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

All right. Good morning, everybody. We will go ahead and get started. I am Patrick O'Shaughnessy, capital markets analyst here at Raymond James. We have S&P Global for you guys this morning, CEO, Doug Peterson. Format is just going to be a 30-minute fireside chat. We'll open up towards the end to see if there's any audience questions. And thanks for joining us this morning. So thanks, guys.

Patrick, thanks for having us here again.

Terrific. It's great to see you.

So let's kind of start off with a big-picture question here. You joined the McGraw Hill Companies, S&P's predecessor entity, in 2011. Since then, the company spun off McGraw Hill Education, you're named CEO. SNL Financial and Kensho were acquired. A few smaller businesses were divested. And then just last week, you closed the IHS Markit merger. How surprised would your 2011 self be how the company has evolved since you joined?

Well, first of all, it's great to be here again in person after 2 years, and it's nice to see you again in person as well. If you go back and when I joined McGraw Hill, what I was most impressed about was the collection of businesses that they had, in particular, in the financial space. And at the time, the business was under attack from some active investors, activist investors, and I knew about the potential of the portfolio and was very fortunate to be named CEO and since then have been driving the businesses towards this idea of being able to serve markets. And when you think about that opportunity to serve markets, we're in the financial, analytical data space, and somebody called this a fintech the other day, but we're in this financial data and analytical space. And we're low capital, in fact, almost no capital, but we have to protect our reputation. We have to ensure that we always have the highest quality, highest set of quality set of data and analytics. And I think that if I would have -- when I joined in 2011, I wouldn't have imagined that we would be where we are today, but I would have thought that we would have moved towards becoming much more of a financial data and analytics company.

Got you. And then speaking of IHS Markit, in particular, the deal just closed. You've had a lot of time to plan at this point, but what's going to be the most challenging part of the integration?

Well, the most challenging part now is really up to us. It's -- this is about execution. We -- as you mentioned, we had a lot of time to plan. We announced the deal on November 30, 2020, and then we had 15 months of planning, not necessarily that we planned for 15 months, we thought it would be more like 9 or 10. We were hoping for 8. But because of some regulatory reviews in Europe, it ended up being a lot longer. The good is that during that additional time, we had much more opportunities for planning. Over the last 15 months, we had in place what we call an Integration Management Office. We had multiple work streams looking at things like technology, people, organization structure, to the extent we could, getting ready for things like cross-sell, commercial modeling and then a lot of work streams around expense synergies and how we could look at those. So the advantage of the extra times, it gave us ability to plan much deeper, have a lot more people engaged and involved. And we were able to launch the deal last week on -- Monday, it closed. On Tuesday, we launched. And I think when you asked the question, what's the challenge? The challenge is you got to put that on me. It's me. It's the team. We have to be executing. I think that there's some external environmental issues. We know with Ukraine that we're not what we had planned for. It's not what we were expecting. But in the past, we've been able to pivot quickly when there is some sort of external stress, but it's really up to us now to start proving that we can deliver what we planned for.

Because of the delay in the deal close, are you behind where you thought you'd be right now? Or do you think that because of the plan you've been able to do, you're still more or less in line with what your original expectations were?

I think if you look at the plans that we have in place, we obviously had to kind of shift the plans. So we're obviously 6 or 7 months behind what we would have -- where we would have wanted to be if we had closed earlier. But I think we'll be able to move a little bit faster than we originally planned. As you know from what we announced last week, we think it will be accretive by the end of next year. Originally, we had said it'd take us accretive to [ beat ] 2 full calendar years, which also would have been part of the year before that. So in that sense, we're probably moving a little bit faster. On the expense synergies, we're able to increase from what had originally been $480 million to $600 million. So that gave us a lot more confidence for the size of the synergies, the speed of how we can move once it closed, and so we're a little bit ahead.

Got it. So there are cost synergies that are tied to post-merger integration and things that you can identify during the integration process. But then there's just structurally improving the margin profile of any business. You've obviously refined and increased your cost synergy guidance since announcing the acquisition. But how are you thinking about the optimal long-term cost structure of the various acquired businesses?

Well, part of the synergy planning is part of that. And if you -- but if you look at the businesses, what we're doing is we've named what we call divisions. Each division has a President, and we build those divisions around a set of activities and customer types. As an example, in our business, we had Platts, and in their business, they had something called Energy and Natural Resources, E&R. They're very similar businesses. And when we take a single leader to oversee that business, that's going to allow us to look deeper for what you're talking about inside of each business, what are those synergies, how can we do the cross-sell, how can we develop new products, but also how we can take out some of the expenses from the infrastructure. How can we put together platforms, you don't have duplicative delivery methods. How do you make sure you have the right investment in technology, you're not duplicating them. So this is part of the scale of the -- of a merger like this is the ability to put together businesses and then squeeze out the expenses in a way that you can run it much more effectively, but also get the growth, get the scale, et cetera.

