Q2 2019 Earnings Call
Okay.
Good morning, and welcome to S&P Global's second quarter 2019 earnings Conference call.
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Good morning, and thank you for joining S&P Global's earnings call presenting on this morning's call are Doug Peterson, President CEO , and Havent seen Bergen Executive Vice President and Chief Financial Officer.
This morning, we issued a news release with our second quarter 2019 results. If you need a copy of the release and financial schedules. They can be downloaded at investor The SP Global Dot com.
In today's earnings release and during the conference call will providing adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the corporation's operating performance between periods and to view the corporation's business from the same perspective as management's.
The earnings release contains exhibits that reconcile the difference between the non-GAAP measures and the comparable financial measures calculated in accordance with us GAAP.
Before we begin I need to provide certain cautionary remarks about forward looking statements.
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-K 's, 10-Q's, and other periodic reports filed with the U.S. Securities Exchange Commission.
I would also like to call your attention to a European regulation, any investor who has or expects to obtain ownership of 5% of more of S&P Global should give me a call to better understand the impact of this legislation on the investor and potentially the company.
We are aware that we do have some media representatives with us on the call. However, this call is intended for investors and we would ask questions from the media be directed to Jason Fortunately or at 212 or 381247.
We're pleased to report excellent second quarter financial results all four divisions delivered revenue growth and adjusted operating profit margin expansion between revenue growth and progress on our productivity initiatives, we achieved significant margin improvement contributing to a 12% increase in adjusted diluted EPS.
Based on these results and our expectations for the rest of the year, we are raising our 2019 adjusted EPS guidance, which gave out will detail in a moment.
As you know, we've earmarked funds to make investments in meaningful growth opportunities in a moment I'll share details around several of these including our first ratings in the domestic Chinese bond market. Our first ratings CSG evaluations and the successful launch by CMS group of micro E Mini index futures.
In addition, we reduced shares outstanding by 2%, which contributed to the 12% increase in adjusted diluted EPS.
Each quarter, we take an opportunity to highlight key drivers to our business and important projects underway. This quarter lets start with ratings issuance trends.
During the second quarter global bond issuance decreased 3% with mixed performance across geographies and asset classes.
But we also include bank loan ratings total global issuance declined 13%.
In U.S bond issuance in aggregate declined 4% as investment grade increased 5% high yield soared, 41% public finance declined 11%.
And structured finance dropped 19% with declines in Siloed, partially offset by gains in RMBS and CMBS.
In Europe bond issuance decreased 12% as investment grade decreased 17% high yield declined 4% and structured finance decreased 1% due to declines in close in ABS, partially offset by gains in RMBS and covered bonds.
In Asia bond issuance increased 10% overall.
On the fourth quarter 2018 earnings call. We introduced this chart to attempt to track debt issuance in global cash balances of the 50 companies with the most overseas cash at the end of 2017.
As you can see here the cash balances of these companies continue to decline and bond issuance. Among these companies is increasing compared to the anemic 2018.
The latest 2019 global bond issuance forecast is modestly more upbeat than the previous forecast.
Excluding international public finance, which has minimal impact on our financial results issuance is expected to increase 1.4%.
In this environment high yield debt with its fixed rates looks relatively more attractive than loans to investors.
This led to a decrease in bank loan ratings revenue in the second quarter to $85 million versus $121 million in the second quarter of 2018.
During Investor Day, we introduced the framework powering the markets of the future, including six foundational capabilities. We use this framework to set our goals and allocate resources I'm pleased to share great progress on a number of our new initiatives in the areas of global customer orientation and innovation.
Last month, S&P Global China ratings published its inaugural credit rating in the domestic Chinese bond market.
This first rating issued was for IC BC financial leasing company limited, a leading Chinese leasing company, which was assigned a rating of AAA on S&P Global China ratings national scale.
And just this week the second rating was issued to lose show banking Company Limited a city commercial bank headquartered in Lucio City of Sichuan Province.
It was issued a triple b rating on the same scale. These two ratings begin to demonstrate the wider rating spectrum that they can expect as S&P global China ratings brings a fresh perspective to a market of significant domestic and global interest built on our long standing principles of objectivity and transparency.
In doing so we hope to contribute to the goals China has for the evolution of its domestic financial markets and its connectivity to the global financial system.
S&P global ratings issued its first SG evaluations.
Separate from a credit rating the new NSG evaluation is for companies looking to help their investors gain a better understanding of their strategy purpose and management quality. The SG evaluation is grounded environmental social and governance factors to assess an entity sustainability efforts. The SG evaluation process is unique and that includes interactions between our ratings analyst and the company's management.
The first TSG evaluation in the US was for next era energy the world's largest producer of wind and solar energy. The first DSG evaluation in Europe was for my Smallville, Spain's fourth largest telecom, operator, providing fixed and mobile voice and internet services to business and retail customers.
Each year S&P Dow Jones indices releases the annual survey of assets. This chart depicts the highlights of that survey for 2018.
Do this stock market correction that occurred late last year asset levels and actively managed funds the benchmark against our indices were actually down versus the end of 2017 to 7.7 trillion dollars.
The assets and passive funds invested in products index were indices were unchanged year over year at 4.8 trillion dollars.
Numerous indices support the 4.8 trillion clearly the S&P 500 is the largest with 3.6 trillion in assets.
S&P Dow Jones indices is continuing to advance opportunities in ESG. The S&P Dow Jones indices ESG scores service Foundation for index eligibility in May 22, New indices were added to the SG index family with versions of well known country and regional benchmarks, including S&P Global 1200, SSG S&P, Asics, 200, DSG and S&P, Japan 500 SSG.
