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

My name is Shlomo Rosenbaum. I'm the business services analyst here for Stifel. And we are going to be having a fireside chat with Doug Peterson, who is the CEO of S&P Global. And I want to just take an opportunity to thank you, Doug, for participating with us. I really do appreciate your being part of our conference.

Thank you, Shlomo, for the invitation today. I'm sorry that we're having to do this remotely. But at least we found a way that makes this work, so we can keep everybody up to speed on what's going on at S&P Global. So thank you for today.

Sure. And what I wanted to do is just kind of open -- ask you to just give a really quick 1 or 2 minute, just real quick overview of the company, then I'm going to dive into some questions. [Operator Instructions] And I will read those questions, and we will -- I'll present them to Doug for him to answer. And so we could poll for -- we're going to -- I'll poll for that occasionally but want people to know that as we're starting out, they can submit them at any time. So Doug, if you don't mind just giving a real quick overview. And then just as part of that, maybe just go through where you're seeing the COVID pandemic impacting the various businesses you have, your 4 main high-level -- businesses at a high level?

Right. Okay. So thank you again for the invitation today. And so at a high level, S&P Global, as all of you know, is a financial data analytics and benchmark company. We're global. We're operating around the globe in more than 30 countries and 70 offices in those countries around the world. At the beginning of January, we started seeing a few little indications of this coming up in China. And by the end of January, we put all of our employees in China and then increasingly in Asia into a work-from-home process. The reason I mention that is that this has gone incredibly well for a company working from home. We put our people first. We had an approach in place that we allowed our employees to be able to figure out how to be effective from working at home, if they needed to buy some cables or new screen or things like that. And we're now, as we roll this out around the world, we're now at 99-plus percent of our employees working from home. We have used that in order to ensure that we can have our technology working. We bolstered our VPN capacity, so we could make sure everybody could work from home. In addition, we needed to make sure that all of our clients could get into our systems. What we've seen throughout this COVID crisis is an increase in people coming to our websites, coming to our webinars, attending different means we've had in ways that we believe that since they're working from home, they're looking for more and more data and information about the markets. In addition to that, we also believe that there's a lot of people worried about risk and worried about strategy. And because of that, they're also coming to the different S&P Global websites and seminars and webinars to keep up to speed on strategic and risk management issues. Very quickly on each business. The Ratings business has seen a large increase in ratings of investment-grade issuance, especially in the U.S. and Europe. We'll talk more about that, I'm sure, in a few minutes. We've got a lower level of issuance coming from structured finance and emerging markets. But that's been something that we've seen a very large activity in April and May, into the second quarter. The Market Intelligence business continues forward with all of its technology developments, including some recent launches of some significant new products for us, including one called Marketplace. Platts, another business which is involved in the commodity space, has also seen a lot of volatility. As you know, the oil markets were incredibly volatile. We've had very few customers that have actually dropped the service. And those that were -- have left were companies that went bankrupt or defaulted on their debt, very high increase in the number of people coming to our websites. But clearly, both in Market Intelligence and in Platts, they're subscription businesses and many of their clients are stressed, so we're seeing a slower sales cycle and some potential risk towards the end of the year and into next year on a growth level. And then finally, the Index business, there was a lot of volatility when the markets took a deep plunge. We're back to much higher levels of the S&P 500 and the Dow Jones, as well as volatility has come back down. And the VIX reached a level of over 80, which was a historic record in -- that was in March. But since then, it's stabilized. It's been in the 20s again for the last couple of weeks.

Hello? Hey, Chip, are you there?

I'm here.

I don't know what happened to Doug.

I'll text him. I'm sure -- hopefully, he realized that he lost the connection. But I'll text him real quickly.

Okay. Everyone, if you wouldn't mind just holding tight while we get Doug Peterson back on the line.

Doug Peterson back on. I'm not sure when I disconnected. I'm sorry about that.

Sure. You were just talking about indices, where things had kind of stabilized. And that's the last thing that you left off with.

Perfect. Well, that was about the last thing I said. So I'm going to hand it back to you for -- to continue with Q&A.

Okay. Great. What would you say works better than initially expected when the pandemic struck? And what had been worse? And how is that shaping your expectations for the second half of the year and into '21?

