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

Good afternoon, everyone. I'm George Tong. I'm really pleased to be joined by Ewout Steenbergen, CFO of S&P. Ewout, thank you for being here with us.

Of course.

Okay. So last week, S&P hosted its first Investor Day since its merger with IHS Markit. And at the Investor Day, the company gave new medium-term targets, including 7% to 9% organic revenue growth for the pro forma company by 2025, 2026. This growth is better than either S&P or IHS Markit delivered as a stand-alone companies. So can you talk a little bit about where in the business you expect the improved growth that come from post merger?

Yes. And first of all, George, I think the Investor Day was a really important moment for all of us because it gives us an opportunity to present the company now on a combined basis, show what kind of great opportunities we have by combining the strength of all the different divisions, to see the divisional precedence with the conviction they have around their plans for the future. And that also translated in that higher revenue growth outlook, which is, in fact, completely consistent with the thesis of the merger to grow this company faster than both companies would have been able to accomplish stand-alone. Because we're so much stronger in each of the divisions that have now seen this combination plus, of course, also much stronger in some of the growth adjacencies. If I go segment by segment, the Index business clearly has the highest growth outlook for 2025 and 2026. And you know we're speaking about annual growth levels in those years, not CAGRs because we can't predict for short term. But once we get out of the economic situation, we know what kind of growth levels and other financial targets we should be able to accomplish in 2026 and maybe already by 2025. So the Index business, double-digit growth, and that is because of a lot of assessments we're doing in multi-asset class, in ESG indices, factor-based, thematics and other areas. So exciting outlook for the Index business from a top line growth perspective. The other divisions are somewhere around 7% to 9% and Ratings 6% to 9%, which is, I think, also very strong and also shows a lot of confidence we have in the opportunities ahead for the company. Of course, Market Intelligence has the largest revenue synergy opportunity because of -- this is the largest business coming together. I'm very also optimistic about the outlook for Commodity Insights. The markets are strong. The position is strong. The cross-sell is attractive. The Mobility business has always been already a very entrepreneurial division and has seen quite nice growth levels. So we expect that to continue. And Ratings between 6% to 9%, I think, is also certainly solid. So yes, overall, I think a very positive picture overall, I would say.

Yes. Okay. Makes sense. In addition to the new growth targets for the overall company and the segments, you've established new medium-term operating margin targets 48% to 50% by 2025, 2026. By then, presumably all the debt issuance headwinds will be behind us. The macro environment will be improved and then your -- all your cost synergies will be realized by then. Can you talk about some of the puts and takes with potential drivers of upside to that target? What could maybe limit you from exceeding 50% operating margins?

In our business, George, is always a trade-off between how much do we reinvest in terms of future growth versus how much do we let flow to the bottom line. I think we have a lot of discipline because we are looking at all of these decisions in isolation. We're not co-mingling all of this. We first look at driving operating leverage efficiencies in existing businesses, driving the top line growth on a BAU basis faster than the expense growth, what we call the jaw. But then also thinking about where some of those reinvestment opportunities, and fortunately, we have many of those across the company in all the different divisions. And yes, that's the trade-off. But we think to see those decisions made separately gives us a very clear insight. And every year, we can really determine what is the right balance, overall, we can find in that. But I would say, in the end, driving the top line faster, if we have those opportunities, and we can make investments, is the most attractive way to run a company like us. With these high margins already, growing the top line faster is absolutely generating the most shareholder value from our perspective. I think going back, for example, to the Index business, that's a great example, the margins stay in the high 60s, but you get double-digit top line growth. I think that's a fantastic proposition compared to, if you would have to definitely move the margin to low 70s, and you would get mid-single-digit revenue growth. For me, that's a no-brainer in terms of what is the more attractive way to look at that business. And similar decisions are being made effectively for each and every -- of the division.

