© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
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 Fourth Quarter and Full Year 2017 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, that is investor.spglobal.com and click on the link for the quarterly earnings webcast. [Operator Instructions]
I would now like to introduce Mr. Chip Merritt, Vice President of Investor Relations for S&P Global. Sir, you may begin.
Thank you, good morning. Thank you for joining S&P Global's earnings call. Presenting on this morning's call are Doug Peterson, President and CEO; and Ewout Steenbergen, Executive Vice President and Chief Financial Officer.
This morning, we issued a news release with our fourth quarter and full year 2017 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'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 managements. 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 this teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates, and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our Form 10-Ks, 10-Qs, and other periodic reports filed with the U.S. Securities and Exchange Commission.
I would also like to call your attention to European regulation. Any investor who has or expects to obtain ownership of 5% or more of S&P Global should give me a call to better understand the impact of this legislation on the investor and potentially the company.
We are aware that we do have some media representatives with us on the call. However, this call is intended for investors, and we would ask that questions from the media be directed to Jason Feuchtwanger at 212-438-1247.
At this time, I would like to turn the call over to Doug Peterson. Doug?
Good morning. Thank you, Chip. Welcome to the call today.
S&P Global completed an exceptional year with strong fourth quarter results with every division delivering topline growth or investing in new products and enhancing productivity. I’m going to review our full year highlights and financial performance and Ewout will review the fourth quarter results for the moment.
Let me begin with the full year highlights. Every division produced strong financial performance while investing in new products and productivity. We delivered impressive financial performance with 13% organic revenue growth and 29% adjusted EPS growth. We generated approximately $1.8 billion of free cash flow and returned $1.4 billion through share repurchases and dividends.
We introduced a new capital management framework which includes our commitment to returning capital to our investors and late in the year, we realigned the company by installing a new integrated operating model designed to stimulate innovation and drive digital transformation. This should enable us to work together more efficiently as all of the businesses will have access to share digital infrastructure, data operations and engineering and technology.
We're fortunate to have so many iconic brands and products but none are as widely recognized as the S&P 500 which celebrated its 60th anniversary in 2017 but we must continue to invest in new products and strategic partnerships to maintain a competitive edge. Some examples from 2017 include when S&P Dow Jones Indices launched the S&P Green Bond Select Index.
ICE launched LNG derivative contracts which are cash settled against the Platts LNG Gulf Coast Marker. Ratings launched Green Evaluations which aim to provide investors with a more comprehensive picture of the green impact in climate risk attributes to bond. We reduced the first release of the new Market Intelligence platform to all SNL users and a beta release to our investment banking customers.
And we advanced in fintech with investments in Algomi, a company that has created a bond information network. Kensho, a company that provides next-generation analytics, machine learning and data visualization versus space systems, a satellite imagery data and analytics provider, an acquisition by CRISIL Pragmatix, a data analytics company for the banking, financial services and insurance industry.
Looking more closely to full year 2017 financial results, the company reported 7% revenue growth and reached 13% growth on an organic basis. The company achieved a 420 basis point improvement in adjusted operating profit margin due to strong organic revenue growth, the sale of lower margin businesses and productivity initiatives.
We delivered exceptional earnings with adjusted diluted EPS of $6.89, 29% higher than in 2016. This figure includes $0.04 a share on favorable impact from ForEx and $0.28 a share favorable tax benefit related to stock-based compensation both of which Ewout will discuss in a moment.
The financial success in 2017 was not an isolated event. Over the last four years, we produced a 7% compounded annual growth rate in revenue. In addition over the same timeframe, we've improved our adjusted operating profit margin by over 1200 basis points.
The company has consistently grown adjusted EPS with a four year CAGR of 20%. The multiyear growth in revenue, adjusted operating profit margin, and adjusted EPS are noteworthy achievements, however we are not done. We believe there is still plenty of opportunity to improve all of these metrics.
The strength of our portfolio is particularly evident on this slide as every segment delivered strong gains in organic revenue and adjusted operating profit. Keep in mind that the markets and commodities intelligence reported results were negatively impacted by the sale of several businesses.
What I’d like to do now is provide color on some of the 2017 drivers of our Ratings business. This chart breaks down the components of full year 2017 global issuance but instead of depicting financial and nonfinancial issuance, this shows the split between investment-grade and high-yield.
Excluding sovereign issuance which is not a major driver of our result, 2017 global issuance increased 7%. Because high-yield issuers are seldom part of the frequent issuer program, their issuance is more impactful to our revenue than other categories. So this 53% increase in high-yield issuance was a key factor in Ratings revenue growth in 2017, an 18% increase in structured finance issuance was also a strong contributor.
When tracking issuance data, we always try to point out that where issuance takes place, which type of issuance, and the size of the deals makes a difference in the revenue we realize. Global issuance in the fourth quarter excluding sovereign debt increased 19% with strength across all regions. Geographically issuance in the United States increased 19% in the fourth quarter with investment-grade increasing 6%, high-yield soaring 47%, public finance increasing 39%, and structured finance increasing 12% due primarily to strength in ABS in RMBS.
In Europe, issuance increased 20% in the quarter with investment-grade increasing 15%, high-yield vaulting 192%, while structured finance dropped 7%. In Asia, issuance grew 15%. The vast majority of Asian issuance however is made up of local China debt that we don't rate.
Leveraged loan volumes become increasingly important to our revenue based on two factors. First, the level of issuance is increased over time, and second the percentage of loans rated has increased over time. This chart depicts both of these trends as they have played out in the U.S. and Europe.
In the U.S. the percentage of loans rated increased from 57% in 2012 to 89% in 2017. In Europe the figure increased from 48% in 2012 to 73% in 2017. For all of 2017, bank loan ratings revenue increased 39% with exceptional growth earlier in the year. During the fourth quarter, bank loan revenue of $83 million contributed to the revenue growth in Ratings.
In a moment, Ewout will provide more information on our fourth quarter results, but first I want to turn to our outlook for 2018, and let's start with our global economic forecasts. Our current economic outlook calls for continued global growth, in fact our expectation for 2018 is 3.8%, slightly ahead of our 2017 forecast of 3.7%.
In the U.S., low unemployment continues to contribute to growth. In 2017, job gains averaged 171,000 per month. In addition, new tax cuts should accelerate business and consumer spending. After years of anemic growth, the Eurozone is experiencing a strong cyclical rebound led by Germany, the Netherlands and Spain.
In China, authorities are focusing on a sustainable macro credit path or pursuing growth friendly policies. In Latin America stable commodity prices and low long-term interest rates in advanced economies have increased capital flows. Many of our businesses benefit from stronger global growth, so the expectation for improved global GDP is very encouraging.
