Good morning, and welcome to S&P Global's Second Quarter 2016 Earnings Conference Call. I'd like to inform you that this call is being recorded for broadcast. All participants are in a listen only mode. We will open the conference to questions and answers after the presentation and instructions will follow at that time. To access the webcast and slides, go to investor.
Spglobal.com, that is investor. Spglobal.com and click on the link for the quarterly earnings webcast. I would now like to introduce Mr. Chip Merritt, Vice President of Investor Relations and SP Global. Sir, you may begin.
Thank you. Good morning, and thanks for joining us for SP Global's earnings call. Presenting on this morning's call are Doug Peterson, President and CEO and Jack Callahan, Chief Financial Officer. This morning, we issued a news release with our Q2 2016 results. If you need a copy of this release and financial schedules, they can be downloaded at investors.
S and bglobal.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 make certain cautionary remarks about forward looking statements. Except for historical information, the matters discussed in the teleconference may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward looking statements. In this regard, we direct listeners to the cautionary statements contained in our Form 10 ks, 10 Qs and other periodic reports filed with the U.
S. Securities and Exchange Commission. I would also like to call your attention to a European regulation. Any investor who has or expects to obtain ownership of 5% or more of S&P Global should give me a call to better understand the impact of this legislation on the investor and potentially the company. We're aware that we do have some media representatives with us on the call.
However, this call is intended for investors and would ask the questions from the media to be directed to Jason Feuchtwanger in our New York office at 212-438-1247 subsequent to this call. At this time, I would like to turn the call over to Doug Peterson. Doug?
Thank you, Chip. Good morning, everyone, and welcome to the call. This morning, Jack and I will review our Q2 results. We're very pleased with the progress the company is making creating growth in a macroeconomic environment that has challenged many of our customers. Let me begin with the highlights of the 2nd quarter.
Every segment delivered revenue growth. This is a testament to the quality of our products and the creativity and execution of the employees who develop and deliver them. In addition to creating growth, driving performance is a key theme in managing the company and margin improvement is an important yardstick by which our progress is measured. This quarter, the company delivered a 2 10 basis point expansion in the adjusted operating profit margin. The top priority for 2016 is the integration of S and L.
We continue to make progress on S and L integration and synergy targets and I'll share a few examples with you in a few moments. Financial performance was excellent with an increase in adjusted diluted EPS of 17% over the most difficult quarter comparison in 2015. As a result of our share repurchases, we reduced average diluted shares outstanding by 3% year over year. Last week, we received final regulatory approvals for the sale of J. D.
Power. Our year to date free cash flow was $513,000,000 and we increased the adjusted diluted EPS guidance range reflecting strong second quarter results. Before I get to the results in more detail, I want to take a moment to discuss the British exit from the European Union. 1st and foremost, Brexit has no immediate implications for European operations. It's business as usual for S and P Global.
While the media has reported that a number of companies plan on moving operations out of London, we have no such plans. We expect that because of the uncertainty it creates, however, Brexit could hamper issuance, particularly in Europe. So far the impact has been muted, but markets never like uncertainty and will take time to resolve all of the various regulatory changes that companies and markets will face. For our company, we will seek to work with the relevant UK and EU legal and regulatory authorities to navigate the path forward, a process that will likely take years. S and P Global Ratings has written extensively on the impact that Brexit will have on the markets and our views can be found on the S and P Global Ratings website at the URL listed on this slide.
Now let's take a closer look at the 2nd quarter results. While reported revenue grew 10%, organic revenue on a constant currency basis increased 5%. In most recent quarters, the company's revenue has been hit by ForEx with little impact to operating profit, primarily due to the weak British pound. However, this quarter was different. In the Q2, ForEx had a negligible impact on revenue, yet contributed approximately 3 percentage points to adjusted operating profit and approximately 100 basis points to the adjusted operating profit margin.
Most of this benefit was realized in S and P Global Ratings. So overall, the company delivered 2 10 basis points of adjusted operating profit margin improvement as a result of ForEx, S and P Global Ratings margin improvement and the progress made on S and L integration synergy targets. Together, revenue growth, margin improvement and share repurchases combined led to a 17% increase in adjusted diluted EPS. In the Q2, every division recorded top line growth and improvement in adjusted operating profit. The 2 standout performers were S and P Global Ratings and S and P Global Market Intelligence with adjusted operating profit margin gains of 400 and 3.70 basis points respectively.
Now let me turn to the business and I'll start with S and P Global Ratings. During the quarter revenue increased 4% with a negligible impact from ForEx. Adjusted operating profit increased 12% and the adjusted operating margin increased 400 basis points to 54.1%. Improved market conditions after a weak 2016 start resulted in a modest year over year issuance increase. For the first time in 6 quarters, international revenue outperformed domestic.
ForEx had a favorable impact of 3 percentage points on adjusted operating profit and approximately 150 basis points on the adjusted operating profit margin, due primarily to the weakness in the British pound. Excluding ForEx, adjusted expenses decreased 3 percentage points, mainly due to reduced outside services. Another highlight of the quarter was the purchase of a 49% stake in Tris Rating. This increased commitment to Tris in an exciting step forward in our long standing relationship. By working together more closely, we'll be in a better position to serve our customers and investors in Thailand and other ASEAN markets.
Non transaction revenue increased 3% from growth in surveillance, CRISIL, commercial paper activity and royalties from misservices. Transaction revenue increased 5% as a result of improved contract terms, increased bank loan ratings and growth in debt issuance in Asia. If we look more closely at the largest markets, 2nd quarter issuance in the U. S. Was down 11% with investment grade decreasing 6%, high yield down 9%, public finance up 4% and structured finance declining 37% with drops with strength in RMBS and CLOs.