Right. So if you go from approximately mid-40s to high 40s between now and 2025, 2026, it's about 100 bps of margin expansion per year. When you look steady state at S&P, is that a reasonable sustainable rate of margin improvement, 100 bps? Or does it moderate to maybe 50 bps beyond the high 40s?

It's hard to predict after 2025, 2026. Philosophically, we are businesses that always should be able to find some margin expansion. Because we have the operating leverage, the incremental margin on the net dollar of revenue that comes in should always be higher. Plus, we have so many opportunities in terms of more automation, more cost allocation decisions, real estate, procurement, all of these that we still have as a company. You know our management philosophy. We never lean back and rest. We always look for the next thing and we're going after it, item by item. So I don't think we will ever rest to say, okay, this is the best we can do ever with margins. There's always more opportunity to improve.

Right. Let's talk a little bit about synergies. At the Investor Day, you provided revenue and cost synergy targets for Market Intelligence and Commodity Insights. As you look at the other segments: Indices, Ratings, Mobility, how would you potentially quantify the revenue and cost synergy opportunity in those other businesses?

Yes. Clearly, if you look at revenue synergies, by far, the largest part is in Market Intelligence. The second largest in Commodity Insights and then the remainder is mostly Index plus a small amount for some of the other divisions. If you look at from a cost synergy perspective, it's, of course, also that same sequence, but also think about corporate expenses that are being taken out. That's a very significant number because a lot of the duplication in senior executives, in some of the functions and so on is all in the corporate area, but ultimately get allocated out to the division. So therefore, you see also significant cost synergies showing up. For example, in Ratings, despite the fact that it doesn't really -- it's not really a division that has itself an integration because it gets the benefit of some of the corporate cost allocation synergies as well.

Right. Okay. Makes sense. Let's dive into the Ratings business. So your 2022 outlook for Ratings consists of mid- to high 20s revenue decline in Ratings and build issuance declines of about 45% to 50%. For this year, 2022, as you think about performance through the end of November, how is issuance compared to your expectations as you laid out these targets?

Yes. George, it's always hard to speak about issuance on a monthly basis. As you know, we love to really look at this from a medium- to long-term perspective because, yes, it can fluctuate by the week, by the month. But ultimately, we know that from a medium- to longer-term perspective, the overall growth levels will be very healthy and positive. But specifically, to your question, I don't think we have seen anything that deviates from the last guidance we gave for the full year. Yes, there are always some small indications of, okay, maybe investment grade was relatively better in November, but then everything below investment grade was still very constrained. So I don't think we should read too much in 1 month and those kind of indications. I really would like to see multiple month of another trend before we can say that we're really in a different period.

Yes. Makes sense. There have been new issuers interested in tapping the debt capital markets, but they've held back because rates have been unfavorable. So this creates a little bit of a backlog for new issuance activity. Can you talk a little bit about that backlog and when you would expect that to translate into improving Ratings revenue outlook?

Yes. I definitely believe there is quite a large backlog. And are indications for it anecdotally because we hear this from a lot of issuers that are waiting on the sidelines and are ready to step in once the macro circumstances are more supportive. But another indication is on certain days where the market looks a little bit more positive. For example, we had in November, a day, you recall, that's only the CPI data came in a little better, which gave an indication of maybe the Fed can start to slow down some of the rate hikes. I think that it led to some of the U.S. treasury levels coming slightly down. Those days, there was massive issuance for -- to the market. But the flip side is we have also never seen so many days with 0 prints this year. So for me, those days are an indication of once the CPI number start to become clearer, it becomes clear, how long the Fed has to continue to hike, where ultimately, the yield curve for lend -- do we get to a mild recession or a more severe recession, which will have an impact on credit spreads, on credit risk, on credit defaults. I think once all of that -- the market starts to settle and understand where it's heading, I think we will be in a very good position and we will see the market turn.

Right. If you take into account the backlog of new issuers and at the Analyst Day, you also provided the refi pipeline about $2 trillion a year over the next couple of years. So when you take that into account, the backlog into account, macro into account, how would you frame the potential upside, downside scenarios for issuance in 2023?

