Good morning, and welcome to S&P Global's First Quarter 2019 Earnings Conference Call. I'd like to inform you that this call is being recorded for broadcast. All participants are in a listen only mode. We will open the conference to questions and answers after the presentation and instructions will follow at that time. To access the webcast and slides, go to investor.
Spglobal.com. I would now like to introduce Mr. Chip Merritt, Senior Vice President of Investor Relations for S&P Global. Sir, you may begin.
Good morning. Thanks for joining S&P Global's earnings call. Presenting on this morning's call are Doug Peterson, President and CEO Ewout Steenbergen, Executive Vice President and Chief Financial Officer. This morning, we issued a news release with our Q1 2019 results. If you need a copy of the release and financial schedules, they can be downloaded at investor.
Spglobal.com. In today's earnings release and during the conference call, we're providing adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the Corporation's operating performance between periods and to view the Corporation's business from the same perspective as management's. The earnings release contains exhibits that reconcile the difference between the non GAAP measures and the comparable financial measures calculated in accordance with U. S.
GAAP. Before we begin, I need to provide certain cautionary remarks about forward looking statements. Except for historical information, 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 10ks, 10 Qs and other periodic reports filed with the U.
S. Securities and Exchange Commission. I would also like to call your attention to a European regulation. Any investor who has or expects to obtain ownership of 5% or more of S&B Global should give me a call to better understand the impact of this legislation on the investor and potentially the company. We're aware that we do have some media representatives with us on the call.
However, this call is intended for investors and we would ask that questions from the media be directed to Jason Feuchtwanger at 212-438-1247. At this time, I would like to turn the call over to Doug Peterson. Doug?
Thank you, Chip. Good morning and welcome to our Q1 earnings call. 2019 began on shaky footing on the heels of the volatility uncertainty in the Q4. The markets have come a long way since the depths of December. The main development in the past quarter has been the recovery of both equity and debt markets.
In the meantime, our baseline forecast is slower, but healthy growth for 2019 remains intact. But the most notable change has been a coordinated stand down by major central banks and across the board shift in monetary policy bias from gradual tightening to neutral. Markets have responded very positively, although risks related to politics and trade still linger. Our subscription businesses, Market Intelligence and Platts led revenue growth in the Q1 as it took several weeks in January for markets and more importantly ETF AUM and debt issuance to recover. Let me review some of the highlights from the quarter.
Market Intelligence led all segments with 8% organic revenue growth. We achieved a 40 basis point improvement in adjusted operating profit margin and as I'll show in a few moments, an even larger increase in our trailing 4 quarter figure. We continued a long track record of reducing average diluted shares outstanding with a decline of 6,000,000 shares. Based primarily on a lower tax rate and lower share count, we delivered 5% adjusted diluted EPS growth. In a period when markets weren't ideal, we were pleased to still be able to grow adjusted diluted EPS.
We generated approximately $306,000,000 in free cash flow, excluding certain items in a seasonally low cash flow quarter. We're reaffirming 2019 adjusted guidance. And finally, we launched 2 landmark ESG offerings that I'll review in a few minutes. Revenue is largely unchanged versus the prior period as the decline in ratings revenue was offset by growth in the other three segments. Our adjusted operating profit increased 1% and our adjusted operating profit margin increased 40 basis points to 47.3%.
But please recall, we measure and track adjusted margins on a trailing 4 quarter basis, which increased 2 30 basis points. In addition, we continue to reduce shares outstanding, which contributed to the 5% increase in adjusted diluted EPS. Each quarter, we take an opportunity to highlight key drivers to our business and important projects underway. This quarter, let's start with the data feeds business within Market Intelligence. When most investors think about Market Intelligence, they think about the Capital IQ or Market Intelligence desktop.
Data Management Solutions in Rating Express, however, offer products that are ingested by our customers as data feeds. This data feed business has grown about 11% annually for the last 2 years and is on track to deliver revenue of more than $600,000,000 this year. Historically, data feeds have primarily been made up of Ratings Express, which is the reselling of ratings information, Compustat and CUSIP along with other offerings including GICS, cross reference services and earnings estimates. In the past year, we've had a 40% increase in the number of data packages available through our data feeds. These have included alternative data such as machine readable transcripts, Panjiva Shipping data and SNL asset level data.
We expect that true cost ESG data, transcript sentiment scores and other unique data sets in the near future. The key is to deliver unique data to our customers in the form in which they need it. Now turning to ratings. During the Q1, global bond issuance decreased 3% with mixed performance in various geographies and asset classes. If we also include all bank loan ratings volume, total global issuance declined 13%.
In the U. S, bond issuance declined 7% as investment grade decreased 8%, high yield increased 6%, public finance improved 17% and structured finance declined 20% with drops in CLOs, ABS and CMBS partially offset by gains in RMBS. In Europe, bond issuance decreased 9% as investment grade decreased 13%, high yield declined 26% and structured finance increased 10% due to strength in covered bonds, a category where we have very little presence. In Asia, bond issuance increased 12%. Last quarter, we introduced this chart to attempt to track debt issuance and global cash balances of those companies with the most overseas cash at the end of 2017.
We're pleased that the cash balances of these companies continue to decline and that the issuance among these companies is showing signs of recovery after an anemic 2018. The latest 2019 global issuance forecast is largely unchanged from the previous forecast. Excluding international public finance, which has minimal impact on our financial results, issuance is expected to decrease less than 1%. Leveraged loan activity has become an important source of revenue as these loans are increasingly rated. This chart depicts new leverage loan volume for the past 6 years and excludes repricing and amend to extend volume.
1st quarter volume is down 26%, primarily due to less M and A activity as well as a dramatic reduction in leveraged loan fund assets. This chart shows that for past 23 weeks, U. S. Leveraged loan funds have experienced significant outflows. In fact, since peaking at $109,000,000,000 in October 2018, loan funds have had net outflows totaling over $25,000,000,000 Investing in leveraged loans is more appealing when rates were rising because loans have variable rates.
