we dig deeper into some specific topics. One that comes up in almost every single conversation. We have is energy transition climate and sustainability. That's a really common discussion it's increasing in terms of how much time, we spend on it and another one.
As data and analytics, how are customers thinking about their own application of AI data and analytics. They want to learn from us how we're managing S&P global but they also want to learn how they can be deploying new types of products and services using more AI, but overall, we have not seen any kind of initial pushback on.
Moving down the sales cycle.
Clearly there are some markets as I mentioned the ratings market you know theres not a lot of issuance right now, but we stayed engaged with the market, but maybe net net the big topics. We spent a lot of time on the macroeconomic environment sustainability as well as AI and data those are big conversations we have in almost every customer interaction.
Terrific. Thank you.
Thanks, Tony.
Our next question comes from Jeff Silber from BMO capital markets, Jeff Your line is open.
Thanks, so much.
Wanted to start with a ratings related question that I asked your competitor your larger competitor. This thing question I'm just wondering about your thoughts what are you looking for in terms of signs of an uptick in that market green shoots et cetera, what should we be focusing on.
There's a few things that I'm, focusing on myself and I know that if we had our ratings teams specifically on the call. They might they might tell me that theres others, they're looking at beyond that but clearly there is a set of factors M&A activity as one for me, which is it's kind of an informal indicator M&A activity has been quite weak recently.
A typical M&A has a set of of transactions come along with it may be a bridge loan which turns into a deal law, which turns into a bond or rated loan et cetera. M&A activity has been weak ipos is another one the reason I look at those myself is that those are just their activity, which denotes confidence in the markets that people are.
We're willing to invest.
But then as you recall, we're having conversations with issuers. We mentioned 3000 that we had last quarter with issuers and we see a lot of interest in investing our people that have plans for investing in new markets for innovation for investing in venture capital ways that they can see new shoots in their own businesses.
So we're watching when is it that people actually pull the trigger and maybe maybe the takeaway is it's not if it's when we know that theres a lot of people out there that are ready to go they have great ideas, but the question is when will those conditions of interest rates of stability of market confidence when will those be back when people.
I'll start going going back to the market. Finally, we do look at the maturity schedules and we know that Theres a point starting towards the middle of next year that there will be maturity schedules are going to start kicking in and we're going to watch that carefully as well will there be pull forward from that but that's another factor we're going to be watching.
That's really helpful and I can shift over to the mobility business.
Margins at least by our record it looks like it hit an all time high even I can compare to IHS does business and I know, it's a different segment right now, but can you talk about what's going on there and should we expect margins to continue to go higher from here. Thanks.
Jeff we're always aspiring to improve margins across all of our businesses. So at mobility is not an exception to that is because of the fact that we're focused on operating leverage we always like to see the top line growing faster than the expense line and of course.
Aided by strategic investments to aim for future growth as well what we're seeing in the mobility business is really a positive overall environment that helps and is very supportive for the business, particularly with low inventory levels, we see margins high for the Oems and for the dealers and as is.
Right and high retention rates and the offset of that is that we see lower spend for sales of marketing products that we are having and thats because of the same factor that the inventory levels are low. So you could say it is a kind of an inherent hedge in that business. If the markets start to turn if we see that the demand supply starts to shift in the car market.
David would also see those different revenue streams moving in opposite directions, but we think that with that we're insulated from our overall financial impact and therefore continue to focus on margin expansion as well and as Doug mentioned before we're also are taking benefit from used car markets and that has been proven to be quite resilient through.
The cycle. So yes overall, we are really happy with the growth of mobility to margins and we would see that continuing going forward.
Okay. Appreciate all the color. Thank you both.
Thanks, Jeff.
Our next question comes from George Tong from Goldman Sachs. George Your line is open.
Hi, Thanks, Good morning Bill.
Build issuance was down 40% in the third quarter, you're assuming full year build issuance declines of a 45% to 50% will be worse than the third quarter decline. What are you seeing that suggest for Q could potentially be worse than Q3 in terms of build issuance any color there would be helpful.
Yes first of all let me just give a little bit more color on that as you know the last forecast we saw the issuance of the non financials or corporates would be down about 30%, we now see it down about 35%.
And then we see that in financial services. They expect it to be down 10% now down about 14% or so when you. When you look at the total build issuance and we mentioned that it was going to.
