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

Hi. This is Sameer Kalucha. I'm an information services analyst here at Deutsche Bank. On behalf of Deutsche Bank, I'm very pleased to welcome Standard & Poor's CFO, Ewout Steenbergen, to be here. It's a pleasure to have you here, Ewout.

Thank you, Sameer. Really a pleasure to be here.

And to -- just to start off, I don't think, this is kind of like childish as well, S&P needs any introduction. This is among the oldest of the brands that's been around in the U.S. and a global brand, 100-plus, 150 years old. But there could be some new investors online, and it will be great to -- let's start with a brief introduction of the company in terms of what S&P does. S&P does a lot these days. It was just Ratings, but it's just too much to grasp in one go. So yes, it will be great to start with an introduction.

Thanks, Sameer. And in fact, the name of the holding company, S&P Global, is not that old. We are celebrating right now the fifth anniversary of the brand. Of course, the brand S&P is known already for a longer period of time. It's known for the Ratings business, for the Index business and so on. But actually, the company came out of McGraw Hill, McGraw Hill Financial and was renamed S&P Global after all the portfolio changes 5 years and before. So we are the premier financial services, data and analytics company. We are active in 4 different divisions: our Ratings business, of course, the largest rating agency in the world; S&P Dow Jones Indices, the largest Index business. We have Platts, which is a commodities benchmark prices and analytics business. And then we have S&P Global Market Intelligence, which provides corporate data, financial data, analytics, insights, credit risk insights to market participants. Company, approximately $7.5 billion of revenues, margins just over 50%. And in fact, we have a very repeatable model, strong market positions, very good secular trends, strong benchmarks in those markets. And that helps us in order to grow the business every year to expand margins and to drop off significant amounts of free cash flow. Our business model doesn't require a lot of capital. There's no regulatory capital that we have to hold. A little bit of operational risk capital and capital expenditures, but relatively minimal. And the cash flow that we generate, we can either reinvest in the business or return to shareholders. So we also return significant amounts of capital to shareholders, being able to do that through dividends and buybacks and to basically have a very repeatable model from a cash flow perspective as well. So that is, in essence, the company. I would say, very strong, very well embedded in everything we do with our customers and the markets. And of course, very excited future ahead with the merger with IHS Markit, where we're waiting for regulatory approval to close on that transaction.

I say, a great segue to start the conversation as well because the biggest news is the merger. The biggest talk of the town is the merger among the -- some of the largest deals on The Street and the company's history as well. And since it is the biggest, it has to have the big [indiscernible]. So would love to understand the strategic rationale behind the merger. And how does it change the company thinking and the company strategy on what you just described on revenue growth and margin expansion and EPS accretion dropping the bottom line in going forward? How does it play into the company thinking? How does the company thinking change from here?

I think the essence, Sameer, of the merger, the essence of the strategic rationale is to build a faster-growing company going forward because if we can grow this kind of companies with this kind of margins at a higher level, I think from a value perspective, it's the most attractive thing we do. And why is this going to be a higher-growth company? Because combining IHS Markit with S&P Global makes 3 of our 4 divisions significantly stronger, and we'll have a better value proposition for our customers, a better offering for our customers. Think about Market Intelligence. It's currently a midsized player. If you combine it with the financial services segment of INFO, now you suddenly have a very prominent player with more data sets, more workflow tools, better and better. Customers don't need to open up 3, 4, 5 different screens. They can really get everything from us in one go, in one workflow too in the whole day. Think about the Platts business. We are mostly strong in price reporting. INFO is mostly strong in research and analytics for upstream and downstream. If you combine the 2, you have a much more complete offering to your customers and can be very helpful, for example, to help customers around energy transition. And then the Index business, we, of course, the premier equity index provider with very strong benchmarks. INFO is very strong in fixed income indices. We're the second largest player in that space. So solely strategically, we now have many more options to combine those 2 franchises being able to offer multi-asset class indices to our customers, private data indices and so on. What we are trying to do is just create a faster-growing company, but largely built on the same algorithm, the same approach, what you're used to seeing with S&P Global. I sometimes joke about it and call it S&P Global on steroids. And what I mean with that is faster growth, further margin expansion, larger drop off of cash flow, higher level of return to shareholders, faster growth in the adjacencies, ESG, energy transition, private company data, KYC, supply chain analytics and so on. And just that same formula as we have before, but then at a scale and at a growth level that is enhanced from what our current shareholders are used to see.

