S&P Global's (SPGI) CEO Doug Peterson on Q2 2016 Results - Earnings Call Transcript

| About: S&P Global (SPGI)

S&P Global Inc. (NYSE:SPGI)

Q2 2016 Earnings Conference Call

July 28, 2016 08:30 ET

Executives

Robert Merritt - VP, IR

Doug Peterson - President & CEO

John Callahan - CFO

Analysts

Ashish Rao - Credit Suisse

Alex Kramm - UBS

Manav Patnaik - Barclays

Toni Kaplan - Morgan Stanley

Craig Huber - Huber Research Partners

Peter Appert - Piper Jaffray

William Warmington - Wells Fargo

Joseph Foresi - Cantor Fitzgerald

Vincent Hung - Autonomous Research

Warren Gardiner - Evercore ISI

Operator

Good morning, and welcome to S&P Global's Second Quarter 2016 Earnings Conference Call. I'd like to inform you that this call is being recorded for broadcast. All participants are in a listen-only mode. We will open the conference to questions-and-answers after the presentation and instructions will follow at that time. To access the webcast and slides, go to investor.spglobal.com i.e. 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 in S&P Global. Sir, you may begin.

Robert Merritt

Thank you. Good morning and thanks for joining us for S&P Global Earnings Call. Presenting on this morning's call are Doug Peterson, President and CEO; and Jack Callahan, Chief Financial Officer. This morning we issued a news release with our second quarter 2016 results. If you need a copy of this 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 an adjusted financial information. This information is provided to enable investors to make meaningful comparison of the corporation's operating performance between periods and to view the corporation's business from the same perspective as managements. The earnings release contains exhibits that reconcile the difference between the non-GAAP measure 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 expectation and current economic conditions, and are subject to risk 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 a 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 in our New York office at (212) 438-1247 subsequent to this call.

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

Doug Peterson

Thank you, Chip. Good morning, everyone, and welcome to the call. This morning Jack and I will review our second quarter results. We're very pleased with the progress the company is making creating growth in a macroeconomic environment has challenged many of our customers.

Let me begin with the highlights of the second quarter. Every segment delivered revenue growth, this is a testament to the quality of our products and the creativity and execution of the employee to develop and deliver them. In addition to creating growth, driving performance is a key thing in managing the company and margin improvement is an important yardstick by which our progress is measured. This quarter the company delivered 210 basis points expansion in the adjusted operating profit margin. The top priority for 2016 is the integration of SNL. We continue to make progress on SNL integrations and synergy targets, and I'll share few examples with you in a few moments.

Financial performance was excellent with an increase in adjusted diluted EPS of 17% over the most difficult quarter comparison in 2015. As a result of our share repurchases, we reduced average diluted shares outstanding debt by 3% year-over-year. Last week, we received final regulatory approvals for the sale of J.D. Power. Our year-to-date free cash flow was $513 million, and we increased the adjusted diluted EPS guidance range reflecting strong second quarter results.

Before I get to the results in more detail, I want to take a moment to discuss the British exit from the European Union. First and foremost, Brexit has no immediate implications for European operations, it's business as usual for S&P Global. While the media has reported that a number of companies plan on moving operations out of London, we have no such plans. We expect that because of the uncertainty it creates, however, Brexit could hamper issuance, particularly in Europe. So far the impact has been muted but markets never like uncertainty; it will take time to resolve all of the various regulatory changes that companies and markets will face.

Our company will seek to work with a relevant UK and EU legal and regulatory authorities to navigate the path forward, a process that will likely take years. S&P Global Ratings has written extensively on the impact that Brexit will have on the markets and our views can be found on the S&P Global Ratings website at the URL listed on this slide.

Now, let's take a closer look at the second quarter results. While reported revenue grew 10%, organic revenue on a constant currency basis increased 5%. In most recent quarters, the Company's revenue has been hit by Forex with little impact to operating profit, primarily due to the weak British pound however, this quarter was different. In the second quarter Forex had a negligible impact on the revenue, yet contributed approximately three percentage points to adjusted operating profit and approximately 100 basis points for the adjusted operating profit margin. Most of this benefit was realized in S&P Global Ratings.

So overall, the company delivered 210 basis points of adjusted operating profit margin improvement as a result of forex, S&P Global Ratings margin improvement, and the progress made on SNL integration synergy targets. Together revenue growth, margin improvement and share repurchases combined led to 17% increase in adjusted diluted EPS. In the second quarter, every division recorded top line growth and improvement in adjusted operating profit. The two standout performers were S&P Global Ratings and S&P Global Market Intelligence with adjusted operating profit margin gains of 400 basis points and 370 basis points respectively.

Now let me turn to the business and I'll start with S&P Global Ratings. During the quarter revenue increased 4% with a negligible impact from Forex. Adjusted operating profit increased 12% and the adjusted operating margin increased 400 basis points to 54.1%. Improved market conditions after a weak 2016 start resulted in a modest year-over-year issuance increase. For the first time in six quarters, international revenue outperformed domestic. Forex had a favorable impact as 3 percentage points in adjusted operating profit and approximately 150 basis points on the adjusted operating margin, due primarily to the weakness in the British pound. Excluding Forex, adjusted expenses decreased 3 percentage points, mainly due to reduced outside services.

Another highlight of the quarter was the purchase of 49% stake in TRIS Rating. This increased commitment to TRIS and an exciting step forward in our longstanding relationship. By working together more closely, we'll be in a better position to serve our customers and investors in Thailand and other Asian markets.