Yes, it's a little too premature to talk about it because, again, it all depends on when is this situation going to bottom out. And I think no one can predict the time lines of it. So I'm definitely not going to do it. But I thought one piece of information was interesting because you know the Ratings research group has put out a very early indication of market issuance. I think you know, everyone knows, there's a significant deviation between markets and build issuance. So market issuance is the only number that we have out there, but the range was very right around that plus 2% because it got from minus 12% to plus 8%. So that's a really widespread. So for me, that's an indication that there's still a lot of uncertainty, which direction this might take in 2023.

Right. You've established as part of your long-term -- medium-term framework, you touched on it, the 6% to 9% Ratings growth outlook by 2025, 2026. That growth is a bit higher than historically what Ratings has delivered. Can you talk about how the -- what the path might look like to get there, considering we're in a higher rate environment now than pre-COVID? And what's driving the improved growth medium term of Ratings compared to before the merger?

Yes. Fundamentally, George, in our view, nothing has changed with respect to the algorithm. For the Ratings business, nothing is broken. And once the market starts to stabilize, they understand where the economy is heading, where the yield curve is heading, then we think it will come back with the same algorithm we have seen before. And that is not so much sensitive around interest rates. It is sensitive around GDP plus future price increases, plus new initiatives that we're building around it. Of course, inflation makes a role ultimately there as well. So maybe that's a slight reason why you see a little bit of higher increases in terms of the revenue outlook, but also the new initiatives that Rating is initiating. Martina was talking about that last week. I think with respect to sustainability, with respect to other related assessments that are close to the Ratings itself. So there's many of those things in Ratings that are attractive. I think geographical expansion is an important element in the Ratings business as well. As you know, we are trying to build up on local domestic rating agencies with smaller stakes in many different markets in the world. And then over time, hopefully see those when those markets get more mature to have a front-row seat with those developments and then ultimately, with the growth as well. And CRISIL in India is a prime example of that. So we hope to be able to replicate that as well.

Right. So now corporations have had a couple of months to handle and cope with the new interest rate environment and inflation. Have you seen any changes in how corporations manage their balance sheets? Are companies now delevering more? Or do you think the leverage structure overall should remain similar to pre-COVID levels?

We don't believe that where rate levels are today, and where they are expected to go that, that is in any form a way prohibitive and restrictive for the debt markets and for issuers. Obviously, it's higher than where rates were at the beginning of the year. There's also always a psychological effect of a reset that people have to realize, "Oh, yes, first, it's unfortunate if I would have refinanced 9 months ago, I would have been in a very different place," but that at some point, that effect goes away and say, okay, yes, this is the new normal. And then compared to other forms of financing, it's still the most effective form. So therefore, it's hard to see that there are really alternatives. Looking at paying back, paying down debt, that only happens on an idiosyncratic basis is hardly ever we see that more structurally happening across the board. GDP growth is often just correlated -- debt growth is correlated with GDP growth and outstanding debt has only gone up over the last multiple decades as a whole.

Right. You touched on this just now. There are multiple potential alternatives to debt financing. You've got issuing equity. You've got the private debt markets. What -- how high do interest rates have to go before corporations meaningfully make a shift to these alternative sources of funding to the point where it could impact overall issuance trends?

