S&P Global Inc. (SPGI) Earnings Call Transcript & Summary

All right. We will go ahead and get started. Thanks, everybody, for joining us. I'm Patrick O'Shaughnessy. I cover capital markets here for Raymond James. Up next, we have S&P Global. And on their behalf, we have President and CEO, Doug Peterson. Doug and I are just going to do a Q&A session. And then if any of you all have any questions, we'll open up to that at the end.

So Doug, thanks for joining us. And obviously, I think the question on a lot of people's minds and kind of how I'm kicking of all these Q&As is, what are you seeing out there right now in your business? And I think probably most particularly with your Ratings business, I think for the entirety of February is actually a pretty decent month for issuance, but things just stopped in the last week of February. So kind of what's your real-time observation of how things are impacting S&P Global?

Well, Patrick, first of all, thank you for inviting us again. This is my seventh year in a row to be here, and it's a fantastic conference. So thank you for hosting this. Going to your question about coronavirus. First of all, we saw in the Ratings business, that you've talked about in particular, the first 8 weeks of the year, the ratings volume was up 7%. It was very robust. It was across the board most geographies, most asset classes. And last week, it really halted to a stop. This was based on the uncertainty in the markets about coronavirus, what impact it's going to have on different industries, what kind of credit impact it might have. In addition, there were uncertainties about rates. Rates were plunging. Spreads were increasing. And when you get a market like that, the investment-grade issuers, they stop going to market. There were no investment-grade issuance last week at all. And then there were a few loans and a few noninvestment grade bonds. So you saw a very little amount of issuance. But we also saw for index business, a very high volume of exchange-traded derivatives. You could see the volume increase when people are hedging their portfolios. But when we lookout for a little bit of a longer-term impact, as you know, our businesses, all of them have a very high correlation with GDP growth and general capital markets activity. So this is something we'll be watching very closely. From a credit point of view, we'll be watching the different industries that have large impacts on this. And then I would also say that just to go to more internal practical point of view, we put in place travel restrictions in Asia for employees in January. We've continued to add other offices around the world on how we think about this. Our -- safety of our employees comes first. We've moved to a lot of people working from home, a lot of video conferencing. And so just for our own company, we've decided that we're going to prioritize our employees' safety, make sure they can work in the right way. But we have not missed a beat, we're still continuing to be able to deliver every single day ratings, Market on Close prices for Platts, index information, et cetera, despite having a lot of people working from home.

And how do you think about the resilience of your business in an economic hiccup or more challenging economic times?

Well, as I mentioned, when you hit challenging economic times, we could see some impact on our business from volumes of ratings or levels of the index and how the AUMs come through, but we have some levers that we can pull. We, in the past, have looked very carefully at things like hiring freezes or we've looked at ways that we can put an impact on our compensation levels, in particular, our bonus accruals during the year. We have some investments that we've been doing that we could slow down. As you know, last year, we did $100 million of investments. This year, it's $150 million. It's the $100 million plus another $50 million. So we have some levers we could pull if we really saw a significant slowdown that we would also slow down some of our investments and some of our hiring, things like that to go -- have the right pace with the business itself.

So you kind of stole my next question a little bit. I was going to ask about your investments. And putting aside the economic situation, $150 million seems like a lot of money, but it's only 2% of your company-wide revenue. Why is that the right amount of investment spending for a company like S&P?

Well, first of all, we looked at the ability to self-fund. We said we've got some demands coming in from our customers and what we're hearing from our employees, what they see as opportunities for us to fill white space that we think in the information services that there's areas that are not necessarily being filled. And we had an opportunity to fill those. So we took a step back and put in place a formalized internal investment process for new investments. So it wasn't just going to be random, or we also weren't just going to wait for our annual budget process that, throughout the year, people could raise ideas for additional investments. Some of the ones that you're already aware of that we're doing are the China investment. We've launched our rating agency there. We're doing work with Market Intelligence in China. We've launched ESG initiatives across the company. We have a comprehensive approach to ESG. We're looking at ways to bring more private company data into the Market Intelligence platform. We've boosted our sales force in Asia for Platts. So these are the types of things that come to the investment committee. We review them to see, will they have a positive return? How are they approaching a customer need? Will they bring us growth? And then we approve those. And we think $100 million last year, $150 million this year. There are levels that we can partially self-fund. And in addition, you saw last year, we increased our overall margin by over 100 basis points at the same time while we invested $100 million. So we think it's responsible in businesses like ours to keep investing for growth and also filling in this kind of white space where the demand is coming from.

