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

All right. We will go ahead and get started. For those of you who do not know me, I'm Patrick O'Shaughnessy. I'm the capital markets technology analyst here at Raymond James. And up next in this room, we have S&P Global. And on their behalf, we have CEO, Doug Peterson. Thank you, everybody, for joining us this morning, and thank you, Doug.

Thank you, Patrick. It's great to be back again in person, although we were here last year as well, but nice to see everyone.

So we do have a lot of journalists and PMs in the room who may be a little bit less familiar with your story. So just to kick us off, could you maybe spend a minute or two kind of telling people what is S&P Global?

Let me start where -- at a revenue level, we're about $12 billion. We have 40,000 employees spread around the world in 38 countries, serving clients in 140 countries. We are a data and information company serving markets. Our #1 businesses. We're #1 in almost every business we're in. We're the #1 rating agency, #1 Commodity Insights and data business. We're the #1 index business. We have the leading franchise providing data and analytics for markets, Market Intelligence. We also have a mobility business that's providing information for people to make decisions about the future of the automotive industry. So across all of our businesses, we're about data, analytics, benchmarks, services, and we have a history that goes back over 160 years.

So what do you think is S&P Global's key competitive advantage? And how does that advantage extend across the company's different segments?

I'd start with our brand, S&P Global. We have one of the best brands of any industry anywhere. Everybody knows S&P. It's running across the bottom of every single financial information, television station every day. We start with that brand. It opens doors. It gives us the strength of bringing capital into our businesses. We have scale across our globe, across all of our businesses. We operate at size and scale. We have technology, data and services that allow us to bring that together, including Artificial Intelligence and Machine Learning through our internal opportunities as well as Kensho. But probably most importantly, it's our people. We've attracted and built a team of really high-quality people across the company that are a differentiator when it comes to sales, our commercial activities and very importantly, the quality of our analytics.

And how did the acquisition of IHS Markit leverage or enhance your competitive advantage?

When we took a step back about 4 years ago to look at the markets to see where the opportunities were going to be for us. We identified areas which were geographic growth opportunities. We looked at specific opportunities like private markets, sustainability, environment, climate. And we looked at reference data and some core information that we felt would be important to get in the portfolio at S&P Global. IHS Markit brought all of that. It was complementary. It brings together with us information that gives us a much deeper review for sustainability in carbon markets. It gave us a much deeper opportunity to get into private markets much faster than we would have on our own. And then things like reference data, research and analytics in the commodities markets, it enhanced everything that we have at S&P Global. So I would tell you that the deal that we've done -- we talked about it before as having this industrial logic that was compelling. And now that we're a year into it, it's even stronger than I thought.

One of the things that the deal did was it did kind of increase the business model complexity. There's now more segments of the company. It's more diverse. Can you speak to how the segments are interrelated? How does mobility maybe have similarities to Market Intelligence and Commodity Insights, et cetera?

Well, first of all, we have five divisions and three of them are now much larger. They have much higher scale because of the merger. Our Index business, we brought in the Fixed Income Indices into our Equity Complex. We brought in the Market Intelligence Information from S&P Global with the Financial Services data to build a much stronger Market Intelligence division. And then what was Platts plus E&R brings together this much larger, much higher scale Commodities Data and Analytics business. But your question also goes what about the cross flow across the entire business. We have so many different areas that we've already seen quick wins. Some of them are just data that we had that we're using from outside that we can now get inside. The Ratings business in the automotive industry that we're rating globally needs automotive data. We get that now from the mobility division directly. We don't have to go get that from third parties, and we're getting the best that there is. We see that as an example, in the Index business, not only were the Fixed Income Indices coming into the business are quite important in giving us a much larger multi-asset class platform. But we also have other data like commodities data, which we can build. As an example, last year, we launched a batteries metal index that was taking information of Commodity Insights and mobility. One other area I'd mention is that Market Intelligence is a data machine for us. We have a very large global group of people that are some of the best data analysts in the world, and this has become a really critical function for the entire company. As an example, in Commodity Insights, we have a platform called Platts Dimensions Pro. And in Ratings, we have a platform called Ratings360. Both of those, which are interfaces for our clients are based off of the same architecture as the Market Intelligence platform. So in addition to specific products, there's capabilities that we leverage across the entire company, and that's also another scale play.

