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

Good afternoon, everybody. Thank you for joining in the Fourth Annual Stifel Cross Sector Insight Conference. Hopefully, this is our last conference that will be done virtually. We look forward to having everybody in person in Boston next year. My name is Shlomo Rosenbaum. I'm the business services analyst here at Stifel, hosting a fireside chat with Ewout Steenbergen, CFO of S&P. I want to thank everybody for joining, and I want to thank in particular, Ewout, for carving out the time for us today and for carving out the time for this fireside chat. It's very nice to have you with us, Ewout.

Thank you, Shlomo, and thank you for organizing. Great conference, and we had a couple of really interesting one-on-ones today and happy to close it off with this fireside chat.

Yes. Thank you so much. So just to let everybody know the format here, again, it's a fireside chat. I've prepared a list of questions to ask. And I clearly have enough questions, as Ewout knows, to keep this whole thing going myself, but that's not really the goal. If anyone has any questions, I encourage you to go ahead and submit them through the website, I will read the questions then and pose them to Ewout but we would like to have this as interactive. And again, I would encourage you to go ahead and do that. And Ewout, I just -- if you don't mind, I'll go ahead and just kind of ask the questions that I've got and the ones that I've been getting from investors lately and I just have a list. And if you don't mind, I'll start off with the Ratings business. I think most investors start off with the Ratings business with the company. So I think I'm just going to start off with that. 1Q '21 was an incredibly strong quarter, really strong between the debt issuance and the mix of issuance. And the company said there could have been some pull forward from the second half of the year in terms of some people looking to refinance with higher -- potentially higher interest rates. I was wondering, does the company have a handle or at least a good guesstimate on what could have been pulled forward? Or -- and if it was -- if they think there was a certain amount of pull forward, how far forward do things get pulled backwards? Is that kind of a 6-month item? Would anything get pulled forward from 2022? Or is it really, hey, something that might have been at the second half of '21, but really, that wouldn't be affecting the next year? Maybe you can take that.

Yes. And this is always the big question around the Ratings business. Pull forward, how much pull forward. And actually, the way I think about it, Shlomo, it's more excess pull forward because there's always pull forward. If you're a treasurer or a CFO and you have bonds that are maturing in the second half of this year or the first half of next year, you're thinking about refinancing at this moment. And you're having your conversations with your bankers, debt capital markets, with your lawyers. And at some point, you think the timing is right, the window is a good window and you pull the trigger. The question, therefore, is not so much was there pull forward, because that's a natural part of the refinancing bond market, but did we see a higher level, an elevated level, excess level of pull forwards in the first quarter. It's hard to quantify, but we expect there was some, particularly with an expectation of a rising rate environment. And where some issuers thought that this was a good moment, a good opportunity to refinance. At the same time, you have seen other parts of the debt markets to do very well so that wasn't the only driving force behind the good results during the first quarter. Bank loans being very strong. We saw high yields, very strong. We saw structured, very strong. We saw the M&A market doing well. As you know, we have -- the part of our revenue base in Ratings called non-transaction revenue, that is very strong. And I think that is reflecting really the diversification of the revenue base of the Ratings business. Sometimes, it's still, in my view, too much seen as a homogeneous business that everything goes up and everything goes down, and there is too much that perception of, well, if there is a good year, it has to be immediately followed by a bad year. And you recall that at year-end, we said that despite the forecast from our economists that the issuance environment was going to be down about 3%, we were still guiding to low single-digit revenue growth for the Ratings business this year. And since then, we have revised that to mid-single-digits revenue growth. Because last year, despite that it was a very good year, bank loans were relatively modest. Structure was relatively modest, and some other categories as well. So Ratings has, in fact, that mix of businesses where some go up, some go down, and there are always a bit of compensation of each other, but over time, there is that secular trend that drives that business up. And therefore, it's obviously a very attractive business.

