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

I think we'll get started. Thank you to everyone who's joined us today. My name is Andrew Nicholas, and I cover the information services, HR technology and consulting sectors here at William Blair. Before getting started, I'm required to inform you that for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. With that out of the way, I'm very pleased to welcome S&P Global's CFO, Ewout Steenbergen, to this 42nd Annual Growth Stock Conference. I also have Head of Investor Relations, Mark Grant, in the first row here. We're going to spend some time today just in a fireside chat format. I'll try to keep it relatively high level, as I know not everyone is intimately familiar with the business, but to the extent that we don't get questions answered here, there will be a breakout session afterward where you can follow up on any topics that I don't hit.

So with all that in mind, maybe just to start with a high-level introductory question is just a lot has happened with the business here over the past couple of years. On March 1, you officially closed the transaction with IHS Markit. So Ewout, if you could just start with kind of a high-level overview of kind of the business as it stands today, and then we can kind of get into the individual segments and that sort of thing.

Sure. Thank you. And first of all, thank you for organizing this event. And thank you all for joining this session. I think you're all familiar that we were able to close on the merger with IHS Markit on February 28. And of course, we are super excited about the outlook for the company because the whole thesis of the merger is that we can become a faster-growing company together. And why do we think about that in such a way? Because we have 3 divisions that are much stronger in combination than where those divisions were before, because we have the Market Intelligence, Market Data platform business of S&P Global, now combined with the Financial Services division of IHS Markit. That business is more focused on pricing, reference data, capital markets platforms, workflow tools. So now in combination, we have really a scale in our market data analytics and workflow businesses that we didn't have before. So I think that is strategically a very important step and will position us well for future growth. The same applies for a second division, which is around commodities. S&P is originally was always more focused on price reporting with its Platts business. And then IHS was always more focused on data, analytics, research, upstream business. So the combination of both also are very complementary and positions us in a much better way in helping our customers with respect to commodity insights. The third area is indices. We are originally, at S&P Global, very large in equity indices, as you know. But then we are now having the opportunity to combine that business with fixed income indices. And in fixed income indices, IHS Markit was 1 of the 3 largest players in that space. So now for the first time, there is a large provider that both combines equity and fixed income. No one has that in the industry at the moment. That is opening up strategically a lot of avenues that we can explore for S&P Dow Jones indices going forward, multi-asset class indices. We're also investing a lot in thematics, multifactor, in ESG indices. So I think also that business looks very differently. We have a couple of other businesses, the Ratings business, not so much changed with the merger, but on a relative basis, has become a smaller part of the company. And then we have also inherited 2 other businesses from IHS Markit. One is around mobility. This is all the automotive business, helping OEMs, dealerships, pricing, financial services with respect to VIN numbers, maintenance, information, accident information and so on. Insurance companies and banks are buying that data from us as well. And then there is a business called Engineering Solutions, which provides data specifications, standards, codes to the engineering community. About 650,000 engineers around the world get all of that data from our platforms. So the last thing, if I may just add one more element to it, is about faster growth. We also believe very much that this company now in combination will be able to be well positioned for faster growth going forward in very important adjacencies. Think about what is happening with ESG, energy transition climate. We now have a breadth of possibilities and opportunities, products that we can provide to the markets. In fact, every business across the company is contributing to our overall ESG strategy. Growing in private markets, private data. I think we are much better positioned there to take a good chunk of that growth market and also about credit and risk management and several others, China, we have been speaking about some of those as well. So growing faster in 3 of our divisions based on the combination, growing faster in the adjacencies, that's the essence of the merger and why we were so excited about it.

That's great. I think we'll hopefully touch on a lot of those different kind of use cases and revenue opportunities as we move through. But before we even get there, I was hoping you could spend a little bit of time on kind of the integration and the execution of a merger of this size. Obviously, I think you've talked in the past about an integration management office. Can you talk about kind of how you take 2 large companies with a ton of over -- well, overlap is maybe overstating it, but a lot of cross opportunities and execute not only in the kind of the next 3 to 5 years, but even long term, organizationally, making sure that all these different teams are working together to the same goals.

