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

I'm George Tong, and I cover business and information services at Goldman Sachs. I'm really pleased to be joined by Ewout Steenbergen, CFO of S&P. Ewout, thank you for being with us.

Good morning, George.

So Ewout, I'd like to start off at a high level with questions on S&P's strategy, particularly around the announced INFO merger and then we'll dive deeper into debt issuance trends and the non-Ratings businesses. Those in the audience interested in asking questions, feel free to submit them through the portal, and we can get to those near the end of the session.

So Ewout, I guess, starting at a high level, you announced the intention to merge with INFO earlier in -- recently in a $44 billion all-stock deal. Certainly, there are scale, diversification and cross-pollination benefits from this deal. As you think about the strategic benefits, which part of the business or which segments do you think will stand to benefit the most from the merger?

Yes. Thank you, George. And if we think about this opportunity, we are so excited about what we can do with the combination of the 2 companies. And you will hear this from the executives of IHS Markit. You will hear this from the executives of S&P Global. And we have spent a lot of time in developing our strategic story and gotten comfortable with the whole set of opportunities we have. Because we believe this is going to be a very attractive company for our shareholders, for our customers, for our employees. And I won't go in too much detail because it takes too much time. But looking at it more strategically to be a company that has the scale, is faster-growing, has a more diversified revenue mix, has a higher percentage of recurring revenues and has a very attractive financial profile and capital return profile to shareholders, of course, that is one of the benefits. But ultimately, you do a transaction like this, not only because of cost takeouts and a financial profile, you do it because you think that you are commercially in better position and you have a better proposition, a more value-enhancing proposition to your customers. And why we like this so much is that 3 of the 4 divisions of S&P Global today are tremendously benefiting from this. Think about the index business, that is now the #1 equity index provider in the world, and combined with the #2 fixed income index provider that owns the source data, which is very important in fixed income, you need to own the source data, which is the case with INFO on their trading platforms. So what we can do strategically with the combination of those 2 business is highly attractive. Think about Platts and the resources, where we are more focused on price reporting, and our analytics business is relatively small. INFO is more focused on upstream, downstream, data and analytics, a much more complete offering we can provide to our customers, including, of course, the focus on energy transition and how we can help our customers with that. And then if you think about Market Intelligence, which used to be a more mid-sized player in the data market space, now in combination with the datasets and the offerings of financial services division of INFO, you certainly get a much richer proposition to our customers. So we thought that the combination of 3 divisions that would be strengthened strategically with this combination is highly attractive. And when we came together and started to have the conversations and brought businesspeople and product people together, I think the enthusiasm was just going through the roof. I would dare to say that we are probably just scratched the surface in terms of the opportunities. I think the more work we do, the more we find -- even last week, there were customers coming to us and saying, "Hey, if you combine this with that, actually that would be really attractive for us." We hadn't thought about that. We hadn't thought about bringing Kensho in so far. We kept it very small for obvious reasons. So now we can unleash Kensho and looking for opportunities, what we can do together with their data lake. So there's many of more of those that can come out of this combination.

Right. Makes sense. You announced revenue synergies from this deal of $350 million spread evenly, relatively linearly over 5 years. What are some specific examples of revenue synergies that you think could be most material?

Yes. And I can give you the whole list because we have very detailed bottoms-up list of initiative-by-initiative. And you saw we broke it out in terms of cross-sell and new products. And I would say every initiative standalone is probably not more than $10 million to $15 million. So therefore, you see the granularity. There isn't 1 or 2 big things that we think will suddenly get us to the $350 million number. There's a lot of smaller things that get us to that number. But if I take your question from a slightly different angle, what we have tried to do is to think about this more from a user perspective. So what is going to change if you are a user of our products today, and what will change for you? Why is this better for you? Why is this more attractive? And I can give a couple of examples. So for example, if you would be an investment banking analyst and you use Market Intelligence platform today, you have all your datasets there. You have your verticals in metals and mining and insurance and commercial banking and real estate and so on. So now in the future, in combination with INFO, you have access to economic and country risk data, which you didn't have before. You will get new verticals. Things about -- or think about automotive, think about upstream oil and gas. Think about the access you will have to reference data with respect to credits and fixed income that will come from the INFO platform, specific data around CES and loans and securitized products and so on. So suddenly, you have access and linkages between datasets you didn't have before, which makes it highly attractive. Of course, you could get those datasets standalone. But you have to go to many different platforms or websites and take it all together. The fact that you have it now in one place is really going to be helpful and far more efficient for you as a user. Another example I can give is if you work on a fixed income desk, either at an asset manager or at a large institutional bank, you're probably using us today for RatingsDirect subscription and your lookup information there with respect to credit research, debt maturity profiles and so on. Now you can get that in combination with INFO's fixed income issuance platform. So now you have a workflow tool in combination with both sets of data, which is making it far more efficient and far more attractive. So those are 2 user examples. Again, we have developed multiple users examples in order to get a good feel for the synergy opportunities are real because there is a clear advantage for users of the products of the combined company in the future.