Now that expectations for rate increase have subsided, high yield debt looks relatively more attractive. Remember when doing your analysis, leverage loan activity is not included in bond issuance data. And so our bank loan ratings revenue decreased in the Q1 to $67,000,000 versus $99,000,000 in the Q1 of 2018. During Investor Day, we introduced the framework powering the markets of the future, including 6 foundational capabilities. We use this framework to set our goals and allocate resources.
During our Q4 call, I shared projects underway in each of these categories with particular emphasis on global with our ratings opportunity in China. Let me start there and then highlight some new opportunities under innovation and customer orientation. After receiving approval to enter the domestic Chinese bond market in January, our official launch event took place on March 26. We hosted a half day seminar in Beijing with 170 participants from issuing companies, fixed income investors, banks and other participants in China's financial markets. This was an opportunity to showcase our new team as well as our strong commitment to bring more transparency and insights to China's financial markets, also outlining a vision that goes beyond our ratings business and across all of our divisions.
ESG is a major focus in the areas of customer orientation and innovation. Our ESG efforts at S&P Global span every business segment. In 2019, we anticipate ESG revenue will approach $50,000,000 We recognize that different clients have different needs and are trying to tailor products specific to those needs. To that end, we have created the ESG data factory to centralize the data collected across the company, which can be used in any of our ESG offerings. This ensures consistency of inputs across the various products as well as scale.
We're expanding on our ESG heritage in S and P Dow Jones Indices. 20 years ago, we launched the Dow Jones Sustainability Indices, arguably the best known ESG indices in the market. We're now introducing an enhanced ESG scoring methodology designed for the new S and P 500 ESG Index and the upcoming country specific and regional ESG indices. The scores are used as inputs to evaluate companies in the indices. The S and P DJI ESG scores are available to the market as a standalone product and can be used as a tool for a broad range of research, indexing and investment purposes.
The first of the new ESG indices to launch is the S and P 500 ESG Index. An increasing number of investors require indices that are aligned not only with their investment goals, but also their individual and institutional values. The S and P 500 ESG Index is constructed with both of these in mind. The S and P 500 ESG Index targets 75% of the traditional S and P 500s market capitalization at the industry level based on their GICS code. The index offers diversification and a profile that is close in line with that of the U.
S. Large cap market. UBS is the 1st firm to license this product for ETF that launched last month on several European exchanges. S and P Global Ratings launched ESG evaluations to serve issuers and fixed income investors. Our ESG evaluation is a cross sector relative analysis of an entity's ability to operate successfully in the future and optimize long term stakeholder value in light of its natural and social environment and the quality of its governance.
In addition to leveraging the ESG Data Factory, the engagement that our ratings analysts have with client company management coupled with the judgment of our analysts add unique insights to this product. Delivering innovative new products and updating existing products is an important emphasis at S&P Global. Our indices business recently launched the Global Small Cap Select Indices. This series of new indices is designed to improve long term risk adjusted performance of small caps by excluding companies without a consistent track record of positive earnings. In addition, Platts launched assessments of low sulfur marine fuel in response to International Maritime Organization's 0.5 percent sulfur cap on marine fuel that begins in January 2020.
Our new assessments are for daily cargo and barge prices of marine fuel 0.5 percent reflecting global pricing of IMO 2020 compliant residual marine fuels. Based on these new assessments, ICE launched 6 marine fuel 0.5 percent future contracts on February 19, which traded 84 lots equaling over 500,000 barrels on the 1st day. In March, S and P Dow Jones Indices benchmarks, including the iconic S and P 500 and the Dow Jones Industrial Average became the 1st benchmarks to be endorsed under the EU benchmark regulation and included in the ESMA register, enabling supervised entity in the EU to continue to use them. And finally, Platts recently announced a change to the dated Brent benchmark. The proposal moves to a CIF, CIF Rotterdam basis, which means it will be a landed cost.
With FOB supply in the North Sea gradually falling, this proposal ensure ample liquidity of grades in the dated bread basket for the foreseeable future. And last, I'd like to share the early success of 2 new price assessments that we featured in previous earnings calls. These charts depict the volume of options and futures contracts that are based on Platts JKM marker and Black Sea Wheat. As you can see in these charts, both price assessments are gaining great adoption in the marketplace. And now, I'd like to turn the call over to Ewout Steenbergen, our CFO, who 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 Q1 financial results. Doug covered the highlights. Will take a moment to cover a few other line items. Adjusted corporate unallocated improved by 30%, primarily because the $20,000,000 contribution to the S and P Global Foundation in the prior period did not recur.
This was partially offset by the addition of Kensho. Total adjusted expenses decreased 1%. This is notable considering that the acquisitions of Pragmatix, Panjiva, RateWatch and Kensho have added to our cost structure. The adjusted effective tax rate was 20.9%, 80 basis points lower than a year ago and less than our full year guidance of 22.5% to 23.5%. This was primarily due to a larger than normal level of stock option exercises that occurred during the Q1.
We have actively been returning capital to shareholders over the past year. These actions resulted in a 2% decline in our diluted weighted average shares outstanding. Stock options associated with 600,000 shares were exercised during the Q1. This resulted in a stock based compensation tax benefit on EPS of $0.07 As the number of employee stock options continues to decline, we expect the stock based compensation tax benefit to decline as well. However, because of the volume of options exercised in the Q1, we're increasing our estimate of the 2019 EPS impact by $0.05 to a range of $0.10 to 0 point 15 dollars Changes in foreign exchange rates had a negative impact on revenue in the Ratings and Market Intelligence businesses and a negligible impact on adjusted operating profit for the company.
