S&P Global Inc (SPGI) — Q4 2018 Earnings Call Transcript

Good morning. Thank you for joining us for 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 2018 results. If you need a copy of the release and financial schedules, they can be downloaded at investor.spglobal.com. In today’s earnings release and during the conference call, we’re providing adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the corporation’s operating performance between periods and to view the corporation’s business from the same perspective as management. This earnings release contained exhibits that reconcile the difference between the non-GAAP measures and the comparable financial measures calculated in accordance with U.S. GAAP. Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates, and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our Form 10-Ks, 10-Qs, and other periodic reports filed with the U.S. Securities and Exchange Commission. I would also like to call your attention to European Regulation. Any investor who has or expects to obtain ownership of 5% or more of S&P Global should give me a call to better understand the impact of this legislation on the investor and potentially the company. We’re aware that we do have some media representatives with us on the call. However, this call is intended for investors, and we would ask that questions from the media be directed to Soogyung Jordan at 212-438-2297. At this time, I would like to turn the call over to Doug Peterson. Doug?

Thank you, Chip. Good morning and welcome to today’s earnings call. As the S&P Global team focused on powering the markets for the future, volatility and uncertainty returned to the market since 2018. The causes were numerous: rising interest rates, trade negotiations, Brexit, and the unwinding of global monetary stimulus. And during the fourth quarter, this volatility and uncertainty impacted debt issuance and therefore our ratings business. Fortunately, our remaining three businesses performed well, and the company delivered strong financial results. I’m going to review our full-year highlights and Ewout will review the fourth-quarter results in a moment. In 2018, we delivered 3% revenue growth and 23% adjusted diluted EPS growth. We generated significant margin improvement in every business. We reported $2 billion in free cash flow, excluding certain items and an 8% increase year-over-year. We returned $2.2 billion through share repurchases and dividends; as you know, our target is to return at least 75% of free cash flow, excluding certain items to shareholders. But we returned more than 100% in 2018. We’re initiating a new $500 million ASR in the next few days and we made great strides towards our Investor Day targets. But in the meantime, we always need to build for the future, both through organic projects and by adding new capabilities from outside the company. To that end, we added leading-edge technology and unique data sets with the acquisitions of Kensho, Panjiva, and RateWatch. Revenue for 2018 increased 3% despite a 4% decline in our rating segment. Adjusted operating profit increased 8% and our adjusted operating profit margin increased 230 basis points to 48.8%. This marks great progress on our Investor Day adjusted operating profit margin target over the next three to four years of low 50s. In addition, we continued to reduce our shares outstanding. The 2% reduction achieved in 2019 helped us to reduce shares by 10% over the past five years. Finally, our adjusted diluted EPS increased by 23%. While revenue growth, margin improvement, and share count reduction play a role, approximately one-half of the increase in 2019 was a benefit of U.S. Tax Reform on the effective tax rate. Revenue growth and productivity efforts propelled the adjusted operating profit margin in 2018. Revenue declined in ratings due to reduced issuance. Despite this decline, ratings delivered greater margin improvement than any other segment. I’m pleased with the efforts of our employees to continue to drive revenue growth and productivity gains across S&P Global. This performance extended our succession of solid revenue growth and adjusted operating margin growth. We’ve delivered a four-year CAGR for revenue of 6% and improved our adjusted operating profit margin by more than 1200 basis points in the past four years. The results of these collective efforts have been a 21% compounded annual growth rate of adjusted diluted EPS over the past four years. As we’ve delivered these results, we’ve continued to invest for future growth and productivity. In 2018, we continued to invest in technology and data. We acquired world-class artificial intelligence and machine learning technology with Kensho, unique technology and supply chain data with Panjiva, and differentiated banking data with RateWatch and in the fourth quarter certain index intellectual property rights. In addition to these acquisitions, we invested in companies pioneering new technologies. These included regtech solutions of FiscalNote, and energy production information was extensive. We also licensed private company data from Crunchbase and, through our other agreements, licensed new data sets for companies in China and the U.K. Finally, we accelerated our ESG investments organically and through the full acquisition of the climate data pioneer true cost. This has allowed us to expand true costs' unique data across S&P Global and combine our data resources with our world-class data operations in market intelligence. In aggregate, during 2019, we invested more than $800 million in acquisitions. We made another $60 million in internal investments that were expensed for work associated with Kensho, Panjiva, RateWatch, ESG in China. One of the highlights of 2019 so far has been our recent approval to enter the China domestic bond market. We’re honored to receive the first approval for a wholly-owned subsidiary of an international CRA to rate domestic Chinese bonds. We’re now authorized to rate issuers and issuances from financial institutions, corporates, structured finance bonds, and panda bonds or Renminbi-denominated bonds from foreign issuers. Our new entity, S&P Ratings China Ltd, will be headquartered in Beijing and has 36 employees, 31 of whom are ratings analysts. We’re able to assemble an exceptional team made up of our existing ratings employees as well as experts from the Chinese debt capital markets and local ratings agencies. It’s important to understand that S&P Ratings China Ltd and S&P Global Ratings are two independent entities, each with their own methodologies and analytical autonomy. The methodologies in the new business have been developed with reference to and leveraged from S&P Global Ratings methodology. This brings our total presence in Greater China for ratings to more than 200 employees. We plan to initiate coverage on the roughly 400 existing corporate clients that already issued cross-border bonds. Today issuance spreads within China’s bond markets are virtually uncorrelated with domestic rating categories. We intend to offer a national scale rating for issuers in the Chinese market. We’re well-prepared and ready to issue Chinese domestic ratings. Both our ratings business and our indices businesses can be impacted by short-term market movements. I’d like to put some of these movements into perspective starting with 2018 issuance. Global issuance decreased 6% in the volatile market environment. In particular, high-yield issuance declined 40%. This category has a disproportionate impact on our revenues since few, if any, of these companies are in frequent issuer programs. We often talk about the correlation between spreads and issuance. This can be seen very clearly in the high-yield market. Issuance levels have a strong negative correlation with spreads, so when spreads widened in 2018, especially in the fourth quarter, issuance was impacted. Just for comparison purposes, you can see that the correlation between spreads and issuance is not nearly as strong in the investment-grade market, where GDP growth, business confidence, and maturity pipeline are more highly correlated to issuance volumes. While the impact from U.S. tax reform has been positive for our bottom line, it has, as we expected, been a drag on issuance. In fact, the 50 U.S. companies with the largest overseas cash balances at the end of 2017 issued $170 billion of debt in 2017 and only $42 billion in 2018. This drop is responsible for a 10% decline overall in investment-grade issuance. In aggregate over 2018, the global cash balances of these 50 companies have declined by $91 billion or 10%. While 18 of these companies have returned to the bond market, we expect more will return as cash balances continue to normalize. We’ll continue to monitor this very closely. During the fourth quarter, global issuance decreased 19% as the weakness in corporate issuance exceeded strength in some pockets of the structured market. In the U.S., issuance declined 36% as investment-grade decreased 34%, and high-yield cratered 79%. In fact, December was the first month since LCD began tracking issuance in 2005, where there was no high-yield issuance. Public finance decreased 44% and structured finance declined 16% with gains in our RMBS offset by declines in ABS, CLOs, and CMBS. In Europe, issuance decreased 11% as investment-grade decreased 25%, high-yield declined 73%, and structured finance increased 59% almost entirely due to strengthened covered bonds, a category where we have very little presence. In Asia, issuance increased 8%. Since much of this is made up of local Chinese debt that we currently don’t rate, this increase is not meaningful to our results. While these declines are very significant, let me put the fourth-quarter global issuance into perspective. This slide depicts quarterly global issuance for the past six years with the fourth quarter of each year highlighted in dark blue. As you can see, the fourth quarter of 2013 was in line with historical fourth quarters. It’s the exceptional issuance in the fourth quarter of 2017 that created a very difficult comparison. There is another dynamic increasingly impacting high-yield issuance. This chart shows that U.S. speculative grade borrowers are increasingly turning to the bank loan market. The light and dark blue bars illustrate leveraged loans, while the brown bars depict high-yield bonds. The movement from high-yield bonds to leverage loans is not a concern for the company. These charts depict in both the U.S. and Europe that leveraged loan volumes have increased, and the percentage of these loans that we rate is also increasing. In fact, in 2018, we rated 92% of U.S. leveraged loans and 84% of European leveraged loans. Our bank loan ratings revenue continues to increase, reaching $380 million in 2018. Remember, when doing your analysis, leveraged loan activity is not included in bond issuance data. Now let me turn to Indices. The savings to investors from the lower fees associated with index investing has been dramatic. The bars on this chart depict the growth in total index assets invested in products linked to the S&P 500, S&P MidCap 400, and the S&P SmallCap 600. By the end of 2017, they totaled $3.6 trillion. The line on this chart depicts the fees saved by investors on these products, more than $150 billion in the last 10 years. Turning to industry trends affecting our indices business, this chart depicts the continuing outflows from actively managed U.S. mutual funds into index-based ETFs and mutual funds, a trend that has benefited us as we’ve worked with the markets to provide index products and solutions. Much of this success arose from the visionary legend in the index investment world who passed away last month, Jack Bogle, the father of indexing. Jack wanted to help individual investors save and give them, as he would say, a fair shake, and we’re grateful for his vision. In 1976, Jack introduced the first index mutual fund, now called the Vanguard 500 Index Fund. Today this fund, based on the S&P 500, is one of the largest mutual funds in the world with more than $400 billion in AUM. Jack didn’t just build a fund; he built an industry. Specifically for ETF AUM associated with our indices, we saw a decline in 2018 due to the year-end market correction. For the full year, market declines led to a $125 billion reduction in year-end ETF AUM. Despite this decline, inflows continued, adding $90 billion in ETF AUM. I’d like to shift to our 2019 outlook. Our economists expect 2019 global GDP growth of 3.6%, slightly lower than the 2018 forecast of 3.8% with lower growth in the U.S., Europe, and China. Our economists believe that there is only a 15% to 20% chance of a U.S. recession in 2019. Last month, 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 2018 and 2019 studies. The five-year period and the 2019 study shows a $400 billion increase in the total debt maturing compared to the 2018 study. We used 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 maturities. 