標普全球 (SPGI) 2018 Q2 法說會逐字稿

Good morning, and welcome to S&P Global's Second 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 second 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'll provide adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the corporation's operating performance between periods and to view the corporation's business from the same perspective as management's. The earnings release contains exhibits that reconcile the difference between the non-GAAP measures and the comparable financial measures calculated in accordance with U.S. GAAP.

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

Thank you, Chip. Good morning, everyone, and welcome to the call.

Global GDP continues to be strong, but trade tensions, Brexit, MiFID II and the unwinding of quantitative easing, present uncertainty and challenges. In the meantime, however, companies continue to look to S&P Global to provide the data, analytics, benchmarks, insights and trade flow information to navigate market events.

But let me begin today's call with the second quarter highlights. The company delivered 26% adjusted EPS growth. Our adjusted effective tax rate declined 500 basis points to 23.9% as a result of U.S. tax reform. In the second quarter, we generated $488 million in free cash flow, excluding certain items. Our $1 billion accelerated share repurchase program continues, and we returned $126 million in dividends. Our 2018 adjusted EPS guidance remains unchanged. And we expanded our differentiated customer content with the acquisition of RateWatch, and we incorporated new data sets from Crunchbase.

Taking a closer look at the financial results. The company reported 7% revenue growth and 6% on an organic basis. Excluding the impact of foreign exchange, however, organic revenue increased 5%. Our adjusted operating profit margin increased 230 basis points to 49.1%. We delivered 26% adjusted diluted EPS growth.

Please note that our EPS included favorable impacts of $0.04 from ForEx and $0.01 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 bond issuance in the quarter, we always 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 second quarter, excluding sovereign debt, decreased 3%. Structured finance, however, continued to be strong.

Geographically, issuance in U.S. decreased 12% in the second quarter, with investment-grade decreasing 19%, high-yield declining 30%, public finance down 12%, but structured finance increased 5% due primarily to strength in RMBS and ABS.

In Europe, issuance increased 9% in the quarter, with investment-grade increasing 10%, high-yield declining 29% and structured finance increasing 29%, with strength in covered bonds and CLOs.

Reverse Yankee bonds in Europe were also getting traction from a very small base. Reverse Yankee bonds are bonds issued in another country by a U.S. company. As Europe offers lower-cost financing, issuers are beginning to take advantage. In June, B-rated bonds in Europe offered average financing of 150 basis points cheaper than the U.S. This differential is beginning to entice U.S. issuers.

In Asia, issuance decreased 4%. The vast majority of Asian issuance, however, is made up of local China debt that we don't currently rate.

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

One area of financing that continues to grow is leveraged loans. During April, the inventory of U.S. leveraged loan surpassed $1 trillion for the first time. It has outgrown uninterrupted every year since hitting a low in 2010. In addition, the loan market now comprises more than 1,000 issuers, an increase of more than 50% since 2010. To meet their financing needs, speculative-grade companies can choose whether to utilize the leveraged loan market or the high-yield bond market as conditions warrant.

Bank loan ratings are primarily issued on leveraged loans typically rated BB+ or lower. Our revenue growth from bank loan ratings has exceeded the growth of the market as the percentage of bank loans that we rate has increased. Our second quarter bank loan rating revenue is $121 million, a 22% increase over the $99 million recorded a year ago.

There is some downside, however. The sharp increase in new issue supply, a whopping $102 billion of loan paper, entered the secondary market in May and June. This pushed spreads higher, limiting potential savings from most repricing exercises. In fact, June repricing volume of only $16 billion is the lowest monthly total in the past year, and July is on a pace to be even lower.

Turning to S&P Dow Jones Indices. At the end of June, we released the Annual Survey of Assets. This chart depicts the highlights of that survey. Most importantly, there was a 17% increase in assets globally that track indices managed by S&P Dow Jones Indices to $13.7 trillion. This includes $8.9 trillion in active money that is benchmarked against our indices and $4.8 trillion in passive money that is invested in products indexed to our indices.

Numerous indices support the $4.8 trillion. I'd like to highlight 3 categories. Clearly, the S&P 500 is the largest of all products with $3.4 trillion in assets. These assets increased 15% in the past calendar year. Smart beta, the second category, which has $234 billion in assets, is up 27%. And fixed income, the third category, with $45 billion in assets, is up 11%.

Agricultural commodities derivatives have historically been settled with physical delivery. Following success in the energy market, increasingly, cash-settled derivatives are being created. Last December, CME launched the first cash-settled futures in agriculture based on Platts' price benchmark for Russian wheat and Ukrainian corn. As you can see from this chart, there's been a very successful launch with over 55,000 contracts traded the first 6 months. Based on this success, last week, CME introduced option contracts for Black Sea wheat and corn futures linked to the same benchmark.

Turning to other developments in the quarter. We continue to innovate, expand differentiated content and create new products. In June, the company acquired RateWatch. RateWatch is a subscription business that provides differentiated data and analytics for the banking sector, including custom reports on bank deposits, loans, fees and other product data. RateWatch was founded in 1989 and was acquired by TheStreet in 2007. It will be integrated into Market Intelligence and will be a great addition to our existing bank data offering.

In April, Crunchbase data on almost 400,000 private companies became available on the Market Intelligence platform with the help of Kensho. Crunchbase utilizes a community of thousands of contributors to crowdsource data.