Right. Now the flip side of revenue synergies is, of course, revenue dis-synergies. How much customer and product overlap is there between the 2 companies? And could there be instances of revenue dis-synergies?

Well, actually, George, that was one of the most attractive parts of this combination, the overlap is really limited. We never thought about INFO as a competitor. They really never thought about us as a competitor. Because the offerings are very complementary to each other. So fortunately, we didn't see a lot of dis-synergies coming out of this. One area where there's a dis-synergy is more on the tech side. I can talk about this more if you want. But we have found offsets to that. So we think we have neutralized that economically. But from a more commercial perspective, there were not really meaningful dis-synergies that we have detected based on the complementary nature of both businesses.

Got it, makes sense. You called out ESG as an attractive growth area for the combined company as well as climate, private assets, alternative data. How large are these growth areas currently for the combined company? And how does the merger help enhance your ability to serve these growing markets?

Yes. First, on ESG, as you know, a very important growth area for S&P Global. INFO is also active in this space more around climate and energy transition. And they have very interesting datasets. Think about from their automotive division, data around e-fees, steel pipe, emissions. Think about emissions from their maritime business and so on. So they are packaging all of those datasets. That is actually very nice fitting with what we are doing with Platts that is focused on energy transition, new price assessments around hydrogen and carbon and recycled plastics and so on and, of course, what we are doing with Ratings with ESG evaluations and SAM in terms of scores, ESG indices and so on. So also there, we think there is a very nice fit in terms of the profile. What we have stated is that this year, our expectation is S&P Global, in terms of ESG revenues, will be around $60 million. And so far, up to the third quarter, we're on track to get to that number. The number that INFO has put out for their energy transition and climate business is around $70 million. So in combination, I think it becomes a quite sizable business and certainly one of the higher-growth areas. I think you know we have stated that we are thinking about a 40% CAGR on the S&P base. I think we haven't stated how large the combined company can grow. But certainly, it is one of the key high-growth areas that we see for the company. The same for private company data. We have added a lot of private company records to our database now, about 80 million. They have a lot of private company data through the Ipreo platforms and what they are doing for private equity providers. So the combination will be attractive because now you can get the credit profiles in combination with those workflow tools for LPs and GPs. That's an attractive element and is clearly high growth. KYC, KY3P, we haven't done a lot in that area as S&P Global. INFO has a clear product. So that is going to be a new product development and sales. So that's in the category of new product synergy benefit that will come out of it. So that's why we thought this is attractive because together we are much stronger in capturing those larger growth markets.

Got it, makes sense. S&P and INFO are targeting $480 million in cost synergies, just to look at the other side of the synergy equation. Business overlap is making up the majority of that, so 65%, corporate and technology makes up about 25% of those synergies, real estate making up about 10%. What are some examples of efficiencies that you expect in the first 2 categories, so corporate and technology and business overlap?

Well, of course, both companies have public company infrastructure. You don't need a duplication of that. So there will be certain roles that you don't need the duplications and can take a benefit out of that. And our philosophy is we take a best of both worlds approach, best athletes approach in terms of thinking about that integration. So I think that is in the corporate space, where scale is going to be really helpful. Real estate is another area, we have done a lot of detailed bottoms-up work. We spent weekends of time, location-by-location. We said, "Okay. Where are you in Denver? Where are we? How many buildings? What is the capacity need? New office-based concepts, you don't need one desk for one individual anymore with hybrid working concepts. What did you already have in your plan? Or what do we have already in our plan?" So what is in addition and over and above that, that we can capture. And we went location-by-location, city-by-city, building-by-building and a very detailed bottom-up approach in terms of the opportunity. So those are some that, we believe, in terms of corporate and real estate, what we can do. It's clearly one of the larger categories next to some of the combination on the businesses side.

Okay, makes sense. I want to switch gears a little bit and talk about China. It's a very meaningful opportunity, not just for the Ratings business, but really also across the other segments. How are you approaching China as a market? And when do you expect to see more meaningful revenue contributions from that country?