And in Asia, investment grade issuance surged 60% and structured finance increased 20% due to ABS and RMBS. Let's take a further look at issuance. The 3% increase in global issuance breaks a 4 quarter streak of year on year declining global issuance that had pressured S and P Global Ratings revenue. During the quarter, only Asia reported an increase in issuance with a 55% gain. Excluding domestic Chinese issuance, which we don't rate, issuance in Asia still increased 35%.
One factor driving this growth was offshore Chinese issuance. During the quarter, investment grade issuers generally had unfettered access to debt capital markets, while spec grade issuers had very limited access with windows of opportunity that opened for short periods and then were disrupted by external events. Despite the year over year declines in the U. S. And Europe, there were periods of extreme strength during the quarter.
In fact, Mace had a monthly record for U. S. Investment grade issuance. June started out with a very strong issuance, but then came to a standstill in the week leading up to the Brexit vote. Last week S and P Global Ratings released its latest global issuance forecast.
We now expect global issuance to decline 3.8% in 2016. This compares to the April forecast, which anticipated decline of approximately 2%. The biggest differences are in corporate and structured issuance, which have been lower due to Brexit and international public issuance, which has been increased as first half issuance already exceeds all of 2015. Now let me turn to S and P Global Market Intelligence. In the 2nd quarter, revenue increased 29%, primarily due to the addition of S and L.
Excluding S and L, organic growth was 8%. Adjusted operating profit increased 48% and the adjusted operating margin advanced 370 basis points to 28.4%. The adjusted segment operating margin includes a benefit from ForEx of approximately 100 basis points. Excluding ForEx, this figure is comparable to the 1st quarter adjusted segment operating margin. ORIX had a favorable impact of 5 percentage points on adjusted operating profit, primarily due to weakness in the Indian rupee and British pound.
In 2016, successful integration of SNL is a top priority for the company. We made a substantial investment with the acquisition of SNL and we recognize we must achieve our integration synergy targets in order to deliver return on that investment. We are well on our way to achieving cross sell synergy targets for 2016. Last quarter reviewed some of the organizational changes that took place. Today, in order to help you get a better sense of our efforts, I'm going to share several examples of integration synergies progress during the quarter.
We reconfigure our risk services scorecard product for analyzing commercial banks to include SNL bank data and received great feedback and early sales success from the market. We integrated our equity ownership and earnings estimate data onto the S and L platform. We made tremendous progress on integrating SNL sector specific fundamental data into our express feed delivery platform. Now in beta testing SNL content will be available this fall, enabling more seamless cross selling to our existing feed clients. We completed significant design work on our next generation consolidated product platform that will encompass mobile, web and excel delivery, reduce costs by replacing third party data with internal solutions.
We completed our office consolidations in Denver, New York and Singapore with other cities still in the works. We've been making great progress. Let me add a bit more color on 2nd quarter revenue growth in S and P Global Market Intelligence, which delivered double digit user growth in both p Capital IQ Desktop and SNL. In Financial Data and Analytics, S and P Capital IQ Desktop and Enterprise Solutions revenue increased 8% with high single digit growth in both products. In addition, SNL revenue reported a 9% increase compared to the Q2 2015.
Prior to our acquisition of SNL, however, excluding a purchase accounting deferred revenue adjustment, revenue grew 10%. With the progress that we continue to make integrating S and L into S and P Global Market Intelligence, it will become increasingly difficult to separate SNL results from the total. Therefore, this is likely the last quarter will provide separate revenue figures for SNL. Risk services revenue increased 10% led by double digit ratings expressed growth. In the smallest category research and advisory, revenue decreased 12% due to declines in Equity Research Services.
Now let's turn to S and P Global S and P Dow Jones Indices. Revenue increased 4%, adjusted operating profit increased 4% and adjusted operating margin improved slightly to 66%. Market volatility has created large swings in AUM from month to month as well as volatility in the number of exchange traded derivative contracts traded each month. During the Q2, revenue increased primarily due to steady data license growth, strength in exchange traded derivative activity due to market volatility and ETF related revenue was up slightly. If we turn to 3 types of revenue, transaction revenue from exchange traded derivatives increased primarily to a 24% increase in average daily volume of products based on S and P DJI indices.
In particular, e mini S and P 500 futures, CBO Volatility Index, VIX and CME Equity Complex contracts all increased more than 20%. Asset Linked Fees revenue mostly from exchange traded funds was up slightly. The exchange traded products industry recorded inflows of $46,000,000,000 in the 2nd quarter with fixed income products receiving the largest inflows. Average AUM associated with our indices increased 3% year over year with inflows of 7% offset by asset value declines of 4%. The quarter ended on a high note with quarter ending ETF AUM associated with our indices reaching a new record of $855,000,000,000 as U.
S. Equity markets rebounded. This creates a great starting point for the Q3. Subscription revenue, which consists primarily of data subscriptions and custom indices increased due to continued steady growth in data subscription revenue. During the quarter, the company launched 90 new indices and our partners launched 18 new ETFs based on our indices.
We added 2 in the environmental, social, governance space that I'd like to highlight. JPX, S and P CapEx and Human Capital Indices designed to measure performance of Japanese companies that are proactively and effectively making investments in physical and human capital based on various metrics, including the Robeco SAM human capital scores. In the S and PESG Index series, designed to measure the performance of companies with a weighting scheme based on an ESG factor score derived from Robeco Sam's annual corporate sustainability assessment. This launch brings together for the first time smart beta and sustainability into a global index family that treats environmental, social and governance or ESG on a standalone performance factor. With the addition of these 2 indices, we now have 130 ESG indices.
