S&P Global Inc.

Good morning and welcome to S&P Global's second quarter 2020 earnings conference call. I'd like to inform you that this call is being recorded for broadcast. All participants are in a listen-only mode. We will open the conference to questions and answers after the presentation and instructions will follow at that time. To access the webcast and slides, go to investor.spglobal.com. If you need any additional technical assistance, please press star zero and I will assist you momentarily. I would now like to introduce Mr. Chip Merritt, Senior Vice President of Investor Relations for S&P Global. Sir, you may begin.

Thank you for joining us today for S&P Global's second quarter earnings call. Presenting on today's call are Doug Peterson, President and CEO, and Abob Steenbergen, Executive Vice President and Chief Financial Officer. As COVID-19 remains a concern, we are all calling in remotely instead of hosting this call together from our headquarters. If you notice any delays, we thank you for your understanding. We issued a news release with our second quarter 2020 results earlier today. If you need a copy of the release and financial schedules, they can be downloaded at investor.svglobal.com. In today's earnings release and during the conference call, we're providing adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the corporation's operating performance between periods and to view the corporation's business from the same perspective as management's. The earnings release contains exhibits that reconcile the difference between the non-GAAP measures and the comparable financial measures calculated in accordance with U.S. GAAP. This call, especially the discussion of our outlook and associated scenarios, contains statements about expected future events that are forward-looking and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from expectations can be found in our filings with the SEC and on our website. Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates, and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our Form 10-Ks, 10-Qs, and other periodic reports filed with the U.S. Securities and Exchange Commission. I would also like to call your attention to a European regulation. Any investor who has or expects to obtain ownership of 5% or more of S&P Global should give me a call to better understand the impact of this legislation on the investor and potentially the company. We're aware that we do have some media representatives with us on the call. However, this call is intended for investors, and we would ask that questions for the media be directed to Dave Guarino at 212-438-1471. At this time, I would like to turn the call over to Doug Peterson. Doug?

Thank you, Chip. Good morning, and welcome to today's earnings call. I'm going to begin by talking about our second quarter financial highlights, but I want to take a moment to express my gratitude for people at S&P Global for their dedication and commitment in these extremely challenging times. I'm very proud of our teams and their resilience. As we enter the second half of a year that none of us could have predicted, SMB Global and our people remain focused on supporting each other, our customers, and our communities through this ongoing pandemic. We're still largely all working from home. We've developed plans to return to the office in a way that best suits our business and our employees when conditions permit. Because we're fortunate enough to be able to work remotely and continue to deliver the highest value to our customers, we'll only move forward with these plans when we're comfortable and confident in our ability to support all of our employees and clients in a safe environment. More to come on how we were doing this. Now let me begin with our second quarter financial highlights. A surge in liquidity-driven bond issuance resulted in exceptional second quarter results. Not only was the performance of the ratings business strong, All four divisions delivered revenue and adjusted operating profit growth. During our first quarter earnings call, we explained the expense controls we were putting in place to prudently manage through the pandemic. These efforts resulted in a 3% decline in total adjusted expenses during the second quarter and demonstrate the company's ability to reduce costs in a difficult environment. The combination of revenue growth, cost reductions, and the reduction of shares outstanding resulted in adjusted diluted EPS growth of 40%. I'd also like to share some additional highlights from the second quarter. Most importantly, the company continued to successfully operate despite this COVID-19 pandemic. We completed the $100 million productivity program that we initiated at Investor Day in May of 2018 and achieved a run rate of $120 million in savings. Abel will provide more details on that during his remarks, as well as review our increased 2020 guidance. We also continued our investment growth initiatives and launched several new products. I'll share information on these in a moment. And we introduced a new internal initiative. Over the next few months, we will reimagine and design the future of our workplace, focusing on technology to transform how we serve our customers, where we work, and how we work. During these unprecedented times, our goal first and foremost is to support our people and our communities. To help our employees, we have increased benefits and introduced flexible work schedules to help them juggle hectic home lives and work. We've also introduced programs to elevate employees' understanding of racial injustice. Our efforts for diversity extend to our supply chain and business partners, where we strive to partner with minority, women, veteran, and LGBTQ-owned businesses. We do not tolerate any discrimination at SAP Global and are taking the time to listen and learn from each other and ensure that we are part of the solution and are advocates of change. In April, we added a question to our NPS survey asking our customers how we were supporting them during the COVID-19 crisis. Our customers have expressed overwhelmingly positive feedback, acknowledging the increased frequency and availability of our research and insights related to COVID-19 via weekly calls, webinars, and robust online content. Similarly, visitors across all our public websites have expressed a strong appetite for insights and research during the first half of the year. We have reached record levels of website visitors, time spent on our sites, and content consumed in our thought leadership pieces webinars, and virtual events. In line with our commitment to give back and support our communities, the company was also able to make an additional $6 