Non-transaction revenue increased 3% from growth in surveillance, CRISIL, commercial paper activity and royalties from the services. Transaction revenue increased 5% as a result of improved contract terms, increased bank loan rating, and growth in debt issuance in Asia. If we look more closely at the largest markets, second quarter issuance in U.S. was down 11% with investment grade decreasing 6%, high yield down 9%, public finance up 4%, and structured finance declining 37% with drops in every class. In Europe, investment grade is unchanged, high yield is down 5%, while structured finance increased 4% with strength in RMBS and CLL [ph]. And in Asia, investment grade issuance surged 60% and structured finance increased 20% due to ABS and RMBS.

Let's take a further look at issuance. The 3% increase in global issuance break the four quarter streak of year-on-year decline in global issuance that had pressured S&P Global Ratings revenue. During the quarter only Asia reported an increase in issuance with a 55% gain. Excluding domestic Chinese issuance which we don't rate, issuance in Asia still increased 35%. One factor driving this was offshore Chinese issuance. During the quarter investment grade was generally had unlimited access to debt capital markets while spec-grade issuers had very limited access with windows of opportunity that opened for short periods and then were disrupted by external events.

Despite the year-over-year declines in the U.S. and Europe, there were periods of extreme strength during the quarter, in fact May set a monthly record for U.S. investment grade issuance. June started out with a very strong issuance but then came to standstill in the week leading upto the Brexit vote. Last week S&P Global Ratings released its latest global issuance forecast. We now expect global issuance to decline 3.8% in 2016. This compares to the April forecast which anticipated decline of approximately 2%. The biggest difference is only corporate and structured issuance which had been lower due to Brexit and international public issuance which is an increase as first half issuance already exceeds all of 2015.

Now let S&P Global Market Intelligence. In the second quarter revenue increased 29%, primarily due to addition of SNL. Excluding SNL revenue, organic growth was 8%. Adjusted operating profit increased 48%, and the adjusted operating margin advanced 370 basis points to 28.4%. The adjusted segment operating margin includes the benefit from Forex of approximately 100 basis points. Excluding Forex, this figure is comparable to the first quarter adjusted segment operating margin. We had a favorable impact of 5 percentage points on adjusted operating profit, primarily due to weakness in the Indian rupee and British pound.

In 2016, successful integration of SNL is the top priority for the company. We made a substantial investment with the acquisition of SNL, and we recognize that we must achieve our integration synergy targets in order to deliver a return on that investment. We are well on our way to achieving cross-sell synergy targets from 2016. Last quarter we reviewed some of the organizational changes that took place. Today in order to help you get a better sense of our efforts, I'm going to share several examples of integration synergies progressed during the quarter.

We reconfigure our risk services scorecard product for analyzing commercial banks to include SNL bank data. We received great feedback and early sales success from the market. We integrated our equity ownership and earnings estimate data onto the SNL platform. We made tremendous progress on these trading SNL sector-specific fundamental data into our Xpressfeed delivery platform. Now in beta testing, SNL content will be available this fall enabling more seamless cross-selling to our existing feed clients. We completed significant design work on our next generation consolidated product platform to encompass mobile, web and excel delivery. Reduced cost by replacing third-party data with internal solutions, we completed our office consolidations in Denver, New York and Singapore with other cities still in the works. We've been making great progress.

Let me add a bit more color on second quarter revenue growth in S&P Global Market Intelligence which delivered double-digit user growth in both S&P Capital IQ desktop and SNL. In financial data and analytics, S&P Capital IQ desktop and enterprise solutions revenue increased 8% with high single-digit growth in both products. In addition, SNL revenue reported a 9% increase compared to the second quarter 2015. Prior to our acquisition of SNL however, excluding a purchase accounting deferred revenue adjustment, revenue grew 10%. With that progress that we continue to make integrating SNL into S&P Global Market Intelligence will become increasingly difficult to separate SNL results from the total. Therefore this is likely the last quarter we'll provide separate revenue figures for SNL.

With services revenue increased 10% led by double-digit Ratings Xpress growth. In the smallest category, research and advisory, revenue decreased 12% due to declines in equity research services.

Now let's turn to S&P Dow Jones Indices; revenue increased 4%, adjusted operating profit increased 4%, and adjusted operating margin improved slightly to 66%. Market volatility has created large swings in AUM from months to months as well as volatility in the number of exchange for a derivative contract traded each month. During the second quarter, revenue increased primarily due to steady data license growth, strength in exchange traded derivative activity due to market volatility, and ETF related revenue is up slightly.

If we turn to three types of revenue; transactional revenue from exchange traded derivatives increased primarily to 24% increase in average daily volume of products based on S&P DJI's Indices. In particularly, E-mini S&P 500 Futures, CBOE Volatility Index, VIX, and CME Equity complex contracts, all increased more than 20%. Asset linked fees revenue, mostly from exchange rated funds was up slightly. The exchange credit product industry recorded further $46 billion in the second quarter with fixed income products receiving the largest inflows. Average AUM associated with our indices increased 3% year-over-year with inflows of 7% offset by asset value declines of 4%.

The quarter ended on a high note recording an ETF, AUM associated with our indices reaching a new record of $855 billion as U.S. equity markets rebounded. This creates a great starting point for the third quarter. Subscription revenue which consists primarily of data subscriptions and customer indices increased due to continued steady growth in data subscription revenues.

During the quarter the Company launched 90 new indices and our partners launched new ETFs based on our indices. We added two in the environment social government space that I'd like to highlight. JPX/S&P CAPEX & Human Capital Index is designed to measure performance of Japanese companies that are proactively and effectively making investments in physical and human capital based on various metrics including the RobecoSAM Human Capital scores. In the S&P ESG Index Series, designed to measure the performance of companies with a rating scale based on an ESG factor score derived from RobecoSAM's annual corporate sustainability assessments. This launch brings together for the first time smart data and sustainability into a global index family that treats environmental social governance of ESG on a standalone performance factors. With the addition of these two indices we now have 130 ESG indices.

