標普全球 (SPGI) 2018 Q1 法說會逐字稿

Good morning, and welcome to S&P Global's First Quarter 2018 Earnings Conference Call. I'd like to inform you that this call is being recorded for broadcast. (Operator Instructions) To access the webcast and slides, go to investor.spglobal.com. That is investor.spglobal.com and click on the link for the quarterly earnings webcast. (Operator Instructions)

I would now like to introduce Mr. Chip Merritt, Vice President of Investor Relations for S&P Global. Sir, you may begin.

Good morning. Thank you for joining S&P Global's Earnings Call. Presenting on this morning's call are Doug Peterson, President and CEO; and Ewout Steenbergen, Executive Vice President and Chief Financial Officer.

This morning, we issued a news release with our first quarter 2018 results. If you need a copy of the release and financial schedules, they can be downloaded at investor.spglobal.com.

In today's earnings release and during the conference call, we're providing adjusted financial information. This information is provided to enable investors to make meaningful comparisons on the corporation's operating performance between periods and to view the corporation's business from the same perspective as management's. The earnings release contains exhibits that reconcile the difference between the non-GAAP measures and the comparable financial measures calculated in accordance with U.S. GAAP.

Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning on the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our Forms 10-Ks, 10-Qs and other periodic reports filed with the U.S. Securities and Exchange Commission.

I would also like to call your attention to European regulation. Any investor who has or expects to obtain ownership of 5% or 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're aware that we do have some media representatives with us on the call. However, this call is intended for investors, and we would ask that questions from the media be directed to Jason Feuchtwanger at (212) 438-1247.

At this time, I would like to turn the call over to Doug Peterson. Doug?

Good morning. Thank you, Chip. Welcome to the call today. Economies around the globe are growing, equity markets face increasing volatility, and the world waits for a potential trade war. But S&P Global is off to a great start in 2018.

Let me begin with the first quarter highlights. Leveraging technology and data is becoming increasingly critical to the company, so we're thrilled to have added leading-edge technology and unique data sets with the acquisitions of Kensho and Panjiva.

S&P Dow Jones Indices delivered exceptional results, as market volatility fueled record exchange-traded derivative revenue.

Our adjusted effective tax rate declined 860 bps to 21.7%, as a result of U.S. tax reform.

We generated approximately $299 million in free cash flow, excluding certain items.

We initiated a $1 billion accelerated share repurchase program, with the majority of the shares received in the first quarter.

We returned $1.2 billion through share repurchases and dividends, with $1 billion from the new ASR.

And as previously disclosed, we contributed $20 million to the S&P Global Foundation to support our investment in community programs.

Looking more closely at the financial results. The company reported 8% revenue growth on both a reported and organic basis. However, excluding the impact of foreign exchange, revenue increased 6%.

Our adjusted operating profit margin increased 10 bps. We fully expect an improvement in our adjusted operating profit margin for the full year, consistent with our 2018 guidance of 47.5% to 48.5%.

We delivered 24% adjusted diluted EPS growth. Our EPS included favorable impact of $0.03 from ForEx and $0.04 from the tax benefit from stock option exercises. Ewout will provide more information on these in a moment.

What I'd like to do next is provide some more color on the current and future drivers of our businesses. When tracking the issuance data, we always try to point out that where issuance takes place, which type of issuance and the size of the deals make a difference in the revenue we realize. Global issuance in the first quarter, excluding sovereign debt, decreased 5%. Structured finance, however, was quite strong.

Geographically, issuance in the United States decreased 13% in the first quarter, with investment-grade decreasing 17%; high yield decreasing 37%; public finance down 31%; while structured finance increased 29%, due primarily to strength in CLOs and ABS.

In Europe, issuance was unchanged in the quarter, with investment-grade decreasing 6%, high yield declining 11% and structured finance increasing 29% with strength in CLOs, ABS and RMBS.

In Asia, issuance increased 3%. The vast majority of Asian issuance, however, is made up of local China debt that we don't rate.

As you'll see later, there is never a perfect correlation between issuance and revenue because of frequent issuer programs, pricing and non-transaction-related revenue. In fact, despite a decline in global issuance during the quarter, Ratings revenue increased.

One of the strengths of structured issuance during the quarter was CLOs, in particular, new CLOs. This was despite continued uncertainties surrounding U.S. risk retention rules. The Court of Appeals for the D.C. Circuit ruled against the SEC and the Federal Reserve Board, concluding that managers of collateralized loan obligations are not subject to the credit risk retention rules mandated under Dodd-Frank. There was an appeal period, at last, and the U.S. regulators chose not to appeal. While no longer mandatory, some managers are looking to continue to abide by risk retention, and some debt investors have expressed a preference for the managers' interest to align with theirs.

Bank loan ratings have been a growing part of the Ratings business over the past few years. Bank loan ratings are primarily issued on leveraged loans typically related -- typically rated BB+ or lower. While our first quarter bank loan rating revenue was a couple of million dollars less than a year ago, at $99 million, it is a solid start to 2018.

The next chart takes a longer-term perspective on the bond market. This chart depicts average U.S. bond maturities for the past 17 years. We're frequently asked by investors if maturities have lengthened as corporate treasurers sought to stretch low interest rates further into the future. This data demonstrates that they haven't. Both investment-grade and high-yield average maturities have been virtually unchanged since 2010.