So it sounds like you've earmarked the after-tax proceeds of your IHS-related divestitures for share repurchases. But would you contemplate turning around and doing some tuck-in acquisitions with that cash as well? Or is it kind of pens down and just full concentration on integration?

Right now, the message I give to you, the message I give to our people is let's focus on the integration. This, for us, is #1 priority right now. It should be your #1 priority for us. We think that it's something that we want to demonstrate that we can deliver, that we have the right team in place, we have the right leadership, we're building the right culture. I think a lot of times, mergers, the success depends on the quality of the culture that you've built, the leadership team you put in place. But we -- I would say that there are some themes that are very important, and you know them because we've talked about them, which is our adjacencies, our growth areas of new areas, which are really the highest growth. If we saw something that was a tuck-in, I would contemplate it, something small. But right now, I'd rather keep our eyes really focused on the integration. But there are areas where, over time, you might see us doing some tuck-ins.

Got it. And then a question that was asked on your last -- your call last week, and I'll maybe follow up on that is, what is the process that you will apply to determine whether or not to ultimately retain all the IHS Markit businesses that are coming over in the deal? So for example, there's an Engineering Solutions segment. It doesn't have the growth profile of legacy S&P. It doesn't have a margin profile. I think a lot of people look at that and say, hey, is this really a right long-term fit for your company?

Yes. When we -- as we started doing the due diligence about almost 2 years ago now, when we first -- started doing our own due diligence based on public information and then we started the discussions with IHS Markit in September 2020, we asked ourselves those questions. Is this portfolio together in a way that we would want to keep it? And how does it fit with S&P Global? Clearly, one of our goals is to continue our discipline on capital allocation we've always had. But in order to make the decisions and answer your question more thoroughly, we're going to need to get deeper into the portfolio. One of the things that I like about IHS Markit and what they did and what's very similar to us is that every single business is related to deep data and analytics. Even the Engineering Solutions business, it's all about data and analytics, connecting data, increasingly using much more advanced types of data sciences and machine learning and then delivering that kind of data and getting embedded in people's workflow or getting embedded in benchmarks. So we think that all the businesses fit the general profile of S&P Global, but we will definitely be doing deep dives on the businesses, applying our prior discipline that we've had about capital allocation.

So speaking of deep data and analytics, you guys have Kensho that you're bringing. They have their Data Lake solution. What capabilities do Kensho and Data Lake together provide you that nobody else has?

This is something that's really the -- one of the most exciting things about the merger is the data assets, and it goes also beyond just Data Lake and Kensho. There's also something we built a few years ago called the Marketplace. And when you take a step back, one of the -- sometimes, one of the most difficult things about mergers is just to find the data. Where is it? Are you going to be able to link it? Are you going to be able to put it together? And one of the advantages that both companies has that over the last few years, we had cataloged our data and put them into formats where they could be linked, they could be merged, they could be used easily. And we're finding that now that applying across both companies, we're going to be able to move very quickly to merge data assets. And then you have the layer of data sciences and machine learning and artificial intelligence on top of that like we do with Kensho that's going to allow us to move very quick. And just one anecdote, last week, Kensho helped IHS Markit with a data set that they used to reconcile manually that would take 10 hours. Kensho in and using data link -- Kensho Link was able to change and upgrade that process, and now it's being done in 10 minutes. So we got a really early win last week applying some Kensho data to a data-linking opportunity with IHS Markit.

Got it. And Kensho, I'm just trying to remember, you bought that 4 or 5 years ago? I think probably you announced it when we were down here at this conference...

4 years ago.

Yes. How feasible will it be for S&P to track and publicly report the expected and sizable revenue synergies you anticipate from the merger? I've covered a lot of companies for a while, and I think revenue synergies tend to be squishy. It tend to be hard to report on and hard to be held accountable for.

Well, first of all, the revenue synergies are more back ended, as you know, from when we're going to start achieving them. But we are -- as you know, Patrick, we've been good about reporting. We're disciplined. We have a strong finance team. It's an excellent finance team. We have built what we call a Value Capture Office. That's the sister of our Integration Management Office. The Value Capture Office is within the finance team, and they are holding us all accountable for tracking and measuring and monitoring both what we've said we're going to do and then maybe also the upside that we hope we could get along the way or if there's any surprises that come along. So we have a Value Capture Office. We will be reporting the results. We've given you the categories that we report them in, and we're ready to get going. But you can count on us to keep the same discipline we've always had.