Our revenue was negatively impacted primarily by the weakening of the euro and the British pound. Weakness in both of these currencies, along with weakness in the Indian rupee, also reduced expenses, resulting in a minimal impact from ForEx on adjusted EPS. There were 3 non GAAP adjustments this quarter, a $113,000,000 pretax non cash charge associated with our frozen U. S. Defined benefit pension plan.
This was the result of transferring a portion of our pension funding obligation to an insurance company, dollars 7,000,000 in Kensho retention related expenses and we had $32,000,000 in deal related amortization. This is a slide that we shared at our Investor Day in May 2018. It depicts a framework that we outlined to show the areas where we can most impact shareholder value. The first two require investments. We need to continue to invest to fuel revenue momentum by improving our products, introducing new technology, adding new data sets and entering new geographies.
We have made great progress delivering EBITDA 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 the tax rate. And finally, we want to return capital to shareholders while maintaining flexible debt capacity. We're committed to returning at least 75% of annual free cash flow to shareholders each year. This quarter, our subscription businesses, Market Intelligence and Platts delivered the strongest revenue growth.
As we have said many times, we managed adjusted operating margins on a trailing 4 quarter basis. So while there were declines in quarterly figures versus the Q1 of 2018, all four businesses delivered margin gains on a trailing 4 quarter basis. Now turning to the balance sheet. Cash and cash equivalents declined versus the end of 2018, principally due to 6 $44,000,000 of share repurchases during the Q1. Our adjusted growth leverage to adjusted EBITDA declined to 1.8 times, remaining within our targeted range of 1.75 times to 2.25 times.
Free cash flow excluding certain items increased 3% to $306,000,000 This is a seasonally low free cash flow quarter with incentive compensation payments each year in the Q1. During the quarter, we returned $785,000,000 to shareholders through a combination of dividends, open market purchases and an ASR. In addition, during the quarter, we received 3,400,000 shares, 800,000 shares from open market purchases, 400,000 shares from the true up of the old ASR and 2,200,000 shares initial shares from the current ASR. Now let's turn to the segment results starting with Market Intelligence. Market Intelligence delivered a strong quarter with revenue increasing 10%, 8% on an organic basis and active desktop user growth of 13%.
I need to point out 2 changes that both became effective on January 1. First, we are now including Kensho revenue in Market Intelligence rather than recording it as a corporate item as we did in 2018. 2nd, in both periods, True Cost has been transferred from Indices to Market Intelligence. With the ESG efforts underway at Market Intelligence, we believe the business is better suited to be included here. Adjusted expenses increased 2%, adjusted segment operating profit increased 27%, and the adjusted segment operating profit margin increased 4.60 basis points to 33.8 percent despite increased investments in the business.
More importantly, on a trailing 4 quarters basis, the business delivered an exceptional adjusted segment operating profit margin increase of 3.50 basis points to 35.2%. Also in March, we announced the sale of the Standard and Poor's Investment Advisory Services business to Goldman Sachs Asset Management. Terms of the deal were not disclosed. The transaction is expected to close in mid-twenty 19. Desktop, the largest category grew 6%, excluding acquisitions.
Data Management Solutions realized 11% revenue growth, once again benefiting from expansion of the data feeds business that Doug highlighted earlier. Risk Services has been renamed Credit Risk Solutions and grew 11% with Ratings Express providing the greatest level of growth as we continue to expand the data feeds portion of Credit Risk Solutions. While bank loan volume and bond issuance activity declined 13%, ratings revenue only declined 7%. This decline was partially mitigated by a 2% decline in adjusted expenses, resulting in an 11% reduction in adjusted segment operating profit and a 2 40 basis points decline in adjusted segment operating profit margin. On a trailing 4 quarter basis, adjusted segment operating profit margin increased 140 basis points to 55.4%.
Non transaction revenue decreased primarily due to a $9,000,000 impact from changes in foreign exchange. In addition, lower rating evaluation services activity, CRISIL and slightly lower new entity ratings contributed to the decline. Intersegment royalties from Market Intelligence partially offset these declines. Transaction revenue decreased due to lower bank loan rating activity and to a lesser extent fewer bond ratings. Non 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 at certain components, namely rating evaluation services, ebb and flow with M and A activity and changes in foreign exchange rates can always have an impact. This slide depicts ratings revenue by its end markets. The largest contributor to the decline in ratings revenue was the 8% decline in corporates, primarily due to less bank loan rating activity. In addition, financial services revenue decreased 2%, structured finance declined 19%, government increased 6% and CRISIL and other category decreased 5%.
This includes an increase in inter segment royalties for Market Intelligence, offset by a decline in CRISIL's dollar denominated revenue. Turning to S&P Dow Jones Indices, the segment delivered 2% revenue growth, 6% adjusted expense growth, 1% adjusted segment operating profit growth and an adjusted segment operating profit margin of 69.5%, a decline of 100 basis points. This margin decline was primarily the result of a revenue mix with a lower proportion of exchange traded derivative revenue than in the prior period. On a trailing 4 quarter basis, adjusted segment operating profit margin increased 80 basis points to 67.7%. Revenue was mixed during the quarter.
Asset linked fees increased 9%, primarily due to an improvement in the timing of customer reporting, purchase of certain intellectual property rights and mutual funds AUM growth. Exchange traded derivative revenue declined 32% from an incredibly strong quarter a year ago. Data and custom subscriptions increased 28% due to a catch up in real time reporting that we first discussed in the Q2 of last year as well as from organic growth. For our Indices business, ETF net inflows were $2,000,000,000 in the first quarter and the average ETF AUM in the first quarter increased 2% year over year. I want to make a clear distinction between average AUM and quarter ending AUM.