Turning to S&P Dow Jones Indices. We continue to invest in our future. S&P Dow Jones Indices added Bolsas y Mercados Argentinos to our international securities exchange network, which has been at the forefront of index-based innovation. This is in addition to our agreements in Latin America with Brazil, Chile, Peru, Mexico and MILA. MILA is a regional trade and exchange organization made up of Chile, Peru, Colombia and Mexico.

We launched the S&P 500 Bond Mega 30 Index family. It includes the S&P 500 Bond Mega 30 Investment Grade Index, which is composed of 30 bonds representing the largest investment-grade issuance from S&P 500 issuers, and it includes the corresponding S&P 500 Mega 30 High Yield Index.

S&P Dow Jones Indices began publishing carbon metrics on the majority of its equity indices, including the S&P Global 1200, S&P 500 and Dow Jones Industrial Average. We're the first index provider to publicly display carbon metrics as standard alongside financial data on our indices on a monthly basis. The source for the data is Trucost, a company we acquired in 2016.

And last, in conjunction with the BSE in India, we launched the S&P BSE 100 ESG Index to measure the exposure to securities meeting sustainability investing criteria.

Next up, Platts has developed a new blockchain application, the first at S&P Global. We believe this project, developed in conjunction with our partners in Fujairah, represent a first for oil markets by offering a full blockchain deployment to provide market participants with data that is increasingly critical in the region and to global oil markets. This is an example of our ongoing commitment to digital transformation in the energy sector.

Last quarter, we highlighted the first Black Sea wheat OTC swap trades. Since then, there has been more than 500,000 tons traded over the counter. In the first quarter, CME launched a new cash-settled Black Sea grain future based on the S&P Global Platts price benchmark for Russian wheat and Ukrainian corn. The Platts prices should appeal to traders looking for correlations across markets. The Black Sea grain complex encompasses wheat, corn production and exports from countries bordering the Black Sea.

Turning to technology. We're thrilled to have closed the Kensho acquisition in April. By applying Kensho's expertise across S&P Global, we can enhance the customer experience we provide. Over time, we expect Kensho's expertise will drive a dramatic evolution of our businesses in areas, like: new analytical capabilities embedded in our products; improved user experiences driven by natural language processing, visualization and advanced search; automation of core workflows that will allow us to create new products faster, mitigate development risks and drive efficiencies; fundamental IT research that not only attracts top talent, but designs and tests new tools and applications for the future; and new applications in how we ingest, link and synthesize data.

Also during the first quarter, we added Panjiva to Market Intelligence. And in March, Panjiva was named to Fast Company's Most Innovative Companies list. Panjiva has a rich import and export data on supply chain relationships, trade flows and other supply chain-related economic activity for companies globally. Their coverage spans multiple sectors, including electronics, automotive, capital goods, agriculture, food and beverage, pharmaceuticals and health care. Their data science and technology capabilities turn this raw supply chain data into essential intelligence for their customers. Data on 8 million companies and over 1 billion shipment records are available. Panjiva supplies not only macro shipping data, but individual shipment level data as well. Panjiva supplies data on consignees, shippers, ports, cargo weights and more. Our plan is to migrate all of the Panjiva functionality into the MI platform.

Finally, I want to remind you that we will be hosting an Investor Day on May 24. The event will be webcast. But for those institutional investors and analysts who wish to attend in person, please RSVP ahead of time.

Let me turn the call over to Ewout, who'll provide more specifics on our business results during the quarter. Thank you.

Thank you, Doug, and good morning to everyone on the call. This morning, I would like to provide additional color around our first quarter results. Doug already discussed the 8% revenue growth and the 24% increase in adjusted diluted EPS. I would like to touch on a few other line items:

First, on January 1, we adopted a new accounting rule, ASC 606, revenue from contracts with customers, and believe that it will not have a material impact on our financial results. You can find further information in our first quarter 10-Q.

Second, I would like to put the $10 million increase in unallocated expense into perspective. This increase is due to the $20 million contribution to the S&P Global Foundation. Without this contribution, unallocated expenses declined $10 million, and this decline was primarily due to lower executive department expenses and reduced professional fees. The $20 million contribution also impacted our adjusted total expenses and adjusted operating profit margin. Without this contribution, adjusted operating profit margin would have increased over 100 bps.

The most impactful item during the quarter was U.S. tax reform, which resulted in a dramatic reduction in our adjusted effective tax rate. During our fourth quarter of 2017 earnings call, we estimated that the EPS impact from the tax benefit associated with stock-based compensation would increase 2018 EPS by $0.10 to $0.20, depending on SPGI's share price and option exercise activity. This also impacts EPS whenever the fair market value of employee stock grants at vesting differs from the grant price. The impact is recorded as an adjustment in tax expense. During the first quarter, we reported a reduction in tax expense that improved first quarter adjusted EPS by $0.04.

Net of hedges, foreign exchange rates had a $25 million positive impact on the company's revenue and a $10 million positive impact on adjusted operating profit or about $0.03 per share in the first quarter. The bulk of the impact was in the Ratings segment. Ratings revenue was primarily impacted by the euro and British pound.

