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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to S&P Global’s First Quarter 2019 Earnings Conference Call. I would 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. [Operator Instructions]
I would now like to introduce Mr. Chip Merritt, Senior Vice President of Investor Relations for S&P Global. Sir you may begin
Good morning. Thanks for joining S&P Global's earnings call. Presenting on this morning's call are Doug Peterson, President and CEO; and Ewout Steenbergen, Executive Vice President and Chief Financial Officer. This morning, we issued a news release with our first quarter 2019 results. If you need a copy of the release and financial schedules they can be downloaded at investor.spglobal.com.
In today's earnings release and during the conference call, we're providing adjusted financial information. This information is provided to enable investors to make meaningful comparisons 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 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 the 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, and welcome to our first quarter earnings call. 2019 began on shaky footing on the heels of the volatility uncertainty in the first quarter. The markets have come a long way since the depths of December. The main development in the past quarter has been the recovery of both equity and debt markets. In the meantime, our baseline forecast is slower, but healthy growth for 2019 remains intact.
But the most notable change has been a coordinated stand down by major central banks and across the board shift in monetary policy bias from gradual tightening to neutral. Markets have responded very positively, although risks related to politics and trade still linger.
Our subscription businesses, Market Intelligence and Platts led revenue growth in the first quarter as it took several weeks in January for markets, and more importantly ETF AUM and debt issuance to recover.
Let me review some of the highlights from the quarter. Market Intelligence led all segments with 8% organic revenue growth. We achieved a 40 basis point improvement in adjusted operating profit margin, and as I will show in a few moments an even larger increase in our trailing four quarter figure. We continued the long track record of reducing average diluted shares outstanding, with the decline of six million shares. Based primarily on a lower tax rate and a lower share count, we delivered 5% adjusted diluted EPS growth.
In a period when markets weren't ideal, we were pleased to still be able to grow adjusted diluted EPS. We generated approximately $306 million in free cash flow excluding certain items in a seasonally low cash flow quarter. We're reaffirming 2019 adjusted guidance. And finally, we launched two landmark ESG offerings that I'll review in a few minutes.
Revenue is largely unchanged versus the prior period as the decline in Ratings revenue is offset by growth in the other three segments. Our adjusted operating profit increased 1%, and adjusted operating profit margin increased 40 basis points to 47.3%. But please recall, we measure and track adjusted margins on a trailing four-quarter basis, which increased 230 basis points. In addition, we continued to reduce shares outstanding, which contributed to the 5% increase in adjusted diluted EPS.
Each quarter, we take an opportunity to highlight key drivers to our business and important projects underway. This quarter, let's start with the data feeds business within Market Intelligence. When most investors think about Market Intelligence, they think about the Capital IQ or Market Intelligence desktop. Data management solutions and rating express, however, offer products that are ingested by our customers as data feeds. This data feed business has grown about 11% annually for the last two years and is on track to deliver revenue of more than $600 million this year. Historically, data feeds have primarily been made up of RatingsXpress which is the reselling of ratings information Compustat and CUSIP along with other offerings including GICS, cross-reference services and earnings estimates.
In the past year, we have had a 40% increase in the number of data packages available through our data feeds. These have included alternative data such as machine-readable transcripts, Panjiva shipping data and SNL asset-level data. We expect that Trucost ESG data, transcript sentiment scores and other unique data sets in the near future. The key is to deliver unique data to our customers in the form of which they need it.
Now turning to Ratings. During the first, quarter global bond issuance decreased 3% with mixed performance in various geographies and asset classes. If we also include all bank loan ratings volume, total global issuance declined 13%. In the U.S., bond issuance declined 7% as investment grade decreased 8%, high yield increased 6%, public finance improved 17% and structured finance declined 20% with drops in CLOs, ABS and CMBS partially offset by gains in RMBS.
In Europe, bond issuance decreased 9% as investment grade decreased 13%, high yield declined 26% and structured finance increased 10%, due to strength in covered bonds, a category where we have very little presence. In Asia, bond issuance increased 12%.
Last quarter, we introduced this chart to attempt to track debt issuance and global cash balances of those companies with the most overseas cash at the end of 2017. We're pleased that the cash balances of these companies continued to decline and that the issuance among these companies is showing signs of recovery after an anemic 2018.
The latest 2019 global issuance forecast is largely unchanged from the previous forecast. Excluding international public finance, which has minimal impact on our financial results, issuance is expected to decrease less than 1%. Leverage loan activity has become an important source of revenue as these loans are increasingly rated. This chart depicts new leverage loan volume for the past six years and excludes repricing and amend-to-extend volume. First quarter volume is down 26%, primarily due to less M&A activity as well as a dramatic reduction in leveraged loan fund assets.
This chart shows that for the past 23 weeks, U.S. leverage loan funds have experienced significant outflows. In fact, since peaking at $109 billion in October 2018, loan funds have had net outflows totaling over $25 billion. Investing in leverage loans is more appealing when rates were rising because loans have variable rates.
Now that expectations for rate increase have subsided, high-yield debt looks relatively more attractive. Remember when doing your analysis, leverage loan activity is not included in bond issuance data. And so our bank loan ratings revenue decreased in the first quarter to $67 million versus $99 million in the first quarter of 2018.
During Investor Day, we introduced the framework Powering the Markets of the Future, including six foundational capabilities. We use this framework to set our goals and allocate resources. During our fourth quarter call, I shared projects underway in each of these categories with particular emphasis on global with our Ratings opportunity in China.
Let me start there and then highlight some new opportunities under innovation and customer orientation. After receiving approval to enter the domestic Chinese bond market in January, our official launch has then took place on March 26. We hosted a half-day seminar in Beijing with 170 participants from issuing companies, fixed income investors, banks and other participants in China's financial markets. This was an opportunity to showcase our new team as well as our strong commitment to bring more transparency and insights to China's financial markets, also outlining a vision that goes beyond our Ratings business and across all of our divisions.