This quarter, we celebrated the 120th anniversary of the Dow Jones Industrial Average launched in 18/90 6 by Charles Dow and Edward Jones. On its 1st day, May 16, 18 96, the Dow closed at 40.94. Today, the Dow Jones Industrial Average is the iconic symbol of the U. S. Stock market.
Now on to S&P Global Platts, which currently includes J. D. Power. Organic revenue increased 4% adjusted for the NADA used CarGuide, Petromedia and Rig Data acquisitions. Adjusted operating profit increased 7% and adjusted operating margin declined 70 basis points to 38.4%.
Platts delivered 7% revenue growth driven by strength in subscriptions and global trading services. J. D. Power had a decline in organic revenue due to lower consulting revenue in China. With all of the regulatory requirements completed, we continue to expect closing the sale of J.
D. Power this quarter. Turning to Platts, Global Trading Services led the growth during the quarter with double digit revenue gains primarily due to the timing of license fees and strong license revenue from the Singapore and ICE exchanges. The core subscription business delivered mid single digit revenue growth led by the petroleum sector the strength in Singapore Exchange listed TSI iron ore contracts and metal market data subscriptions. While rig counts are up since the beginning of May, many of our customers remain under pressure from low oil prices.
Therefore, we continue to expect growth to moderate slightly in the remainder of 2016 as these customers continue to face difficulty. Finally, the CME Group introduced a new aluminum A380 alloy futures contract that settles against our price assessment. There been growing need for North American aluminum alloy risk management tool. This contract will provide market participants with an effective solution for hedging aluminum alloy price risk. On the business development front, we have several new items.
In June, we acquired RigData, a leading provider of daily information on rig activity for the natural gas and oil markets across North America. We've discussed our desire to add our own supply demand data offerings and this extends our energy analytic capabilities in North America natural gas with oil offering. Founded in 1986, Rig Data provides over 5,500 customers with daily electronic reports on drilling permits, activity and rig locations in United States, Gulf of Mexico and Canada. We launched 5 domestic oil product We launched 5 domestic oil product assessments in Japan. Platt now assesses prices for important refined oil products for domestic waterborne deliveries in Japan from locations in Tokyo Bay, Chukyo and Honshi.
The Japan waterborne assessments reflect prices for gasoline, gas oil, kerosene, low sulfur A fuel oil and high sulfur fuel A fuel oil. These assessments will follow Platts market on closed principle. And finally, we launched the LNG U. S. Gulf Coast Marker.
The natural gas infrastructure that connects United States, Mexico and Canada is the world's largest and most integrated natural gas market. By 2020, the Americas are expected to be the world's 3rd largest producer of LNG behind Australia and Qatar. This new price reflects the daily export value of LNG traded free on board from the U. S. Gulf Coast.
In summary, all segments delivered revenue growth, bond issuance recovered from a weak start to the year, margin improvement continues to be a key focus. Integration of S and L remains a top priority for the company's meaningful progress to date. We expect Brexit to have no immediate implications for the company and we are increasing our adjusted diluted EPS guidance by $0.05 to a range of $5.05 to 5.20 dollars Our guidance has been updated to now include dilution from the pending sale of J. D. Power.
With that, I want to thank you all for joining the call this morning. But before I turn the call over to Jack Callahan, our Chief Financial Officer, I wanted to say a few words about him. As you know, Jack has accepted a new position at Yale. Not only is he an active Yale alumni, he grew up in New Haven, Connecticut. So Jack's going home.
We're thankful for the time he spent with us. After joining the company in November of 2010, he was instrumental in engineering the transformation to S and P Global, a faster growing, more focused and profitable company. He's also assembled an outstanding organization and we're grateful for all he's done for the company and shareholders. Early next month, Jack will begin his role as Senior Vice President of Operations at Yale. We wish Jack and his family all the best.
Ron McKay, our current Senior Vice President and Corporate Controller has been named Interim CFO as we continue the search process for Jack's replacement. Thank you, Jack. And now I'll turn the call over to
you. Thanks, Doug, and I appreciate those kind words. Good morning to everyone on the call. This morning, I will recap key financial results. I also want to discuss the impact from adjustments to earnings, then I'll update you on the balance sheet, free cash flow and return of capital.
And in wrapping up, I'll provide some color on our updated guidance. Let's start with the consolidated 2nd quarter income statement. There are just a couple items I want to highlight. As you've just heard from Doug, all of our segments delivered top line growth. Collectively, that led to an increase in reported revenue of 10% with organic growth of 5%.
The difference is largely due to the SNL acquisition. Our adjusted operating margin increased 210 basis points. Approximately 100 basis points was due to ForEx. The balance was primarily due to outstanding profit growth and margin improvement at S&P Global Ratings and S&P Global Market Intelligence. Both businesses have delivered impressive margin improvements year to date.
Interest expense was up over $26,000,000 due to our highly successful bond offerings last year, partially in support of the SNL acquisition. This stepped up level of interest expense will continue to create a difficult year over year comparison until the Q4. Share repurchases over the past year have resulted in more than a 3% decline in average diluted shares outstanding. So overall, sustained top line growth, margin improvement and share count reduction delivered a 17% increase in adjusted diluted earnings per share over the most profitable quarter in 2015. Now let me turn to adjustments to earnings to help you better assess the underlying performance of the business.
Pretax adjustments to earnings totaled to a gain of $22,000,000 in the quarter. The first item is a net gain from insurance recoveries. The second item includes net disposition costs primarily related to the pending sale of J. D. Power to the XIO Group and our Speedy and CMA pricing businesses to ICE.