The only non-GAAP adjustment that was made during the quarter was $24 million in pretax deal-related amortization expense.

In the first quarter, led by S&P Dow Jones Indices, every business segment contributed to gains in revenue. While 9% growth at Market Intelligence was notable, 25% growth at Indices was outstanding. Indices' adjusted operating profit growth and adjusted operating profit margin growth of 28% and 160 bps, respectively, also led every business segment. While it is unrealistic to expect every business segment to have an increase in adjusted operating profit margin every quarter, let me add to Doug's earlier comment. Not only do we fully expect an improvement in our adjusted operating profit margin for the full year consistent with our 2018 guidance for a range of 47.5% to 48.5%, we expect that all 4 business segments will contribute to this improvement.

Now turning to the individual business segments. Since Indices had such a strong performance this quarter, let's start there. Revenue increased 25%, with large gains in both exchange-traded derivatives and asset-linked fees. This surge in revenue led to a 28% increase in adjusted operating profit and a 160-basis point increase in adjusted operating margin to 69.5%.

Asset-linked fees, which are principally derived from ETFs, mutual funds and certain OTC derivatives, increased 21%, driven by a 28% increase in average ETF AUM. Exchange-traded derivative revenue rose 59% to $50 million, setting a new quarterly record for this category. The previous record was $34 million.

Extraordinary market volatility led to increased exchange-traded derivatives trading activity. To put this volatility into perspective, during the first quarter, there were 23 days when the S&P 500 changed by 1% or more. For the full year 2017, there were only 8 such days.

And then subscription revenue increased 5% due to growth in data subscriptions and custom indices.

The trend of assets moving into passive investments continued in the first quarter, with the exchange-traded products industry reaching net inflows of $128 billion. The quarter-ending ETF AUM tied to our indices totaled $1,326,000,000,000, up 19% versus the first quarter of 2017. As the chart shows, this was the result of $109 billion of net inflows and $101 billion of market appreciation over the last 12 months. The first quarter average AUM associated with our indices increased 28% year-over-year, and this is a better proxy for revenue changes than the quarter-end figures.

Exchange-traded derivatives volume was very strong during the first quarter. Key contracts include: S&P 500 index options, which grew 38%; and VIX futures and options activity, which increased 56%; in addition, activity at the CME equity complex increased 48%.

Now moving to Ratings. Ratings revenue increased 5% or 2% excluding a favorable impact from ForEx. Adjusted operating profit increased 8% while the adjusted operating margin increased 190 bps to 54.7%. As we have said in the past, we manage the Ratings business on a rolling 4-quarters basis, and you can see on that basis, the adjusted operating margin increased 270 bps.

Non-transaction revenue increased 11%, due primarily to growth in fees associated with surveillance, new entity ratings and Rating Evaluation Service fees. New entity ratings are from customers that are coming to us for their first rating. There was a flurry of activity, as we had 30% more new customers in the first quarter than in our first quarter of last year. In addition, with a jump in M&A activity and corporate carve-outs, our rating evaluation service fees were up over 40%.

Transaction revenue decreased 1%, as declines in corporate bonds and public finance were slightly larger than gains in structured products. While market volatility helped our index business, it temporary sidelined a number of would-be issuers during the first quarter. On the days when the equity markets had sharp declines, there was often little to no corporate bond issuance.

If you look at Ratings revenue by its various markets, you can see the greatest gains were in structured finance. Structured finance increased primarily due to strong CLO and ABS activity in both the U.S. and Europe as well as increased CMBS activity in the U.S. Corporate revenue was impacted by decreased issuance. The only revenue category that declined was governance, due to the 31% decline in U.S. public finance issuance, that Doug mentioned.

Let me now turn to Market Intelligence. In the first quarter, revenue increased 9% and adjusted operating profit improved 4%. Our adjusted operating margin declined 150 bps, primarily due to increased investments in commercial and technology, increased data cost, foreign exchange and timing of expenses. We fully expect margins for Market Intelligence to increase in 2018.

Here, I want to briefly review some business highlights. We have discussed the movement to enterprise-wide commercial agreements for our desktop products, but it is important to understand that outside the Desktop business, essentially all products were sold as enterprise-wide commercial agreements already. With the emphasis on instituting enterprise-wide commercial agreements for our Desktop business, by the end of the first quarter, approximately 70% of former Capital IQ Desktop customers had been converted.

Also during the quarter, we realized a 14% increase in Market Intelligence active Desktop users versus the prior period. As for the new Market Intelligence platform, progress continues as there were several new releases during the first quarter. Mike Chinn will give a more comprehensive update on our platform and commercial rollout progress during Investor Day.

Looking more deeply at Market Intelligence revenue. All 3 components delivered strong revenue growth. Desktop products grew 7%. Data Management Solutions increased 13%, leading growth for Market Intelligence. Risk Services grew 8%, with RatingsXpress and RatingsDirect providing low teens and mid-single-digit growth, respectively.

Turning to Platts. Revenue increased 3% in the first quarter. The mid-single-digit growth in our core subscription business was diluted by weakness in Global Trading Services revenue, which experienced mid-teens declines. Derivative trading was weak in certain oil and metals products. The adjusted operating profit margin declined, primarily due to lower Global Trading Services revenue, foreign exchange and timing of expenses. In 2017, Platts margin declined as the year progressed due primarily to the timing of certain expenses. We expect the margin to be more stable from quarter-to-quarter in 2018.