On our first quarter earnings call, we shared that UBI asset just launched an ETF in Europe based on our S&P 500, ESG index early this week the AUM for the ETF reached $125 million.
In June Dws launch to X trackers, S&P 500, SG ETF based on the same index, which screens out firms with the lowest environmental social and governance profiles.
In May micro mini futures were launched at the CMS to make trading more accessible micro E mini futures or 110th the size of existing E Mini equity index futures and Thats more affordable for certain investors. These new micro in many futures are based on four prominent indices, including the S&P 500, and the Dow Jones industrial average.
The new micro E. Minis were recently dubbed the most successful launch in CMV groups history, with 2.6 million contracts traded in the first four week.
This chart shows the average daily volume of each of the products with the S&P 500 contracts seeing the largest trading volume.
Delivering innovation delivering innovative new products and nurturing existing benchmarks as an important emphasis as S&P global indices recently launched eight new sector indices in Chile with a focus on local investors of the Santiago stock exchange. Examples include the S&P CLX construction real estate index, and the S&P CLX food and beverages index.
The market on closer MLC as platts process for offering transparency into bid offers and transaction submitted by participants to platts editors.
He window enhances the MRC process. The inclusion on E. window is an important milestone in the ongoing maturity and evolution of marine fuel and LNG markets.
And now I would like to turn the call over to Eva Steenbergen, who will provide additional insights into our financial performance and outlook Ava.
Thank you, Doug and good morning to all of you on the call.
Let me start with our second quarter financial results Duck covered the highlights of strong revenue and adjusted operating profit growth.
I will take a moment to cover a few other line items adjusted corporate unallocated improved by 10% primarily due to reduced project spending.
Please keep in mind that can show revenue is included in the 2018 and bigger but starting in 2019 and it is included within market intelligence revenue.
Interest expense increased 41% because the prior year figure was unusually low due to a reduction of fin 48 to interest accruals associated with the resolution of New York State tax audits covering several years.
The adjusted effective tax rate was 23.1% 80 basis points lower than a year ago. This was primarily due to slightly higher stock option exercises as compared to the second quarter last year.
Share repurchases continue to be an important element of our capital return program. These actions resulted in a 2% decline in our diluted weighted average shares outstanding.
Stock options associated with 120000 shares were exercised during the second quarter. This resulted in a stock based compensation tax benefits on EPS of two cents year to date stock option activity is running well ahead of last year. However, as the number of employee stock options continue to decline, we expect the stock based compensation tax benefits to decline as well.
Changes in foreign exchange rates had a negative impact on the revenue in the ratings and market intelligence divisions, and a one cents favorable impact on adjusted EPS for the company.
Ratings revenue was negatively impacted primarily by the weakening of the Euro Australian dollar and British pounds.
There were four non-GAAP adjustments this quarter, a $20 million restructuring charge, primarily in ratings and corporate.
A 5 million dollar lease impairment associated with Platts Vacating office space at two Penn Plaza in New York City, and these employees are relocating to our headquarters downtown.
$5 million in can show retention related expenses, and we had $31 million in deal related amortization.
The first to require investments, we need to continue to invest to fuel revenue momentum with product innovations, introducing new technology, adding new data sets and reaching out to new customers in new geographies. We have made great progress delivering EBITDA enhancement and we must continue to fund new organic opportunities to drive additional productivity gains.
And finally, we want to return capital to shareholders, while maintaining flexible debt capacity. We are committed to returning at least 75% of annual free cash flow to shareholders each year.
This quarter, all four deficiency delivered revenue growth and margin improvement. This is a testament to all the hard work by our employees, creating innovative new products nurturing benchmarks and delivering on productivity improvements our section important focus across the company output five color on the individual business results in a moment.
Now turning to the balance sheet.
Cash and cash equivalents.
Declined slightly from the end of 2018, principally due to $644 million of share repurchases. During the first quarter. However, our cash and cash equivalents increased considerably versus the $1.4 billion on hand at the end of the first quarter. This year.
Our adjusted growth leverage through adjusted EBITDA was 1.9 times remaining within our targeted range of 1.75 to two point 25 times on an adjusted basis, our gross debt to EBITDA leverage multiple decreased to 1.1 times based on EBITDA growth in the first six months of 2019.
Free cash flow, excluding certain items increased $98 million to $956 million in the first half of this year with an existing asrs underway. There were no additional shares repurchased during the quarter. This asrs concluded in late July and we expect to initiate a new 500 million dollar ANSR later this month.
$140 million of dividends were paid during the quarter.
Now, let's turn to the deficient results starting with ratings ratings revenue increased 3% Despite bank loan volume and bond issuance activity that declined 13%. We've emphasized in the past that changes in total issuance aren't necessarily indicative of changes in revenue. The issuance mix is very important with that in mind high yield issuance is very incremental to our revenue and was up 41% in the us our largest market.
Hi yields revenue growth combined with modest price increases at the beginning of the year cost ratings revenue to increase 3%, excluding the impact of foreign exchange revenue increased 5%.
Adjusted expenses increased less than 1%, resulting in a 5% increase in adjusted segment operating profit and a 120 basis points increase in adjusted segment operating profit margin.
On a trailing four quarter basis adjusted segment operating profit margin increased 70 basis points to 55.7%.
Non transaction revenue decreased due to a 6 million dollar impact from foreign exchange rates with changes in the other components offsetting each other.
Transaction revenue increased as debt rating activity driven by high yield bonds outpaced the decline in bank loan rating activity.
