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

Hello, everyone. I'm Jeff Meuler, Baird's information solutions analyst. Pleased to introduce S&P as the next presenting company in this room. S&P is a leading global provider of independent ratings, benchmarks and insights predominantly to capital and commodity markets but broadly across industries. On a consolidated basis, about -- or over $12 billion of revenue, nearly $6 billion of EBITDA. There's five segments: Market Intelligence, Ratings, Commodity Insights, Mobility and Indices. We're fortunate to have the leaders from two of the segments at the conference today. Martina Cheung, the President of Ratings, is onstage with me. That's going to be the focus of this fireside chat. Edouard Tavernier, the President of Mobility, is also at the conference; as well as Mark Grant, the SVP of Investor Relations. In addition to running the Ratings business, Martina also has oversight for Sustainable1, the ESG initiatives at the company. She was previously the President of Market Intelligence, joined S&P in 2010, also Chief Strategy Officer, among a number of roles. If you have questions, again please focus them for this session on either Ratings or the ESG products. But you can e-mail them to [email protected], and we'll try to get those weaved in.

But just to start, Martina, and thank you all for being here, can you give us just a brief overview of the Ratings business and how does it fit within S&P? So what are the interactions with the other segments? Where do you leverage their data? What corporate resources do you use?

Yes. Well, first, thanks for having me, Jeff. So S&P, I think of S&P Ratings as being really synonymous with the S&P Global brand. The company has been around for -- as a Ratings division for well over 100 years, and as you know, an incredible company and franchise within S&P Global overall. We have quite a few cross-division and enterprise-level, call it, sort of points in traction, points of synergy collaboration, et cetera. So the easiest thing to think about right off the bat, and I like this one because it's a place where we benefited from the merger, is corporate functions, technology, human resources, legal, et cetera. We -- like every other division in S&P Global, we use all the corporate functions. And we carry a lot of third-party expense or allocation on third-party expense. We benefited from the cost synergies of the merger in that area. Another area that I would say specific to technology, and this goes back to my days running Market Intelligence, we found a number of ways when we were building out the next generation of the Cap IQ Pro Desktop in Market Intelligence, we built a lot of shared -- what we called shared service capabilities within the Desktop. So we've actually taken several of those over to Ratings because we have a pretty big initiative around the analyst workflow. So we have the equivalent alerting functionality, for example, from the Cap IQ Pro Desktop that's now actually working on all the analyst workflows. So those are two sort of, call it, capability sharing examples, I'd say. The next area is around data, IP, thought leadership. We were just really excited. We had dozens of analysts asking, "When can I get access to the IHS Markit data?" And the team worked really hard. With a team of about, I'd say, 300 analysts, and they put everybody against like all of the datasets that IHS Markit brought. And as you know, it's a very vast array of datasets. We prioritized 50. And 3 months after close date, we actually made those available to all the analytic teams that had asked for them. So some of the favorite ones are the automotive data, the upstream data, for example, from Commodity Insights, the bond pricing and reference data from Market Intelligence. So that's been a real success story. And I think the feedback from the analysts has been very, very strong in that. We've also broadened our ability to research and create real insights across divisions. We already had a Ratings-sponsored sort of S&P Global-wide research lab. And we expanded that into a council that's now co-chaired by somebody from Ratings as well as somebody from Commodity Insights. And they've actually taken on huge amounts of additional research. One of my favorite areas in that is energy transition with -- that with all of the additional insights that Commodity Insights team has and pairing that up with the ability to generate real market analysis, forecasting, that sort of thing. So that's been a big win for us as well. And then as you know, we have the largest, call it, sort of commercial relationship across divisions with Market Intelligence through the CRS royalty. I think that's well understood and well documented. We also, several years back, started a cross-division referral program. So it works both ways. We send referrals over to other divisions. We get referrals back into Ratings. One of the things that the team has spotted in the last year is that there is some interesting -- for the types of clients that we're talking to, like the personas and different roles that we're talking to, some of the incoming IHS products are actually very relevant to those roles. And so we've prioritized some of the referral efforts around those. And that's given, I would say, really high-quality referrals back to, for example, the Market Intelligence team. But that's just one example. We've prioritized a number of areas. So I think that's probably a good summary of how we fit.