Yes. What -- well, I'll talk about it from a business and volume point of view. What we -- one of the things that we had not necessarily expected was the very large amount of -- a very high increase in investment-grade issuance in the U.S. and in a couple of other markets. This is just something that we had not expected that we were going to see this. It was a liquidity trade, large corporations, especially the ones that had access to the markets, they quickly went and raised capital. They wanted cash on their balance sheets. And what worked really well, I would have hope that we could have expected it, but it worked as well, if not even better than expected, was the ability for us to continue to support our clients with 99% of our people working from home. And so that's something that's seeing, that I'm using a Ratings, a massive increase in volume to show that. But it's just something where everybody had to figure out how to have the right connectivity from home, the ability to support their customers from home and the markets from home. So I'm very pleased that we were able to do that. And that's worked beyond the expectations. What we've -- some lessons learned we've had, we are -- have made sure that we're going to have to upgrade some of our computers. We're going to have to upgrade some of our VPN capacity, things that are more routine, day-to-day things that we need to make sure that our employees can work optimally from home. And then there were some -- definitely some volatility in the oil markets that wasn't expected. Our teams were able to cover that. But you see there's different types of consequences, unintended consequences as well as unexpected consequences from this crisis overall. But we do think we've been able to handle them well.

And is there anything in terms of your managing the business that you will be doing differently? In other words, there's so many people able to work so effectively from home. Were you anticipating shrinking your real estate footprint or anything like that, or just from a manager perspective?

Yes. What we're looking at is we have a -- we put in place a steering committee at the very beginning of this at the end of January that meets -- was meeting daily, it's now meeting twice a week. We've also been having town halls with our employees. It started off weekly, now it's every 2 weeks. We do 1 in the morning and 1 at night, so we can cover Europe and the U.S. as well as Latin America and Asia. So we cover the whole globe with the town hall. But what we've learned and what we see now is that we're talking about how are we going to reimagine the future of work. And we do have some roles that could be done remotely. We do have people that want to work remotely. And so instead of approaching this by saying, "We're going to have a smaller footprint of real estate," which it's likely we will, we're approaching this saying, "Well, what is the future of work going to look like? And how are we going to make sure we have the right controls in place, the right quality assurance in place, the right kind of cyber risk and when people are working from home potentially, et cetera?" And we do expect that over time, there will be a different way to work, potentially a lighter real estate footprint and potentially a lighter amount of travel since we've been able to find that working on Zoom and Teams and other remote working tools have also been effective.

Okay. Good. And so that seems like all those are probably positive for the company just in general in terms of being able to -- probably have to adapt to it from a management perspective. But in terms of resource allocation, it seems like it would be more available in terms of investing into revenue-generating items.

Yes. That would be -- our goal would be to continue. As you know, we've had investment programs in the last few years in what we call new products. So ESG is one of those. We've been very pleased with our progress on investing in ESG. Marketplace, which is a new product that we've launched in Market Intelligence, we're looking at more and more investment in private company data. And then one of the most important was our launch of a Ratings business in China. And all of those were funded through savings internally. So we have the ability to continue to invest in new business initiatives because we've found ways to generate more capacity. That, to us, is one of the best ways to do that.

Okay. Great. And then just from a global basis, I mean, this is a question that investors have been asking in terms of the strong investment-grade issuance. Like you noted, you stated upfront that it was kind of unexpected. But the federal government has also been buying a lot of corporate debt and doing a lot of propping up in the debt capital markets. From what you see, is that something that you think can continue indefinitely, will the government have the tools it needs for -- to assure liquidity in the market for a really extended period of time?

Yes. So first of all, that was a tool that the Europeans used in the last financial crisis and the U.S. used in a different way. The U.S. definitely used it to buy up a lot of securitized mortgage bonds and government debt directly, as well as in Europe they used it to buy government debt, securitized bonds as well as corporate debt. In theory, the government could have as much capacity as possible. But what's fascinating in this current situation is that what the government has purchased so far is basically ETFs. They haven't bought any direct purchases of corporate bonds yet, even though they said they would and they could. It's amazing that what their word meant to the market and the amount of liquidity that came in the market to purchase corporate bonds. And the Fed hasn't even bought any of them directly yet, only through ETF. But we think that they have the staying power. But it's almost more important that they've got the backup. It's almost more like a backup. And it's really truly a liquidity backup, not a credit backup. If somebody goes under, the government's not going to bail them out. This isn't a bailout program. This is a liquidity program. And what we've seen now is that liquidity has come into the market where corporations wanted to have very liquid balance sheets. I would imagine that there's no Board of Directors that's going to criticize a CFO because they have a lot of liquidity on their balance sheet going into this uncertain time.