The last item is a restructuring charge in S and P Global Ratings as the business continues to focus on sustained productivity. And as we discussed last quarter, our adjusted results now exclude deal related amortization of $23,000,000 All adjustments are detailed on Exhibit 5 of today's earnings release. Now let's turn to the balance sheet. At the end of the quarter, we had $1,600,000,000 of cash and cash equivalents, of which approximately 95% was held outside of the United States. We also had $3,500,000,000 of long term debt and 309,000,000 dollars of short term debt in commercial paper and from a drawdown on our credit facility.
Since the end of the Q1, we have reduced short term debt by $163,000,000 Going forward, our level of short term debt will likely fluctuate a bit as we periodically tap into the short term debt market to fund our share repurchase program and meet other corporate needs. Our first half free cash flow was $478,000,000 However, to get a better sense of our underlying cash generation from operations, it is important to exclude the after tax impact of legal and regulatory settlements and related insurance recoveries. On that basis, first half free cash flow was 513,000,000 and is on track to reach our 2016 guidance of approximately 1,300,000,000 Now I want to review our return of capital. During the quarter, the company bought approximately 1,400,000 shares. These purchases combined with our dividend totaled to approximately $242,000,000 of cash returned to shareholders just in this quarter.
Year to date, the company has returned $538,000,000 to shareholders. The volume weighted average price for the shares repurchased so far this year is approximately $98 The share repurchase program remains an important component of the company's overall capital allocation. In addition, we anticipate stepping up share repurchases to help mitigate some of the dilution from the pending sale of J. D. Power subject to conditions.
Now let me provide some additional perspective on our 2016 guidance. There are 3 items that have been updated. Our previous guidance included the results of J. D. Power for the full year.
We now assume that the sale of J. D. Power will be completed during the Q3 and have removed J. D. Power results for the balance of the year.
This will have an impact on revenue, and our guidance moves from mid- to high single digit to new guidance of mid single digit growth. Year to date margins have benefited by approximately 100 basis points from ForEx. Therefore, we have increased operating profit margin improvement from approximately 50 basis points to a new guidance of approximately 150 basis points. Despite the inherent dilution from removing several months of J. D.
Power results, we are increasing our 20 16 adjusted diluted earnings per share guidance by $0.05 due to the strong first half results in our outlook for the remainder of the year. The new range is $5.05 to $5.20 We are keeping a wide range as there remains considerable macroeconomic uncertainty that could impact the markets and our customers. So in summary, the Q2 was a strong quarter for the company. Each of our segments is performing well, and we are well positioned to continue to provide the essential benchmarks, data and analytics that our customers require. As Doug mentioned earlier, today is my last earnings conference call.
It has been a pleasure and an honor to be the Chief Financial Officer of initially the McGraw Hill Companies, then McGraw Hill Financial and now S and P Global. I want to thank our shareholders and the analyst community for your interest and support as we have transformed the company. And finally, I want to thank the over 20,000 S and P Global Associates for your hard work and commitment in building a stronger organization for the future. I wish you all well and I remain optimistic on the continued success of S and P Global going forward. With that, let me turn the call back over to Chip for your questions.
Thanks, Jack. Just a couple instructions for our phone participants. I would kindly ask that you limit yourself to 2 questions, that's 2 questions each in order to allow time for all callers during today's Q and A session. If you've been listening through a speakerphone, but would now like to ask a question, Operator, we'll now take our first question.
Thank you. This question comes from Ashley Sarrau, Credit Suisse. You may now ask your question.
Good morning.
I guess first question just on market intelligence. Geographic presence into Europe are faring and also how pricing conversations are going so far as you integrate SNL and iCapitalIQ?
Thank you and welcome. Welcome to the call. I think this is your first time on our call. So first of all, the Market Intelligence business is advancing quite well as you heard from some of the statistics that I provided and some of the examples. Related specifically to your question about the selling environment, I'll just be clear that we continue to progress faster on cost synergies than we do on sales synergies, but we are finding some early wins.
We're finding more wins in Asia right now than we are necessarily in Europe. And this is where we're able to either sell SNL products into Asia customers who before didn't use them using the former Cap IQ sales force or we're finding opportunities where we've integrated the services together between Cap IQ and SNL and also delivering them into Asia. The selling environment is mixed. As you know, there still are a lot of financial institutions that is one large part of our customer base that are reducing headcount. They're reducing some of their specifically trading and front office people.
On the other hand, on the back office in areas like compliance, control, risk management and also some more traditional consumer banking and commercial banking activities, there are continued to be increase in headcount. So the environment is mixed with some consolidation and shrinking happening and on the other hand, increase in demand for risk management for other sorts of tools. So we're seeing a mixed market, but we are continuing to have a very, very strong sales effort. Our sales team has integrated excellent in a way that's very well integrated and they've got a new commercial approach reaching out to clients in a much more consolidated organized way and we're starting to see top line growth coming out of the synergies as well.
Great. And maybe a question for Jack. On the pending sale of the pricing business to ICE, I'm curious if you could A, give us the EPS contribution this quarter and
In terms of its contribution, it's a couple of pennies for a quarter. We're still waiting on the final approvals on the to close that transaction. Our current assumption is that we'd look for a close towards the end of the year. Our current estimate assumes 4th sometime in Q4. And so we believe the net dilution impact within 2016 is going to be quite minimal.
Okay. Thank you for taking my questions. And Jack, I wish you well.
Thank you.
Thank you. Our next question comes from Alex Kramm, UBS. Your line is open.