If we look at Platts revenue by its 4 primary markets, you can see that petroleum and power and gas make up the majority of the business. The 2 smallest categories, petrochemicals and metals and ag, each delivered 9% growth. And the 2 largest categories had little or no growth.

Now turning to our capital position. Our cash balance was reduced by approximately $1 billion from the end of 2017, due to the accelerated share repurchase agreement that we initiated in the first quarter. Our debt was basically unchanged since the end of 2017. Our debt coverage, as measured by adjusted gross leverage to adjusted EBITDA, remains 1.9x.

First quarter free cash flow was $277 million. Due to the incentive compensation payments that occur in March each year, first quarter free cash flow is generally the lowest of the year. As for the return of capital, the company returned more than $1.2 billion to shareholders in the first quarter, with a $1 billion ASR, $100 million in open market share repurchases and $127 million in dividends. During the quarter, we received 0.6 million shares from open market purchases and the initial shares under the ASR of 4.5 million shares.

Now I will review our 2018 guidance. As part of the Kensho announcement on March 6, we lowered our GAAP guidance by approximately $0.20 due to increased amortization of intangibles as well as retention and integration cost. This slide depicts our initial GAAP guidance and our current GAAP guidance. Please keep in mind that our guidance reflects current spot market Forex rates.

This slide shows our adjusted guidance. The differences from our initial guidance are highlighted on this slide. Our deal-related amortization increased by $30 million to $35 million as a result of the Kensho acquisition. In addition, we will incur post-acquisition compensation expenses for replacement equity awards and retention plans as well as anticipated integration cost. Since both of these items are excluded from our adjusted results, our adjusted diluted EPS guidance was not changed.

We're pleased to have begun the year with solid first quarter results, and our guidance reflects our expectation that 2018 will be a very strong year for the company.

And with that, let me turn the call back over to Chip for your questions.

Thanks, Ewout. (Operator Instructions) Operator, we will now take our first question.

Our first question will come from Manav Patnaik with Barclays.

This is actually Greg calling on for Manav. I just wanted to ask quickly on the investments that you made in Market Intelligence. I understand the margins coming down in the first quarter had some onetime items in there, but maybe you can quickly touch on some of the investments you're making on the commercial and technology side.

Yes. Thank you, Greg. This is Ewout. Indeed, we have said investments in commercial and technology. In commercial, you should think about expansion of the sales force. What we have announced today is a very strong organic revenue growth of 9%, much higher than the market growth, so we're clearly gaining market share in our Market Intelligence business. And we're investing in expansion of the sales force in order to stimulate future organic revenue growth and sales growth in the business. With respect to investments in technology, you should think about investments in the Market Intelligence platform. That's a key strategic priority, and we expect that will also help with our commercial position in the future. So overall, we expect margins to improve for Market Intelligence during 2018. Market Intelligence should contribute to overall margin growth for the total company during 2018. And we expect already to see a step up in the margins during the second quarter of this year.

Okay. That makes sense. And then quickly, also on the subscription piece of the Ratings business, which is really strong. How should we be thinking about that growth going forward in terms of -- some of that growth is probably coming from the strong results that you showed in 2017, and the monitoring that you get off that versus some of the evaluation services. So just some thoughts on the moving pieces on the subscription piece for Ratings.

Greg, this is Doug. Let me just tell you a little bit about what are some of the components in there. I don't have ability to tell you what the growth rates are going to be. Going forward, we're going to be providing you some more information about that when we get to Investor Day of some of our outlook for that. But what the components include are frequent issuer fees, our ratings evaluation services, our surveillance. And as the same way that Ewout just talked about commercial activities and having a sales force in place, we've been investing in our commercial activities across all of our businesses, including in Ratings, for the last couple of years. And so this last quarter and over all of 2017, we've been growing in terms of number of entities that are rated, which has increased our new entity fees, which go into the frequent issuer fees. So that's another one of the areas. As you see more issuers coming to market, as that expands throughout the year, as you see more M&A activity which could lead to more ratings evaluation services, those are the key drivers of that area.

Our next question comes from Alex Kramm with UBS.

Maybe just coming back to, I think, the first question asked on the margin. I think, Ewout, you noted yourself that there were no non-GAAP adjustments this quarter other than intangible amortization. So it looks like there's not a lot of integration costs and onetimers here anymore. So is that just a temporary blip? Or do you still see other work that you personally can do when it comes to your driving that margin upside by integrating and doing some things differently in the past? And if there is still more, maybe you can just highlight the biggest inefficiencies that you still see by segment.

Yes, Alex. I think there's so much more to be done. I can talk probably the rest of this call about all the opportunities, but that would not be respectful for the next callers that have questions. But in all seriousness, absolutely, there is a lot of initiatives that we're taking. Normally, adjustments are around restructuring expenses. It could be about some legal positions or certain onetime items. You should certainly not read in anything, that we have no restructuring announced during this quarter, that there are no activities happening. There's a lot of opportunities with respect to efficiencies, commercial growth, new markets, new products, new concepts, collaboration commercially between the businesses, the implementation of new technology, efficiency opportunities that we have identified within the company and so on and so forth. So we're definitely planning to give you more insight on that during our Investor Day. But in terms of our aspiration with respect to margins, we are certainly not at the point that we are done. On the contrary, we believe there's still a lot of runway in terms of margin expansion for the company going forward.