That's wonderful. So bringing the companies together, I think a very complementary skill set and data sets as you mentioned. So certainly offers a good opportunity and a good value proposition going forward. Combined the 2 companies -- combining these 2 companies at such a scale, I mean S&P is 23,000, 24,000 people. And IHS is 12,000, 13,000, 14,000. So combining these 2 large organizations, both from a personnel perspective and technology perspective, I think that's a huge undertaking and something that really everybody thinks about how it's going to happen and how it's going to come together. You have already been working on it for -- since November, so like almost 6 or 7 months. Now that you have so much better visibility from what you had in the beginning, how are things coming along? What are the things that have surprised you so far on the positive or on the negative side as well? I mean it will be good to hear both the themes.

Well, first, I have to say that, of course, at this moment, the 2 companies are still independent companies run by their respective executive teams, separate Boards in terms of oversight. So legally, that's the setting we're in until we get the regulatory approval to close. Having said that, there's a lot of work underway in terms of the integration planning, getting ready for day 1, making sure that we can operate as one company, act as one company from day 1. And then, of course, also, not everything can be ready on day 1, a kind of integration plan for the next 100 days, 300 days after the close. A lot of work is going into work design. How are we going to operate as a company? How are our segments going to look? What is the design for the company? How do we find glue between the divisions going forward around the functions, around technology? Think about the opportunity we have for ESG, which is touching all of our divisions going forward. And then, ultimately, that leads to synergies and synergy expectations that during the due diligence phase, when we were preparing for the transaction in the fall, we did a lot of granular work around synergies. But now those synergies get supported bottoms-up, so you get more and more confident along the way that you can see concrete plans in order to bring the 2 companies together. I'm not overly concerned about the scale. Yes, it's a very large merger. But culturally, we are very aligned in terms of values. We are very aligned, and we have a phenomenal leadership team that is working currently very hard to prepare for this merger. Everyone is so excited about this opportunity. You asked, Sameer, about surprises. We have mostly positive surprises. So many opportunities that can come up and say, "Hey, if you link this data set with that data set or if you help this customer with this combined proposition, that's really an attractive combination that we can build within the company." Every day, those things are coming up. And actually, it's really attractive to see that's happening. So I think that's mostly the positive surprise is how many new things are coming up that we even were not thinking about in the fall of last year.

That's good. And so there have been preparations going on, and the latest news was the OPIS metals and mining divestiture. I think that was -- that's what people were talking about in terms of what is done. And I don't know what we can talk about, but any other things that could need to happen in that front in terms of integration pass coming together? That is a question I get a lot from investors.

The regulatory approval is the last remaining open hurdle to take before we can close on the transaction. We got shareholders approving overwhelmingly by shareholders of both companies, 99% at level support for this merger. And we make progress on the regulatory side. We decided to take a piece of the resources business of INFO, which is called OPIS, and to divest that piece. That was as expected because that's a price reporting business. And in fact, there are only 4 price reporting agencies in the commodity space around the world. [ Glass ] is by far the largest, as large as the other 3 combined. So this was not a surprise. This is one of the few areas where there's real overlap between the 2 companies. So we took that decision to divest OPIS in order to keep speed in the regulatory approval. We have still ongoing discussions with the regulators in 5 jurisdictions. Therefore, I can't give more commentary around this because these are ongoing discussions, but I see the divestment of OPIS as an important step along the way. And we are still on track to close on the transaction in the second half of this year. Just to put some dimensions around OPIS, the overall OPIS plus the coal, metals and mining business is about $125 million of revenues, approximately 3% of the revenue base of INFO itself. And this divestment does not have an impact on our synergy case. So we have not assumed synergies on this business already. So important step, we are on track. But since these are ongoing discussions, I cannot give any further commentary on that at the moment.

No, that's totally understandable. Good to know the scale of the business in there. I think we all talk about being greater than $100 million. So $125 million is a good number. So with S&P, of course, integration and big -- company becoming bigger with INFO is great. And yes, there are current things as we operate as an independent company right now. S&P still is -- the largest segment is the Ratings segment and the conversations always start with how are things going in the Ratings space right now from your vantage point, where you are? You already mentioned and/or has talked about it in terms of your forecast for the year was earlier for a decline of 3% in the issuance. Now you're thinking more like 2%. So obviously, things are looking better than what it started -- when you started the year. So from the vantage point from where you are, how does it look going forward? What's the sense you're getting right now?