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. The company updated its 2019 bond issuance forecast in a report issued last week. Excluding international public finance, issuance is expected to decrease less than 1%. 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. In 2019, here are some of the top projects and initiatives we prioritized and aligned to this framework. Under Global, we believe that we are in a unique position to bring additional transparency and independent analytics to the capital markets in China. The ratings opportunity that I just discussed is one example. In addition, market intelligence will be expanding its private company and local content within rich data, risk analytics, and models in China. Platts will be extending its commercial presence in Asia in additional locations with a larger Salesforce. Under customer orientation, we continue to build out the market intelligence platform, which will be rebranded as the S&P global platform. We’ll continue to migrate both Capital IQ content and Capital IQ users to the platform. In addition, we’ll be adding Platts pricing and news content to the platform and expanding the ratings 360 content. These efforts are intended to create an increasingly rich user experience for our customers. Under innovation, we’re ramping up our ESG data factory by centralizing datasets from across the company, as well as adding new datasets. We’re also creating new data feeds for our customers. Our indices business will be expanding its offering of ESG and smart beta indices. Under technology, we’re moving out of several data centers and into cloud operations. In addition, as Ewout will review in a moment, we’re implementing numerous Kensho-related projects. Under operational excellence, we’ll continue our efforts to optimize the management of data ingestion and operation. We’ll also be leveraging artificial intelligence and machine learning capabilities throughout our data operations. While cybersecurity has already been an area of focus, it’s important that we keep improving our capabilities as benchmarked against the next framework. Under people, we’ll extend a program that was initiated in 2018 to raise the technological acumen of all of our employees through a series of online and classroom training courses. We’ll also maintain our commitment to diversity and inclusion. I also want to bring your attention to a campaign that we introduced at the World Economic Forum in Davos last month. It’s entitled ChangePays. Through our data and insights, we were able to demonstrate that greater workforce inclusivity leads to healthier, stronger economies. Our campaign illuminates the positive impact of women in the workforce on companies, organizations, economies, and global communities. Please take a look at our research and watch the ChangePays video. Additionally, check out our 2018 corporate responsibility report for all we are doing in ESG. Now, I’d like to turn the call over to Ewout Steenbergen, who will 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 fourth quarter financial results. Organic revenue decreased 4% as issuance-driven declines in ratings exceeded growth in the other three segments. Adjusted corporate and allocated loss was improved by 24% due to lower incentive compensation as well as our productivity efforts to lower real estate costs and a reduction in professional fees. Adjusted total expense declined due to lower incentive compensation and success with our ongoing productivity efforts. This led us to a 270 basis points improvement in our adjusted operating profit margin. While U.S. tax reform has substantially lowered our adjusted effective tax rate, this quarter it was unusually low because new tax regulations related to U.S. tax reform were issued in the fourth quarter, which altered our previous assumptions. When the stock declined in the fourth quarter, we initiated a new $500 million ASR. This program along with other share repurchases resulted in a 2% decline in our diluted weighted average shares outstanding. Finally, we achieved a 20% increase in our adjusted diluted EPS to $2.22 during the fourth quarter. Because of the unusual level of stock option activity in the third quarter of 2017, the stock-based compensation tax benefits that we received in 2018 were $0.14 lower than in 2017. As the number of employee stock options continues to decline, we expect the stock-based compensation tax benefits to decline as well. For 2019, we estimate a positive EPS impact of $0.05 to $0.10. Changes in foreign exchange rates had a modest negative impact on revenue in the ratings business, and a positive $15 million impact on adjusted operating profit for the company or about $0.05 of adjusted diluted EPS. Our expenses were positively impacted by the weakening of the Indian rupee, British pounds, and Argentine Peso. For the full year, changes in foreign exchange rates had a favorable impact of $0.19 on adjusted diluted EPS. There were a number of non-GAAP adjustments to operating profit this quarter, including $16 million in restructuring charges in ratings and market intelligence. We expect that this will result in $15 million in annual savings, $5 million non-cash accounting adjustments associated with our U.K. pension plan, $9 million in Kensho retention related expenses, and $31 million in dual-related amortization. This is a slide that we shared at our Investor Day in May. It’s a big set framework that we outlined to show the areas where we can most impact shareholder value. The first requires 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 involves optimizing interest costs, reducing shares outstanding, and optimizing tax rates. Finally, we want to return capital to shareholders while maintaining flexible debt capacity. We are committed to returning at least 75% of annual free cash flow to shareholders each year. This quarter, we recorded strong revenue growth in S&P Dow Jones Indices, Market Intelligence, and Platts. Ratings declined due to lower debt issuance. With the exception of the revenue-driven shortfall in ratings, revenue growth and productivity efforts resulted in substantial adjusted operating profit and adjusted operating profit margin improvement in every other business segment. Here you see our headcount by business at the end of the last three years. The key takeaway is that over the past two years, headcount has increased 6% and revenue and adjusted diluted EPS have increased 11% and 59% respectively. The major additions have been from acquisitions and insourcing of contractors. At Investor Day, we cited a new $100 million three-year cost reduction plan. It was based on productivity improvements often through investments in support functions, real estate, technology, and digital infrastructure. I’m pleased to report that after our first year, we estimate that we have achieved run-rate savings of approximately $60 million, of which about $40 million was realized in our 2018 results. Examples include reducing our real estate footprint by exiting space at our New York headquarters and at our London office, consolidating data centers, and offshoring certain business services. Now turning to the balance sheet, in 2018, our return of capital to shareholders exceeded 100% of 2018 free cash flow. This was accomplished by returning $1.66 billion to repurchase 8.4 million shares and paying $503 million in dividends. In addition, we’re actively working to fuel future revenue growth through acquisitions and organic investments. Collectively, these actions resulted in an $800 million decline in our cash balances versus the end of 2017. Our adjusted gross leverage to adjusted EBITDA is holding steady at 1.9 times, well within our targeted range. While we have begun our 2019 share repurchase program, with open market purchases of approximately $130 million in January, we will initiate a new $500 million ASR in the next few days. Free cash flow, excluding certain items, increased 8% in 2018 to $2 billion. This level is a bit lower than our 2018 forecast, due to lower fourth-quarter ratings revenue and a longer renewal process associated with enterprise-wide contracts in Market Intelligence. The latter is due to a timing issue that will reverse in 2019. Now let’s turn to the segment results, starting with ratings. The decline in issuance, particularly high-yield issuance that Doug discussed resulted in a 16% decline in ratings revenue. Nevertheless, we reported a 16% decline in adjusted expenses, resulting in a 10 basis point increase in adjusted segment operating profit margin. The expense reductions were primarily from productivity programs, lower incentive compensation accruals, and lower IT spending as Ratings has established an IT center in India and has insourced much of its IT spending. For 2018, Ratings delivered a 240 basis point improvement in adjusted segment operating profit margin to 56%. This is particularly notable in light of the 4% decline in revenue for the year. The Ratings cost structure is well positioned for a recovery in Issuance. Non-transaction revenue decreased primarily due to a $6 million impact from changes in foreign exchange. In addition, there were lower excess issuance fees associated with medium-term notes and lower rating evaluation services activity. Transaction revenue decreased due to debt issuance reductions, partially offset by increased bank loan rating activity. Loan transaction revenue has been a steady source of growth. This is because the majority of the revenue is subscription-like. However, there is some volatility in certain components, namely; Rating Evaluation Services ebb and flow with M&A activity. 