Hey, good morning, everyone. And yes, first of all, let me echo what Doug said. Thanks for all the help, Jack, over the years and obviously all the best in the new endeavors here. With that, maybe on the Ratings business, not sure how easy this is to answer, but as you know, your primary competitors already reported a few days ago and what certainly stood out is your much better growth year over year, in particular, on the transactional side. So from what you can tell, it would be helpful if you could maybe decipher where you might be winning, what businesses you might have done a little bit better or what in the mix contributed to that outperformance?
Yes, this is Doug. So, thanks for the comments. And to start off with, as you know, we've been engaging in a commercial approach to running our business with the hiring of Chris Heusler last year to lead our commercial activities. We've approached our clients in a way that gives us a broad relationship oriented approach where we're looking at ways to broaden our coverage, including products like loan ratings, RES, etcetera. So we're looking across that as well as looking at our contract terms.
One of the areas where we also had very strong growth in this quarter was in Asia. Just to give you a color on the issuance in Asia, it was up in across the board in every category. In fact, total issuance in Asia this quarter was greater than total issuance in the United States, if you include sovereign issuers. Sovereign issuers are not necessarily an area that there's a lot of profitability on, but even so the total issuance in Asia for the first time outgrew the total issuance in the U. S.
In the U. S, as you know, the issuance was down overall, in the corporates at 7%, financial institutions was down, while in Asia, the corporates were up 32% and financial institutions were up 84%. So, it was a combination of our sales approach, our relationship management approach, more penetration and looking at how we're working on contracts and then very importantly, the volume in
it looks like the margin actually came down a little bit quarter over quarter. I think last quarter you had said, expect kind of like a flattish for the remainder of the year. I know this can be bouncing around, but just given that you're taking cost out and I think folks are hoping for that margin to actually trickle higher, Just maybe some commentary of what you expect for the remainder of the year and why that maybe was down a little bit quarter over quarter despite the FX benefit?
Yes. Let me give a little bit more detail, building. I think Doug had some comments on it earlier. The primary difference between the 1st and second quarter is the ForEx benefit. There was just relatively more ForEx benefit in Q1 than there was in Q2.
So there was about 2 points of benefit in Q1 and less than 1 in this quarter. So once you equivalize for that, you're pretty much in that same range around 28%. And we're quite pleased with that step up versus a year ago. And we do think this is an opportunity we can continue to get some steady improvement over time.
Very good. Thanks. Thank you.
Thank you. Our next question comes from Manav Patnaik of Barclays. Your line is open.
Thank you. Good morning, gentlemen. And firstly, congratulations, Shaq, as well. Thank you for all your help. My first question on the ratings business, if you could just elaborate on, I guess, you had in your press release and you just mentioned in terms of the commentary around improved contract terms.
Can you just help understand like is this some of those pricing initiatives you guys have talked about or we've been talking about for the last year or so? Or what specifically are you referring with that language?
Yes. That language refers to the types of engagements that we have with our customers. We have many, many different pricing approaches across the globe. We're one of the biggest themes you're going to hear from us, from our ratings business over and over is this term simplify. We have projects to simplify our workflow.
We've been investing in technology to simplify our workflow that always also brings with a combination of better control, better process management and then also in many cases lower expenses. So on that side, we're having a lot of focus. And on the top line, we're also looking at ways to simplify our pricing model to revisit our contracts that we've had with customers for a very long time that provided relationship pricing that we want to recalibrate to markets where there's much larger issuance. So it's a combination of factors, but the top line growth, some of that has been driven by approach to how we look at our pricing. And even though we're simplifying it, it has had some benefits and also going up.
Got it. And then just bigger picture, obviously a lot of things are going good for the company and you've done a lot of tuck ins here and there. Just thinking about the appetite for M and A going forward, obviously, there seem to be some assets up for sale on the indices side of things in fixed income. So just curious on how we should think about your plans in that area?
I guess what I'd say, first of all, our number 1 and number 2 priorities are number 1 is to continue with the integration of S and L. That is something that's critical for us. As you know, we made a very large investment in that. And even though we've had we're off to a great start with doesn't mean we're going to take the eye off the ball on that one. And number 2 is to smoothly complete the exit of J.
D. Power, which has been going well, but we want to make sure that we complete in a way that's very organized and executed well everything that we started. Putting those two aside though, you mentioned the word tuck ins there. We continue to look at opportunities. We're not going to shut things out.
But if we believe that there would be opportunities that might have incremental value to our company by adding capabilities or products or sales or operations or geographies that might enhance our ability to create value. We might look at those, but we're always going to look at those in combination with what the financial returns are and how that looks for the long run. And then also do we have the capacity and management skills and capabilities to absorb and take over those businesses as well. So we have our eyes open and you know our normal philosophy about our capital waterfall. And so we do look at things, but nothing to report on.
Okay. Thanks a lot guys.
Thank you. Next question comes from Toni Kaplan, Morgan Stanley. You may ask your question.
Hi, good morning. You mentioned that S and L grew about 10% in the quarter. Well, I think last year, it might have been closer to about 13%. Is there anything to call out there and are you still looking for low to mid teens for that business longer term?
Let me start and see if Jack has anything to add. Yes, we're still looking for a long term. We have looked at this business. It is a it's a very attractive growth machine for us. We expect that over the long run, it's going to be growing in the low double digit range.
It's something that we're looking for. This last quarter, there were a combination of factors that potentially the growth came down a little bit. Again, it has to do with the overall financial institutions market with some of the downsizing that firms have done inside of their organizations. And we're looking continue to see how we can drive that growth. And the main factor over the last quarter just related to the slowdown in some of the headcount in financial institutions.