Yes. And this is a question, Sameer, we are getting a lot because, obviously, the Ratings business had a very strong year 2020 with some exceptional issuance, particularly the liquidity driven issuance that happened by multiple market participants in the second quarter, third quarter of last year was very helpful. But that also created a bit of a situation that a lot of our investors are concerned about the comps for this year. Actually, the way -- how we try to address that when we came out with our fourth quarter earnings call, we showed the issuance forecast, which was down 3%. But we also indicated that's not the only area to look at. We have non-transaction revenue. We have bank loan revenue and other categories that all look quite optimistic. Now after the first quarter, what we have seen is actually a quite strong start of the year from an issuance environment. Our researchers now from Ratings have changed the issuance outlook to negative 2%. But from a revenue perspective, we are now expecting the Ratings business to grow mid-single digits this year. So even off that very strong base, 2020, we expect Ratings growth mid-single digits. And why is that? Because not everything was positive last year. And that's the beauty of the Ratings business. Some parts of the business are sometimes weaker. Other parts of the business are stronger. And the other periods, it is the other way around or I've said once, it doesn't always rain everywhere at the same time or not the sun is shining everywhere at the same time. It is always a mix at different parts. So what we're seeing is last year, high yields, bank loans, structured finance were relatively weaker. We see those areas being relatively strong this year. Investment-grade market remains quite constructive also this year, and we see some -- actually, some large issuers going to the market. The refinancing pipeline still looks very healthy. And then non-transaction is an important part of our revenue base as well. And elements there that you have to think about is surveillance fees. Because of the higher level of bonds outstanding, surveillance fees are up. The M&A environment is clearly supportive. So for example, Ratings Evaluation Services fees is doing well. And then the general economy seems to be in a good position for acceleration in the second half of this year. And in general, debt levels have the highest level of correlation with GDP. So therefore, overall, we remain quite optimistic about the outlook of the Ratings business. And mid-single-digit growth from a very strong level in 2020, we think, is going to be a very good result.

That's great. And the kind of other things that [ you also ] talked about is the -- is this transitory inflation that could happen or that is happening. Curious how that plays into the issuance trends? And does that impact corporate thinking on getting into some kind of a window? Or do you think there's any kind of a pull forward that is potentially happening in the first half or anything like that?

In the issuance of debt, there is always pull forwards. If you are a treasurer and you have debt that is maturing in the second half of this year or the first half of next year, you are starting up your activities at this moment. You're starting to think about what you're going to do to refinance, what kind of structure, what kind of forms and timing. You're going to discuss with your bankers, your lawyers, timing. And you're not waiting until the last day when your debt is maturing until you're going to refinance. You always refinance early. The question, therefore is, is the refinancing accelerated is more than at the normal level, which would mean there's more pull-forwards activity and therefore, activity that otherwise would have been expected in the future has already taken place. Maybe there is a little bit of that. And certainly, you're referring to inflation and the expectation of writing interest rates. However, I would like to point out that interest rates maybe has a correlation with respect to the issuance environment for the lower end of the high-yield spectrum, but not so much for the more stronger spectrum of high-yield and certainly not for investment grades, because that's more correlated with GDP and economic activity and economic growth. Maybe rising rates might have a short-term impact because people have to get used to new interest rate levels. But at some point, that becomes the new normal, and again, refinancing needs to take place. In general, corporates are not so active in paying down debt. It's much more efficient from a corporate financing structure to keep debt on your balance sheet. And therefore, ultimately, the level of activity will continue. So we're not overly concerned about the impact of inflation and rising rates. There was maybe a little bit of excess pull forward in the first quarter. But at the same time, there was also general positive activity about M&A and other factors that are not an impact on future levels of revenue or maybe I have to say, will have a positive impact on future levels of revenue. So overall, still very constructive, Sameer.

That's good to know. And sticking to Ratings for a little bit and the thoughts going out of Washington and the opportunity in China. So combining those 2 together as -- what's your view on the China opportunity right now? What are the trends you're seeing there? And once we're on the new administration, I think we'll segue into the ESG side of things as well. But would love to hear your thoughts on China as they stand right now.