Year to date was down 42% and we're expecting it to be down now.
45% this is going to be based on what we see in the pipeline as I mentioned in the in the answer I gave a few minutes ago, we see that the market itself is quite hesitant. It's not a question of if it's a question of when and we see that during the fourth quarter, what we've picked up from investment banks from issuers directly.
Right now, they're still waiting to see what the conditions are going to be around economic growth interest rates and spreads. So it is just based on our forecast not our issuance forecast. This is based on our market forecast based on people that are meeting with issuers and meeting with investors that the current conditions are still such that people were holding back before they go to market.
Very helpful.
Related to that where we're likely going to be in a higher interest rate environment for some time relative to pre COVID-19. What are your thoughts on whether corporate me enter a phase of balance sheet delevering and implications for issuance performance.
Yes, that's a theoretical question, but let me go back and look at history.
Know that many of us have been in the market for many years remember when interest rates were 4%, 345% base rates and in the markets. We're incredibly active I think that will settle into a range once their stability and we understand what the longer term rates are going to be what longer term inflation and growth are going to be.
Companies and financial institutions, we will go back to the markets because they want to invest and grow we know that organizations like to grow and to grow you deploy capital. We also look at the trend around the globe, where more and more markets are shifting from being banking markets. The capital markets right now in Europe , There's a couple of shifts going on in the <unk>.
Support programs that the ECB was providing to the banks. This was very easy very low cost funding, they're starting to wean the bank's off of those and they're going to the capital markets to raise more capital as well as to deploy more capital into bonds instead of into loans. So we see this trend of capital Marketization.
The globe and we think that's another trend in the long run that will drive a lot of positive top.
Positive tailwind for the ratings business.
Very helpful. Thank you.
George.
Our next question comes from Craig Huber from Huber Research partners.
Line is open.
Great. Thank you my first question on pricing can you just update us on a like for like basis, what would you say the average price increases this year and how does it varied across the segments is it 3% to 4% of it was a little bit higher.
Good morning, Greg while we are always very careful when we speak about pricing in isolation, because first and foremost we start with customer value what do we deliver for our customers and the good news is that based on the very high value of our products and services, we should be able to pass on cost price increases and two.
To achieve more favorable contract terms and fees overtime at renewal of course, it depends all facts and circumstances of each and every product each and every customer situation and the situation of each and every of our businesses, but that is our overall philosophy I can't give you specifically a number four across the company.
How much price increases are up compared to previous periods, but there are definitely areas, where we're looking at price increases or have already implemented price increases that have been higher than in the past, but again that all has started with that there is a good balance with the overall customer value that we're delivering.
My second question. Please on market intelligence can you just talk a little further about the health of your clients. The sales pipeline there a little bit further I'm your numbers speak for themselves, but how you feel about the outlook for market intelligence right now thank you.
Yes, we still we still feel very very positive and we were optimistic about the market intelligence pipeline you read every once all about some of the financial institutions here and there that might be.
The slowing down some of their growth, but we haven't we're not seeing that in terms of negotiations with clients, but very importantly, one of the propositions of the merger between nitrogen market in S&P global was to cross sell.
Excellent products from both groups to the client bases on the other we believe that we have a strong diversification of our client base and as an example.
IHS Markit businesses their financial services business was was mostly focused on financial services, we're finding that a lot of the opportunities in a lot of our initial cross sell has been selling IHS markit products to corporate clients.
We think that there is a lot of upside and a lot of opportunity. We are out in the market actively talking with our customers about ways, we can bring value through new products and services through data et cetera. So right now we're not seeing any.
The pullback or any kind of major slowdown of our sales activities or pushback from clients.
Great. Thank you guys. Thanks.
Thanks, Craig.
Your next question comes from Manav Patnaik from Barclays. Your.
Your line is open.
Good morning, maybe just specific to market intelligence on the desktop side can you just help us understand the accounting all issues I guess that that will help reaccelerate the growth and then.
Just thinking out a little bit longer in there how do you expect the trajectory of the gross debt to play because I mean, it's similar dsos I imagine that's outside in other customers will be tightening budgets as well.
Yes, good morning, Manav, we recognize that the third quarter revenue growth off the desktop was below of our normal growth potential.
But you have to look at it from that particular perspective that there is always some timing of revenue recognition of certain contracts.