Two weeks ago Ratings issued its annual global refinancing study. This yearly study shows debt maturities for the upcoming five years. The chart on the left illustrates data from the 2017 and 2018 studies. The five-year period in 2018 study shows a $600 billion increase in the total debt maturing over the 2017 study. We use this study along with other market-based data to forecast issuance.
Taking a closer look at data from the study reveals an important trend in high-yield maturity seen in the chart on the right hand side of this slide. Over the next five years, the level of high-yield debt maturing significantly increases each year which is a potential source of revenue in the coming years.
In January Ratings published it's 2018 issuance forecast. This forecast provides estimates for each of the major issuance categories. Importantly, we anticipate the impact of U.S. tax reform may produce a neutral to modestly negative impact on 2018 issuance.
For 2018 excluding international public finance which is not material to our results, we expect a medium decrease of approximately 1% in 2018 in overall issuance. Our forecast of a 31% decline in U.S. public finance due to tax reform will likely be off-site by increases in global structured finance and financial services. We expect a 2% decline among non-financial corporates due to some factors from the U.S. tax reform.
While not depicted on this slide, 2018 U.S. leveraged loans are expected to be flat or possibly decline with fewer refinancings after completing the busiest year ever for leverage loans. In Europe, 2017 leverage loan volume was at its highest since 2007.
Europe will likely also see refinancing in 2018. Although both the U.S. and Europe could experience a pickup in funding for mergers and acquisitions with private equity and corporate issuers looking to take advantage of improving economic conditions.
As we begin 2018, let me share some highlights of our enterprise goals. Creating shareholder value is always a top priority but we would like to add to our strong track record in 2018. We're introducing mid single-digit organic revenue growth and adjusted diluted EPS guidance of $8.45 to $8.60. This EPS guidance includes more than $1 per share, $1 per share of expected benefit from a lower effective tax rate due to U.S. tax reform. Ewout will provide additional detail on our guidance in a moment.
The core of our strategy and purpose revolves around serving markets and fulfilling the needs of our customers. Some key initiatives include increasing investments in new technologies, alternative data in ESG. We embrace data science and machine learning to drive product innovation and internal productivity.
Growing ratings beyond the core through expansion of additional credit tools include ESG, Green Evaluations and Ratings360. We're leasing multiple versions of the new Market Intelligence platform and starting a methodical, thoughtful transition with S&P Capital IQ users to new platform toward the end of the year.
Enhancing our Platts commercial model and simplifying our customer facing and operating platform for improved user experience and expanding index product offering in factors, smart Beta, ESG and solution-based indices. And we want to continue to deliver excellence by funding productivity initiatives and process improvements. There are countless projects underway to optimize and standardize processes using lean methodologies and automation.
Executing our IT and data roadmap to enhance the quality of our offerings and drive productivity and protect our assets, data and operations. And importantly, we want to deliver these results while maintaining our commitment to compliance and risk management.
Fortunately we have a strong leadership team and committed and dedicated employees around the world who strive to learn, grow and serve every day. Finally, we’ll host an Investor Day in New York City on May 24. We will issue a press release with details of the event along with an invitation RSVP as get closer to the date.
Now let me turn the call over to Ewout to provide more specifics on both our business results during the quarter and our 2018 guidance. Ewout?
Thank you, Doug and good morning to everyone on the call. This morning I would like to discuss the fourth quarter results, the impact from U.S. tax reform on our results and then provide specifics on our 2018 guidance.
The company finished the year with exceptional results in the fourth quarter. Revenue increased 14% with growth in every segment. Adjusted unallocated expenses increased 19% primarily due to performance related incentive compensation cost and a companywide IT project to replace our order to cash system.
Adjusted operating profit increased 28% and adjusted operating profit margin increased 530 basis points. Our adjusted effective tax rate declined to 28.5% primarily due to the discrete tax benefit from stock option exercises which I will overview in a moment. Adjusted diluted EPS increased 44% to $1.85 per share.
We introduced this slide during the third quarter earnings call and have updated it today. A recent change in FASB guidance related to stock payments to employees result in a tax benefit when employee stock options are exercised and this change also results in the tax benefit whenever employee stock grants vest and the fair market value of the stock exceeds the grant price. These impacts are recorded as reductions in tax expense.
During the fourth quarter, we reported a reduction in tax expense that improved fourth quarter adjusted EPS by $0.08, $0.06 was due to the vesting of restricted stock which occurs each year in the fourth quarter and $0.02 was due to the exercise of stock options. We estimate that there will be a beneficial impact for 2018 EPS of $0.10 to $0.20. This benefit is reflected in our 2018 effective tax rate guidance.
Net of hedges, foreign exchange rates had a $16 million positive impact on the company's revenue and a $3 million positive impact on adjusted operating profit or about $0.01 per share in the fourth quarter. The bulk of the impact was under rating segment. Ratings adjusted operating profit was primarily impacted by the Euro and the British pound.
Now let me turn to adjustments to earnings to help you better assess the underlying performance of the business. Pretax adjustments to earnings totaled to a loss of $124 million in the quarter and these included an increase in our legal settlement reserve, restructuring actions in Ratings, Market Intelligence and Corporate. Despite strong results, we are continuously looking for opportunities to transition to leaner and more effective organizations.
Lease exit charges associated with vacating double floors of space in London and New York as we continue to try to minimize our footprint in high cost locations. Together these restructuring actions and lease exits will result in annual savings of approximately $40 million.
$25 million in due related amortization expense, a charge associated with U.K. retirees or due to a change in the law chose to take a lump-sum payment from the defined benefit pension plan. These pretax items total $124 million. Because of U.S. tax reform, we're taking a net tax charge of $149 million which I will review in a moment. In addition, we incurred a tax benefit from prior year divestitures of $21 million. These two after-tax items total $128 million.
In the fourth quarter led by ratings every business segment contributed to gains in organic revenue, adjusted operating profit, and adjusted operating profit margin. It's very gratifying to see strength in every segment and progress in every metric.
Let me now turn to the individual segment's performance and start with Ratings. Ratings revenue increased 20% or 18% excluding the favorable impact from ForEx. Adjusted operating profit increased 40%, while the adjusted operating margin increased 810 basis points to 55.6%.
As we have said in the past, we managed the ratings business on a rolling four quarters basis and you can see on that basis the adjusted operating margin increased 400 basis points to 53.8%. This marks the 6th consecutive year that the adjusted operating profit margin has improved by more than 100 basis points, as the business continues to successfully grow revenue and identify and implement productivity initiatives.
Both transaction and non-transaction revenue recorded very strong growth. Non-transaction revenue increased 12% due primarily to growth in fees associated with surveillance, short-term debt including commercial paper and new entity ratings. Transaction revenue increased 29% primarily from gains in U.S. corporate bonds particularly high-yield bonds, global structured products and a modest gain in bank loans.
