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

All right. Hello, everyone. I'm Jeff Meuler, Baird's information solution analyst. Pleased to kick off the next session, which will be with S&P Global, one of the world's leading information solutions companies that provides industry standard and benchmark solutions for capital and commodity markets and emerging leader in ESG and several other exciting solution categories. As many of you are aware, the company is also in the midst of a pending transformative acquisition of IHS Markit. With us from the company, we have its EVP and CFO, Ewout Steenbergen. Ewout has joined the company in 2016 as CFO, was previously CFO at Voya Financial and in several management positions at ING. He will do a screen share for an overview, and then we'll launch into the Q&A format. Also joining for the Baird conference in meetings throughout today is the Head of IR, Chip Merritt. But with that, over to you, Ewout.

Thank you, Jeff. Let me pull up the slides. I hope this is visible for everyone.

Yes, we can see it.

Good morning, and thanks for inviting us to this conference. Really a big pleasure to be here today. The first few slides is just going to be a very quick overview of the company. I presume the company is well-known to most investors. But for the ones that we are a new name, happy to give you the quick rundown of our activities, our divisions and our results. And then happy to go into the Q&A with Jeff. First, we are S&P Global, a company focused on data analytics, insights. We provide essential intelligence to our customers so that they can take decisions with conviction. And we're doing that through 4 divisions. We have S&P Global Ratings, which is the largest and foremost ratings agency in the world. Then we have S&P Global Market Intelligence, which is one of the 4 desktop platforms for company data, market data that is out there, but also providing a lot of data products through feeds and cloud and other solutions to customers. Then we have S&P Dow Jones Indices, the largest index provider in the world, providing indices to passive managers for ETFs, mutual funds or custom indices as well as to active managers for benchmark purposes. And then we have S&P Global Platts, which is our commodities benchmark pricing and analytics business. We put out about 20,000 commodity prices every day. It's estimated that about 70% of the world's oil is traded on prices that are set by S&P Global Platts. And for example, the Dated Brent crude price is set by Platts every day among many other commodity prices. So those are the 4 divisions that we have and how we operate to the markets. Of course, we're also very active in new initiatives like ESG, energy transition and other areas that I'll come back to later on. Quick overview of our results. First quarter, it's not so much about the numbers, but more to explain to you the composition of the company. What you see is in the dark blue in terms of revenue, about half of our revenues are coming from Ratings. About 1/4 is coming from Market Intelligence, and then approximately 1/8 from each of Platts and Indices. If you look at the operating profit, you see Ratings composition a bit larger. That's because Ratings is having a larger margin than the average margin of the company. Also, you see Index is having a larger contribution due to the higher margins of the index business. We are a company that is growing on a very consistent basis. We believe that growth in a mid- to high single-digit range over -- on average, over a multiple-year period is achievable. And we have shown that in the past. If you look at the CAGR for the last 4 years, growth was about 7%. First quarter growth was much higher due to very particular reasons that maybe we can come back to later on. I wouldn't say that 30% growth is the new normal, but it was certainly a strong start of the year. But what you see is a very steady and stable revenue base, and it's largely derived from that a large part of our revenues are recurring in nature. If you combine that then with operating profit margin that is also growing in a very healthy way -- and you see here over the last few years from 2016 to 2020, more than 10% points growth of margins over that same period. And if you combine that, of course, with the top line growth that we saw at the same time, you understand the value creation model of the company. Also, you see here the first quarter margins that were very strong, but again, a bit elevated. I wouldn't say that it's the normal level going forward. But clearly, the positive trajectory will continue for the company. Combination of those elements, plus active return of capital to shareholders, helps to drive the earnings per share up. And you see here the 4-year CAGR of 22%. This is a very repeatable model. So in essence, the company, what it's doing is: having good secular trends, growing the top line, being able to capture operating leverage, driving productivity improvements and other efficiency improvements, expanding margins, not having a lot of capital requirements. We are very capital light. There's no regulatory capital. Capital expenditures are relatively minimal. We have an active program to return capital to shareholders. Approximately 75% -- or at least 75% of capital we return today, and we step up with that target after the merger to at least 85%. And in that way, we're able to grow our earnings per share even faster, and you see here these growth levels. Also there, you see first quarter of 2021 EPS growth to be at a very healthy level, 24%. I already touched on the secular trends. I won't go in too much detail, but that continues to grow around the world as long as GDP is growing. There is that direct correlation. We continue to see the shift from active to passive investments. We're benefiting from that. We're seeing continued trends with respect to investors looking for unique data sets, proprietary data sets, unique insights that we are providing through very deep verticals on our platforms. We see trade flows. We see supply chain data becoming more and more important. And of course, the last year, 2 years, I have seen some of the supply chain risks, so price assessment analytics become more and more relevant. And then many new trends that are helping future growth. Think about ESG investing and the opening of China and our activities in terms of growing the business in China over the next few years. So very positive trends that should help to continue with the overall model for the company. Then about the merger with IHS Markit. We announced this merger on November 30 of last year. We think it's a transformative opportunity for the company, becoming an even stronger and even better, even faster-growing company than we are -- what we are today. This transaction will help to strengthen 3 of our 4 divisions. It's very complementary for Index, because IHS Markit is owning the second largest fixed income index provider. Combine that with our equity indices and you get a very powerful combination. Market Intelligence is one of those 4 platforms, as I mentioned, but more a midsized player. Combine it with financial services of IHS Markit, unique data sets, workflow tools and becoming a much stronger position player there as well with a much broader proposition to our customers. And then if you think about Platts plus IHS Markit resources, IHS Markit Resources is more focused on analytics and research for upstream and downstream, focused on energy transition. If you combine that with the price assessments of S&P Global Platts, you also get a very complementary business that should provide more value to our customers. So 3 of our 4 businesses are benefiting from this combination as well as what we expect to see is higher growth in adjacencies, like private markets, like ESG, like credit analytics, like counterparty risk, KYC, KY3P assessments. It will also help to increase the recurring revenue base. About 3/4 of the company will have recurring revenues going forward. There are significant synergy expectations of $480 million of cost synergies and $350 million of revenue synergies. And then we will have still a pristine balance sheet. This is going to be an all-stock transaction with very substantial free cash flow generation. In year 2, we expect free cash flow over $5 billion, and as I mentioned, a step-up in the capital return of the company going forward. Also, we are, of course, looking at talent. This is clearly also a talent play, and we're very happy to add some of the best talent of IHS Markit and S&P Global together, leading this company going forward. There's one specific update that I want to give you with respect to the time lines. So far, we have mentioned to you that we expect this transaction to close in the second half of this year. I wanted today to refine that estimate. And what we want to say now in terms of our best expectation for the closure of the transaction is now the fourth quarter of this year. So the fourth quarter of this year is the most likely time line with respect to the transaction close with respect to this merger. And with that, Jeff, I think that was the main overview, and I wanted to hand it back to you.