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 15% decline in corporates, primarily as a result of U.S. Tax Reform that Doug discussed earlier. Issuance declines associated with market volatility also drove the declining revenue. Financial services revenue decreased 22%, structured finance declined 14%, and governments decreased 33%. The CRISIL and other category decreased 2%, it included an increase in intersegment royalties for Market Intelligence, offset by a decline in CRISIL’s dollar-denominated revenue. Market Intelligence delivered a strong quarter with organic revenue excluding revenue from Panjiva and RateWatch increasing 7% and active desktop user growth of 12%. With adjusted expenses down 1%, adjusted segment operating profit increased 27% and the adjusted segment operating profit margin increased 570 basis points to 38.5%, a new high point. For the full year, the adjusted segment operating profit margin increased 200 basis points to 34.1%. While we are thrilled with the fourth-quarter margin, the full-year margin is more representative of our current run rate. Beginning this quarter, we begin to integrate costs into Market Intelligence. Market Intelligence has a lot of ESG activity underway, and we believe that business is better suited to be included here. Desktop, the largest category, grew 6%. Data Management Solutions realized 12% revenue growth, once again benefiting from the expansion of the data feeds business. Registrar offices grew 6% with the Ratings express providing the greatest level of growth as we continue to expand that data feeds portion of Risk Services. Turning to S&P Dow Jones Indices, the segment delivered 13% revenue growth, 7% adjusted expense growth, and 17% adjusted segment operating profit growth. This led to an adjusted segment operating profit margin of 67.1% for the quarter, and 68% for the full year, increases of 220 basis points and 160 basis points respectively. Strong revenue growth during the quarter was driven by a 43% increase in exchange-traded derivatives from increased market volatility and a 19% increase in data and customer subscriptions. Data and customer subscriptions increased due to a catch-up in real-time reporting that we first discussed in the second quarter, as well as from organic growth. Asset-linked fees increased 4% primarily due to increased average AUM in ETFs and mutual funds linked to our indices. It is important to understand that asset-linked fees include revenue associated with ETFs, mutual funds, and certain over-the-counter derivatives. Investors frequently assume that all this revenue is related to ETFs. Despite the market downturn, at the end of 2018, inflows into passive products continued in the fourth quarter, both for the industry and for ETFs tied to our indices. For our indices, business ETF, net inflows were $22 billion in the fourth quarter and $90 billion for the full year. The average AUM in the fourth quarter increased 9% 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 disclosed 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, quarter-ending AUM declined versus the end of the fourth quarter of 2017. A year ago, there was $1.343 trillion in ETF AUM linked to our indices. At the end of 2018, there was $1.309 trillion. During 2018, we sold $90 billion of inflows and $125 billion in stock market declines. Industry inflows into exchange-traded funds were $168 billion in the fourth quarter and $499 billion in 2018. We are encouraged by the recovery in ETF AUM in January. Key indicators for our exchange-traded derivatives volume were extremely strong during the quarter. S&P 500 index options activity increased 36%, VIX futures & options activity increased 2%, and activity at the CME equity complex increased 71%. For the full year S&P 500 index options activity increased 26%. VIX futures & options activity decreased 6% and activity at the CME equity complex increased 34%. Now turning to the last business segments, Platts delivered healthy revenue and margin growth. Revenue increased 7% as a result of a 7% increase in core subscriptions, and an 11% increase in global trading services, partially offset by a decline in other revenue, which is mostly from conferences. Adjusted expenses declined 2% due to reduced incentive accruals and a reduction in outside services. The fourth-quarter adjusted segment operating profit margin increased 470 basis points to 48.2%, and the full-year adjusted segment operating profit margin increased 200 basis points to 49.1%. This chart depicts Global Trading Services revenue by quarter for the last three years. This volatility from quarter to quarter reflects how the underlying trading volume fluctuates. However, GTS does provide a constant revenue contribution to the Platts business. During the fourth quarter, revenue improved due mainly to increased trading volumes in certain gas oil and fuel oil markets. Platts revenue increased in the quarter as all four commodity groups delivered mid-single-digit growth. During Investor Day in May 2018, we introduced medium-term aspirational targets for the company. We’re pleased to use this morning’s investor call to reiterate these targets and to share the great progress we have made in just the first year. We target to deliver organic revenue growth of mid to high single digits each year. During 2018, we achieved targets in three of our four businesses. Unfortunately, Ratings fell short due to market factors. We target low, double-digit adjusted EBITDA growth. During 2018, we delivered 23%. We’re committed to return at least 75% of our free cash flow each year. In 2018, we returned 108% through share repurchases and dividends. We established adjusted operating profit margin levels that we target to achieve in the next three to four years. In the first year, we made substantial progress, with each of the businesses contributing to an overall 230 basis point improvement in the company’s adjusted operating profit margin. We’re energized by our progress and confidence as we begin the second year of this effort. In 2019 we plan to invest $90 million to $110 million in new projects to fuel additional future organic growth. This is an increase over the $60 million we invested in 2018. The first category for investment is global growth. With regulatory approvals now secured, Ratings will continue to build its domestic Ratings capability in China, and Platts is working to expand its commercial operations in Asia. Market Intelligence has a China initiative that involves setting up digital infrastructure and domestic operations as well as adding additional local capability to the S&P global platform. The second category is innovation, with plans to ramp up our ESG data factory as a central source to serve ESG offerings from various business segments, including new ESG analytics and data products that we will be piloting. Platts agriculture acceleration involves extending news and data offerings and expanding into additional commodities. We’ll also expand the number of projects that are underway as part of our Kensho initiative. The third category is in technology. We’re adding investments to continue the deployment of data science, AI, cloud, machine learning, and robotics tools. We also continue to raise the technological acumen of all employees through a multitude of training programs. All of these investments are aimed at either growing revenue or enhancing EBITDA. Next, I would like to update you on Kensho, one of the greatest challenges we have had with Kensho is prioritizing the large number of projects that employees have identified. Projects generally can be grouped in three key areas; data ingestion, data processing, and data and document delivery. Within these categories, there are several projects that are underway. Omnisearch and Entity Linking are two we have cited in the past. Omnisearch is the next generation of search capability for our Market Intelligence, Ratings 360, and Platts LNG service applications. It leverages advanced machine learning techniques to bring natural language search to our web and mobile platforms. We’re also working to link user personas to more relevant responses, as well as expanding the datasets that will be searchable. The first release will be available in the first half of 2019 to a select group of clients for preview and feedback, and then released in a broader capacity later in 2019 or the first half of 2020. Entity Linking involves using machine learning to link data from different sources to correct entities without errors and in a fraction of the time it would take our employees. It unlocks the ability to ingest datasets that are too large to be done with traditional methods. In addition to the Crunchbase data we previously discussed, we have been working on certain datasets for private company data in China and the U.K. For the U.K. data, we plan to make the first 1000 companies available in the first quarter of this year, with subsequent releases of coverage throughout 2019. Codex is a next-generation customer-oriented platform, designed to ingest any documents and provide the relevant data and information for a particular user's needs. A first version of the platform has been built and demonstrations are underway. Proof-of-Concept user case has been created for Ratings analysts to alert them to new relevant information more quickly. We have numerous other projects underway in data processing and delivery, and numerous others that have been identified but not yet begun. We believe that this is a very positive start with much more value generation to be achieved during the next few years now. Lastly, I would like to introduce our 2019 guidance. This slide depicts our GAAP guidance. Please keep in mind that our guidance reflects current spot markets and foreign exchange rates. This slide shows our adjusted guidance, indicating an increase in revenue of mid-single digits with contributions by every business segment. We have decided to record Kensho's revenue in Market Intelligence going forward. Therefore, we are providing guidance on corporate and allocated expense, excluding any revenue of $155 million to $165 million, deal-related amortization of $120 million to $125 million, Kensho retention plans of $20 million to $25 million, operating profit margin in a range of 48.8% to 49.8%, interest expense of $145 million to $150 million, a tax rate of 22.5% to 23.5% - this is an increase over 2018 because we expect to have lower benefits from employee stock-based compensation as well as less discrete benefits from prior year tax adjustments - and diluted EPS, which excludes deal-related amortization of $8.95 to $9.15. In addition, we expect capital expenditures of approximately $120 million and free cash flow excluding certain items in a range of $2.2 billion to $2.3 billion. In 2019, we are increasing our organic investments in productivity programs and new revenue opportunities. We will continue to look for opportunities to add unique data, analytics, and geographies. Despite many pending global economic issues, this guidance reflects our expectation that we will continue to deliver solid financial performance again in 2019. 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, we’ll now take our first question.