If you look at Ratings revenue by its various markets, you can see there were gains in every category with the greatest gains in corporates and structured products. Corporates revenue was boosted by a large increase in high-yield issuance structured finance revenue increase with gains in every asset class.
Let me now turn to market and commodities intelligence. This segment includes S&P Global Market Intelligence and S&P Global Platts. In the fourth quarter, reported revenue increased 7% and organic revenue increased 8%. Due primarily to divestitures, organic growth and synergies realization, adjusted operating profit improved 13% and adjusted operating margin improved 200 basis points to 36.5% and full-year adjusted operating segment margin increased 310 basis points to 37.2%.
Turning to Market Intelligence excluding recent divestitures, organic revenue grew 10% with growth across all major categories. We continue to benefit from a diverse sets of customer types with commercial banks, insurance companies and private equities bolstering growth.
At the beginning of 2017, Market Intelligence combined the former SNL and Capital IQ sales team into one market intelligence sales force and transformed the commercial model into one offering that is priced on an enterprise wide contract. This commercial process has contributed to growth of Market Intelligence desktop users which increased 15% versus the end of 2016.
At the end of the third quarter we told you that approximately one-third of RatingsDirect and Capital IQ desktop businesses has been conferred as to enterprise-wide commercial agreements. At the end of the fourth quarter, that figure reached approximately 55%. In addition we have migrated nearly all former SNL users to the new market intelligence platform. As with any beta release, our customers have provided important feedback and we're actively working to resolve all of the items on our funds list.
Looking more deeply at Market Intelligence revenue, all three components delivered strong organic revenue growth. Desktop products grew 9%, data management solutions increased 12%, risk services grew 9% with ratings Xpress and RatingsDirect providing low teen and high single-digit growth respectively. And finally note that there was $5 million of revenue in the fourth quarter of 2016 from businesses that were divested.
When we announced the acquisition of SNL back in 2015, we established a $70 million synergy targets through 2019. This divest was later increased to $100 million. Over this period, we have delivered a significant improvement in the adjusted operating margin of this business. Today we are announcing the successful completion of the $100 million synergy program. We estimate that approximately $50 million of savings were reflected in our 2016 results and that an additional $25 million of savings were reflected in our 2017 results.
By the end of 2017, all projects have been launched. In total this program will deliver $105 million in annual synergies with $85 million of cost synergies and $20 million of revenue synergies. In addition to delivering on our synergy commitment, we have created a fully integrated business with a powerful new platform.
The Market Intelligence platform was built on the foundation of rich S&P Capital IQ financial data and deep SNL sector data combined with trusted analytics. The new Market Intelligence platform leverages the technology behind its predecessor the SNL platform to offer an intuitive interface with content and functionality that can be accessed on any device.
Turning to Platts. Revenue increased 5% with a core subscription business growing mid single-digit. This was somewhat offset by global trading services revenue which decreased mid single-digits primarily due to weaker derivative trading in petroleum and metals.
Beginning in 2018, Platts will be managed as a separate business and reported as a separate segment. To help you with modeling, Exhibit 10 in the press release has Platts pro forma 2017 data on that basis.
If you look at Platts revenue by its four primary markets, you can see that petroleum and power and gas makeup the majority of the business. Platts growth this quarter came primarily from petroleum which benefited from solar subscription growth partially offset by weak global trading activity. In addition, petrochemicals contributed 10% growth and metals and agriculture increased 8%.
Let me now turn to indices. Revenue increased 12% mostly due to continued growth in ETF assets under management. Adjusted operating profit increased 16%, adjusted operating margin increased 210 basis points to 63.7%. For the full-year, the adjusted operating margin declined 10 basis points primarily due to the acquisition of Trucost.
Asset linked fees which are principally derived from ETFs mutual funds and certain OTC derivatives experienced the greatest growth in the fourth quarter rising 17% driven by a 34% increase in average ETF AUM. Exchange traded derivative revenue rose 12% with gains in S&P 500 Index options and fixed futures and options activity. Subscription revenue decreased 3% with modest organic growth offset primarily by the timing of customer reporting.
The trend of assets moving into passive investments shows no signs of letting up with the exchange traded products industry reaching net inflows of $174 billion in the fourth quarter and establishing a new annual record with yearly inflows of $633 billion and this is an increase of about 67% over the prior record inflows in 2016.
The year ending ETF AUM guide to our indices totaled $1,343 billion up 31% versus the end of 2016. As the chart shows, this was a result of $146 billion of net inflows and $174 billion of market appreciation over the last 12 months. The $1,343 billion is a new record.
The fourth quarter average AUM associated with our indices increased 34% year-over-year. This is a better proxy for revenue changes than the quarter end figures. Exchange rate of derivative volume was mixed. Key contracts include increased S&P 500 index options and fixed futures and options which experienced robust activity and a decline in activity at the CME equity complex.
Now turning to our capital position. At the end of 2017, we had $2.8 billion of cash and $3.6 billion of short and long-term debt. Approximately $2.1 billion of our cash was held outside the United States at the end of the year. Our debt coverage as measured by adjusted growth leverage to adjusted EBITDA declined slightly to 1.9 times versus 2.1 times at the end of 2016.
2017 free cash flow was approximately $1.85 billion of which nearly $700 million was generated during the fourth quarter. Consistent with our capital management philosophy, we paid out approximately 75% of our free cash flow to shareholders in 2017. The company returned $1 billion to repurchase 6.8 million share and $421 million in dividends for a total of $1.4 billion.
As we look at U.S. tax reform we are impacted in three principal areas. First, we have recorded a net charge to Texas of $149 million in the fourth quarter. This is composed of a $173 million tax on deemed repatriated foreign earnings. The cash tax payments will be made over the next eight years. This expense is partially offset by a $24 million tax benefit from the revaluation of our net deferred tax liabilities.
Second, tax form will have a significant impact on our effective tax rate. We estimate that we will have an effective tax rate of between 21% and 22.5% in 2018 down considerably from the 28.9% adjusted effective tax rate in 2017.
Third, the reduction in our effective tax rate will generate approximately $200 million both additional cash flow in 2018. The U.S. tax reform will have an impact on cash availability and capital deployment. Our ability to generate free cash flow will substantially increase as a direct result of the lower effective tax rate.
We now have access to offshore cash and our first priority is to reinvest it in our businesses and to strengthen core capabilities consistent with our strategic priorities and disciplined capital management philosophy. We will continue to return at least 75% of annual free cash flow generation through dividends and share repurchases.
Today we announced a large dividend increase of 22% bringing the annualized dividend rate to $2 per share supported by a significant increase in our net income and free cash flow and our desire to support the dividend yields. This marks the 45th consecutive year of dividend increases.
Also we are making a stepped up investment in our communities through a $20 million contribution to the S&P Global Foundation in the first quarter of 2018. Note that this will impact our first quarter results.