Excellent. And S&P is also an early mover in AI. You acquired an AI company, Kensho, I think, $550 million in 2018. So it's been a while now relative to the more recent buzz in AI. So how do you leverage AI within Ratings? Or what are the regulatory considerations that maybe could prevent more rapid AI adoption within Ratings?

Well, we've -- I think in the context of AI, we've been using some form of that for quite some while, similar to all the other divisions. So our data and tech team, for example, will always work with the other divisions to share best practices, whether it's automating the extraction of data from financial statements, for example, which the Market Intelligence data team has helped with tremendously over the last several years. AI is -- it's good. It's going to be really good. We just don't know how good yet. We're -- I would say we're in the early innings of evaluating generative AI capabilities and the application of those within Ratings. And I would say a couple of things. You take regulation aside and look at what we actually do, the function we perform, our goal is really to provide transparency, high-quality opinions. And I think there is -- that's really a distinguishing factor for a credit rating agency, and certainly for S&P Global Ratings. And I think thinking about that in the context of where AI can help is going to be important. I don't see it, for example, a large language model is not going to interview a management team, for example, as part of a quarterly update. So it's important to think about those aspects and the function that we actually perform and what we actually do. I would say there's -- we think there's lots of application, maybe I'll say, sort of at the front of the process than the back of the process, so all the inputs into the rating, what can we do around streamlining how we get our reports to market, how we draft reports and things like that. We're looking at, I would say, proofs of concept, multiple proofs of concept. And then as it relates to the regulators, their focus is also on transparency and quality. And so we're always very proactive and transparent with them directly in terms of what we do. And this is certainly an area of interest to them as it is to everybody else. And so we're engaging with them and being very open about the areas where we see some of this being potentially applicable.

Excellent. So S&P held an Investor Day late last year. You had a somewhat unusual methodology for the way that you articulated growth objectives. So you gave us some 2025 and 2026 growth targets for Ratings. I think that's 6% to 9% organic annual revenue growth. Should we think of that as like a good through-cycle long-term growth rate for the Ratings business? Or is there something that's specific to like 2025, 2026?

So that's -- the 6% to 9% is a good guidance range right now. I think one of the things that we tried to do at Investor Day was to sort of lay out the historical trajectory of the bond markets and then how we as S&P Global Ratings tend to perform vis-a-vis that. And one of the key points that I made is we often outstrip the growth in the bond markets with own performance. And that has a lot of reasons to do with different parts of the book and how we manage it. The -- I would say we're back to -- 2022 was basically sort of back to overall market issuance numbers that looked more like 2019. And what we're essentially modeling for is stable growth from there, consistent with what we've seen in the past. It's a through-the-cycle guideline, I would say. Are there opportunities for upside to that? There could be. I mean, nobody anticipated the pandemic, nobody anticipated what happened there, et cetera. We're not modeling for a snapback to 2020 and 2021. That would be the point that I would make, but always potential for upside in this kind of market.

But I guess, would you consider like the last 12 months a depressed baseline? It seems like M&A activity depressed, like the geopolitical risk, a lot of things that could go bad for you did in the last 12 months. So how do we think about where there could be normalization just in terms of a depressed market on top of the structural growth?

Yes. It's -- I think you look at '22, we sort of looked at it as a bit of a reset. In some cases, the very things that were driving the very high issuance in 2020 and '21, like high-yield and bank loans, were the things that fell off quite dramatically last year. So getting back to sort of more healthy issuance such as what we would be planning for, you need to see investment grade, high yield, bank loan and some of the other areas continuing to reset. And I think we've seen some pretty decent indicators so far this year. We've seen about $100 billion in inflows into -- net inflows into fixed income funds in Q1, back to historical averages or getting back to, I'd say, historical averages. We also saw high yields came in at about $86 billion in Q1, about double Q4 but just flat year-over-year for Q1 last year. Bank loans has ways to go. It was -- we saw actually some interesting refinancing volume in bank loans in Q1, up sequentially from Q4 but down from still about -- I think about 60% down from Q1 last year. So those are some of the things that as part of the sort of the reset and the getting back to levels that we've seen before, those things we're taking into consideration.