This quarter we celebrated the 120th anniversary of the Dow Jones Industrial Average launched in 1896 by Charles Dow and Edward Jones. On its first day, May 16, 1896, the Dow closed at 40.94. Today the Dow Jones Industrial Average is the iconic symbol of the U.S. stock markets.

Now onto S&P Global Platts which currently includes J.D. Power. Organic revenue increased 4% adjusted for the NADA Used Car Guide, Petromedia, and RigData, acquisitions. Adjusted operating profit increased 7% and adjusted operating margin declined 70 basis points to 38.4%. Platts delivered 7% revenue growth driven by strength in subscriptions in the global trading services. J.D. Power had a decline in organic revenue due to lower consulting revenue in China. With all of the regulatory requirements completed, we continue to expect closing sale of J.D. Power this quarter.

Turning to Platts, global trading services led the growth during the quarter with double-digit revenue gains primarily due to the timing of license fees and strong license revenue from the Singapore and ICE Exchanges. The core subscription business delivered mid-single digit revenue growth led by the Petroleum sector with particular strength in Asia. Metals, Agriculture & Petrochemicals revenue grew at high-single digit, primarily due to the strength in Singapore Exchange-listed PSI iron ore contracts and metal market data subscriptions. While rig counts are up since the beginning of May, many of our customers remained under pressure from low oil prices; therefore we continue to expect growth from moderate slightly in the remainder of 2016 as these customers continue to face difficulty.

Finally, the CME Group that reduced the new Aluminum A380 Alloy, our futures contract that settles against our price assessment, there has been growing need for North American aluminum alloy risk management tool. This contract will provide market participants with an effective solution for hedging aluminum alloy price risk. On the business development front, we have several new items; a June reacquired RigData, a leading provider of daily information on rig activity for the natural gas and oil markets across North America. We've discussed our desire to add our own supply demand data offerings, and this extends our energy analytic capabilities in North America natural gas with oil offerings.

Founded in 1986, RigData provides over 5,500 cost to customers with daily electronic reports on drilling permits, activity and rig locations in United States, Gulf of Mexico and Canada. We launched five domestic oil product assessments in Japan. Platts now assesses prices for important refined oil products for domestic waterborne deliveries in Japan from locations in Tokyo Bay, Chikyo [ph]. These waterborne assessments reflect prices for gasoline gas oil kerosene, low for fuel oil and high fuel oil. These assessments will follow Platts market on closed principal.

And finally we launched the LNG U.S. Gulf Coast marker. The natural gas infrastructure that connects the United States, Mexico and Canada is the world's largest and most integrated natural gas market. By 2020, the Americas are expected to be the world's third largest producer of LNG behind Australia and Qatar. This new price reflects the daily export value as LNG traded free onboard from the U.S. Gulf Coast.

In summary, all segments delivered revenue growth. Bond issuance recovered from a weak start to the year, margin improvement continues to be a key focus. Integration of SNL remains a top priority for the company's meaningful progress to-date. We expect Brexit to have no immediate implication through the Company. And we are increasing our adjusted diluted EPS guidance by $0.05 to a range of $5.05 to $5.20. Our guidance has been updated to now include dilution from the pending sale of J.D. Power.

With that I want to thank you all for joining the call this morning. But before I turn the call over to Jack Callahan, our Chief Financial Officer, I wanted to say a few words about him. As you know, Jack has accepted new position at Yale, not only is he an active Yale Alumni, he grew up at New Haven, Connecticut, so Jack's going home. We're thankful for the time he spent with us after joining the company in November 2010 he is instrumental in engineering the transformation to S&P Global, a faster growing, more focused and profitable company. He also assembled an outstanding organization and we're grateful for all he has done for the company's shareholders. Early next month, Jack will begin his role of Senior Vice President of Operations at Yale. We wish Jack and his family all the best.

Rob Mackay, our current Senior Vice President and Corporate Controller, has been named interim CFO as we continue the search process for Jack's replacement. Thank you, Jack, and now I'll turn the call over to you.

John Callahan

Thanks, Doug, and I appreciate those kind words, and good morning to everyone on the call. This morning, I will recap key financial results. I also want to discuss the impact from adjustments to earnings. Then I'll update you on the balance sheet, free cash flow and return of capital. In wrapping up, I will provide some color on our updated guidance. Let's start with the consolidated second quarter income statement. There are just a couple of items I want to highlight. As you have just heard from Doug, all of our segments delivered top line growth. Collectively, that led to an increase in reported revenue of 10% with organic growth up 5%, the difference is largely due to the SNL acquisition.

Our adjusted operating margin increased 210 basis points, approximately 100 basis points was due to Forex. The balance is primarily due to outstanding profit growth and margin improvement at S&P Global Ratings and S&P Global Market Intelligence, both businesses have delivered margin improvements year-to-date. Interest expense was up over $26 million due to our highly successful bond offerings last year, partially in support of the SNL acquisition. This steps up the level of interest expense, will continue to create a difficult year-over-year comparison until the fourth quarter. Share repurchases over the past year have resulted in more than a 3% decline in average diluted shares outstanding. So overall, sustained top line growth, margin improvement and share account reductions delivered a 17% increase in adjusted diluted earnings per share over the most profitable quarter in 2015.