What's particularly impacting this quarter, but we expect that desktop growth to normalize again in the fourth quarter also for market intelligence in general if you take out to the full year effect of the capital markets business and also FX than the overall growth for the full quarter was north of 7% and we believe thats more.
Indicative of the normal growth opportunity for market intelligence as well.
Okay got it and then can I just ask on the non transaction side of the ratings business.
It's obviously down 2% I think you said ex FX.
Yeah.
How long will that Keith I guess slowly declining like when do we lap the ratings evaluation services tough comps or whatever it is that's driving that down.
Well, none of that is directly correlated with the overall economic environment capital markets activity debt issuance M&A environment, and we have of course seemed at the beginning of this year will still relatively strong and it started to deteriorate somewhat from March onwards.
Non transaction revenue is usually quite stable as a revenue stream. We have two particular areas that are mostly sensitive for the more general macro environment. This is initial credit ratings, we don't see a lot of new issuers coming to the markets and the rating evaluation services. This has a correlation with the <unk>.
Market. These are issuers that theyre thinking about ipos spinoffs, and so on and want to have some kind of an insight in terms of implications for our ratings. So obviously those are revenue streams that will come back once the market start to turn the more stable element in non transaction are around surveillance.
Around frequent issuer programs and then most notably I want to point out that Crystal is doing very well and is supporting the non transaction revenue in that fit in that category.
Got it thank you.
Our next question comes from Jeff Mueller from Baird Jeff.
Your line is open.
Yes. Thanks, I hear you that there are some inherent hedges in the mobility business, but I think the used car business is a decent amount larger than the new car market for you. So.
If the market I guess shifts back from a mix perspective, and some of the profit pools for use target hit I'm just wondering if there is.
Our net benefit or a net detriment to you and I I recognize <unk> has good structural growth historically resilient. So could you just give us any more detail on what product lines, the competitive wins and new customer growth was coming in or any more detail on car faxes innovation, that's driving the growth given that the core reported fairly.
Well penetrated.
Yeah, Jeff you're absolutely right that the used car market is a significant component of the overall revenue stream for the mobility business and the good news. There is that it is has been a very resilient market through the cycles. So we're not overly concerned about if the cycle in the car market start to turn that out.
We will have a material impact and as I mentioned before we have other revenue streams actually that we expect to pick up if the equilibrium in the car market start to change, particularly about our sales and marketing products, where we have seen relatively lower growth in the more recent past.
The mobility business in general is a phenomenal business. There was a lot of innovation a lot of new product development a lot of good support for our customers <unk> is really again from my perspective in terms of growth and in terms of innovation and new business activity very close to the customers a lot of new business lounges.
Our new product launches. So I think this business is in a very good position and we would expect.
So if the car market start to turn and go into different direction that we see continued good performance from this segment.
Okay. Thanks, and then Doug you entered the deleveraging question can you also give us the historical view of like how much issuance was there in a falling rate environment of bonds being issued.
That.
Refinancing debt that wasn't coming due the next say three or four years, but bonds that had significant duration remaining on them, where there was issuance to get the interest expense savings from our following wage environment.
I guess on the theoretical that we might not have that type of activity for a while if you could help me understand roughly if that was meaningful in the past or not.
Yes, basically this is a question about pull forward and we saw in 2020 in 2021 during the pandemic. There was what we felt now was structural pull forward. It was a combination of low rates, but probably more importantly, if you were a CFO of any organization you are not being criticized for having ample.
Quiddity during what people didn't understand was the pandemic because we went into it. So we did see a lot of structural pull forward during that period, but historically.
Thank the treasurers and Cfos of organizations are quite thoughtful and looking at their overall funding strategies and so the funding is not people when people what their balance sheets. It's not only just looking at what they have on what their costs are but the opportunities that organizations have no or are much more complex than that.
It used to be Securitizations looking at how theyre going to use.
Maturity transformation, what do you do in terms of derivatives. So yes, we do see the balance sheets, we do see that there was pull forward into 2020 'twenty, one, but we know the maturities are coming now and we think that that sort of tools that corporations have to and banks have to manage their their risk and their liquidity have really changed.
In the last 10 or 15 years. So it's hard to go back and compare to history, but we do know what happened in the last few years, where we did see pull forward, but the upcoming maturity schedule, which starts in the second half of 2023 going forward in a sense of kind of what was all the.