Now lastly I will introduce our 2018 guidance. This slide depicts our GAAP guidance. Please keep in mind that our guidance reflects current spot market ForEx rates. This slide shows our adjusted guidance, an increase in revenue of mid single-digit with contributions by every business segments. Unallocated expense of $160 million to $170 million, pension benefit of $25 million to $30 million and the past most of this benefit or cost was included in unallocated expense.
Due related amortization of $95 million, operating profit margin in a range of 47.5% to 48.5%, interest expense of $145 million to $150 million, a tax rate of 21% to 22.5% and diluted EPS which excludes deal-related amortization of $8.45 to $8.60. In addition we expect capital expenditures of approximately $125 million and free cash flow excluding certain items of approximately $2.3 billion. Overall this guidance reflects our expectation that 2018 bolstered by continued performance improvements and by U.S. tax reform will be a very strong year for the company.
With that, let me turn the call back over to Chip for your questions.
Thanks Ewout.
Just a couple of instructions for our phone participants, please press Star 1 to indicate that you wish to enter the queue to ask a question. To cancel or withdraw your question, simply press Star 2. I would kindly ask that you limit yourself to two questions; that's two questions, in order to allow time for other callers during today's Q&A session. If you've been listening through a speaker phone, but would like to now ask a question, we ask that you lift your handset prior to pressing Star 1 and remain on the handset until your question has been answered. This will ensure better sound quality.
Operator, we'll now take our first question.
This question comes from Hamzah Mazari from Macquarie Research. You may now ask your question.
The first question is just on U.S. tax reform, you mentioned it’s a neutral to slight negative, you also mentioned your global forecast for 2018 down 1% on issuance. Could you may be flush out the puts and takes in terms of it being neutral to slight negative. And then can investors expect that carry on effect in terms of you U.S. tax reform as you look towards 2019 issuance and beyond?
First of all, when we look at tax reform we look at all the different aspects that could be impacting corporate, financial institutions, as well as public finance. First of all we look at some of the positives to the tax reform or economic growth. There is also going to be an additional amount of potential accelerated depreciation which would be leading to additional investment. So we see a lot of positives in the general economic conditions which as you know in the long run are what actually drive issuance.
In terms of some headwinds to issuance, our repatriation of offshore cash could actually a slowdown issuance of companies that have been issuing what we call in the past a deemed repatriations or a synthetic repatriation. Our interest rate deductibility might have some impact on the high-yield market. And then the public finance market had a very robust fourth quarter in anticipation of different conditions in the market as well. So that as you saw we expect it would be down around 30%.
But overall we look at then - in addition to what’s the impact from tax reform, we look at general growth as I already said and we also look at maturities and you saw on the slides that we showed that there is a very robust pipeline of maturities especially starting in 2019 and going forward in all different types of issuance and in particular in high-yield issuance. So we've taken all of this into account as we've built our forecast for 2018.
As you know always the mix is could change at any one time, I just want to give you one factor which is an interesting a mix shift. We do think that there is going to be strong financial services issuance in 2018. Last year in the United States financial service issuance for the entire year was up around 9% but it’s actually down in the fourth quarter by over 13%, and in Europe it was up 65% for financial institutions issuance in the fourth quarter.
So as you know there's always a lot of different pieces to the mix of how this comes through, but we go back to tax reform being a very positive impact for the economy overall. And even though it might have some headwinds on issuance from point of view of repatriation and a couple of other factors we do see that the economy is in a strong position.
Just a follow-up question, maybe for Ewout and then I'll turn it over. Your adjusted gross leverage to adjusted EBITDA is at 1.9 times - you've given us a range of 2.25 on the high-end. You've also said 75% of free cash flow goes back to shareowners, we're also upping the dividend considerably on tax reform. Is it fair to say that you guys are out of the market for larger M&A assets and most of the deal flow you're looking at is tuck-ins or can we expect sort of you can issue equity to do a large deal assuming valuations right? Thank you.
You're right. We have given guidance with respect to our adjusted growth leverage in a range of 1.75 on the low-end and 2.25 on the high-end. We are very comfortably within that range at this point in time and as we have told you this morning we have 2.8 billion of cash by year-end of 2017 which is now largely unconstrained after the tax reform.
So the balance sheet of the company is very strong. We're in a very good healthy financial position. We’re obviously not commenting on any M&A opportunities, but what you should read out of the announcement this morning is we’re clearly have the intention to reinvest in the business according to our strategic priorities, strengthen our core capabilities with the cash balance we have on our balance sheet today. And that could be organic, it could be inorganic. We would love as a first priority to reinvest that cash balance in our business.
Our next question comes from Mr. Alex Kramm from UBS. Your line is now open.
Wanted to just come back to the Ratings forecast you put out there. I looked at the January piece you guys put out with a 1% decline, but obviously that's an overall number. So when you dig in a little bit deeper and look at the commentary, I think pretty big decline I think like 10% or so for high-yields when you back into it et cetera.
So I guess when I put all this together look at the mix of the business, and maybe assume like 3% to 4% pricing bumps that you usually take. Now I guess it's something like 2% Ratings forecast revenue growth, is that kind of like in the range of what you're thinking for the Ratings business for 2018?
Well if you look at our total guidance overall we put together for the entire company a guidance of the mid-single-digit range, as well as an improvement of a 100 basis points in our margin, that’s our guidance for 2018. Included in that as you said give-and-takes on what’s going to happen in the markets.
Our overall outlook is about 2% decrease in overall corporate, industrial out of 5% increase in financial services, structured finance we’re expecting an increase of about 4% for the year. And then U.S. public finance is one of the areas we think is going to be the most impacted by tax reform it will be down by about 31%.
I’ve always said in the past its going to depend also on what's the mix of high-yield and what sort of structured finance comes out. Just very quickly you know January doesn't make a quarter, issuance overall in January was down year-on-year but on the other hand noninvestment grade spec rate issuance was up very strong. It was up 27% in the U.S. But you know one month does it make a quarter, we do think that a lot of where we’re going to come out is going to depend also on leverage buyouts on what's going to happen with the M&A market.
And but we do think with the overall robust growth around the globe that this actually bodes well generally speaking for issuance. But we do see some of these as you saw in our forecast we did see lower issuance in particular from the corporates, but we built that into our forecast but I don't have a specific number related to the topline growth in Ratings.
Fair enough, I thought I'd try. And maybe just shifting on the margin side, obviously continued margin expansion pretty impressive even given them again as I said like softer outlook in Ratings if I just paraphrase I guess. But looking at the Market Intelligence now that you pulled out Platts I think last year it was something like 33% operating margin for that segment. Now I think that compares pretty favorably relative to like some other desktop players, but when you look at some of the pure play data providers out there, I mean some of those guys even have like 50% operating margins plus.