Thank you. Really appreciate the overview. I want to start with Ratings since it's the largest business. Obviously, it has a great competitive position and I think a lot of favorable structural trends. Are there any initiatives at S&P or market -- newer market trends? I don't know, something like the development of the Chinese domestic market that can further elevate the growth potential of S&P Ratings? Or am I being greedy, and it's more about sustaining the growth and the attractive economics that you've had?

I think this is the strategy we're looking for in all of our businesses, Jeff and, therefore, also in ratings. And what I mean with that is we have strong market positions. We own benchmarks. We have good secular trends. There is natural growth in those businesses. And of course, in Ratings, it's growth in bank loans, it's growth in investment grade high yields, it's growth due to M&A and other drivers. But also Ratings has a significant component of the revenue base in nontransaction revenue, like surveillance fees for frequent issuers, which also gives a stable base. So that should help Ratings with a growth, let's say, mid-single digits on average going forward. And then we have new initiatives that should add a few percent points of growth on top of that going forward. China is a very important investment. That's a multiyear investment before we see really, it showing up in the financials. But China is the second largest bond market in the world. We got invited 2.5 years ago. We're the first to get a license to operate in the Chinese bond market as a global rating agency. And since the beginning of this year, we really seem to have an inflection point in terms of growth, the number of issuers that come to us, the number of new ratings that we're doing. The first quarter, we had 18 new ratings compared to 22 in the first full year 2020. So 18 this quarter versus 22 in the full year 2020. So that really is promising in terms of the expectation. Again, it's a 3- to 5-year horizon before we really would see this showing up from a financials perspective. But obviously, over the mid- and long term, really attractive opportunity. And we believe that the proposition we have in terms of helping with better quality insight, better quality ratings, credit analytics, wider spectrum of ratings outcomes, that is very much aligned with the objectives that the regulators have in China. Next to that, we have other initiatives for growth in Ratings, growth in emerging markets, other emerging markets, domestic rating agencies where we take early stakes. CRISIL, our subsidiary in India, is a great example of that. But also think about other initiatives around ESG evaluation, green bond evaluations and many, many others. So new initiatives and innovation. The plan is to make sure that, that is adding a few percent points in growth on top of the basis growth that we're having as a company on a natural business-as-usual setting.

