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spk00: Good morning and welcome to S&P Global's third 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, so you may begin.
spk03: Great, thank you. And thank you for joining us today for S&P Global's third quarter earnings call. Presenting on today's call are Doug Peterson, President and CEO, and Avon Steenbergen, Executive Vice President and Chief Financial Officer. We issued a news release with our third quarter 2020 results earlier today, If you need a copy of the release and financial schedules, they can be downloaded at investor.spglobal.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 review 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, 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 are 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 from the media be directed to Dave Corino at 212-438-1471. At this time, I would like to turn the call over to Doug Peterson. Doug?
spk01: Thank you, Chip. Good morning, and welcome to today's earnings call. Before I talk about our third quarter financial highlights, I want to thank our people at S&P Global for their dedication and commitment in these extremely unusual and challenging times. Our people remain focused on supporting each other, our customers, and our communities through this ongoing pandemic. And I've been impressed at how our people have been providing relevant time to research to help our clients navigate the uncertainty of the pandemic. We're fortunate that the vast majority of our employees can work remotely and continue to deliver the highest value to our customers. Now, let me begin with our third quarter financial highlights. S&P Global continues to perform well in the current environment, and all four businesses delivered revenue growth. Ratings once again delivered the strongest revenue growth, in part due to a 94% increase in U.S. high-yield issuance. During our first quarter earnings call, we explained the expense controls we're putting in place to manage through the pandemic. Based on the strong performance we've delivered year-to-date, we've begun to unwind some of these controls. Most importantly, we've begun hiring again in open positions. In addition, our incentive accruals were increased substantially during the third quarter to reflect this strong performance. And we're pleased to increase our full year 2020 guidance by 50 to 55 cents, which Aval will discuss in a moment. I'd also like to share some additional highlights from the third quarter. Our investment and growth initiative continues to result in new product launches, additional data sets, and new technology enhancements. We've made great progress across all four divisions in ESG as our recently launched products are gaining traction in the market. We also continue to be committed to running our operations in the most cost-effective manner. And we're introducing a new $120 million productivity program today, which Aval will discuss in a moment. We recently refinanced a portion of our outstanding debt, extending maturities at lower rates. And we continue to design and reimagine the workplace of the future, by incorporating technology solutions to transform how we serve our customers, where we work, and how we work. The project is still underway, and we hope to share the outcome with you on the fourth quarter earnings call. To recap the financial results for the third quarter, revenue increased 9% to $1.8 billion. Our adjusted operating profit increased 11%, and our adjusted operating profit margin increased 100 basis points to 52.9%. and this was despite a catch-up to our incentive compensation accrual of over $50 million. As you know, we measure and track adjusted operating profit margin on a trailing four-quarter basis, which increased 370 basis points to 53.8%. In addition, shares outstanding decreased 2% over the past year, contributing to the 16% increase in adjusted diluted EPS. Each quarter, we highlight a few key drivers to our business and important projects underway. This quarter, let's start with ratings issuance trends. During the third quarter, global bond issuance increased 7%. If we also include bank loan ratings volume, total global issuance increased 4%. Here are some key points regarding third quarter issuance. First, the further we get from the March credit sell-off, the more investors have been purchasing weaker credits. Second, Yields on U.S. non-financial corporate debt are near all-time lows, bringing issuers into the market. In fact, there were two large investment-grade corporates that issued debt in September to replace debt they just issued in March. And third, despite the strong U.S. issuance that has occurred in the last two quarters, we've identified more than 60 issuers that have issued at least $5 billion between 2017 and 2019 that have not tapped the bond market this year. They're on the what we call our what are you waiting for list. Turning to the data, in the U.S., bond issuance in aggregate increased 9%, as investment grade decreased 5%, high yield increased 94%, public finance increased 25%, reaching the highest third quarter issuance in the last 10 years, and structured finance decreased 12%, with large reductions in CLOs and CMBS partially offset by a gain in ABS. European bond issuance decreased 8% as investment grade decreased 7%, high yield increased 3%, and structured finance decreased 17% due to reductions in every asset class except RMBS, which posted a large increase. In Asia, bond issuance increased 19% overall. During the quarter, ratings completed five domestic ratings in China, bringing the total to date to 18%. In addition, the PBOC, CSRC, and SAFE jointly released a draft policy to attract international investors to the domestic bond market on September 2nd, which indicates another round of opening of China's capital markets. The draft policy includes suggested actions to simplify the market access process, integrate access to the interbank bond market and exchange bond market, and reduce foreign exchange controls. There are two major bond markets in China. One is the interbank market, where we received a license to operate from the PBOC in 2019. The other is the exchange