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

Hi, it's Andrew Steinerman, your business and information services equity research analyst here at JPMorgan. This is the Ultimate Services Investor Conference or annual forum, where we bring together the best info services companies and investors. And this is the S&P Global session. Ewout Steenbergen is with us. He's the CFO. This is a fireside chat, so I am just going to basically launch into questions with Ewout. Also, just a quick administrative aside, I'm not going to be talking about -- or I'm not going to be asking questions about the pending transaction because we're restricted in research for JPMorgan's role in that transaction. We're going to be talking about the business itself, and that's how this dialogue is going to go. So Ewout, thank you for joining us. I appreciate the conversation here today.

My question to you is kind of a simple one. Like how do you measure innovation at S&P Global? Like how do you know if there's enough innovation in the system? Are you doing that internally? Do you have an external measurement like an NPS score? Tell us about tracking and measuring innovation at S&P Global.

Well, first, Andrew, thank you for hosting us today. I think this is a great event, and we're very pleased to participate. The question you are raising is actually a question we were thinking about a lot because it's very important for our business to think about growing the core and then growing in new areas, new products, adjacent markets, new customer relationships. Because -- we have, of course, very strong areas in our core around the ratings, around some of our index benchmarks, around some of our commodities price benchmarks, but we need to make sure that we can grow faster, over and above that because if we can drive our company a few percent points faster with those kind of margins, that is obviously the best value generation that we can create for our shareholders. So we have a very specific investment program in place. Every year, we put a significant number aside, this year about $100 million, the year before, it was a bit higher number, that we are reinvesting in organic initiatives. And in fact, if you see what is coming out from that, it is, over the last few years, higher growth, much more new product launches than you're used to see from us. And we -- as an example, what we reported in the third quarter, that 1/3 of the growth of Market Intelligence and 1/3 of the growth of the Platts business were coming from those new initiatives that we are launching. We are tracking that in a very specific way. So we're tracking growth in the core and growth from new initiatives separately because it's important that we are looking at both. Because the core can be so large that new initiatives are basically dwarfed in the overall scale of the organization and in the numbers, so that's why we are tracking this separately. We are using a specific metric, which we call the vitality index. And the vitality index is showing what percentage of our growth is coming from new initiatives. And we have that in our scorecards. We're discussing that in our business reviews. So vitality index is a specific metric that we're using. By the way, IHS Markit is the original inventor of the vitality index. So it's something that will come together for the combined company going forward. And it's one of those elements we already like in the way how they operate. You're asking about Net Promoter Score. A few years ago, we had launched an initiative around customer experience, customer satisfaction and being closer to our customers, and we are measuring that based on an NPS. We had different kind of customer satisfaction measurements before, but we said we need to have one approach, a consistent approach across the company. So we're tracking NPS now for a few years, and we're looking at our absolute scores, the year-over-year trends, how we're doing relative to some of our peers. And actually, we're very pleased to see this positive trend in our NPS scores, which is important because, in the end, it's really -- the most important thing, the most relevant thing is that we are adding more value for our customers, that they're satisfied with the way how we operate, that we are responsive, that we are really helping them with their challenges and requests. And so yes, that is being measured for the company across the board.

So since you obviously just intrigued me, I'm a bit, let's say, [ a student ] of NPS scores. Are you willing to either disclose or describe your NPS scores? Where, again, if you -- for example, Verisk publishes it in their annual report. Last year, they did 50. But if you're not willing to disclose a number, which is fine, could you just give us a sense of how much it's been rising? Do you have goals for your NPS score? What do you have to change in your customer initiatives to get a higher NPS score? Like is your NPS score where you want it to be?

