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

Okay. Good afternoon, everyone. Thanks for joining our next session with S&P Global. I am very pleased to welcome back Doug Peterson, President and CEO of S&P Global, to the SEC. Doug will give a short presentation, and then we'll sit down virtually for a Q&A session. So Doug, thank you for joining our conference and over to you.

Thank you, Christian, and thank you for hosting us today. Let me share my screen quickly here. Let me find this one. No. I mean, sorry, I have the wrong one here. Unshare that. Okay, can you see my screen? Okay, let me do this here. Okay. There we go. So first of all, thank you for hosting us today, and I would like to give you a quick overview of what is S&P Global. And to start with, we're a company that has data and information, benchmarks and research that is used by market participants to make decisions. We have 4 divisions: S&P Global Ratings, S&P Global Market Intelligence, S&P Dow Jones Indices and S&P Global Platts. And all of these divisions are providing information that is used by market participants. And we go back many years. In fact, the S&P Global Ratings business has roots that go back 160 years that were started when Henry Varnum Poor published the very first compendium of information about railroads and canals. To give you a sense of the dimensions of our businesses, in the first quarter, our revenues were a little bit over $2 billion with our Ratings business representing about 50% of that. And you can see that the Market Intelligence business is about 1/4, Indices and Platts are about half of the rest of that. And -- but you can also see from the dimensions that the Ratings business is about 55% of our segment profits followed by the Index business and then Market Intelligence and then Platts. We've had a very consistent approach to revenue growth over the last 5 years. You can see we've had a CAGR of about 7%. The first quarter this year was a 13% revenue growth. And we're very pleased with the ability for all of our businesses, the subscription businesses, which are Platts and Market Intelligence, and then the AUM-based growth business and the Index business and then a combination of subscription-like business and transaction business from the Ratings business have continued to give us this kind of growth over the last 5 years. Our adjusted profit margin has gone from the low 40s since 2016 into the mid-50%. Our target has been in the mid-50% -- low to mid-50% range. Clearly, in the first quarter of 2021, we continue to have some benefits from what would be the revenues and expenses that we had from the pandemic. We were able to quickly adapt to the pandemic to ensure that we can have enough cash as well as an operating approach to put our people first, to ensure that our people were able to work from home, that they had the tools that they needed to be successful. But we also saw a decrease in travel, other things that many companies saw at the same time with a very high level of operating revenues from businesses when our customers are reaching out to learn from us during the pandemic. You can see our EPS growth continues to be strong. We have a 22% CAGR over the 4-year period and 24% in the first quarter. Now we think about what are the biggest, most important trends that are out there growing in the markets to give us confidence that the long-term growth of our business can be sustained. I'm not going to talk about all of these, but let me just mention 3 of them. The first one on the left, the total corporate debt outstanding continues to grow over time. We see markets moving from being bank markets to capital markets. We see down at the bottom, ESG investment gaining momentum. ESG is a theme that I'm sure everybody on this call is having dialogue about. And if it's not ESG, it's climate change or it's climate analytics or it's energy transition. All of these are playing well into our growth plans and our capabilities. And then you can see in the middle, on the right-hand side, the asset continued to shift into index-related ETF, passive investments. And with our Index business, we can continue to benefit from that. Finally, as many of you know, we announced a merger at the end of the year last year with IHS Markit. This was based off of our thesis that markets are going to continue to grow in areas like private markets, fixed income indices, ESG, climate change, supply chain, areas that we wanted to fill the gaps. And by looking at a company like IHS Markit, we realized that we could fill the gap very quickly together with them by bringing these 2 businesses together that there was not a lot of overlap. As opposed to overlap, there's complementary assets. We've announced the transaction, which allows us to accelerate our growth and create a business that would be approximately 75%, 76% recurring revenue, also balanced across many industry segments. We also announced at that point in time a revenue synergy target of $480 million as well as a -- synergies on the revenue side of -- sorry, revenue side of $350 million, which after tax will be approximately $200 million. We think that this brings 2 best-in-class businesses together and will allow us to have a very strong future together. So with that, let me do see if I can get out of this, stop share, and we're back. So thank you for that few minutes, and I look forward to our discussion.