Got it. And then you just gave us some metrics on Q1. S&P now reports billed issuance on a monthly basis, a little bit in arrears. But January through March, each down 5% to 9%, April down 17% year-over-year. Can you just talk about the recent trends and any sort of market impact, including from the bank stresses, that picked up in mid-March?

Yes. I mean, it's difficult to say with absolute certainty because you'd have to be able to sort of get into the guts of every single deal and things like that. But what we're observing from client feedback and other market sources is definitely there was a halt in activity, I would say, in March, observed, I think, pretty broadly, driven by the concerns with the banking crisis. The extent to which that's spilled over into April, probably some spillover into April. April is also just a seasonally slower month with corporate earnings blackouts and things like that. So we don't usually see massive spikes in activity in April.

Got it. And then just for those that are unfamiliar, can you just summarize what billed issuance is and how it differs from overall issuance and how the forecast differ?

Yes. So the main difference will be unrated loans and -- or unrated debt rather and most international IPF, sovereign IPF. We decided to start publishing the number this year because billed issuance is more closely correlated with our transaction revenue. We felt it would be helpful to the market to disclose more of that.

Okay. And then you made a decision to preserve analyst capacity through a challenging environment. And you've managed expenses a bit differently than one of your ratings peers. So what's the impact of that? Like where do we, as investors, see the payback on that preservation of capacity?

Yes. I mean, I think -- look, it's worth saying that over the last 10 years, we were -- our margin in 2013 was 44%. We've done an incredible amount of work, particularly in the last 5 years, on managing our cost base. We have a very strong relationship with CRISIL, which is our majority-owned KPO and credit rating agency in India. And we have about -- I think I mentioned at Investor Day, we have about 1,000 people there. That's given us a lot of leverage and allowed us to improve margins. We've had productivity initiatives in the last 5 years as well. And so we are always extremely focused on making sure that we're stewards -- strong stewards of our expense base and looking under every rock. I think the decision on capacity and preserving capacity is completely linked to how we interact with our clients, the confidence that we can give our clients that we have not just the capacity but the subject matter expertise. I think that's a real key thing. This isn't -- I mean, you all know your analytic as part of your roles as well. You can replace, let's say, a body, the 8 hours a day equivalent or whatever. But you can't replace the expertise immediately. And so those are things that take a long time to build back up. And that is what issuers look to us for. They look to us to bring not just the capacity but the expertise to the table. And we have managed very carefully a capacity outlook, which we look at every quarter. And we've gotten to a base case for capacity that we think works, that allows us to cover the basic surveillance and uptick surveillance that we've had to do with all the volatility in the market. And that's a huge part of the analyst's day-to-day as well as be responsive to issuance and to pockets of the market as they come back.

And which parts of the market have the best structural growth opportunity?

So we are looking at, I would say -- look, investment grade has been good for -- I mean, it was sort of like the leading kind of driver starting in Q4 and continued to look strong going into Q1. I think with -- we always think about structurally the book in terms of refinancing. And we see a healthy amount of refinancing coming through both for investment grade as well as for high yield. You'll have heard us quote numbers like $2 trillion to $2.5 trillion every year over the next 4 years. We started this year with about $1.8 trillion. And we've seen some of that already in Q1. So I think structurally, within -- across -- and across the book, I think in addition to refinancing, we see opportunities in project finance. There are massive amounts of capital that will be deployed into project finance, I would say, mostly driven by energy transition in terms of the boost in the growth. A lot of that will see the debt markets at some point. We see interesting opportunities coming through in structured finance also going forward. These are all areas that we were excited about and talked about at Investor Day. And I think it's also interesting to pay attention, albeit off a much smaller base, interesting opportunities in the sustainable finance space for us as well that we look at structurally. It's smaller but more outsized growth.

What about China? That used to be a big talking point. And maybe if you can just update us on the market, or what could cause your revenue to more meaningfully ramp in China?

Yes. So China, as you know, just with the general slowdown there, we had some challenges with, I would say, the local market essentially kind of being shut for some period of time. We're extremely optimistic for the long term about that business. And I think we've always talked about it as a long-term opportunity. We now have a really fantastic team, quite tenured, experienced. They've been working very closely with local market issuers as well as investors and have innovated in a couple of areas as well. So they're working on private credit assessments as well as ratings and, I think, doing a great job.