Excellent. What do you think the implications of your own regulatory review experience are on broader corporate M&A going forward? Is it going to get increasingly tough to get big deals done? And if so, would this have ramifications on your Ratings business?

Well, there -- if you're referring to the Department of Justice, the antitrust review that we went through in the U.S. and what we see that's been discussed with the FTC as well on what we saw in the EU and the U.K., I would imagine that the antitrust environment is a little bit tougher than it was when we started. We do believe, though, that when we went into the deal that there was absolute logic about what we're putting together and that we went in with a conviction as to what these businesses would do together and how they were, what we've always said, were complementary data sets. Our 2 businesses fit together more like this than like smooshing things together that are competing and doing the same thing. We always felt from the very beginning that that's one of the reasons we had started talking with IHS Markit is because everything was so complementary. I believe that if you go into the antitrust and review process with complementary businesses, you can make your arguments and get them through.

Would that suggest though that, I guess, going forward, pure scale type acquisitions are going to be harder to get past regulators?

I have seen that there's recently a few in the market like the Aon deal that didn't get through it all. There are some others that have not been getting through. But it seems to me that the environment could be a little bit tougher overall.

Understood. Speaking of regulators, the FCA in the U.K. recently kicked off a market study of what it refers to as wholesale data markets. It's an umbrella term for reviewing pricing and other contract attributes for benchmarks, indices and credit ratings data. Obviously, this will take quite some time to play out on their behalf. But is there a realistic scenario where the FCA and potentially other regulators are able to meaningfully alter the economics or some other aspect of your business?

It's always possible. I don't know if I won't even say it's likely, but we're very close and very cooperative with the regulators in all different jurisdictions and all different types of regulators when it comes to those regulator activities, to those that are doing analysis of different aspects of the market. If you look at -- sometimes you look at the pricing of our products, they're actually quite low if you compare them to the economic value that they add. And that's obviously going to be one of the most important parts of how we work with the regulators is so that they can get to know our business much better. The workflow that we have, the amount of activity that goes into it, the uniqueness of what we provide, protecting intellectual property, but we think that we can always build strong relationships with the regulators and help advocate along the way.

What's the genesis of a market study like this? Is it somebody's complained with the FCA and they say, hey, we think we should look into this? Is there something entirely kind of instigated on their behalf? I don't know if you know the details...

I don't know the details, but I do know that the markets in data and analytics has definitely gotten much broader, much more complex. And there have been some cases where people had started looking at exchanges and exchange-type data, and maybe it's just gone beyond that as they started looking at areas like exchanges.

Got it. Switching gears a little bit here. What are going to be the critical inflection points in terms of your onshore Chinese Ratings business becoming a material contributor to S&P Global? And does increased geopolitical risk make you nervous at all about your investments?

Well, first of all, the China business is one that we're very pleased with. They're very pleased with the progress. I had been going to China for the last 8 or 9 years working with the regulators, with the central bank, with the large bankers and asset managers to try to pitch why it was important that they had an independent analytical research organization like our Ratings business providing opinions and research about the credit markets in China. Those credit markets are getting larger and larger all the time. And there's more international players either starting to invest in the market or in the case of large financial institutions like the JPMorgans and Goldmans and Citis, building their own onshore capabilities with the blessing of the government. It's a great backdrop for us. The Chinese want to reform. They want to update. They want to have a more global-oriented financial market. So for us to play in that market is something that's -- it's a privilege for us, and we're treating it like that. We're off to very strong start. We have a great team in place with local leadership as well as having built up a track record already of strong set of ratings, including some BBBs, some AAAs across corporates, governments, structured finance, financial institutions. So we've started building out a broad array. Last year, we did 56 ratings. This year, we've started off with a strong pipeline, and we'll continue to report on that as it proceeds. But we see that this is a long-term play, and the Chinese markets will be -- are very important for the global markets. You asked about the geopolitical impact. We're finding that the -- putting aside what you might hear at a geopolitical level or state department or government discussions, we're finding that the financial sector regulators are all in on reform and having people like us there.

