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

Hello, and welcome to everyone joining us on the [Audio Gap] I am the research analyst covering the info services, consulting and HR technology sectors here at William Blair. Before getting started, I am required to inform you that, for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. With that out of the way, I'm very pleased to welcome S&P Global Chief Financial Officer, Ewout Steenbergen, to the conference today. Thank you very much for joining me, Ewout.

Thank you, Andrew.

I'm guessing most everyone on the call is familiar, to some extent, with S&P, and we only have 30 minutes today. So I'm going to pass on the typical business overview question. I'm sure we'll cover it in some form or fashion throughout and get right into it.

Before digging into the individual segments, I was hoping you could just start by walking us through the different actions the company has taken in the current environment to prepare for what seems to be a wide variety of economic scenarios. And how did you approach scenario planning? What cost actions did you take? And how much flexibility do you have kind of left to flex up and down spending through the rest of the year?

Sure. So when the COVID crisis has started, clearly, our first focus was on the health and well-being of our employees because that's the first and foremost that we want to take care of. Also, of course, the communities where we operate and that we are good corporate citizens. Also, our foundation has given a lot back in terms of grants and support for several nonprofits that are helping with the current situation in several markets and countries around the world With respect to the business, I think what was very important was that we are able to continue to operate a company in a virtual environment. And that was an enormous test. Because clearly, I don't think any company from a business continuity plan could have foreseen that all your sites and offices would not be operating at the same time. But I'm very proud of what we have been able to achieve that we had almost 20,000 colleagues around the world working from home and being able to continue with our products and services. And it has been quite seamless. There hasn't been really hiccups, serious hiccups. And the price reporting from Platts and the market on close, as an example, or the index business, that was, of course, tested when the market was going to be halted at some point in March. All the ratings actions that were taken so far, 3,200 rating actions until the end of May, which is all done through virtual sessions by credit committees of the Ratings business. So many of those examples. With respect to thinking about resilience of the company and making sure that we are able to navigate through this period in a good way, let me first say that we are, of course, very fortunate that we have a very solid and prudent balance sheet that's deliberate, that's by design, low leverage, high level of cash on our balance sheet. So the most important when there is a crisis is, of course, liquidity. That's always where everyone is going back to. The fact that our liquidity position is so strong. We didn't even have a discussion if we needed to draw on our banking revolver because there was absolutely no need and requirement. And usually, we had about $2 billion of cash on our balance sheet at the end of the first quarter. That was even after a significant buyback in ASR that we put in place during the first quarter. And looking at our free cash flow forecast and guidance that we have provided to The Street, I would expect that number even to go up for the remainder of this year, before, of course, any other usage of that capital. But otherwise, it would go up, our cash position. So that's, I think, on the balance sheet. On terms of making sure that the businesses continue to operate and deliver financial results during the year, we immediately went into a mode of scenario-based planning. Because it was so hard to think about how long this situation would last, what kind of recovery patterns we would see, we have all seen all the latter shapes, kind of forms, even if there would be a second wave, and it would come back at a certain point in time. And we wanted to make sure that we think about all those different scenarios and take appropriate management actions to deal with those scenarios. A lot of work has gone into this, of course, together with the divisions, to make sure that we have our plans right. A lot of short-term management actions, particularly on the expense side. And you have seen that in some of our first quarter disclosures. We said in our middle scenario a $108 million of additional expense saves, partially by some variable expenses, think about cost of sales, commissions, variable compensation that is automatically adjusted, but also incremental, more discretionary spend that we're able to pull back, think about consulting spend, think about travel, think about events, think about hiring and so on. So we think that we can, on top of our more structural expense and productivity program where we have also given you some more insight that this year, we would reach $120 million level productivity improvements in our overall productivity plan, another $180 million due to this COVID situation. And we thought that it was important when we were preparing for the earnings call for the first quarter to give those level of details and that level of transparency also to The Street because we thought it was very important because it's so hard to predict what is going to happen. All of you, investors, analysts, all the market participants could see the sensitivities and the assumptions that we have put in our scenarios. We are very fortunate we have so many experts in the company, from economists to credit experts to commodity market experts. So we could have put many of those assumptions in from our own research teams and all the information that we put out in terms of research to the market. And we thought to give the transparency and the clarity about all those sensitivities was really the best approach to take. Of course, we'll continue to monitor this, update those scenarios. I cannot tell you what exactly we're going to disclose when we publish our second quarter results at the end of July. But in terms of overall philosophy, giving as much information, being transparent, I think, is clearly what we stand for and what we are planning to continue to do.