Okay, great. And then, in Platts, it looked like revenue grew nicely, but margins declined a little bit year over year. Is that just a result of mix or what caused that? And can you just remind me of any initiatives you might have going on in terms of flat margin expansion? Thanks a lot.
I think the impact on the margins in the quarter was largely driven by more J. D. Power than flat just from some expense timing at J. D. Power.
So that was actually a bigger driver than anything really at Platts. And in a couple of quarters, J. D. Power will be out of the numbers and it will be we'll have clear view of the quarter to quarter performance at Platts.
Got it. Thanks a lot. Good luck, Jack.
Thank you. Thanks, Tony.
Thank you. Our next question comes from Craig Huber of Huber Research Partners. You may ask your question.
Yes. Good morning. Congratulations as well, Jack. Thanks for all your help. Let's talk margins if we could on the market intelligence area here.
With margins in the very high 20s right now including S and L, when you guys think out long term here, I mean, do you think it's possible to get these margins into say the high 30s including S and L long term, assuming the market holds together?
Craig, we I think from a longer term point of view, from the benchmarking we've done relative to other similar companies, I think we'd be a little reluctant to put up a target of high-30s. I do think though with growth, with scale, with realization of incremental synergies that have been identified for 2017 2018, we do see a path to margin expansion. But I think from a longer term point of view, it would be more in sort of a mid-30s range versus a high-30s.
Okay. And then also on the ratings business, I mean, you did a great job on costs here again in the first half, down 5% or so. The size of FX, but what's driving that? And how sustainable is those cost efforts you guys are doing?
Yes. So there's a couple of things driving it in addition to FX. One of them is, if you recall, about a year and a half ago, we had undertaken a couple of programs to rebalance our sales force as well as rebalance our analytical force globally. We also had some programs where we slowed down some hiring. So some of that's just coming through from straight headcount and straight changes to the way that we are managing the business.
Those continue to flow through. But one of the major areas, if you recall last year, in the first half of the year, we had the final resolution of some of the disputes and lawsuits we had with the U. S. Government in 20 states as well as some private litigation. There had been some residual expenses related to that.
And then we had also been engaged in the full blown implementation of the Dodd Frank rules, which kicked in June 2015. And in order to implement that, we had engaged some outside help from some consulting firms and risk management experts, etcetera. So those are the legal fees related to those had tapered off in the Q2 and then some of those external consulting fees and other advisory fees, those are gone. And so we think that we're approaching a more sustainable level of expenses going forward. Although I would point out that with some of our programs, we do continue to invest in technology.
That's critical for us. And as we simplify the business, we will be investing in technology. And here and there, we are going to invest in talent and people. So, but we do think that some of those extraordinary expenses have been cleaned now, cleared through.
Great. Thank you.
Great.
Thank you. Our next question comes from Peter Appert, Piper Jaffray. You may ask your question.
Peter?
Sorry. Here I am. Sorry for that. So keeping on margins in the ratings business for a sec, you've made tremendous progress here in the last several years. And I'm wondering if your comments, Doug, are meant to imply that you're thinking that margins have approached the appropriate level or whether you think there's more upside from here?
The way I think about it isn't that there's necessarily an appropriate level. We have a commitment as well as an operating philosophy across the entire company that we're going to always look for continuous improvement and continuous upside. One of the biggest determinants of our margins are going to also be top line growth. That's one of the reasons that we also have a big focus across the entire company and also in ratings on commercial activities, which are the things I've mentioned before on needs based selling relationship approach to selling deeper penetration, broadening customer product coverage, looking at contracts, pricing, etcetera. So it is a combination of how well we do on growing the top line that is going to have an impact on it.
And if we can have some of that incremental sales drop to the bottom line, taking advantage of our scale. But I guess a long answer to your question, but we continue to be committed to driving growth in our margin through continuous improvement, both from top line activities as well as finding ways to continue to be more efficient on our cost base as well. And I just want
to add one
thing that if
you think about the Q2, if you look at the last 3 years or so, the Q2 has been our highest margin quarter for the ratings business, because of the larger levels of issuance during the quarter. So, you know, I can't predict the future, but we would not expect necessarily to have those kind of margins each quarter in the 3rd Q4.
Understood. And then when you talked earlier, Doug, about simplified pricing in the Ratings business, does that suggest more transaction based versus relationship pricing and therefore higher price realizations because of that?
What it implies is that we had some of our contracts had been basically become stale or become quite old and we needed to go back and just look at the level of compensation we had been receiving for the type of activities that we were providing and the benefits we were providing for the issuance. I'd also say that another aspect has to do with, how do we look at these long term relationship contracts in the context of the size of issuance that had been undertaken originally when these contracts were put out versus what kind of issuance we see today. So there have been opportunities. This is something that we're going to continue to look at, but it's based off of generally speaking, no better coverage and better relationship management. Those go hand in hand.
Understood. Thank you.
Thank
you. Our next question comes from Tim McHugh of William Blair. You may now ask your question.
It's Steven Sheldon in for Tim. I appreciate you taking my questions. First, I wanted to ask what you're seeing on the CMBS side now that you're back in the market. I think you talked last quarter about seeing a strong pipeline of deals. So I was wondering if some of those came through in the quarter and then how the pipeline is looking now, just any detail there?
Yes. The CMBS pipeline has actually been quite weak. CMBS issuance was down over 60% in the Q2. There were 10 transactions that were completed. We were on one of them and we continue to claw our way back into that market.
The pipeline now right now is actually quite weak. It's the trend that started off in the first quarter. I mean the first and second quarters continued in CMBS. So we do we have hired a great team. We've retooled our approach to the business over the last couple of years.