Sure. And as you talked about, you just mentioned the Ratings business in China, could you talk a little bit about the impact the pandemic had over there, any aspirations you had -- not any, the aspirations that you have in terms of China? Has there been any kind of meddling from the Chinese regulators in terms of the political posturing that's been going on between the U.S. and China in the last little while?

Yes. So a couple of parts to my answer. The first is on the business itself, we're very pleased with the progress we've made on the business, even though people are working from home for a few months. We're starting to get back to the office in China. We've got somewhere between 10% and 20% of the people are going into the offices every day. We've got them set up again. We've worked with our building managers so that we can get people into the office when they show up. And we have a checkerboard approach to the offices, so people got social distancing. But throughout all of that, we continue to do -- rate bonds. We rated 5, we issued 5 ratings in the first quarter and we're still very connected to the markets. We -- as you know from prior conversations, we started up this business with a full-fledged scale operation with over 30 analysts that cover the entire market. We've been doing market research. We've been meeting with hundreds of issuers and hundreds of investors. So that didn't change. It hasn't gone away. It was a little bit slow over the end of January, when it was the traditional New Year's celebrations and people were starting to deal with COVID. But since then, it's back into a normal track. And we're starting to see now people are back to work in China. The second part of my answer relates to the political environment. And the way I think about that, there's 2 aspects to it. The first is that, when it comes to the broader trade issues and some of the issues related to cyber risk and technology, et cetera, there's a lot of noise. There's a lot of posturing both on the U.S. side and the Chinese side. When it comes to the financial markets, we've seen absolutely no impact to the continuation of the reform agenda by the Chinese government and what that means for us. So I have seen nothing whatsoever that has impacted our business. And in fact, we've seen other organizations like JPMorgan getting licenses in China that allow them to own up to 100% of their entity. So we see the reform agenda improving. Actually, moving forward, we think there's a technical reason why it's very important for the Chinese to reform their financial markets. And the latest news, that one of the other rating agencies also got a license to be able to start operating in China.

Okay. So that's -- it seems like things are -- despite the headlines and things, things are progressing the way that you would want them to go.

Yes. That would, for us, the access to the regulators, the dialogue is incredibly professional. It's moving forward and all of the indications we get from the financial regulators is that they are continuing on a path to reform.

Okay. One question that's been brought out -- brought up on the webcast, I'm going to ask it here, is they asked me to ask you if you could lay out your thoughts on the investment-grade issuance that's been very strong in April and May, how much of that might be a pull-forward? Because we assume that you have some kind of framework to see how much of that is additional liquidity versus pull-forward from stuff that would have been refinanced later on in the year.

Yes. So there's 3 ways to look at this. And some of it is likely pull-forward. I don't -- I can't tell you exactly how much is pull-forward. But let's say that there's a portion which once a company gets -- has all that liquidity and then at the end of the period of a crisis, they say, "What are we going to do with all this liquidity?" But there's been 3 main uses of this investment-grade issuance. And obviously, all of it is just a massive bolster of liquidity on their balance sheets. But the first is for companies that actually are going to use it. And so that's clearly not pull-forward, if somebody had gone out and they need to keep running their business, an airline, hotel company, their revenues dropped 70%, 80% and they need it as operating capital. So some of it is going to be used. It's going to be -- it's going to keep them -- their business running. A second use of this was for a lot of companies that went to their banks and drew down their revolving credits. And so the revolvers are not typically drawn down. But the banks did see a very large amount of revolving credits being drawn down. And now we're seeing a lot of those are being repaid with the debt issuance, which is obviously shifting from more short-term debt, which is floating rate, into a fixed income. And the rates themselves have also been very attractive with the base rate being so low. So you've seen substitute from revolvers into fixed income. And then the third is that people are just want to have the cash around. And that's where you've got some potential pull-forward. We looked at the number of clients who issued more than $3 billion. And it looks like some of that, at the end of the day, they could be -- they might be using it as a pull-forward later this year. But on the other hand, for us right now, the size of this issuance is something that -- it's a very unique period to see this much issuance at once, where you saw in May, for example, that the total investment-grade issuance was kind of up over 50%, in the U.S. is up over 75%. It was very, very attractive issuance. And we do think that in the long run, once a bond is a bond, it stays as a bond. It's very rare that somebody ever pays off a bond. And there's also very healthy issuance -- potential issuance of the pipeline in maturities that we see coming up over the next 5 years.