Our contracts are based on average AUM. We disclose quarter ending figures because flows and market gains and losses are best depicted using quarter end figures as shown in the waterfall chart on the right. While average AUM increased modestly, quarter ending AUM increased 11% versus the end of the Q1 of 2018. A year ago, there was $1,327,000,000,000 in ETF AUM linked to our indices. At the end of the Q1 this year, there was $1,473,000,000,000 Since March 31, 2018, there has been $95,000,000,000 of inflows and $51,000,000,000 in stock market appreciation.
Industry inflows into exchange traded funds were $97,000,000,000 in the Q1, with the majority going into fixed income and global equity products. Flows into U. S. Equity Funds were only $7,000,000,000 These charts are from a report S and P Dow Jones Indices recently published entitled Sector Effects in the S and P 500: The Role of Sectors in Risk, Pricing and Active Returns. Tradable sector based investment tools are not new.
Products such as exchange traded funds based on sector indices have existed since at least the late 1990s. However, interest in these products has recently grown materially. These charts show that the assets, open interest and trading volume associated with certain index based sector products have more than doubled in the past 5 years. In addition, in February 2019, Cboe launched options on 11 of our select sector indices. These products make it easier for investors to use sectors to express views and manage sectoral exposures.
Key indicators for our exchange traded derivatives volume decreased from a volatile Q1 of 2018. S and P 500 index options activity decreased 23%, fixed futures and options activity decreased 48% and activity at the CME Equity Complex decreased 23%. And now turning to the last business segment. Platts revenue increased 5% as a result of a 5% increase in core subscriptions and a 7% increase in Global Trading Services. Adjusted expenses increased 6%, leading to adjusted segment operating profit margin of 47.4%, a decrease of 60 basis points.
The trailing 4 quarter adjusted segment operating profit margin was exceptional, increasing 260 basis points to 48.9%. Flat revenue increased in the quarter as all 4 commodity groups reported growth. Petroleum, the largest category delivered the most growth at 6%. Last quarter, we shared the slide on the right with you depicting a stepped up level of investments to fuel future organic growth. However, we thought that as you try to model our results, it would be important for you to understand the level of investment in each of the segments.
As you can see from the chart on the left, Market Intelligence is investing half of the total. In addition, this spending is expected to build as the year progresses. Now lastly, I would like to discuss our 2019 guidance. This slide depicts our GAAP guidance. Please keep in mind that our guidance reflects current spot market ForEx rates.
Because of the $113,000,000 pre tax non cash charge associated with a partial risk transfer of the frozen U. S. Defined benefit pension plan that I noted earlier, we are decreasing our 2019 GAAP guidance, diluted EPS guidance. However, because this item is not part of our adjusted results, it does not necessitate any changes to our adjusted guidance. In fact, we are not making changes to our adjusted guidance because we are optimistic about our current outlook for markets, our competitive strength and the initiatives we have underway.
In addition, we continue to expect year over year growth as quarterly comparisons get easier as the year progresses. With that, let me turn the call back over to Chip for your questions. Thank
you. Just a couple of instructions for our phone participants. Operator, we'll now take our first question.
Thank you. This question comes from Ms. Toni Kaplan from Morgan Stanley.
Thank you. Good morning. Good morning. My first question is on ratings margins. Understandably, the weakness in issuance led to the lower ratings growth in the quarter, but I think margins were just a little bit lighter than what we were expecting.
So I just wanted to ask, at what level do you start getting operating leverage in the ratings segment? Do you need sort of like a mid single digit growth to get that leverage there? And just, I guess, just some additional color on what drove the margins down in the quarter would be helpful. Thank you.
Good morning, Toni. This is Ewout. If you look at the margin development in the Q1 of ratings, we are overall satisfied with the results we're seeing. And the reason is that we are also seeing at the same time the benefits of our productivity plans. We see expenses coming down by 2% or in dollar terms $7,000,000 and we think that that is overall showing good expense discipline within the Ratings business.
But in general terms, we see that expense discipline across the enterprise in totality. Clearly, if you look more to the outlook of Ratings and Margins, although we don't really guide and provide specifics with respect to margin outlooks by segment. I do want to say that if you look at the remainder of the year, our expectation is that margins should look better compared to the respective quarters a year ago. So overall, we still expect rating margins to expand year over year 2019 compared to 2018.
Great. And my second question I wanted to ask about Market Intelligence. You mentioned the change with Kensho being included in there. I guess on a like for like basis with last quarter, was the organic growth up sequentially? I imagine that Kensho is probably pretty small, so the 8% look like a pretty good number.
And your user growth of 13% is really strong, much faster than the market. And so just wanted to understand what you attribute sort of the really strong growth rate in the Market Intelligence business too and international Market Intelligence was really strong too. So just any colors on growth there? Thank you.
Tony, if
you look at the inorganic revenue in the Market Intelligence segment during this quarter, it was in total $8,000,000 That was driven by a couple of acquisitions by Market Intelligence. Think about Panjiva, think about RateWatch, as well as some contribution of revenues from Kensho, but that was only a part of that $8,000,000 improvement in revenues on the acquisition line. So overall, it's not a large change. As you will recall, we acquired Kensho in the Q2 of 2018. So next quarter, basically, this is not going to show up in the inorganic category anymore.
It's becoming part of normal business as usual.
Great. Thank you.
Thank you. The next question is from Alex Kramm of UBS.
Hey, good morning, everyone. I may be splitting hairs here with my question a little bit, but I think when you talked about the taxes and the stock based impact there, I think you're now basically saying you have a $0.05 higher bottom line contribution at the same time you left your EPS guidance unchanged. Again, I think it's like less than 0.5 percent of EPS. But just wondering, you sound very positive on the outlook, but clearly, you're not changing anything despite that help. So maybe just a little discussion on the puts and takes there to leave that unchanged.