Yes. I could say, in fact, there was a benefit of the time lines between the announce -- announcing the transaction and closing the transaction and getting all the antitrust approvals in place in that 15-month window. Because we had quite a lot of time to make sure that we are very well prepared from an integration perspective. And everything was there on the table, thinking about organizational design, operating model, thinking about leadership roles and possibilities, thinking about what we needed to do from a system environment in bringing the systems together and being able to run as one integrated company but also, of course, the areas of synergies. Because on the one hand, we identified $600 million of cost synergies, which was mostly people, procurement and real estate related, and then also with respect to the revenue synergies. And we did a lot of bottoms-up work to substantiate those plans. So this wasn't something like high level, we apply some benchmarks that some consultants have provided to us and say, okay, we probably should be able to achieve the same. If I would go to the CFO of our Market Intelligence business, he could tell me synergy example or synergy initiative #72 is this initiative. This is what we are going to do. This is the technology capacities needed. This is when we start. This is the person who's responsible, accountable. This is the investment that's needed. That's how detailed and specific is the overall buildup. So we did a lot of work in order to be ready and to get prepared. Also, of course, about culture, culture and the social aspects, because we all know large M&A transactions can look great on paper from a strategic perspective, but usually, they fail when there are issues on a social or cultural aspect. So we did a lot of work how we would operate as a senior team and also thinking about the culture that we would like to have as a company going forward. And it wasn't something like it's just one and we try to fit in the other. We really said, if you take a blank sheet of paper approach, what would we like to be? How would we like to operate? And how can we take different elements of both organizations? Actually, it feels very natural now if we are working together because it really feels that people get along well, and you wouldn't even notice who would come from what part of the organization, which for me, often is maybe the most important culture you also need to feel. It's not something you put on a sheet or a PowerPoint page. It's something that you need to feel. And actually, it feels really good how we are working together. So after the close, actually, we have had an emergency office, a quick response office set up. If something would go wrong, that we quickly could step in. We could dismantle that after a couple of days because actually, we had no major hiccups that happened. We have an integration management office that continues. And of course, that is looking at interdependencies and milestones and that we are on track in delivering on the integration and the value capture around the merger. But I think overall, it's going very well, and we are very pleased. And I certainly think the confidence level around delivering on the merger and the financial targets around this has only gone up over the last few weeks.

What about for the sales force? Obviously, you have 2 large sales organizations combined, different go-to-market strategies in some instances. Can you talk a little bit about that integration and how you're managing that from an organization perspective?

The way how we structure ourselves is we don't want to go to the situation of one big sales force for the company as a whole. We think that isn't good for a couple of reasons. It would mean that our sales forces would become such a generalist that they don't have a lot to offer in the interactions with customers. I think the other drawback is that you are going to miss a kind of ownership, a kind of entrepreneurship. So we like that those divisional sales forces will really stay within those businesses. Obviously, there, an integration is needed, and the teams are working on the execution. But we'll have a separate sales force for Market Intelligence. We have a separate sales force for Commodity Insights and so on. What we have built at the same time is an overall customer relationship management layer on top of it, so that at least we have the overall insight in how many different ways do we touch the same customer across the company. So that we, at that level, can have the overview and not, for example, have multiple sales forces calling the same customer at the same time so that we at least can have quite a coordinated approach. And the last thing, Andrew, to mention is we do have, for the most -- for the largest and most important customers, we do have also some executive relationship management. Sally Moore, who runs our strategic group, is also looking after all the main partners, which could be data partners, exchange partners and so on. And then every executive committee member also looks after a couple of large customers. So I have 3 or 4 that I look after as well. And actually, it's fun to go out and represent the company as a whole.

Sure. And you also have leadership role in the engineering business, if I'm not mistaken?

Absolutely. It's the most fantastic business in the portfolio, yes.

You're welcome. Maybe we start there. I think that's one that often gets forgotten because it is a little bit smaller relative to the other 5. But you want to talk a little bit about the engineering business and the growth opportunity?