Yes. That's a great point. And Andrew, we have not disclosed that historically. It's something we might consider going forward, so you're certainly triggering me with that question. But to tell you a little bit more of what we do internally. So if we look at the performance of all of our businesses, we're looking at a scorecard that has several elements. Of course, financial performance is one thing, but then we have 3 other categories: customer, operations and people. And we say we only think that our businesses are performing well not only if we hit the financial results or exceed those, but we have to do well with respect to our customer, with respect to operations and our people because if we are starving our people or if we are not investing in operations or if our customer satisfaction is going down and we hit our financial targets, we still don't think that we have done a good job. So success means success on all of those 4 dimensions. In the customer category, NPS is a major element, and we have an annual target that every year is going up for each of our divisions. So we're tracking this. We're measuring that we are making progress. As I said before, the progress is significant over the last few years. And well, let's see if we can potentially, at some point, even disclose that to you and everyone else.

Yes. That sounds good. I really like that. Okay. That makes total sense to me. Obviously, you guys were kind enough to give an issuance outlook for the market. I know this is not your Ratings outlook, but the issuance outlook that your internal research suggests '22 might be down 2%. I know there's a lot of caveats about economic assumptions in that. My question is a more general question. You might not like this one, so I'm sort of saying brace yourself. If the issuance environment turned out as your team expected, minus 2%, my Ratings revenues will be up kind of low single digits -- I'll tell you what, a rule of thumb I use, again, you could say you like it or don't like the rule of thumb, I think of in a flat issuance environment, Ratings revenues, and I'm not just talking about S&P, I mean the ratings industry, would grow about 5%; flat issuance, about 5%. And then we start talking about caveats. My question is do you think I'm thinking about the relationship between Ratings revenues and issuance correctly, knowing that there usually is a positive factor on revenues?

Yes. And by the way, Andrew, I like every question, so no worries about it at all. This is a very complicated area because we know there is so much that goes in between the issuance forecast and the revenue forecast. And you're right, we haven't given guidance for 2022. But if I look back to this year, 2021, exactly a year ago, our research group in Ratings said that they expected the issuance forecast for the bond markets to be down 3%. They are now about flat year-over-year. And then at the same time, we're now telling you and everyone else that we expect Ratings revenue to grow this year in the low double-digit area. So you see, flat bond issuance and double-digit Ratings revenue growth, that is a significant gap. So why is there such a significant gap? First of all, issuance growth does not contain bank loans and bank loan ratings. And we know bank loans are doing very well this year. And then also, a significant part of our Ratings business, the revenues, is driven by what we call non-transaction. And non-transaction are elements like surveillance fees. It is the frequent issuer programs. It is initial credit ratings for new issuers. It is rating evaluation service. And then it's also the revenues that are coming from CRISIL, the India subsidiary. So those are all in the non-transaction. And non-transaction actually is doing very well because we are having some tailwinds this year in the surveillance fees from all the liquidity-driven bond issuance that we saw last year in corporates. This year, we're seeing all those bank loans going up. That will definitely help with what we'll do in the next year because we also collect surveillance fees over bank loans. So there's a lot of elements that go in between. The nice part, I always think about the Ratings business as it is a very diversified mix of revenues. Sometimes, markets is up and structured finance is down, but financial service is up and bank loans and non-transaction. So we have many elements and not everything is moving in the same way at the same time. So therefore, it's actually a far more steady revenue base than many people [ think ] from a high-level perspective.

You didn't quite address the last part. And you could say pass, you could say pass. Like do you think that -- thinking about next year, that the Ratings revenues business will outperform the issuance environment?

In general terms, I think the formula we always think about is there is issuance growth, and particularly, in investment grade, it's linked to GDP growth. Then there is pricing. We can't talk about forward-looking pricing, but you know we have always done something like 3% to 4%. And we are -- there is penetration -- so for example, in certain areas of structured finance, our position is a bit lower, so there's penetration opportunities. And then there are new initiatives around ESG or China and other areas. So that is usually the formula of how we think about it. So definitely, if you would think about those elements, there is more than only the issuance forecast or GDP that goes into the mix that ultimately drives the outlook.

Right. But all those things you just mentioned were additive, meaning like these are things that add revenues that's higher than issuance.

That's correct.