Good morning, Alex. This is Ewout. If you look at the improved impact that we are now expecting from stock based compensation, if you are looking at the guidance we have provided with respect to the effective tax rate for the full year, which is 22.5 percent to 23.5 percent, we're still within that range, now more at the lower end of the range. So therefore, overall, we have not adjusted the tax rate range in our guidance. But what I do want to say is compared to 3 months ago, we have become incrementally more confident around our guidance in general, because you will recall 3 months ago, we came out of a very volatile quarter and it was very uncertain where the markets would go.
If we now look where the markets are at this point in time, the outlook for the next few quarters in the year, the starting point for our subscription businesses with respect to annualized contract value, which is a leading indicator for future revenue for our subscription businesses. If you look at the starting point of ETF AUM in the second quarter of this year compared to a year ago. Overall, the health of the debt markets at this point in time, we are incrementally more confident around the outlook and the guidance we have provided compared to 3 months ago.
Fair enough. And then secondly, on the index side, was a little surprised about the very good performance on the asset based fees. Now obviously it was challenged by the ETF business, but you mentioned some of the other things that helped like the derivatives, I guess the OTC side and maybe some of the mutual funds. Can you just give us a little bit more detail? It seems like that really helped this quarter.
Maybe that's a little bit lumpy. Maybe there was some one time ish stuff in there. I just want to make sure that if I think about that stuff going forward, that we don't overestimate that going forward, I guess. Maybe you can break out how big those fees are relative to the ETF side? Thank you.
Alex, if you look first at the exchange traded derivative volume, you might recall due to market volatility, there was a very large spike in February 2018. So that's not recurring. Markets have more stabilized and then you also see the volumes on the derivatives trading coming down. So we are looking more at the Q1 2018 as an exception And this is more a normal level quarter, the Q1 of 2019. But we have always said that this business has a natural hedge.
So if exchange traded derivative volume is coming down, that's usually because markets are more positive. And then we see the flip side with respect to the asset based fee levels. There's indeed a couple of elements that are going into the asset based fee level category. Overall average AUM for ETFs was up 2%, so that helps in a modest way. Then there is also the mutual funds assets under management where we saw a positive increase.
There was not so much change with respect to the OTC levels. And there was one particular administrative matter, we have accelerated and implemented improvement in our processes, where we have faster reporting of asset levels by certain managers, that is a one time step up in revenues and that will from now on basically be the new normal level going forward. So that is I think the other element that goes in the mix here with respect to assets under management fees. But overall, like I said, we are optimistic about the 2nd quarter outlook because the starting point in assets is so much better than we have seen at the beginning of the Q2 of 2018.
Excellent. Totally get it. Thank you.
Thank you. The next question comes from Manav Patnaik from Barclays. You may ask your question.
Thank you. Good morning, gentlemen. The first question I had was, I was just hoping you could help us understand the mix components of the non transaction piece of your ratings business. Like how much of that is that the way you described the subscription? And then just within that, I guess I understand why ratings evaluation is down.
Can you just help me understand what's going on with CRISIL?
Good morning, Manav. Non transaction revenue was down $15,000,000 year over year, of which $9,000,000 was FX related. So that's clearly the largest driver of non transaction revenue. Then the second driver here was Rating Evaluation Services. That is very much linked to M and A activity in the market that was relatively modest and therefore also the rest fees and revenues were a bit lower this quarter compared to a year ago.
And then what we see with CRISIL is a couple of impacts. First, impact of foreign exchange based on the difference in foreign exchange rates from a year ago between the Indian rupee and the U. S. Dollar. With respect to the Research and Analytics business, we see revenue coming down due to some market headwinds, but that is then offset by the Indian ratings revenue, which is actually up in a healthy way.
So those are some of the elements that are happening within CRISIL. Overall, we will expect to see maybe quarter over quarter slow and modest fluctuations for non transaction revenue, but we still expect over a longer period of time a normal trend of growth of non transaction somewhere low to mid single digits.
Got it. Okay. That's very helpful. And then maybe just on the balance sheet, your leverage target or your current leverage is pretty close to your target. Just any thoughts on what the plans are there with the cash and the flexibility you have?
Yes, we have, of course, have a very clear statement with respect to our capital philosophy and our capital targets, and we are disciplined around that and we are committed to stay within the targets that we have set. So at the point we will fall below the floor of our leverage range, we will certainly at that point start to consider adding new leverage to our balance sheet. What we'll do with the proceeds, I think is still to be determined. I think you know our first priority is to reinvest in the business. We are investing already this year in a stepped up way in organic initiatives.
You know all of those about ESG and China and Technology and Kensho and other areas. We could also use the proceeds for inorganic investments. We will continue to remain very disciplined from a valuation perspective. And then of course, the 3rd option we have is return of capital to shareholders. So still to be determined, but we have clear targets with respect to our capital philosophy and you may expect us to continue to be committed to those targets.
All right. Thanks a lot, Tay.
Thank you. Our next question comes from Tim McHugh from William Blair. You may ask your question.
Thanks. Just want to ask on Platts, the selling environment, I guess, are you seeing any improvement? And I guess an update on the analytical solutions that you tried to develop over the last few years, the success with selling those to improve the growth of Platts? Thanks.
Hi, Tim. This is Doug. Let me take that one. Well, first of all, as in the past, people have always looked to see if there was any kind of major correlation of plats with commodity prices. And as we've always said, there's some kind of a range.
I'm not can't even know exactly this, but if prices get too high, sometimes it squeeze some of the buyers. If they get too low, it squeezes some of the sellers that we sometimes see. But we've been in a very comfortable range of the price of oil, the price of natural gas. We've also been developing the new products, which we've been highlighting like the JKM marker, rebalancing the Brent components, etcetera. So we see that we're selling into a pretty benign actually maybe neutral to positive environment for Platts.