That's Doug. Doug, now you can be CTO as well with your various skills in technology. Maybe a good place to start is the last slide on the sort of the IHS merger. It was, I think, second biggest deal announced last year. So it's a very sizable acquisition. I'm curious kind of why you thought now was the right time for such a big deal, particularly with the context that over the last decade, you spent a lot of time simplifying the business, spinning off sort of noncore assets. Just help us think about the strategic dynamics as to why you pursued such a big deal.

Yes. This is, for us, was a really important discussion that we had with our management team and our Board of Directors. And one of the most important questions we asked ourselves is, do we have the capacity? And by capacity, I mean, both capital and ability to execute the transaction from a capital and a structure point of view, but also management capability. We felt like we had a track record of delivery of growth, of delivering the top line, of delivering the margins that you saw that I just went through on those slides and that we needed to take a step back and understand what are our customers looking for? What are the new data sets? What are the new capabilities? And when we thought about those, which was things like private markets, ESG, fixed income indices, a few things I've already mentioned, we realized that we could either invest organically, we could go to the market and look for tuck-ins. And the question was, is there anything out there that could bring all of those capabilities in one package that we could put the companies together? And IHS Markit filled those buckets. So what was most important about this, we identified it was the top line growth and the innovation that would come along with this. But we also feel like what's valuable for us is that we can also get cost out of this. So it's a combination of what is the top line growth, the innovation that we can bring, the data sets that can come together, the cross-sell, all of the things that we see that come through and revenue synergies and excitement. And then along with this, in a traditional merger like this, you also get benefits from scale. And the scale means that we can also get the cost synergies. We can invest in technology in a different way. We can invest in data in a different way. And so we were convinced that this was something that we should pursue. And so far, the partnership has been excellent as we work towards close.

Great. Maybe staying on the synergies on the expense side, I think the $480 million you've highlighted, it's about 13% of in-force cost base, which is actually lower than typical deals. And if we look at your track record, you tend to underpromise and overdeliver, whether we think about SNL, for example, your realized synergies were far higher than initially anticipated. So help us understand sort of in a bull case scenario how to think about sort of the incremental ability to drive extra cost synergies.

Well, first of all, we have put together a program with the teams that has 3 work streams. The first was getting approval from our shareholders, which we've already received, which is about a 99% approval from shareholders. The second is to receive approval from the regulators around the world. There's 5. And then the last is our own work stream internally to ensure that we can get to know each other better, we can plan. Right now, we're still in a period -- because we haven't closed the transaction that we have firewalls between the 2 companies. And we're doing all we can to plan, but we haven't had the ability to get into in-depth information about customers, about products, about how the pricing works, et cetera. So we're very -- continue to be very comfortable with the level of synergies that we already described, the $480 million of expenses and $200 million after-tax and revenues. And we're not going to provide any additional guidance on that until after we close the transaction. But the work streams are going really well. The teamwork is fantastic. We're learning a lot about each other. And every day, I'm more and more impressed by the quality of the people, their approach to innovation, their customer orientation, their innovation approach. And I get more excited about closing this all the time.

On the revenue synergy side, this is typically harder to extract if you just look at general M&A deals. I'm not looking for an update quantitatively here. But just qualitatively, how do you think about what -- how you'll be able to drive revenue synergies? Is it just, I don't know, better distribution? Is it new products? And it's a particularly important question, given IHS is a fairly mature company.