Okay. No problem at all. Something that the company is obviously very excited about is ESG. And I surely understand that ESG is really another element of business information. And there really wasn't a question if you had a choice of being in ESG or not. To have bond ratings, you need to have climate risk in there. So in some ways, this is a table stakes. So good news is you've made smart acquisitions, you're in the business. But are we sure that this is going to grow to being a big business? Because, as you know, there are a lot of ESG research and ratings providers out there. Surely, you guys are uniquely positioned to do that in the context of a bond rating, but what about other contexts? Like are we sure we're going to address the broader opportunity, as I mentioned?

Yes. So this time, I will start to answer in a numerical way and then give you a little bit more perspective because here, it's easy to talk about the numbers. We are expecting about $100 million, approximately $100 million in revenues this year from ESG. And we expect to be about $300 million in revenues in 2024. And that does not take into consideration any additional ESG revenues that will come with the merger with IHS Markit. So we're speaking about a 40%-plus CAGR that we expect. And by the way, we have been delivering on that growth over the last 2 years as well. Why we think that we are uniquely positioned around ESG is because, exactly, we have all those different pieces of the puzzle. Because one of the clear frustrations of the ESG market is the lack of quality of data and insights. We have the benefit of having those 1,500 ratings analysts that meet managements of corporations every year. We also have the benefit of the acquisition we did 2 years ago of the RobecoSAM ESG scoring business and 1,850 corps throughout the world that fill in a very detailed survey. So we don't need to do the website scraping that most ESG providers are doing to get some outside-in perspective. And usually, there's a lot of inaccuracies in the data. We have an opportunity to look deeper based on the business model we have. Then if you combine it with the indices -- the ESG indices and the importance for a lot of corporates to be part of those ESG indices and our ESG scoring and data business in Market Intelligence, the climate data that we have from Trucost, the renewables and the pricing around the renewables that Platts can bring into the mix and then IHS Markit is having private company data around the -- data around tailpipe emission and EC and so on, [ we do have ] a very complete set that we can provide to market participants. So we are quite optimistic about our market position because we really think we have so many elements that we can bring together. And we are also running that really as now an enterprise initiative within the company.

And just staying a little bit more. Like what about the competitive landscape? Do you feel like the customers are going to always use many ESG providers? Or do you feel like there is actually an opportunity that you could become a primary ESG research and ratings provider?

Well, it depends so much on which part of the ESG market we're talking about. But in my thinking, the 2 main parts -- or 3 parts, I have to say, one is about climate, one is about ESG score and data and the third is about ESG indices. I think those are the 3 main markets that will really matter going forward in the ESG space. And we're investing a lot in all those areas. At some point, the market will migrate to certain standards. I think it's clearly a frustration by market participants that there are so many different providers out there. And we're working very hard in investing a lot in order to be one of those standards. It won't be 1, it's probably 2 or 3 or probably a few years out until the market has migrated to a standard. But it's definitely our intention, and we give it a very hard push to be one of those.

And are there any areas of ESG research and ratings or indices that you feel like, "That's not for us?"

That's hard to say because we actually like to play in so many different areas. I think for example, Ratings just launched second party opinions. So if someone wants to do sustainability-linked bonds, we give an opinion around the metrics, around the sustainability elements that go into the mix. We just launched an initiative around private company data in the ESG space of Novata with some partners. So there's many of those that we are launching. Definitely, we can't play in every area. But what we believe is we have definitely a quite broad offering that we can bring to the market. I think if I go a little deeper, if you think about ESG in general, I think there's a lot of focus on the E and within the E, on climate. So I think that's clearly where we put most of the attention.

That makes some sense to me as well. I'm sorry for jumping around. I'm going to kind of go back to your comment about issuance. You said, hey, that minus 2% doesn't include bank loans. And obviously, bank loans lead to CLOs. Can you just a little talk about like why that caveat is such an important caveat and how bank loans can really be an important wildcard as we look into next year?