Sure. Yes, it really seems that it's really based on a lot of business activity, like what we saw last year was a lot of the refis. Things coming out because of pandemic-driven. What we're seeing a lot of the strength now is actually from strong business activity. And one of the things I thought I'd ask you is like one of the -- as deals get done by SPACs buying other companies, that seems to be particularly beneficial to bond issuers because they raise bonds, it's a first-time mandate. It sometimes can be a complex transaction as well. How much do you think that the strength in the SPAC market has helped the debt issuance in the first quarter? And frankly, what's probably going on in the second quarter as well? And do we have to be concerned that as kind of the pipe market kind of slows a little bit in the SPAC market that, that's going to lead to a little bit of a gap somewhere down the road? How do you think about that?

Yes. We are sometimes showing a graph which shows the total activity and revenue from high-yield and bank loans and the sources and uses of the proceeds of that debt activity. And every period, somewhere between 20% to 40% is M&A-driven. The first quarter was about 25%. The total bar was higher. So the total bar of activity of bank loans and high yield was higher, but a component of that, what was M&A-related, was about 25%. We definitely see a benefit, therefore, for the Ratings business. I'm thinking about this in a couple of ways because SPACs are now, of course, established, to a large extent. They now have to look for the next 24 months for an opportunity for an acquisition or a merger, that might potentially lead to some rating evaluation services activity because they need to know how much debt can they put on their balance sheet in order to achieve a certain ratings level and do that advisory around it. Then potentially, you get a new issuer ratings fee because this is a new entity. And then the bond itself that is being issued is going to be rated. So definitely, the M&A environment driven by SPACs, but probably also by a general strong economy and strong economic growth and a high level of liquidity that is in the market. Strong balance sheet of corporations is definitely going to be helpful for the Ratings business as well. And I think about it in those different components of revenues, where we could see those benefits ultimately showing up.

So I mean, one of the things I had a CEO tell me that he hadn't made a big deal in a little while because he said he was competing with the SPACs. And one of the things I was thinking about is that if the SPAC stuff kind of cools down, you probably have some of the corporate money on the sidelines that have been waiting to do deals as well, but just are not willing to pay those multiples. And are you thinking about it the same way that, hey, there's definitely a lot of interest out there. It's just going to depend on who's doing the buying in terms of the debt issuance?

I think both are possible and likely because maybe the environment for SPACs has pulled down in terms of establishment of new SPACs, but the existing SPACs are, of course, looking now for the M&A opportunities and have that window. At the same time, I understand that also some of the financing conditions for those SPACs have changed. So that is one dynamic. And then definitely, where the corporations, but also others like private equity or other investors, are definitely also looking for opportunities. So with all the liquidity in the markets, I think this is going to be a very active M&A environment. For us, it doesn't matter so much who is ultimately driving the M&A and where the activity is coming from because in most cases, they are looking for a levered transaction. And if there's leverage in the transaction, it could come from a bank loan or from another form of borrowing or from a bond issuance and whatever form that will take, there's probably a high likelihood that will rate that ultimate instrument.

Right. Okay. I think I want to move over a little bit to the IHS Markit acquisition that you guys are -- it's pending. And I know we've talked about this a lot. It's been out there since, I guess, the December time frame. And I guess one of the questions I've gotten from investors is these are 2 big companies that you're putting together. This is not a tuck-in acquisition. And what gives you the confidence that the rewards of putting the 2 companies together will really outweigh the risks in terms of integration risks and things like that? And how did you approach it in terms of putting it, what makes this so worth it? Can you -- maybe you could talk about some of the things that companies will be able to do that really makes it worth it and the confidence you have in terms of mitigating those risks of integration?