And within Market Intelligence, when you describe some of the potential synergies from the IHS merger, it sounded like a lot of the financial data coming into Market Intelligence. Is there a similar play to what you did with SNL with differentiated industry data? So thinking things like the automotive data at IHS Markit. And maybe if you just want to talk about the fit of transportation more broadly within S&P Global? And I think supply chain was another initiative where it could potentially play.

Absolutely. And we think about revenue synergies in 2 buckets. We think about new products that we can launch as well as the opportunity for cross-sell and adding more value for existing customers. And your question around the Desktop is, I think, a clear example in the latter category. Because we would be able to add new data sets and new verticals on the platform, making it even more attractive for customers to find specific data that they are looking for. As you know, today, we have very deep industry data with respect to metals and mining, retail banking, insurance and several other categories on the Market Intelligence platforms. And we will be adding new verticals. Private company data, I think, is a clear example. And IHS Markit is having a very strong business there. The automotive business could be a very attractive vertical. Normally, if you look at the customer base of IHS Markit, you would probably be active in the automotive space in order to buy that particular data set. But now in the future, when you're an investor and you just need those data at very specific moments during the year when you look at very specific securities, you wouldn't buy the whole data set from IHS Markit in the past. But now if you can have access to that on the platform, it becomes a much richer platform for you and much more valuable. And there are several other initiatives that we are looking at. I mentioned already KYC, KY3P, where IHS Markit is having an attractive business that would be in the category of new product development, where we can further expand. And then I very much think about just the integration of different pieces to help some of our users not to be having the necessity to go to 3, 4 different screens anymore during the day. So think about, in fixed income, IHS Markit having great origination platforms. They have fixed income portfolio management tools. They have the underlying reference data of bonds trading. Then there is, of course, also the fixed income indices, the iBoxx and iTraxx. If you combine that with the LCD product that we are having, our credit risk insights and ratings and our credit risk modeling tools that we are providing, plus the workflow tools underneath, now you have a very rich product that you can offer to a customer that doesn't need to take bits and pieces from different parties, but having it all in one workflow tool during the day. I think that's, as a kind of a vision, where we think we would end up, and how we expect this merger to be value-enhancing to customers.

And then within Indices, how central is the thesis to the point that they're large in fixed income, and you expect growth in multi-asset class indices? Or to what extent are distribution points in terms of S&P having greater scale, more partnerships and potentially using unique content to create smart beta or factor ETFs? Or how important are those as elements to the deal thesis?

I would say all of the above. And the reason is, I think, strategically, this is such an attractive development for our index business. Because although we are very large, we are still very focused and concentrated in terms of the type of indices we provide and the customer set. So the fact that we can strategically expand swimming lanes, now can add fixed income indices but also private data indices. But most importantly, as you are mentioning, now you can go to multi-asset class and new forms of indices that otherwise we would not be able to develop in-house and only could do through partnerships. So let me give an example of that. As you mentioned in the introduction, the kind introduction, you said that I came from financial services. Voya Financial is insurance company, asset management, retirement. And in the insurance and annuity space, it's very important that you have custom indices, which is usually multi-asset class. And we are able to help those customers going forward with multi-asset class indices that we can all develop in-house is a concrete example how we can help our customers better going forward.

Okay. Within Platts, how cyclical is it? And I ask because if I look at the financial performance of Platts, considering a historical anomaly with 2 big end market downturns fairly concentrated in time, it doesn't look all that cyclical based on Platts performance. But to the extent to which we're entering an energy up cycle potentially, I just -- does that create additional opportunity for you? Or should investors just view it as largely acyclical?