Thank you. Good morning. Transaction revenue this quarter was not surprisingly weak given the issuance levels, and January issuance was maybe modestly better than 4Q, but still down double-digits according to our sources. So, can you give us a bit more color on how you’re thinking about the credit environment as we progressed through the year? Thanks.

Hi, Toni. Thank you. This is Doug. First of all, as you know during the last year, we had a solid year overall, but the fourth quarter in particular, December ended up with very weak comparables from prior years. In particular, there was a shift in the high-yield market where people started thinking differently about the type of covenants that were going out to the markets. We also had, as you know, the impact from tax reform from the largest cash holders that started bringing their cash back and had not gone to the market. We think that January is not necessarily indicative of the entire year. As you know, typically January is a pretty weak month. One of the important things in January is to see in the second half of January in the third and fourth week, the markets actually started rebounding. You saw more people coming back to the market. You saw spreads come down in the high-yield market, but as you know, in our forecast overall, we have projected that for the entire year that issuance will be down about 0.6%. So, call it down a little bit or flat. We think that in the corporate sector that’s going to be down about 4%. Financial services are going to be down about 1.3%, structured finance is basically flat, and public finance is up over the prior year of about 9%. So, if you look across different categories, this is how we’ve calculated and this is what we’ve used to build into our plans for the year.

