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

Good afternoon, everybody, and welcome to the Ultimate Services Investor Conference. Hopefully, it's been a productive and enjoyable day for everyone. We look forward to hopefully being in person at the conference next year. This -- for this next slot, we are pleased to be hosting S&P Global. They're represented by their SVP of IR, Chip Merritt. I want to thank him for coming back to the conference again this year. It's always great to have you. In terms of the program here, I'm sure everybody knows by now. We're doing fireside chats for the conference. So there's no formal presentation or slides. There will be an interactive Q&A. And hopefully, there'll be an opportunity if anybody has any questions, you can send them along in the -- through the conference website. I'll be monitoring and try to work it into the conversation if time permits. But with that in mind, let's tee it off. So Chip, great to have you. Thank you.

Most people, I would say, are pretty familiar with S&P's Credit Ratings. It's got a great brand, and people are well acquainted with that business. But people might be a little bit less familiar with the non-Ratings businesses, the other 3 segments of the company. So before we jump further into the Q&A, I was hoping you could just take a few minutes, give a brief overview of the company, and how the product -- how the portfolio has really evolved in the company?

Sure. So thanks for having me today. Yes, we think of ourselves as a benchmark company. I mean, data is in vogue now, and people are really kind of a bit obsessed with data, data companies. But I think that is nice. It's interesting. It's -- but if you could turn something to a benchmark, it really transcends data. And we're fortunate that we're going to see is our Platts and our Ratings business are all really benchmark businesses. We paired years ago, some of the other businesses out of the portfolio, that's kind of ancient history there. But the remaining businesses are really pretty special. If you think about the Indices business, right, the move from active to passive, while many people on the line today might not appreciate it, but it's certainly good news for us because we're paid by the increasing AUM in passively managed mutual funds of ETFs. And as that balance grows, then, of course, our revenue grows along with that, along with increased derivative activity. So that's really the backbone of the Indices business, and that's really just a special business. Market Intelligence, it's something that many people on the call today will use what is CapIQ. And we're competing in that world with Bloomberg and Thomson, Refinitiv and FactSet. So that's a very competitive space. The requirements are that we continue to make the product better and better, better, and yet, our competitors are doing the same thing. So the key of the game these days is unique datasets. And we've added in all the SNL datasets that no one else has, the Panjiva datasets, and we've got some really nice linking pools that were our Kensho Link, Kensho capability, technology. It's nice to have the data, but what good is it, if you can't take the data and link it in with your data and your datasets. And we can help you do that with our Kensho Link tool. And lastly as Platts, which I always say Platts is our most resilient business. It's estimated at 70% of the world's oil trades on our prices. So we are the Brent oil price. So we put out about 12,000 prices every day on these various commodities. And these prices are embedded in the long- and medium-term contracts of companies. So if you're buying or selling a commodity, you need to buy for 3 or 4, 5 years in a row, so you've entered a contract at what price, you're not going to enter into a fixed-price contract for a 5-year period with a commodity, the price risk is too great. So you need a variable price in your long-term contract. Could very well be a Platts price. So I'll stop there.

So other than being great businesses, what ties together this portfolio of oil benchmarking and indices, et cetera, et cetera?

Yes. So one of the things that our CEO likes to talk about is that they're global, right? And so the other thing is that they're market facing. We had a very nice business with JD Power, but it was really more of a consumer-facing business. Consumers recognize the JD Power brand. So we want to be market facing. We want to be geographic, and we want unique data and benchmarks. That's really the tie between them all. And the ties are getting stronger over time. If you think about ESG, I don't mean to jump into new category or -- but the ESG products that we're launching are all stronger because of the collection of assets that we have. Whether you've got the Indices with ESG indices or the Ratings ESG evaluations or Market Intelligence actually collecting a lot of the data with RobecoSAM scores. All these things play together. And that's what really, really, really beneficial that we have this collection of assets in one company.