Okay. Great. And we have just a couple of minutes left. The one other question I just got from the webcast is, has the downgrade or upgrade criteria been altered at all due to COVID-19 and/or the civil unrest? Has there been any changes to criteria?

No. We had -- criteria literally goes back 40 or 50 years. And after the financial crisis, we spent a couple of years going through every single criteria of every single asset class to see if there were any lessons learned from the financial crisis. And then we've spent the last 10 years testing it. So right now, the criteria is performing as expected. There has been a very large amount of activity of credit market, credit outwatch changes -- outlook changes and watch changes as well as downgrades. But 85% of those have been in the non-investment-grade sector of our ratings. So no changes from COVID overall. There might be a sector, maybe health care or something like that, in the long run we might take a look at. But because we've spent the last 10 years with a fine-tooth comb going through our ratings criteria, we haven't seen any impact that wasn't something we would have expected.

Okay. Great. One thing I want to also make sure to bring up is can you talk about how your company is really uniquely positioned to provide ESG products kind of at a high level? There was a lot of interest for -- in ESG. From my understanding of talking to you recently is that, that has actually kept up in the current volatile environment. And maybe you could talk about what it is that you're doing there and what's unique that S&P can offer that a lot of your -- a lot of other companies out there just can't do.

Yes. So the ESG is something that is becoming more and more important to the markets. There's a lot of -- the root is that there's asset owners, so the ultimate owners of assets are putting more and more pressure or much higher-level request to asset managers, institutional investors to know what is the funds that I ultimately own, how are they being used, where are they being invested in. And that comes from a lot of different angles. It's people who have environmental interests, social interests. Social interest could be the community, it could be business practices at a corporation, it could be the supply chain. There's a lot of different ways the social, the S. And then the G would be the governance, the management, the Board, fraud risk, financial risk, et cetera. So there's a lot of different ways that ESG could be manifested with the direction that an asset owner could come towards the asset manager and say, "I would like to know more about it." And this could go for an asset manager for a bank, et cetera. And so what we had decided a few years ago is that what will differentiate us is when we have actual core data. We know in our company having data is a differentiating factor. Instead of just issuing a report with a number on it or a report with a short, little explanation, we know that institutional investors, asset managers, asset owners, et cetera, they also want to know what are the underlying statistics and data that drive that. So our strategy a few years ago is to put in place a horizontal group across the entire company to come up with this data strategy, which ended up with us moving our Trucost business, which we had bought, which is an environmental company that has over 15,000 companies' information that go back for many years. We felt that we needed to bolster that even further. And we bought the Corporate Sustainability Assessment business, which -- from RobecoSAM, which has -- is our partner in the Dow Jones Sustainability Indices. And they have information on over 7,000 companies. And some of it goes back over 20 years. And with that really powerful set of core data, which is going to provide information for the Index business for index construction, it's the foundational data for the ratings evaluation, which we have a ESG evaluation product and we have a green bond product. We can use that same core data. In the Market Intelligence business, we're offering that RobecoSAM CSA information through the Marketplace, et cetera. By having a data factory, which is high-quality, granular data, investors can use that instead of just an opinion. We're going to provide the opinions. We're going to provide the reports. But behind that, it's going to be based on really core data. Just one important point for you and the investors, last year, our revenues in the ESG space were $46 million. This year, in the first quarter, it was $15 million. And our projection that we had expected was a growth rate of about 40% a year.

Got it. And in terms of the indices, can you talk about how that kind of leads into the indices business and some of the ESG capabilities that you have?