Did the IHS Markit acquisition structurally change the incremental margin profile of S&P? That is does the business going forward require more investment to support it and to grow than it perhaps used to?

Well, first of all, the margin profile did come down clearly for two reasons. One is that 2021 was a banner year, especially for Ratings. It was one of the most historic years for issuance. And so we had strong issuance that year. And last year, the issuance profile dropped a lot. So that was one impact on the margin. And then the IHS Markit businesses have lower-margin profiles generally speaking. But this is an opportunity for us to continue to manage the company with the same discipline we've already had. We've had this discipline for years. Over the last 10 years, we improved our margin by 1,200 basis points from the low 30s to the mid-40s. This is a discipline we have. We're going to continue to drive towards that. But the more fun way to grow margin is through growing the top line. It's a lot more fun and it's a lot more important to be growing our top line, and that's one of our most important focuses. It's in your question. And we will invest for that growth, whether it's tuck-in acquisitions, but more importantly, through organic growth in areas like sustainability and private markets, which I've talked about. We have a structured investment program where we look at the capital we're going to allocate each year to the businesses for new investments, organic investments, and we've had a lot of discipline around that. And in fact, we're going to be using that to also report our revenue, we call Vitality revenue.

And I have a question on Vitality. But before I get to that, one of the things that the acquisition did and pretty much any major acquisition is going to do, it's going to lower your returns on invested capital. How do you and the Board at S&P Global think about returns on invested capital?

Yes. ROIC is one of the most important measures we look at. In fact, not only do we look at it for -- to the whole company, anytime somebody brings forward an investment proposal, we look at that. But it's not the only metric we look at. We also look at what's our growth profile, what's our return on capital, what would be our payback period. So there's other factors that we look at. Right now, as a company, looking as a long-term approach to manage -- being not a quarter-by-quarter approach. We're looking quite importantly at top line growth and margin expansion. Both of those, over time, will lead to a higher ROIC. So we look at ROIC. We look at it as one of our metrics. We know it dropped given what happened with the markets as well as post merger, but it is one of the main -- one of the metrics that we look at that's quite important, along with those others. -- and we have a long-term approach that we know this is going to improve as we continue with better performance.

And then you touched on Vitality Index. Previously, it's a portion of your revenue coming from recent innovations. At your Investor Day, you established a 2026 target of greater than 10% of your revenue coming from the Vitality Index. But on your fourth quarter call, if I heard it correctly, you guys are already at 10%. So are you thinking about bumping up the target? Or was this something unusual about the fourth quarter? How do you think about your expectations for Vitality Index going forward?

Yes. We think that about a 10%, 10% plus level is the level we want to have continuously having new products, which are coming into our pipeline that we're getting revenue from, achieving revenue. One thing is to talk about new products and new services and rolling them out. But what's more important is you're getting revenue from those that is one of your most important sources of driving growth. We also don't want to call something that is a product that's been out in the market for 5 years of new product anymore. So what we have with this Vitality Index is an approach to saying to our entire company. We want everybody to know that one of the most important ways that we're going to grow the company is through new products and new services. We're going to measure it, and we're going to track it. We also get a lot of growth from pricing, from volume, from taking a product that exists into a new market. So we look at that entire matrix of new products, new markets, new products, old markets, old products, old markets, et cetera. And we want to make sure that new products and new service is one of those growth drivers. So we'll be providing disclosure on exactly how that is measured, how it's tracked. And we also will have discipline around how we move things into that category of Vitality. So it's something that stays fresh and it stays dynamic, but it's not just someone who moves something there and that stays there forever. So that's why you saw that it was already 10% last year, and our target is 10%, but there's things that will be falling out because we would no longer consider them new products.

Got it. That makes sense. And then you touched on sustainability revenues earlier as well. The company generated almost $250 million in sustainability and energy transition revenue in 2022. And your 2026 target of $800 million implies a 34% CAGR. What products and solutions do you think is going to generate the highest growth in demand in this area?