And as we've mentioned in the past, this is very much about relationships and getting out to have a commercial approach to how we're dealing with the markets. So we're seeing what we would call a neutral to positive environment. On the analytical solutions, this continues to be part of our growth plans and investment plans. We had made, as you know, acquisitions the last few years to build out data sets. Those data sets are included in products that we actually have as well as on their own basis.
One of the early wins I'd like to mention is that as you've heard us talk about the S and P Global Platform, which is an initiative we have to have a single technology base to be able to provide our information in the market. Platts is now piloting a new set of materials that they're delivering to the market, which used to be via PDF. And now through subscription services, they're able to deliver all that information online, where instead of seeing a PDF, a customer is able now to download the information, build in their spreadsheets, use it in their analysis, etcetera. So, we're laying a very strong foundation for the vision of Platts analytically and one of the key elements in that was building out this S and P Global platform, so we can deliver those kinds of solutions.
Okay. Thanks. And then just on the investment spending within, I guess, in particular, Market Intelligence and Kensho. You made the comment it builds as the year progresses. Can you help us think about the subsequent years, I guess, 2020, 2021?
Is this an expense, I guess, spending or project level that continues to build, stays at this elevated level? Or do we start to see savings in terms of data ingestion costs and so forth as we go out a year or 2 where, I guess, you get a reversion relative to this, I guess, weight against the margins?
Tim, if you look at the next few years for those business cases where we're investing in Market Intelligence, a part of the current expense for this year is really for the buildup phase and we don't expect those to recur. A part is really for operations and a setup of new organizations and new products we will provide to the market. So those expenses will remain going forward. I think the biggest difference that you should expect to see is that those initiatives will start to drop off revenues over the next few years, some a little faster, some a little bit further out in time. For example, we have always said that the Chinese investments are more in a horizon of 3 to 5 years, but some others in Market Intelligence, the payoff in terms of revenue could be a bit faster.
So there you should expect the biggest change that these investments we're doing this year will ultimately lead to an improvement of the organic growth in Market Intelligence going forward.
Okay. Thank you.
Thank you. The next question is from Mr. Jeff Silber from BMO Capital. You may ask your question, sir.
Thanks so much. Doug, when you started the presentation, you talked about the markets having come a long way since the depths of December. I'm just curious in your conversations with issuers, are they thinking the same things? I'm just wondering in terms of the outlook, there still seems to be a lot of uncertainty out there. If you can provide some color, that would be
great. Yes, there definitely is a lot of uncertainty out there. I'd basically divide this into 2, the positive as well as then some of the uncertainties. On the positive side, business sentiment is still strong, consumer sentiment is strong, banking balance sheets are very strong, there's abundant capital, The accommodative policies of the central banks around the world have continued in place with very cheap capital and in Europe in particular flood of liquidity into the markets. So there's very, very strong conditions.
And then we've also seen economic growth, even though it slowed down a little bit in China and Europe, the U. S. Just had a very strong quarter. And our own estimations are for a slight slowdown in global growth from last year, but still a global growth. And we also see a low probability, 20% or so probability of a recession in the U.
S. In the next 12 months, which is actually a very low level. Now what are some of the challenges or uncertainties? Clearly, there's uncertainties around trade. There's still the markets are still waiting to see what's going to happen with the U.
S.-China trade negotiations. European markets are still quite weak, Southern Europe in particular. And even though Brexit is something that we were panicking about a few weeks ago, and it went away for 6 months, Brexit still needs to be resolved. So you still have some political issues and trade issues that create some of the uncertainty. And then as I said, Europe is also continues to be a pretty weak area.
Okay. Appreciate the color. And Ewout in terms of my follow-up, I know you haven't disclosed the potential details regarding the sale of the SPIAS business, but can you give us an order of magnitude roughly how large that business is so we can take that out of our model?
Yes, we have not disclosed those details. But overall, you should see that that is a relatively small business for us. So not a material large impact on the results and the difference in your models, would say relatively small.
Okay. And that's happening at the end of the second quarter, is that what you said?
Yes. We expect closing somewhere mid of this year. So if you model this, you should probably take it out for the second half of this year.
Okay, perfect. Thanks so much.
Our next question comes from Mr. George Tong from Goldman Sachs. Sir, you may ask your question.
Hi, thanks. Good morning. Your overall global issuance forecast for the full year is unchanged at down less than 1%. Drilling deeper into the individual categories of debt, can you discuss how your issuance expectations for the year have changed and what implications there would be from a pricing and mix perspective?
Hi, George. This is Doug. As we've looked at this and we've made a couple of quick adjustments to it, looking at what we see from the pipelines from speaking with debt underwriters and investment banks by looking at what we see from issuers as well as taking a look at what we see in terms of credit conditions and global markets. As you see, it's relatively unchanged. There's a slight, slight change in what we expect for corporates to be up a little bit, for financial institutions to be down a little bit, for public finance to be down a little bit.
But net net, the overall change is very similar to what we had before. And the differences across those different asset classes in different types of industries are so minor. It doesn't really have much of a change in what we'd look forward in terms of revenues and our revenue mix.
Got it. That's helpful. And then looking at operating margins at Platts, they declined in the quarter despite reasonable revenue growth. Can you talk about what drove the margin decline and how you expect profitability at Platts to evolve over the course of the year?
George, that was mostly driven by timing of certain expenses. So we had particularly some expenses related to initiatives and events that were a bit higher this quarter. We don't expect that to continue for the remainder of the year. So therefore, from a margins perspective, we are very comfortable with respect to the outlook of the margins for Platts and we still expect that the margins will develop in a favorable way for the next three quarters compared a year ago.
Very helpful. Thank you.
Thank you. Mr. Joseph Foresi from Cantor Fitzgerald, you may ask your question.
Hi, this is Drew Kootman on for Joe. I had a quick question on China. You mentioned you had a seminar in Beijing and I was just wondering if you could provide any updates or give us a better understanding of the risks you may
be seeing in the region?