So just thinking about - can you give us an update on your - what you’re thinking the margin that business could get to, what kind of self-help opportunities we'll have in that segment. As you know I think a lot of that segment is actually proprietary data that - I think you have good pricing power on et cetera?
You're right. Now we have provided you the details of the split of the margins between Platts and Market Intelligence. You see 33% margins for Market Intelligence both in the fourth quarter and for the full year 2017. And that is up approximately 260 basis points compared to 2016.
We have indicated to you that we expect margin improvements for S&P Global as a whole in 2018. We haven't given you a breakdown for each of the segments. And what we should do is we realize with respect to the margins for some of our segments we're more or less at the point of our aspirational margin targets that we have provided for the mid-term.
So we will come back during the course of this year with new mid-term aspirational targets for each of our segments. Most likely we will do at the Investor Day late May. So I cannot give you any specific guidance with respect to the Market Intelligence margin going forward from here.
But what you may expect is we will drive operational performance for each of our businesses. We expect positive topline growth for each of our businesses. We look at operating leverages. We look at the efficiency opportunities and so on and so forth. So ultimately as Doug said in his prepared remarks, we are clearly believing that we can make S&P Global perform better also in the future.
This question comes from Mrs. Toni Kaplan from Morgan Stanley. You may ask your question.
I wanted to ask about the margins as well. So in Ratings very strong quarter also mainly driven I think by just the topline as well. But are there other factors that drove the strong Ratings margins this quarter, was it the flow through from growth or some other continued initiatives with regard to like pricing and simplification that you've been implementing over the last couple of quarters?
We were especially pleased if you look at the performance of Ratings this quarter that despite a very strong topline growth, expenses were more or less flat and even slightly down if you take into consideration the FX impact. So the combination of such a strong topline growth and expenses flat and very disciplined drove the margin up by 810 basis points.
What you have seen is announcements of restructuring actions both in the third quarter and fourth quarter. Those actions are applicable to several of our segments, but certainly also on the ratings. So we are looking continuously in transforming our organization to become more effective. So certainly we’ll continue to look at the margins of Ratings and look at all the opportunities to improve those margins in the future as well.
And then just on market and commodities, intelligence I think the margins there sequentially declined a little bit this quarter. Was there anything in particular that drove that and how should we look at margins in 2018 in that business? Thanks.
Yes, I think that’s mostly driven by the Platts margins. So if you look at the details in Exhibit 10, you’ll see that the Platts margins were bit lower at the second half of 2017 compared to the beginning of 2017. The main reason behind that is timing of certain expense categories. We saw commissions, incentives, compensation, as well as certain marketing expenses more back end loaded during 2017.
We expect it to be more equally divided during 2018. So I would expect that - I would explain that more that it is more timing of those expense categories and Platts that drove slightly lower margin in markets and commodities intelligence at the end of 2017.
Our next question comes from the line of Manav Patnaik from Barclays. Your line is now open.
My question is around in the Market Intelligence, so you showed 15% increase in the user growth and so the first part of that question is just more around what's driving that particularly in the context of all the other challenges the industry is facing like MiFID and so forth that's gone in. And also just a disconnect on that 15% growth with the 9% revenue growth number you said for desktop.
Well as you know we've been moving towards an approach where we provide enterprise-wide licensing to our customers in Market Intelligence. And what we've always talked about how this leads to more users signing up when you see an organization that has now given basically free access across the entire organization for all people to sign up and use the product. We see that the user increases and it's a good forward-looking measure for us in our ability to then talk to our customers in the future about the value of the contracts and the value that we're providing.
As you know we have a very important discussion with customers at a value creation and value approach to how we think about the long-term relationship. And this is for us one of the benefits of the enterprise-wide pricing and this is one of the ways we can see it actually coming into effect.
And I guess just the question on, if you're seeing any impacts like with MiFID and so forth?
Yes, on MiFID we haven't seen any immediate impact on MiFID. Related to MiFID generally as you know we're not a sell-side research firm. We've always been a data and analytics provider the way we approach to our products and services that there are already paid for in hard dollars.
One interesting thing of note, during December we saw over 90,000 of our users go in and look at their entitlements or change their entitlement, and we believe that was driven by a MiFID where people had to ensure that they had the right sort of entitlement in the system.
We also though know that we have the ability to deliver research and be able to monitor and track usage and monitor and track how many people are downloading and as well as find ways that we can help it, sell-side get paid for the research.
I guess the risk that we've got is that on the buy side, if a buy side start getting squeezed on their budgets overall because they're looking at how they're going to pay for research, it could be that there could we have a negative impact from total research budgets under strain but we have not seen any of that so far.
And then just your thoughts on the acquisition of Thomson Reuters just you know may be competitively you see that changing your approach here.
We don't see any major change to our approach. We do think that Thomson Reuters is a very formal competitor. We think that the competitive landscape is getting tougher all the time not just with people like Thomson Reuters taking approach of how they're going to be going towards market but there's also a very large number of additional of fintech's and other types of company coming into the markets. You also have a company's like ours and others looking at ways to apply artificial intelligence, natural language processing and different ways of serving the market.
So we think that the Thomson Reuters transaction is going to make the markets more competitive but we welcome that competition and we're investing also to transform our business so that we can be more competitive as well.
This question comes from the line of Craig Huber from Huber Research. You may ask your question.
Two questions please. One can you just give us a little bit better your outlook for speculative grade bank loans this upcoming year here obviously was very strong last year, so just given the thus seems rise in interest rate environment. What you guys outlook year for bank loans I guess in the U.S. and Europe if you could?
Our general expectation is that bank loans are going to be flat to potentially down a little bit. Last year it was such a robust year and the first quarter, fourth quarter were both very strong throughout the year we saw the issuance. But it's going to depend a lot on what happens with high-yield financing, high-yield refinancing. It's going to also be driven by interest rates.
We do see a market in Europe which has been incredibly robust. Over the last few years we've see more and more of financing taking place through the bank markets, as well as ratings - the loans being themselves rated. But our general expectation is that the bank loan market is going to be weaker than it was last year.
And then also, if we switch over to China for net income interest update us if you would on changes at the government level in China to allow foreign rated agencies like yourselves and your competitors to rate underneath your own brand name in that jurisdiction there? And how impactful would that potentially be. Can you maybe size it for us potentially? Thank you.
We are very interested and very excited about the opportunity that has come up in China. Let me elaborate on that a little bit. So today the domestic Chinese bond market is about the third largest bond market in the world. We are not active in that market today but we do rate international bond issuance by Chinese companies. So as Chinese companies want to accept the international bond markets those are being rated mostly out of our office in Hong Kong.
The Chinese domestic bond markets in the past had some foreign ownership restrictions. So up to the mid of last year, we could not own an entity domestic ratings agency by more than 49% and that was the reason why S&P Global Ratings had never decided to enter that market but those foreign ownership restrictions have been lifted since the mid of last year, so we are actively looking at opportunities to enter that market at some point in time.