Issuance. It came after the financial crisis in $2013 $14 15, just think about that that huge boom of issuance that took place that's going to start maturing next year. It was seven year 10 year paper, we see a lot of that will start maturing and that we know that that's going to be in the queue very soon.
Got it thank you.
Thanks, Jeff.
Our next question comes from Ali <unk> from Deutsche Bank Your.
Your line is open.
Great. Thank you and good morning.
Firstly I just wanted to ask about the commodity does Nash.
You mentioned climate transition so it sounds like.
There are some underlying drivers that are sustainable and curious if you could talk about the cyclical aspect of the business and maybe areas, where you're running into tougher comps and just how sustainable you think the overall growth rate is there.
Yeah, Let me, let me start with giving you an overall.
Expect if all the commodity inside your business and how it's doing into current environment, and then I'll hand, it over to Doug more for the energy transition and climate part. So if you look at the overall macro environment is very supportive for the commodity inside business at this moment.
Definitely where commodity prices are today is benefiting most of our customers and therefore, we're seeing also I would say based on the very attractive proposition of the combined businesses that we have now brought to bear.
All together under the commodity insights segment, we're delivering a lot of new opportunities to our customers and therefore, we've seen really one of the best sales momentum in this business. If I look at the actual sales levels. This was probably one of the very best year for the last maybe decades or so so very positive trends that we're seeing that it held.
<unk> data and insights that is helping price assessments the global trading services business was a little lower this quarter at the main reason dervis that we're lapping more difficult comps, but generally we also see elevated to hedging activity on commodity prices and we're also benefiting from that as well and then if you look at.
Add to the upstream business there we have seen a turnaround. There is also a business that for many years was in a more difficult period, but clearly our customers are healthier there as well, we see larger capex, our capex budgets for those customers and that is helping that business to grow and we said in our prepared remarks that if you take out the ifs.
The Russia and on a constant currency basis actually the subscription book of business in the upstream business was growing during the quarter. So overall very favorable macro environment for commodity insights and that is clearly helping the business. This quarter and also in the next couple of quarters.
I just wanted to add two points. The first is that all of US know that energy transition is on everyone's mind, whether it's a corporation a government regulator financial institution and as I mentioned earlier almost every conversation we have talks about this and where else do you want to go to find about learn about energy and energy <unk>.
It's commodity insights of S&P global we have the expertise we have the experts that can talk about current market transition markets and were finding a incredible amount of engagement. We have conferences. It's one of the areas that are commodity insights excels at and we see very high demand for people to participate in those.
Conferences, and we're now back in person and the attendance is above the chart, but the second point I want to make is that we're launching new products. All the time just in the last quarter, we launched some new products that were related to energy transition and new ways to find information about markets. As an example, there's a in the <unk>.
<unk> market, we talked earlier, we had one of our points on our slide showed the low sulfur fuel oil market, which we I remember on an earnings call about three years ago talking about when we launched that and now it's become a benchmark in the markets. But in addition, there's things like the carbon accounted tanker rate price assessments.
There is interest around the world for understanding freight emissions and what would be under the EU emissions trading system youre going to need to have much more information for every single tanker and what its carbon output and we will have a product for that.
As an example, there's a whole information that's.
Needed in Brazil, and India, and Turkey on energy certificates in the emerging markets and then finally, we have some examples recently as you know in the United States. There is the new climate, Bill, which was issued by the United States by the Congress and we've done very special research.
Really industry, leading about the clean energy procurement and what that can mean for industry. So when it comes to energy and energy transition, where the place you want to go.
Great. Thank you that's all very helpful.
Just as a follow up email.
On market intelligence I think you had.
The margin performance was really strong.
And I'm curious is that the area, where you may be getting the most synergies or just give us a little bit more color on the margin performance.
It's mix related and how we should think about that going forward.
I'd, probably say, yes, we're seeing the largest benefit from cost synergies and revenue synergies in the market intelligence deficient that's because it's the largest deficient. It's also the largest combination of different businesses that we're bringing together and also based on the size of that division. It will also benefit of course from a lot.
Part of the synergies that we're realizing in the corporate center and the allocation of those costs down to the divisions.