Got you. And I think a lot of that investment is coming in your Market Intelligence segment in initiatives like developing those ESG capabilities and providing SME data and analytics. The Desktop revenue component of Market Intelligence saw its growth decelerate a little bit in the last year. Is your investment spending aimed at reaccelerating that? Or is it kind of more broad and aimed at just kind of growing the market opportunity for S&P?

Yes. Market Intelligence in particular, as you know, it's a diversified segment. We have a diversified customer set. We have corporate customers, financial institutions, insurance, asset management, government officials, regulators, et cetera. So we have a nice diversification across that segment. And we're hearing from them different types of needs. We've got the needs from the Desktop, although we have seen some deceleration in the growth rate because there was some shrinkage of the customer base. We saw some banks and other institutions shrinking their sales force or their users, their asset managers, bankers, et cetera. So we saw a little bit of slowdown in growth there. At the same time, we've seen growth in Risk Services. We've also seen growth in the aspect of our business, which is the data services. People really starting to use models more intensively and using our data directly into their models. So we look at this at Market Intelligence. We still see a segment that is very relevant for our own business internally. It's a data source. It's a technology engine. It's an innovation engine. We think this is critical for our company overall. And then we see the external demand coming in for SME, private company data. We're using this as our ESG platform. So we're very pleased that we have this capability. It's functioning at a very high level, and we think it's critical for us.

Got it. And to build off of that, on your last earnings call, you spoke about how Market Intelligence is increasingly becoming a distribution channel for your other businesses. Can you maybe provide some examples of how it is, that distribution channel?

There's 2 aspects to that. One is where the Market Intelligence business is a direct-distribution channel, like for our Ratings business. Right now, it's absolutely critical that for the research and the ratings components, those that are becoming more and more useful for investors, those are delivered through Market Intelligence. So that's the most obvious example, and that's been around for a long time. But another example with Ratings is we used to have a product called My Credit Portal that issuers would use to have a relationship, a direct contact with our rating agency, and it allowed us to have the ability to provide information. But it was a black screen with little green dots on it. And so the last couple of years in Market Intelligence, based off of their platform, we've built a product called Ratings360, and this is an example where we could use the technology and the platform of Market Intelligence to deliver a new product and a completely new way to interact with our clients in the rating industry. And so we have 10,000 installations now of this Ratings360. It gives a company the ability to interact with the ratings. They can see benchmarks against their other peers. One other example would be in Platts. Last year, we -- at the end of the year, we launched a new mobile app for Platts. And we also built that off of the MI platform. So this gives us the ability to move faster, to reuse technology in a way that we don't have to learn it over and over. We can learn it once and then apply it across the entire company.

So shifting gears to Ratings for a second here. So on the one hand, you have -- rates are still pretty low, earnings are still pretty healthy. And on the other hand, you have headlines about, hey, there's so many BBB companies, and we're worried about downgrades there and companies are overlevered. How does kind of all that net out in terms of your outlook for issuance in the Ratings business?