There is still a lot of regulation that has to be issued so there's still a lot of uncertainty how this ultimately will play out but we are very actively following this and actively looking at the best way to enter the Chinese domestic bond market at some point in time.
Our next question comes from the line of Vincent Hung from Autonomous. You may ask your question.
So just on adjusted unallocated expense, the 160 million to 170 million guidance looks to be up on the 1.1 figure from last year. Are you also including that 25 million to 30 million pension benefits while the actual increase is higher? Can you just talk about what's driving that?
So that's a great question Vincent so let me explain that a bit because if you take all the pieces into consideration I fact you unallocated are - expenses are coming down year-over-year. So look at 160 to 170, then what is included in that number is a 20 million contribution to the S&P Global Foundation, so you have it out.
And then in the past the pension benefit, the pension income loss methods in the corporate unallocated expenses and now is broken out due to a new accounting rule. So what we have indicated is $25 million to $30 million of benefit that now is broken out but in the past was negative on that line. So if you look at those two elements and take those into consideration, in fact year-over-year corporates unallocated expenses are down.
And on the non-transaction revenues and ratings, there’s been an acceleration in value growth there in the last few quarters. So can you just give us some color here in terms of how much relates to the pricing changes, the frequent insurer programs and whether win rate continue to 2018?
On the non-transaction revenues, if you look at what the components are there, they are combination of frequent issuer fees, it's rating evaluation services that include some of the revenue from CRISIL and also includes short-term issuance under one year for instance our commercial paper. And it's really combination of all of those factors that is driving that growth.
As you know there's been a lot of mergers and acquisitions activity that's been increasing in the Ratings valuation services. With the very, very attractive financial markets in the last year there been a lot of shorter-term issuance in the commercial paper market, that's been part of it.
And then net, net we've also increased the number of new issuers and number of new issuers come to the market also has helped to increase that. So there's not any one specific factor, it’s a combination of all of those together.
This question comes from Patrick O'Shaughnessy from Raymond James. You may ask your question.
Just one from me, in early - I guess maybe mid-January as must put out, a report kind of complained a bit about lack of fee schedule clarity from you and your competition on the Ratings business. Any thoughts on implications of EMSA's views and any potential adjustment you might have to going forward.
We have looked at that report that's where we've been working very closely with ESMA as well as with the Parliament in Brussels to understand the implementation of the rules for CRA 3 which were put in place about five or six years ago. One of the provision had a basically instructed ESMA to review the pricing markets and look at the cost structure of the rating agencies to see how that would be related to price - fees and prices.
We think this is very, very early stages of what ESMA is going to be working on. We're working closely with them to tell them what we disagree with in their analysis. We do think that the overall structure fees relates to many, many different factors, it's not just cost alone. And so we are working closely with ESMA to give them our viewpoints and as of right now we don't see any impact to the markets and this is probably going to be a very long gain in how we work with ESMA and Brussels on the Ratings market in Europe.
This next question comes from the line of Joe Foresi from Cantor Fitzgerald. You may ask your question.
This is [Drew Cumin] on for Joe. I was wondering if you could discuss some of the progression from the index business outside of equities?
What is the exact question, what do you mean by progression?
What's going on with fixed income or ESG, any of the other opportunities?
First of all as you know we have a combination of different approaches to revenues and in the index business we have our AUM fees, we have our data fees and then we have other services, ETM and ETD fees. So we're looking at how we can continue to diversify our revenue streams plus also how we can diversify and grow our - the economic impact of new opportunities like ESG.
What you see is that we've made a lot of progress in fixed indices with new issuers going out of ETFs using fixed indices. We're seeing a lot of take-up of ESG, different types of ESG indices which use either some sort of a carbon, low carbon in particular environmental approach. None of those have any major impact so far or material impact on our revenues.
The way we see the evolution of these types of products as we have to invest upfront, we have to build the relationships of the channel partners. We have to be responsive to what are the demands coming from asset owners and asset managers and come up with new indices that are responsive to those needs and as we build them and as we set the new products out, they start getting take-up and then that's when you start seeing the revenues.
So in terms of our total revenues in the index business, none of these are creating any major material lift so far but in terms of volumes and growth, we believe overtime all of these are going to have more and more impact and it’s going to be important to us that we also do have this innovation in this market relevance for what are the demands coming from the asset owners.
And we broke out I believe it was in our second quarter earnings call, the year-over-year gains in fixed income and ESG and from a percentage standpoint they were significantly that Doug's point from a total standpoint that it will remove the needle in our business. And we’ll likely put those out again probably in the second quarter next year based on annual survey that goes out.
This question comes from Jeffrey Silber from BMO Capital Markets. You may ask your question.
Its Henry Chien calling in for Jeff, thanks. I just wanted to go back to the guidance for organic growth for 2018. Just thinking for 2017 there is a number of - I'd say special items that sort of drove pretty high growth rates in both ratings and the Market Intelligence. So just trying to understand how should we think about the mid-single-digit growth rate, is that driven by sort of the new market and new initiatives that you outlined early in the presentation. And just in light of issuance, it looks like just going to be down a bit this year as well? Thanks.
Let me just clarify the question, when you say special items for revenue growth in Ratings and MI this year what are you alluding to there?
Yes, I know not special item is wrong, I just meant there seem to be a number of strong growth headwinds in the year whether it’s you know the pickup in issuance which was a record year and in the Market Intelligence side shifting over to the enterprise thing. Just thinking of those which don't sound like they would recur this year. So I'm just trying to understand what would be driving growth this year?
You're right, we see a lot of positive momentum and positive drivers around our business. I can point at bank loans, I can point at corporate issuance in Ratings, below investment-grades, structured finance, I can point at the user growth in Market Intelligence. I can point at commodity pricing going up for our Platts business. I can point at move from active to passive investments in the indices business.
So all of those drivers are very favorable and I have really helped the company to be positioned well for the future. And therefore you saw a 13% organic revenue growth for the company as a whole during 2017.
We have guided to mid-single digit growth in revenue for 2018, that's mostly because we are now starting from much higher base then we were a year ago so we have to take that into account. But if you look at some of those drivers, we are confident that those will continue and will be continued positive drivers for the company going forward because we think those are not all market related, those are largely also related to methods where management can have some influence going forward.
So therefore we think mid-single digit growth is a reasonable expectation for revenue growth during 2018.
I just want to add one thing which is maybe a little bit philosophical it was embedded in the comments I made at the end about our 2018 enterprise goals. And you’ve heard me talk about this for the last few years that we're driving towards having much higher quality customer experience, much commercial organizations that are out there customer focused, building products providing services that's relevant and responsive to our customer’s needs. And we think this is critical in a very competitive world.