What you see is in general that we continue to invest in market intelligence for future growth. So you'll see new product launches continuing strategic investments in new areas and initiatives that was already touching on private credit private markets ESG investments, we're having dara as well, we're having expansion still continuing in China.
The marketplace in many different areas that we're continuing to invest as well as cloud expenses were also continue on our cloud journey and market intelligence as continue to invest as well, but then the opposite.
Factors. They are some of the expense reductions the expense discipline and the synergies and the combination of all of that led to the significant margin expansion and market intelligence.
Understood. Thank you so much thanks.
Thanks Faiza.
Our next question comes from Stephanie more from Jefferies. Stephanie Your line is open.
Hi, This is a hot Hoffman filling in for Stephanie could you just comment a bit on what you're seeing across your European revenue base and how that region did relative to your expectations either by segment or overall.
Yes overall, not so much of a different trends, we're seeing in Europe compared to other parts of the world I understand the background of the question because definitely the economic outlook in Europe is of course quite quite difficult given the inflation levels given of course, the close proximity.
To the Russia, Ukraine conflict, but overall from the customer dynamics perspective overall in terms of.
Commercial activity, we're not seeing a significant difference compared to North America or Asia.
Got it that's helpful. And then just on the revenue synergy side I.
I guess, where are you seeing the most success. So far and then you know sort of where do you kind of see the most opportunity.
Yes, most successful far we see in our largest efficient that we're bringing to get our market intelligence commodity insights in the index business, It's mostly cross sell at this moment, which was as expected because cross sell is the introduction of one product group to existing customers and making sure.
That we can sell new activities there.
For example in market intelligence, we had a nice sale of <unk> product to an existing customer that was more of a customer from the legacy as it would be global sites, where we could sell a product from the legacy IHS Markit side. So just as an example, so we see continuing to see good cross sell at the.
Same time, we're investing in new product development and system development that will help them with that growth wave going going forward. So it's still early and I have to say around revenue synergies, but we are clearly ahead compared to our original expectations.
Got it.
Thanks Hans.
Our next question comes from Russell quality from Redburn Russell Your line is open.
Yes, Hello, Gents just wanted to talk about capital allocation policies, you still got about 2 billion of cash on the balance sheet and your own cost to generate around 5 billion of free cash flow in 'twenty three I believe consensus.
Just wanted to do further M&A or do you have enough integrations on you had.
No.
On the free cash flow again in 'twenty three.
Overall, no change with respect to our.
Capital Philosophy capital management targets, we think consistency and reliability data is the most important particularly in this environment that you've seen us continuing with the $12 billion ASR, even despite that we have seen some impact of the current environment on the rating issuance levels, we are able to execute on our plans this year.
And you May expect the same from us over the next couple of years. So at least 85% of return of capital to our shareholders a combination of dividends and share buybacks dividend payout ratio between 20, and 30% and M&A. The focus is really on small tuck in bolt on Barbie.
<unk> that we can add a nice capability to show more of our core strategic focus areas, but nothing large because we first of course need to focus on the integration of the large merger and organically building out our businesses. So no changes at all and we think that is actually the right approach.
Okay, and then just one housekeeping question I guess.
Given the earlier comments on being able to achieve but lower than average rates due to the refinancing of the IHS that whilst the level of interest delivered in Q3 now the right quarterly rate to assume going forward.
Yes. This is the new run rate with respect to the interest expense on our debt who are very fortunate with hindsight that we refinanced.
A large part of the debt at the beginning of March when the 10 year U S. Treasury was around $1 73 at that point in time.
So we are very happy that we've locked ourselves in with long term debt at very low levels and actually if you look at the average cost of debt for any play in our industry. We're at the one of the lowest level. So yes. This is the normalized level. If you look at the interest expense line. There's one point that I want to make it as a net <unk>.
Number so we're generating more interest income on our cash balances. So that is helping us a little bit and obviously that might fluctuate over time.
Yes.
Yes got it good stuff. Thanks.
Thanks Russell.
Our next question comes from Shlomo Rosenbaum from Stifel.
Your line is open.
Hi, Good morning. Thank you for taking my questions, Hey, Abe out I just wanted to ask you a little bit about your labor cost trends, obviously, it's a significant component of costs everyone. The industry has been dealing with the rising labor costs.
Go out on the market, what's what's your outlook for that and do you see there.
That kind of letting up.
In terms of just how we should think about that.