Yes. So we have the experience that goes back, as I said, over 20 years with RobecoSAM on the Dow Jones Sustainability Index. And what we're finding today is there -- that investors are looking for 2 very clear aspects that relate to the index business. The first is benchmarks. It's the clear benchmarks that they can compare their performance against a standardized ESG portfolio or maybe more of a low-carbon or a non-carbon portfolio, et cetera. So we're seeing, working with investment companies, in particular sovereign wealth funds and pension funds and government pension funds and endowments, this quest for finding some benchmarks. So we have already launched a benchmark, which is the S&P 500 ESG Index. We're working with iShares on a benchmark with them. And then we've got companies like GPIF in Japan that are using S&P benchmarks to understand how their portfolios are performing. And then the second aspect of index is actually indices themselves that people can invest in, not just as a benchmark, but investing. So we've got many we've already launched that are being -- people are investing in. There's many under development. And then through our custom index business, there's a lot of investors who are coming to us and then working on a custom index that they use for their own portfolio.

Got it. Great. And maybe I'd jump around a little in terms of some of the things that you guys are doing. You've made some interesting investments into some fintech funds, so Arbor and Green Visor. Can you talk about what the strategy is over there? Is this something to make sure that you're staying in touch or ahead of industry trends? Are you looking at these as potential future acquisition candidates? Is it both of them, something else? Can you talk about that a little bit?

Yes. So we decided that we need to stay in touch with industry trends, that it's just as important to have some internal incubation and innovation in the company as it is to understand key trends that are happening around us in the fintech space. We didn't want to get a fintech company to come in and try to build new products and services that would overtake us or compete with us. We wanted to understand exactly what's going on in those spaces. As a result of that, we put in place a fintech strategy, which includes direct investments and then those like through Arbor and through Green Visor that we're investing as partners into those funds. And the idea is to stay very close to those. We're not trying to make -- we're not trying to be venture capitalists. We're not trying to make -- get home runs from these investments. If we do, that's nice to have, but that's not our core operating business. There are a few of these types of investments. Kensho is one of those. We bought Kensho. We had already had an investment with Kensho. That didn't come through Arbor or through Green Visor. But that was part of that general fintech strategy. And so that could be a case where we actually then also acquire some of these companies directly as we get to know them better.

Okay. Good. And I'll just ask, one of the things about -- you can talk about your business is that there's a lot going on in the world. And despite the various ranges of your 2020 scenarios that you laid out of what could happen, there really is not a huge difference between the high end of your -- of the EPS potential that you laid out and the low end. It's really like $0.50, going from $9.80 to $10.30 despite everything that's going on in the world. Can you talk just at a high level just what makes it -- what is it about the business that you can have a really, relatively tight range of expectations despite what is kind of an incredible -- events that are going on around us right now?

Yes. So first of all, I'm not going to talk about the guidance itself. We issued our guidance and that's our guidance. But when it comes to the circumstances around the company, remember that a very large portion of our company is subscription data. We've got the Market Intelligence business and the Platts business are subscription businesses. They motor along with subscriptions that range anywhere from 1 year to 3 years, occasionally even longer. So that gives us a solid foundation of knowing over at least a certain period of time what's contractually upcoming. There's a certain level of assumption that you could make around our Ratings business that we also have a, what we call the subscription -- we don't call it subscription revenue, but it's our revenue that's not coming from our ratings. It's very important for us to have certain contracts which are on a frequent issuer fee. So we also have a level of subscription-like revenue coming in, in Ratings. And then within our index business, we do have a base of AUM-based fees, which we think over time AUMs could drop and you could see a drop in those revenues and those fees. And so we do believe that, that's always a possibility. We believe there's a possibility in any of our businesses that you could see a drop, and it's important that we lay out what are a lot of those risks around those areas. But at the same time, it gives us a solid foundation of what we think is recurring revenue. Despite the risk around that, despite all of the different ways that we could get hit, through a major recession, through downturn of our clients' business themselves, looking to come back to us to say that they need to renegotiate their fees, from what could happen if there's a lot of bankruptcies in a certain sector, et cetera, we understand there's a lot of risks around our business. But net-net, we also have a pretty solid foundation of subscription and subscription-like revenues.

Okay. Great. Doug, I want to thank you very much for taking the time here. We certainly appreciate it, and really are looking forward to hopefully next year being able to do the same kind of thing, just in person, in our next CSI conference.

Great. Well, thank you so much for hosting us today. And I look forward to meeting with many of the investors later in other calls.

Great.

Thank you.