All right. Fair enough. And then secondly, coming back to Market Intelligence and the growth in that business and the whole enterprise pricing move, et cetera. When we talk to clients, it sounds like there's starting to be increasingly more push back to the point where I think some senior management is getting involved in some of these discussions on the pricing side. So just wondering, in this maybe budget-constrained world, do you feel like you're having a harder time making the case for pricing increases? Or do you still feel like you have a -- you have all the tools to continue to use that lever going forward? Maybe it's better for Mike Chinn, but I mean, if you have a view, that would be helpful, too.

Alex, it's always hard to react on anecdotal examples because we have a lot of anecdotal examples where, actually, we've become aware of changes to enterprise-wide agreements where the customers are very happy. It's a very good transition. And in effect, it provides a lot of additional value and a lot of more users for the platform than what we have now. And you have seen, we announced 14% increase in active users for the platform. So overall, we don't recognize this particular trend or signal that you are giving to us today. We believe that the transition to enterprise-wide agreement is going in a very positive and constructive way.

Our next question comes from Hamzah Mazari with Macquarie.

This is Kayvon Rahbar. I'm filling in for Hamzah. Can you give us -- can you walk us through how you're thinking about the Platts business, in both an oil up cycle and down cycle?

Yes. This is Doug. Let me start with that. First of all, because our business generally is a subscription business, we've seen over the years, more stability than other organizations that are more dependent on consulting or a transaction-type approach. We do have the GTS business, as you know, which is a transaction-oriented business, but the core base of our business has given us a stability over time, and we're -- we continue to take advantage of that. What we've seen typically in up cycles is that there's more investment. There's more spending. And then when you see a down cycle, there's a pullback from the industry. As you know, actually using Ratings information from the past few years, the oil and gas sector has been that which has the higher number of defaults and delinquencies and bankruptcies, which in some ways had some negative pressure as well. But we see that the oil industry is getting back to an investment mode. We think that there's going to be a range of oil prices, from our experts in the Platts business, between $45 to $70 range, although it's above the $70 range right now, and that we've built our plan for oil prices that are kind of in that range. So we see -- over time, we see a steady growth in this business, and we see -- compared to many of the other business models, we think that we have a more -- a smoother approach to how we can see that growth coming in.

All right. And then unrelated question. Could you frame for us how you're seeing the bond issuance longer term going forward in light of the higher interest rates? And then -- and specifically too, how this cycle might be different versus the past cycles.

Yes. Well, first of all, as you know, there's a couple of factors which we know drive bond growth -- bond issuance growth. The first is GDP growth. And so GDP growth has continued to be strong. In fact, our U.S. Chief Economist has increased our expectations for growth in the U.S. market this year of up to 2.9% because of the tax reform. That added about 500 to 600 bps to that growth. And so we see the underlying most important factor for bond issuance is GDP growth. Secondly, overall spread does have an impact on what happens within -- with issuance. We see right now in the first quarter this year and as we moved into this year, bond spreads are continuing to be very, very tight. The investment-grade composite was about 123 bps in the most recent numbers as of last week, and speculative grade is up at about 295, close to 300 bps, but those are very tight compared to historic averages. But we look at interest rates. The last few days, there was a lot of people talking about the 3% 10-year bond rate. But if you look historically, bond rates have been low the last 5 or 6 years. But historically, 3% bond rate would have been very low because if you look at that, how that links to inflation. So there's a number of factors. It's underlying growth rate in the GDP. It's what are the spreads? It's what are interest rates? What are inflation expectations? But we really look to economic growth as the key driver of bond issuance overall.

Our next question comes from Toni Kaplan with Morgan Stanley.

This is Jeff Goldstein on for Toni. I know there was some reinvestment within Indices last year, causing pretty flattish margins there, but you had a pretty healthy step up this quarter. Should we be interpreting that to mean that reinvestments are -- they are largely complete, and we should be anticipating a higher flow-through of revenue this year?

Overall, our approach with the Indices business is that we would like to grow that business as fast as we can in that mid-60% of margin range. So we have seen, indeed, margins going up this quarter based on the exceptional exchange-traded derivative volumes, but the question is if that will continue. Of course, that depends a lot on market volatility and it's directly correlated to market volatility. But that shouldn't be a kind of new objective for the company to stay at this particular margin level. I think you should continue with the expectation of we would like to reinvest, to grow the Indices business, invest in new initiatives and products and concepts like fixed income indices, like smart beta, like ESG, like international. And we would like to do that within the room we create by growing this business in that mid-60% margin kind of range.

Okay. Great. And then it looked like your international ratings growth was a lot higher than domestic in the quarter, despite pretty tough comps at both. Can you talk about what you're seeing internationally that helped drive that growth?

Yes. If you go to the -- if you look at the issuance overall, Europe was actually quite strong this quarter. There were both a combination of structured finance coming out of Europe that was a very strong market for RMBS, CMBS, ABS, covered bonds, et cetera. And then across our Asian business, you did -- you also saw some growth from the business. We do not issue Chinese domestic bonds, but across Asia, there was growth there. But generally speaking, the main part of our drivers of the last quarter were in Europe.