Over time non transaction revenue has been a steady source of growth. This is because the majority of the revenue is subscription like however, there is some volatility as certain components, namely rating evaluation surface ebb and flow with M&A activity. In addition changes in foreign exchange rates can always have an impact.
This slide depicts ratings revenue by end markets the largest contributor to the increase in ratings revenue with a 7% increase in corporates. In addition financial services revenue increased 3% structured finance declined 6%.
Governments increased 4% and the Chris on other category decreased 7%. This includes an increase in intersegment royalties from market intelligence, which was more than offset by decline in crystals dollar denominated revenue.
I need to remind you of two changes that both became effective on January onest.
First we now include can show revenue in market intelligence, rather than recording it as a corporate item as we did in 2018.
Second through cost as being transferred from indices to market intelligence and results in both periods have been adjusted for comparability.
With the EEG and climate data and analytics efforts underway at market intelligence. We believe trucost is better suited to be included here.
Adjusted expenses increased 6% as investment spending began to pick up in the second quarter.
Adjusted segment operating profit increased 14% and adjusted segment operating profit margin increased 180 basis points to 34.3%. Despite increased investments in the business more importantly on a trailing four quarters basis. The division delivered an exceptional adjusted segment operating profit margin increase of 380 basis points to 35.6%.
We expect increased investment spending in the second half of 2019, as we continue to invest in strategic growth initiatives.
The sale of the Spice business that we mentioned on our first quarter earnings call closed on July 1st Spy Es revenue was approximately $20 million a year and was included in desktop.
Desktop revenue the largest category grew 3% excluding acquisitions, while active desktop users grew 11% growth in this category has been slowing for the past few quarters due to industry trends and a shift towards data management solutions as customers increasingly prefer data feeds.
Data management solutions continues to exhibit strong growth.
Credit risk solutions grew 12% with ratings express providing the greatest level of growth as we continue to expand the data feeds portion of credit risk solutions.
So turning to S&P Dow Jones indices, the segment delivered 14% revenue growth and this included a nonrecurring benefits of approximately $11 million associated with several recent contract renegotiations, we do not expect a material change to future revenue from these contracts to changes.
In the second quarter, we reported 4% adjusted expense growth.
19% adjusted segment operating profit growth and.
On an adjusted segment operating profit margin of 69.6% an increase of 280 basis points.
On a trailing four quarter basis, just the segment's operating profit margin increased 130 basis points to 68.4%.
Asset linked fees increased 18% due primarily to EGM growth in EPS and mutual funds as well as the benefit from recent contract renegotiations.
Exchange traded derivative revenue declined 6% from lower exchange fees.
Data and custom subscriptions increased 21%, but recall that a year ago, we reported a 4% decline associated with a delay in contract renewals as a result of a change in administrative processes. This is all behind US now and the second quarter 2019 revenue reflects a more normalized run rate.
For our indices division over the past year EPS net inflows were $70 billion and market appreciation was $69 billion. This resulted in an increase in quarter, ending ETF AUM of 10% over the past year to more than $1.53 billion.
I want to make it clear distinction between average AUM and quarter ending AUM.
Our contracts are based on efforts aylwin, which increased 9% year over year, we disclosed quarter ending figures because flows and market gains and losses are best depicted using quarter end figures as shown in the waterfall chart on the right.
Industry inflows into exchange traded funds were $108 billion in the second quarter with the majority going into fixed income and global equity products flows into us equity funds were $42 billion.
Ltd full use increased during the quarter, but revenues declined.
While changes in volume are often a good indicator for changes in revenue to our pricing elements that change as well for example, we aren't paid on volume at the CMP were paid on the percentage of the profits of the equity complex at the CMB and debt could differ from folio.
And now turning to the loss deficient.
Flat revenue increased 4% as a result of a 4% increase in score subscriptions and an 11% increase in global trading services with increased trading volumes of oil LNG and iron ore.
Adjusted expenses decreased slightly leading to an adjusted segment operating profit margin of 52.1% an improvement of 220 basis points. The trailing four quarter adjusted segment operating profit margin was exceptional increasing 260 basis points to 49.5%.
Also yesterday, we closed on the sale of rigs data through drilling info.
Big data is a small business that we purchased three years ago to secure the rights to North American Rick information.
In conjunction with this sale, we have secured the licensing rights to Rick data datasets for use by Platts analytics going forward.
Power and gas delivered the largest rate of growth at 7%, primarily the result of increased adoption of our LNG benchmark.
Petroleum and metals on AG grew 4% and 3% respectively.
Petrochemicals revenue declined 1%.
And lastly, I would like to discuss our 2019 guidance. This slide depicts our GAAP guidance those items that changed our highlights. Please keep in mind that our guidance reflects current spot market Forex rates.
And now let me review the changes to our adjusted guidance.
Corporate unallocated expense has been reduced by $10 million due to a reduction in professional fees, resulting in an increase to our operating profit margin range.
The tax rate has been reduced by half percent points with higher levels of stock option activity than initially anticipated.
These items resulted in a 10 to 15 cents increase to our diluted EPS guidance range.
While these changes increased our expectations for free cash flow, we're still within the guidance range, we provided before.
So in conclusion, we continue to execute upon our corporate initiatives, including our stepped up investments in growth opportunities and our $100 million cost reduction program.
Some of our progress can clearly be seen in our current results. Other programs are just getting underway. We're pleased with the progress we are making both to advance the company and to deliver on our new 2019 guidance and with that let me turn the call back over to chip for your questions.
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Thank you.
I'd like now introduced Ness Manav Patnaik.
Thank you good morning, gentlemen.