And then, I guess, speaking about the broader geopolitical landscape right now, you touched on it a little bit last week, but obviously, we have a lot more risk and uncertainty introduced into the global markets right now given what's going on with Ukraine and Russia. How are you seeing that impact your business, if at all, so far? And I also saw over the weekend, Moody's put out a press release saying that, I believe, they're ceasing all operations in Russia right now. Just operationally, what has changed for S&P Global?

Yes. So there's 2 impacts. The first, on a macroeconomic level, we all see right now the volatility. One thing I watch is obviously VIX, and VIX had been trading in the 15, 16, kind of mid-teens. It's back up into the 30s. So we see more volatility in the markets. You've seen what happened with rates. We did a bond issue on Friday. And we watched all last week what was happening with the 10-year, and it was bumping up and down a lot during the week. So this is going to change the market dynamics for a while when it comes to rates, currencies, FX, people, when they're going to go to the markets, risk on, risk off, et cetera. So there's a lot going on here. When it comes to Russia itself, we have a small operation there across 3 of our businesses. We have downgraded the country. We've -- we're going to be removing all of the Russian securities from our indices. We have people that we're protecting very carefully. We have some that are going to be going offshore. And we've suspended or ceased operations in most of our areas. We're looking at a couple of final ones to see what the final conclusion is on a couple that we're going to suspend as well.

Got you. I think geopolitical kind of brings up energy right now and the energy prices that are going on. Obviously, you guys have a pretty substantial energy franchise with Platts and then the businesses that you acquired from IHS Markit. You also have a burgeoning ESG franchise and trying to play a role in that. I think you guys actually have a somewhat unique position because of the different assets you bring together here. So how do you think about coming up with constructive ESG solutions for your clients, for the general marketplace and also leveraging your energy information to try to inform ESG activities in a way that does not necessarily lead to energy inflation or otherwise, some of the issues that we're seeing right now?

Right. Well, first of all, this is a -- the broader theme that you bring up about energy and ESG, we think of it in a way that is -- think of it as if it's a Venn diagram and you have one part of it is climate, another part is energy transition and another part is ESG solutions, ratings, scoring, analytics, et cetera. We have a very strong franchise already in climate. And recently, we did an acquisition of a company called The Climate Service that has its own set of models, and it's a fantastic business. And we started with Trucost, which is the leading climate information provider. And then on the ESG, we have a set of solutions of different types of scoring. We have the CSA, the Corporate Sustainability Assessment, which we got from RobecoSAM a few years ago. So we have another whole set of products around there. And then when it comes to energy transition, you touch on it, that with Platts and E&R coming together, the commodity insights and then also the mobility business from IHS Markit, we have access to a whole set of different services and products looking at energy transition directly and then pricing and benchmarks for hydrogen, for metals that are used in electric vehicles, the analytics around mobility that's going to be changing. And this is one of our most important top growth areas. We see the market itself growing well above a double-digit rate, kind of in the -- not -- it's not just 10%. It's much higher than that. We've seen that growth ourselves in the last few years, 20%, 30% range. And we expect that this is going to be a very high-growth market. We're incredibly well positioned in it, and you'll hear a lot from us in this space.

Got it. And then next, I do want to jump back to follow up on your prior answer. Just about the general market conditions right now in the bond market. 10-year yield, I think, has come down 25, 30-plus basis points over the last week or so. Credit spreads are starting to widen out a little bit. So you have some offsetting factors. What are you hearing right now in the marketplace in terms of how CFOs and treasurers are thinking? And obviously, you guys thought market conditions were sufficient last week that you could come to market with a pretty good offering?

Right. Yes, in February, issuance dropped off a cliff. It was as if everybody was waiting around to see what was happening. There was a probability that Powell is going to increase rates in the U.S. There is discussion in the U.K. and the ECB might increase rates. There was the threat of Russia potentially invading the Ukraine. People are worried about, generally speaking, inflation, what was happening in the energy markets. So we saw a lot of people on the sidelines in February. And I don't ever look at a market based on a day or a week or even a month. I'd like to look, for what we do, I'd like to look at it over more of kind of quarter-by-quarter. And we've seen a lot of quarters that were really great before and some that are pretty bad. But February was a pretty poor month for issuance. What we saw over the last week, again, I don't like to talk about weeks or days, but the last week, a lot of people that had been on the sidelines came to the markets, partially because the 10-year came down, partially because there had been some uncertainty out there and partially because on the others -- on one hand, you didn't have any issuers. On the other hand, you had a lot of people that were accumulating liquidity that they wanted to put it to work. And so there was circumstances in the last 5 to 10 days where people started coming back to the market. But as I say, I watch the markets myself every day, but that's not the way I project or look at our business. I look at them over quarters and years.