Great. Thanks for that. And then, in Market Intelligence, I saw margins expanded significantly this quarter. And I know you said the full year is probably more representative of run rate margins, but could you get some additional color on what maybe the one-time pieces were in Q4 and what’s ongoing? And then, are margins in Market Intelligence an area that you can flex if there’s a weak cash flow environment? Thank you.

Good morning Toni. This is Ewout. So the strong margin improvement in Market Intelligence was driven on the one hand, as you’ve seen, by very healthy revenue growth, and then on the other hand, by a small decline in expenses. If you look at the underlying components in the expense movements, there were a couple of items that were going in opposite directions, and therefore showing the decline, a small decline, a modest decline in expenses. Base compensation was up, but then there was an offset in lower incentive compensation accruals. So the net was close to zero. We saw strong sales in the fourth quarter driving up the cost of sales as well as intersegment royalties, but then also strong sales leads to higher capitalization of acquisition costs under the new revenue accounting methods. So those are also a bit offsetting. We saw FX having a positive impact on the expenses of Market Intelligence. Allocations were down, so corporate allocations were down, but then acquisitions that were down during the year, most notably, Panjiva and RateWatch were driving expenses up. So a lot of moving pieces, but net, net small decline in expenses and therefore good improvement in margins, but we don’t expect all of these items to recur in every quarter. So therefore, the full year margin is a better guidance for Market Intelligence going forward.

Thank you.