The first question is just on the market intelligence desktop growth to 3% I was just wondering if you could.
Ill elaborate a little bit more on some of the trends I think we know the obvious ones, but the deceleration in awards the little bit more notable to the 3% and also the 11% user growth is obviously positive but.
Manav. This is Doug. Thank you for your question well first of all the 3% growth. As you know is is something that we it's a little bit below what weve been targeting we are targeting a mid single digit growth going forward and as you know there's been a few industry trends as some equity shops that have been shrinking et cetera. So occasionally we get a request from customers like that to negotiate but but what's really what we're focused on is the diversification of our of our business model. If you think about it we have a different customer sets. We've got we have banks investment banks insurance companies buy side sell side corporates are government regulators et cetera, and so when we look at our user growth 11% is a good leading indicator for US. We also were coming up during the year, we have different cycles of renegotiations of our contracts, but overall, we're still projecting mid single digit revenue growth for the rest of the year.
Okay got it and then just secondly, given you guys, obviously still have one of the.
Most flexible balance sheets in our universe right now just trying to think about how you plan to maybe use that flexibility in the appetite for M&A just given some.
Large deals recently, including the one today just curious how we should think about that.
Well first of all you should think that we're very careful stewards of our of our capital and our balance sheet, we take it very seriously our our obligations to manage those funds on behalf of our shareholders.
As you as you know, we're always looking to see what would be potential opportunities for us to grow and to invest.
In the slides are included a framework, which we call powering the marks the future and that's really how we guide where we're going to be investing in the future and we put a major emphasis as you can see the last year or so on on internal.
Organic investments has in China with SG with other initiatives. So as you as you would imagine were were looking all the time to see what would be out there. It's just part of having a corporate development strategy, but nothing specific that I would talk about right now.
Right. Thank you guys. Thank you.
Thank you. This question comes from Alex Kramm of you be asked you may ask your question.
Yes, good morning, everyone.
Ask about China, obviously, I know, it's a little bit more long term, but obviously things are happening.
Wondering what other.
I guess metrics you can provide so far in terms of what you've seen you obviously have a couple ratings now, but and I know, it's early days, but anything else you can disclose around no pricing, you're getting new interest levels Youre seeing I guess is opening up any any sort of data sales opportunity at this point already and and if you can comment on on what these companies have seen in terms of you mentioned triple B. Just now mean, if credit spreads spin impact that so I guess, a big question about like give us give us on what would you can.
But what we're seeing so far.
Okay, well, thanks, Alex first of all the reception for our business in China has been very positive both from the markets themselves from issuers from investors as you can see we were approached.
To issue a bond that was actually not a AAA rating is the first time. This week that we that anybody had issued a triple b rating in the market and the market reaction was actually curious and very positive. They were interested to see what is the criteria. We're using how it's going to be applied as well as people are have very high expectations for the way that we are applying our global expertise into a domestic market. As you know the market is still very large it's the third largest bond market on approaching the number two bond market, but overall as you know the bonds are still they are very short term about three years, a corporate issuance is about 12% of the total market local governments about 31%.
The policy banks about 17% commercial banks about 14%.
Overseas investors still only own about 2% of the total bonds in the Chinese market and so if you think about those dynamics the people weve been approaching four on the issuer side, we have a very active program with our commercial team to approach issuers and talk to them about what are the opportunities to be rated by S&P, China and we're getting very good response from them. We're starting to build a pipeline nothing that we would be able to talk about formal yet and then on the investor side, where we're really swamped with investors, calling us to learn more about our approach and especially now having two different ratings, a AAA to triple b. It demonstrates that theres going to be a wide spread of of of ratings in China as opposed to the domestic ratings, which are all clustered around the AAA and and double the level what we'd like to do is over time as we get more track record as we have more ability to give you data we will start sharing more of that but we're very pleased with that.
Progress we've had so far and also I'm really pleased that we've already had two ratings, especially the cover a range of ratings.
All right great. Thank you I'll I'll stay tuned.
I guess then for EV out on the margin side I mean, you continue to do really.
Deliver.
Good operating leverage but also seems to show that you're still finding new efficiency. So I guess, it's a broad question, but just curious.
How you feel about your ability to continue to do that how many still wants to ask Phil to turn over to to find these efficiencies or RF, where we're starting to run out. Thank you.
Good morning, Alex I would say a whole pile of stone for sale.
In the in the company and we are very pleased with the progress. We are we are making.
As you have seen we are very disciplined with the execution of all of our programs to deliver on the commitments we have given to our shareholders. So if you look at the margins. Overall, we have now won business that had has hit its aspirationally margin target that is the index business on a trailing four quarter basis, 68.4% and we set the aspirational target is mid to high Sixtys. They have one business that is getting close to the aspirational target. That's the platts business that is on the trailing four quarter basis now at 49.5% and then ratings and market intelligence have still a little bit of room with ratings being now at 55.7 with the aspirational target of high Fiftys and market intelligence at 35.6 trailing four quarter margin and the aspirational targets is mid to high Thirtys. So we'll continue to execute on our plans to the.
However on the operational leverage that we have to deliver on our productivity programs to grow the top line, which is of course, the best way to expense margins is to grow the top line in a healthy way you've seen that we have had strong revenue growth. This quarter in all of our businesses and if Thats, where you may expect us to continue with that and we have a lot of opportunity still to continue on this path.
Very good thank you.
Thank you.
This question comes from Toni Kaplan of Morgan Stanley You May ask your question.
Thank you.
Morning.
Similar to your largest competitor your ratings performance in the quarter, notably outperform the issuance environment and I know you're attributing a lot of that Kim next just given the strength in high yield and what can you also talk about if there are any other drivers outside of mix and price.