Great. Great. And one of the assumptions, obviously, that everyone's kind of focused on is the assumption of the guidance embedded in -- from a global build sequence perspective. I think you guided to mid-single-digit decline for the full year. I was hoping you could just unpack the different components of that a bit further and, maybe more importantly, speak to how the debt markets have performed relative to those expectations thus far in the quarter and maybe even over the last month. I know that there's been quite a bit of issuance -- record-level issuance in some of the higher-rated debt. So any additional context would be helpful.

Yes, that's correct. The middle scenario that we put out was an end of third quarter recovery of the economic environments. And in that scenario, the forecast for global issuance was down approximately 10%. And then we translated it to a reduction of build issuance for S&P Global Ratings of approximately mid-single digits. So that was, indeed, the assumption that we put in that scenario. If we think about and look what is happening now, actually, April, May and the beginning of June, the debt markets are really on fire. And what we're seeing is very high issuance in investment grade, both for the U.S. and Europe. But also high yield in the U.S. is very strong. It's relatively weak in Europe, but it's very strong in the U.S. I think Central Bank actions matter there. But we also see that structured finance is relatively minimal. So it's a mix picture, but because the investment-grade market is so large, clearly, overall issuance is looking very favorable for what we have seen over the last 2, 2.5 months. Why is that happening? In our view, there are 2 very large opposite forces that are here at play. There is a lot of liquidity-driven issuance. These are companies that have drawn on their banking revolver and see that they don't have the ability to repay debt and just want to term out and add additional debt to their balance sheet or companies that have issued commercial paper. Companies that just have a cash burn that is too high and the balance isn't strong enough, and they just want to add additional liquidity to their balance sheet. From what we have seen, and if you look at the larger issuers over the last 2 months, it's probably just -- it's really the majority of the issuance is liquidity-driven. Just a smaller part has to do with normal refinancing activity that you would expect to see happening. So that's very clearly one driving force. And opposite driving force is the normal correlation, what you expect so see happening that issuance, particularly investment-grade issuance, is most directly correlated with economic activity and GDP. That makes sense. If the economy is under pressure, you wouldn't expect a lot of new investments in office buildings, in new factories, just the level of investments in the market will come down because those projects economically don't make sense anymore. It's very unclear to expect -- to predict what is going to happen, when this liquidity-driven issuance will come down and when we would see more of that normal course impact of the economy on the debt markets and when we'll see that showing up. Clearly, that liquidity-driven issuance is a bit of a windfall that we're having at this moment. How much it's going to be -- this added on the balance sheet? And how much is going debt to remain in the future? Or how much of that is going to be paid down in terms of debt over time? I think it's a clear unknown. I think it's probably going to be a mix of debt in terms of behavior, what companies ultimately will do. Because if they don't have the ability to pay it down, it will remain more permanent part of their debt structure going forward.

Yes. Makes sense. I mean do you have an opinion like in terms of how -- if there could be a structural shift in terms of how corporations are thinking about leverage or broader debt levels and maybe not the very near term but medium term? Or does that still kind of fall into the too hard pile?

It's very hard to say. I think, certain companies, certainly, at some point, would like to move back to their original corporate financing structure. Certainly, if there was a rating actions linked to adding the additional debt, they probably would like to migrate back. But some other companies might really think about building up resilience more in general terms and trying to be prepared for a downturn in general terms and strengthening liquidity on their balance sheet more on the permanent basis. Some other companies might just simply not be able to pay down because their cash burn is very high. And even if they wish, there wouldn't be an opportunity for them to pay down debt over time or do it in a very slow way. So certainly, it's hard to see that all the additional liquidity-driven debt will suddenly disappear in a very short period of time due to those reasons.

Yes. Makes sense. Makes sense. Sticking in Ratings but maybe a different component of it. You've talked about ESG a lot in the past, and I think S&P as a whole is really excited about that opportunity. I'm trying to get a better sense for how you're monetizing that capability within Ratings. I think it's pretty easy for me to understand the packaging it up in Market Intelligence as a data feed, as an example, or scoring or incorporating it in an index. But in terms of that opportunity within Ratings, can you kind of just walk through what that opportunity looks like and what the use cases might be?