Well, as you know, in the last quarterly call, we talked about our outlook for issuance for this year, which was around 5%, about 4.9% for this year. That's based off of a combination of factors of looking at the -- what is the pipeline of maturities that we can see on balance sheets. It's also speaking with investment banks and ratings advisers, rating issuers to see what they're seeing in the market. It's an estimation of what we're going to see on M&A, mergers and acquisitions. So we look at all of those factors to see what we see coming up in the year. And that's how we build the forecast. And that forecast is -- it's truly a forecast because you mentioned some factors that could intervene and change that quickly. We talked earlier about coronavirus, what potential impact that could have. Economic growth, rates, spreads, those are also things that come in to impact that. But let me talk a little bit about the second part of your question, about credit conditions themselves. In the last 6 or 7 years, we've seen an increase in the number of companies and banks and governments that are willing to lower their credit appetite in a sense, or move from having more credit on their balance sheet, move from being, for instance, A companies to BBB companies. One of the reasons they've done that is their credit has been very, very inexpensive, rates are low, spreads are low. And they're able to increase their debt levels, use it for investments, stock buybacks, things like that. But their interest coverage ratio is still probably similar to the ratio it was before because the rates are so low. And we've seen a lot of companies actually explicitly make that decision that they're going to move to a lower credit rating. Similarly, there's a lot of issuance in the B level, B, B- level. Again, because rates are so low, there's such a high appetite for this kind of credit. And it's something that we watch very carefully. Clearly, we're -- it's something that we want to be aware of. If there is an increase in interest rates, it might have an impact on that credit quality. There's people that are looking at the size of the BBB credit and saying, well, will this mean that there's less flexibility if there's a downturn in the economy and more of those companies are downgraded? In fact, we're on the leading edge of that kind of research. And we've been writing about it, publishing about it and we do think that it's something that we have to watch very carefully when it comes to credit conditions. But one last comment. Most of the BBB areas that could be of more concern are more by sector than they are looking at the entire volume of BBB credit.

So China as a ratings market seems to be really interesting and powerful long-term opportunity for you. But I think you've also been careful to frame it as, hey, this is a long-term opportunity, it's not going to happen overnight. What are some of the challenges that you have to overcome in order to really gain a foothold and build that business?

Yes. This is, for us, it's one of the most important long-term investments we're making. And to take a quick step back, we look at it as a market that has already a very large financial system, which is basically bank-centric. Even the bond market that exists today is more of a bank bond market. It's bonds that are traded. The issues bonds. They're very short term, 3-year tenure, and they mostly go on bank balance sheet. So what are the things we're watching for? One is the development of a institutional investor market. So pension funds, insurance companies, mutual funds, saving funds, et cetera, that are going to be looking for a new type of instrument, looking for more research, more data. Another development we're looking at is the government opening up their capital markets, opening up to have more foreign capital coming into China that can buy bonds. Right now, only about 1.5% of the bonds in China are owned by foreigners. So it's a very low participation of foreign capital in the Chinese bond market. And as they do that, they're going to have a yield curve. They're going to open up the ability to see the trading and hedging and things like that. Another factor we're going to look at very closely comes from the recent trade agreement between United States and China. One of the provisions of the trade agreement was to allow foreign financial institutions, in this case, American financial institutions, to own more than 50% of Chinese financial institutions. We had already been in advance of that at our 100% ownership of a rating agency. But with this, we've already seen that Visa, Mastercard, JPMorgan have quickly moved in to establish their new entities, and they've applied for the 100% ownership. Our -- the other rating agencies are also going to be looking at getting in the market, I assume. And so we believe that's another very important milestone that's going to see more participation of foreign financial institutions in the Chinese market. So these are some of those factors that are, call them hurdles, opportunities. These are the things that I'm watching to see how that bond market is going to develop, become a much more institutionalized bond market that then our data will get embedded in how that market actually behaves.

So ratings are back in the regulatory spotlight to some extent. The SEC had their Fixed Income Market Structure Advisory Committee meeting where it was a topic of conversation. Somebody else from the SEC gave a presentation, I think, in Las Vegas where they mentioned, hey, we need to take a look at conflicts of interest in structured finance ratings. How are you looking at this in terms of potential risk it could pose to S&P? And how the process might play out from here?