Yes. It depends on the timing of this. So first of all, I think if rates and spreads go up so much that it becomes really hard to run a company that is on the extreme ends of below investment grade spectrum. I think those companies will just not survive at all. That will happen. That happens every now and then, but that's just a very small part of the spectrum. But in the end, those assets will be bought by someone else who needs to finance that in order to continue with those assets. We have seen this year, particularly a larger increase in private credit. But that's more -- that has more to do where the markets are particularly this year, particularly for high yields or levered loans where it's really hard for some issuers to tap the public markets. And if you are with your back against the wall and private equity gives you a possibility to finance faster and with some level of certainty, then you probably do it. But that comes with terms and conditions that maybe are less favorable, including covenants that come with the private debt. So the question is, at some point, when the public, high-yield markets [indiscernible] start to open up again and those companies can refinance, what will they do? And most likely, I would expect that a lot of that debt that gets issued this year is more effective and more -- in the end, more efficient to refinance in the public market again if ultimately the coupon will look better if ultimately you can get rid of some of the covenants. So private credit is definitely somewhere to stay, but probably this year have shifted a little further than it normally would have done, given the fact that we're in a unique situation that the speculative grade market is shut down for a large part of the year. But most likely, there is a little bit of the shift that will move backwards at some point.

Right. Right. Let's shift gears and talk about Market Intelligence. Historically, that business has grown mid- to high single digits. This year, it's tracking to grow about mid-single digits. Can you talk a little bit about the trends you're seeing in MI, including what conditions you would need to see for that growth to reaccelerate to mid- to high single digits? How the revenue synergies are coming together in that segment?

Yes. There's a couple of specific reasons why the growth is a little lower this year. The first is there's a few -- a little bit of FX headwinds to the business. And then there is also the capital market's business in Market Intelligence, which is more volume driven. So these are the IPO platforms, the book building platforms, also for debt markets, where there is a part of it is volume related. And again, just due to the same reason that we just discussed, that has some level of an impact. Obviously, we are lapping that next year. So that's going to be a positive. So the baseline is going to be very different. And then I think just this business has so many opportunities. I was yesterday joining the commercial team in our monthly -- sorry, weekly meeting on Monday morning, 8 a.m. and just the level of energy, the number of deals they were doing, the number of cross-sell opportunities that we're discussing, I think there's a lot of momentum in this business. And so certainly, we're quite optimistic about seeing that business getting to that high single-digit kind of level again over the next periods.

Right. What examples of -- can you think of revenue synergies in cross-sell are happening in MI? And that seems to be the biggest opportunity for revenue synergies. So as you think about the realization, I think half of the synergies will be realized in year 3 and then year 4 and year 5. So what's the cadence of that revenue synergy realization in MI, specifically?

I would say there are so many of those opportunities. Think about an existing relationship where we now can sell certain ESG products to this existing relationship because they are looking for support and we are able to provide our sustainability products. An existing relationship that was looking for a KY3P solution that has come now with IHS Markit, we're able to provide that to that customer. New data sets that we can add to CapIQ and CapIQ Pro, making those platforms more attractive. We can add enterprise value, that should help with an uplift when we do the next contract renewal, adding data sets to some of the software business, the workflow tools, existing data sets, which makes those software and workflow tools more attractive, more sticky. Ultimately, that will drive up all of this retention levels and value for customers. And ultimately, that also will translate in top line growth. So actually, I could go for a very long list -- longer list of items, but I think you probably got the feel for how many things we can do with Market Intelligence.

That's great. Commodity Insights business, that certainly has exposure to the energy cycle. How would you say the business is performing given prevailing energy trends, energy prices, particularly given Platts historically has been more resilient versus energy prices, whereas IHS Markit's Energy business has been more volatile and sensitive to energy prices? So what's your outlook there, especially given your latest view around energy prices heading into 2023?

Yes. Overall, I would say the macro circumstances for this business are absolutely supportive and constructive. The growth level this year is a little bit misleading, mid-single digits because the business is facing some of the impact of our withdrawal from Russia. So the mid-single digits, you should probably add somewhere around 3% points or so of growth, if you would correct for that. We still have a bit at the beginning of 2023 to go in terms of lapping that impact. But then after March, we should be through that. So then the growth levels will most likely look very differently in Commodity Insights. The levels of commodity prices are, at this point, really healthy for most of our customers. So that is very helpful. And then many of the customers are, at the same time, looking at support for their plans, their aspirations with respect to energy transition. So we're both benefiting from traditional energy and everything that's happening with alternative energy sources and the needs and the help that our customers need from us to help them through that transition. So I think the combination actually is in a really good position. And also there, I spoke actually also yesterday with the Head of Commercial of Commodity Insights, stay very positive momentum, I think, what we're seeing from a sales perspective.