Are you seeing similar mix shifts in the quarter to more infrequent issuers and M&A financings or is there anything else that can just explain a really really strong performance on ratings, even though the environment still pretty muted. Thanks.
Thank you Tony This is Doug there's really nothing that is really more beyond what you just mentioned what we've talked about and it is it is the pricing. It's also the mix is you saw there was a 41% increase in in high yield issuance, which is really a significant increase in the mix. This quarter was was very different than prior quarters. We saw that 41% increase in in high yield in the US is definitely a big part of that.
We also saw corporates, which many of the corporates that want to go to the markets during the quarter, where people that actually pay us with transaction fees versus those that aren't on.
Frequent issuer fees that were not going to the market. This quarter. So those are really the most important drivers. There is nothing that was unusual overall it whats unusual is that there was the 41% increase in high yield in in all of a sudden in really.
Dramatically in June as well, but other than that there's there's really nothing that that's a main shift.
Quarter on quarter from prior quarters.
Great. Thanks, that's helpful.
Shifting to.
Market intelligence with their recent large M&A announced this morning, you know maybe you could talk about if you see the industry changing in the coming years and if you plan to make any changes to your kept by Q strategy. Your market intelligence strategy overall, just I guess, Dennis Dennis large M&A sort of change anything in your view going forward.
Well first of all it's a it's a very interesting transaction and I don't want to comment on the actual transaction itself, but they're both formidable competitors both in EMEA and in indices.
But when it comes to the landscape, we've been watching and obviously watching very carefully what would be the landscape and what could be some of the changes that take place with this type of a competitor which is already very formidable on its own but we're very pleased with our strategy at market intelligence and indices. We've got a diversified segments in our businesses as I mentioned earlier, we have customers and government agencies corporates universities.
Et cetera, and we have a growing data business, which is something that's not only in market intelligence, but also across the company. We're looking to see how we can harness our data business even more than it than we have already. So these are some of the things that we will watch in terms of industry trends of from our competitors, but we also feel with the with the various transactions. We've done the last few years for data assets like true costs, what we're doing with DSG can show, which is showing that there is a lot of value in in artificial intelligence machine learning date data linking.
Et cetera, we feel that we're very well.
Position to be also to be a tough competitor in this space.
Thanks, Dan Congrats on the quarter.
Thank you.
Thank you.
This question comes from Bill Warmington of Wells Fargo, You May ask your question.
Good morning, everyone.
So a question for you on market intelligence.
You've been talking about and you've been executing on creating a unified platform for us and our capital our Q.
I was hoping to get an update on how the migration of the cap by two users onto that new platform is going.
Yes first of all the EMI platform as we've discussed is is a platform that were in addition to working on the migration. It's also important for US the way. We're supporting other divisions is an example, the S&P global platform, which we're using to support ratings 360, and ratings and new very dynamic data delivery products for platts, but going back to your question. We continue to add cap by Q datasets and functionality to the platform on an ongoing basis and this will continue in through to 2020, and so along the way. We've we found some ways to be more flexible to allow our clients to also be more involved in the transition from cap by Q to mine. So that the customers themselves can choose the timeline for their own migration to make sure that they can transfer all of the functionality along with it. So the the transition is going well, but it's probably a little bit slower than we had originally.
Envisioned so it's now moving into more of a timeline into 2020.
So when that.
Transition is completed.
What kind of and you were able to actually start to shut down the legacy cap by Q system, what kind of a margin benefit do you think you can get from that shutdown.
Bill, we haven't really quantified debts.
But obviously running two platforms with all the maintenance expenses that come with that is expensive. So there should be operating leverage benefit that will come out of that but we haven't really quantified that at this point in time.
Well, thank you very much.
Well.
Thank you. This question comes from Joseph Foresi of Cantor Fitzgerald, you May ask your question.
Hi, This is drew coming on for Joe could you provide a little more color on that he or she scoring system and the early customer reaction again.
Yes so.
Thank you first of all there's there's various SG.
Products, we have across S&P global with the indices in ratings and in market intelligence and we in a prior call talked about how we had put together design team to ensure that we had a common data architecture, which we have been managing as well as to ensure that across the different groups, where we have a consistency of approach and methodology, but the on the slides. This time there was a slide 14, where I included the profile factors, which are used for the SG evaluations and not to go into too much detail.
Just as an example, the ratings CSG evaluations it starts with an with an approach to look at the overall geography in an overall market. It. Then also has a way to look at 44 different industry structures for environmental and social factors, we've been doing a lot of governance over the years and then for each of the different SG companies are being evaluated there's factors four factors for environmental for for social and four for governance and each of those are scored.
And what makes these unique compared to some of the other tools being used in the market right. Now is that the person that receives this evaluation can then dig into and analyze each of these different factors to understand how they led to the total score.
In addition in the ratings evaluation Theres also a management meeting, which takes place which allows the ratings analyst in the end the management team to discuss their overall SG.
And overall governance and stewardship profiles. So we think it's a it's a really interesting approach. We've only issued two of these three evaluation so far.
Although the true cost, which is one of the other companies, which we acquired three years ago and as I mentioned earlier is now included in the EMI Pro in the EMEA segment is also a very advanced company. When it comes to the 15000 different companies that they have included environmental profiles, including greenhouse gas emissions waste and pollution et cetera. So this gives US also we think a real a leading position with having true cost that we can use across all of our SG products. So much more to come really good really really good feedback so far from the markets on what were developing.