Yes. So this is a -- we're now 10 years basically into Dodd-Frank. And before Dodd-Frank, the ratings industry was only very lightly over -- had a very light oversight in the United States and was only regulated in 2 countries around the world, in Argentina and in Mexico. So this has really been new to become a regulated industry. And as you mentioned, the head of the office of credit ratings gave a speech last week or the week before last in Las Vegas to the structured finance conference. And one of the things she talked about was all of the advancements that they've made, the rigor that they've brought to the ratings industry, how this Office of Credit Ratings has now had 10 years of exams of looking at how the rating agencies have built robust compliance organizations, robust oversight. But they also raised the question, do we have enough oversight? And is there enough transparency to how structured finance ratings are issued? And so we think that this will play out potentially over the next couple of years as people explore this, as the SEC gets some feedback on the structured finance market. If you look at the other part, I talked about the Office of Credit Ratings, this group, the fintech group of financial -- fixed income market advisory group. It's an advisory group for the SEC. They're looking at many, many different aspects of fixed income markets. They've looked at reference data, classification of ETFs. They're looking at block trades in the fixed income market. So they're looking at ways to ensure that the fixed income market overall has transparency, liquidity, and one of the areas they've looked at is rating agencies. And so we're very pleased that we can participate in these kinds of forum, in these kinds of groups. We have a really good, strong relationship with the SEC. We're pleased that the OCR has made its advancements over the last 10 years. And so as this dialogue proceeds, we're going to be very, very much involved in it.

Got it. And then turning to Platts now. So your energy data business. I think the glass-half-full view is it's been a really tough environment for energy companies, that business still grew 4% on an organic constant currency basis in 2019. The glass-half-empty view is, hey, energy is structurally challenged going forward. Oil prices doing what they're doing right now probably is not helpful. So what are you thinking right now about the long-term outlook for Platts?

Yes. So the long-term outlook for Platts is that we went through a period, in the last couple of years, where the price of energy and the energy -- well, the petroleum industry more specifically has been fairly challenged, and we saw some slowdown in growth in that and because of the petroleum industry itself. So we look at Platts. We do believe that we have a very unique, very strong franchise that is embedded in people's workflow, the price is embedded in peoples' contracts, the data and the analytics is embedded the way people make decisions. And we believe that we can take that same business model, expand the kind of information that we're providing and then expand into new directions of other sorts of asset classes that don't have that same kind of analytics, same kind of transparency in the market. So if you've seen, we've invested in, as an example, part of energy complex on natural gas. We've expanded into metals. So we now have more and more metals products. We've expanded into ag. And recently, we've also added a whole new set of products, which are related to energy transition and to think about the environmental movement. There's a whole new need for pricing for alternative energy. We have some renewables that we started doing pricing on. We have a new product for hydrogen, and we also have a new product for recycled plastics. So we think we can take that expertise and knowledge of bringing transparency and data and analytics and start expanding it into other markets. And we don't think that the petroleum market is going to go away. It's going to go through a transition. Peak oil, depending on who you speak with, could be from 7 to 15 years from now. So we think that this is an industry that's going to go through transition. Our role is critical to it and that we're going to continue to invest in this area.

Got you. I think one of the challenges facing the energy industry has been ESG and making sure that energy has been -- the societal impact has been measured. You guys recently have been making investments in ESG. And you recently acquired a business called RobecoSAM. How would you characterize your overarching ESG strategy?

We looked at ESG from a lens of the needs of investors. And we've been seeing this develop over the last 8 years or so, where investors started listening to their asset owners, who are wanting to know more and more about what's in the portfolio of my investments that you're managing for me. And really, this movement started more in the Nordics and Scandinavia, in Northern Europe, where the asset owners have started asking more and more for information about what's the environmental impact, what's the social impact of the portfolio that you're managing for me? And that started spreading around the world. Over the last 5 or 6 years, we've been incubating this in many parts of our business, although we do have -- we do go back over 20 years with the Dow Jones Sustainability Index. Over the last 5 or 6 years, we've been incubating across the company different ESG capabilities. And about 2.5 years ago, we put together a team, a design team that said, let's come up with a strategy for ESG for the company. It's a singular strategy instead of having 4 or 5 different incubating teams across the company. The first decision we made is that we needed to have a single source of data. So we said every data source we have, whether it's a company we bought 3 years ago called Trucost, which is the premier environmental data company. We put that into this data factory within Market Intelligence. We started putting other data assets into this, so we can have a singular view of the data. We're not recreating it. And then we can use that kind of as a hub and a spoke to prepare and provide products for the -- can be build-in products to deliver to this different customer bases. But what was very important for us, when -- we were looking at this last year and said, if we really want to scale and we want to move fast, we need to have a larger base. We've been working with RobecoSAM for 20 years, they're the partner for the Dow Jones Sustainability Index. And so we approached them and worked out an agreement where we purchased out of RobecoSAM, which is an asset manager, their ratings business. And now that's 100% owned by us. It gives us a base of 27 companies that we have -- 2,700 companies we have data that go back 10 to 20 years. We have 5,200 companies in total that we have data on, and we're going to scale this very rapidly, so we have a strong base to begin from. So this is the vision. We'll have a set of products. We've got 1,500 ratings analysts that can meet with customers to add value on top of this data. We have this collection of assets where we're gathering the information from surveys directly from the customers. It's not scraped from the web. So we think that we have a really strong position for this. And by the way, I'd end by making a plug for your report. I think that the report that you guys prepared on ESG is a really good primer for what's happening in the industry. And the way you reported it, we want to be very soon up at the top of your list.