ESG is a major focus in the areas of customer orientation and innovation. Our ESG efforts at S&P Global span every business segment. In 2019, we anticipate ESG revenue will approach $50 million. We recognize that different clients have different needs and are trying to tailor products specific to those needs. To that end, we have created the ESG data factory to centralize the data collected across the company which can be used in any of our ESG offerings. This ensures consistency of inputs across the various products as well as scale.
We're expanding on our ESG heritage in S&P Dow Jones Indices. 20 years ago, we launched the Dow Jones Sustainability Indices, arguably the best known ESG indices in the market. We're now introducing an enhanced ESG scoring methodology designed for the new S&P 500 ESG Index and the upcoming country-specific and regional ESG indices. The scores are used as inputs to evaluate companies in the indices.
The S&P DJI ESG scores are available to the market as a stand-alone product and can be used as a tool for a broad range of research, indexing and investment purposes. The first of the new ESG indices to launch is the S&P 500 ESG Index. An increasing number of investors require indices that are aligned not only with their investment goals, but also their individual and institutional values. The S&P 500 ESG Index is constructed with both of these in mind.
The S&P 500 ESG Index targets 75% of the traditional S&P 500's market capitalization at the industry level based on their GICS code. The index offers diversification and a profile that is close in line with that of the U.S. large cap market. UBS is the first firm to license this product for ETFs that launched last month on several European exchanges.
S&P Global Ratings launched ESG Evaluations to serve issuers and fixed income investors. Our ESG Evaluation is a cross-sector relative analysis of an entity's ability to operate successfully in the future and optimize long-term stakeholder value in light of its natural and social environment and the quality of its governance. In addition to leveraging the ESG data factory, the engagement that our ratings analyst have with client company management coupled with the judgment of our analysts add unique insights to this product.
Delivering innovative new products and updating existing products is an important emphasis at S&P Global. Our indices business recently launched the Global SmallCap Select Indices. This series of new indices is designed to improve long-term risk-adjusted performance of small caps by excluding companies without a consistent track record of positive earnings.
In addition, Platts launched assessments of low sulphur marine fuel in response to International Maritime Organization's 0.5% sulphur cap on marine fuel that begins in January 2020. Our new assessments are for daily cargo and barge prices of marine fuel 0.5%, reflecting global pricing of IMO 2020 compliant residual marine fuels.
Based on these new assessments, ICE launched six marine fuel 0.5% futures contracts on February 19th, which traded 84 lots equaling over 500,000 barrels on the first day. In March, S&P Dow Jones Indices benchmarks including the iconic S&P 500 and the Dow Jones Industrial Average became the first benchmarks to be endorsed under the EU Benchmark Regulation and included in the ESMA register enabling supervised entity in EU to continue to use them.
And finally, Platts recently announced to change to the Dated Brent benchmark. The proposal move to a CIF, C-I-F Rotterdam basis, which means it will be a landed cost. With FOB supply in the North Sea gradually falling, this proposal ensure ample liquidity of grades in the Dated Brent basket for the foreseeable future.
And last, I'd like to share the early success of two new price assessments that we featured in previous earnings calls. These charts depicted the volume of options and futures contracts that are based on Platts' JKM marker and Black Sea wheat. As you can see in these charts, both price assessments are gaining great adoption in the marketplace.
And now, I'd like to turn the call over to Ewout Steenbergen, our CFO, who'll provide additional insights into our capital plans and financial performance. Ewout?
Thank you, Doug, and good morning to all of you on the call. Let me start with our first quarter financial results. Doug covered the highlights, I will take a moment to cover a few other line items. Adjusted corporate unallocated improved by 30%, primarily because the $20 million contribution to the S&P Global Foundation in the prior period did not recur. This was partially offset by the addition of Kensho.
Total adjusted expenses decreased 1%. This is notable considering that the acquisitions of Pragmatix, Panjiva, RateWatch and Kensho have added to our cost structure. The adjusted effective tax rate of 20.9%, 80 basis points lower than a year ago, and less than our full year guidance of 22.5% to 23.5%. This was primarily due to a larger-than-normal level of stock option exercises that occurred during the first quarter. We have actively been returning capital to shareholders over the past year. These actions resulted in a 2% decline in our diluted weighted average shares outstanding.
Stock options associated with 600,000 shares were exercised during the first quarter. This resulted in a stock-based compensation tax benefit on EPS of $0.07. As the number of employee stock options continues to decline, we expect the stock-based compensation tax benefit to decline as well. However, because of the volume of options exercised in the first quarter, we're increasing our estimate of the 2019 EPS impact by $0.05 to a range of $0.10 to $0.15.
Changes in foreign exchange rates had a negative impact on revenue in the Ratings and Market Intelligence businesses and a negligible impact on adjusted operating profit for the company. Our revenue was negatively impacted primarily by the weakening of the euro and the British pound. Weakness in both of these currencies along with weakness in the Indian rupee also reduced expenses resulting in a minimal impact from ForEx on adjusted EPS.
There were three non-GAAP adjustments this quarter: a $113 million pretax non-cash charge associated with our frozen U.S. defined benefit pension plan. This was the result of transferring a portion of our pension funding obligation to an insurance company; $7 million in Kensho retention-related expenses; and we had $32 million in deal-related amortization.
This is a slide that we shared at our Investor Day in May 2018. It depicts a framework that we outlined to show the areas where we can most impact shareholder value. The first two require investments. We need to continue to invest to fuel revenue momentum by improving our products, introducing new technology, adding new data sets and entering new geographies. We have made great progress delivering EBITDA enhancement and we must continue to fund new organic opportunities to drive additional productivity gains.