Well, first of all, thanks for the question. Drew, nice to hear you today. We opened up our credit rating agency in China officially on March 26 with a seminar. We felt it was valuable to launch this with an approach to having relationships with issuers, with investors, with market players, with debt underwriters, financial institutions, etcetera by introducing them to our employees, by talking about our methodology and talking about how we're heading into the market with this very transparent approach to credit ratings. Since then, we continue to see customers.
We're now up to having had over 250 calls with relationships that we're starting to build to open up the rating agency and to be able to do more and more issuance there. We have not done an issuance clearly, there's discussion about the level of growth in China, clearly, there's discussion about the level of growth in China and the type of growth that China has been developing. As you know, a few years ago, China was very much of an investment led export oriented economy. They've shifted more towards a consumer oriented consumption economy with a lot more investment in the domestic markets. We think that there are a few sectors, which we're watching carefully there, which would be the couple of property sectors.
In addition, there's some municipal debt, which has been growing. But we don't see any major credit bubbles right now in China. If we did, we would raise those. But we think we're off to a great start, and very enthusiastic reception from the market players as well as excellent relationships with the key regulators and official market players that we need to be working with to ensure the success of our ratings business in China.
Great. And then you talked about Kensho a couple of questions ago. So I was just seeing any updates on the progress that you're seeing from Kensho and RateWatch and just anything moving forward?
We're still very excited about Kensho and what Kensho is doing for S&P Global as a catalyst for innovation and change in our thinking with respect to our business models, our proposition to the markets. There's new initiatives going on. We have actually a very interesting initiative going on in Platts at this moment. And there's a lot of enthusiasm from the Platts leadership team around the implementation of that initiative as well. And we are continuing on some of the implementation of the other initiatives that we told you before.
Think about some of the new initiatives around search, the omni search on the platform that we expect to introduce in a beta form later this year. With respect to the financials update and particularly with respect to value creation updates, we're planning to give you more details once a year. We did that at the end of Q4 of 2018. So we will provide you more details on that by the end of this year again.
Thank you.
This question comes from Craig Huber from Huber Research Partners. Sir, you may ask your question.
Thank you. Doug, I want to just focus on China, if we can, for your ratings business. Just curious how big of an effort you guys have rolled out there, I guess, number of analysts, if you could share that you have in that market right now. I believe globally you have probably something like 1400, 1500 analysts in ratings around the world, if you could just clarify that. But as you sort of think of the China market from a rating standpoint from an S and P standpoint, how big of an opportunity do you think this is kind of I think talk about talk with market participants and stuff?
Yes. Thanks, Craig. Well, first of all, just a brief comment on how we ramp this up, because I think that's important. As we've been going to this market for the last few years, trying to build up a relationship to understand the dynamics of the domestic market. We wanted to make sure that we built this out with a consolidated approach with a long term view.
What we did is we originally started with 10 veteran S and P global analysts who are Mandarin speakers that we brought from offshore and they spent months building out criteria working on how we're going to be able to rate in the market using domestic criteria, domestic understanding of bankruptcy laws, of recovery laws, etcetera. And then they back tested 400 credits to ensure that we had the right kind of criteria in place. As we were doing that, we went out market and hired 21 more analysts. So right now, we have 31 analysts covering the Chinese market. They've covered 40 different sectors and different types of sectors and subsectors and they've done the 400 plus initial credit reviews that they've done.
And now with that, our sales teams are out of the market discussing what that and they've done the 400 plus initial credit reviews that they've done. And now with that, our sales teams are out of the market discussing what that means and building up those relationships. Now just in terms of some of the size, you've heard this before, it's the 2nd largest bond market in the world, after the U. S. It's close to bypassing the Japan also on the public side as well.
They have most of the bonds are held by banks and financial institutions. They're still not necessarily into a pension system and individual holders and only 2% of the bonds are held offshore by foreign investors. So we think that the dynamics of the market shifting from a short term bond market, the typical bond is about a 3 year duration more or less as opposed to U. S, which is depending on which market you look at 7 to 11 year duration. It's a very short term duration.
It's still being held by financial institutions with very little international presence. We think that all of that's going to change. And then as that changes, this is the opportunity for ratings. We have not built out a very aggressive revenue model for the 1st year. We think this is an investment year.
And we think that over time we're going to build out a revenue model. I'd prefer to come back to you as the year progresses with some more information that could be either financial or directional, because we're really right now just at the ground floor of getting this thing off and running.
Great. Thank you, Doug.
This question will come from Mr. Peter Appert from Piper Jaffray. Sir, you may ask your question.
Thank you. So Doug, I'm just interested in your thoughts on particularly for the Q2, what you're seeing in terms of activity in the debt market. And related to that, I'm wondering if refi activity is impacted by the more stable rate environment?
Yes. So, what we've seen so far in the Q2, it's only been a month. It's similar to the kind of mix we saw throughout the 1st part of the year. Europe is still weak. The European markets were very weak in the Q1.
In fact, if you look at the total market in Europe, the financial institutions was down 25% in the Q1. Total Europe was down 8%. In Europe, the investment grade is down 12 point percent. High yield was down 25% and we've seen that continue. So you have very specific conditions in Europe that are a little bit different than the rest of the world, partially because of the economy has slowed down, there's some uncertainty.
And then also you have a new round of liquidity being pumped into the banks by the ECB. It's an LTRO like situation and very, very low interest rates. So putting Europe aside and coming to the U. S, what we saw in the U. S.
In the Q1 was a as you know, there was a very the bank loan activity was down over 26% on new bank loan, but high yield issuance was actually up 6%. It's not quite apples for apples, but it is the markets that those types of borrowers will go to. They'll decide if they're going to go to the fixed income market or the loan market. We have seen in April some refinancing starting to pop in as well as new issuance. And we've seen April was not a great month either, but overall though we did see a lot of the activity with people coming back to market for refinancing.