First of all, this is a set of capabilities that we have that cuts across the entire company. Many years ago, we saw opportunities in ESG products, services, ratings and benchmarks. And we started letting all of the groups across the company invest in sustainability and climate, et cetera. And over the last few years, we started off by saying, well, let's, first of all, take advantage of all that investment and start building one single source of data. Then after understanding how that could benefit us, we built a group across S&P Global called Sustainable1, that's a horizontal group that benefits from coordinating all of these investments in sustainability. Now your question is what are some of the most promising areas of growth? The first I would say is all of the products around climate specifically. Those go from Trucost, which is an acquisition we did about 6 years ago, which has the best climate data of any company out there, over 9,000 companies that are being covered across all the portfolio, we're doing more and more climate products. climate opportunities, climate transition. Related to that, a second area of promising growth is in energy transition. So outside of Market Intelligence, where Trucost is in both our index business and in Commodity Insights, we're seeing a high demand for growth on information that relates specifically to energy transition. In indices that will manifest itself or something like the Paris Climate Accord indices or climate transition indices. In the Commodity Insights business, it's going to be carbon intensity products for energy transition. It will be new energy sources. And then in the Ratings business, we have second-party opinions and green bond evaluations, things, it's another very promising area. Last year, we did an acquisition that enhances our second-party opinion approach. And we think that between Scores and Ratings everything related to climate data and then energy transition. Those are the big growth themes right now for us.

Got it. Maybe some questions now on the individual business lines that you have and starting with Market Intelligence. It's now your largest segment by revenue. But also your lowest-margin segment, excluding the Engineering Solutions business, which you're divesting. Do you think Market Intelligence is always going to be the lowest margin segment due to the nature of the underlying businesses or in a combination of revenue and expense synergies elevate the margin profile meaningfully over time?

Well, first of all, margin improvement is one of our goals across the company, and it's something that's in our metrics also for our own compensation. But as I said earlier, we want to do it through revenue growth. Market Intelligence has a profile that margin expansion is something that we're targeting. It was something that we will continue to grow. On the other hand, Market Intelligence is a center of excellence for S&P Global for data, for technology, for technology investment for platforms. And so we will continue to invest and probably see more organic investment in this area that actually benefits the entire company. But to your core question, yes, revenue growth is critical, something we're focusing on that we will continue to grow and margin expansion is a key objective for all of our divisions and Market Intelligence included.

Got it. So I've made it 10 questions without asking about Ratings, but eventually it's going to happen. How are you thinking about the outlook for 2023 for your Ratings business? And kind of maybe break that up across some of the key issuance buckets?

Yes. First of all, we looked at 2023, and we have an outlook for build issuance to grow somewhere between 2% and 6% and our revenue to grow somewhere between 4% and 6%. We have an expectation that the year will have some slowness to it, whether it's a recession or not, I don't know, but we have an assumption that there will be some level of slow growth. We see that China just came out with a growth level of 5%. We had been projecting about 4.8% growth. We think China is generally a positive, even though it's not really high growth, it's better than having the slow growth they've had, plus there will be more spending and more investment coming from China. The EU, the U.S., the U.K. are all markets that had been very slow last year, we see the market starting to come back, which helped bolster our case of that 2% to 6% of issuance growth. We think that the financial services area is one that will continue to be strong. Corporates will also be back in the market. Last year, Corporates were down quite considerably. And then structured finance is an area that there's more question marks what will be the segments within structured finance that are going to be active this year. But across the board, we do believe we're going to get back into growth after a year last year, issuance was down over 30%. Build issuance down about 35%. So we think that this is a year where we get back up to growth levels modest, but this is something that we're watching for and too early to call it based on what we've seen in the first 2 months.

But a good start to the year.

Good start to the year.

Longer term, if we're in a higher interest rates for a longer backdrop and private credit continues to grow, how do you see those potential headwinds impacting the health of the Ratings franchise?