Yes. This is always one of, as you say, one of the most important things about a merger, especially when it's built on a thesis of innovation and growth. And how do you get that innovation? How do you get that growth? And how do you get the revenue synergies? I think of this -- first of all, it's going to be layered in over 5 years. The first place you can get the fastest out-of-the-shoot synergies that are the first ones you get are from cross-sell. And that's where -- as we learn that there are products and services that we provide that they don't provide, products and services that they provide we don't provide, that's where we can leverage the sales forces across both companies in the division level to cross-sell products. That's where we can get the first kind of attraction from the transaction. The second will be when we can start putting our data into their products and their data into our products. As an example, our Market Intelligence Desktop, there's probably reference data on fixed income. There's some information about markets, credit default swaps. There's a lot of information that we don't have today in our platform that will be valuable to build into workflow tools into the Market Intelligence data -- Desktop. Similarly, there's many products in software and services, workflow services that IHS Markit has that can benefit from data that would come from S&P Global. So there's ways that we can put data in and enhance the quality of our products and get more approach there. And then the third is going to be new products. Those take longer to produce and longer to develop. Fortunately, both companies are working today on new services around ESG, energy transition, climate analytics. I think that together, we'll be able to move faster than we would have each on our own around that area. So that would be an area I'd point out that will be a lot of new products and services that today, I can see some of the tangible opportunities there. Some of the others, we're learning about now. And we'll get much better once we can close the deal and go over the firewall.

I think for antitrust reasons, you recently announced there will be a couple of spin-offs, I think, of the OPIS business, some of IHS' coal and metals businesses. So can you talk through kind of what drove that decision to spin those businesses off? And then any impact on the deal financial-wise?

Yes. This is -- as I've mentioned in the slides earlier when I first presented the company, these are very complementary businesses. There's not a lot of overlap. And we always were very excited about the OPIS business, but we also realized that there was some overlap between the 2 businesses. And we never built in any significant synergies or both -- whether it's on the revenue side or the expense side related to OPIS because we knew that there was some overlap in those businesses. As we proceeded with our discussions with the regulators, we realized it would be better if we quickly moved to decide, make the decision to look at potentially divesting that business. And so we felt it was a way that we could close the deal faster if we all together serve that up as a way to move away from one of the areas where there is some overlap. I don't know if that's going to change the timing at all about being able to do this. Clearly, there could be other topics we need to cover later on with the regulators. But this is one that we felt we needed to serve up right away to keep the deal on track. But no significant difference to the deal trends -- to the deal economics, no significant impact at all on any of the synergies.

Just -- so you made some fairly big management changes as well in connection with the deal announcement, changing leadership of the Ratings business, brought on some new talent, obviously, from IHS Markit, to your management team. Could you just talk about the rationale for making these changes? And then more broadly, how to think about any other organizational structural changes that you're having to make in light of the INFO deal?

Yes. This is one of those areas where it's quite important early on in an M&A transaction to come up with a team that's going to lead it going forward. And we were able to get to know each other quite fast before and through the due diligence. And it was apparent that we can take the best of both teams to build a management team that would allow us to achieve what we think is the potential of this transaction. And because of that, we looked at what are the businesses that are -- need to be integrated, where are some of the growth areas? And we were able to put together a management team that has 2 divisions that will be led by IHS Markit leaders, 3 divisions that will be led by S&P Global leaders. The strategic function will be led by somebody from IHS Markit, who's also bringing some additional expertise and partnerships and understanding the ecosystem of the supply chain. And so we were able to bring together a team that's going to really leverage the best of both. I also have a philosophy. I didn't want to have co-heads or tri-heads or quadral-heads or whatever you end up when you don't make the tough calls upfront. Just one other thing I want to mention. We have our integration management approach. We do have many work streams. I'm very involved in the work stream related to values and purpose and strategy. It's something that we want to be very clear the day we close. We want to be able to tell the markets, we want to be able to tell our employees what we stand for, what we're like together, what are our values of the 2 companies together. And so this is also very important. Not only are we creating a strong management and leadership team, we'll also close the transaction with a set of values, with a purpose, with a strategy that will unify us so we can get right out of the shoot with that approach to leading the company.