And our next question comes from Craig Huber with Huber Research Partners.

My first question. Doug, can you just update us on your thoughts on global debt issuance, your expectation this year? I think before, you've talked about flat, maybe slightly down for the year. And in particular, can you talk about what your outlook is for bank loans and what seems like a rising rate environment? And I have a follow-up.

Yes. A couple of things there. I think on the overall issuance, we've just issued our update on our global forecast for the year. Even though the number itself shows that there's an expectation that the total issuance will be down about 2% to 2.3%, if you exclude what we would consider to be international public finance that we don't rate, overall, it looks like it's still down about 1%. It's different components. Overall corporate, globally, we think we are going to be down for the entire year for various reasons, 2% or so. Financial services still could see some upside, even though in the first quarter, it was weak. There are organizations in Europe and Asia, a few in the United States that are still basically putting longer-term debt on their balance sheet, TLAC, things like that. Structured finance is where we think we're going to see the strongest issuance this year for various reasons. It's for balance sheet purposes. And then finally, U.S. public finance is the area that we see as the weakest for the year, where our full year expectations are down over 30%. And you saw that in the first quarter. When it comes to loan issuance and CLOs, there is still a lot of demand for floating rate instruments, and that's one of the drivers. It's not just the deal activity itself, LBOs and structured deals that are taking place that drive the loan demand -- the loan issuance side. There is also a lot of demand from the investor side for floating rate investments, and this is -- especially in this environment where there's a lot more volatility in the market, the demand for floating rate is still up. So we expect that the loan business is becoming a bigger business. Not only has it just become larger because there's more activity, but it's also become larger because a much higher percentage of it is rated than it used to be in the past. So we believe that the loan market will continue forward. I don't have a specific projection for it, but we do think that it will continue to be strong in this kind of an environment.

And then my other question. You touched on this a little bit. But in Platts, the slow growth, roughly 2.5% on the top line, being hurt by your trading operation. Can you just touch a little bit further about what exactly happened in the quarter? And then why are you more optimistic that overall Platts revenue growth may improve as the year goes on?

Craig, if we look at the different components, the core subscription business, the price reporting business, we see healthy growth both in revenues and another indicator we're looking at is annual contract value, which is an indicator of future growth of that particular revenue category. So we see healthy growth, positive development. And hopefully, with stronger commodity markets in the future, we could see some further improvement there. Global Trading Services, as you are highlighting, is down. That can move around a bit quarter-by-quarter. It depends very much on the volume of certain products and indices that we have built together, mostly with ICE, and what kind of those products are seeing more volume and lower volume from quarter-to-quarter. So that can move around a bit. But overall, we are managing our business, as you know, not on a quarter basis, but on a full year basis. So therefore, we are confident that Platts should be able to contribute to the overall margin expansion of the company for the full year.

Our next question comes from Jeff Silber with BMO Capital Markets.

Actually, just a follow-up on the margin side. Ewout, you've mentioned a few times that you do expect margins to increase year-over-year for all the segments. Again, I know you don't manage the business on a quarterly basis, but you started off in the hole in Market Intelligence and in Platts. And what gives you the confidence that margins will expand for the rest of the year in those segments?

Well, first of all, Jeff, I would like to point out that if we would not have done the $20 million contribution to the foundation, the overall margins would have improved by more than 100 bps for the company during the first quarter. So just to put that in perspective. But focusing in on the 2 segments that you are mentioning, Market Intelligence has seen particularly certain expenses that were more timing-related that should reverse during the rest of the year and some expenses that we don't expect to occur at the same level during the remainder of the year. There was specific impact from foreign exchange, some impact from ASC 606, fringe and many other categories. So a lot of moving parts there. But overall, we expect that, that expense level should be different going forward. And therefore, with improvement of the revenue top line, and you have seen the 9% organic growth in Platts, that therefore, we should be able to see margin improvement for Market Intelligence. With respect to Platts, let me put the margin of Platts a bit into perspective. So if we look back to 2017, expenses were more back-end loaded. And this is expenses with respect to initiatives, discretionary spend, variable expenses. And therefore, we saw a trend of margins going down during 2017, from 51% in the first quarter down to 44% in the fourth quarter of 2017. And the full year margin for Platts during the -- during 2017 was 47%. So we started the year with 48% margins for Platts, which is above the fourth quarter and above the full year 2017. We expect expenses to be more even this year, so therefore also margins to be more stable during the course of 2018. And therefore, we are confident that Platts should also contribute to overall margin expansion for the company during the full year.

All right. Really appreciate the color. That's helpful. And in terms of the follow-up, I wanted to shift gears to the Indices basis. Obviously, the numbers continue to be very impressive. But I'm just curious, do you think you're gaining share in that market? And if so, are there any ETFs, or are there any specific markets where you're stronger than your competitors?