Got it and then just to add on top of the one of the previous questions about China. So with that Triple B rating are you seeing any pushback or hesitancy from companies that were thinking of getting rated and now. They see you guys are going to be all over the place and now they're a little concerned by that.
We havent seen that at all in fact quite the contrary people, especially institutional investors have come to us to really learn more and more about our methodology because they see this granular approach with a with a brought wider spread that actually is much more reflective of what the pricing is in the market as well. So we havent. This is it's probably too early for me to draw conclusions from two ratings, but that but the response has been really enthusiastic.
Perfect. Thank you.
Thank you.
Thank you. This question comes from Tim Mchugh with William Blair and company. Thank you you May ask your question.
Yes, Thanks, just wanted to ask about platts.
Both in terms of I guess, it was a slightly slower growth.
Right in the subscription piece.
So is anything happening there.
And then the sale of rig data.
Is there anything that's reflective of in terms of the broader strategy with regard to.
Additional research and analytics, you're selling on top of that price assessment products. Thanks.
Good morning, Tim. This is this is Dave out on I think you should not read anything with respect to the plots results that there is a change in trends, we expect the platts business to grow mid single digits growing forward. That's can always stance around a bit that's a little bit quarter by quarter, but this is a very steady business, where there's a lot of recurring revenues.
We see the GTS business doing doing well, we see strong margin improvements and we expect appliance business to continue on that path. So again expectation of mid single digit revenue growth going forward.
With respect to rig data rig data was acquired approximately three years ago. The main strategic reason at that time was to secure the data source of the rig counts in North America, and the only way to secure that at that time was through the acquisition in the meantime, we had an opportunity to secure that going forward through a licensing agreement and therefore, there was a better owner for this assets in the future and that's why we decided to sell rake data to the other owner, but at the same time have access all of this data set on an ongoing basis as I mentioned in the prepared remark rate data. It was a relatively small business approximately 10 million of annual revenue for this business.
Okay. Thanks, and then just more you also sold the kind of investment advisory business I guess is this.
Is there any sort of sign that you're doing or refresh portfolio review are reassessing some of the smaller business units.
Or is it just.
I guess coincidence.
Two of these situations popped up.
Here recently.
I would say we are very happy with our portfolio. We think we have a fantastic set of businesses. So there's nothing large happening and the need for suspect to a portfolio review, but we always are looking ads at certain elements and wherever you first of all can strengthen our portfolio based on acquisitions, but sometimes there are certain elements and smaller businesses that we think there is someone else who could be a better owner. So don't see that this has anything large in terms of a change in our strategic intent. At this has just continued healthy review of our portfolio, but these are all in general terms small businesses. So there is nothing nothing behind it.
Thank you.
Thank you. This question comes from George Tong of Goldman Sachs. You May ask your question.
Hi, Thanks, good morning.
I'd like to dive deeper into your ratings revenue performance. This quarter. Your other major competitor reported a 2% decline in ratings revenue into Q compared to 3% ratings revenue growth at S&P would you say that you have structurally higher exposure to high yield issuance that explains it's different for perhaps different pricing power.
And George Good morning. This is about I think it's hard to of course for us to comment on some of our peers, but I think in terms of our market profile. Indeed, you always have to go to three layers deeper and looking at mix changes and to understand the impact on the on our company. So for example, if you look at structured finance, we are having strong market positions in certain areas and we have smaller market positions in other areas. So for example, if there is a decline in CLL. Our COO position is relatively modest so we won't be impacted so march based on debt and the other element is watts a duck mentioned before at the previous question and that is that we saw particularly a decline in.
Or sorry, we saw an increase in issuance from issue worse that are paying us more on a per transaction basis. So we have our frequent issuer programs, where we have more a fixed fee arrangements and so we saw more an increase on the customers that are on a transaction basis, and therefore benefiting a bit a little bit more this quarter than if the issuance growth would have been into frequent issuer programs, which wasn't the case.
Got it that's helpful.
You increased your full year EPS guidance to reflect lower corporate expense interest and taxes given the strength in your ratings business is your view on full year revenues also improved or do you expect.
Weaker trends in the back half of the year that could offset to Q outperformance.
George I think you should look at the increase in our guidance overall that we are very optimistic.
Around our current performance the growth progress we are making the progress we are making with respect to our productivity programs as Doug mentioned that the issuance outlook that is modestly stronger for the full year. So overall you have to take all of these elements into account if you think about our new.
EPS guidance, one element I would like to point out that debt and the investment spend will be a bit higher in second half of this year. So think about approximately $15 million higher investment spend in the second half than compared to the first half of 2019 and at 50 million will mostly be incurred in the market Intelligence segment and then also if you look at the two divestments. We did is bias and Rick data on an annualized basis. Both companies combined had a revenue of $30 million 30. So we also missing a bit of revenue in the second half of the year because of those divestments. So look at that oil in combination, but I think what you should clearly take out of our improved guidance is we're very happy with the current performance as you have seen this has been a very strong quarter for the company and we are also optimistic about the outlook for the second half of this year.
Very helpful. Thank you.
Thank you. This question comes from Craig Huber of Huber Research partners.
You May ask your question.
Great. Thank you Doug curious to hear your updated thoughts on the debt issuance environment out there. When you think about where we are right here in the cycle in terms of credit spreads M&A calendar.
Obviously strong refinancing calendar coming up et cetera, and I have a follow up.
Yes, Thanks, Craig well first of all is Eva just mentioned it was mentioned earlier, we have built our global issuance summary, based off of many different factors. We've been looking at obviously, what's the pipeline of refinancings coming up what's in on People's balance sheets for having tougher maturity schedules, we speak with the debt capital markets groups of various investment banks and we also watch very carefully what what we think are going to be some of the factors driving that including rates and obviously growth.