Driving financial leverage, enforce optimizing interest costs, reducing shares outstanding and optimizing the tax rate. And finally, we want to return capital to shareholders while maintaining flexible debt capacity. We're committed to returning at least 75% of annual free cash flow to shareholders each year.
This quarter our subscription businesses, Market Intelligence and Platts delivered the strongest revenue growth. As we have said many times, we managed adjusted operating margins on a trailing four quarter basis. So while there were declines in quarterly figures versus the first quarter of 2018 all four businesses delivered margin gains on a trailing four quarter basis.
Now turning to the balance sheet. Cash and cash equivalents declined versus the end of 2018, principally due to $644 million of share repurchases during the first quarter. Our adjusted growth leverage to adjusted EBITDA declined to 1.8 times remaining within our targeted range of 1.75 to 2.25 times. Free cash flow excluding certain items increased 3% to $306 million. This is a seasonally low free cash flow quarter with incentive compensation payments each year in the first quarter.
During the quarter we returned $785 million to shareholders through a combination of dividends, open market purchases and an ASR. In addition, during the quarter, we received 3.4 million shares 0.8 million shares from open market purchases, 0.4 million shares from the true-up of the old ASR and 2.2 million shares -- initial shares from the current ASR.
Now let's turn to the segment results starting with Market Intelligence. Market Intelligence delivered a strong quarter with revenue increasing 10%, 8% on an organic basis and active desktop user growth of 13%. I need to point out two changes that both became effective on January 1. First, we are now including Kensho revenue in Market Intelligence rather than reporting it as a corporate item as we did in 2018.
Second, in both periods Trucost has been transferred from Indices to Market Intelligence. With the ESG efforts underway at Market Intelligence, we believe the business is better suited to be included here. Adjusted expenses increased 2%, adjusted segment operating profit increased 27% and the adjusted segment operating profit margin increased 460 basis points to 33.8%, despite increased investments in the business. More importantly, on a trailing four quarter basis, the business delivered an exceptional adjusted segment operating profit margin increase of 350 basis points to 35.2%.
Also in March, we announced the sale of the Standard & Poor's Investment Advisory Services business to Goldman Sachs Asset Management. Terms of the deal were not disclosed. The transaction is expected to close in mid-2019. Desktop the largest category grew 6% excluding acquisitions. Data Management Solutions realized 11% revenue growth, once again benefiting from expansion of the data feeds business that Doug highlighted earlier.
Risk Services has been renamed Credit Risk Solutions and grew 11% with RatingsXpress providing the greatest level of growth as we continue to expand the data feeds portion of Credit Risk Solutions. While bank loan volume and bond issuance activity declined 13%, Ratings revenue only declined 7%. This decline was partially mitigated by a 2% decline in adjusted expenses, resulting in an 11% reduction in adjusted segment operating profit and a 240 basis points decline in adjusted segment operating profit margin. On a trailing four-quarter basis, adjusted segment operating profit margin increased 140 basis points to 55.4%.
Non-transaction revenue decreased, primarily due to a $9 million impact from changes in foreign exchange. In addition, lower Rating Evaluation Services activity CRISIL and slightly lower new entity ratings contributed to the decline. Inter-segment royalties from Market Intelligence, partially offset these declines.
Transaction revenue decreased due to lower bank loan rating activity and to a lesser extent fewer bonds ratings. Non-transaction revenue has been a steady source of growth. This is because the majority of the revenue is subscription-like. However, there are some volatility at certain components namely; Rating Evaluation Services, ebb and flow with M&A activity and changes in foreign exchange rates can always have an impact.
This slide depicts Ratings revenue by its end markets. The largest contributor to the decline in Ratings revenue was the 8% decline in corporates, primarily due to less bank loan rating activity. In addition, financial services revenue decreased 2%, structured finance declined 19%, government increased 6%, and CRISIL and other category decreased 5%. This includes an increase in inter-segment royalties from Market Intelligence, offset by decline in CRISIL's dollar-denominated revenue.
Turning to S&P Dow Jones Indices, the segment delivered 2% revenue growth, 6% adjusted expense growth, 1% adjusted segment operating profit growth, and an adjusted segment operating profit margin of 69.5% a decline of 100 basis points. This margin decline was primarily the result of a revenue mix with a lower proportion of exchange-traded derivative from revenue than in the prior period.
On a trailing four-quarter basis, adjusted segment operating profit margin increased 80 basis points to 67.7%. Revenue was mixed during the quarter. Asset-linked fees increased 9%, primarily due to an improvement in the timing of customer reporting, purchase of certain intellectual property rights, and mutual funds AUM growth.
Exchange-traded derivative revenue declined 32% from an incredibly strong quarter a year ago. Data and custom subscriptions increased 28% due to a catch-up in real-time reporting that we first discussed in the second quarter of last year as well as from organic growth.
For our Indices business, ETF net inflows were $2 billion in the first quarter and the average ETF AUM in the first quarter increased 2% year-over-year. I want to make a clear distinction between average AUM and quarter ending AUM. Our contracts are based on average AUM. We disclose quarter ending figures, because flows and market gains and losses are best depicted using quarter end figures as shown in the waterfall chart on the right.
While average AUM increased modestly, quarter ending AUM increased 11% versus the end of the first quarter of 2018. A year ago, there was $1.327 trillion in ETF AUM linked to our indices. At the end of the first quarter this year, there was $1.473 trillion. Since March 31, 2018, there has been $95 billion of inflows and $51 billion in stock market appreciation.