Trucost, a leader in carbon environmental data and risk analytics, has launched the Trucost Sustainable Development Goal, or SDG, Evaluation Tool. The tool is designed to help companies to identify business risks and opportunities aligned with United Nations SDGs. Over 9,000 companies and investors with more than $4 trillion in assets have pledged their support to the SDGs.

S&P Dow Jones Indices launched the S&P 500 Carbon Price Risk 2030 Adjusted Index. It's designed to measure the performance of the constituent companies of the S&P 500, reweighted to account for the potential specific impact of 2030 carbon prices on constituents' stock prices. Adjusting market valuations to account for the future possible cost of carbon emissions seeks to address potential company-specific financial value at risk attributable to carbon rather than looking purely at quantity of emissions.

Now let me turn the call over to Ewout to provide more specifics on our business results for 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 second quarter results.

We reported solid operating results, and Doug already discussed the revenue growth and the increase in adjusted diluted EPS. I would like to touch on a few other line items.

First, adjusted corporate unallocated operating loss increased $3 million due to $6 million associated with Kensho and a $3 million reduction in excess real estate in New York and London.

Second, I want to compliment our employees for their efforts in outstanding year-over-year expense control. It is important that we work to ensure that our revenue growth outpaces our expense growth. An increase of only 2% in adjusted total expenses is a result of numerous technology projects, lower incentives and productivity improvements.

Third, interest expense decreased $11 million, primarily due to the resolution of New York state tax audits. FIN 48 requires us to accrue interest and penalties associated with potential tax payments. Based on the resolution of these items, we reversed interest expense accruals, resulting in lower interest expense in the quarter.

Fourth, the most impactful item during the quarter was U.S. tax reform, which resulted in a dramatic reduction in our adjusted effective tax rate. We are continuing to review and evaluate new provisions of the Tax Cuts and Jobs Act. During the second quarter, we reported a $9 million provision for the global intangible low-tax income tax for all of the first half of 2018. We are continuing to monitor regulatory guidance and interpretations of the new legislation.

Finally, while it doesn't impact our financial statements, I want to update you on another tax matter. Some of you may recall that in the second quarter conference call last year, we discussed that the IRS issued a 30-day letter proposing to increase the company's federal income tax for the 2015 tax year by approximately $242 million. The increase related primarily to the IRS' proposed disallowance of claimed tax deductions for certain amounts paid in 2015 to settle lawsuits by 19 states and the District of Columbia. We stated at the time that we vigorously disagreed with the proposed adjustment and are pleased to report that we have reached a settlement with the IRS in April for $14 million that was fully reserved.

We continue to estimate that the EPS impacts from the tax benefit associated with stock-based compensation will increase 2018 EPS by $0.10 to $0.20, depending on SPGI's share price and option exercise activity. EPS is also impacted 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 second quarter, we recorded a reduction in tax expenses that improved second quarter adjusted EPS by $0.01.

Foreign exchange rates had a $12 million positive impact on the company's revenue and a $16 million positive impact on adjusted operating profit or about $0.04 per share in the second quarter. The bulk of the impact was in the Ratings segment. Ratings revenue was primarily impacted by the euro and the British pound.

There were 3 adjustments to operating profit this quarter. The first was related to our legal settlement reserve. As we stated back in May, the company settled the final significant financial crisis litigation. We are increasing our reserve by $73 million this quarter to meet this settlement obligation. Second is an item that will be ongoing for the next 3 years related to retention expenses for certain Kensho employees. And finally, there was $33 million in pretax deal-related amortization expense.

In the second quarter, every business segment contributed to gains in revenue, adjusted operating profit and adjusted operating profit margin. This was truly a solid quarter of operating performance by each of our business segments.

Now turning to the individual business segments. Let's start with Ratings. As you may recall, Ratings revenue grew 10% in the second quarter of 2017. Against this strong prior year comparison, Ratings revenue increased 4% this quarter or 2% excluding a favorable impact from ForEx.

Adjusted operating profit increased 12% while the adjusted operating margin increased 400 basis points to 57.1%. The decline in expenses was primarily due to lower incentive accruals and productivity improvements.

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 380 basis points.

Non-transaction revenue increased 7% due primarily to growth in fees associated with surveillance, new entity ratings and rating evaluation service fees. Transaction revenue increased 1% as a 22% increase in bank loan ratings revenue offset a decline in bonds rating revenue.

If you look at Ratings revenue by its various markets, you can see the greatest gains were in structured finance, as has been the case for 5 straight quarters. Structured finance revenue increased primarily due to strong CLO and RMBS activity. Corporate revenue increased despite a decline in issuance. The only category where revenue declined was governments due to the 12% decline in U.S. public finance issuance that Doug mentioned.

Turning to Indices. Revenue increased 13% with higher EPS and mutual fund AUM, greater OTC transactions and strong exchange-traded derivatives activity. This strong growth in revenue led to a 15% increase in adjusted operating profit and a 70 basis points increase in adjusted operating profit margin to 65.8%.

Asset-linked fees, which are principally derived from ETFs, mutual funds and certain OTC derivatives, increased 18% driven by a 21% increase in average ETF AUM. Exchange-traded derivative revenue rose 17%, healthy growth but not near the record-setting volume experienced in the first quarter. Subscription revenue declined 4% due to a delay in contract renewals as a result of a change in administrative processes. We believe these contracts will be renewed later this year.