Yes. First of all, if you go back historically and you go before the last 10 years when interest rates have basically been 0 issuance followed economic growth. So it didn't matter what rates were because you end up with a normalized situation where you have inflation and growth are quite normalized, and we think that there will be a normalization again of that combination of economic growth and interest rates and people will be issuing to grow. If you look over the long run, issuance has grown about 6% a year. on a normalized basis. In addition, issuance has always been about total debt outstanding, corporate debt has been about 40-plus percent of the total GDP. I don't see any reason why that's not going to change. I think that this will continue to be something we can count on. In addition, there's an incredibly healthy pipeline of debt issuance, which is on balance sheets, which is going to be in maturity profiles. We see the maturity backlog starting this year, '24 -- especially '24, '25, '26. It's very strong. So all of this bodes well for a base of issuance for the markets. We had very strong 2020, '21 issuance. Some of that overhang. We have to see when it plays out that, that comes back to the market. But in the long run, we think that issuance will get back to normal compared to where it was last year. The conditions are quite strong for that. Now your question about private markets, the private market, which is debt, which was underwritten and put on the balance sheet of financial institutions, nonregulated financial institutions who didn't have the debt rated. That was where last year, the debt issuance was so low that they absorb that capacity when the public markets have basically been closed. In addition, that was a way where the private credit shops. It started with SME credit, they moved up into much larger loans. We think that there's two factors, which we can look at. One is that when the total volumes normalize again, a lot of that will be rated and we'll go back into the public markets. And the second is we see opportunities for us between Ratings and Market Intelligence to serve the private markets. whether that's with credit estimates, with securitizations that would get rated as they start syndicating and moving the portfolios, I don't think they're going to be sitting on the portfolios. And then for Market Intelligence, whether it's eye levels that we provide the data, which is needed by the investors in private credit, so they can see what's in their portfolios, it's products, pricing, it's ways we can look at reference pricing. -- risk tools, et cetera. So we look at this as an opportunity for us as private credit starts -- if they consolidate their position, we can serve them with traditional products as well.

Got it. another one of your businesses with at least some theoretical macroeconomic exposures, Commodity Insights, theoretically, maybe there's some exposure to energy prices. And those have been volatile and they've come down a fair amount over the past year. So how do you think about kind of the energy macro backdrop as it applies to Commodity Insights?

When I look at the energy backdrop, it doesn't worry me that there's volatility. In fact, volatility usually plays to our strengths because people need more information, more insights. They want to look at how they're going to be forecasting going forward. We have some products, global trading services that benefit from volatility. What I look at is more of a range when you get the price too low that it starts hurting the producers are too high that it starts hurting the users, that's where we see some stress in the business. So I can't tell you what the range is $50 to $120 for the price of oil. Maybe it's a little bit -- maybe the band is a little bit more narrow than that. But the range is something that we look at to see if you get too far out of whack on the range, but the volatility is something which isn't necessarily a problem for us. What we're seeing right now in the energy markets is that they're extending into other types of markets. In order to understand the energy markets in the long run, you also have to understand the metal markets. You have to understand what's happening with copper and nickel and lithium, which are substitutes as you start building new energy markets. You're looking at the substitutes from oil and gas, which are going to be the renewables. And we have the products, the services, the expertise to either benchmarks, prices for those or the research for those, the forecasting for those. So this is an area that we are very well-positioned. We have a leading position in the benchmarks, a leading position in the research. And this is one of the areas that I would highlight that the benefits of the merger of the Platts benchmarks with the Energy Natural Resources, Research and Data and Analytics from IHS Markit, this really creates an incredibly powerful franchise.

And then maybe we should touch on the mobility segment. But what do you see as kind of the secular growth drivers? Because obviously, there has been a really good growth story there. And then how do you view the macro risks for that business?

Yes. This is an where area, again, there's a transformation taking place in the industry. In fact, I think if you look over the next 5 to 10 years, it's an industry that will probably have almost as much change as anything, which is a combination of electric vehicles, which is a new drivetrain we're seeing starting to be rolled out around the world. And then autonomous vehicles, there's levels of autonomous vehicles now. Many of you probably drive cars that already have 1 or 2 levels of autonobility, if that makes any sense, in them. So we think that, that's another benefit for us is to have the core data, the core analytics that we'll be able to use for the forecasting for the future of the mobility sector. In addition, we saw a lot of disruption in the last 2 years. And what was interesting for me is the way that no matter what the direction of the disruption was, we benefited from it. When it was related to used cars, you have the CARFAX franchise, which benefited incredibly that CARFAX franchise also helps to benefit financial institutions, insurance, banks for underwriting the value of automotive. It also goes into the dealer franchise. So across the franchise, whether it was the CARFAX products, the pulp products, et cetera, we saw that no matter what way the market was moving, the users needed that kind of data.

And then we touched on higher interest rates as it impacts the Ratings business. But how do you think about it internally managing S&P's balance sheet and your financial leverage in a higher interest rate world -- and how does that inform your capital allocation outlook for 2023?