Yes. Well, first of all, Shlomo, we are very excited about this opportunity. It's going to be transformational. It's going to create such a phenomenal company in the data and information services space. I think it will strengthen some of our core divisions that we have today. It will position us very well in the higher growth adjacencies. So this is going to be a phenomenal company and a faster-growing company than both companies as stand-alone. Of course, there are risks with large transactions like this, and we thought about this a lot. You know that we are a leadership team that is quite disciplined, thinks about activities. We hold ourselves to very high standards. We keep our feet on the ground. So we have a lot of discussion amongst our team and with our Board about this transaction. I think if we would have come to our Board a year earlier or 2 years earlier, and we would have proposed something like this, we would probably have received the answer of, "We're not so sure that we are ready from an organizational capacity perspective, from an organizational maturity perspective to do something of this size." But you know that the company has done well. We have been able to perform. We have been able to deliver. We have made a phenomenal transformation on the technology side. We have integrated previous acquisitions quite well like Kensho and others. We have a very stable leadership team. So there were many of those factors where, I think, we first were able to convince ourselves and also our Board that we are ready from an organizational perspective to take something on like this. And then, of course, we also looked very carefully at culture because any large or even small M&A transaction can look great on paper and can have all the strategic elements that you're looking for but we know that most M&A fails ultimately based on culture, based on fits, based on people and personalities. If it fails, it's usually for those reasons. But we wanted to make sure that from a cultural perspective that we were aligned. So we had an opportunity to meet their leadership team in October of last year at a remote place with all the COVID protocols around it. And that actually gave us a lot of confidence. And of course, we got to know them better over time and more members of the team, and we felt that there's actually a very good fit from a people and personality perspective. We like each other. We are a relatively similar kind of operators. I was looking at some of their people, and I thought if they would have applied for an open position with us, we probably would have hired them because we probably would have thought they are a good fit with our company. And the other way around. So in other words, there was quite a large cultural fit where elements of the culture that are different, but actually, there was admiration for the differences in the culture. We looked at them and we said, "We think you're a bit more entrepreneurial. You're going a little faster with new initiatives and test and learn and build and test and learn and develop new things." And they looked at us and said, actually, "We like that you're a little bit more rigorous and disciplined and have a stronger processes in place". So we're trying, of course, to keep the best of those elements together. Now we are working together for the last 6 months in the integration planning. Obviously, the 2 companies are still run independently and separately. Still, we are waiting for the approval to get merged. So we are run independently, but we're working on the integration planning for many different aspects. And I still -- I have to say, I feel very good how we are progressing and how we're collaborating. So I sincerely feel we're on the right track to bring this well together, Shlomo, and also to be able to deal with those risks that you mentioned.

Yes. One thing I just -- I, well -- observed that having covered the company and meeting the management of S&P is that there seems to be a really good balance of discipline and boldness on the management team. In terms of -- on the one hand being rigorous, but on the other hand, willing to try certain things that other people would not. And it seems to me to be a very interesting balance between the 2 that the company has. Like not that many companies I know would have made that Kensho acquisition, but it seems like a really interesting acquisition. And so I look at this as kind of a similar type of observation. So.

I think that's fair.

One -- another thing just in terms of the acquisition, so there was announcement that the company -- that INFO is looking to divest the OPIS coals, metals and mining business because of some of the potential regulatory -- the feedback that they got from the regulators. Is there some kind of like commentary you can give us in terms of like there were certain items and targets that the company had in terms of merging the 2 companies together. How -- does this change anything in terms of selling this business? Is there a revenue or adjusted EBITDA from that business that you're -- are able to discuss with us in terms of it? My having been there, I've covered INFO for a long time and I was there when they bought OPIS and then it seems to be a really good business. And so obviously would prefer to not see them have to divest this. But can you comment on how that might change the way that you look at things even just a little bit?

Absolutely. And let me first dimensionalize this business. It's approximately $125 million of revenue. So it's about 3% of the revenue base of INFO, about 1% -- or less than 1% of the revenue base of the combined company. And we had not assumed any synergies on this combination. So our overall business case for the merger has not changed in any way with this divestment. Because we knew from the beginning that if you looked at the 2 companies, that we had actually very limited overlap, it's very complementary in nature. And also the antitrust lawyers that are helping us and that looked at the transaction in the fall of last year said that it's actually remarkable how limited is the overlap for the scale and the size of both organizations working in the same industry. But clearly, price reporting in the commodity space was one that was jumping out because if you have effectively 4 price reporting agencies, and Platts is already, by far, the largest of the 4, it's hard to see that you can combine that Platts with 1 of the other 3. So this was largely as expected. It's an important step in the regulatory process. We're still working through the process with the regulators. And because it's ongoing, I can't give you more insights of the specifics of those discussions. But largely, we're fulfilling the process of information requests that are coming to us. The regulators are doing what they're supposed to do, looking at this very carefully. These are 2 large and important companies. We're helping them. We have a good and constructive relationship. We are fulfilling all those information requests. And we're going through that process. I can't say if there's anything else that will be needed. Time will tell. But I would see the OPIS transaction as an important step in this process. From a time lines perspective, we would now expect this transaction to close most likely in the fourth quarter of this year, we said before in the second half. So we are now refining this and narrowing that time frame to the fourth quarter of this year. Nothing specific you should read into it, just working through the process with the regulators.