The trend of assets moving into passive investments continued in the second quarter, with the exchange-traded products industry reaching net inflows of $119 billion.

The quarter-ending ETF AUM tied to our indices totaled $1,382,000,000,000, up 20% compared to second quarter of 2017. As the chart shows, this was the result of $119 billion of net inflows and $107 billion of market appreciation over the last 12 months. The second quarter average AUM associated with our indices increased 21% year-over-year. This is a better proxy for revenue changes than the quarter end figures.

Exchange-traded derivatives volume was mixed during the second quarter. Key contracts include S&P 500 Index options, which grew 18%; VIX futures and options activity, which decreased 25%. Lastly, activity at the CME equity complex increased 14%.

Let me now turn to Market Intelligence. In the second quarter, revenue increased 8%. Organic revenue increased 7% and excludes the acquisitions of Panjiva, which is increasingly cited in the media for its trade flow data, and newly acquired RateWatch.

Adjusted operating profit improved 9%. Our adjusted operating margin increased 40 basis points. There was some concern among investors during the first quarter when we reported an adjusted operating profit margin of 29.5%. We hope that the improvement to 32.8% will allay those concerns.

Looking more deeply at Market Intelligence revenue. All 3 components delivered solid revenue growth. Desktop products grew 5%. Data Management Solutions increased 11%, leading growth for Market Intelligence. Risk Services grew 8%, with growth in RatingsXpress, RatingsDirect, CreditPro and other credit analytics and risk solutions.

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's important to understand that outside the Desktop business, essentially, all products were sold as enterprise-wide commercial agreements already. With our emphasis on instituting enterprise-wide commercial agreements for our Desktop business, by the end of the second quarter, approximately 75% of former Capital IQ Desktop customers have been converted. Also during the quarter, we realized a 13% increase in Market Intelligence active desktop users versus the prior period.

As for the new Market Intelligence platform, progress continues. We have been systematically rolling out the new platform to investment banking clients and rounding out the offering with additional Capital IQ content. In conjunction with Kensho, work is underway to enhance screening and search capabilities. And we are building unique user interfaces, with functionality tailored to different customer types because we know that what a corporate treasurer wants to see is different than what an equity analyst wants to see. As we roll out future releases, we'll offer flexibility for clients to preview and test platform changes as well as switch back and forth between platform versions to gain comfort with new enhancements.

Turning to Platts. Revenue increased 7% in the second quarter, including about 1 percentage point of the growth that was timing related. The high single-digit growth in our core subscription business was diluted by weakness in Global Trading Services revenue. Global Trading Services generally represents less than 10% of Platts' revenue. In the second quarter, it experienced mid-single-digit declines as derivative trading continued to be weak in certain high-sulfur fuel-oil products.

After reporting a 48% adjusted operating profit margin in the first quarter of this year, margins rebounded to 49.9% in the second quarter, an increase of 190 basis points over the second quarter of 2017 and, coincidentally, the first quarter of this year. Revenue growth outpaced a 3% increase in adjusted expenses.

If you 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. All 4 categories delivered revenue growth during the quarter, with petrochemicals and metals and ag leading the way with 20% and 10% growth, respectively.

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 increased approximately $100 million as we issued a $500 million 30-year bond to redeem $400 million in maturing debt. Our debt coverage, as measured by adjusted gross leverage to adjusted EBITDA, remains 1.9x.

Year-to-date, free cash flow, excluding certain items, was $787 million. This was an increase of $152 million versus the first half of 2017 and was due to higher net income from revenue growth, lower tax rate as well as improved working capital.

As for return of capital, the $1 billion ASR initiated in the first quarter continues. In addition, we paid $126 million in dividends during the second quarter.

While we do not plan to provide headcount information quarterly, we thought that you might find this information useful. In the past 1.5 years, our headcount increased 4%. Excluding acquisitions and divestitures, headcount increased 3% while organic revenue grew 13% in 2017 and 7% in the first half of 2018. The largest increase in employees was in corporate. This category increased primarily due to transfers from the businesses to centers of excellence, the Kensho acquisition and insourcing of certain corporate functions, like recruiting and accounting business support. The costs associated with most of these additions are allocated out to the businesses and are not included in corporate unallocated.

Now I will review our 2018 guidance. This slide depicts our previous GAAP guidance and our new GAAP guidance. Please keep in mind that our guidance reflects current spot market ForEx rates. The difference from our previous guidance is highlighted on this slide. The only change is that we are lowering our interest expense guidance by $10 million. Diluted EPS guidance remains unchanged.

This slide shows our adjusted guidance. The only change is that we are lowering our interest expense guidance by $10 million. Adjusted diluted EPS guidance remains unchanged as we expect the tax on global intangible low-tax income to push our tax rate to the high end of guidance. While our tax rate guidance remains 21% to 22.5%, we expect that the third quarter tax rate to be similar to the second quarter tax rate and then decline in the fourth quarter when annual restricted stock grants vest, creating a stock-based compensation tax benefit.

In addition, as you model the third quarter 2018, remember that the third quarter of 2017, we recorded a $0.14 benefit to EPS as a result of exceptionally high level of stock option exercises. We can't expect that this will occur again in the third quarter of this year.