Yes, this is Doug. This is a -- that's a difficult question to answer in terms of gaining share. What we can look at is what's the overall size of the asset management market and how that's growing, as well as what is the component of the total asset management market globally that's in different types of passive or index strategies. But there's a lot of movement within different asset class allocations between U.S., between global, with local, regional assets, et cetera. But we know that if you look at the large cap U.S. market, we have a large share of that, obviously, with S&P 500 being a very large component of the index position in that market. So we don't have a very specific market share itself, but we do see that there -- that we've done very well, and there continues to be a big movement into index and passive strategies and we benefit from that. Even if funds move from active to passive and they originally start in an international position that we don't have, as they move around from different types of passive strategies, we, at some point, usually see a benefit from that.

Our next question is from Joseph Foresi with Cantor Fitzgerald.

I wanted to stick with indexing. I'm particularly wondering about the impact from fixed income in some of the newer areas and what their contribution is starting to look like.

Fixed income is still, for us, a pretty small area. We have total revenues in there below -- it's about $30 million a year in total, but it's something that is -- we can give you some more information on that when we get to Investor Day. But it's a nascent area. In fact, for the total market, globally, fixed income indices is still a pretty small component of all the different investment portfolios. It's a new area. It's one that we believe is going to get a lot bigger. We want to play a much bigger position in it. But as of today, it's a very small component of our revenues.

Okay. And then just maybe an update on the progress with Kensho and Panjiva.

Yes. Let me comment on Kensho. It is, of course, very early days. We closed the transaction 2.5 weeks ago. There's a lot of enthusiasm about this acquisition as well as about Panjiva because of the new data sets that Panjiva is bringing, the technology, the expertise that both companies are bringing, the data scientists and the quality of the people that are coming to our organization. With respect to Kensho, as you know, it is about $20 million in revenues that they have today with a small loss, which we will absorb in corporate unallocated. So therefore, you won't see that showing up on an adjusted basis. But we will work on many projects that we have identified, and we will keep you updated on the economic benefits of those projects along the way. We will have a particular section during our Investor Day, where there will be a panel with Daniel Nadler and a couple of other people giving you more insight in Kensho. So we'll definitely come back to you during Investor Day with a couple of more concrete examples.

And our next question is from Peter Appert with Piper Jaffray.

So the Ratings margin performance is quite impressive in the context of a tougher revenue environment. Any more color you can share in terms of mix or cost initiatives that are driving this performance? And then I'm also interested in any perspective on longer-term targets in terms of where you think margins can go in Ratings.

Peter, this is Doug. When it comes to longer-term margins, we'll provide some more of that when we get to the Investor Day. But in terms of mix, you've heard me say before that we could have a very weak quarter, and that over time, we know that there's going to be a lot of volatility in issuance. And we saw a very weak quarter in corporate, financial institutions, public finance, et cetera. The overall global issuance is down 5%. If you take out structured finance, it was down even a lot more than that. But it's still a business that there's a couple of aspects to it we have to think about. First is that the kind of mix of actual issuance itself. So if you see more mix, as we know normally lower-rated of structured finance transactions -- or of structured finance transactions. High-yield transactions typically have a higher margin component, higher revenue component. But at the same time, we've also been able to balance out our business with non-transaction-type fees, from frequent issuer fees, from bringing more issuance into the business. So we've been able to get through a very tough quarter because of the mix of our business as well as the mix of the issuance. And as I've always said, we could see some very weak quarters, very tough quarters. And we think we just had one. There might be some more ahead, given the volatility that we're starting to see in the markets. But we're trying to manage the business on the type -- top line. But then as you've seen over time, we've done a couple of different restructuring reserves and restructuring actions, so we're also managing our expenses very tightly. But at the same time, we are investing in innovation. And there are innovations we're taking in terms of sustainability indices, ESG indices, Green Bond Evaluations, et cetera. Those are all very small now, but we think that over time, they're going to be important for us to build more revenue but also importantly, maintain a relevance in our markets.

Peter, let me add one thing here because I think a lot of you folks are scratching your heads about the non-transaction. So there's a number of components in non-transaction that Doug has alluded to. But the important thing is every single one of them was up. That doesn't normally happen in a particular quarter. So our annual fees or surveillance, up. That's not abnormal. Our frequent issuer fees are up. Our program fees, that's commercial paper, commercial paper is up. The new entities, we had a surge of new entities coming in, that's up. RES, a lot of M&A activity, that's up. Then our segment royalty, so the business we get from Cap IQ, that's up. So it's not common that every single component of non-transaction is up in a given quarter, but they did this quarter.

Got it. And Ewout, can you talk a little bit about the $22 million for legal settlements? I guess I was a little surprised that number is still so large. What's driving that? And how much more might we anticipate on that front?

Yes. There was no particular legal settlement charge during the quarter from an accounting perspective. You might have looked at it from a cash perspective. So this was a payout of a reserve we have already established last year. We are very much at the end of the pipeline with respect to cases for the financial crisis. There's still very few cases that are going on at this point in time. Obviously, we cannot further comment on that, but I would say we're very much at the end of the pipeline with respect to financial crisis cases.

Our next question is from Vincent Hung with Autonomous.

Yes. Just on the Market Intelligence expenses, you talked about the higher data costs. Can you just give us a bit of color here what that relates to? Is it exchange data? Is it pricing data?