Industry inflows into exchange-traded funds were $97 billion in the first quarter with the majority going into fixed income and global equity products. Flows into U.S. equity funds were only $7 billion.
These charts are from a report S&P Dow Jones Indices recently published and titled Sector Effects in the S&P 500: The Role of Sectors in Risk Pricing and Active Returns. Tradable sector-based investment tools are not new. Products such as exchange-traded funds based on sector indices have existed since at least the late 1990s. However, interest in these products has recently grown materially.
These charts show that the assets, open interest, trading volume, associated with certain index-based sector products have more than doubled in the past five years. In addition, in February 2019, CBOE launched options on 11 of our select sector indices. These products make it easier for investors to use sectors to express views and manage sectoral exposures. Key indicators for our exchange-traded derivatives volume decreased from a volatile first quarter of 2018. S&P 500 index options activity decreased 23% VIX futures and options activity decreased 48% and activity at the CME equity complex decreased 23%.
And now turning to the last business segment, Platts revenue increased to 5% as a result of a 5% increase in core subscriptions and a 7% increase in Global Trading Services. Adjusted expenses increased 6%, leading to adjusted segment operating profit margin of 47.4%, a decrease of 60 basis points. The trailing four-quarter adjusted segment operating profit margin was exceptional, increasing 260 basis points to 48.9%.
Platts revenue increased in the quarter, as all four commodity groups reported growth. Petroleum, the largest category, delivered the most growth at 6%. Last quarter we shared a slide on the right with you, depicting a stepped-up level of investment to fuel future organic growth. However, we thought that as you try to model our results, it will be important for you to understand the level of investment in each of the segments. As you can see from the chart on the left, Market Intelligence is investing half of the total. In addition this spending is expected to build as the year progresses.
Now, lastly, I would like to discuss our 2019 guidance. This slide depicts our GAAP guidance. Please keep in mind that our guidance reflects current spot market ForEx rates. Because of the $113 million pretax non-cash charge associated with a partial risk transfer of the frozen U.S. defined benefit pension plan that I noted earlier, we are decreasing our 2019 GAAP guidance, diluted EPS guidance. However, because this item is not part of our adjusted results, it does not necessitate any changes to our adjusted guidance. In fact, we are not making changes to our adjusted guidance because we are optimistic about our current outlook for markets, our competitive strength and the initiatives we have underway. In addition we continue to expect year-over-year growth as quarterly comparisons get easier as the year progresses.
With that, let me turn the call back over to Chip for your questions.
Thank you. Just a couple of instructions for our phone participants. [Operator Instructions] Operator, we'll now take our first question.
Thank you. This question comes from Ms. Toni Kaplan from Morgan Stanley.
Thank you. Good morning.
Good morning.
My first question is on Ratings' margins. Understandably the weakness in issuance led to the lower Ratings growth in the quarter but I think margins were just a little bit lighter than what we were expecting. So I just wanted to ask, at what level do you start getting operating leverage in the Ratings segment? Do you need sort of like a mid-single-digit growth to get that leverage there? And just, I guess, just some additional color on what drove the margins down in the quarter would be helpful. Thank you.
Good morning, Toni. This is Ewout. If you look at the margin development in the first quarter of Ratings, we are overall satisfied with the results we are seeing. And the reason is that, we are also seeing at the same time the benefits of our productivity plans. We see expenses coming down by 2% or in dollar terms $7 million. And we think that is overall showing good expense discipline within the Ratings business. But in general terms, we see that expense discipline across the enterprise in totality.
Clearly, if you look more to the outlook of Ratings in margins, although we don't really guide and provide specifics with respect to margin outlooks by segment, I do want to say that if we look at the remainder of the year, our expectation is that margins should look better compared to the respective quarters a year ago. So, overall, we still expect Ratings margins to expand year-over-year 2019 compared to 2018.
Great. And my second question I wanted to ask about Market Intelligence. You mentioned that change with Kensho being included in there. I guess on a like-for-like basis with last quarter, was the organic growth up sequentially? I imagine that Kensho is probably pretty small so the 8% looked like a pretty good number, and your user growth of 13%, really strong much faster than the market. And so I just wanted to understand what you attribute the really strong growth rate in the Market Intelligence business too. And international Market Intelligence was really strong too, so just any colors on growth there? Thank you.
Toni if you look at the inorganic revenue in the Market Intelligence segment during this quarter, it was in total $8 million. That was driven by a couple of acquisitions by Market Intelligence. Think about Panjiva, think about RateWatch as well as some contribution of revenues from Kensho but that was only a part of that $8 million improvement in revenues on the acquisition line. So overall it's not a large change. As you will recall, we acquired Kensho in the second quarter of 2018. So next quarter basically this is not going to show up in the inorganic category anymore. It's becoming part of normal business as usual.
All right. Thank you.
Thank you. The next question is from Alex Kramm of UBS.
Yeah, hey good morning, everyone. I may be splitting hairs here with my question a little bit, but I think when you talked about the taxes and the stock-based impact there I think you're now basically saying you have a $0.05 higher bottom line contribution. At the same time you left your EPS guidance unchanged.
Again I think it's less like than 0.5% of EPS. But just wondering you sound very positive on the outlook but clearly you're not changing anything despite that help. So maybe just a little discussion on the puts and takes there to leave it unchanged.
Good morning, Alex. This is Ewout. If you look at the improved impact that we are now expecting from stock-based compensation, if you are looking at the guidance we have provided with respect to the effective tax rate for the full year, which is 22.5% to 23.5% we're still within that range now more at the lower end of the range. So, therefore, overall we have not adjusted the tax rate range in our guidance.