Got it. Okay. That's actually -- that's very useful. And one of the things that -- when I think about this transaction, having covered INFO for so long and now covering S&P, is that the idea to kind of put different data sets together in interoperability and come up with something different that neither company could have done on their own. And maybe you could discuss a little bit, a lot of that has to do with getting things down to kind of a common technology platform in order to be able to do that. Maybe you could talk a little bit about where you are in terms of moving things to the cloud, in terms of when you hit the ground running, I guess, by putting the companies together, how much investment or how much time do you think you'll need to have in order to be able to platform it so that you really will be able to put the data sets together and start coming up with new products and new analytics?

Yes. And this is actually one of the really attractive things also of this combination because where INFO was working on philosophically with respect to data in the cloud, and where we were working on -- at, Shlomo, was very aligned from a direction perspective. So therefore, this will give a good combination to bring those 2 together. And what I mean with that is INFO was looking at all these data sets of all these businesses and said, we need to logically categorize this, put this in a library and ultimately bring that all to a cloud so that it is easy to access that data and to make it available internally and externally, the so-called data lake strategy that they have been explaining. And we have followed a very similar process. We also, a few years ago, decided to bring all of our data sets together because it was very inefficient that one division was buying data maybe externally because they didn't know that the other division already had that data set. So we put that a few years altogether. We have also brought that to a cloud-based environment. We're having collaboration with several cloud providers, among which is Snowflake. As you know, Snowflake is a provider that is helping us in delivery of those data sets to our customers in a cloud-based environment. Kensho has been playing a very important role with all of that because, as you know, Kensho has phenomenal tools and capabilities about ingesting, linking data sets, making sense out of unstructured data sets and making it structured, looking through very large sets of documents and so on, and being able to query that and take the most important data out, going from speech data to written data and create all of the links and entity references and so on. So Kensho has a lot of those tools around it. And then we also have developed something that we call the Data Marketplace which is a commercial platform where customers can buy very specific data sets, and it's actually a very cool platform that we have out there and is doing very well commercially. We're very happy how the data marketplace is developing. So both companies, bringing those data sets together, will be one of the most attractive things, how we can provide more value for our customers, either by creating new verticals and new data sets on our platforms. And as you know, INFO doesn't have a platform. So that makes this also an attractive combination. Because we're not working on a platform integration, we can use INFO's data sets on the S&P Global platforms and create new verticals, for example, about transportation or private company data. We, of course, have the Direct Data Feeds business, and then we have also the Cloud Delivery business. So for us, it doesn't matter so much in which form, customers would like to have access to the data. Strategically for us, the most important is that we have all those data sets together, can link it, can combine it and have tools also for customers to combine it with our own data sets to create the insights.

Okay, great. I just wanted to just remind the investors as well. If anyone is interested, you can go ahead and submit a question to Ewout, I'll read it. I don't want to think that I'm going to monopolize this unnecessarily but waiting to see if anyone else wants to put something. I thought I would ask you a little bit more. Just in terms of the Market Intelligence business because it's a very interesting business. And kind of the -- it's -- I would say that's the business that requires more investment to stay ahead of the pack than the other units that you guys have, kind of the Ratings business, the Platts business, they kind of seem to -- in the Indices business, you guys are kind of far out ahead. But Market Intelligence, there really is a certain amount of investment that needs to happen. And I was wondering, is there a way to think about the potential for like the margins to expand, given the amount of investment that's required in that business, to make sure that you guys are running in the position that you are running?