Sure. And I will make sure I don't talk the last 18 minutes about Engineering Solutions. But why I'm enthusiastic, not only because I have the privilege to look after this business as well, but it is a fascinating business because this is the original IHS business. And this is a business that started to serve engineers around the world, because engineers need to have access to standard specifications, codes, other data and insights because this is changing all the time. And if you are designing a vehicle or an oil rig or an aircraft, you need to know what is the latest standards that you have to apply. You need to know if you change one part in your design, how it impacts all the other parts of your design. So that is the information that is being provided. It's being provided through specific workflow tools or platforms where engineers can go in and can find the specific information that they need, and we call that the Workbench. And as I said before, 650,000 engineers around the world are using our products. So it's a fascinating business. It's also clearly a data and analytics and insights business for very specific industry. Originally, it's a business that provides more static data, so it is more one type of data. And we're now building more AI platforms around it that makes it more dynamic because you don't want the engineer to connect all of the different data points. If we, through artificial intelligence, can connect that ourselves, then some of those designs can be developed largely by AI, and the time to market can go much faster. So you want the system itself to check if all the design work really fits and is accurate. So that's, in fact, the future of that business make it from static data to more dynamic data and use artificial intelligence. And obviously, Kensho is also helping with that.

Sure. Before getting into a few of the other segments, I just want to take a step back and talk about capital allocation. I think one of the things that's quite attractive about the post-merger company is the amount of free cash flow you can generate. So if you could just kind of outline for everybody in the audience what the capital allocation strategy looks like and how you plan to leverage capital?

Yes. What we have said is that in terms of our capital targets, we're aiming for a growth-adjusted leverage range of 2 to 2.5x. And adjusted means that we're adjusting our direct debt for a few elements. The most important part is the so-called put option. This is the option that CME has on their stake, their 27% stake in S&P Dow Jones Indices. We did some refinancing during the first week of March, immediately after the close of the merger, and we were able to upsize some of the debt offering. We went to the market with $5.5 billion debt offering. So that brought us to the higher end of that range. But we thought this was the right thing to do, particularly out of the gate as a new company. We are generating significant free cash flow. I can't speak about the level now because technically, we have suspended guidance. So I need to be careful. But historically, it was somewhere north of $4.5 billion of free cash flow. And our objective is to return at least 85% of the free cash flow to our shareholders. So the attractive part of these kind of businesses is you don't need to use a lot of capital to run these businesses. We have no regulatory capital. Our capital expenditures are relatively low. So the net income is largely also the cash flow that the businesses are producing. And we think with returning at least 85%, we have an attractive story for our shareholders. Partially, this goes through dividends, and the remainder through share buybacks. This year, the share buyback amount is pretty large. What we have said is that we are going to buy back $12 billion of our stock this year. That's a bit of a catch-up because both IHS Markit and ourselves were out of the market for the last 2 years. There's the upsizing of the debt. There are some of the proceeds of the divestitures that we needed to do and then the return of the free cash flow this year. But $12 billion, to put it in perspective, that will be close to 10% of our overall market cap so far this year. So we will continue to do that not at that level, but at a significant level going forward. And I think that helps with just the whole compounding story. Good businesses, good secular trends, driving top line up, focus on high margins and margin expansion, significant free cash flow generation, significant return of capital from that, and then the EPS growth will be also very attractive. So that formula and how we will run the company, nothing has changed. That is what we expect to do also going forward.

Perfect. You mentioned briefly suspending guidance. I do want to touch on Ratings here in a second. But maybe one more question before we get there would just be to talk about kind of cyclicality and cyclical exposure in the whole outside of Ratings. I know that there's -- within the Index business, there's a little bit of mark-to-market on the asset-based fees. But I mean, how do you think about maybe potential offsets to that factor and also the resilience of some of your other businesses being primarily subscription-based in a lot of cases.