Now let me turn to adjustments to earnings to help you better assess the underlying performance of the business. Pre-tax adjustments to earnings totaled to a gain of $22 million in the quarter. The first item is a net gain from insurance recoveries. The second item includes net disposition costs primarily related to the pending sale of J.D. Power to the XIO Group, and our CMA pricing business to ICE. The last item is the restructuring charge in S&P Global Ratings as business continues to focus on sustained productivity. Again, as we discussed last quarter, our adjusted results now exclude deal related amortization of $23 million. All adjustments are detailed on Exhibit 5 of today's earnings release.

Now, let's turn to the balance sheet. At the end of the quarter, we had $1.6 billion of cash and cash equivalents, of which approximately 95% was held outside of the United States. We also had $3.5 billion of long-term debt and $309 million of short-term debt in commercial paper and from a draw down on our credit facility. Since the end of the first quarter, we have reduced short-term debt by $163 million. Going forward, our level of short-term debt will likely fluctuate a bit as we periodically tap into the short-term debt market to fund our share repurchase program and meet other corporate needs.

Our first half free cash flow was $478 million. However, to get a better sense of our underlying cash generation from operations, it is important to exclude the after-tax impact of legal and regulatory settlements and related insurance recoveries. On that basis, first half free cash flow was $513 million and is on-track to reach our 2016 guidance of approximately $1.3 billion.

Now I want to review our return of capital. During the quarter, the company bought approximately 1.4 million shares. These purchases combined with our dividend totaled to approximately $242 million of cash returned to shareholders just in this quarter. Year-to-date, the Company has returned $538 million to shareholders. The volume weighted average price that shares repurchased so far this year is approximately $98. The share repurchases program remains an important component of the Company's overall capital allocation. In addition, we anticipate stepping up share repurchases to help mitigate some of the dilution from the pending sales of J.D. Power subject to market conditions.

Now let me provide some additional perspective on our 2016 guidance. There are three items that have been updated. Our previous guidance included the results of J.D. Power for the full year. We now assume that the sale of J.D. Power will be completed during the third quarter and have removed J.D. Power results for the balance of the year. This will have an impact on revenue, and our guidance moves from mid to high single digits to new guidance of mid-single digit growth. Year-to-date margins has benefited by approximately 100 basis points from Forex. Therefore we have increased our adjusted operating profit margin improvement from approximately 50 basis points to a new guidance of approximately 150 basis points.

Despite the inherent dilution from removing several months of J.D. Power results, we are increasing our 2016 adjusted diluted earnings per share guidance by $0.05 due to the strong first half results and our outlook for the remainder of the year. The new range is $5.05 to $5.20. We are keeping a wide range as there remains considerable macroeconomic uncertainty that could impact the markets and our customers.

So in summary, the second quarter was a strong quarter for the company. Each of our segments is performing well, and we are well positioned to continue to provide the essential benchmarks in data and analytics that our customers require.

As Doug mentioned earlier, today is my last earnings conference call. It has been a pleasure and an honor to be the Chief Financial Officer of initially the McGraw Hill Company, the McGraw Hill Financial, and now S&P Global. I want to thank our shareholders and the analyst community for your interest and support as we have transformed the company. And finally, I want to thank you over 20,000 S&P Global associates for your hard work and commitment in building a stronger organization for the future. I wish you all well and I remain optimistic on the continued success of S&P Global going forward.

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

Robert Merritt

Thanks, Jack, just a couple of instructions for our phone participants. I would kindly ask that you limit yourself to two questions; that's two questions each, in order to allow time for other callers during today's Q&A session. Operator, we'll now take our first question.

Question-and-Answer Session

Operator

Thank you. This question comes from Ashish Rao, Credit Suisse. You may now ask your question.

Ashish Rao

Good morning. I guess first question just on market intelligence. Can you please give us an update on the selling environment, I was particularly curious on how efforts to broaden SNL's geographic presence into Europe? And also how pricing consolidation are going so far as you integrate SNL and Capital IQ?

Doug Peterson

Thank you and welcome. Welcome to the call, I think this is your first time on our call. And so first of all, the market intelligence business is advancing quite well as you heard from some of the statistics that I provided and some of the examples. Related specifically to your question about selling environment, I'll just be clear that we continue to progress faster on cost synergies than we do on sale synergies. But we are finding some early wins -- we're finding more wins in Asia right now that we are necessarily in Europe. I mean this is where we're able to either sell SNL products into Asia customers who are using the former Cap IQ salesforce. Or we're funding opportunities where we've integrated the services together between Cap IQ and SNL and also delivering them into Asia.

The selling environment is mixed as you know, there still are a lot of financial institutions that is one large part of our customer interface that are reducing headcount, they are reducing some of their -- specifically, trading and front office people. On the other hand on the back office and areas like compliance, controlled risk management, and also some more traditional consumer banking and commercial banking activities, there continue to be increase in headcount. So the environment is mixed with some consolidation and shrinking happening, and on the other hand increase in demand for risk management, for other sorts of tool. So we're seeing a mixed market but we are continuing to have a very, very strong sales effort. Our sales team has integrated excellent in a big way that's very well integrated, and they've got a new commercial approach like reaching out to clients in a much more consolidated organized way, and we're starting to see a top line growth coming out of the synergies as well.

Ashish Rao

Great. And maybe a question for Jack, on the pending sale of the pricing business; so I'm curious if you could give us the EPS contribution this quarter and also any sense of the timeline for the sale?

John Callahan

In terms of its contribution, it's a couple of pennies per quarter. We're still waiting on the final approvals to close that transaction. Our current assumption is that we've looked for a close towards the end of the year. Our current estimate assumes -- sometime in the fourth quarter, and so we believe the net dilution impact within 2016 is going to be quite minimum.

Ashish Rao

Okay, thank you. These were my questions. And Jack, I wish you well.

John Callahan

Thank you.

Operator

Thank you. Our next question comes from Alex Kramm, UBS. Your line is open.