One last trend that we mentioned, Ewout mentioned in his comments that the M and A activity was weak during the Q1, actually in the Q4 and the Q1 this year was is the pipeline has actually started looking a lot better when you look at deals announced. So the one of the charts that I track, which looks at deals announced has actually started popping up, which is usually a good indicator for ratings evaluation services as well as issuance down the road.
Got it. Thank you. And then just on the market intelligence quickly. Doug, your performance, as mentioned earlier, is quite a bit better than what we're seeing from the industry overall.
Is it possible to sort of delineate
how much of that is a function of share gains versus some of the product line extensions you've been offering?
I don't have a precise answer for you to give you what's from share gains. But what I could tell you is that a lot of our growth and you saw it in the charts today is coming from what I would call the newer or non traditional products. We had strong growth in the on the desktop, which you saw, but we had even stronger growth from data feeds and from credit services and things that we see are where the demands are growing from our users. The users are looking for more and more granular data and new ways to incorporate data into their own modeling. And so that trend is something that I think we're investing in and we think it's going to continue going forward.
But I don't have any specific comments about share gain.
The only thing I would add is that if you think about our customer base versus some of our competitors, we're much less dependent on Wall Street. So I think that also plays into the numbers as well.
Got it. Thank you.
Thanks, Peter.
Thank you. Mr. Bill Warmington from Wells Fargo, you may ask your question.
Good morning, everyone.
Good morning.
So, a question for you about the competitive landscape. Throughout ratings, I think in REITs, CompStack and so on. Is that an area of focus for you as well, something you need to have in your arsenal?
As we've looked at what we need to have to enhance and improve and continually update our approach to ratings as well as all of our analytical products is right now our major emphasis is on ESG. As you can see, we believe that there is an exploding demand. We don't know how it's defined yet and what direction it's going, but we think it's exploding for ESG data and content. So this is where this quarter you saw that we launched or last quarter in the Q1 we launched 2 significant benchmarks for ESG products which we're out working on and building up. When it comes to specific data, whether it would be real estate or if it's information about interest rates or credit recoveries, etcetera, we believe that we either have or have access to adequate information to fulfill our duty to produce excellent ratings.
Okay. And then a question based on some of Ewout's comments about the Q1 ETF inflows. You mentioned that they had come in at $97,000,000,000 but the U. S. Equity inflows were about $7,000,000,000 I just wanted to get your thoughts on whether you saw that as a short term phenomenon or more of a longer term trend?
Good morning, Bill. This is clearly short term. We see always some fluctuations in flows going in different asset categories, either from a geographical perspective or from an asset class perspective. Overall, these movements can differ quarter by quarter, but we are looking at the overall ETF market share that we are having of the overall assets under management that are using our indices, that's close to 30% and that number is basically stable already for a longer period of time. So our market share is continuing to be good.
We're leading with that market share and this is really fluctuation period over period. If we look at flows for example to U. S. Equities in the month of April, we've seen that those are actually pretty robust. So again, this can really move around a bit.
Excellent. Thank you very much for the color.
Thank you. We will now take our final question from Shlomo Rosenbaum from Stifel. You may ask your question.
Hi, good morning and thank you for squeezing me in. Hey, Doug, maybe you can just elaborate a little bit more on the Kensho investment. It's going to be 30% of planned investment. Can you talk about any potentially new initiatives that might be going on right now or things that you want to highlight? And also is it people costs?
And I just want to be clear that this I don't think it's the retention bonuses included in that, but can you just clarify that?
Yes. So, first of all, Shlomo, thanks for asking the question. We are really thrilled and very pleased with having made the Kensho acquisition and all of the difference that it's making across the company. We've traditionally had a couple of areas that we've highlighted, which were data linking. We talked about enhanced search capabilities and omni search capability.
Ewout just mentioned something that's going on with Platts where we have now a team embedded in Platts working on the market on closed process to find different ways to look at the value of information and to get it in a faster way as well as identify potential opportunities to continue to improve our business model. And if I use those as a few of the examples, those are there's activities like that now going on in ratings and indices and also even some of our corporate functions. They're helping us look at some of the ways we manage the business overall. And as a result of the early wins that we've had, we decided that it's valuable to invest in our businesses for growth opportunities. And this is where the investments are coming from Kensho.
So they're related to investments in growth. They're related to where we're going to be either opening new markets or launching new products where we think that Kensho can help us with that. Some of those expenses are people and some of those expenses are additional computing capacity or capacity for data tools, etcetera. But all of them are based off of early results that we're very comfortable with the progress with Kensho and they're all geared towards growth. Although I would say there is some of the data work that's going on will potentially lead to productivity as well.
So we're not just putting productivity behind us, but a lot of this is being geared towards growth opportunities.
Okay, great. And the investments are not part of the retention payments, right? These are actual incremental investments?
These are incremental investments.
Okay, great. Thank you so much.
Thank you. Well, let me just wrap this up. And first of all, thank everyone for joining the call today. As you've heard from us, we continue to be committed to growing our businesses, to investing for growth to finding new ways to continue to have productivity. We're using our framework of powering the market to the future and the 6 foundational capabilities as a guide frame for us.
We'll continue to show that to you as we use that as a consistent approach for speaking with our Board of Directors about our long term growth with our employees and also with our shareholders. So we look forward to being back in touch with you at the end of the Q2. And with that, thank you again always for your great questions and for your support. Thank you again.
That concludes this morning's call. A PDF version of the presenters' slides is available now for downloading from investor. Spglobal.com. A replay of this call, including the Q and A session, will be available in about 2 hours. The replay will be maintained on S&P Global's website for 12 months from today and by telephone for 1 month from today.
On behalf of S&P Global, we thank you for participating and wish you a good day.