Thank you. Good morning. Just on the 2019 top-line guidance, what’s the FX impact here assuming, and also you kind of gave us the framework for the Ratings business. I know you don’t like to give specific guidance on the others, but is there anything to call out for next year for each of those businesses, or can we just assume kind of the trends that we’ve seen so far?

Good morning, Manav. This is Ewout. First, in our guidance, we assume current spot market foreign exchange rates. So that is what the underlying assumption is. If you look at our guidance with respect to topline for the company as a whole, as you know we’re not breaking out guidance for each of the segments. But what I can explain to you are some of the assumptions underneath. If you have to think about Ratings as Doug already mentioned, our assumption is more or less flat issuance markets during 2019, and then we have some small adjustments in market shares in certain segments. We also take into account price increases based on the new list price that we are using from the first of January of this year. So that is the underlying assumption we have under our plan for 2019 for Ratings. We have two subscription businesses. So those are, I think businesses that fee growth based on the annualized contract value that we are increasing every year. You have seen the good progress we’re making for Platts and Market Intelligence. With respect to indices, as you know there is a natural hedge in our indices business. If stock markets come down, we see exchange-traded derivative volumes going up, and the other way around. You have to take that into account in your modeling to also reflect the growth of our indices business. But as we have said in the prepared remarks, we expect mid-single digit revenue growth for the company as a whole and contributions by each of our segments to achieve that.

Got it. Thank you. And then, I guess just thinking about China. You’ve talked about the Ratings opportunity there for some time, but I guess, I was struck by you know it sounds like Market Intelligence is doing something new, Platts, Kensho. I was just wondering if you could briefly address how we should think about the opportunity that those other areas present?

Let me address that. First, it's important to recognize that the Chinese financial markets are primarily bank-focused. In our analysis of the Ratings business opportunity, we found some key figures. For example, in China's bond market, banks hold 54% of the bonds, while mutual funds and wealth management products account for 32%. Only 2% of the bonds are owned by foreign investors. The issuers include corporate bonds, which are relatively low compared to other markets, along with local governments and commercial banks. What's critical is that as the Chinese market becomes more advanced, transitioning to a real bond market rather than one dominated by commercial banks, we anticipate increased interest from foreign investors. We analyzed how market structures evolve as they develop, leading us to believe there will be a growing need for independent analytics. Ratings will be one of the first products to gain traction, particularly as demand emerges from both domestic and, in time, international investors. Along this line, there will also be a need for various other products and services, such as data products and analytics on private companies. We're focusing on our Market Intelligence offering to deliver comprehensive data and analytics similar to Cap IQ and SNL for the Chinese markets, which we have recently initiated. We have established a local team, and what's exciting is that we're pursuing this as a unified S&P Global effort, despite the Rating agency having its own license and staff. Our approach integrates hiring, human resources, and a single legal and compliance team, enabling us to effectively leverage our resources in the market. Overall, as the market becomes more sophisticated and interconnected, we foresee a significant demand for data, analytics, and financial products.

Good morning. You talked about the shift from high yield to leveraged loans in the U.S. Could you maybe remind us what the margin difference is in your business between loan ratings and high yield, and then whether you’re seeing the same trend in Europe because a secular thesis a while back on Ratings was European bank disintermediation, so wondering if that has sort of reversed any color there?

Thanks, Hamzah. This is Doug. First of all, on the pricing, it’s basically about the same. There’s not a material difference between the pricing of the two products. In Europe, the capital markets are continuing to develop. However, you have one major impact that has, in a sense, slowed down what we thought was going to be the ultimate development and that is the ECB is continuing to provide a lot of liquidity for the markets. But in the last quarter, up until you had the slowdown of the leveraged loan market, the European markets were actually moving quite fast. There was a lot of issuance. In the last two weeks of January, the European leveraged markets came back to life and there was issuance back in the European market. We do think that in the long run, the European markets will continue to move towards capital markets. However, it’s not quite at the level of the U.S. regarding the participation of traditional capital market entities like insurance companies, pension funds, and asset managers.

Okay. And just a follow-up question. On Ratings margins you talked about a 10 bps increase on a 16% revenue drop and highlighted various reasons. If Ratings revenue does come back, how quickly do costs come back in that segment? Any comments on operating leverage in that segment being structurally much higher? Or any thoughts on how costs come back to that segment if you see revenue come back?

Good morning Hamzah. This is Ewout. A couple of thoughts that hopefully are helpful. On the one hand, Ratings is working on very active programs to think about how to redesign its operations, its business model, its processes, its systems, and introduce new technologies in order to increase the productivity for the analysts and take away some of the lower value-added work. So, we expect operating leverage for Ratings to continue. You saw that we took another restructuring charge for Ratings as well. Those are benefits in the programs where we will continue to see improvements in overall productivity in the Ratings organization. The other element to consider is incentive compensation. We had some expense benefit during the quarter from the incentive compensation accruals. For the full year, if we dimension that, Ratings had a very good year in 2017, as did some other businesses in the company as you will recall. In 2017, we saw high payouts. There will be a reduction just every year reset to a 100% of the accrual levels. This year, particularly in the fourth quarter, performance was of course lower. So now you have a reflection of lower payouts from that 100% level. If you look at the overall expense reduction year-over-year for Ratings, the adjustments totaled approximately $120 million. The majority of that came from incentive accruals with a little over half being just a reset year-over-year to the 100% level, while a little bit less than half of that reduction came from the lower accruals we established in 2018, which of course will come back up to the 100% level in 2019. So that is an automatic increase in the costs that we'll see in 2019 from 2018. But again, we expect continued overall improvements from all of the productivity programs we are implementing in Ratings.

Very helpful, thank you.