Alex Kramm

Good morning, everyone. First of all, let me echo what Doug said, thanks for all the help Jack over the years and obviously all the best for the new endeavors. With that, maybe on the ratings business, I'm not sure how easy this is to enter but as you know, your primary competitor is already reported a few days ago and what certainly stood out as your much awaited growth year-over-year, and particularly on the transactional side. So from what you can tell would be helpful as you could maybe decide for where you might be winning; what businesses you might have done a little bit better or what the mix contributed to that for the outperformance?

Doug Peterson

This is Doug, thanks for the comments. And to start off with -- as you know, we've been engaging in a commercial approach to running our business with hiring of Krik Hoise [ph] for the last year to lead our commercial activities. We've approached our clients in a way that gives us a broad relationship oriented approach where we're looking at ways to broaden our coverage, including products like loans, ratings, RES etcetera. So we're looking across that as well as looking at our contract terms. One of the areas where we also had very strong in this quarter was in Asia. Just to give you a color on the issuance in Asia, it was up in across the board in every category. In fact, total issuance in Asia this quarter was greater than total issuance in United States if you include sovereign issuers; sovereign issuers are not necessarily an area that there is a lot of profitability on but even so the total issuance in Asia for the first time outgrew the total issuance in the U.S.

In the U.S. as you know, the issuance was down overall, in corporate 7%, financial institutions is down, while in Asia the corporates who have 32% and financial institutions were up 84%. So it was a combination of our sales approach, our relationship management approach, more penetration and looking at how we're working on contracts and then very importantly, the volume in Asia.

Alex Kramm

Great. And then maybe just for Jack on the GMI margin; and hopefully my numbers are correct here but it looks like the margin actually came down a little bit quarter-over-quarter. I think last quarter you had said expect kind of like a flattish for the remainder of the year. I noticed it can be bouncing around but just given that you've taken cost out and I think folks are hoping for that margin to actually go higher. Just maybe some commentary of what do you expect for the remainder of the year and whether maybe it was down a little bit quarter-over-quarter despite the benefit? Thanks.

John Callahan

I'll only give a little bit more detail as Doug added some comments on it earlier. The primary difference between the first and second quarter is the Forex benefit, there was just relatively more Forex benefit in Q1 than it was in Q2. So there was about two points benefit in Q1 and less than one in this quarter. So once you equalize for that you're pretty much in that same range around 28%. And we're quite pleased with that step versus the year ago and reducing this is an opportunity we can continue to get some steady improvement overtime.

Alex Kramm

Very good, thanks.

John Callahan

Thank you.

Operator

Our next question comes from Manav Patnaik of Barclays. Your line is open.

Manav Patnaik

Thank you. Good morning, gentlemen, and firstly, congratulations Jack as well as thank you for your help. My first question on the Ratings business, if you could just elaborate on -- I guess you had in your press release and you just mentioned in terms of the commentary around improved contract terms. Can you just help understand if there is -- some of those pricing initiatives you guys have talked about or we've been talking about the last year or so or what basically are you referring with that language?

Doug Peterson

That language refers to the types of engagements that we have with our customers. We have many, many different pricing approaches across the globe where one of the biggest things you're going to hear from us, from our ratings business over and over this term simplify, we have projects to simplify our workflow, we've been investing in technology simplifier workflow that also brings with a combination of better control, better process management; and then also in many cases lower expenses. So on that side we're having a lot of focus and on the top line we're also looking at ways to simplify our pricing model to revisit our contracts that we've had with customers for very long time that provided relationship pricing that we want to recalibrate to markets so there is much larger issuance. So it's a combination of factors but the top line growth, some of that has been driven by approach to how we look at our pricing and even though we're simplifying it, it has had some benefits and also going up.

Manav Patnaik

Got it. And then just -- bigger picture, obviously a lot of things are going good for the Company and you've done a lot of tuck-ins here; just thinking about the appetite for M&A going forward, obviously there seemed to be some assets up for sale in the sea side of things in fixed income. So just curious on how we could think about your plans in that area?

Doug Peterson

I guess what I'd say -- first of all, our number one and number two priorities are; number one is to continue with the integration of SNL, that is something that's critical for us; as you know, we've made a very large investment in that. And even though we've had -- we're off to a great start it doesn't mean we're going to take our eye off the ball on that one. And number two is to smoothly complete the exit of J.D. Power which has been going well but we want to make sure that we complete in a way that's very organized and executed well everything we started. Putting those two aside though, you mentioned tuck-ins there, we continue to look at opportunities, we're not going to shut things out but if we believe that there would be opportunities that might have incremental value to our Company by adding capabilities or products or sales or operations or geographies that might enhance our ability to create value, we might look at those but we're always going to look at those in combination with what the financial returns are and how that looks for the long run. And then also do we have the capacity and management skills and capabilities to absorb and take over those businesses. So we have our eyes open, and you know our normal philosophy about our capital waterfall, and so we do look at things but nothing to report on.

Manav Patnaik

Okay, thanks a lot.

Operator

Next question comes from Toni Kaplan, Morgan Stanley. You may ask your question.

Toni Kaplan

Good morning. You mentioned that SNL grew about 10% in the quarter while I think last year it might have been closer to about 13%. So anything to call out there and are you still looking for low to mid-teens for that business, longer term?

Doug Peterson

Let me start and see if Jack has anything to add. We're still looking for long term, we have looked at this business, it's a very attractive growth machine for us. We expect that over the long run it's going to be growing in low double-digit range, it's something we're looking for. This last quarter there were combination of factors that potentially growth came down a little bit, again, it has to do with the overall financial institutions market with some of the downsizing that firms had done inside of the organization. And we're looking continue to see how we can drive that growth and the main factor over the last quarter just related to the slowdown in some of the headcount and financial institutions.