Let me first say, Shlomo, that I would expect a larger step-up in margins for the Market Intelligence business this year than you have seen over the last 2 years. And the reason is that Market Intelligence, over the last 2 years, made some investments in new growth initiatives as well as there were a few acquisitions that were margin-dilutive. Think about 451 Research, which is research for the technology world. So those elements were particularly holding back a bit of the margins the last 2 years because you get the normal margin expansion based on the operating leverage and the productivity programs, but those 2 elements were moving margins in the opposite direction. So therefore, there wasn't a lot of margin development. But we would expect this year to see those headwinds disappearing. Those new initiatives start to pay off from a margin perspective. No new acquisitions. So we should see some improvement of the margins. I'm usually not so much looking at the absolute level of margins, but more at the delta. Because thinking about economic profit kind of models, if you can improve margins by, let's say, hypothetically, 2 points -- 2% points, 3% points, it doesn't matter if your starting point is 35 or 55. The growth is the most important over a certain revenue base. So that is, in my thinking, always the most important. For a business like us with our levels of margins, growing the top line as fast as we can is always the most value-enhancing strategy that we can follow. So that's why you see us investing in new growth initiatives because the simple perspective behind that is we are growing on the business as usual basis. We have strong secular trends. We have good customer relationships. But if we can add new initiatives on top of it that grow the top line a bit higher, then ultimately, that is from a reward perspective, the most attractive thing we can do. So that's why you see so many new initiatives, so many new developments. That's why we are making these investments. I think you see it at the quarterly earnings call, all the new announcements we're making, and I'm actually really excited because you just feel the energy in the company of all those new developments.

Yes. And also, I think it's important to keep in mind that you're looking to maximize profit dollars, right? It doesn't help to maximize margins if you have a small revenue base. You want to maximize that revenue base as though you want [ to get ] the money to take home to the bank. That's really the most important part.

Exactly.

Okay. One of the other things I always like to talk about or when we talk about S&P is you're kind of in a unique position when it comes to monetizing data sets from ESG. And ESG is -- there's different players, and it's a big kind of a buzzword for different players that have different things to offer. But the company, I feel, is somewhat of a unique position between the data it has and the distribution capability that it has. And maybe you can elaborate on that. And where do you see this going for the company over the next, say, 5 years or so?

Yes. We think this is one of the largest opportunity stories in general. And then we are uniquely positioned in this space because we have so many different pieces of the puzzle. We know that some of our peers have certain pieces of the puzzle but no one can put the whole puzzle together as we can. And what I mean with that is we have ESG data and scorecards. And we did that acquisition of SAM and the SAM Scores, which have 20 years of historical data, 1,500 companies are filling in the survey, the CSA and provide very detailed scores and information. So that is unique. But we have also -- and we, by the way, use that data set for all of our ESG propositions across the company. But we have also 1,500 ratings analysts that are meeting company's management every year and have the opportunity for interactions. They are having services like ESG evaluations or green bond evaluation. So not many of the players in the ESG space have the opportunity to have that face-to-face interaction with companies in the market. Also, we have, of course, the indices, the ESG indices, which are important because companies want to be part of these indices. If those indices are growing, if those funds are growing, you don't want to miss out on those capital flows because, at some point, it will impact your cost of capital, which makes it, again, part of -- you want to be part of our ecosystem from an ESG perspective. And then we have, of course, Platts that is focused on renewable energy prices with respect to hydrogen, carbon, alternative energy, biofuels, recycled plastics and so on. If you then add the contributions that will come from INFO in the future with respect to energy transition in the resources business, EVs and other data from the transportation business, we think that we have a very complete picture that we can offer. For that reason, we have now developed a horizontal organization called Sustainable1, and that is trying to link all those pieces together because we have to make sure that the way how we go to the market, how we communicate with the market is well-coordinated and that the market can see that we have an integrated and horizontal approach for our ESG activity. So actually, it's a part we are investing a lot. And I think it's, of course, also a very important part for the market just for the outcomes because, as you know, we are big believers ourselves that it is good to focus on a sustainable way of running companies and ultimately, what that does for the society in large.

Okay. That's great. I think we're coming -- we've passed the hour -- over the half hour. I want to thank everybody for joining. Ewout, thank you so much for being here to present, and I want to thank everybody else who's here on the line. And really appreciate you all being here. And we hope that you are able -- are benefiting very much from the Stifel Cross Sector Insight Conference between the one-on-ones and all the fireside chats. Thank you so much.

Thanks, Shlomo.