We're pleased with our second quarter results, and our guidance reflects our continued expectation that 2018 will be a very strong year for the company.

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

Thank you, Ewout. (Operator Instructions) Operator, we'll now take our first question.

This question comes from Hamzah Mazari from Macquarie Capital.

My first question is just on the Ratings business. And Doug, I think you mentioned sort of offsets in terms of if issuance is down, Ratings can still grow. Maybe if you could frame for us, at what level of issuance declines does the Ratings business sort of not grow? Is it sort of double-digit -- issuance needs to decline double digits? Just any sensitivity to issuance and how to think about cyclicality of that business.

Well, Hamzah, first of all, thank you for the question, and welcome to the call. I don't know if I can always project exactly what that point would be, but let me just give you the dynamics and the different pieces that we look at. Clearly, issuance is very important for us. And as you saw during the quarter, issuance in the United States was very weak except for structured finance, that on the corporate side, it was down 18% with corporates and financials and public finance overall. So it was quite a weak quarter. But remember that we have 2 components of revenue: we have transaction fees, which are and could be directly impacted by this, but we also have non-transaction fees, which includes things like RES, it includes the fees that we get for surveillance, it also includes new issuer fees when we're able to get new issuers to come to market, et cetera. And so we look at the total, all the components. And as you saw this quarter, despite a weak issuance overall, down 3% in total for the entire market, we were able to increase our revenues 4%. So answering your question a little bit more specifically, I don't have a number. I haven't run a sensitivity analysis, none of us have that would get you to what that number is. But we do think that we have flexibility to also flex some of our expenses if we were to see a really, really -- a really large downturn.

Very helpful. And then my second question, and I'll turn it over, is just on the Market Intelligence segment. That segment seems like it's overlevered to the U.S. Maybe if you could talk about just strategy to grow that business globally and then how you're thinking about that.

Yes. That's something that's really important for us, and not just for Market Intelligence but for every single one of our businesses, to respond to the opportunities globally as different markets become more sophisticated, whether it's their capital markets or their pension markets or how they look at the growth of their banking markets, et cetera. We have 2 components of our businesses across the board, and I'll comment a little bit more specifically on Market Intelligence. Some of our businesses have traditionally done all of their billing in U.S. dollars out of the U.S. And for example, in the index business, we have always billed traditionally here. And you end up with -- maybe it's not so easy to always exactly explain where was the client from because it ends up being U.S.-sourced income. And that's one aspect I wanted to mention, that we're always looking at to see how we can ensure that we're identifying the source of our customers and, over time, be able to show the components that are international. In Market Intelligence, the combination of Cap IQ and SNL, first of all, the U.S. capital markets and the banking markets, they are the largest in the world. They're the most sophisticated, the most -- the largest, with the most number of transactions, whether it's M&A, it's the size of the banking markets, the equity markets, et cetera. And so we would tend to think that, that business would be larger here than the rest of the world. But we do have high growth around the world, especially in Western Europe and Asia. Those are the 2 markets where we see a lot of take-up of Market Intelligence services, especially as there's more and more M&A taking place within those markets and as the capital markets get more sophisticated. But you're right, the center of gravity of MI is in the United States, but we're increasingly investing overseas and seeing much more growth there.

The next question comes from Alex Kramm from UBS.

So on the Ratings side, love to, Ewout, I guess, for you to parse out the margin a little bit more. I know you made some comments already on the comp accruals, and also, the employee numbers were very helpful. But if you think about it from a year-over-year perspective, I mean, how much of the increase is really efficiency gains versus maybe mix that you can talk about that may have favorably impacted the margins? And of course, how much opportunity do you still think is left for -- from the efficiency side? And what are you focused on?

Yes, Alex. To put the Ratings result in perspective, 57% margin for the quarter; on a trailing 12-month basis, around 55%. During our Investor Day, we have indicated that our aspirational direction for Ratings margins is high 50s. So we have some nice way to go there. But as you have seen, a pretty significant step-up in terms of margins this quarter, on a trailing 12-month basis, 380 basis points. And we're very pleased to see that, particularly in a quarter where revenue growth is a little bit light. So revenue was up 3 points at 7%, but if you exclude FX, it was up 2.2%. And expenses were down, in fact, 5.1%, but excluding FX, 3.1% down. So still a gap between revenue growth and expense decline on a basis, excluding FX impact, of over 5 percent points, so a very positive development. Why are expenses going down for Ratings? You see there are the impact of some of the restructuring actions that we have taken last year. You might recall the restructuring actions that we explained in the commercial organization, in the analytical organization. So clearly, headcount reductions are helping there. We're also seeing that incentive compensation accruals are lower this year than previous year. And we start to see the benefit from some of the technology investments, the efficiency opportunities. So we're able to handle more volume without adding a lot of headcount. So overall, those are the main drivers we see in Ratings, and we expect that we will continue with those drivers in the future. Hence, the aspirational margin target of high 50s in the future.

The next question comes from Toni Kaplan from Morgan Stanley.

Market Intelligence had a slight revenue deceleration in the quarter, with Desktop a little bit slower. Is there anything to read into that from the shift to enterprise pricing and maybe taking less revenue dollars upfront in order to drive higher usage? Just any thoughts on that, that would be helpful.