Toni Kaplan

Okay, great. And then in Platts, it looked like revenue grew nicely but margins declined a little bit year-over-year. Is that just a result of mix or what caused that and can you assure money of any initiatives you might have going on in terms of Platts margin extension?

Doug Peterson

I think the impact on the margins in the quarter was largely driven by more J.D. Power than Platts, it's from some expense timing at J.D. Power. So that was actually a bigger driver than anything really at Platts. And in couple of quarters J.D. Power will be out in numbers and it will be -- we'll have a clear view of the quarter-to-quarter performance in Platts.

Toni Kaplan

Got it, thanks a lot. Good luck, Jack.

John Callahan

Thank you.

Operator

Our next question comes from Craig Huber of Huber Research Partners. You may ask your question.

Craig Huber

Good morning. Congratulations as well Jack, and thanks for all your help. Let's talk margins if we could on the market intelligence area here. With margins in the very high 20s right now including SNL, when you guys think out long-term here -- I mean do you think it's possible to get these margins inside the high 30s including SNL, long-term, since the market holds together?

Doug Peterson

Craig, I think from a longer term point of view, from the benchmarking we've done relative to other similar companies, I think I'll be reluctant to put out a target of high 30s. I do think though with growth, with scale, with realization of incremental synergies that has been identified for 2017 and 2018, we do see a path to margin extension but I think from a longer term point of view, we'd more in sort of a mid-30's range versus a high 30s.

Craig Huber

Okay. And then also on the Ratings business -- you did a great job on Platts again in the first half, down to 5% or so. Despite FX, what's driving that -- in-house sustainable or cost efforts you guys are doing?

Doug Peterson

Yes, there is a couple of things driving it in addition to FX. One of them is, if you recall about year and a half ago, we had undertaken a couple of programs to rebalance our sales force, as well as rebalance our analytical force globally. We also had some programs where we slowed down some hiring, so some of that's just coming through from straight headcount and straight changes to the way that we are managing the business, so those continue to go through. But one of the major areas, if you recall last year in the first half of the year we had the final resolution of some of the disputes and losses we had the U.S. government in 20 states, as well as some private litigation. There had been some residual expenses related to that and then we also have been engaged in the full blown implementation of the Dodd-Frank rules which kicked-in in June 2015. And in order to implement that we had engaged some outside help from some consultant firms and risk management experts, etcetera.

So those are the legal fees related to -- those have tapered off in the second quarter, and then some of those external consulting fees and other advisory fees, those are gone. And so we think that we're approaching a more sustainable level of expenses going forward, although I would point out that with some of our programs we do continue to invest in technology, that's critical for us. And as we simplify the business, we will be investing technology; and here and there we are going to invest in talented people so -- but we do think that some of those extraordinary expenses such as clinge [ph] now clear through.

Craig Huber

All right, thank you.

Operator

Our next question comes from Peter Appert, Piper Jaffray. You may ask your question.

Peter Appert

So keeping on margins in the Platts business for a second, they had tremendous progress here in the last years. So I'm wondering if you're comments Doug are meant to imply that figure, thinking that margins have approached the appropriate level or whether you think there is more upside from here?

Doug Peterson

The way I think about it is -- there is necessarily an appropriate level. We have a commitment as well as an operating philosophy across the entire company that we're going to always look for continuous improvement and continuous upside. One of the biggest determinants of our margins are going to also be top line growth. That's one of the reasons that we also have a big focus across the entire company and also in ratings on commercial activities which are the things I'd mentioned before on needs they're selling relationship approach to selling deeper penetration, broadening customer product coverage, looking at contracts pricing etcetera. So it is a combination of how well we do on growing the top line that is going to have an impact on it. And if we can have some of that incremental sales drop to the bottom line, taking advantage of our scale. I guess long answer to the question but we continue to be committed to driving growth in our margin through continuous improvement, both from top line activities, as well as finding ways to continue being more efficient on our cost basis.

John Callahan

I just want to add one thing, that if you think about the second quarter, if you look at last three years or so, the second quarter has been our highest margin quarter for the rating business because of the larger levels of issuance during the quarter. So -- it can't predict the future but we would not expect necessarily to have those kind of margins each quarter in the third and fourth quarter.

Peter Appert

Understood. And then when you talked earlier Doug, about simplified pricing in the Ratings business, does that suggest more transaction based versus relationship pricing? And therefore higher price utilizations because of that specifically?

Doug Peterson

What it implies is that we had some of contract have been basically become stale or become quite old and we needed to go back and just look at the level of compensation we had been receiving for the type of activities that we were providing and the benefits we're providing for the issuance. I'd also say that another aspect has to do with how do we look at these long-term relationship contracts in the context of the size of issuance that had been undertaken originally when these contracts were put out versus what kind of issuance we see today. So there have been opportunities, this is something that we're going to continue to look at but it's based off of generally speaking, better coverage and better relationship management, those go hand-in-hand.

Peter Appert

Understood. Thank you.

Operator

Our next question comes from Tim McHugh of William Blair. You may now ask your question.

Unidentified Analyst

It's Steven Shulman [ph] for Tim, I appreciate you take my questions. First, I wanted to ask what you're seeing on the CMBS side. Now that you're back in the market, I think you talked last quarter about seeing the strong pipeline of deal, so I was wondering if some of those came through in the quarter and then how the pipeline is looking out, just any detail there.