But what I do want to say is compared to three months ago we have become incrementally more confident around our guidance in general. Because you will recall three months ago we came out of a very volatile quarter and it was very uncertain where the markets would go. If you now look where the markets are at this point in time, the outlook for the next few quarters in the year, the starting point for our subscription businesses with respect to annualized contract value, which is a leading indicator for future revenue for our subscription businesses ,if you look at the starting point of ETF AUM in the second quarter of this year compared to a year ago, overall the health of the debt markets at this point in time, we are incrementally more confident around the outlook and the guidance we have provided compared to three months ago.
Fair enough. And then secondly on the index side, I was a little surprised about the actually very good performance on the asset-based fees. Now obviously it was challenged by the ETF business. But you mentioned some of the other things that helped like the derivatives, I guess the OTC side and some of the mutual funds. Can you just give us a little bit more detail? It seems like that really helped this quarter. Maybe that's a little bit lumpy; maybe there was some one-timer stuff in there. I just want to make sure that if I think about that stuff going forward that we don't overestimate it going forward I guess. Maybe you can break out how big those fees are relative to the ETF side. Thank you.
Alex, if you look at -- first at the exchange-traded derivative volume, you might recall due to market volatility, there was a very large spike in February 2018. So that's not recurring. markets have more stabilized. And then you also see the volumes on the derivatives trading coming down.
So we are looking more at the first quarter 2018 as an exception and this is more a normal level quarter, the first quarter of 2019. But we have always said that this business has a natural hedge. So if exchange traded derivative volume is going down that's usually because markets are more positive. And then we see the flip side with respect to the asset-based fee levels.
There is indeed a couple of elements that are going into the asset based fee level category. Overall, average AUM for ETFs was up 2%, so that helps in a modest way. Then there is also the mutual funds assets under management where we saw a positive increase.
There was not so much change with respect to the OTC levels. And there was one particular administrative matter. We have accelerated and implemented improvement in our processes where we have faster reporting of asset levels by certain managers. That is a one-time step-up in revenues and that will from now on basically be the new normal level going forward.
So that is I think the other element that goes in the mix here with respect to assets under management fees. But overall like I said, we are optimistic about the second quarter outlook because the starting point in assets is so much better than we have seen at the beginning of the second quarter of 2018.
Excellent. Totally get it. Thank you.
Thank you. The next question comes from Manav Patnaik from Barclays. You may ask your question.
Thank you. Good morning gentlemen. The first question I had was I was just hoping you could help us understand the mix components of the non-transaction piece of your ratings business. Like how much of that is that the way you described the subscription?
And then just within that I guess I understand why Ratings Evaluation is down. Can you just help me understand what's going on with CRISIL?
Good morning Manav. Non-transaction revenue was down $15 million year-over-year of which $9 million was FX-related. So, that's clearly the largest driver of non-transaction revenue.
Then the second driver here was Rating Evaluation Services. That is very much linked to M&A activity in the market. That was relatively modest and therefore also the rest fees and revenues were a bit lower this quarter compared to a year ago.
And then what we see with CRISIL is a couple of impacts. First impact of foreign exchange based on the difference in foreign exchange rates from a year ago between the Indian rupee and the U.S. dollar.
With respect to the research and analytics business, we see revenue coming down due to some market headwinds, but that is then offset by the Indian ratings revenue which is actually up in a healthy way. But those are some of the elements that are happening within CRISIL.
Overall, we will expect to see maybe quarter-over-quarter slow and modest fluctuations for non-transaction revenue. But we still expect over a longer period of time a normal trend of growth of non-transaction somewhere low to mid-single-digits.
Got it, okay. That's very helpful. And then maybe just on the balance sheet your leverage target or your current leverage is pretty close to your target. Just any thoughts on what the plans are there with the cash and the flexibility you have.
Yes. We have -- of course have a very clear statement with respect to our capital philosophy and our capital targets. And we are disciplined around that and we are committed to stay within the targets that we have set. So, at a point, we will fall below the floor of our leverage range. We will certainly at that point start to consider adding new leverage to our balance sheet.
What we'll do with the proceeds I think is still to be determined. I think you know our first priority is to reinvest in the business. We are investing already this year in a stepped-up way in organic initiatives. You know all of those about ESG and China and technology and Kensho and other areas. We could also use the proceeds for inorganic investments. We will continue to remain very disciplined from a valuation perspective.
And then, of course, the third option we have is return of capital to shareholders. So, still to be determined, but we have clear targets with respect to our capital philosophy and you may expect us to continue to be committed to those targets.
All right. Thanks a lot guys.
Thank you. Our next question comes from Tim McHugh from William Blair. You may ask your question.
Thanks. Just wanted to ask on Platts, the selling environment, I guess are you seeing any improvement? And I guess an update on the analytical solutions that you've tried to develop over the last few years the success with selling those to improve the growth of Platts. Thanks.
Hi Tim this is Doug. Let me take that one. Well, first of all, as in the past, people have always looked to see if there was any kind of major correlation of Platts with commodity prices. And as we've always said there's some kind of a range I'm not giving what exactly it is.
But if prices get too high, sometimes it squeezes some of the buyers; if they get too low; it squeezes some of the sellers we sometimes see. But we've been in a very comfortable range in the price of oil the price of natural gas. We've also been developing the new products which we've been highlighting like the JKM marker rebalancing the Brent components, et cetera.
So, we see that we're selling into a pretty benign -- actually maybe neutral to positive environment for Platts. And as we've mentioned in the past, this is very much about relationships and getting out to have a commercial approach to how we're dealing with the markets. So, we're seeing what we would call a neutral to positive environment.
On the analytical solutions, this continues to be part of our growth plans and investment plans. We had made as you know acquisitions in the last two years to build out a data set. Those data sets are included in products that we actually have as well as on their own basis.