Toni, this is Doug. I don't think you should read anything into it. This is -- this was a period where we have been, as you know, engaged in moving our contracts to the enterprise-wide pricing. We're making good progress there, but there's clearly a set of clients left that we will be getting to between now and 2019. Most of the contracts that we moved to enterprise pricing were the largest ones or the ones that had the fortunate convenience that the contracts were expiring. Some of those that are left, where we have not gone into any sort of negotiation yet on the upside there, are larger contracts, in some cases, where they have multiple dates or multiple -- we already had multiyear contracts in place before that we're now going to be able to go in as those expire. So I didn't read anything into it. We think that the leading indicator of the growth of users that they're up 13% is a positive leading indicator for us. I'm not saying that that's -- you should build that into your models, but it's a good leading indicator to us over time. And as we continue to move everyone to enterprise contracts -- we're getting toward the end of that. We're at about 75%. We have about 25% to go, but those 25% to go are going to be some of the harder ones or longer to get those in place.

Okay, that's helpful. And then I just wanted to ask my follow-up on Platts. With 7% growth in the quarter, is this mid- to high single-digits growth sort of a level you'd expect for the foreseeable future just given the high subscription mix? And if Global Trading Services were to turn around, what kind of upside could you see in that business?

Toni, this is Ewout. As I mentioned during the prepared remarks, of the 7% growth in revenues for Platts, there was about 1 percent point -- 1% of increase that was more onetime in nature. There was some catch-up on some subscription revenue. So if you think about modeling this out in the future, you should not take that into account. That 1% is more onetime revenue. Also, with respect to the Global Trading Services, we don't expect that to rebound in the near term. That has to do with the specific nature of derivative tradings on certain high-sulfur oil-fuel products that we see declining. That has mostly to do with marine fuel where, in 2020, we will see a prohibition of high fuel-oil products in the marine business. So derivatives trading is already coming down, and we expect over time, low-sulfur oil-fuel products derivative trading to come up but not in the near term. So that would be our expectation. But overall, we are very pleased that in the core business of Platts, the core price benchmarking subscription business, Platts is really doing well, and we see they are very steady and solid growth.

The next question comes from Manav Patnaik from Barclays.

Maybe I can just follow up on the Cap IQ Desktop piece. So the last 3 quarters, it has decelerated. I think it was 9%, 7% and now 5%. I guess outside of just maybe some of the friction of transitioning to enterprise, I mean, are you seeing pressures on the client side, more people cutting costs, MiFID impacts, stuff like that? I was hoping you could give us some color there.

There is -- when you come to those sorts of topics, obviously, when we're negotiating with clients, there are -- there's always going to be a give-and-take on different themes related to the circumstances of clients. And we do hear people saying that MiFID II is increasing their costs, so we might hear them talk about the size of their businesses as they downsize. But we see, as you can see overall, that the approach that we take to building these enterprise-wide contracts lead to higher usage and higher users. And that is fundamental to our overall relationship and how we think about the long-term pricing of these contracts. But there -- but remember that we also are coming off of some very strong growth. So some of the comparables quarter-on-quarter, year-on-year, also have been a little bit difficult on some of the quarters. But we do see that this is a business that is -- it's still growing. There's high demand and high interest in our products. And some of the pricing on Desktop is also made up on the feeds and the data services. As you see some of the -- some of our customers are moving away from analysts to modeling, and sometimes we're able to -- if that -- if there is that's the case, we can substitute over into the data services products.

And Manav, if I may build on Doug's answer, I think you should also look at this in perspective of the whole industry. I think the growth numbers we are reporting are by far exceeding any other player in the industry. So we're still clearly a net winner of market share at this point in time. The other additional perspective I want to share is the conversion to enterprise-wide agreements, what we see happening now is that the contracts that we had in the past that were on an annual basis, those come up in the normal course calendar and have been converted to enterprise-wide contracts. But we also had a set of contracts that had multiyear terms, and those will come up more slowly in the future because again, the natural calendar when those multiyear contracts are expiring will be out in the future. So that's why the slowdown from the current 70% to 75% to 100%, that's what you should expect. But there's no specific underlying reason besides that these are now the more multiyear contracts that we need to convert, and that takes, obviously, a little bit more time.

Got it, that's helpful. And then my second question is just on the index subscription piece, the slowdown you talked about due to administrative process changes. I imagine that's on your end, but I guess, does that mean in the third and fourth quarter, there will be a catch-up which will make that growth look above normal?

Yes. Manav, what is happening here is we made some changes early this year in administrative processes, and also, we moved some of the billing and contracting on those contracts to another provider, another administrator. It's one of our partners. There is a bit of an administrative backlog. They are sending out new contracts, and only when the new contracts are signed, we can send out the bills. So therefore, from an accounting perspective, we cannot recognize that revenue. But this is purely a technical administrative matter, and we expect to see that catch up again in the second half of this year. So yes, we expect this to normalize, and there is no commercial disagreement or commercial matter behind it. It's purely administrative.

The next question comes from Jeff Silber from BMO Capital Markets.

Just wanted to circle back to Market Intelligence again. You had mentioned or you highlighted the fact that margins went up year-over-year in the second quarter versus, I guess, the lower margins that you saw in the first quarter. Was there something going on differently between 1Q and 2Q? And what should we expect going forward?