Well, bank loans are a major driver of growth this year. So what we see if you look at the underlying elements, we see a decline in investment-grade corporates this year. We see financial services slightly up year-over-year. But whereas -- particularly, the high growth this year is in structured finance and in bank loans. And that's really driven by the market circumstances, demand and supply in the sense of there is clearly a demand for floating-rate products and that helps to drive the bank loans and the bank loan markets, but also a lot of new companies that are starting or restarting and that have a demand for financing in a situation where the economy is really growing quite rapidly. And then most of those bank loans ultimately then gets packaged and being sold as a CLO going forward. And we also rate those CLOs often as a second step. So that's an important part of the market dynamic. Where the bank loans will be next year compared to the other elements is to be seen. But we are generally and cautiously optimistic because we think that there's still -- with a rising interest environment, there will be continued demand for floating-rate products. And in general, credit spreads remain relatively tight. So overall financing circumstances are still quite attractive.

So when I think about your index business, I have to admit to you that kind of quarter-to-quarter, it's a little hard for me to model. Like as you probably know, I have a global issuance database, so I have a sense of what Ratings revenues would come in. We just went over Ratings revenues are usually above issuance. But I really -- even though I track AUM into your ETFs and I surely know [ buoyant ] market in general is good for the business, I don't know how to model this business. So my question is how do you model this business?

I model this business in the 3 different components of the revenue streams in the index business. So we have the asset-linked fees, which are fees we make over ETFs, mutual funds. It could be insurance funds and balances and then also over-the-counter derivatives, which are often priced based on the underlying asset levels. Where this is going to be often difficult, Andrew, is the ETF balances are quite public, but then mutual funds less so. And those are reported on 1 quarter lag basis. So there's always that quarter of time lag in terms of mutual funds. And then OTC is, by definition, not so visible in general. So that's because there's different elements that go in the mix why that's often a little bit hard to see that link. Of course, when assets go up, the average basis points we make on fees is coming down. That is just the fact. But net-net, you see that the revenues are still growing in a very significant way, so a clear trade-off. The other element to think about is this is a business that has a natural hedge. So often when the markets are more bullish, you see the asset levels going up, so the AUM fees are going up, but we see some decline in the exchange-traded derivatives. So the ETD fees are coming down. But when there is more market volatility and markets turn more bearish, then you see, in fact, often the opposite happening, much more hedging to protect positions by market participants, ETD fees up, but the fees we collect over assets under management coming down. So there is that natural hedge. It's not a perfect hedge, but I like it that there are those offsetting elements that actually make that business quite stable from an overall revenue perspective.

That makes sense. Talk a little bit about Platts. That's also like a business -- like until I see S&P's report, what did Platts grow, I'm like, "Hey -- I can't just track kind of crude oil and see what Platts is going to do. So my question is, one -- it does seem like the energy industry and particularly, the commodity price is on a rebound here. Is that good for Platts? And two, how do you model Platts?

Yes, it is good for Platts because we see in general that our customers are healthier in these market circumstances. And that is helpful when we have the discussions around expanding our products, expanding our contracts with new offerings. Definitely, that will help from a commercial perspective. How I look at it internally is the following. I look at the subscription book of business, and I look at what is the contract value of the total book of business that we have today, which is a leading indicator of future revenue growth. So that is one. Are we seeing retention levels of the contracts at good levels? And then do we see net renewal rate, which means growth over the number of contracts that we are losing and so make sure that the book is developing in a healthy way? Another element of the Platts business is around global trading services. So this is a little bit similar to that exchange-traded derivative in the index business. These are contracts that are linked to certain global trading that is happening on certain exchanges around the world, where we have done joint product development with those exchanges. So when there's more volatility in the commodity markets in terms of prices, more derivative trading in terms of commodities and then we also have higher fees we can collect on that together with our partners. So in general, there's many of those elements going into the mix. What I like particularly, Andrew, is the 8% growth in revenue that we were reporting for Platts this quarter was the highest we have seen for a very long period of time. It's quite a stable business. When the commodity markets were under a lot of pressure, Platts always was growing, but the growth was more low single digit. But now we see growth more high single digit. And that's not only market. It's a lot of new product launches and investments we have made in innovation where -- a little bit to the point that you asked me at the beginning of this conversation, that we're seeing now the benefits. LNG, energy transition, agriculture, expanding our commercial footprint in Asia, so those are some of those elements in Platts where the growth is coming from. And that's very encouraging because we haven't seen that growth for a long period of time.