Yes. In general terms, I think we have very resilient businesses. 76% of our revenue is coming from recurring revenue sources, mostly subscription type of businesses and contracts that we are having with our customers. There's always puts and takes on a large company, of course. There are some businesses that actually are benefiting from such an environment, a lot of volatility. There's more demand for our product, research and insights. We have businesses that are linked to hedging, hedging in the commodity space, equity hedging. So we see those volumes going up, and we are benefiting from that. And then we have some businesses that are more market sensitive. There's a small part within Market Intelligence. This is the Capital Markets platform, the former Ipreo, but it's really a very small part in the larger MI setting. Then we have in the Index business, fee revenue stream from assets under management. So these are fees we generate over indices, in terms of indices that use our mutual funds or ETFs that use our indices. But again, that's offset by exchange-traded derivative, fix, 500, futures and options activity. And then, of course, there's the Ratings business that is particularly now sensitive for the sentiments in the debt capital markets. And I think that's the reason why we're suspending our guidance last week.

Very well done, the perfect transition to my next question, which is just if you could kind of speak to the decision to suspend guidance last week. And I think included in that release, some sensitivity around what could happen if year-to-date issuance trends were to persist through the remainder of the year. If you could just spend a little bit of time kind of level setting there, and then we can dig in a bit more.

Yes. So getting into last week and looking at the investor interactions that were planned for this period, including this -- in this conference, we realized that we were not in a position to affirm the guidance that we had put out with our first quarter earnings call. And the reason was that the -- particularly the Ratings business saw a particular significant impact from the issuance, the debt market issuance environment and the bank loan issuance environment during the month of May. And the month of May, from a seasonality perspective, is a really important month for the Ratings business because then usually overall, as a cycle during the year, that's a month where a lot of activity is taking place. And we saw that the high-yield market and the levered loan markets were effectively closed during the month of May. So we knew that we could not affirm guidance, and we wanted to be frank, upfront and transparent about that. So that's why we came out with the announcement that we had to suspend. But at the same time, we have had many investors that told us and say, "Give us the quantification, if the debt markets would not improve for the remainder of the year, so what we have seen over the first 5 months, if that would continue during the next 7 months, what would be the impact on your Ratings business?" And that's the quantification we put out. We didn't call that guidance because at this moment, it's really hard to predict what is happening with the debt market, so we called it a scenario. And the scenario then shows that we would lose about $600 million of revenues compared to our last guidance, and that the Ratings margins would drop to -- up to -- or as low as high 50s, that it could go to that level. So that is the sensitivity because that gives at least a kind of a bookmark around what can happen if such a scenario is going to play out. Our plan is to reissue guidance with our second quarter earnings call, then we have 2 months of more observations. So then we can come back with normal guidance again.

And can you spend a little bit of time, maybe giving a little bit more context about what is happening in the high-yield market right now, the bank loan market that's negatively impacting issuance? Obviously, there's a lot of geopolitical factors at play. But just kind of speak to what's happening under the hood and maybe what the prospects would be towards normalization in your view. Understanding that timing is impossible to predict, but what kind of are you looking for in those markets to have some sense of normalization?

Yes. I think what you -- what we see in the debt markets is effectively a reflection of what we see in general. I think the uncertainty, which direction is the economy going? We don't know. There's a lot of different opinions out there. People don't know really what to expect and how is the Fed going to respond to all of those scenarios. Are we getting inflation under control? How far the Fed has to hike? Are we going to stagflation? Or is this going to be a soft lending? So there's a lot of that uncertainty out there at the moment. I think that is impacting the appetite for risk assets and therefore, particularly for the high yield and levered loan markets. You see that there's just -- that is more a demand issue than a supply issue. The demand for high yield and levered loan is just very low at this moment. There are many issuers that are waiting on the sideline that want to come to the market, have refinancing needs, maybe find some bridge facilities through some of their banking facilities at the moment. But we know that at some point, this should come back. Also a little bit of lighter activity in investment-grade, but in the end, that's still holding up relatively well. So what should happen in my view to see this coming back? I think in general, market sentiments start to come down. The appetite for risk assets should come back in general in the markets. Then you would see probably a couple of issuers starting to test the market, probably more on the stronger part of the high-yield spectrum, see how the market reaction is on that. And when that's positive and those deals go well and they price well in terms of new issuance, then there will be probably more confidence around it and then more issuers will test. And then slowly, you will see that opening up. So exactly when those sentiments are going to play out and when those issuers are coming back and testing the market, a little bit to be seen. We saw a few last week, but it is much too early. It's far too premature to say that, that is the start of that process. So we need to see how that is going to play out over the next few weeks or months.