We see China as a long-term strategy. I lived in the region. So I know culturally they think long term. Commitments are long term. Loyalty is long term. And therefore, benefits are long term. And that is fine because we have the time. We can make the investments. And ultimately, the benefits that can come out of that can become very meaningful. So we're not looking at those opportunities from a short-term perspective. If you think about the Ratings opportunity, obviously this is the second-largest bond market in the world, opening up, getting more mature. That's the reason why we got invited in, to help with the regulators and the institutions to develop the markets, credit insights, better credit analytics, more transparency, wider rating scale, therefore, more investors that come in, economic benefits, tighter spreads, more liquidity, all the benefits that come out of that step. But it's a market that needs development, needs time because it is used to have a completely different approach. I think, George, you know that the existing rating agencies all rate companies AAA and AA. But there were a couple of defaults recently, even one that went from AAA immediately to default and no recovery at all. So those are eye-openers that the market will see. And we are actually very encouraged about the level of activity for our Ratings business, the level of interest and the pipeline that looks very healthy. So we believe that's a great opportunity. Market Intelligence is investing in specific Chinese content, Chinese language, Chinese credit platform. So all of that is being developed and launched. And then actually INFO is having 3 joint ventures in China as well. They have about 200 people, 3 joint ventures, of which 2 are in financial services. So we think even there in the combination, we probably can create a bigger scale opportunity as well.

Got it. That makes sense. Let's switch gears and talk a little bit about the Ratings business and debt issuance trends. So S&P expects global debt issuance volumes to be down about 3% in 2021. Based on issuance 4Q to date and the recent surge in COVID cases, how have your expectations around debt issuance volumes changed, if at all?

Yes. First of all, debt issuance forecast is developed by our research group, our credit research group in the Ratings business. So we take that as management as a piece of information. But technically, it's not management's forecast. It is the research group forecast. And they will update that again at the end of the fourth quarter. So we will give you the latest update on the 2021 expectations when we do our earnings call at the beginning of February. Having said that, clearly, this has been a phenomenal year with respect to the issuance environment, particularly helped by the liquidity-driven issuance in the second quarter, beginning of the third quarter, which makes the comps very high for 2021. If you think about that and then the latest expectations that were set by our research group of a midpoint of 3% decline next year, I would say that is quite constructive still. It still shows that despite all the liquidity-driven issuance this year, there is still a quite healthy pipeline of refinancing coming in 2021 if the drop is only 3%. And then in combination with other elements, if you want to make the link between issuance to Ratings revenue, there is a couple -- many other things that go into the mix. Because it's not only bond issuance. There are bank loans. Clearly, bank loans were coming from a very low point this year. So we think that should look much stronger next year. There are, of course, commercial conditions. We have non-transaction, which is about, as you know, depends on the year, but approximately half of the revenue base of Ratings. We should see there are benefits of a number of bonds outstanding that has gone up, so more surveillance fees, which are in the non-transaction category, benefits of new products, for example, ESG evaluations. So there's many things that go into the mix why we think that overall the outlook for next year is still quite constructive also for the Ratings business. That is actually, George, one of the reasons why during the investor call on Monday last week, we came out and made an explicit statement that the earnings per share expectation for next year, although we are not giving guidance yet, the earnings per share expectation should be somewhere in the mid-single-digit level. And that excludes any buybacks because we are precluded from buybacks at this point in time. So without the help of buyback, still mid-single-digit EPS growth is our best estimate at this moment for S&P Global standalone for 2021, coming out of a phenomenal year. If you look at our latest guidance for this year, we will be close to 20% EPS growth at mid-single-digit next year. So if you get somewhere mid-20s growth combined over 2 years, it's still, of course, a very strong result for the company. So in our view, we should still see quite a solid year for S&P Global next year. And we think it's important that, that is the general understanding.

Yes, makes sense. And drilling deeper into some of the individual debt issuance categories, investment-grade certainly hit a record in terms of issuance earlier this year. That was lifted by U.S. Fed backstopping actions. What are your expectations for U.S. investment-grade issuance over the next several quarters? And do you think corporations have prefunded? Or what extent do you believe corporations have prefunded their balance sheets, which may limit growth in this category over the near term?

Yes. If you look at corporates, the expectation is that next year, there will be a larger decline but then offset by financial services, that should see some positive growth for next year. Stocks chart looks better. And I also already mentioned bank loans. So as usual, it's a whole mix. Not all the categories go up or down at the same time. It's usually going in opposite directions in the result of mitigating effects there. It's hard to predict how many corporates in the U.S. have prefinanced and might be looking at just paying down debt in the near future. Definitely, there was a lot of liquidity-driven issuance. Maybe some corporates have done that just to create an additional liquidity buffer on their balance sheets and might at some point say, "I don't need that anymore." Others are having a cash burn at this moment and the cash is not on the balance sheet anymore. And there won't be a possibility to pay down those loans. And it, in the end, becomes a permanent element of their corporate financing structure. So it will probably be a mix. Anyhow, we see it as a windfall because it is additional issuance over and above what we would have predicted in any 5-year kind of outlook. Anything we did this year from a liquidity-driven perspective was windfall. And if some of that becomes repetitive, it's actually even repetitive windfall that we will have as a company.