Sure. And first, let me say that ESG is already embedded and has become an important element in the credit risk analytics criteria and methodology. Because, obviously, ESG could have an impact on the financial health and perspective of companies in terms of business model, in terms of risks, in terms of potentially liability exposures. So actually, this has become part of the criteria and methodology more from a credit risk perspective. Ratings is also launching a couple of other products or has launched, about 3 years ago, a green bond evaluation. And more recently, last year, a product that is called ESG Evaluations. This is an issuer-paid model, an issuer-paid product. Here, you have a company, let's say, Unilever, that wants to have an ESG evaluation done on themselves. And they hire S&P Global Ratings because they want a well-known party that is objective, unbiased, has a high level of market credibility, to give an assessment on their ESG practices, their ESG metrics, but also forward-looking, their plans and initiatives and the opportunity to hear from management what they're implementing. Why are companies inviting S&P Global Ratings to do that is there are so many ESG reports and scorecards in the market where the quality of the data is very poor. These are companies that do websites scraping. They look more from an outside-in perspective, in press releases, in CSR reports and so on. But often, there are a lot of inaccuracies in those reports. And instead of going out and calling 20 companies and saying, "Hey, you have an incorrect data point here or something is incorrect there." They say, "We better retain a party. We pay that party to have a really high-quality report out in the market." so far, we have done more than 65 of those, and the pipeline is very strong. We see a lot of interest in this product. It's different than, indeed, as you said, a Market Intelligence ESG product, which is more scores, scorecards, how those are built up, more for investors, other financial market participants. I think that's a very scalable business that can go very fast. This ESG Evaluations is a very intense process that the Ratings analysts have to go through, including meeting companies' management and so on. But therefore, you get a very high quality of report. For us, of course, what's interesting is that we have all those different propositions, all those different components, and actually, because we feel that we have all those different pieces of the puzzle together for ESG starting with the same data set. And we all use the same data set and ESG score and methodologies now from the acquisition of the RobecoSAM ESG Ratings business. And then all of the business are building their own commercial propositions, on top of that from the ESG indices. On the one side to what we just discussed for Ratings, the Market Intelligence, which is not only the ESG scores and reports, but also, there is a company that we own called Trucost that puts a lot of carbon and climate-related data out there. And it's generally seen as one of the absolute experts in that field. And also, Platts has already a sizable renewable energy business and is launching a lot of new products. Think about recycled plastics, think about hydrogen. So I think this is a really good product and commercial opportunity for us across the company because it touches so many parts of the company. And therefore, we think we are well positioned.

Great. Great. Yes. I would imagine the deep dives in the Ratings business is certainly synergistic to the data in the other spaces, and that makes a whole lot of sense, so I appreciate that. Switching up gears a little bit to Market Intelligence. You issued a press release a couple of weeks back announcing the launch of your Marketplace data platform. Can you talk a bit more about what that platform is, how it sets you up to compete with some of the other offerings in the marketplace? And then maybe more broadly, kind of how Market Intelligence is poised to capitalize on the growing demand for data from a variety of different organization types?

Yes. Yes. This is an initiative that we also are very enthusiastic about. Why? Because we believe that just the market for data is going to be very important. And there are going to be a lot of companies that sit on data that could be very attractive, but they don't know what to do with it and don't know how to monetize. And there are other companies that are actually looking for certain data sets and don't know where to look for it and where to find it. And that's why we have established this data on Marketplace proposition. You could say it's a kind of approach of an Amazon for data but at a very low scale, of course, at the moment. But why there are similarities is, first of all, we put our -- all our own data on this platform from Platts data to other data. So it is across the company. And we also add external data, but we make sure it's highly curated, it's high-quality data and it's linked. So it is not that everyone can just put whatever data. We need to make sure that the quality is high, and it is linked to other data sets. And then everyone that is interested in data can go there. It's very easy in terms of navigation with certain tiles where you can click into, can get sample sets, can understand what is the background of the data, what are the time series and so on. So it's very easy to navigate, and you can directly buy certain data sets that are attractive for you. It's a part of the thinking that what we have seen in Market Intelligence that the data feeds business in general is growing very rapidly due to market trends. And we think that particular component where we are not only looking at our own very important data sets, but data sets of others that we can add and curate and then ultimately put up for commercialization, that, that could be very attractive in terms of a proposition to the market. So it's one of those new initiatives. It's part of, if I may make a step backwards, our overall strategy, what we're trying to achieve with the company. Because the company has, as you know, attractive businesses, good market position, secular trends. So we should see a normal kind of business-as-usual growth of the company. Where we're really challenging ourselves is what could be acceleration of that growth going forward? What are the new initiatives we can grow over and above our normal business-as-usual growth? And this is an example, ESG, but also what we're doing in China, what we're doing with private company in SME and several other initiatives where we're optimistic that we can accelerate the growth of the company going forward.

Great. And I would imagine this is another kind of way for you to take a look at what investors are, or end users, are interested in and potentially leverage that information to build new data sets yourself or potentially even buy them if prices were attractive.

Of course, you learn a lot from that, and you can see the behaviors, you can see where is the interest, where is the actual usage. We're actually also putting some Kensho capabilities on this platform. So as you know, we believe that Kensho is really helping us to be a catalyst for innovation within the company. But we also still always look for Kensho as a possibility more on a commercial basis to see which of those capabilities could be helpful for some of our customers. So indeed, this is a nice platform to learn a lot and to fine-tune our product and concept and data development in the future.