Perfect. All right. Let's kind of switch gears here. And this is a growth conference, let's talk more about growth. I do want to spend some time on ESG. I think you've outlined growth targets for that business over a multiyear period that are pretty strong, I think, 46%, 40% plus. Can you talk about kind of your right to win in that market, the assets that you have to bring to that market? And then maybe -- I know this is a multipart question, but you've seen a lot of buzz from the SEC around kind of regulating investment disclosure around ESG. Is that a tailwind? Is that something that you think would further support that growth?

Yes. Let me first give you the numbers, then the regulatory environment, and then I can speak a bit about why we think we have the right to win and be a strong player in this market. So from a numbers perspective, together with IHS Markit in 2021, our ESG revenues were approximately $140 million. We expect this year to be around $210 million, so about 50% growth, and to end up in -- well, end up in 2025 to be at a level of about $600 million. And that's not end up, then, of course, we'll continue to grow in a very strong way from that level. So significant growth, north of that 40% kind of level. And so far, over the last few years, when we put those numbers out, we have been able to deliver on that. And in terms of the regulatory environment, we are very used to run regulated businesses. This is in the way how we structured ourselves in our compliance processes, our controls, everything, how we operate the company today. So we would be very familiar, if the ESG markets get more regulated, to be able to act and operate. And actually, scale matters there, because you should be able to segregate your organization, build walls in between, have proper processes around it and be independent. So if that's going to happen, we think we are very well prepared and ready for it. And actually, in Europe, they are a little bit ahead to the U.S. So we see that probably happening there first before it's coming here. So why do we have the right to win? I think the most important is because we touch market participants in so many different ways as a company, and I think that gives us a strategic advantage, in my view, above anyone else, because we have the benefit of the Index business and the growth of the ESG indices. We have the benefit of 2,200 Ratings analysts that meet companies' management every year, and we'll also ask ESG questions in the context of credit risk assessment, but we'll get that insight. We have something that's called the Corporate Sustainability Assessment that we acquired with SAM, which a lot of companies are submitting, more than 2,000 companies now, and where we have very detailed information. We have products around climate with Trucost, which is generally seen as one of the best providers. We now have -- with the mobility division, we have the benefits of a lot of data around EVs and tail pipe emissions. In our commodities business, we do a lot of price assessments about carbon, hydrogen, recycled plastics, biofuel. We help customers with energy transition. IHS brought clean energy technology capabilities around it. So in other words, I can continue for another few minutes just to give you the whole laundry list. But the point there is we touch market participants in so many different ways. We have built a coordinated layer on top of it, an organization called Sustainable1. And because we touch market participants in so many different ways, we think we can create a level of quality and consistency to the market that is, in fact, what the markets are looking for.

Great. We do have a minute here. Can't cover all the growth opportunities, but if you have a 45-second answer on maybe another growth opportunity that you're particularly excited about. You've talked about private data. You've talked about a bunch of different opportunities. So if there's one other item that you'd like to cover and squeeze in here, go for it.

Yes. Maybe quickly, I think growth in Asia is, of course, a really attractive one. That's still, on a relative basis, a smaller part of the company, but we're clearly investing. We are having a license to run a domestic rating agency in China. We're now doing that for a few years, and it's picking up in terms of growth. I mean, this is a long-term strategy perspective, but this is the second largest bond market in the world that has been very close. Not a lot of investors -- foreign investors have invested in that market. But hopefully, with the additional transparency that we can bring, more investors can step in, and we can add a lot of value there. So I would say that's an attractive one, not for the short term but more for the medium and long term.

Great. Thanks so much for joining us, and everyone in the room for joining us. We'll move to Maher, I think it's how it's pronounced, for a breakout session in a few minutes here. So thank you.

Thank you.

Thanks so much. That was great.