One of the early wins I'd like to mention is that as you've heard us talk about the S&P Global platform, which is an initiative we have to have a single technology base to be able to provide our information in the market. Platts is piloting a new set of materials that they're delivering to the market which used to be via PDF. And now through our subscription services, they're able to deliver all that information online where instead of seeing a PDF, a customer is able now to download the information, building their spreadsheets using their analysis, et cetera. So, we're laying a very strong foundation for the vision of Platts analytically. And one of the key elements in that was building out this S&P Global platform, so we can deliver those kinds of solutions.
Okay. Thanks. And then just on the investment spending within I guess in particular Market Intelligence and Kensho. You maybe commented it builds as the year progresses. Can you help us think about the subsequent years I guess 2020, 2021? Is this an expense, I guess spending or project level that continues to build, stays at this elevated level? Or do we start to see savings in terms of data ingested cost and so forth as we go out a year or two where I guess you get a reversion relative to this I guess weight against the margins?
Tim, if you look at the next few years for those business cases where we're investing in Market Intelligence, a part of the current expense for this year is really for the build-up phase and we don't expect those to recur. A part is really for operations and a setup of new organizations and new products we will provide to the market. So those expenses will remain going forward. I think the biggest difference that you should expect to see is that those initiatives will start to drop off revenues over the next few years; some a little faster some a little bit further out in time. For example, we have always said that the Chinese investments are more in the horizon of three to five years. But some others in Market Intelligence, the payoff in terms of revenue could be a bit faster. So there you should expect the biggest change that these investments we are doing this year will ultimately lead to an improvement of the organic growth in Market Intelligence going forward.
Okay. Thank you.
Thank you. The next question is from Mr. Jeff Silber from BMO Capital. You may ask your question, sir.
Thanks so much. Doug, when you started the presentation, you talked about the markets having come a long way since the depths of December. I'm just curious in your conversations with issuers, are they thinking the same things? I'm just wondering in terms of the outlook there still seems to be a lot of uncertainty out there. If you could provide some color that would be great?
Yes. There definitely is a lot of uncertainty out there. I'd basically divide this into two the positive as well as then some of the uncertainties. On the positive side, business sentiment is still strong, consumer sentiment is strong, banking balance sheets are very strong. There's abundant capital. The accommodated policies of the central banks around the world have continued in place with very cheap capital and in Europe in particular flooded liquidity into the markets. So there's very, very strong conditions.
And then we've also seen economic growth. Even though it slowed down a little bit in China and Europe, the U.S. just had a very strong quarter. And our own estimations are for a slight slowdown in global growth from last year, but still a global growth. And we also see a low probability about 20% or so probability of a recession in the U.S. in the next 12 months, which is actually a very low level.
Now what are some of the challenges or uncertainties? Clearly, there's uncertainties around trade. There are still -- the markets are still waiting to see what's going to happen with the U.S.-China trade negotiations. European markets are still quite weak Southern Europe in particular. And even though Brexit is something that we were panicking about a few weeks ago, it went away for six months, Brexit still needs to be resolved. So you still have some political issues and trade issues that create some of the uncertainty. And then as I said, Europe is also -- continues to be a pretty weak area.
Okay. Appreciate the color. And Ewout, in terms of my follow-up, I know you haven't disclosed the potential details regarding the sale of the SPIAS business. But can you give us an order of magnitude roughly how large that business is so we can take that out of our model?
Yes. We have not disclosed those details. But overall, you should see that that is a relatively small business for us. So not a material or large impact on the results and the difference in your models. I would say relatively small.
Okay. And that's happening at the end of the second part is that what you said?
Yes. We expect closing somewhere mid of this year. So if you model this, you should probably take it out for the second half of this year.
Okay, perfect. Thanks so much.
Our next question comes from Mr. George Tong from Goldman Sachs. Sir, you may ask your question.
Hi, thanks. Good morning. Your overall global issuance forecast for the full year is unchanged down less than 1%. Drilling deeper into the individual categories of debt, can you discuss how your issuance expectations for the year have changed? And what implications there would be from a pricing and mix perspective?
Hi, George, this is Doug. As we've looked at this and we've made a couple of quick adjustments to it looking at what we see from the pipelines, from speaking with debt underwriters and investment banks, by looking at what we see from issuers as well as taking a look at what we see in terms of credit conditions and global markets, as you see it's relatively unchanged. There is a slight, slight change in what we expect for corporates to be up a little bit, for financial institutions to be down a little bit, for public finance to be down a little bit.
But net-net, the overall change is very similar to what we had before. And the differences across those different asset classes and different types of industries are so minor, it doesn't really have much of a change in what we look forward to in terms of revenues and our revenue mix.
Got it. That's helpful. And then looking at operating margins at Platts, they declined in the quarter despite reasonable revenue growth. Can you talk about what drove the margin decline? And how you expect profitability at Platts to evolve over the course of the year?
George that was mostly driven by timing of certain expenses. So we have particularly some expenses related to initiatives and events that were a bit higher this quarter. We don't expect that to continue for the remainder of the year. So, therefore, from a margins perspective, we are very comfortable with respect to the outlook of the margins for Platts and we still expect that the margins will develop in a favorable way for the next three quarters compared to a year ago.
Very helpful. Thank you.
Thank you. Mr. Joseph Foresi from Cantor Fitzgerald. You may ask your question.
Hi. This is Drew Kootman on for Joe. I had a quick question on China. You mentioned you had a seminar in Beijing. And I was just wondering if you could provide any updates or give us a better understanding of the risks you may be seeing in the region.
Well, first of all, thanks for the question, Drew. Nice to hear you today. We opened up our credit rating agency in China officially, on March 26 with a seminar. We felt it was valuable to launch this with an approach to having relationships with issuers, with investors, with market players, with debt underwriters, the financial institutions, et cetera, by introducing them to our employees, by talking about our methodology and talking about how we're heading into the market with this very transparent approach to credit ratings.