Yes. In the Indices business, you recently raised your 2022 growth outlook to mid-single digits due to strength in exchange-traded derivative volumes. How have AUM performance and ETD volumes performed relative to your expectations?

Again, I don't think there's anything materially different than we put out with our third quarter earnings, George, because I think it's just too short of a period to impact the overall guidance for the full year. What I can point out, because this is public information that everyone can find is, of course, the volumes of derivative trading at some of the exchanges, and they -- those continue to be quite nicely elevated. So I think this business is really a unique business because there seems to be always that offset if the markets are coming down, then the derivative trading does better and the other way around. Of course, we will also have periods where both will come down at the same time. We have warranted a little bit for 2023. But I would say this year, it's actually remarkable that in a year like this, if you make a few step backwards, that the Index business is still growing in quite a healthy way despite how far I think the markets have come down in terms of pricing valuations on the equity side.

Right. In the Mobility business, historically, top line growth has been high single digits. Premerger, even this year, the segment is tracking to grow high single digits. Your medium-term target for Mobility is 7% to 9%. So what are the potential constraining factors? Why not have the growth be higher? What could drive the growth to be lower than high single digits to get to the low end of the range of 7% to 9%? What are some of the puts and takes there?

Yes. Very positive business with a lot of entrepreneurship, a lot of innovation. It's just really a business where the leadership always wants to find new opportunities for growth. So definitely, we are very, very comfortable that 7% to 9% range is possible. Two things to take into consideration in terms of why can't this be higher. One is obviously, over time, this business gets bigger and bigger. So based over a larger base, to achieve higher growth becomes -- just in absolute terms, becomes a bit more difficult. So to be able to stay at these high growth levels over a higher base, actually, we think is a positive development. The second is -- and that's, by the way, across the board, this is all organic. We did not include any benefit from inorganic initiatives. And as you know, from our capital allocation philosophy, 15%, we have earmarked for potentially inorganic opportunities, some venture investments. But if we don't find the right opportunities that can be added to the buyback capacity. But then our financial projections, we have not given us any benefit as it should be on an inorganic basis or from a share price -- sorry, a share count take out for EPS. So there's a little bit of that as well, but that's more across the board. That's not specific for Mobility.

Right. Okay. Makes sense. I'm going to pause there and see if there are any questions from the audience before continuing. Okay. No. So your medium-term targets involve -- and we touched on this earlier, in dedicating more of shifting a little bit of margins to reinvestment spend to really fuel growth. What are some examples of technology frontier investments that you hope to make? And how would that differ from core R&D? I know you've broken that out at your Analyst Day. So what's the distinction there? How is that going to help the business achieve its growth target?

Yes. And what we said last week, just to clarify that to the whole audience is that our current spend in technology, which is 73% in our, what we call, foundational systems and infrastructure that we want to bring that down to 60% over the next few years in exchange for a higher allocation to core R&D and new frontiers. And we think that's healthy because we would like, of course, optimize. Our technology spend is a significant part of our expense base after people cost is the second largest. This year, we spent about $2 billion on it. So I really want to make sure that those dollars goes to the most effective areas of spend and impact. Core R&D means technology investments in our existing products. So an example is that if we would do an upgrade from CapIQ Pro as new features there, that goes in core R&D. And then new frontiers are new products and new initiatives and innovation that we don't have before. So areas could be new product launches with respect to sustainability. Some of the areas of innovation that Kensho is going after, some new markets that we're entering into, like China and some of those initiatives. So that goes in the bucket of new frontiers.