Yes. Hey, good morning everyone. Just hoping you can expand on the conversation about China that was asked about earlier. In your prepared remarks, you gave some nice data points. I think 35 employees in that new entity, but 200 in the other parts. Like how quickly are you ramping people here, and what cost is tied to that end? Secondarily, you said 400 companies already rated out of the other entities, so that can come pretty quickly. So maybe just talk about the next few quarters, few years in terms of how quickly that business can ramp, and then in terms of pricing, like how do you envision the pricing structures, they are very comparable to the rest of the world, or is there something we should be thinking about differently in terms of basis points? Thank you.

Okay. Thanks Alex. Well just to give you a little bit more of the ramp-up plan. As you heard, we have 36 employees in the entity; 31 of those are analysts. Of those analysts, about 10 of them are employees from S&P Global that transferred in from other parts of the world who are bringing the core knowledge and expertise of how S&P Global works everywhere else. They are native Mandarin speakers that have come in from other offices. We have hired 21 more analysts from the markets. Being a first mover was an advantage to us because we were able to go out in the market and attract a very large pool of candidates and hire a highly qualified set of people. Because we were there first and have already started hiring, we think we can ramp up very quickly if the demand comes in. Right now in China, there are about 4000 issuers that are rated across the markets by the domestic rating agencies. We rate about 400 of those offshore. We’ve already developed plans to go out and meet with all the different 400 that we are working with already as well as as many as possible of the other issuers that are rated. I don’t want to give you any kind of financial projections, but I can tell you that the pricing that we’re looking at over time will develop to a level similar to the rest of the globe. It’s likely to start out at a lower pricing level to close transactions and get out into the markets. But we expect over time that pricing will be comparable to the rest of the world. As you know, pricing on bond ratings is a low amortized cost compared to actual bond issuance. That’s why we think we can develop to that level of pricing. When we look at the different kinds of bond markets, there are four categories of bonds that we were able to rate that we've been approved for. We think that the financial institutions and corporates are the core areas that we will start rating right away because that’s where we have the relationships with the 400 issuers. We have been working on this for years – John Berisford, Ewout, and myself have been visiting China for years to build relationships and to understand the markets. With that kind of long-term commitment, we believe we can build out the business on a strong foundation and have a solid team on the ground.

Good morning. You talked about the shift from high yield to leveraged loans in the U.S. Could you maybe remind us what the margin difference is in your business between loan ratings and high yield, and then whether you’re seeing the same trend in Europe because a secular thesis a while back on Ratings was European bank disintermediation, so wondering if that has sort of reversed any color in that?

Thanks Hamzah. This is Doug. First of all, on the pricing it’s basically about the same; it’s not a material difference between the two products. In Europe, we continue to see capital markets developing. However, one major impact has slowed down what we thought was the ultimate development, that is the ECB continuing to provide a lot of liquidity for the markets. In the last quarter, up until you had the slowdown of the leveraged loan market, the European markets were moving quite fast. There was a lot of issuance. In the last two weeks of January, the European leverage markets came back to life, and there was issuance back in the European market. We do think in the long run, European markets will continue to move faster toward capital markets to catch up with U.S.

Okay. And just a follow-up question. On Ratings margins, you talked about up 10 basis points on a 16% revenue drop and highlighted various reasons. If Ratings revenue does come back, how quickly do costs come back in that segment? Just any comments on operating leverage in that segment being structurally much higher? Or any thoughts on sort of how costs come back to that segment if you see revenue come back?

Good morning Hamzah. This is Ewout. A couple of thoughts that hopefully are helpful. On the one hand, Ratings is working on very active programs to think about how to redesign its operations, its business model, its processes, its systems, and introduce new technologies in order to increase the productivity for our analysts and take away some of the lower value-added work. So, we expect operating leverage for Ratings to continue. You saw that we took another restructuring charge for Ratings as well. Those programs will continue to improve overall productivity in Ratings. The other element to consider is incentive compensation. We had some expense benefits during the quarter from the incentive compensation accruals. For the full year, if we dimension that, Ratings had a very good year in 2017, as did some other businesses in the company as you will recall. This resulted in high payouts. Therefore, we will see reductions just every year in a reset to a 100% of the accrual levels. This year particularly in the fourth quarter, performance was lower. You now see the impact of lower payouts from that 100% level. Overall, if you look at the total expense reduction year-over-year for Ratings, adjustments amounted to approximately $120 million, mostly from incentive accruals with a little over half being a reset to the 100% year-over-year and a little less than half from lower accruals we established in 2018, which will come back to the 100% level in 2019.

Very helpful. Thank you.

Yes, hey, good morning everyone. Just hoping you can expand on the conversation about China that was asked about earlier. In your prepared remarks, you gave some nice data points. I think you mentioned 35 employees in that new entity, but 200 in the other parts. How quickly are you ramping people up here? What costs are tied to that? You also mentioned 400 companies already rated by your other entities, how quickly do you think that business can ramp up? And what about pricing? Will it start off quite lower and then work its way up to comparable levels in the rest of the world? Thank you.

Okay. Thanks, Alex. Regarding the ramp-up plan, we currently have 36 employees in the entity, 31 of whom are analysts. Among these analysts, about 10 are employees from S&P Global who transferred from other operations around the world, bringing core knowledge and expertise of how S&P Global operates. They are native Mandarin speakers who were brought in from other offices. We've hired 21 additional analysts from the local markets. Being the first mover allowed us to attract a large pool of qualified candidates. Because we have already started hiring, we believe we can ramp up our operations quickly if the demand increases. Presently, in China, there are about 4000 issuers rated by domestic rating agencies. We rate around 400 of those offshore, and we plan to meet with those companies and explore ratings opportunities. I can't give any direct financial projections, but over time we believe the pricing will align more closely with global standards, though we might need to enter at a lower pricing level to gain market entry. The pricing for bond ratings is relatively low compared to the overall cost of bond issuance, which supports our belief that we can ultimately reach that pricing level. In the different bond market segments, we will begin with financial institutions and corporates due to existing relationships with the 400 rated issuers. This approach has been developed over years of engagement with the Chinese market.