Since then, we continue to see customers. We're now up to having had over 250 calls with relationships that we're starting to build, to open up the rating agency and to be able to do more and more issuance there. We have not done an issuance so far.
When it comes to some of the risks when we look at China, clearly there's the discussion about the level of growth in China and the type of growth that China has been developing. As you know, a few years ago China was very much of an investment-led export-oriented economy. They've shifted more towards a consumer-oriented consumption economy, with a lot more investment in the domestic markets.
We think that there are a few sectors which we're watching carefully there, which would be the -- a couple of the property sectors. In addition, there's some municipal debt which has been growing, but we don't see any major credit bubbles right now in China. If we did we would raise those.
But we think we're off to a great start and very enthusiastic reception from the market players as well as excellent relationships with the key regulators and official market players that we need to be working with to ensure the success of our ratings business in China.
Great. And then, you talked about Kensho a couple of questions ago. So as you're seeing -- any updates on the progress that you're seeing from Kensho and RateWatch and just anything moving forward?
We're still very excited about Kensho and what Kensho is doing for S&P Global, as a catalyst for innovation and change in our thinking, with respect to our business models, our proposition to the markets. There's new initiatives going on. We have actually a very interesting initiative going on in Platts at this moment and there's a lot of enthusiasm from the Platts leadership team around the implementation of that initiative as well. And we are continuing on some of the implementation of the other initiatives that we told you before.
Think about some of the new initiatives around search, the Omnisearch on the platform that we expect to introduce in a beta form later this year. With respect to the financials update and particularly with respect to value-creation update, we're planning to give you more details once a year. We did that at the end of the fourth quarter of 2018, so we will provide you more details on that by the end of this year again.
Thank you.
This question comes from Craig Huber from Huber Research Partners. Sir, you may ask your question.
Thank you. Doug, I wanted to just focus on China if we can for your ratings business. Just curious, how big of an effort you guys have rolled out there. I guess, the number of analysts, if you could share that, that you have in that market right now. I believe, globally, you have probably something like 1,400, 1,500 analysts in ratings around the world. Can you just clarify that?
But as you sort of think of the China market from a ratings standpoint, S&P standpoint, how big of an opportunity do you think this is, kind of, going forward here? How do you -- what's your general sense, how you think it might scale up this calendar year and next year, as you sort of talk about -- talk with market participants and stuff?
Yes. Thanks, Craig. Well, first of all, just a brief comment on how we ramped this up, because I think that's important. As we've been going to this market for the last few years, trying to build up a relationship to understand the dynamics of the domestic market, we wanted to make sure that we built this out with a consolidated approach with a long-term view.
What we did is, we originally started with 10 veteran S&P Global analysts who are Mandarin speakers that we brought from offshore. And they spent a month building out criteria, working on how we're going to be able to rate in the market, using domestic criteria, domestic understanding of bankruptcy laws of -- recovery laws, et cetera. And then they back-tested 400 credits to ensure that we had the right kind of criteria in place.
As we were doing that we went out to the market and hired 21 more analyst. So right now we have 31 analysts covering the Chinese market. They've covered 40 different sectors and different types of sectors and subsectors and they've done 400-plus initial credit reviews that they've done. And now with that our sales teams are out in the market discussing what that means and building up those relationships.
Now just in terms of similar size you've heard this before, it's the second largest bond market in the world after the U.S. It's close to bypassing Japan also on the public side as well. They have -- most of the bonds are held by banks and financial institutions. They're still not necessarily into a pension system and individual holders and only 2% of the bonds are held offshore by foreign investors.
So we think that the dynamics of the market is shifting from a short-term bond market. A typical bond is about a 3-year duration more or less as oppose to U.S. which is depending on which market you look at 7 to 11 year duration. It's a very short-term duration. It's still being held by financial institutions with very little international presence.
We think that all of that is going to change. And then as that changes this is the opportunity for ratings. We have not built out a very aggressive revenue model for the first year. We think this is an investment year. And we think that over time we're going to build out a revenue model. I'd prefer to come back to you as the year progresses with some more information that could be either financial or directional because we're really right now just at the ground floor of getting this thing off and running.
Great. Thank you, Doug.
This question will come from Mr. Peter Appert from Piper Jaffray. Sir you may ask your question.
Thank you. So Doug, I was just interested in your thoughts on particularly for the second quarter what you're seeing in terms of activity in the debt market? And related to that, I'm wondering if refi activity is impacted by the more stable rate environment?
Yes. So what we've seen so far in the second quarter, it's only been a month it's similar to the kind of mix we saw throughout the first part of the year. Europe is still weak. The European markets were very weak in the first quarter. In fact if you look at the total market in Europe financial institutions was down 25% in the first quarter. Total Europe was down 8%.
In Europe the investment grade was down 12.5%, high yield was down 25%. And we've seen that continue. So you have very specific conditions in Europe that are a little bit different than the rest of the world, partially because of the economy has slowed down, there's some uncertainty and then also you have a new round of liquidity being pumped into the banks by the ECB. It's an LTRO-like situation in very, very low interest rates.
So putting Europe aside and coming to the U.S.. What we saw in the U.S. in the first quarter was as you know there was a very -- the bank loan activity was down over 26% on new bank loan, but high-yield issuance was actually up 6%. It's not quite apples-for-apples, but it is the markets that those types of borrowers will go to. They'll decide if they're going to the fixed income market or the loan market.
We have seen in April some refinancing starting to pop in as well as new issuance and we've seen -- April was not a great month either, but overall, though we did see a lot of the activity with people coming back to market for refinancing.