Jeff, this is Ewout. We highlighted during our first quarter earnings call that there were certain specific expense items that were more timing related, that should reverse during the course of 2018 or should not recur during other quarters of 2018. Therefore, we always expected that margins of Market Intelligence would improve during the next few quarters. And what we have said last quarter was we expect overall a year-over-year margin improvement for Market Intelligence, that 2018 as a whole should be better than 2017 on a margin basis. So basically, in line with that commitment and promise to our investors, that is basically what we are delivering this quarter, and we expect that to continue for the next few quarters. So overall, that commitment remains.

All right, great. And then appreciate that reminder. In terms of your overall guidance, except for the item you highlighted on the interest expense that didn't really change, despite the fact that you've really outperformed the first half of the year, are you being overly conservative? Should we expect a slowdown in the second half of the year? If you can give us a little bit more color on that, we appreciate it.

Yes. Our guidance is, of course, always middle-of-the-road, neither aggressive nor conservative. So that's how you should always interpret this. There is indeed a couple of elements that go in a positive and to a negative direction, but they are basically offsetting each other. We expect that interest line to be a little lower, as we have indicated. At the same time, we expect the tax rate to be more at the high end of the range that we have indicated before. So the 2 are therefore more or less offsetting, and therefore, we're still very comfortable to continue to affirm our EPS guidance raise, as we have done this morning.

The next question comes from Peter Appert with Piper Jaffray.

Doug, you mentioned that the bank loan market had gotten a little bit weaker late in the quarter. I'm wondering if that has any continuing applications for the second half. Or even more broadly, if you could just give your thoughts about outlook for issuance activity in the second half.

Okay, good. And in fact, if there was a little confusion, I'm glad you asked the question. There's 2 components to the bank loan market. One is the issuance of bank loans. And those are -- as I mentioned, in many cases, those could either go to the high-yield bond market or they could go to the bank loan market. And that market is incredibly strong. And that's where you see the volume, that's where you see that crossing the $1 trillion mark for the inventory that's outstanding, et cetera. That continues to be very strong. As you see, there's a lot of M&A activity. The part that I said that was a little bit weak is the refinancing. There had been a period where bank loans that had been issued the last -- prior 2 or 3 years, as rates and spreads had been coming in and getting tighter and tighter, there was -- many of the -- some of the activity was of issuers who were going back and repricing their bank loans. When a bank loan reprices, we get a small fee. It's not the same kind of a fee you get when you have an initial transaction, but that was -- that's the component of the market that is a little bit weak. But the reason it's weak is because the initial issuance is so strong, and it's basically crowding out the ability of issuers to go to the market to tap refinancing -- or repricing, sorry, not refinancing, repricing.

Got it, excellent. And then maybe just an update on the Kensho transaction in terms of momentum you're seeing there. And Ewout, I think you talked about 3 years of incentive payments. Can you quantify what those will be?

Yes, Peter. Let me take the first answer -- first question -- the second question you asked and answer that first with respect to the incentive compensation. So if you look at the transaction consideration for Kensho, a part was in cash and a part was in shares. And we deliberately paid a part in shares to get maximum alignment, particularly with the employee shareholders. And those are being amortized over time. What we are doing in our results is any equity grants that were over and above what should be assumed normal compensation are pulled out as a performance correction on a non-GAAP basis, and all equity grants that are more considered normal course are kept in our normal operating expenses and results on a performance basis. So if you look at $12 million of Kensho retention-related expenses that were pulled out, what's basically the expense related to those excess equity grants, that number should come down over time. That's more because of the accounting. We use an accelerating accounting method. So over the next 3 years, that should slowly come down, and 3 years from now, that particular expense line item should completely disappear. But then you see that Kensho itself had, on normal course, about $11 million of expenses that we have in our non-GAAP results as well as approximately $5 million of revenues that we have recorded. On your first question about how the Kensho implementation and transaction is going...

Let me step in a little bit. We have an incredible amount of excitement both internally in the company as well as from the market since we purchased Kensho. We have instituted a very thorough, systematic approach to what I would call integration, even though you know that we're not integrating the company. It has to do with ensuring that the resources of Kensho are deployed against the best opportunities where they can add value across the company. That means that every division has some type of work going on. Probably most of it's in Market Intelligence. And the kind of work begins at the beginning of bringing data, data ingestion, data linking. It also involves projects in the middle part of our workflow that has to do with creating products, analytics, adding value, enhancing the analytics that we have; and then at the front end, the delivery end of our businesses, with search and visualization and other tools. So we're very pleased with the progress. You saw that there were a couple of things during the quarter when we added the 400,000 private company information from Crunchbase, we were able to do that utilizing Kensho technology. It was accelerated from something that would have taken about 6 months to a couple of weeks. And we've recently put a tab on the Market Intelligence platform which has a Kensho Lab on it, where you can see 2 different products. Well, they're not products yet, but I guess you can call them pilots or demos of some of the things you can do with Kensho. One of them is for alternative credit indicators, and the other is for analyzing the commercial real estate market. So we're very pleased with the progress. Much more to come. And thank you for the question.