Doug Peterson

The CMBS pipeline has actually been quite weak. The CMBS issuance is down over 60% in the second quarter. There were 10 transactions that were completed, we were on one of them and we continued to crawl our way back into that market. The pipeline now -- right now is actually quite weak, it's a trend that started off in the first quarter, I mean the first and second quarters continued in CMBS. So we do -- we have hired and great team, we tooled our approach to the business over the last couple of years, and it's our hope that we get included on more and more deals on the CMBS market overtime. We do continue to rate many of the single borrower transactions but those also have been quite weak during the quarter.

Unidentified Analyst

That's helpful. And then second, could you talk about the slowdown in Platts growth in the quarter, the growth rate is still solid overall given your pressure in that market but it sounds like core revenue growth decelerated in a little bit. Was there anything specific that led to that slowdown?

Doug Peterson

I pointed two things. One, compared to Q1 -- Q1 was normally terrific growth quarter for our global trading services. It was up quite considerably in the first quarter, we still had very nice growth in that area, it's only 10% in the mix. But we saw very nice growth in the second quarter but it just wasn't quite stacked [ph] as what we saw in Q1. So it wasn't as accretive as we saw previously. It's still a challenging market out there in terms of the profit -- the profit pressure is not enough on the commodity space. We're still going growth but it may be constant to point or two.

Unidentified Analyst

Great, thanks.

Operator

Our next question comes from Bill Warmington of Wells Fargo. Your line is open.

William Warmington

Good morning, everyone and congratulations to Jack on the new position.

John Callahan

William Warmington

First question for you to go back to the incremental margins on the Ratings business, with revenue up 24% and the adjusted operating is at 39%. It looks like -- I mean to assume a 100% incremental margin would be about $15 million coming from a cost cut, is that a fair way of looking at that? And Doug, what I want to go on the question is how should we think about the incremental margins on that business going forward and your minimum revenue growth on organic basis to achieve that kind of incremental margin?

John Callahan

I think that -- I mean, I assume the way you're asking the question is you're looking at more on a sequential basis from first to second quarter?

William Warmington

Yes.

John Callahan

I think some of the expense difference between the first and the second, and that general range that you mentioned had to do with the drop off -- what Doug mentioned in terms of some of the outside professional fees that we were paying either to lawyers or more significantly some of the work goes underway and risk the compliance area to ensure that compliance from the Dodd-Frank requirements which we had to do last year. So that money has been spent, we do have that risk and compliance investment now in run rate, so that benefit is from the expenses quarter-to-quarter. On a go forward basis, it's not like we expect minimal revenue, I mean we have to kind of -- to Doug's point, we're trying to be more commercially oriented going forward, we are going to be influenced by what's going on with the issuance trends. I mean I just would say that our forward outlook is not assuming robust activity that we saw clearly here in the second quarter.

Doug Peterson

Let me just give you a little bit about -- nobody's asked this question yet but since I'm prepared for it, I'll say a couple of factors that are beyond assets related to the overall issuance markets going forward, as you know from what we just gave you, we do see that there is going to be a reduction in the overall issuance for 2016 but if you look forward further, I mean you look at the 2016 -- looking out for to 2020 or so, there are two factors we're looking at. One of them is total debt markets, including bank loans which we don't necessarily rate. The market is large with independent growth by trillions of dollars, in fact it could stand over the next five years to $73 trillion market including a large increase in China. We do think that there is an increase in the combination of refinancing as well as new financing going into that. We are targeting through all of our business in market intelligence, couple of businesses there and then also in rating; more and more penetration of loan markets and through models and things like that. So we look at the size of the markets and how they're growing longer term and just the next quarter.

Over the rest of the year though we do think that there is large amount of debt maturing between now and 2021, the issuance -- the maturations over the rest of the year are actually not that strong, that's why we see the full year down about 3.8%. We're concerned about the Brexit, what kind of impact that might have on issuance. U.S. interest rates and global interest rate outlooks have been quite volatile and they're changing all the time. So in the short run we usually expect possible volatility as you've seen, as you track this business; quarterly issuance can go up and down but with a very long run five year view we see some very large numbers, $73 trillion overall corporate debt market which includes bank loans. And then through 2021, $10.3 trillion in debt maturity, that's actually publicly issued debt. So we do see that there is a lot of activity, we're trying to build our business around this and trying to expand it beyond just being a single leading approach to the market, looking at bank loan rating, RES, different types of loan evaluation services, etcetera. So this is a big area for us to focus our strategy going forward.

William Warmington

If I could on Platts, just wanted to ask what has happened on the client side for us to anniversary the slower growth and see the return to the double-digit growth. Not that I'm complaining about 7% organic in that market, I think that's very strong but just traditionally it's been more into double-digit side. And yet in terms of the timing and whether it's operating expense on the client side or capital expense or rig count or what you think would be the leading indicator of that for us?

Doug Peterson

I think the leading indicators could be higher oil prices. It's probably -- I'm giving you an unscientific answer but if I were going to look at what are -- what's one of the most important correlations to overall volume as well as activity, it has to do with the price of oil. As you know, as we dropped into a very low oil price certainly this year even though it's recovered somewhat, there were lot of -- people at the industry -- you had a large increase in the falls from bankruptcies in the U.S. in particularly, in different types of oil businesses. So probably getting a higher price of oil would be the largest factor that could bump up growth to the double-digit range if that was still possible. We have still been growing quite steadily in the mid-single, mid to high single digit range despite this because it's still such a demand of information and for our prices embedded in different kinds of contracts but double-digit range would require more than just -- would require lot of work for us but in particular for the price of oil to be a lot higher.

John Callahan

Bill, I'd add to that. Just keep in mind, we're trying to grow off an ever increasing day, so double-digits of $700 million will be different in double-digits of $0.5 billion. So reality is the business is working hard to extend its product line so we have been investing to expand out the product line beyond the oil, on that note in terms of the business. And we're also looking to do more than just price assessment than we're investing to do more in the area of supply demand analytics. So I think we also -- in the longer term point of view need to kind of build out the product line and increase our offering.