So weve in our current forecast, we see that industrials and corporates are going to be up about 2.5% financial services about 0.8% structured finance about about flat for the rest of the year and public finance up a little bit as well, which leads to about a 1.4% total but a couple of the factors, which which you've asked about though or are pretty interesting right now the investment grade composite.
Spread has has been pretty pretty low recently.
Its recent high was about 176 basis points right now in July it was down to below a 140.
In.
Speculative grade high yield investments high yield issuance right now the spreads about 400 basis points, it's been as high as 500 recently its been as low as around 300 recently, so it's still a little bit higher than it had been down at 300, but we see that the conditions for issuers is still very strong low rates and then on top of that you know that the overall rate environment is very low the United States tenure as of yesterday was just 2.06% the ukase at 0.6%, Japan is negative <unk> 0.15 negative Germany is now down to <unk> 0.43 are negative in Switzerland's down it negative 0.64% so with.
Underlying 10 year base rates, this low and trending lower along with.
Spreads, which are very attractive they are not as low as they have been but they are still attractive financing conditions are attractive there's still a lot of liquidity out there. We think that overall, it's a it's a good environment for issuers, it's a more of an issuer friendly environment. Although we don't see the market's going gangbusters, which is I think reflected in our overall, 1.4% expectation for growth for the rest of the year.
Good My second question, Doug can you just comment on if we can show acquisition in terms of I'm curious in terms of employee retention rates. There. How that's doing and also what are you guys. Most excited about right now with or working on it from from a cost perspective, but also enhancing the products that you have with four or five areas for you. If you want to talk with you. Most excited about thank you.
Yes, let me start and then I'll hand, it over to Eva So I am really excited about the things that I've been singing can show and recently Ive had opportunity to meet with some some employees and in platts as well as indices in ratings, who are having direct contact or direct product development beyond just what we had originally done within mine and so the enthusiasm is really great and there's there's interesting.
Enhancements that are being looked at for the market on clothes for surveillance in ratings for the New index team, which has joined the the index team from can show into our index business. So there is a lot of enthusiasm across the company, we're starting to see tangible products delivered or beginning to be scaled that let me hand, it over to Dave out who will elaborate on that and tell you a little bit more also about the attrition.
Hi, Greg.
I can just shared the enter shazam of duck around can show.
If you for example here about the redesign on the market both on the close process implants, the end to share some implants and the people that are in full for that in working in a joint team with can show to redesign search a process, which will be really a leapfrog in terms of the proposition that platts has to its existing customers. That's fantastic. If you think about the only search and how much that is completely changing the experience of our customers in terms of the market intelligence platform and looking at more and more data that we add to this platform, which will make it more and more difficult to search what you're really looking for so a very strong search engine its importance and in fact that doesn't really exist in the b to b markets. Today. So that is already being rolled out to date to shorten customer groups and the feedback is very positive I can give you the whole list, but of course I don't want to spend too much time on that Greg you also.
One very specific question about retention, which is of course important metric that we are measuring and following very closely and I'm happy to tell you that the Koreans attrition levels are below industry benchmarks for can show. So we're pleased with that as well.
Great. Thanks, Greg.
Thank you.
Dan Dolev from.
New Mara.
You May ask your question.
Hey, guys. Thanks for squeezing me in I appreciate it.
Great results.
So if I look at your guidance starting from last year, you went from negative two.
0.62, plus 1.22, plus 1.4 in terms of the issuance outlook.
Maybe asked differently is this is this just a matter of.
Be deeper into the year or increased optimism or little bit of both.
Thanks, Dan. This is that this is a combination it's I wouldn't I wouldn't I would say that this is really combination of what we saw in the first half as I mentioned, a little while ago and I can give you a few more statistics there was a lot of volatility in the first half of of some numbers as I've mentioned before with high yield up 41%.
In the in Europe investment grade issuance was down 17%.
In Europe corporates are down 17% sovereigns were down 28% our public finance in the US was down 11%. The corporates were up 17%. So what we do is we try to look and see what was the issuance. So far this year against these are initial expectations are also looking at as I mentioned water maturity schedules that are coming coming forward and so this is this is something that our team our fixed income research team. They put this together in a way that they're they're taking into account all of these different factors based on what was the issuance earlier in the year what is the upcoming maturity schedule what are they hearing from the banks what are they seeing from the M&A pipeline and the one of the most important factors, which is also part of that is the outlook for rates and we've seen that SCB, Japan, and then yesterday in the us the fed lowered rates by 25 basis points as well, which is really setting a a more attractive rates environments as well. So those are all of the different.
Factors that would be.
Built into this 1.4% increase for the rest of the year.
Got it thank you and given its 936, so I want to ask a follow up thanks again.
Thank you.
Thank you. This question comes from Jeff Silber asset fee and Oh, you May ask your question.
Hey, good morning Attendee Chen.
Good morning, Doug.
Just wanted to ask a high level question on on.
The strategy around powering markets.
Yes, I guess, especially not in market intelligence in Platts business.
Just wondering if you could just comment on how you're thinking about investments in either data and analytics for and how you're thinking about which markets sort of attack.
And to build products for us. Thanks.
Yes. Thank you well this is the one of the things that we've done with this the strategy of powering the marks the future and you saw the framework in the in the materials that we provided it gives us a way that we can speak to our businesses about their core investments in their core businesses as well as areas of disruption or what we would call adjacencies and as part of that were looking and driving this on what our customers want.