One last trend that we mentioned -- Ewout mentioned in his comments that M&A activity was weak during the first quarter -- actually in the fourth quarter and the first quarter this year was -- is the pipeline has actually started looking a lot better when you look at deals announced.
So one of the charts that I track which looks at deals announced has actually started popping up which is usually a good indicator for our Ratings Evaluation Services as well as issuance down the road.
Got it. And then just on Market Intelligence quickly. Doug your performance as mentioned earlier is quite a bit better than what we're seeing from the industry overall. Is it possible to sort of delineate how much of that is a function of share gains versus some of the product line extensions you've been offering?
I don't have a precise answer for you to give you what's from share gains. But what I could tell you is that a lot of our growth and you saw it in the charts today is coming from what I would call the newer or nontraditional products.
We had strong growth on the desktop which you saw, but we had even stronger growth from data feeds and from credit services and things that we see are where the demands are growing from our users.
The users are looking for more and more granular data and new ways to incorporate data into their own modeling. And so that trend is something that I think we're investing in and we think it's going to continue going forward. But I don't have any specific comments about share gain.
The only thing I would add is that if you think about our customer base versus some of our competitors we're much less dependent on Wall Street. So I think that also plays into the numbers as well.
Got it. Thank you.
Thanks Peter.
Thank you. Mr. Bill Warmington from Wells Fargo. You ask your question.
Good morning, everyone.
Good morning.
So a question for you about the competitive landscape. One of your main Ratings competitors has been aggressively adding commercial real estate data assets with a view to leveraging that data throughout Ratings. I think in Reis, CompStak and so on. Is that an area of focus for you as well something you need to have in your arsenal?
As we've looked at what we need to have to enhance and improve and continually update our approach to Ratings as well as all of our analytical products is right now our major emphasis is on ESG. As you can see we believe that there is an exploding demand. We don't know how it's defined yet or what direction its going, but we think it's exploding for ESG data and content. So this is where this quarter you saw that we launched -- or last quarter in the first quarter we launched two significant benchmarks for ESG products which we're out working on and building up. When it comes to specific data whether it would be real estate or if it's information about interest rates or credit recoveries et cetera we believe that we either have or have access to adequate information to fulfill our duty to produce excellent ratings.
Okay. And then a question based on some of Ewout's comment about the first quarter ETF inflows. You mentioned that they had come in at $97 billion but the U.S. equity flows inflows are about $7 billion. I just wanted to get your thoughts on whether you saw that as a short-term phenomenon or more of a longer-term trend.
Good morning, Bill. This is clearly short-term. We see always some fluctuations in flows going in different asset categories either from a geographical perspective or from an asset class perspective. Overall, these movements can differ quarter-by-quarter. But we are looking at the overall ETF market share that we are having of the overall assets under management that are using our indices. That's close to 30% and that number is basically stable already for a longer period of time. So our market share is continue to be good. We're leading with that market share and this is really a fluctuation period-over-period. If we look at flows for example to U.S. equities in the month of April, we have seen that those are actually pretty robust. So again this can really move around a bit.
Excellent. Thank you very much for the color.
Thank you. We will now take our final question from Shlomo Rosenbaum from Stifel. You may ask your question.
Hi. Good morning, and thank you for squeezing me in. Hey, Doug maybe you can just elaborate a little bit more on the Kensho investment. It's going to be 30% of planned investment. Can you talk about any potentially new initiatives that might be going on right now or the things that you want to highlight now? Also -- so is it people costs? And I just want to be clear that this -- I don't think it's the retention bonuses included in there, but can you just clarify that?
Yes. So first of all, Shlomo thanks for asking the question. We're really thrilled and very pleased with having made the Kensho acquisition and all of the difference that it's making across the company. We have traditionally had a couple of areas that we've highlighted, which we're data-linking. We talked about enhanced search capabilities and omnisearch capability. Ewout just mentioned something that's going on with Platts where we have now a team embedded in Platts working on the market on close process to find different ways to look at the value of information and to get it in a faster way as well as identify potential opportunities to continue to improve our business model.
And if I use those as a few of the examples those are -- there's activities like that now going on in Ratings and Indices. And also even some of our corporate functions they're helping us look at some of the ways we manage the business overall. And as a result of the early wins that we've had we decided that it's valuable to invest in our businesses for growth opportunities and this is where the investments are coming from Kensho. So they're related to investments in growth. They're related to where we're going to be either opening new markets or launching new products where we think that Kensho can help us with that.
Some of those expenses are people and some of those expenses are additional computing capacity or capacity for data tools et cetera. But all of them are based off of early results that we're very comfortable with the progress with Kensho. And they're all geared towards growth. Although I would say there is -- some of the data work that's going on will potentially lead to productivity as well. So we're not just putting productivity behind us but a lot of this is being geared towards growth opportunities.
Okay. Great. And the investments are not part of the retention payments right? These are actual incremental investments?
These are incremental investments.
Okay, great. Thank you so much.
Thank you.
Well, let me just wrap this up and first of all thank everyone for joining the call today. As you've heard from us, we continue to be committed to growing our businesses to investing for growth to finding new ways to continue to have productivity. We're using our framework of Powering the Markets of the Future and the six foundational capabilities as a guide frame for us. We'll continue to show that to you as we use that as a consistent approach for speaking with our Board of Directors about our long-term growth with our employees and also with our shareholders. So we look forward to being back in touch with you at the end of the second quarter.
And with that thank you again always for your great questions and for your support. Thank you again.
That concludes this morning's call. A PDF version of the presented 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 two hours. The replay will be maintained on S&P Global's website for 12-months from today and by telephone for one month from today. On behalf of S&P Global, we thank you for participating and wish you a good day.