million contribution to the S&P Global Foundation in Q2. In 2020, the foundation is scheduled to make at least $11 million in contributions to support organizations in line with COVID-19 relief, racial equity and social justice, economic inclusion, environmental sustainability, gender equality, and other organizations supporting our communities. Our foundation grants during the COVID-19 pandemic have been used to help organizations connect half a million people to local nutritious food distribution in the United States, distribute PPE kits to vulnerable families in many locations in Brazil, and to feed one million people hot meals across parts of India. To recap the financial results for the second quarter, revenue increased 14% to $1.9 billion. Our adjusted operating profit increased 31%, and our adjusted operating profit margin increased 740 basis points to 58.7%. As you know, we measure and track adjusted operating profit margin on a trailing four-quarter basis, which increased 410 basis points to 53.6%. In addition, shares outstanding declined 2% over the past year, contributing to the 40% increase in adjusted diluted EPS. One of the strengths of S&P Global is the resilience of our business model. In 2019, over 70% of our revenue came from either subscriptions from the non-transaction portion of our ratings business or from asset-linked fees, primarily in indices. In addition, much of the transaction-based revenue and ratings is driven by the refinancing of debt as it reaches maturity on a known and predictable schedule. Another strength of our company is the wide range of sectors that we serve. In addition to financial institutions, we serve numerous industries, including utilities, technology, integrated oil and gas, as well as governments. And because of this diversity of revenue, no one industry and certainly no one customer represents a majority of our business. In fact, non-financial corporates and industrial categories represent almost 60% of our revenue. Each quarter, we highlight a few key drivers to our business and important projects underway. This quarter, let's start with the ratings issuance trends. During the second quarter, global bond issuance increased 36%. If we also include bank loan ratings volume, total global issuance increased 31%. The US led the way with quarterly records for both investment grade and high yield issuance. Companies poured into the market to enhance their cash positions. While it's not unusual for large banks to tap the bond market several times during the quarter, it's unusual for corporates to do so. However, between the third week of March and the end of June, There were over 50 corporations that came to the market with multiple bond offerings. What was also interesting was the way that companies approached issuance. Some came straight to the market, some tapped their revolvers, and then several weeks later turned out their debt with new issuance and repaid their revolvers, as you see on the next slide. And finally, some companies that were frequent issuers of commercial paper turned the bond market with new debt as the commercial paper market experienced a period of rate volatility. Turning to the data, in the U.S., bond issuance in aggregate increased 57%, as investment grade increased 135%, high yield increased 115%, public finance increased 9%, and structured finance decreased 56%, with large declines in every asset class. European bond issuance increased 36%, as investment grade increased 63%, high yield decreased 28%, and structured finance decreased 21% due to declines across every asset class except ABS. In Asia, bond issuance increased 16% overall, and ratings issued three new domestic ratings in China. As China recovers from the pandemic, lockdowns are ending and we have reopened our Chinese offices. While the pipeline of prospects continues to grow, meeting clients in person should help to advance the business. As mentioned, here you can see how corporations drew down these revolvers in March and April. And on the right-hand side of this slide, you see the dramatic increase of issuers during the quarter with over 500 compared to 300 last year. One of the first questions investors ask whenever there is a strong quarter of issuance is, how much of this was pull forward? Because of the unprecedented level of issuance, we thought we'd try to address this with some data. On this slide, we analyze upcoming maturity data from different points in time. As you can see, the upcoming maturities in the second half of this year and the next few years have not changed much in the past six months. So despite the flurry of issuance in the last few months, there doesn't appear to have been much pull forward activity. Next, we look at the total amount of global debt outstanding. As you can see, it has been growing every year by an average of $884 billion, or approximately 5%. In the first six months of this year, the amount of global debt outstanding increased by $781 billion, clearly a significant increase. So we conclude that the level of pull-forward activity is not unusual. Instead, we have a surge in new issuance that has created an uptick in the growth of total global corporate debt. Bank loan rating activity is not captured in issuance data. However, since it's an important element of ratings revenue, we like to disclose bank loan rating revenue each quarter. In the second quarter, it decreased 47% from the prior period to $45 million. High-yield bonds were clearly the preferred option for issuers this quarter. ESG is a major emphasis across the company, and we continue to strengthen our footprint. In ratings, 15 ESG evaluations were completed or in progress during the quarter and 80 year to date. We also completed three green evaluations during the quarter with 79 to date. In addition, we launched the S&P Global ESG scores based on the SAM data that we acquired early this year. True cost climate data has been integrated into portfolio analytics, enabling investment professionals to analyze ESG factors for an enhanced portfolio view. The True Cost Metals in Mining Climate Competitiveness dataset was launched on our data marketplace. The dataset covers 1,400 mining assets owned by more than 500 public and private companies located in 78 countries. In indices, ESG ETF AUM continues to climb, reaching $6.6 billion at the end of June. And Platts launched three new daily spot price assessments for the U.S., post-consumer pet bottle bales adding transparency to the trade of recycled material. In addition, Platts Analytic Scenario Planning Service, SPS, and World Energy Demand have been gaining traction with annual contract value growth of over 70% at the end of the second quarter compared to