I think maybe building off of that point, we had MSCI here about an hour or so ago, and they were talking about how ESG is a great opportunity for them, and they will speak to their first-mover advantage. So how do you go after the opportunity when you do have a first-mover like MSCI that is dedicating a lot of resources to it? Do you have to approach it differently?

Well, first of all, we think that there's going to be room for more than just one provider. So we think that they might have a first-mover advantage. We think we have a second-mover advantage that in the sense that there's going to be more than just one provider. A lot of the information services industries, there's 3 or 4 key providers. We think that this will end up shaking out that way as well. But in order to move fast, one of the things we did, as you know, is we bought this RobecoSAM so we could get the right kind of base. But we do think what's really critical for us is that we've got those assets and the data that we're gathering directly from the clients where we're adding value on top of it with our 1,500 ratings analysts. And to be able to move with speed, we've trained everybody in the company about this. We're out meeting with every investor to talk about them. And I bet if I did a survey of everybody in this room and I asked you 3 years ago, how many of you are incorporating ESG into the work that you do? Maybe a few of you would have raised your hands. And if I asked it this year, I bet almost everybody in this room would raise their hand. So I'm going to ask the question. How many of you in this room now are incorporating some sort of ESG evaluation into your portfolio management? So it's probably about 75% -- 60%, 75%. And a few years ago, nobody would have raised their hand. So I think that in 2 years from now, 100% of the people are going to raise their hand.

All right. Well, speaking of the room, I will survey the room and see if there's any questions right now for Doug. All right. It's been quiet all day. So maybe one more for me and then we can head to the breakout session downstairs. So I should probably touch on your index business. There's multiple components to it. There's the asset-based fees, there's the trading revenues that you get from your partnership with CBOE and CME. On the asset-based fee side, how are you thinking about -- because that is about 70% of segment revenues. How are you thinking about the long-term outlook for pricing compression in that business? And how that is going to be offset by inflows? And so where do you expect that to net out?

Well, first of all, in the -- on the AUM part of our fees, that part of the business, our contracts are very long term. So we don't come up. It's not an annual fee. It's on annual renewal. These are long-term contracts because when we enter into a partnership with an asset manager or a distribution company, we don't want it to be just a quarterly or an annual contract. We need to know there's a commitment to have S&P 500 as part of their complex or the S&P or Dow Jones Indices as part of their complex for a long time. So we don't come up for repricing every year. This is really very long-term contracts. And so that's the first part of how we think about this. The second is that because the S&P 500 is the key benchmark for the market, people that have this in their portfolio know that it's a necessary part of their portfolio, and they're willing to continue to pay pricing for it. And then if you think about the actual product and the pricing itself, this is also very liquid. So people are willing to pay sometimes a higher fee for this -- for the S&P 500 and the associated funds because of the liquidity that they have in the market. So we think that there's -- it's more complex than just the fee itself. The fees are very small. They're tight, quite tight. But it's long-term contracts. It's the liquidity that they bring. It's the brand. It's the investment that we make back in the brand so that they can get value-added from us. So we think of this as long-term partnerships and adding value. And because of that, we can keep a strong revenue stream.

Great. Well, with that, we will wrap it up. But thank you very much, Doug. We'll have a breakout session downstairs.

Thank you. Thank you so much.