So I want to move to Market Intelligence, MI. A quick comment on the call was that the platform was rebranded Capital IQ Pro, obviously. I thought when we introduced the term Market Intelligence, we were sort of sunsetting the word Capital IQ, and here you are bringing it back. And so my question is, is it -- I used the word rebranding. Is this a branding exercise? Or does this mean the legacy platforms, SNL platform and the CapIQ platform are now 1 single platform? Is this a technology comment? Or is this a branding comment?

It's largely a rebranding and repositioning. So what we have done is to say, okay, we have CapIQ Pro, which is the future platform. We have the existing CapIQ. Of course, we're adding more and more data sets, more and more features on CapIQ Pro. In essence, that is the old Market Intelligence -- or what we call before the Market Intelligence platform that has been rebranded. And we're still going through the transition of moving customers over. Most of the customers now have dual access. But that is still a process that will take a while. So we're definitely not in the position yet that we have 1 common desktop platform. And we're still working through that, and that will happen over the next periods.

Do you have 3 -- like does SNL still exist?

No, no. SNL does not exist. So SNL was completely revamped, became Market Intelligence, and that is now what we call CapIQ Pro.

So it's not bad, right? Like -- it sounds like you did consolidate platforms and now you're upgrading that consolidated platform.

Absolutely. And we're adding more and more features, data sets. Some of the new data sets are only available in CapIQ Pro. And hopefully, with some of that, we can help customers to migrate over, and they can find everything they need on the new platform.

So I don't know if you've ever looked through our information services data book, which is our quarterly primer on info services, and we just published it with this conference. On Page 11, I have a stacking of the EBITDA margins for the whole info services industry, and it probably doesn't surprise you that S&P Global already has the highest margins. So again, please don't talk about IHS, but just talk about S&P Global. My question is -- it just seems like every time S&P Global achieves a margin target, you just come back to us and say, "No, no, there's more margin expansion ahead." Like does it in any way bother you that relative to all the info services peers, that S&P already has the highest margins? What gives you the confidence that there could continue to be continued margin expansion ahead?

Well, I think this is, I think, a reflection on management, on the leadership of the company. We're very down to earth. I think we're very focused on doing better every day, looking for opportunities and being quite rigorous and disciplined around it. I am actually looking not in aggregate. I'm looking at this area by area, division by division, business by business. And we're looking, of course, relative to some of our peers, where we are from a margin perspective, but not in aggregate but really on by business line by business line. And then secondly, I think there are different drivers underneath here. In general, we should always have operating leverage because the next incremental billions of dollars of revenues that comes in, our incremental margin should always be higher, everything else equal, because the fixed costs are already covered. Then we have the efficiency programs that are coming in, synergies. But I won't talk about the merger further. But the offset is investments, investments in new initiatives and in future growth. And the more we can invest in that and we have good initiatives, of course, it will move margins in the opposite direction. But we believe that's a good investment, and that's healthy because, ultimately, growing our business is going to be more valuable than market expansion. Actually, we did some work a while ago. If you can expand your top line by 1% at existing margins, which is 3x higher in value generation, then keep your top line the same and expand your margins by 1% point. So ultimately, growing your top line is the best thing we can do. And we will continue to see us being disciplined about the margins because I think we are in really good businesses and we have the benefit of the operating leverage and the other opportunities that we can go on.

If you can believe it, Ewout, that's our 30 minutes. It went quickly. I want to thank you. I appreciate the ongoing research dialogue and joining us at the Ultimate Services Investor Conference.

My pleasure. See you soon.

I will. Thank you.

Stay well.