If I may just add one other element to that, we will, later this year, come back to you about the economic benefit we will have from all of those projects. So we're setting up a value capture methodology. So expect later this year that we get back to you and, of course, all your colleagues and investors with more specifics about what do we really get out of that and the value enhancement from those projects.

The next question comes from Craig Huber with Huber Research Partners.

Doug, my first question. Can you just -- appreciate your thoughts on the bank loans earlier, but can you just give us a little bit further idea what you guys are thinking on the bank loan market for the back half of this year in terms of what you're sensing there is going to happen?

What we're sensing in the bank loan market right now, obviously, is just based on where we are with the current banking environment and financial market environment. The -- first of all, one of the key factors which we're watching very carefully are spreads and rates. And you do have some shift from bank loan market as well as the high-yield market moving to Europe. I mentioned in my prepared comments that we've seen the reverse Yankee bond trend starting where there's more and more companies going to Europe to raise funds. Clearly, with the U.S. 10-year yield at almost 3%, around 2.9%, and the German 10-year yield at about 0.4%, that differential of 240, 250 basis points means that sometimes raising funds in Europe is a lot more interesting. So in terms of where people might be raising funds, we see some differences there. But the key driver of the loan activity as well as the high-yield bond activity is much more linked to market activity, M&A, investments in factories, et cetera. The only negative factor which we're obviously watching very carefully is just will there be any impact on global growth from some of the exogenous factors like trade wars and things like that. I mean it was encouraging yesterday to see that the U.S. and the EU are going to go to the table to negotiate the trade conditions. I would hope that at some point, we can get to the same place with China. But underlying market conditions are still very strong, they're very robust. Banks have a lot of capital. The investment community is looking for places to invest. But we have seen some more volatility in the meantime. But as of now, we don't have any specific indicators that would change our outlook for the rest of the year on bank loans.

And then also, the new platform you're in the process of rolling out for Capital IQ, when do you think that will be fully deployed in the U.S. and a little bit you have outside the U.S.?

Craig, that's probably over the next 2 years or so because we will go step by step, customer group by customer group, persona by persona. That needs a lot of support, handholding, explanation because someday, that might be in another place, it is important that our customers can find it. We don't want to confront them solely from one day to the other with a new platform and they are lost. So that needs a lot of support from our sales force and our whole Market Intelligence organization. So therefore, we do this in a step-by-step basis because it's very important we take our customers along the way with that transition.

One thing I would mention is that we've seen the success of the conversion of what was the SNL product to the MI platform. And so that gives us the ability to understand what were the needs of the customers along the way. And as Ewout said, this is a systematic approach over the next couple of years, and it will have the conversion of Cap IQ users and then also include certain risk products. And we're very encouraged that the platform itself, whether it continues with the name MI or it's an S&P Global platform or reskinned for other products like Platts, et cetera, that the kind of expertise we're getting from the technology is going to be beneficial to the entire company.

The next question is from Joseph Foresi with Cantor Fitzgerald.

This is Mike Reid on for Joe. I was wondering if you think this period was more normal for the exchange-traded derivative growth? Or could it spike back up or probably just too volatile to tell?

Mike, that is actually very hard to tell because as you've seen, the 3 different categories and groups, some are up, some are down. You could say there's still a lot of market volatility in the world. But in fact, VIX contracts came down in terms of volume. So this is, in fact, an interesting situation that you could say there is quite some volatility in VIX derivatives volume trading period-over-period. So it's very hard to tell. We definitely think the first quarter was more an exception with the very high volumes. So that would be only what we would expect to see recurring, is if there is really heightened tension in the world. But otherwise, it's very hard to predict.

Mike, this is Doug. Just -- this is just an anecdote from myself. Personally, I watch VIX. I think that the VIX is a good indicator of market volatility to begin with. But second, that is one of the major ETDs. And the more volatility there is in the market, the more trading there is, the more likely that the ETD revenues are going up. So when -- if you go back last year, the VIX had been kind of locked into a very low level, below 10, for many quarters, and then it started popping up again. It got as high as into the 30s over a couple of weeks. And that's typically the leading indicator that I watch to see how I think the ETD revenue is going to be coming out.

Okay. And then just quickly, do you think there will be any impact to numbers at all this year from RateWatch?

I would say relatively modest. And it will help, of course, with some revenue impacts, but there will be some integration expenses as well and some synergies that we will be able to achieve over time. So normally, that will be about 1 year to 2 years that we will be able to take the full economic benefit of this acquisition. We are very enthusiastic about this acquisition. We think it helps with a new set of customers, particularly community banks in the U.S. And so we're very happy that we added that set of customers to Market Intelligence. But expect the benefits, to see that slowly coming in over the next year to 2 years. That's probably the best expectation.

Next question is from Tim McHugh from William Blair & Company.

This is Trevor Romeo on for Tim. First of all, revenue for structured products has been growing double digits for 5 straight quarters now, as you mentioned. I know the global economy is a bit stronger, and we've had some positive regulatory changes for structured products lately. But do you think that level of strength is sustainable going forward? Particularly as comparison will start to get tougher in the next few quarters?

Yes. Just to be clear, are you talking about structured finance in Ratings?

Yes.