And it's our hope that we get included on more and more deals on the CMBS market over time. We do continue to rate many of the single borrower transactions, but those also have been quite weak during the quarter.
Okay. That's helpful. And then second, could you talk about the slowdown in Platts growth in the quarter? The growth still solid overall given the pressure in that market, but it sounds like core revenue growth decelerated a little bit. Was there anything specific that led to that slowdown?
I'd point to 2 things. 1, compared to Q1, Q1 was an abnormally terrific growth quarter for our Global Trading Services. It was up quite considerably in the Q1. We still had very nice growth in that area. It's only 10 percent of the mix, but we still had very nice growth in the Q2, but it just wasn't quite as fast as what we saw in Q1.
So it wasn't as accretive as we saw previously. And as we it's still a challenging market out there in terms of the profitability the profit pressures on the commodity space. So we're still seeing growth, but it may be costing us a growth point or 2.
Great. Thanks.
Thank you. Our next question comes from Bill Warmington of Wells Fargo. Your line is open.
So good morning everyone and congratulations to Jack on the new position.
Thanks Bill.
So first question for you to go back to the incremental margins on the Ratings business. With revenue up 24% and the adjusted operating income up 39%, it looks like I mean to assume 100% incremental margin would be about $15,000,000 coming from a cost cut. Is that a fair way of looking at that? And what I want to go to on the question is what how should we think about the incremental margin on that business going forward and sort of your minimum revenue growth on an organic basis to achieve that kind of incremental margin?
Well, I mean, I think that I mean, I assume the way you're asking the question was you were looking at more on a sequential basis from 1st to 2nd quarter. Yes. Yes. No, and look, I think some of the expense difference between the 1st and second in that general range that you mentioned had to do with the drop off, what Doug mentioned in terms of some of the outside professional fees that we were paying either to lawyers or more significantly some of the work that was underway in the risk and compliance area to ensure tight compliance, some of the Dodd Frank requirements, which we had to do last year. So that money has been spent.
We do have that risk and compliance investment now in the run rate. So that benefited some of the expenses quarter to quarter. On a go forward basis, it's not like we expect minimal revenue. I mean, we have to kind of we to Doug's point, we're trying to be more commercially oriented going forward, but we are going to be influenced by what's going on with issuance trends. I just would say that our forward outlook is not assuming this sort of robust activity that we saw clearly here in the second quarter.
Let me just give you a little bit about nobody's asked this question yet, but since I'm prepared for it, I'll tell you a couple of factors that you haven't asked yet. Related to the overall issuance markets going forward, as you know from what we just gave you, we do see that there's going to be a reduction in the overall issuance for 2016. But if you look forward further and you look at the 2016 to 2000 looking out for to 2020 or so, there's 2 factors we're looking at. One of them is total debt markets, including bank loans, which we don't necessarily rate. The market is large.
We think it's going to grow by 1,000,000,000,000 of dollars. In fact, there could expand over the next 5 years to a $73,000,000,000,000 market, including a large increase in China. We do think that there is a increase in the combination of refinancing as well as new financing going into that. We are targeting through all of our businesses in market intelligence, a couple of businesses there and then also in ratings more and more penetration of loan markets and through models and things like that. So we look at the size of the markets and how they're growing longer term than just the next quarter.
Over the rest of the year though, we do think that there is a large amount of debt maturing between now and 2021. The issuance, the mature maturations over the rest of the year are actually not that strong. That's why we see the full year down about 3.8%. We're concerned about the Brexit, what kind of impact that might have on issuance. U.
S. Interest rates and global interest rate outlooks have been quite volatile and that they're changing all the time. So in the short run, we usually expect possible volatility as you've seen as you track this business quarterly issuance can go up and down. But with a very long run 5 year view, we see some very large numbers of $73,000,000,000,000 overall corporate debt market, which includes bank loans and then through 2021, dollars 10,300,000,000,000 in debt maturing that's actually publicly issued debt. So we do see that there's a lot of activity.
We're trying to build our business around this and trying to expand it beyond just being a single ratings approach to the market, looking at bank loan ratings, RES, different types of loan evaluation services, etcetera. So is a big area for us to focus our strategy going forward.
Excellent. If I could on Platts, we just wanted to ask what has to happen on the client side for us to anniversary the slower growth and to see a return to the double digit growth. Not that I'm complaining about 7% organic in that market. I think that's very strong. But just traditionally, it's been more on the double digit side.
And just in terms of the timing and whether it's operating expense or on the client side or capital expense or rig count or what you think would be the leading indicator of that for us?
I think the leading indicator should be higher oil prices. It's that is probably I'm giving you an unscientific answer, but if I were going to look at what are what's one of the most important correlations to overall volume as well as activity, it has to do with the price of oil. As you know, as we dropped into a very low oil price early this year, even though it's recovered somewhat, there were a lot of people that exited the industry. You had a large increase in defaults and bankruptcies in the U. S.
In particular in different types of oil businesses. So probably getting a higher price of oil would be the largest factor that could bump up growth to the double digit range, if that was still possible. We have still been growing quite steadily in the mid single mid to high single digit range Despite this, because there's still such a demand for information and for our prices to be embedded in different kinds of contracts, but double digit range would require more than just would require a lot of work from us, but in particular for the price of oil to be a lot higher.
The only thing I'd add to that is, just as keep in mind, we're trying to grow off an ever increasing base. So double digits off $700,000,000 is a little bit different than double digits off $500,000,000 So the reality is the business is working hard to expand its product line. So we have been investing to expand out the product line beyond oil and that now represents a third of the business. And we're also looking to do more than just price assessments and we're investing to do more in the area of supply demand analytics. So I think we also, from a longer term point of view, need to kind of build out the product line and increase our offering.