Let's switch over to the Ratings business. Maybe start with some of the long-term secular trends impacting that business, particularly post-COVID. Just curious how the Fed's cleaning our markets changed the dynamic, what is the risk assessment, et cetera, or who actually buys that sort of paper? And more broadly is that whether it has an increased appetite for who wants to buy corporate debt and thereby expanding the addressable market? Just curious how you think the post-COVID environment has changed sort of the long-term secular trends in the corporate debt markets.

Yes, the post-COVID market, well -- or even I'll talk a little bit about through COVID. At the beginning of COVID, there was a rush to raise capital from all companies, especially companies that wanted to have a large amount of liquidity on their balance sheets. And we see that a lot of those companies are not issuing debt this year that had raised last year. The large investment-grade corporate sector have sort of pulled back from issuing because they wanted to have the liquidity. No CFO is going to be punished by having a lot of liquidity on their balance sheet last year. Now at the same time, we see -- saw a decrease into this year from those sorts of issuers. There's a whole new set of issuers, which are -- many of the investors are searching for yield. And so we see a combination of high-yield issuers, loan issuance as well as CLOs that are packaging of leveraged loans into the market. So there's a lot of issuance there as well right now where the interest rates are low, growth is picking up. I look to the M&A as one of the areas to see what's sort of forward-looking approach? Is there confidence in the business market from the M&As that are announced? I look at what's in the pipeline coming up of debt, which is going to be maturing on the balance sheets. There was a lot of debt issued in 2011, '13, '14 that is now going to be maturing over the next few years. We think that that's going to be a good part of the issuance pipeline that's going to be coming up over the next few years. And even if some of that's pulled forward, it will still continue to be on balance sheets for the future. So there's been a lot of investor demand for fixed income and for loans. And there's also been a lot of growth, which has been fueling the issuance market. And we think that those trends will continue. That doesn't mean that every single quarter is always going to be a great quarter. There could be a mix where everything is kind of down at once. But we think the secular trends continue sort of a mid-single-digit growth level for the Ratings business.

Another big trend is sort of like the shift from bank to capital markets. And we had a couple of U.S. bank CEOs at the conference, and they keep moaning about the lack of loan growth on their balance sheets. And I sort of wonder how you think about sort of like debt penetration. Has that accelerated in the last -- post COVID? And then globally, what are you seeing in Europe and Asia?

Yes. This shift from banking markets to capital markets is something that's already taken place, obviously, in the United States. And we have a very deep capital market, which I would say is one of the strategic advantages of this country, that's very easy to raise capital and to take risk capital in particular for start-ups and things like that. So I do think that we're seeing that approach in Europe. It's continued. If the U.S. is 65%, 70% capital markets, Europe is closer to 40% capital markets and growing. I've seen a few fits and starts depending on the role of the ECB in providing liquidity for the banking markets. But Europe is also continuing to head that direction. More recently, Europe has been very active in the leveraged loan market as well as the structured finance markets as CLO. So we've seen a lot of activity in Europe in those markets in those directions. So I think that we can see that happening there. It's our thesis that in markets like China and across Southeast Asia and others, they will see that path start opening up and seeing more and more capital markets approach. One comment about -- you mentioned about the balance sheets and bankers complaining, which is kind of the flip side of the negative side of it is that in the U.S., as an example, last year, the balance sheets of banks in the credit card business shrunk by 8%. But the flip side of that is it means there's a lot of firepower in the consumers right now. They -- a lot of savings, a lot -- much lower debt that was outstanding. And so there's a lot of firepower to drive economic growth, and that's not just the United States. So the flip side of complaints of not having enough loan activity is that there's a lot of firepower for investing and for growth that I think we're all believing that starting now into the -- this year, next year, there's going to be very robust growth around the globe.

What about in the noncorporate markets, so things like structured credits, structured debt, how do you think about penetration there, whether it's auto, credit cards, real estate? And how do you think about secular growth in that -- in those markets as well?