Okay. Well, typically, when we see this kind of strength coming in, in one product, it's from the banking sector and other sectors which are taking advantage of the securitization markets and access to capital there. And I don't know -- I don't want to project going forward exactly where issuance is going to be coming from, but we've seen the strength in structured finance. A lot of it has been related to banks wanting to manage their balance sheets as they've been managing capital levels and they've been willing to tap the AFS markets for credit card receivables, auto receivables, things like that, as the balance sheet's management tool. And then you see there are a lot of special-purpose vehicles in CMBS and other areas. But this has just been a period where the capital markets were drawn towards structured finance. It's been -- it has been growing every quarter, but I don't -- one of the things that I do, obviously almost continuously but definitely at the quarter end, is look very carefully at all of the different sources of issuance around the world. And one thing I can tell you is that every quarter, the components of where growth is coming changes from quarter-to-quarter.

Okay. And then just wanted to touch on any geographic differences you're seeing for Platts. Revenue was kind of flattish in this quarter in the U.S. but grew double digits internationally. So is there anything you'd point out that drove the strong international growth that didn't necessarily happen in the U.S.?

Yes. Overall, Platts is in general our most international business. In fact, they are headquartered in London, and in fact, their business is very international in Europe and particularly in Asia. And we are very happy to see growth, sales in Asia doing very well, but also, Europe is strong. I think that has just to do with the saturation of -- saturation levels of the markets. We see a lot of economic activity in Asia, and we are clearly taking the benefit for our Platts business. So overall, we would expect to see that continuing. And actually, coming back to an earlier question, this is clearly, as part of our strategy, to more actively grow our activities outside of the U.S.

The next question is from Vincent Hung with Autonomous.

On Market Intelligence, first, I notice you've converted to enterprise-wide pricing already. Is there anything you can share in terms of usage trends you're seeing with Cap IQ? Because I'm just trying to get a sense of where the stickiness is building with the new users.

I think that it would -- that would be a great question for us to take up on some future calls. I don't have the -- I don't have enough of a granular view on that to give you an answer right now because we -- typically, once we move to those kind of contracts in addition, we start having a blended approach, which is it's an enterprise-wide contract. So if you don't mind, let's get back to you on a future call.

Got it. And on Indices, just want to get your thoughts on the growing trend of ETF issuers, like BlackRock and Invesco deciding to go the self-indexing route in the fixed income factor-based arena. Is this something that concerns you?

Overall, the answer is no. That is a trend we don't think will be a large change to the market because if you look at the big benchmark indices, those are not really aimed to replace those; this is more for new categories of ETFs. So overall, that's only for a very small part of the market. But there is not, in our view, any intention to compete with the large benchmark indices. So overall, we don't see that as a threat to our overall business model.

We will now take our final question from Alex Kramm from UBS.

Actually, just quickly, on the Ratings side, since I asked about the costs earlier, maybe you could talk about the revenue opportunity there a little bit as well. I mean, anything new that you're investing in that you would point out? I know you've talked about China, but historically, you've lost some share in CMBS, for example. What are you doing there? And then, Doug, I think you pointed out covered bonds being an area of strength. I thought you were actually pretty small in that business relative to your primary competitors. So are you catching up there? Anything you would point out where you're actually trying to grow the business organically on the Ratings side would be helpful.

Yes. Well, just to give you some examples and some ideas, as you know, our goal is to cover every asset class in every region in the world. And places where we don't have a position, like in China domestic market, we're investing there. As you know, we had a weak run in the CMBS market. Over the last few years, we've invested there in our team, our criteria, our technology to be able to deliver. Last quarter, we were up, like split in 4 out of the 10 conduit fusion transactions in the CMBS market. We are definitely making a concerted effort to continue to support the structured finance market. We're growing internationally in China. We're looking at more ways to grow in Southeast Asia. We have some products that we're working on in -- related to ESG, whether it's our green bond products and some other ESG indicators. So across the board, if you see any type of analytical product or ratings product which is being developed, whether we're developing and we have it ready to go, we definitely have somebody looking at it and we're working on it. But the ones that are more promising is getting our way back into a much more -- much larger position on structured finance globally, looking at China, looking at Southeast Asia, looking at ESG. These are some of those factors. I don't think I mentioned covered bonds. Covered bonds is an area that we do not have a strong position in. I may be -- maybe I misspoke or I was more likely talking about the high-yield bond market in Europe, not necessarily the covered bond market. But anyway, we're excited about the growth in the Ratings business and the opportunities we have there, especially with all of the new types of asset classes.

Thanks, Alex.

Well, thank you, everyone, for the call. As you've seen today, we -- and as we presented on our Investor Day earlier in the quarter, S&P Global has developed a strategy to Power the Markets of the Future. We've been incorporating the dynamics of the markets around us, looking at our competitors, understanding the competitive landscape, what's happening with technology. And as you can see from the quarter, we appreciate all the questions that you came back with. The leadership team here at the company is committed to deliver our performance, both on a quarterly basis but also in a way that we can allocate what I consider to be our scarce capital so that we can send it back to our shareholders but also build and invest for the future of S&P Global.

So I want to thank everyone for their support, for their participation on the call. The people in the northern hemisphere, I hope you also get a chance to enjoy the summer. So thank you very much, everyone.

That concludes this morning's call. A PDF version of the presenter 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 the S&P Global's website for 12 months from today and by telephone for 1 month from today.

On behalf of S&P Global, we thank you for participating, and we wish you a good day.