Right. Two areas of product innovation that you focused on at the Analyst Day were private markets and sustainability. Can you talk a little bit about that opportunity? And you provided some kickers there and revenue targets by 2026. And what the tactical means it is that you're planning to take to get there to scale those 2 markets, in particular, sustainability and private markets?

With respect to private markets, today, a $400 million business, we expect it to be about $600 million by 2026. That is a CAGR of 12%. But there are certain pockets within this that are going to be high growth, new product development that we have with respect to private equity customers, for example, with respect to supply chain, risk valuations. Some of those, we expect to grow by about 40%. And then we have sustainability that we expect to be around $800 million by 2026, and that's a CAGR of about 34%. So both really healthy growth areas, and we think that we are very well positioned to capture that growth in the future. From a governance perspective, we have a slightly different approach between the 2 because I think that's where you were going with your question as well. For sustainability because it touches all across the company, every division has propositions with respect to sustainability. Think about ESG and other sustainability indices to EV development and battery, battery metals in Mobility to scores and climate information, climate risk data in Market Intelligence to second-party opinions in Ratings. Of course, energy transition and certain price assessments in Commodity Insights, for example, in hydrogen, carbon, recycled plastics and so on. So every business structure sustainability. So we have built a horizontal organization to make sure that our approach to the market is consistent. We speak with one voice. We have a coordinated approach to customers, and we think that's very important. Private market is a bit different because it largely touches 2 divisions. Ratings, where we do bank loan ratings and assessments for private entities. And Market Intelligence, where we have some of the private equity customer tools like iLEVEL, where we have private company data, private asset data and so on. So we are more looking at that from a more committee structure perspective where we are trying to make sure that we coordinate the overall commercial approach, but we think it's too happy to start to build a horizontal organization around private markets because the business that we need to focus on it is pretty clear, and therefore, we don't need to build the whole structure.

Right. Makes sense. Your medium-term operating margin target for the Ratings business doesn't exceed 60%. What kind of issuance environment would it take to get Ratings operating margins to be above 60%, which is what you -- what S&P delivered in 2020 and 2021?

Yes. But I think, George, there is -- the market circumstances were unique in 2020 and 2021. So it's hard to see that those market circumstances come back. Probably we can get back to those margins if we get to those market circumstances. And what made it unique? Because in 2020, there was all this liquidity-driven issuance when the COVID pandemic started, companies that really wanted to strengthen their balance sheet. And last year, it was all below investment grade that was really issuing a lot. We were not at the organizational capacity to deal with all of this volume. We had to say no to a couple of deals. And we just couldn't catch up from an organizational capacity and infrastructure perspective and, therefore, expenses. So I think 2020, 2021 were unique in one direction. 2022 is unique in the other direction. We think that the medium-term outlook for Ratings we have given is attractive, is positive in combination with the growth. But the same as in any of our businesses, we always have the opportunity every year to make the trade-off decision. But we think ultimately, growing the business faster is more attractive than trying to really force higher margin expense.

Right. Over the medium term, S&P plans to return 85% of its free cash flows to shareholders in the form of buybacks and dividends. And the other 15%, which we touched on earlier would be for opportunistic M&A. Can you talk about what areas of the business are most appealing from an inorganic growth perspective where you see most opportunity for a tuck-in acquisition?

Yes. We're really disciplined around the opportunities that we're looking at, both from a strategic perspective and then also from a valuation perspective. It's mostly additional capabilities that would strengthen existing proposition. So we're not looking after something that we don't have today that is completely in the left field. It is something that could add and strengthen what we already have today and make that a more attractive proposition to the markets. It's all more bolt-in -- bolt-on, tuck-in kind of level. But again, we stay very disciplined around it. If we don't find the opportunities that potentially could help to add to additional buyback capacity in the future. Again, as I said before, none of the 2 is embedded in any of those growth outlooks that we have given.

Right. We've got about a minute left. Any questions from the audience? Okay. Ewout, thank you for the time and insight.

Thank you so much, George.