We have to be out there that in a way that we’re serving our customer needs and anticipating their needs in the future and we believe that this is actually one of the most important and necessary component to our topline growth is to have that approach to customers and not be complacent in very, very competitive markets.
This question comes from Peter Appert from Piper Jaffray. You may ask your question.
Buybacks versus dividends, the big dividend increase I assume doesn't suggest any shift and how do you think about the allocation between the two. And can you also related to that talk about how we should think about the timing of buybacks in 2018?
If you look at the growth in dividends as such if you look at the underlying growth in net income and free cash flow, this is very much supported by those factors. Just look at the free cash flow in 2017, 1.85 billion going to 2.3 billion in 2018. If you look at that 2.3 billion and you take into consideration our commitment to return 75% of the 2.3 billion to our shareholders, then a 22% dividend increase is really in line with those underlying growth percentages.
So I don't think you should read anything out of this that it is a shift in the mix. What you should read out of it is that the underlying fundamentals in terms of net income and free cash flow are really very strong and we expect also that to continue during 2018.
And how about on timing?
Yes, timing obviously we are not commenting specifically on that management has a philosophy as you know that we’re not market timers, we believe in dollar cost average that might be sometimes tactical decisions why we scale up or down is certain periods. But otherwise we like to be as much in the market as possible during the year.
So I cannot give for obvious reasons further specifics on that, but we would like to be as much in the market as possible because these are significant numbers in terms of return of capital to shareholders. And like I said management doesn't believe that we should be market timers ourselves.
And Doug your prepared comments might have suggested that you're seeing a little bit of pushback from Capital IQ users on the model change. Am I hearing that correctly and maybe you could just expand on that?
No, I'm sorry if I gave you that impression, not at all. It’s just that we have a very large number of clients we’re going to have to go out to look at the approach to what their current contracts are. In some cases it's a combination of shifting from a per seat contract to an enterprise wide contract but also in some cases we have multiple contracts, it's an opportunity to go out and simplify our approach to a customer. In some cases we have five, six different contracts across different divisions of an organization that gives us a way to unify those contracts and to want to move them shift them to an enterprise-wide contract.
My point is that the difficult to my point - this still has another year maybe even till the end of 2019 before we complete the final approach to all of the Cap IQ accounts on the conversion, but it's going very well. I'm sorry I gave you a different impression.
And if we use the word punch-list, you know what we’re trying to deal with there is just anytime you have any sort of release there’s going to be bugs, there’s going to be things that need to be resolved and in fact the MI just had a new release over the weekend to deal with usability feedback and application performance and things like that.
So just one trivial fact for you, if you’re out there on an old Internet browser your speed seems to slow mostly we don’t use that browser, but now we’re fixing that. So that's a kind of thing that we work on.
This question comes from Conor Fitzgerald from Goldman Sachs. You may ask your question.
Just looking for a little more color when you mentioned on reinvesting back in the business some of the benefits of tax reform or is your marginal reinvestment dollars going?
So we are looking at all of the opportunities to grow our businesses to reinvest and to strengthen our core capabilities. When we announce our capital philosophy and targets in the mid of last year, we have indicated some areas that are for us strategically important. Think about growing ratings in some of the emerging markets and looking at domestic ratings businesses. Think about indices for fixed income ESG international, Smart Beta. Think about in Market Intelligence our risk analytics and surfaces business, but those areas that are strategically important and then for Platts some of additional commodity price reporting without certain benchmarks or supply demand analytics.
So those are the areas for the businesses itself. We’re also looking at some core capabilities of the company, investing in technology, specific talents, and other areas that are important in terms of core capabilities for the company. We're looking at this investing on organic basis, inorganic basis, but please be assured we apply a very disciplined capital management philosophy metrics and look at the valuation perspective.
So the company is very critical with respect to those opportunities that they hit certain hurdle rates that we think are important going forward.
And then just looking for your thoughts, there has been a lot of more conversations recently about the potential for an infrastructure bill. Obviously there's a lot of ways such a bill could be structured if it did pass, but as we start to hear more about that over the coming months what are the key things you’re focused on that could potentially drive a positive impact for your business if we do see and if it’s a structure bill make its way to the Congress?
Well as you know we've been looking at infrastructure now for over five years. We bolstered our infrastructure practices across the businesses in particular in Ratings. We brought in a team of people that are able to be very responsive infrastructure and that's not just in United States it’s a global team.
We've included additional data in analytics and Market Intelligence. We also have some infrastructure indices that we have through the index business. And then obviously Platts benefits from infrastructure investments in energy, and oil and gas, but the bill coming through Washington is going to have a few key elements that we’ll watch carefully.
One of them is permitting. Permitting is one of the areas which is quite slow in the United States compared to countries like Australia and Canada that have very robust approaches to infrastructure investment that also bring a lot of private capital. Permitting can be done a lot faster literally in a couple years instead of some cases United States 9 or 10 years. So we think that permitting is one of the critical factors that will get investment moving a lot faster into infrastructure.
Second will be the approach towards support or leveraging capital coming from Washington into the states and local communities where most of the real infrastructure takes place. It's at that level, it’s at the state and municipal level where most of that takes place and one of the factors on that is going to be an openness to seeing more public, private partnership as I said also very important in Canada and Australia.
So the more we see private capital coming into infrastructure, the more we see it coming in a lot faster, when we see other fixes to the federal programs that are used for transportation and ports and airports, those will also stimulate more investment.
So our overall view is the faster that this starts getting into the market, the more comprehensive the approach is and particularly if - you see us reach out to the states and municipalities, we’ll see a robust infrastructure investment which will benefit growth, it will benefit jobs and part of that will be then more investment activity which we will be supporting through all of our different divisions.
This question comes from Tim McHugh from William Blair. You may ask your question.
Just want to follow-up the comment around some additional restructuring in the Ratings business. I guess can you elaborate on what type of activities are you doing at this point, is this still kind of trying to automate some of the roles, any color there would be helpful. And then secondly, I apologize if I miss this, but given exchange rate movements have you assumed a lift much to revenue as you think about the 2018 guidance here?
Tim, let me first take the restructuring question about the ratings and then I will make a few comments on your FX question. Ratings restructuring we’re looking at many areas where we would find opportunities to make the organization more effective. I can give you two examples, one example is in our commercial organization. Until recently we had two commercial organizations in Ratings. We have moved those together we created one commercial organization and based on that restructuring, we’re able to reduce the run rate particularly in more senior management positions going forward.
Another example is the ongoing project simplified which is putting technology tools in place, workflow support and more standardization in the work of the ratings analysts and that will help with also efficiency, think about population of mobiles data intake, and so on that will be more automated so that our analysts can focus more to higher value-added work going forward. So those are clear areas where we see opportunities in Ratings going forward.