That is -- Vincent, that is overall just data with respect to new products and new data sets we put on the platform. I would look at that as directly correlated with volume growth, business growth, revenue growth, customer growth. We are trying to expand our platform, adding new content, and therefore, new data sets. So for me, this is a variable cost which is directly correlated with the strong organic growth we see in the business, again, emphasizing the 9% organic growth we have seen in Market Intelligence this quarter.

Got it. And can you talk about Ratings 360 in terms of how you plan to use that to extend the value proposition to customers? And any feedback that you've received from issuers so far.

Yes. Ratings 360 is a replacement of a tool we used to have called My Credit portal, which was a way that we could have connectivity to issuers, so treasurers and CFOs. We are replacing that with Ratings 360, which is a much more dynamic platform and has more information on it. It allows us to have a dialogue or connectivity electronically between the issuers and the analysts. We're also seeing the ability to add new data, new information to that, which makes it even more relevant for issuers to have the relationship with us. So we see the feedback is excellent. We're continuing to improve it and to build it and to move it out. And so I'm really pleased with where we started with Ratings 360, and it's something that we will also talk more about in our Investor Day.

Our next question is from Tim McHugh with William Blair & Company.

This is actually Trevor Romeo on for Tim today. Just wanted to touch on the trading revenues for the index segment. That was obviously driven up by the volatility in the quarter. But how sustainable is growth there going forward? Are there other factors beyond volatility that would drive further growth? Or do you see that kind of just continuing to spike up and down with volatility?

That is -- revenue is actually driven by transactions, so you should expect to see some volatility in it. We benefited tremendously this quarter from that volatility and from the level of transactions, but that revenue is pretty much directly linked to transaction volumes.

Okay. And then also on the index segment, the asset-linked fees were pretty strong, even with a little bit of a decrease sequentially in AUM. I was just wondering if you could maybe give us an update on the pricing you're getting for that business, maybe if you're not seeing as much fee compression there lately.

Trevor, 2 comments on the fee revenue with respect to the asset-linked fees. First of all, we're comparing, of course, first quarter '17 to first quarter '18. So year-over-year, there's a significant increase in the asset levels. And secondly, the fees that we generate is based on average AUM, so it's on the daily average of the asset balances of those products. So you shouldn't look at a quarter-end number because if there is a healthy development with respect to average asset levels but markets come down at the end of the quarter, then the fees are much higher because it is generated over the average AUM. So that is to put it into perspective. We do, of course, have the declining scales with respect to the fees in basis points over those exchange-traded products. But the flip side is that the marginal costs are very low. So therefore, the incremental benefit of the additional volume is very high, the flow-through to the bottom line is very high. So on a trade-off basis in terms of volume growth versus the fee structures we have in place, it's very favorable for the company when the volumes are going up.

Our next question is from Conor Fitzgerald with Goldman Sachs.

Most of my questions have been asked, so just one for me. But just wondering if you're seeing any increased competition for talent and how we should be thinking about that impacting your compensation expense. It seems that we've heard a couple of management teams have talked about a tighter labor market this quarter, particularly on the technology side of their business. Just wondering if you're seeing that in your business as well, and how we should think about that impacting you as well.

This is definitely one of the most important topics that we discuss about with our Board of Directors and our operating committee, and that is the high quality of people that we already have in our company and the high quality of people we want to attract to the company. Clearly, the technology space is one that it's a very competitive market. We are seeing, obviously, a -- what you might want to call a war for talent. But any of the expected expenses and able to fund that to train and develop our people to ensure that we have great leadership in the company, that's included in all of the estimates and the guidance that we've given you.

We will now take our final question from Patrick O'Shaughnessy with Raymond James.

So a quick follow-up on Platts CTS (sic) [GTS] revenues. Are there specific ICE products that you would point us to look at in terms of driving those CTS (sic) GTS revenues? Because as we look at overall ICE energy volumes, they were up, I think, about 3% versus 1Q '17. So I'm guessing there's a very specific subset that's more relevant for you guys.

Patrick, that is fair to say because if you look at the ICE overall trading volumes, they are up. And then if you look at our GTS revenue for Platts, you see a decline. So of course, that raises the question of how is that possible? Our licensing agreements give us some significant exposure to certain contracts that we have built together with ICE. To mention a few of those products, the Singapore Fuel Oil, Dubai, but not to all others. So it's very much the mix of the type of business and volumes of the trading activity on the ICE platform that will impact, and again, that therefore, can move around quarter-to-quarter.

Thank you, Patrick. Well, I see that we've come to the end of the people in the queue for the calls.

I just want to thank everyone again, that we're very pleased to have launched 2018 with very, very strong first quarter results. As you've heard, we're going to continue to focus on our top line growth, customer experience, our commitment to improving our margins, which I hope comes through very clear. You'll also hear from us throughout the year about our new corporate-wide emphasis on technology, specifically on Kensho's impact on our company. And we look forward to seeing all of you on our Investor Day in about another month or so.

And thank you this morning for your comments, questions and your ongoing interest. Thank you very much.

That concludes this morning's call. A PDF version of the presenters' slides is available now for downloading from investor.spglobal.com. A replay of this call, including the Q&A session, will be available in about 2 hours. The replay will be maintained on S&P Global's website for 12 months from today and for 1 month from today by telephone. On behalf of S&P Global, we thank you for participating and wish you a good day.