And when we talked about the 6% to 9% growth formula, you talked about outstripping bond market growth. I think your pricing mechanism is part of that. But what are the key initiatives at S&P to like drive growth? Because to some extent, it's a market-driven business, and you're dependent upon market activity. But what are the initiatives for you to drive that market outgrowth?

Yes. So take transaction, we look at that as it's a market-driven business. But there are always ways in which we can focus more on customer service, making sure we have the right capacity and expertise. And so there, you've seen that we've been able to inch up our coverage in structured finance, for example. And so I don't necessarily look at transaction as being 100% market issuance -- dependent on sort of issuance tailwinds or headwinds. And then of course, we have the surveillance part of the non-transaction side of the book. That's pretty substantial. That has benefited from the massive uptick in issuance in '20 and '21. And we've spent a lot of time there. We've been able to -- for the value that we create in all the additional publishing, scenario analysis, et cetera, we generated, I would say, outsized value and have been able to align some of our pricing with the value that we bring to our clients. We also have the -- in non-transaction, we also have CRISIL, which has performed really nicely. And they have a great growth plan going forward. That's a combination of the domestic Ratings business that's benefited very well from the recent growth in the Indian domestic market but also the international business that's one of the high-end KPOs that serves both us and many other global institutions. So that's a key part of the growth in the non-transaction also. Pricing, generally speaking, we look to align our pricing with the value that we create. And we think first and foremost around that. And we're happy that we've been able to align the pricing both this year and generally speaking with that value.

And many of the -- much of the issuance and many of the entities that are rated by S&P are also rated by other credit rating agencies. What are the most important ways that you try to like differentiate S&P from the other credit rating agencies?

Well, we differentiate on quality, first and foremost, and transparency in our ratings. We -- that is the anchor that matters the most to us in terms of the product itself. But we have, I would say, doubled our efforts around customer service in the past year and have been very, very careful about engagement, lots more engagement in the past year. We've been hiring off a little bit in pockets where we needed to create additional expertise, for example, in the commercial team, so like private credit expertise or expertise and knowledge of the main players in the private credit market, for example. So those are areas that we focus on very closely.

It's a perfect transition point, and you put out a white label or white paper yesterday, Some Find Opportunity in Shrinking Private Credit Markets. And you talked about a little bit of slowdown with rising rates more recently after a period of really good growth. But I think it ended with this quote about like the golden moment for private credit. Can you just maybe go into more detail on defining like what is the private credit market? Where is it taking share from? Is it from bank loans? Is it from bonds? And what's the opportunity or risk to S&P from it?

Yes. I mean, very simply put, it's essentially lending by nonbank institutions. And I've seen an incredible amount of growth and momentum in the last several years. It's sitting at around $1.3 trillion to $1.5 trillion. And we anticipate continued double-digit growth in assets in private credit. We see a tremendous amount of opportunity overall at S&P. We've -- obviously, the IHS Markit teams have had workload software, et cetera, that serve the private credit market. So that's one of the reasons why in addition to sort of the real growth that we're seeing there, why we have it as a key strategic theme for S&P Global. For S&P Ratings in particular, we've been in and around this market actually for a very long time. So we rate the BDCs, funds, the asset managers. And increasingly, with the amount of engagement initiated on both sides, we've had a lot of the asset managers come to us and say, looking at the books and really want S&P Global in there. And so we see demand for credit estimates. We think there may be some additional demand for CLOs and bank loans by companies who are in private credit portfolios. And then more broadly, if you think about lending by nonbank financial institutions, these nonbank financial institutions need to also manage their balance sheets. So we're seeing increased -- a lot of conversations and dialogue around structured finance issuance also.

And it sounds like you have products that can work in that market. But I think penetration rate is currently lower. And much of it is not rated or doesn't have credit estimates. Do I have that right? Or what are you doing to drive up penetration of the solutions that you have that you can sell into the various parts of the market?