Got it. What are the pros and cons for inflation for your business model? So for example, I would imagine con would be labor cost and something that's come up in your recent calls. But are there maybe some underappreciated positives such as inflation driving nominal bond issuance sizes higher?

Yes, there are -- inflation is an unwanted tax on an economy, and it's not something that I would ever want to advocate for. Generally speaking, we have benefited tremendously. I'm not talking about our company, but as general economies and communities around the globe from stability, from a very low inflation over the last 10 years, certainty about interest rate, certainty about growth rates that gives a corporation the ability to plan for the long run. So getting back to inflation is not a situation that I would like to see. And I do think that the central banks have the tools it will take to combat inflation. When it comes to our business, as you mentioned, we have inputs that we have to pay for based typically on inflation or some type of an inflation index. And then we have our revenues, which might not be as closely indexed to inflation. A lot of our contracts are longer-term contracts, relationship-oriented, relationship pricing contracts. The advantage of those is that you get the recurring revenue. You can have stability in your planning. Sometimes if there's very high inflation, we might not be able to catch up right away. So that could be one of the risks.

Got it. At this point, why don't I pause and see if there's any audience questions. Go ahead.

Maybe if you could comment about your [indiscernible].

Yes. The question was about anything that's going on with the insurance market with our insurance ratings. Whenever our Ratings business goes to the market to update or revise its criteria, which I am not involved in, I'm on the other side of the firewall, so we have an independent set of analytical teams, whenever they are going to contemplate providing an update to their criteria, they go to the market for what's called an RFC, a request for comment. They're going through that right now with some ratings criteria for the insurance industry. And some of the criteria, instead of coming back to us, is going to the press and going to the media. So this happens occasionally. I don't have any comment about those comments that are coming back and forth. It's a live request for comment period. And I know about as much as you do. I know what I read in the paper. I don't ever cross the firewall in our company. And I'll watch it carefully, but we have excellent processes and procedures for incorporating that comment, and then we'll get back to the market once it's been completed.

Doug, have you got to narrow -- I think some people looked at IHS as cyclical [indiscernible] you got to know the business better. What do you think of the market kind of over the last 10 years? It's really underappreciated about their assets. Maybe you might have a better [indiscernible].

Yes. I think that the -- if you look at IHS Markit, the much more cyclical part of the business was the upstream business, and that has actually been a drag on their business for the last 5 years. That's been -- it's been decreasing. It's not growing. It's been shrinking, and so that's been hitting the top line, and it's also a little bit more volatile. Their core financial markets business, credit default swaps, the original Markit business, the pricing, the embedded workflow solutions, those are not at all the same -- have the same cyclicality as what you see in that upstream business in the energy side. So I think that the cyclicality, so to speak, in what's been a downdraft has been coming from that upstream business. Now coincidentally, as we're buying the company -- as we're merging with the company, you can see now that there's an approach where that business is getting close to potentially bottoming out. But also with this climate where there's so much focus on what's happening with the Ukraine and Russia energy assets, there's a lot more interest and demand coming from that part of the IHS business.

Maybe one last one for me then before we wrap up here. So you touched on your index franchise previously in terms of taking some of the Russia components out of that. But just higher-level question about your index franchise overall, when you compare it to your primary competitors in the space, and I know it's not necessarily direct head-to-head competition, but you -- I'm sure you look at the overall set of assets and where you do well and where you don't, where do you think are the opportunities for your index franchise to really take the next step?

Well, one of them is really coming from the merger with IHS Markit and that's fixed income indices. We have always been wanting to increase our ability to have our own in-house fixed income index franchise so we could do more blended mixed asset types of opportunities to serve the insurance market, the pension fund market, people that are looking at new annuity products, et cetera, as well as just the direct opportunity there. The ESG market is starting to really take off in the index business. We have what it takes on the data and analytics. We have some really good successes, and we can start transferring that from the equity side to the fixed income side. So there are areas where we think that we'll be able to play more, this extension into fixed income, into ESG. Those are 2. Then there's a third, which is we have developed, over the last 20 years, relationships with exchanges around the world like Tokyo, Australia, Canada, and that's really a latent opportunity for us as well on the global front. But just generally speaking, we think that the trend for increasing size of the pool of assets, which are in passive strategies and index strategies, is going to continue to grow and that we can take advantage of that secular growth and be part of that, which will benefit our franchise tremendously.

Terrific. And with that, we are out of time. Thank you so much.

Thanks, Patrick. Great to be here. Nice to see everyone.