And what we hear from our customers, we decided that we needed to drive our investments and drive our growth by by hearing what comes back from the markets. Instead of just trying to come up with him come up with ourselves. So in addition to our strategic teams and and our executives. We also have our commercial teams and others out listening as much as they can what are the key trends and you mentioned what is one of the most important trends for not only platts and and in market intelligence, but also indices in ratings and that's the future of data.
This is where we are we're very pleased to see the growth of over 10%, 11% in the in the data feeds business and market intelligence.
When we meet with our platts customers, they're talking about data they have rules and piles in an avalanche of data in their own business that they're trying to make sense of and one of the questions are asking US is can you provide us with more data that it's easier for us to use and also makes sense of our own data. So the data equation is one.
That is most on the minds of our customers with a combination of of how do you use that through technology through modeling tools et cetera, and as we look at that Thats. How we decide that's how we decide where we're going to invest its really based off of customer feedback customer insights and it's not just a a team that is doing this in a theoretical way, we're actually out boots on the ground visiting our customers to listen to what they need.
Got it okay Thats a great. Thanks, so much.
Thanks Henry.
Thank you we will now take our final question from Michael Cho of JP Morgan.
You May ask your question.
Hi, good morning, Thanks for thanks for squeezing me in here on my first question I want to touch on yes cheaper than we talked about.
She like on this call, but I was hoping if you can give an update on how you're thinking about.
Framing the overall size of the yes, she opportunity for S&P and do you think S&P has all the assets today to adequately capture that opportunity.
Let me start and give you a little bit of a view of the market opportunity and how we're thinking about it and then that will give you a little bit of thoughts about the market sizing and we're heading from that point of view.
In terms of the opportunity and how we think about it. It's one that is really expanding very rapidly. It is when people ask me about this in meetings that I met I, usually say that I think were in the second inning.
This is this is a very early stages of the development of the SG data market. There are worse, we're finding demands from the investor side. The buy side is trying to understand what this means for their portfolios and its going beyond what were the traditional impact investors or investors that had some sort of a sustainability quotient already included in their in their mandate and so this is also starting to now filter through to pretty much all in institutional investors. When we look at this we also know that there are needs from governments from corporates from issuers et cetera, and what we're trying to see and make sure that we have the right mix on my right portfolio of products and services. We think that there are opportunities for every single one of our divisions to provide ESG products and services. We also believe that with a true cost as an anchor which is an excellent anchored for what we do.
This gives us the ability to have a starting point.
For environmental factors, our governance work that we've been doing for over 30 or 40 years in the ratings business also helps us with the foundation there so youre going to see us developing these products and services coming out of all of the different divisions and as we've shown in the last couple of quarters. This is a commitment for us on investment commitment. We've also started building in a way that we designed it from the ground up so we've got a very sophisticated approach to data across S&P global So we don't duplicate our efforts, but but that's the general approach you should see us continuing to talk about this investing in it and growing it from what we think is a strong foundation, but in the very early innings, and let me hand, it over to Eva.
Yeah, Michael Good morning, So if we look at the overall size of our ESG business. We're looking at activity some products across all of our divisions as John just explained so think about renewable energy implant sync about through cost and you'll see scorecards that are being developed in market intelligence. The S&P Dow Jones sustainability index and the new 500, TSG Index, an index the ratings years GE evaluations and many more products that are currently under development.
Overall last year, we reported approximately $37 million of revenue for years GE. The forecast for this year is approximately $50 million of revenue for the whole company and the outlook is growth of approximately 40% over the next few years, so 40% growth. So this will be clearly a growth driver for the company in the future.
Great. That's very helpful. I am going to squeeze just one more in on China.
Doug I mean outside of ratings I mean on the call you talked about powering markets harnessing data.
But but in tandem and can you give us.
With that framework or an update on how we should think about the incremental us with the opportunity within China because of establishment of the local ratings business.
Well first of all thank you.
Michael for initiating coverage, we appreciate having JPM has one of the organizations, it's covering us and thank you for the questions on China. Just we've mentioned this before we are as we are thinking about China and we're entering it with a consolidated comprehensive effort for all of S&P global So right on the heels and I could see the nipping on the heels of ratings is market intelligence that that's also building out a domestic data and analytical service for the financial markets as well. We so we look at this as a as a really important transition of a large financial market that is moving towards becoming more of a capital market than a bank market. As you know right now in China. Most of the financing is actually on bank balance sheets as opposed to bonds and the the most of the bonds that are actually issued are very short term there three years and they're also going on banks balance sheets.
And so when we look at this transition that we think is going to take place as the capital markets. Our reform they become more sophisticated and also more linked globally. We believe that there's going to be opportunities for all of the S&P global businesses to established domestic onshore.
Products and services, we don't have a sizing for you yet.
We will provide that over time as we get more experience and we build out that.
Build out the roadmap for you, but right now you can be assured that we look at this comprehensively across S&P global the first onshore investments in the first products that are launched during ratings, but market intelligence is really close behind.
Great. Thank you.
Thank you so with that let me thank everyone again for joining the call today I'm very pleased with the strong quarter that we had.
Im pleased that were continuing with a lot of progress in all of our investments in our core businesses, which you saw demonstrated today from our strong results and then it's also encouraging to see the progress that we're making on these new investments such as the China discussion. We just had the USG products and services that are based on anchored off of some of the true cost.
Benefits that we had from that and that investment. So thank you again, everyone for following the company I hope everyone has a great summer and we'll be back in the quarter. Thank you very much.
That concludes this morning's call a PDF version of the presenters. The slides is available now for download from Investor that asked peak global Dot com.
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Yeah.