Yes. Those markets are -- depend highly on the position of banks as well, how do they want to manage their balance sheets and what sort of liquidity profile do they want to have. We have a very good position in ABS and structured finance. The criteria that we use for rating those is something that investors understand. There's a lot of demand from investors to have the S&P Ratings on those types of asset classes. But fundamentally, they're pretty traditional. Things like ABS, credit cards, auto loans, they're pretty traditional approaches to liquidity management, balance sheet management, capital management. And I think that those are part of the landscape. It's -- what I'd like to see is also when those start moving into other markets outside of the U.S. and become another way that financial institutions use to manage their capital and their liquidity, which then benefits us as well once those become more standardized approaches to capital management.

Let's talk about near-term outlook for your Ratings business. Seems like markets have been calling for the demise of the Ratings business for a couple of quarters now and just keep growing on what are pretty tough comps. And just curious how you think about the rest of the year. How is the quarter shaping up in terms of what you see? Just trying to get a sense of sort of the near-term environment for issuance.

Yes. We had -- at the end of the first quarter, we looked at the markets and felt that based on many factors that the issuance would be down into totality for the year. That's not a revenue forecast. That's an issuance forecast. And we thought that the corporates would be down about 7.5%; financial institutions, up about 4% for the year; public finance, down about 5%; and structured finance, up about 6%. Now in -- at the start of this quarter, we've kind of seen that play out. In the first part of this quarter, we saw that corporate issuance was down about 50%, whereas structured finance was up about 100% -- over 100%. But that's only 1 month. That doesn't give you a full quarter. But the forecast from our Ratings research team showed that issuance for this year would be down a little bit over 2%.

Okay. Let's switch over to ESG. It's a topic that I think it's been a priority for you as a management team. So can you just talk about -- and I think you recently rebranded your efforts Sustainable1. I think you're even having a conference, just know if I'm right, around Sustainable1. So I think what we always struggle with ESG is compare and contrast the different businesses across the street. So how do you think about the strategic differentiation versus peers and the growth opportunities you have in your ESG business?

Well, first of all, we think that the ESG business is one that's going to be a growth driver for S&P Global in the future. We think that this is going to grow at about a 40% rate. This week, we published our Task Force for Climate-related Financial Disclosure report, and we included a table in there that shows the different components of what we think the growth is, which is across all of our S&P Global businesses at that kind of 40% rate. So it'll continue to grow and become a more substantial business. I also think that the ESG capabilities will start becoming embedded in our regular business as well, something like Ratings where some even traditional ratings might have some ESG aspects to what is demanded by the market for those products. But we look at the ESG opportunity across the business. Over many years, we allowed all of the businesses to do ESG opportunities and start growing. But 1.5 years ago, a year ago, we decided we wanted to bring them together in a unified approach. So we were consistent on our approach so that we were serving the markets with the highest growth areas. But over the years, we had done an acquisition of Trucost, which is the premier source of data about climate analytics and other tools. RobecoSAM CSA, Corporate Sustainability Assessment tool, that's another one where we now have an unprecedented amount of data that's gathered from corporations over many years. It was also the base of the Dow Jones Sustainability Indices. We've also built an ESG evaluation tool in the Ratings business. We have data and analytics tools in Market Intelligence. We have Indices, ESG Indices. And then in Platts, we've got foundational data, which is used for things like climate change and energy transition, battery metals, et cetera. What I'd say is that all of these are going to give us the capabilities at a high-quality level to support the markets and the data needs of markets and the benchmark needs. Finally, it's very important that we're also at the table in the discussion that's taking place around the world for setting the standards. There still are no standards about disclosure from corporates and financial institutions or how they need to look at their portfolio for portfolio attribution. And so we're very active with groups like the IBC, which is International Business Council, of the World Economic Forum with the group that's designed the Task Force for Climate-related Financial Disclosure. Ewout Steenbergen, our CFO, is a member of the A4S, which is the Accounting for Sustainability, which was set up by Prince Charles. So there's many, many groups that we're involved with because we also want to be at the table where the standards are being set.