I think you're right that the Platts business itself is very insulated from a cyclicality perspective. That's the beauty of the business. It's very essential for customers. You have that benchmark status. It's embedded in contracts. It's embedded in hedging structures for customers. So the subscriptions to have access to those price assessments are really relevant for customers. And as long as these customers stay in business, the business itself is very steady and stable in terms of revenue development. I think you are implicitly referring to the IHS Markit resources business. There have been some headwinds over the last few quarters, particularly on the upstream side. But we have done a lot of work doing due diligence. We think it's a terrific business. We expect a few more quarters of some decline, and then it should bottom out. And particularly the downstream analytics and the focus on energy transition is going to be really important in that business. The fact that we can provide a much richer product to our customers, not only give them the price assessment today, but can tell them all the underlying dynamics that are happening in the market can help them from a forward-looking perspective. Can help them with transformation of their own organizations and business models, I think, is a really great proposition. So we actually think that after the close, the combination should help also drive future growth for the company at a higher level than what we have seen in the past.

And then investors, obviously, increasingly understand ESG and the need for ESG. I guess at a higher level, why is S&P the right company to provide some sort of like industry standard solution for ESG?

Because we are unique in this space in terms of all the pieces and components that we can deliver to the market. And we have, of course, very respectful competitors in general and also in this space. But I truly believe no one can put all those pieces together as what we can do because of the breadth of our businesses and where we are today. So let me expand on that a bit. Think about what we can do with the ESG data and scorecards. We have ESG data and scorecards from a company that is called SAM -- RobecoSAM that we acquired 1.5 years ago, but that company has 20 years of history, which is important for data sets. Data sets time series is important. That is the basis of our ESG propositions. Now on top of that, we have 1,500 ratings analysts that are meeting senior management of companies every year and can get more insights, more perspective on strategies that those companies are having with respect to sustainability, environment, governance and so on. If you add that with the products that, for example, the index business is developing with respect to all the ESG versions of the large indices, the 500 ESG Index and all of those companies want to be part of that. Those are becoming important indices and are very keen and eager to provide us the right data so that we have the right insights in their activities so that our ESG scoring is done in the right way. Now you combine it with Platts, which is very active with respect to renewables, think about biofuels, think about recycled plastics, hydrogen, carbon price assessments. If you combine it with IHS Markit and their focus on energy transition, EVs in the transportation business, so we should have a unique insight in so many components. Plus having the benefit of having the direct access to companies around the world through the ratings business, but also those very deep surveys from SAM. And as you know, Jeff, what is the ESG market looking for? Mostly 2 things: Better quality of data because the quality of data today is not that good. It's mostly outside-in, website scraping done by computers. And often issuers, often companies are not very happy about that quality. And secondly, the market is looking for standards. So with all these components, we think that we have the right answers in place for those 2 key questions that the market is trying to solve.

Okay. And then I just -- because it was new information to the market, I want to ask a follow-up question. You said that you're now expecting a Q4 close. You also agreed to divest -- or IHS is planning to divest some businesses, including OPIS and coal, which I think was a surprise to some investors. So why the refinement to Q4? And I know that still falls within the second half, but why the refinement? Are you running into additional hurdles? Or what's taking longer?

There's nothing specific that I can call out there, Jeff. We're just working through the process. I don't think there is anything new that is a surprise to us. It's just working through the information requests. We have a very collaborative process with all the regulators in the 5 jurisdictions where we need to get approval. I think the divestment announcement of OPIS, plus the Coal, Metals and Mining business of IHS Markit, was an important step in the process. But we're working through other information requests as well. We have said from the beginning, and we're still saying today, that we don't believe there is anything that comes out of this process that cannot be managed and addressed. We're still there. We're just looking at the time lines now and think that the fourth quarter has become more realistic relative to where we are in the process.

Excellent. And we have less than a minute, so we'll cut it off there since it will be hard to get a question and answer in. So Ewout, I really appreciate you joining us; Chip, you as well. And to the investors as well, thank you. The -- there's a short break for a lunch period after this session. The next sessions will be Visa, Chipotle, Terminix, HealthEquity, Aritzia, CoStar and Clarivate. So again, thank you to the S&P team.

Thank you.

Thanks.