Yes. We don't have much of a need right now to worry about our -- the debt on our balance sheet. We were able to refinance all the debt last year when the rates were still quite low. We also have some rate locks in place. But what's important for us is that we've decided that we're going to keep the company as an investment-grade company. We have a range of 2.5x EBITDA as a maximum leverage. We plan on maintaining that level of leverage. It's something that we've talked with you about before. We also have a goal to return capital as a target to our shareholders 85% of our free cash flow to return every year to our shareholders through dividends and stock buybacks. That other 15%, we will allocate in a way that makes sense. If we don't have a good use for it, we'll also return that -- so this is a capital framework that we have. It's something that is used to support higher growth. And we want to make sure that over time, what we're delivering is value to our shareholders through growth, through margin improvement and capital return.

All right. With that, I'm going to pause and see if there are any questions in the room. All right. Go ahead.

[indiscernible].

All right. So for the webcast, if I can summarize the question, it was Doug, how do you see your career arc progressing from here? What are you excited about accomplishing in the future?

Yes. So I think about the career I've had with S&P Global, which started actually with Standard & Poor's rating services as part of McGraw Hill and then I became the CEO about 1.5 years later. We started out with McGraw Hill Financial. We had some opportunities there to reposition the portfolio. We then had a period of great growth. We returned a large amount of capital to our shareholders, $25 billion over the last 10 years. We were able to improve the margin by 1,200 basis points. And then we looked at what's the opportunity to now do another transformation to really meet the needs of the customers. And that's what excites me. When I get out of bed every day, I love seeing customers. I love the markets. It's something that I really live and breathe is markets. I've been doing it for almost 40 years. And so what I like doing is -- we have a strong team. We're all interested in the markets. And for me, right now, the most important goal I'm looking at is to get the value from the merger. As I mentioned, we have this really strong value propositions in Market Intelligence and Commodity Insights and in the Index business and then the entire portfolio. So what excites me is to take that to a new level. We've got these interesting things floating around the markets, ChatGPT. Well, we already have Kensho. Kensho is an opportunity for us to take what we've had for 5 years. We were ahead of the curve on bringing Artificial Intelligence and Machine Learning into our portfolio. We can move very quickly on that to understand the implications of something like ChatGPT. So I'm engaged in the markets. I'm engaged in what's happening at a macro level. But then I spend the time day to day to manage the business to make sure we have the best team. So we continue to deliver growth and transformation and value for our shareholders.

Maybe one last one for me then before we wrap up. You touched on China briefly earlier. How are you thinking about the opportunity for S&P Global in China, whether it's your Ratings franchise, whether it's Market Intelligence, -- and obviously, there's some geopolitical layers on top of things, but how are you thinking about the Chinese opportunity for S&P Global?

Let me start with China and then move to international generally. China is a market that we've been looking at for many years, and I've had a lot of fun. It's been quite rewarding over the years to spend time in China and help influence the shape of markets, which are moving more away from bank markets to capital markets, but quite slowly, and there was definitely a hiatus in the last 3 years. One of the things I watch quite closely is how many new licenses are being issued to foreign financial institutions for either control at 51% or 100% ownership. And we see that continuing. Even in the last few weeks, there's been a couple more foreign financial institutions, which were issued licenses. So there is -- in the financial markets, there's growth, there's innovation and there's a change going on where the Chinese markets will have more like a foreign financial market influence in them. And in that market, you need ratings, you need benchmarks. You need the benchmarks from pricing, commodity pricing. You need the data analytics for something like Market Intelligence. We rolled out 4 years ago, a 100% owned rating agency. And the revenue model has been pretty slow to get moving, but we're committed for the long run. We have a great team there. And we see with these new financial institutions coming in that they need the kind of data and analytics that we provide. So I'm encouraged that over time, we will see more and more relevance and more market share from those investments. At a broader level, you didn't ask the question but just internationally, I watch quite closely what's happening with the move from bank markets to capital markets, the move from active to passive, the move from data to benchmarks, et cetera. All of these are trends, which favor us. And the United States and the New York market is a specific city are already incredibly liquid, very open, very strong rule of law, and we've always benefited from that. And we usually grow faster in the U.S. than we are around the rest of the world. But I'm starting to see in Europe, that what's happened after Brexit with the U.K., what's happening in Singapore and some of the Southeast Asian countries, we're seeing this move towards more and more sophisticated capital markets or even if they weren't very sophisticated, they're moving up the chain, and that's really something that we benefit from tremendously. So I'm quite bullish about growth in the international markets that play to our strengths over the next few years.

Terrific. Well, I think that's a great place to wrap it up. So thank you, everybody.