Right, makes sense. So if we switch gears and look a little bit at high yield, that category grew very strong double digits, about 50% year-over-year in the third quarter. How sustainable do you think the double-digit growth in high-yield can be, especially where you see default rates and credit spreads trending as well as rates? And how much does that issuance represent a pull-forward of high-yield refinancing activity?

Yes. That will most likely taper off at some point. We're already seeing that now. But there is always a bit of an offset in bank loans. You see at some points, companies like more to go to the bond market and do high-yield bond financing. In other moments, they like more to go on the route of bank loans. So you see usually those going up and down in different directions. So perhaps if there will be next year high-yield issuance at a lower level, certainly our expectation would be that there is a level of offset then on the bank loan volumes.

Right, makes sense. And just wrapping up that line of thought around loans and perhaps looking at structured finance as well, both of those categories, loans and structured finance, have been in decline now for several quarters, CLO volumes potentially likely to remain soft because of declines in loan issuance. How long do you think this trend around weakness in structured and loans could persist? And what could potentially mitigate the weakness?

It's usually when the overall risk tolerance levels in the markets are going up and the markets become less and less tolerant for risk that you see those kind of markets withdrawing a bit. And then when markets become stronger again and the risk acceptance is getting higher, you see a level of return coming back in those markets. So the answer to your question is very much around what is the outlook for the general economy, how quickly are economies coming back after the rollout of the vaccine. I have to say I'm a COVID optimist. I believe that there will be a lot of -- I'm now speaking personally -- a lot of positive things coming out of this period for the world. Yes, it has been very hard for a lot of people and a lot of organizations. But there will be a lot of positives coming out of this in the sense of advancements of scientific development, pharmaceutical industry, a sustainable world, work-life balance and so on. So I think this is going to be a period that ultimately, hopefully, will also lead to some kind of a revival of economies over time. And clearly, we, as a company, would be positioned well to take advantage of that.

Okay, makes sense. Pricing typically adds about 3% to Ratings revenue growth each year. Have you had to adjust your pricing actions, given the current environment, perhaps give some pricing concessions or pricing relief? And has there been any customer pushback to pricing increases in the current environment?

And are you speaking about Ratings or in general?

Ratings and it's also a question that might apply more broadly to the company.

Yes. So Ratings, I need to be careful because we have not published our fee schedule for next year. So I can't speak on a forward-looking basis about our pricing. I can just tell you that, historically, we have always been able to have some level of a price increase. And the simple reason is that the overall fee for an issuance of a bond relative to the spread benefit of having a rating on a bond, that tradeoff is still very positive for the issuer. So the list price this year, 7.1 basis points, the credit spread differential on an empirical basis, what we have been able to see is somewhere on average about 30 basis points yearly. So if you have one-time 7.1 basis points upfront versus 30 basis points benefit each and every year, that's still a pretty good tradeoff. But again, I can't speak about from a forward-looking perspective for Ratings. Our other businesses, definitely, we have been monitoring very closely, particularly after the start of the COVID crisis. What is happening with customers? How many customers needed help from a contract perspective? How many got into difficulties from a payment approach? In the end, although, of course, we were monitoring this very closely, I think the overall number of customers, where we needed to provide help, was very manageable. And you have seen our results over the last few quarters, I think it was not -- did not have a meaningful impact in the overall commercial activities and revenues of the company.

Makes sense. Let's switch gears and talk a little bit about the non-Ratings businesses, starting with Market Intelligence. The shift to passive investing and MiFID II are factors that impact growth in that segment. What are your expectations for workstation and data fee growth over the intermediate to longer term?

We have been, standalone as S&P Global, already one of the faster-growing companies in the data market space. Our desktop is having growth somewhere low to mid-single digits, which is, also this year, we're able to achieve that, which is showing, I think, about the resilience of our business. And then if you think about data feeds, our data feeds business, that is growing somewhere low-teens in most of the quarters because we clearly see a shift and preference of customers to get more direct data feeds. We have different offerings now to deliver that to customers. We have also the collaboration with Snowflake as a cloud provider that customers can get those data delivered through the cloud platforms. So we would expect going forward similar kind of growth levels plus, of course, then the synergy, the revenue synergy opportunity of the merger with INFO on top of that.