Good morning. You talked about the shift from high yield to leveraged loans in the U.S. Could you remind us what the margin difference is in your business between loan ratings and high yield? Are you observing a similar trend in Europe because a secular thesis a while back on Ratings indicated European bank disintermediation? Any color there would be great.

First of all, on the pricing, it’s basically about the same; there’s not a material difference between the pricing between the two different products. In Europe, the capital markets are continuing to develop. However, you have one major impact that has, in a sense, slowed down what we thought would be the ultimate development; that being the ECB is continuing to provide a lot of liquidity for the markets. In the last quarter, until you had the slowdown of the leveraged loan market, the European markets were actually moving quite fast, with a lot of issuance. Interestingly, in the last two weeks of January, the European leveraged markets came back to life, demonstrating there’s volume and activity returning.

Thanks, Doug.

Hey, good morning everyone. Hoping you can expand on the conversation about China that was asked about earlier. In your prepared remarks, you gave some nice data points. I think 35 employees in that new entity but 200 in the other parts. How quickly are you ramping people up here? And what costs are tied to that? Secondarily, you said 400 companies already rated out of the other entities. So that can come pretty quickly. Can you just talk about how quick that business can ramp? And in terms of pricing, how should we think about how it progresses to more comparable global levels?

To give you a little bit of insight on the ramp-up plan, we currently have 36 employees in this new entity, 31 of whom are analysts. Among them, about 10 analysts are from S&P Global, which provides core experience on how S&P operates in other markets. We have also hired 21 local analysts. Serving as a first mover has granted us access to a large talent pool of qualified candidates. With ongoing hiring, we believe we can grow this quickly if demand rises. Presently, within China, there are around 4000 issuers rated by domestic rating agencies. We currently rate roughly 400 of those offshore issuers, and we have developed plans to connect with those companies. I won’t provide specific financial projections, but the pricing we anticipate will align more closely with global standards over time, yet we may need to enter at a lower pricing point initially to foster relationships and gain market entry. We believe pricing for bond ratings will be a manageable cost—relative and favorable compared to the cost of overall bond issuance.

Good morning. You talked about the shift from high yield to leveraged loans in the U.S. Could you remind us what the margin difference is in your business between loan ratings and high yield, and whether you’re seeing the same trend in Europe?

The pricing is basically similar; there’s not a material difference between the pricing of the two products. In Europe, we continue to see capital markets developing, albeit at a slower pace due to continuing ECB liquidity in markets. However, there was a shift in issuance from mid-December that suggests it had slowed down. In fact, over the last couple of weeks, the markets are showing signs of recovery and increased activity.

Thank you, Doug.

Good morning everyone. I was hoping you can expand a little on the conversations around China that we've had previously. You provided some great data points, like the 35 employees in the new entity, and 200 elsewhere. What's the overall ramp-up plan for those resources? And associated costs? You also mentioned that out of the 400 companies already rated from your other entities, how quickly do you anticipate being able to ramp your local ratings business, particularly as it relates to financial projections?

We currently have 36 employees engaged in the initiative, consisting of 31 analysts. Approximately 10 of those analysts are employees from S&P Global—bringing necessary expertise—and the remainder are new hires from the local market. Having established a presence early gave us the advantage to attract qualified candidates quickly. The market contains about 4000 issuers rated by domestic agencies, with 400 rated offshore by us currently. We're developing plans to further meet 400 rated issuers and establish reciprocal relationships quickly. I can’t provide financial projections directly, but the pricing will likely become aligned with global standards over time. Initially, we expect to offer lower entry-level pricing to develop relationships.

Good morning. I wanted to revisit the ongoing shift from high-yield loans to leveraged loans in the U.S. What is the margin difference in your operations for this shift? Are you witnessing anything similar in European markets?

As I mentioned, the pricing remains pretty similar; neither product yields starkly varied margins. The European market is transitioning, although hindered recently by ECB liquidity. Historically, issuance has recovered swiftly, and it appears to be returning to strength, exemplified by the issuance activity observed over the past few weeks.

Thanks Doug.

Hey, good morning everyone. Would you mind expanding a bit on the discussions about China from before? The data points you shared were awesome, like the 35 employees in the new entity and 200 elsewhere. How is the ramp-up proceeding for those resources, and what costs are associated? Also, I noticed you mentioned already 400 companies rated from other entities—how quickly can the local ratings business ramp? And regarding pricing, how will it align with global averages?

The ramp-up plan shows we have 36 employees, 31 of whom are analysts, with about 10 transferred from our global operations. They bring essential knowledge that helps accelerate our local operations. Additionally, we've hired 21 local analysts. Our early entry allows us to tap a significant talent pool quickly. Currently, there are approximately 4000 issuers in China rated by domestic agencies; we are connected with 400 of those offshore. We’ve structured our approach to develop relationships and maximize engagement, with a clear pathway toward aligning our pricing with international standards. We expect to start off at an entry price to secure new business but anticipate that pricing will stabilize to global averages as relationships develop.

Good morning. Can you remind me of the margin differences between loan ratings and high yield in your company? Are you seeing the same trend in Europe as you've seen in the U.S.?

The pricing remains relatively constant with no substantial difference in margins. In Europe, markets are progressing but slower than anticipated due to ECB interventions; there is capitulation but continued improvements are evident.

Thank you Doug.

Good morning everyone. You mentioned earlier you are increasing your focus on the operational aspect of your ratings business. What do you expect from the ratings sector in the next few quarters? Will the trend point positively?

Yes, thanks Alex. We're encouraged with the outlook for the ratings business, particularly concerning innovation and efficiencies in operations. We expect trends to point toward considerable growth, especially with emerging opportunities from our enhanced analytics and focused operational strategy.