Okay, great. And we'll definitely drill more into some of -- a lot of what you just said, especially ESG later on. I would say S&P has seen a couple of years of increased investments in the last couple of years. There's been a flurry of product launches, some of whom you just mentioned before. What would you say, discuss some of these and maybe give us a sense of 1 or 2 or a couple of these that are the most exciting needle movers in the near term and long term?

Sure. Yes, so 2 years ago, going into '19 and '20, we told The Street that we're going to make some serious investments, $100 million in '19, $150 million in '20, to try to step up the game in terms of major projects. One of the things as a company, we noticed that we tended to do smaller projects and smaller ideas, right? So we kind of set aside some funds for some big ideas. And then made the company and the businesses compete with the best ideas, they got fund it. Things like Ratings in China, things like Market Intelligence in China, things like our new Marketplace with our datasets out there, things like ESG, things like adding -- I think we've added 50 million or 60 million companies or small private company data into our datasets. So these are all initiatives that are kind of part of that. And what to me is the most exciting is these things are all launching now. So instead of just being investment ideas, this is like the year of the launch. We've launched so many of these this year. It's really fun to see things materialize that were just ideas assure 2 years ago.

If you want to pick maybe 1 or 2 of these...

Oh, I'm sorry.

No problem.

Yes. I think in the short run, ESG is going to grow the fastest just because the demand is there, and people aren't particularly enamored with the products that are out there today. But I think in the long run, perhaps China could be larger because the China bond market issues about $1 trillion of issuance every year on corporates. And the U.S. in a normal year, not pandemic year, does about $1 trillion of corporate issuance each year. So it gives you a sense of the order of magnitude of the Chinese bond market, it's quite large. So if we were to gain a meaningful position there, that would be a meaningful contributor to the ratings business.

Okay, great. Maybe we'll talk about the Ratings business before we get on to some of the other areas like China, like Platts, Indices. Within Ratings, what significant changes do you envision for the business, for the industry, structure, better landscape, regulatory changes over the next 5, 10 years? What do you see as being areas that might evolve in this industry?

Yes. So really, I'd say most of the change has taken place already. So the regulatory -- if we go back before the financial crisis, we were not regulated. And since the financial crisis, we're now regulated by 20-some-odd countries, right? That's a big change. And we like it. I mean, initially, you're always afraid of regulation, but we like it because we know the rules of the game. It's very clear what you can and can't do. And as long as you follow those rules, you're in good shape. So I think we really like being regulated. From an opportunity standpoint or changes out there, I need to keep going back to ESG. But it's -- the green bond evaluations are relatively new. The Ratings ESG evaluations are relatively new. We might see us do some work in maybe in cyber or some other areas. So -- and then beyond that, we have made a conscious efforts to make sure that we're -- making sure that we're participating in every asset class. So coming out of financial crisis, there was talk even inside the company about walking away in some -- from some of the structured classes. And the decision what was made was no, we are S&P Global. And we work for S&P Ratings. And we're going to participate in every asset class in every world area. And so we went back in and worked on some methodologies and criteria to bring them up to speed. And so really structured is a very nice part of our business. That -- but yes, I'll stop there.

That's perfect. So you mentioned China. So maybe you can talk a little bit about the company's strategy in China? Obviously, your main competitor globally has a little bit different strategy. So maybe I'll let you comment on -- there's 2 different paths as we sort of see it in terms of the domestic and the global market and whether you're operating as a stand-alone or operating in terms of a JV. What do you see as being the optimal strategy as it relates to China and the unique geopolitical risks and other environment dynamics that go on there?

Yes. I think -- and I can't recall if it was earlier this week or late last week, there was a pretty major bankruptcy in China of a AAA company. Straight to default. I mean, that says it all. That is the problem. 99% of the bonds in China are rated AA or AAA, and no one believes the ratings. So that is a problem. And so when we entered the Marketplace, we made it abundantly clear to the regulators that we're going to have the full-scale. In fact, our second bond -- our second rating that we put out was a BBB and the market was astonished. And -- but that's what we're going to do there. And so having that breadth of Ratings to actually help people think about relative credit risk. What good is it if everyone's AA and AAA? What is -- how does that inform the markets of the relative credit risk between 2 bonds that might be 500 basis points spread difference, but they're both AA. You never see that in any other country in the world. So that's really the role that we can play to help bring transparency to a very, very opaque market. The existing players as well as the joint venture, they're all getting AAs and AAAs. I don't think that's very informative. So we're really thrilled to be able to have the ability to I think utilize the full scale.