Got it. Makes sense. Kind of switching gears again to the energy segment or the Platts segment. Obviously, the market backdrop there is a bit challenged right now. But by and large, the nature of your offerings are such that Platts has been or should be relatively insulated. That being said, and we know there are a lot of factors at play outside of the level of oil prices, for example, but what type of dynamics should we be aware of that could potentially play out or metrics to keep an eye on that would signal that the potential for more elevated attrition in the mid- or large-size customer base could occur to an extent that would potentially move the needle for the segment?

Yes. If you look at the overall Platts business, I think the business composition is really helping us to see that this business is resilient when there is a market downturn. And we have seen that. It could be either financial market downturn or a distressed period for the commodities markets. And Platts actually has proven over the last number of years that it is able to keep up its business in quite a good way, certainly relative to some competitors. And the reason is that the largest part of the Platts business is the price reporting business. We do have some analytics, but it's a smaller component. And what we could see is that the analytics business, when you're more focused on add-on upstream kind of -- or part of the value chain that, ultimately, customers that are having budgetary constraints will say, "You know what, I will reduce my contracts in those areas." However, price reporting is so core. If you are an active participant in the commodities markets, price reporting is so core to everything you do. It's hard to switch off your subscription. And that's why that business is so solid and resilient. What is, of course, important and what we are very closely monitoring is what is the number of customers that go out of business. Because when they go out of business, clearly and obviously, you lose the revenue going forward. Fortunately, that number is relatively low. It's less than 20 at the moment, and most of them are relatively small. So in aggregate, it's not really a meaningful impact. What we, of course, are closely monitoring is renewal cycles of existing customers because you may expect some of those renewal cycles to take longer. There's more discussion about the pricing of the new contract going forward. And there's -- of course, that will take more time. And then there is new sales, which is clearly a bit more difficult in the current environment. If you don't have the relationship, it's a little harder to convince the customer to sign up. The length and the depth of the economic downturn is going to ultimately impact what is the effect on Platts. I think that full effect we will see for the first time in 2021. But overall, so far, if I look at all the dashboards that we have put in place, and we're monitoring this very closely on a weekly basis, I would say, yes, there is some impact, but it is still manageable overall for the company.

Got it. Got it. Turning a little bit more to some growth opportunities. I know we have a handful of minutes left. I just want to make sure I touch on a few more. Specifically in index, what are the largest opportunities or adjacent opportunities for that business, in your view, specifically as it relates to new product development? I think indexing and ETF space is generally one where money goes to the first-mover. So just kind of thinking about what are the areas that you're not as big in now or that you potentially are targeting that could be primed for indexation that you can address given the information and data you have.

Yes. I think the list is ESG, what we already discussed; fixed income; smart beta or factor-based; and then international growth. Those are the main areas that we're focusing on. Obviously, that's the flip side of a benchmark business. It's a lot of work and a lot of investments and a long-term plan in order to really make significant inroads to those markets, as is the other way around, of course, for those areas where we have a strong position in the index market. But there are several initiatives that we're having in place. For example, we're having a relationship now. We established a partnership with IHS Markit on fixed income to develop combined products given their strength in fixed income and our strength in equities. We have the relationship with several exchanges around the world for the global growth. So those are some of the initiatives that we're having to grow the index business over and above the existing position that we have in the markets.

Perfect. And I think we only have a couple of minutes left. I just want to ask a high-level question about growth opportunities more broadly. I think if I -- if we were to fast forward 5 years from now, what's the one part of your business you're investing in today that you're most excited about being a material growth contributor? And I know we've talked quite a bit about ESG. So I would imagine that's one. But if there's anything else outside of that, that comes to mind as a real needle-mover 5 years from now, what would you say that would be?

I think the initiatives we have in Ratings in China, I think that's, of course, such a large market. And we believe that, yes, there is the geopolitical tension, but we believe that the overall long-term plan that the Chinese regulators and institutions have with respect to opening up and making their capital markets more mature is sincere and is important part of their overall plan to develop their economy. So clearly, the interests are aligned. That will be investments for a certain period of time. But then clearly, I would expect, in terms of contribution in the mid and longer term, the benefits will be quite large and really significant in terms of the overall growth for the Ratings business. And the other part that we haven't really discussed is just, in general terms, the whole investments we're doing with Kensho. So it's not only on efficiencies. Actually, I think the opportunity with respect to new and alternative data sets and propositions that we can, therefore, put out to the market, the benefit of new technologies is another area, I think, that commercially will help the company going forward.

Great. Well, I think that is a good place to wrap up as we're running out of time. Thank you very much, Ewout, for your time. And have a great rest of the day.

Thanks, Andrew. Pleasure.