a year ago. SPS, underpinned by the market-leading World Energy Demand, offers clients a view of the medium and long-term trajectories of energy and commodity markets, as well as insights into the interconnected nature of market fundamentals, technology, policy, and consumer preferences. This comprehensive service gives access to the data and tools needed to respond to the risks and opportunities presented in the energy transition. PLAS has been operating in the energy transition space for over 15 years, with valuable analytics in the form of price assessments, news, and analytical services across a variety of environmental markets and related commodities. We think that the launch of S&P Global ESG scores is a significant milestone for the company. These scores are based on 20 years of SAM data. This data set we provide includes sustainability scores that have an impact on a company's business value drivers, including growth, profitability, capital efficiency, and risk exposure for more than 7,000 companies. A qualitative screen evaluates a company's response to critical sustainability issues that may arise during the year and full data history dating back to 2013. The scores are available as data feeds and can be found on the data marketplace that we described to you last quarter. In fact, these scores have quickly become the most sought-after data sets on our data marketplace. A sample of the data for an industrial company is depicted on the right side of the slide with the total ESG score in the top row and the scoring components underneath. I'm particularly pleased with all the distractions that our employees face during this pandemic. They continue to innovate and launch new products. Let me highlight just a few of these. Machine-readable filings by Market Intelligence is a new data offering that applies cleansing and parsing techniques to generate machine-readable text extracted from SEC regulatory filings. This might be of interest to many of you. Our indices business has partnered with IHS Markit to create multi-asset class indices. We'll use the S&P 500 and IHS Markit's IBOX bond indices and CDX and ITRAC credit indices to construct new multi-asset benchmarks. In the first phase of the collaboration, the companies are working to design a liquid multi-asset allocation strategy. As we continue to ramp up our Chinese operations, we launched the first Mandarin language release of Ratings 360. As part of the broader efforts of contributing to the digitalization of commodity markets, Platts has introduced APIs for two important data sets, the World Refinery Database and Platts Oil Inventory. Platts worked with selected clients in the development phase of these APIs. These new APIs are the beginning of a multi-year effort to provide fundamental commodity insights and data from our highly valued analytical services to direct machine consumption in customer back-end systems and quantitative model. Lastly, I want to share that Kensho is now making its entity linking capability available to our customers. It's called Kensho Link. And it's a machine learning model which minimizes the time it takes to onboard new data sets and organize entity data. We've even seen clients use Kensalink to manage data in their CRM system. There's just one more new product launch I want to feature. It's called RiskAge. Small and medium-sized enterprises account for approximately 90% of global businesses. Financials for many of these companies, however, are difficult to find. RiskAge offers credit information on more than 50 million global companies. With its significant SME coverage, risk gauge reports allow the streamlining of counterparty credit risk assessment by helping uncover risks and deteriorations in payment behavior. Clients can now access a detailed company credit risk profile that contains relative performance benchmarks and insightful commentary. In addition to company profiles, a risk gauge score, and probability of default commentary, we offer PaySense, which allows identification of an entity's trade payment behavior and potential liquidity risk based on our statistical model, and MaxLimit, a framework that recommends maximum exposure limits by incorporating multiple risk dimensions, user risk appetite, and macroeconomic elements. Each year, S&P Dow Jones Indices releases the annual survey of assets. This chart depicts the highlights of that survey for 2018. Asset levels in actively managed funds that benchmark against our indices increased 21% to $9.3 trillion. Assets in passive funds invested in products indexed to our indices increased 33% to $6.4 trillion. Numerous indices underlie the $6.4 trillion, including the S&P 500, the largest with $4.6 trillion in assets. Other categories include smart beta and fixed income, which both increased, and ESG, which increased 37% to $11 billion in 2019. We anticipate that new ESG products launched by UBS, DWS, State Street, and BlackRock will create further growth in this category. Next, I would like to provide additional information around our outlook for 2020. Let me start with our issuance outlook. The correlation between GDP and issuance has been upended by the surge in liquidity-driven issuance after central banks initiated bond purchase programs to support market liquidity. This windfall in issuance has resulted in our expectation for a 5% increase in global issuance, excluding international public finance, versus a decline of 10% in our previous forecasts. The fastest growing area is non-financial corporates, which we expect to increase 20%. The weakest area is structured finance, which we expect to contract 30%. Early this month, our economists updated their global GDP forecast. Due to a deeper downturn than initially anticipated in emerging markets, notably in India, the forecast now calls for a 3.8% contraction to global GDP in 2020. The effects of extended lockdowns on employment and consumer confidence also means that recovery will take longer than previously expected into 2021 to 2023 with a permanent loss in output. We continue to maintain a close watch on the macroeconomic and other factors that impact our business. We're in unprecedented times, and there's a great deal of uncertainty in our ability to predict how geopolitical and macroeconomic forces might react and behave in times with very little historic precedence. We continue to monitor the developments in global political and economic scenarios and hope to gain better visibility and clarity into their impact on the global business climate and our company as we get further into the year. I'll now turn the call over to Evald Steenbergen, who's going to provide additional insights into our financial performance and outlook. Evald?