Great. Turning to instruments, I guess, more U.S. global based. Your outlook for next year is for a 3% decline following a record historical 2020 due to central bank stimulus, et cetera. Maybe you can talk a little bit about some of the puts and takes in that outlook? What are some of the upside cases that could drive that issuance above 3 -- better than 3% decline or some of the variables that are really embedding some risk in that outlook and leading to declines?

Yes. If you were to read the forecast report, you'd see that in many cases throughout the report, they talk about lots of uncertainty, a wide range. So there's just a lot of unknowns for next year. And so that creates a forecast that you wonder how accurate can it be when there's so many wide range of assumptions that can be in there. If we look at the challenge that we have is just coming off of this year where you've got investment-grade in the U.S up over at 60%, and you've got high-yield in the U.S. up over 70%, right? That just creates an enormously difficult comparison, right? But the good news is, I mean, it's kind of a bizarre way to say it. The good news is structured is down over 30% this year, right? So that creates an easier comp for next year. Bank loan rates have been anemic this year. M&A has been, until very recently, pretty light this year. So those create the opportunities. The other opportunity I'll throw out there is the opportunity for companies to take advantage of refinancing early to take advantage of these rates before they start to rise, if people think they're going to start to rise. And that's the question. So if people think rates are going to start to rise, you might see a surge of issuance come in for people who want to take advantage of the rates while they're still there and refinance things may be issued 2 years ago or 3 years ago. So that's yet to be seen, but that's a potential.

Okay. Great. So I want to go back now to -- actually, before we move on, let's stay with Ratings. I was just thinking about Ratings margins. They've been really strong. They've been up over 100 basis points for 6 straight quarters. They were actually over -- they were up over 1,000 basis points for a couple of quarters, if you go back in the first half. So what has been driving this improvement in Ratings margins? And how do you think about the medium-term outlook for those margins?

Sure. If you think about the Ratings cost structure, with the exception of incentive compensation, it's relatively fixed in the short run. We have a set number of analysts. And when you have very light issuance coming in, you're generally going to have low margins that quarter. When you have a surge of issuance coming in and the analysts are working till midnight, then you're going to see a big jump in margins. Now in the longer run, you can adjust your workforce. If you've got a category that's going to be growing for a long period of time, you can add to it. Or if you've got a category that's drying up for whatever reason, you can take away from that, move them around. But in the short run, that's not an opportunity. So that's why the quarterly margins swing around quite a bit because issuance from quarter to quarter swings around quite a bit. And that's why we always encourage people to take a look at the rolling 12-month margin because that's more representative of the margins we're actually achieving. And you pointed out the margin increase over time. It's really just a continuation of the productivity programs. But John Berisford, Head of Ratings, is trying to accomplish. And this is not a promise or a guidance, but it's an aspiration. And he's aspiring to be able to handle more credits every year with the same number of analysts by automating a lot of the processes and taking away some of the mundane parts of their job and automating that. And so he's been quite successful so far. And hopefully, we can continue to make strides in that.

So if it's really very much a function of operating leverage, driven by the revenues. If you assume that revenues are getting down next year in Ratings or issuances will be down. Does it stand to reason that we should be looking for margins down next year in Ratings as well?

So I would never make a prediction like that until we have guidance out there, but I will give you a very recent data point. If you go back to 2018, our revenue in Ratings was down and our margins were up. So I wouldn't necessarily draw that conclusion.

And what was the reason for that? Remind us, me, please, and the audience how were margins able to stay up despite those low issuance trends?

Sure. So first of all, it's an ongoing productivity effort that takes place. So we're constantly trying to work down the cost base because of that. And secondly, you're going to have -- if you're having less revenue, you're likely to have lower incentive compensation.