William Warmington

Excellent. Thank you for the insight and Jack, it's been a great run.

John Callahan

Thank you.

Operator

Our next question comes from Andre Benjamin of Goldman Sachs. You may ask your question.

Doug Peterson

Andre? Operator, I guess he is not there.

Operator

Next question comes from Joseph Foresi of Cantor Fitzgerald. You may ask your question.

Joseph Foresi

I was wondering, I think you talked in your remarks about keeping the range wide on the guidance side just to take into account some potential volatility on the macro front. I was wondering, could you just have -- give us some idea of what would put you at the top end of guidance versus the low end at this point?

Doug Peterson

It's just sort of -- primary driver would be first this level of overall debt issuance because that's probably the first and the second most important driver. There could be a little bit of impact from what goes on with fund flow relative to U.S. equity markets that could impact our indices business. But now we have pretty good revenue visibility outside of debt issuance because so much of our business today is recurring revenue subscription base.

John Callahan

The only thing I'd add to that is, as you know in our indices business we do have certain, as you know we've changed the way we characterize our revenue. If AUMs continue on a very steady increase that would also be a benefit that revenue tends to drop almost all straight to the bottom line, so that could be another factor that would put us up towards the higher end of the range. And that's as per the funds flow and overall end market level.

Joseph Foresi

Got it. Okay, and then the Ratings business seems to be a little bit tricky in the sense that you had a very good quarter this quarter but then of course Platts is out there and then you have your annual outlook and then you have the outlook with obviously the debt levels rising there. How do you handle the staffing where the challenges in that business? Do you prepare for a pick up? Do you change staffing levels at all? I'm just wondering how the resourcing of that business is handled with so many different variables that's out there?

Doug Peterson

We have a resource model that takes everything you just mentioned in terms of our forecasting. We are able to manage the staffing level through attrition if we needed to and we're also able to manage it through our bonus pool, our bonus accruals, if that was something we needed to look at to ensure that we're accruing according to the kind of level of staffing we have, as well as level of activity. So those are two of the most important levers. But we've built a way that we've got some flexibility as well by having analysts that are spread around the globe, they're not all concentrated in London and New York. Despite the Brexit being a concern for us, we do have significant staffing and other European cities including Frankfurt and Paris and Madrid. We also get support from our partner CRISIL in India, they are part of the overall flows, some of the aspect to work for process of crunching numbers etcetera. So we have various variables we use to manage that and that's part of what John Burris Curtis [ph] is doing great job at.

Joseph Foresi

Thanks. Good luck, Jack.

John Callahan

Thank you.

Operator

Our next question comes from Vincent Hung, Autonomous. Your line is now open.

Vincent Hung

On the improvement in contract service, have you take all the low hanging fruits, whether some left from the second quarter?

Doug Peterson

This is an interim process that could take a while. There was no low hanging fruit. This is something that's not -- it's very important for us to proceed from a relationship point of view and we hope that there is continues steady penetration of more products, more services to our customers as I mentioned. There is now league table for loan ratings and this is another area that we're trying to do more and more of it. We think also around the globe as most markets are more bank markets as oppose to loan markets. We're trying to penetrate with more services in that area as well. So this is something that we hope we can see continuous improvement in growth on the top line from many, many different factors, it's not just the contract terms.

Vincent Hung

And do you get much push back from customers on this?

Doug Peterson

We have good relationships with our customers and as you can imagine anytime when you want to renegotiate contract terms, it's never, it's not always easy.

Vincent Hung

Okay, thanks.

Operator

Thank you. We will now take our last question from Warren Gardiner of Evercore ISI. You may state your question.

Warren Gardiner

I just wanted to -- I was wondering if you guys could just give us a quick update on the fixed income index business? And then also sort of as you look out there, how you're thinking about growing that as you move forward? Thanks.

Doug Peterson

Yes, that's an area that we've been spending a lot of time on, structurally, as well as strategically. The industry itself is going through a massive amount of change with Barclays having changed hands with I7 bought IDC, with what's happening in Europe with the exchange transaction going on there and the interest of fixed income investments from the world. As well as all of the main asset managers, large globe assets managers looking at so much change in volatility in the shape of the fixed markets, especially with pricing and liquidity concerns creeping in. We think it's an area that it will continue to develop, we think there will be more and more ETF products and target day products, we retirement products, etcetera that are developed over the years. We would like to play in that.

We're off to a good start with our dialogue with the asset managers and with ultimate distributors about these types of products and services. We have a core set of indices around the S&P 500, as well as some other fixed income indices. We have $40 billion right now in AUM in the fixed income index space. We are looking at all different ways to grow the business, whether it would be continuing to grow and penetrate with what we already have and what we're developing, as well as looking at the different properties that pop up for sale and whether or not they could be valuable to be added to our portfolio at the price is attractive, as well as if the capabilities are being attractive. So it continues to be an important potential growth area for us. And we do have dedicated resources to seeing how we can grow in this area.

Warren Gardiner

Great, thanks a lot.

Okay, thank you very much everyone. With that let me conclude the call. I'm pleased that we had another strong quarter. The financial performance is excellent, ending up with an EPS growth of 17% and year-to-date cash flow of $530 million, etcetera is all something that we're very pleased that we've been able to achieve. But let me end the call again by thanking Jack Callahan. He has been a great partner and he is heading off to Yale University and they are going to get the benefit of his experience and expertise. So thank you, Jack. We wish you all the best. Thanks everyone.

Operator

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

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