With respect to foreign exchange rates, let me give you a couple of perspectives. The company's exposure is what we call a negative exposure on Indian rupees, British pound and the Australian dollars and negative exposure means we have higher expenses in those currencies and revenues. And we have positive exposure on Euro which means we have higher revenues in Euro then our expense base in Euro denomination.
We have an FX program to offset to a large extent those exposures in order to make sure that the company's impact on economic basis is mitigated to some extent. So overall if you look at our guidance we have provided to you that is based on the most recent spot market rates with respect to ForEx and where our currencies are today we are confident that is properly reflected in the guidance we're providing you this morning.
And just one other follow-up in terms of numbers, the pension benefit that you're counting on for 2018 how is that compared to - I guess last year and the last couple of years. Is that kind of a normal level I guess now that is being broken out?
Yes, it’s more or less on a similar level if you compare it to previous years and the background there is that we have a well funded pension plan. So particularly the asset assumption on our plan is helpful to create this pension income but more or less similar compared to what we have been reporting in previous years.
This question comes from Shlomo Rosenbaum from Stifel Nicolaus. You may ask your question.
First question is how is the tax deductibility of interest expense is treated by the recent legislation, how is that impact the forecast you have for leverage finance and some of the deals that will come from PE funds?
We've been looking at this - we’re trying to model it out. We see a very minor impact from this for a few reasons, one is that a lot of the companies that could be potentially impacted by the leverage rules are not paying taxes anyway and even though there's always been a theoretical tax shield to leverage type organizations just given their overall operating procedures and operating profits, they’re not necessarily really paying taxes.
We also think that there is a level of profitability which is about a six times leverage that's more or less where we've modeled it out that will still allow you to have deductibility of your interest expense. So we're not quite sure exactly what the impact is going to be but our initial modeling doesn't show that it’s going to have that big of an impact because - leverage is a very, very legitimate way to use for corporate financing for different types of organization.
And we've seen a little bit of fishing around for some other opportunities from the investment bankers looking at whether its securitizations or other types of tools that aren't necessarily directly financial tools or leverage. So, we don't think that we’re going to see much of an impact.
And then just in terms of the enterprise migrations with SNL Capital IQ. Is the increase in seat count largely from displacement of competitors or you just seeing people just put a lot of the organization on there that might not necessarily have had access to this kind of information beforehand? I'm trying to see basically competitively is this enabling you guys to displace competitors?
I don’t think you’re seeing any meaningful displacement at this time. You might have someone who has access to competitive product and they have been using that competitive product. And now their firm gives them the opportunity to use our product so they might use them in conjunction in tandem for a while. So I don't think anything happens right away but over time I think that certainly robust.
What I'd add is that a lot of the penetration that we have is new users. So as you mentioned when you get a new - a firm which has maybe 10 or 15 or 20 seats whatever it is and we open it up for a firm-wide enterprise-wide contract you see new users coming in. And then we've also been able to get some new customer. So customer growth itself is also important to us and that's another thing that we measure carefully.
We will now take our final question from Bill Warmington from Wells Fargo. You may ask your question.
So quick question for you on the Capital IQ business. You had mentioned that sell-side is not a big part of what you do. But my question is given the fact that the sell-side is under a lot of cost pressure and likely facing more with MiFID II. What kind of an opportunity does that create for Capital IQ specifically since it’s lower cost option versus Bloomberg and FactSet?
First of all let me just point out, I don't have the figures in front of me Chip might have them at his fingertips. We believe one of the advantages of our business models that we are very diversified across different types of industries, investment banks, sell-side, buy side, we've got insurance companies, banks, other types of financial institutions, regulators, academic et cetera.
So we believe that it's a model that allows us to have diversification across different kinds of users between the SNL content and the Cap IQ content which is coming together and other types of data services that we’re adding specially alternative data services et cetera that we can provide multiple types of users with good experience, as well as the data they need.
So we're not as dependent on any one type of industry, but in terms of overall your point of your question is, will we see an opportunity to displace other more expensive products? We believe that that is one of the areas where we can be more competitive.
Then a follow-up question on the index business, how big is Smart Beta and ESG within the index business these days. And then how long does it take to get to a point where it starts to move the needle?
I think in absolute numbers it’s still relatively modest certainly if you look at it from a revenue perspective. But this is the nature of benchmarking business, you have to invest early, you have to put a lot of effort in trying to become the standard in the market and once you are the standard you're being picked up then it can take off and your revenue streams in the future can be very large.
So those kinds of investments can be over multiple years. Think about the fixed. That was an investment that was done over very long period of time to get over CBOE and at some point it took off and it is a very successful product at this point in time.
So relative modest today, but that is exactly why we're making those investments. We’re taking the benefit of the margin of the larger benchmark indices, and vest back into the new industries and over time that will be revenue driver for the company.
Bill if I recall if you go back to our second quarter slides we gave the exact number.
Got it.
I don't know the number exactly.
And in addition it’s also part of the custom indices business. This is one of the areas where it's not necessarily just ETS, we also see a lot of interest from structuring debts and investment banks which are using these types of products for their family offices and other sovereign wealth funds, other types of direct investors where we provide the structuring of the index itself that's responsive to their needs.
Bill found a number for you. At the end of 2016, Smart Beta accounted for 184 billion in assets side to it.
And then, okay, so end of 2017 - that's the reference point we don’t have the 2017 number?
That was the end of 2016. So I don't have a new end of 2017 number for you yet.
I look forward to seeing. Thank you very much for the insight.
Thank you, this is Doug. Let me just make a couple of closing comments. I do want to comment very briefly on the market drop yesterday, 1,175 points in Dow Jones. It was the largest drop in history in index point terms, but it actually doesn't even make the list of the top 10 drops in percentage terms. Given that we've been managing this since over 125 years, we've got all the data and it's actually the 100 largest single drop in percentage terms. So its way down there, it’s only number 100 in overall percentage terms and we think we should put that in context.
We've built our plan, our approach to the markets looking at the economies right now which are growing. Our inflation is still low, rates are still low, banks have very strong liquidity and very strong capital around the world, tax reform we think is a tailwind for the U.S. economy. And so we do believe that overall economic conditions putting aside some volatility in the markets and all of the transformation taking place and technology around us are going to be very positive aspects to how we’re going to grow the business going forward.
We’re very pleased that we concluded 2017 with strong momentum and very strong performance. Our topline growth for the entire year of organic growth of 13%, the margin improvement that we've been carrying through for the last five years. We are starting off the year also benefiting from U.S. tax reform with a strong position in cash and capital with a very good leadership team and what we think are very promising approaches to how we're going to work with the markets in the future.
So, we appreciate all of you listening on the call. We look forward to working with you during the year. We will be on our first quarter call in between now and the time we see you at our Investor Day. Thank you very much.
That concludes this morning’s call. A PDF version of the presented slides is available for downloading from investor.spglobal.com. A replay of this call, including the question-and-answer 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.