Right. That makes sense. And if we switch gears and talk about the index business, that's on track to grow mid-single-digits-plus this year, driven by -- in part by growth in asset-linked fees. Can you talk about recent trends you've seen around AUM growth and ETF and mutual funds and perhaps how that business is performing from a pricing and market share perspective?

Yes. We track very closely market share in the sense of what percentage of ETF AUM is using our indices around the world. Pretty stable and steady in terms of that particular percentage and continue to be a market leader. So there's always shifts in flows going in one period to more emerging markets and other periods more to mature markets, some periods to fixed income, other periods to equities. It's interesting because you have -- there are always a kind of a reversal to the mean. Because in some periods, one category is more attractive, in other periods, another category. But in the end, it's always a kind of reversal to the mean. Therefore, we see our market share being relatively steady and stable. We continue to believe that the trend of more investment in passive products will continue. We continue to believe we are well positioned to capture a benefit of that and even more in combination with INFO, of course, and the fixed income indices and multi-asset class indices that what we can have there. So yes, I think the economic model behind that business is completely intact and will just continue.

Right. Got it. And then Platts, that grew 5% year-over-year organically in the third quarter. Can you talk a little bit about how you expect the oil price downturn to potentially impact future segment performance within Platts?

Yes. Fortunately, we have seen the oil price decline bottoming out and have seen a nice uptick. Because, of course, in the spring, the early spring, when we were looking not only at the economic impact of the COVID crisis, plus on top of that, the oil price prices as well because there was, in fact, the double crisis happening at that time, that Platts was able to continue to perform in such a steady way, showing their resilience, able to continue to deliver the growth. Every time this question comes up with Platts is how is it being impacted by the external environment, I think, in periods where we have headwinds that the business was able to act, behave and perform in such a way, we're very, very proud about that. I think from an outlook perspective, therefore, it's also quite similar. And actually, if oil prices would persistently very low, I think that would be, at some point, become more difficult for some of our customers. Now we see the Brent crude oil price consistently above $40 a barrel, it's definitely going to be helpful. And of course, we need to see when the economies are going to pick up again after the vaccine rollout and hopefully some demand pickup as well. That would be helpful in the end, too. But Platts, I think, very steady, very stable, very resilient. And I think that should remain the outlook as well for the next period.

Got it. And if we switch gears and talk a little bit about margins and profitability, S&P introduced a $120 million cost savings program spanning the next 2 to 3 years with savings from real estate, from procurement, T&E and IT. How do these savings harmonize with the $480 million cost synergies that you're expecting from the INFO merger?

The most important is no double counts. This is absolutely clean. What we said when we were starting to work with the INFO team, they had their announcement of 100 basis points margin expansion yearly and they had embedded a certain productivity program, although they didn't have a dollar number for that. We were a little bit more explicit with our $120 million productivity program that we announced during our third quarter earnings call. So the $480 million are in addition. So therefore, we have been very careful on the bottoms-up plans to say, "Okay, what is already included, and what is actually over and above that we have already in our existing plans?" So that is really an add-on number that we can present to our shareholders.

Yes, makes sense. S&P's medium-term operating margin target is in the low 50s. How do you think the INFO merger changes your medium-term or longer-term view on margins?

Yes. The pro forma margin for the combined business is approximately 45%. That is our existing margin we have as S&P Global, the low 50s. And the margin on a comparable basis for INFO -- and what I mean with comparable basis, we have, on a comparable basis, 2 adjustments that we make because we include stock-based compensation expenses and will also include software development costs into that number. Because both in the S&P Global reporting protocol, we have included that as a normal course business expense and therefore a part of operating profit and operating margin. Again, that's not a right or wrong. This is non-GAAP. It's just a different reporting protocol. But we will put INFO ultimately on the same protocol as we have with S&P Global today. That means that the margins of INFO come down a bit to what is being reported on a stand-alone basis but then again, pro forma, together with S&P Global as a combined company, mid-40s. And then we have stated last week when we announced the merger that our expectation is that we would be able to expand margins by 200 basis points or more annually over the years following the closing of the transaction. So we should be able to move that up. We haven't given aspirational margin targets. I'm a little careful to give you a specific numerical number where we are heading. But you understand, if you're at 45% and you have a few years of 200 basis points margin expansion that we are trending, I think, in a very healthy direction and in the direction that investors are used to see from S&P Global today standalone.

Perfect. Well, it looks like we're just about out of time. Ewout, thank you for all the helpful commentary and color. And thank you all for joining us.

Thank you so much, and appreciate that you have organized this, George.

Of course, thank you.

Okay. Stay well.

Bye-bye.