The costs of the business on a go forward basis, let's say over the next <unk>.
Six months to 12 months.
Shlomo obviously, we are exposed as everyone else to increases from an overall labor market perspective, and comp expectations and we need to stay competitive in order to attract and retain the best the best talent. So let me expand a little bit on that OLED <unk>, so about 60% of our overall.
Fence base is people cost and obviously, we have people across the whole world in many different job groups and categories. It's not a one size fits all we see more competitive situations in certain markets and jurisdictions, we see it more in certain jumped groups and we're continuously making sure that we stay.
<unk> from an overall comp perspective, and we will continue to do that so we're definitely expecting to see also some of the changes over the next periods flowing through our our P&L, but at the same time. We're also taking advantage of a lot of levers that we are having and maybe lever hirst at all.
Given to us through the merger. So we have of course, the opportunity to realize cost synergies and reduction of head count is an element to that so that goes in the opposite opposite direction as well as.
Synergies cost synergies around real estate around procurement and then as you see this year given the performance of the company also incentive compensation costs are down and we gave you the overall impact of around $120 million to $140 million. So it is a bit of a mix on the one hand staying competitive.
From a labor market perspective, but on the other hand, using a lot of levers in order to offset.
The overall impact on our expense line in on our margins.
Okay. Thank you and then this one is a little bit more about trying to figure out how far we are from the bottom. It just in terms of the ratings revenue, Doug you talked about refunding walls, becoming more meaningful in the middle of next year. If you take the revenue that you would expect from those refunding walls together with your subscription revenue that you are.
Youre getting let's say this year, how far away are you from let's say 2022 revenue that youre expecting in other words, how much further downward it really have to go to just to kind of hit that number.
Shlomo, we're not really trying to call a bottom or a top to the market. We are also not providing any guidance or outlook for 2023 at this time as I mentioned, we've been very engaged with the markets with issuers and investors. We're also we have world class economists and experts that are providing us with input. So we're looking at all.
Of that you just discussed, but where there is no we have no ability to actually call a bottom.
Okay. Thank you thanks.
Thanks Shlomo.
We will now take our final question from Andrew Steinman from J P. Morgan. Thank you. Your line is open hi, I can refer to slide 38, I just wanted to talk about implied a rated margins for the fourth quarter to get to that mid fifties right a good margin for the full year.
My math says that's about 49% ratings margins for the fourth quarter.
Could you just please confirm that and then just help us appreciate the 49% because that's a notable step down from third quarter rating for margins. Please please comment about seasonality or any other factors, we would need to understand fourth quarter ratings margins on on slide 38.
And Andrew as you understand we're not giving quarterly guidance. So I cant give you numbers by quarter or by segment margins, but what we are of course trying to do is if it gives you a full year picture. We give you our full year outlook and then of course, you can backwards calculate what is the expectation for the quarter itself.
I do want to point out that the third quarter in general is the lowest quarter for us from an expense perspective that is due to seasonality. The fourth quarter is higher but you have seen that in previous years as well. So from a trend perspective, there is nothing different than what you shoot that you should have seen in the past, but sequentially you should expect.
Expenses to go up again that there's normal seasonality okay. Thank you.
Okay.
Well that was the last question so I'd like to make a quick closing comment. So first of all thank you everyone for joining the call today for your questions and your support but I'm really pleased with the progress we've made since closing the merger, it's only been eight months and we've been able to unify our management team under a strong vision.
Set of purposes and values, we see strong commercial success you heard about it on this call are cross selling our product innovation and we're ahead of schedule to achieve our cost synergies and all of that and the challenging macro economic backdrop, where we discuss some of those topics today, but we also have very important secular trends that are create.
Opportunities for S&P global the energy transition the continued interest in climate and sustainability the need for analytics and insights and very turbulent markets. So we're very pleased with our progress and I'm excited that we'll be able to share more with you on our strategic vision and our multiyear targets at our Investor Day on December one, but let me end by <unk>.
Thinking again, our people who are absolutely fantastic, they're world class and I want to thank all of you again for joining us on this call today. Thank you very much.
Yeah.
That concludes this morning's call a PDF version of the presenter slides is available now for downloading from Investor S. P. Global Dot com replays of the entire call will be available in about two hours the webcast with audio and slides will be maintained on S&P Global's website for one year the audio.
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