Yes. I mean, look, the market is private by design. So in some respects, there is -- you have to kind of start with the basics around what is driving this. These are oftentimes deals that are held to maturity, could be looking at 5 years-plus, much higher rate of return in some cases, although I would say that, that premium didn't look as favorable these past 12 months with the rate rises. But in some cases, some of these deals or companies may be too small to need a rating. But what we're increasingly seeing is that there's a lot of focus on managing the portfolios and demand for -- increased demand for credit estimates, private credit assessments. On the higher end, one of the other trends that I'm sure all of you will have picked up as well is that private credit has played an increasing role in the larger end of the market. And we do capture quite a bit of that, if not at our sort of proportionate levels in terms of ratings.

Got it. The last 12 months, there's been a lot of factors that have impacted the Ratings business, it's not just rates. But how could higher rates for longer impact the Ratings business?

Yes. I was laughing because our CEO, Doug Peterson, was asked this question this week. And he said something to the effect of that he had a loan that was at 16% when he graduated school -- graduated from college or something like that. So I think everything in perspective, right? Yes, the rates are higher than what we've previously seen since the quantitative easing and supportive policies over the last several years. Generally speaking, it's as much about the rates just stabilizing where they are as it is anything else. The volatility is what we've heard quite a bit of feedback on that's kept issuers on the sidelines. You have very sophisticated issuers who have worked very hard to be able to know when to time going to market. So we've seen volatility come up as much, if not more, in terms of the dialogue that we've been having with our issuers. Our base case, I think the good news is we're seeing some signals, right, that this is stabilizing. Our base case right now with our global macroeconomic -- economics team is 5% or above until midyear next year and could be coming down to 4% or above by the end of next year. So that's what we're taking into consideration as a base case. And we're getting, I think, good sort of sense from issuers that they're thinking along those lines as well.

So you highlighted how much margin expansion you've seen over time. And your margins are at a fantastic level. But the '25, '26 targets, they don't imply much margin expansion relative to like 2019, which didn't seem like it was an outlier positive year like '20 or '21. Just what are the trade-offs on why there's not more margin expansion opportunity from here?

Well, I think we're -- as I said before, we're always looking under every rock. So we will continue to try to find opportunities within that range. And obviously, depending on if you get an unforeseen boost in issuance, for example, we could certainly be above that range. The areas, I think we have some good productivity initiatives underway. We've got to balance that out with investments in workflow and capacity. I mean, these are the things that enable us to perform the work that the analysts do in a more rapid time frame. And so the trade-offs are basically investing in the core so that you can actually drive more capacity, bring that subject matter expertise there while at the same time, looking at are we managing real estate properly? Are there other opportunities to work with CRISIL, other ways to think about generative AI and parts of the process and seeing how much you can do to continuously improve?

Got it. And then you also have oversight for Sustainable1. But maybe if you can just articulate S&P's ESG solution strategy and why you're positioned to be one of the market leaders.

Yes, we feel quite excited about the way the market is developing. And by the way, there are many areas within ESG and sustainability. So the pockets that I tend to sort of think about are scores around ESG, really deep climate and energy transition and then some other areas that are growing, like nature risk and things like that. We do a lot in energy transition and climate, as you know, through Trucost, partnering also with the fantastic team in CI specifically around the ESG scores, which we think has gotten kind of an outsized amount of attention in the last couple of years. We see great opportunity because our clients are increasingly not willing to accept a headline sort of black box score and looking for us to give them the underlying data and information, so they can actually create their own scores. And we're doing that. We have 3,000 companies reporting with us their own data. And we also use public sources to supplement that. So we have data on well over 11,000 companies. And we make that data available in very granular levels of detail so that our customers can use it for their own purposes.

And maybe just in the last minute since you said you're excited about the way the market is developing and that could be a longer-term comment. Some other ESG solution providers, which may do different things than what S&P does, have called out a slowdown, political considerations and other factors. So just in the short term, are you seeing similar slowing in the types of ESG solutions you provide?

I think we're so diversified in this area. Some of you, if you're attending the sessions with Edouard today, will hear Edouard talk about what he's doing in Mobility, for example. We're very diversified in this area. And we see really fantastic growth opportunities.

Excellent. And that's all the time we have for questions in this room. Please join me in thanking Martina for her insights.