Excellent. Thank you for the insight. And Jack, it's been a great run.
Thank you.
Thank you. Our next question comes from Andre Benjamin of Goldman Sachs. You may ask your question.
Andre, are you muted? Okay, operator, I guess he's not there.
Next question comes from Joseph Foresi of Cantor Fitzgerald. You may ask your question.
Hi. I was wondering, I think you talked in your remarks about the keeping the range wide on the guidance side, just to take into account some potential volatility on the macro front. I was wondering, could you just kind of give us some idea of what would put you at the top end of guidance versus the low end at this point?
The primary driver would be, 1st is the level of overall debt issuance, because that's probably the first and the second most important driver. There could be a little bit of impact from what goes on with fund flow relative to U. S. Equity markets that could impact our indices business. But now we have pretty good revenue visibility outside of debt issuance because so much of our business today is recurring revenue subscription based.
The only thing I'd add to
that is that, as you know, in our indices business, we do have certain business as you know, we've changed the way we characterize our revenue. If AUMs continue on a very steady increase that would also be a benefit that revenue tends to drop almost all straight to the bottom line. So that could be another factor that would put us up towards the higher end of the range.
And that's both the flow issue and overall stock market level. Flow end market level. Right. So two things there.
Got it. Okay. And then the ratings business seems to be a little bit tricky in the sense that you had a very good quarter this quarter, But then, of course, Brexit is out there and then you have your annual outlook and then you have the long term outlook with obviously the debt levels rising there. How do you handle the staffing or the challenges in that business? Do you prepare for a pickup?
Do you change staffing levels at all? I'm just wondering how the resourcing of that business is handled with so many different variables kind of out there?
Yes. We have a resource model that takes everything that you just mentioned into account in terms of our forecasting. We are able to manage the staffing level through attrition if we needed to and we're also able to manage it through our bonus pool, our bonus accruals if that was something we needed to look at to ensure that we're accruing according to the kind of level of staffing we have as well as level of activity. Those are 2 of the most important levers. But we've built a way that we've got some flexibility as well by having analysts that are spread around the globe.
They're not all concentrated in London and New York. Despite the Brexit being a concern for us, we do have significant staffing in other European cities, including Frankfurt and Paris and Madrid. We also get support from our partner, CRISIL in India. They're part of the overall flow as well as some of the aspects to workflow processes of crunching numbers etcetera. So we have various variables we use to manage that and that's part of what John Beresford is doing a great job at.
Thanks.
Good luck, Jack.
Thank you.
Thank you. Our next question comes from Vincent Hung, Autonomous.
So on the improvement in contract terms, have you picked all the low hanging fruit or is there some less for subsequent quarters?
This is an iterative process that could take a while. There was no low hanging fruit. This is something that's not it's very important for us to process from a relationship point of view. And we hope that there is a continuous steady penetration of more products, more services to our customers. As I mentioned, there is no league table for loan ratings and this is another area that we're trying to do more and more of is we think also around the globe is most markets are more bank markets as opposed to loan markets.
We're trying to penetrate with more services in that area as well. So this is something that we hope we can see continuous improvement and growth on the top line from many, many different factors. It's not just the contract terms.
And just lastly, do you get much pushback from customers on this?
We have good relationships with our customers. And as you can imagine, any time when you want to renegotiate contract terms, it's never it's not always easy.
Okay. Thanks.
Thank you. We will now take our last question from Warren Gardiner of Evercore ISI. You may take your question.
Great, thanks. Just quickly, I was wondering if you guys could just give us a quick update on the fixed income index business. And then also sort of as you look out there, how you're thinking about growing that buy versus build as you move forward? Thanks.
Yes. That's an area that we've been spending a lot of time on structurally as well as strategically. The industry itself is going through a massive amount of change with Barclays having changed hands with ICE having bought IDC with what's happening in Europe with the exchange transaction going on there in the interest of fixed income investments around the world, as well as all of the main asset managers, large global asset managers looking so much change in volatility in the shape of the fixed income markets, especially with pricing and liquidity concerns creeping in. We think it's an area that it will continue to develop. We think there will be more and more ETF products and target date products, retirement products, etcetera.
They're developed over the years. We would like to play in that. We're off to a good start with our dialogue with asset managers and with ultimate distributors about these types of products and services. We have a core set of indices around the S and P 500 as well as some other fixed income indices. We have about $40,000,000,000 right now in AUMs in the fixed income index space.
We are looking at all different ways to grow the business, whether it would be continuing to grow and penetrate with what we already have and what we're developing, as well as looking at the different properties that pop up for sale, and whether or not they could be the valuable to be added to our portfolio if the price is attractive as well as if the capabilities are being attractive. So continues to be an important potential growth area for us. And we do have dedicated resources to seeing how we can grow in this area.
Great. Thanks a lot.
Okay. Thank you very much everyone. With that, let me conclude the call. I'm pleased that we had another strong quarter. The financial performance is excellent, ending up with an EPS growth of 17% and year to date cash flow of $513,000,000 etcetera is all something that we're very pleased that we've been able to achieve.
But let me end the call again by thanking Jack Callahan. He's been a great partner and he's heading off to Yale University and they're going to get the benefit of his experience and expertise. So thank you, Jack. We wish you all the best. Thanks everyone.
That concludes this morning's call. Available in about 2 hours. The replay will be maintained on S&P Global's website for 12 months from today and for 1 month from today by telephone. On behalf of S&P Global, we thank you for participating and wish you a good day.