market, which is regulated by the China Securities Regulatory Commission. Just last week, we successfully filed a registration with the CSRC to rate products on China's exchange bond market. This means we have the widest remit of any wholly foreign-owned credit rating agency in the market, and one that is on par with the domestic players. Bank loan rating activity is not captured in the issuance data, Since an important element of ratings revenue, we like to disclose this bank loan rating revenue each quarter. In the third quarter, it decreased 28% from the prior period to $58 million. High-yield bonds were clearly the preferred option for issuers again this quarter. On this slide, we look at the total amount of global debt outstanding. As you can see, it's been growing every year by an average of $884 billion, or approximately 5%. In the first nine months of this year, the amount of global debt outstanding increased by over $1.2 billion, clearly a significant increase. This is a slide that we have shared with you in the past. What is noticeably different is that the duration of newly issued U.S. investment-grade and high-yield bonds have diverged in 2020, with investment-grade duration extending out to almost 13 years and high-yield contracting to close to seven years. While many companies would like to extend maturities to take advantage of historically low rates, only the higher quality credits are able to do so. As the total amount of U.S. investment-grade debt outstanding is increased significantly in 2020, most of that increase has come from longer-dated maturities, while the volume of debt outstanding with maturities of one to five years is similar to what it was in early 2020. Next, we analyze upcoming maturity data from different points in time. As you can see, approximately 9% of 2021 maturities have been refinanced year-to-date, While this is global data, if we look at the U.S. data, we find that in the full year of 2019, maturities coming due the following year in 2020 were reduced by 15%. While in the first nine months of 2020, maturities coming due in the following year in 2021 were reduced by 18%. So part of the flurry of issuance in the last two quarters has included a slight increase in the pull forward of near-term debt. The big unknown is how much delayed pull forward exists. An example would be a company that issued new debt to increase liquidity and sitting on the cash. There may be a point when a bond maturity comes due in the next year or two and they use this cash to pay it down. However, the real question is, will they still have the cash on hand? Will they have burned through the cash during the pandemic? That will depend on the individual company and the impact of the pandemic on that company. So we conclude there has been a slight increase in pull-forward activity of 2021 maturities. More pronounced is a surge in new issuance that has created an uptick in the growth of total global corporate debt. Turning to our investments and growth initiatives, let me start with ESG. We've been providing the market with data and insights on sustainability for over 20 years. But over the past few years, and now during the pandemic, we see increasing and accelerating demand for clear, consistent, and comprehensive ESG data and solutions. And we have an ESG strategy based off of leading products across all four divisions. In ratings, in the second quarter, 15 ESG evaluations were completed or in progress. In the third quarter, it was up to 61. In the second quarter, we completed three green evaluations, and in the third quarter, we completed 13. In market intelligence, we recently launched the S&P Global ESG scores and have closed seven deals to date. In indices, we had $6.1 billion of ESG ETF AUM at the end of last year. As of the end of the third quarter, it was up over 50% to $9.5 billion. In addition, let me highlight a few other new products. Last quarter, we shared with you that our true cost climate data had been integrated into our portfolio analytics product. We have since integrated the full suite of true cost data into the market intelligence platform. We have now successfully made all of our true cost data available through all of our distribution avenues, which include the market intelligence platform, express feed, and the cloud. If you'd like to better understand what content is available, it's showcased on the S&P Global Marketplace. Now our clients can combine the true cost data with other S&P Global data for a more integrated customer experience. In building a powerful benchmark, establishing a network effect is critical. To that end, we had two new launches of products based on the S&P 500 ESG index, a State Street ETF, and CBOA options. Together, the S&P 500 ESG ETFs, futures, and options, and insurance products all reinforce each other to make the S&P 500 ESG index more relevant to the markets. Lixor launched four new climate ETFs based on S&P Dow Jones Paris-aligned climate indices. The ETFs will integrate the greenhouse gas emissions of the entire value chain of any given company, while also taking the physical risk to business activity from extreme climate events into account. Platts launched the first European price assessment for sustainable aviation fuel. Sustainable aviation fuel is produced from used cooking oil and can be blended with conventional fossil-based aviation fuel. The energy transition consolidated product that was launched on the PLATS platform is unique in that it spans across multiple commodities. PLATS has been covering energy transition topics for over 15 years. Users who once had to navigate through numerous platforms and market reports can now find this information in a single location. We've had an incredible year of innovation and product launches. Let me highlight a few more that occurred this quarter. Market Intelligence launched ProSpread. This is a remarkable product that many of you might find valuable as it eliminates the time-consuming process of manual input of financial statement data into your workspace. ProSpread is a workflow tool that automates the extraction and spreading of financial data from PDF, JPEG, and other image files. Optical character recognition, natural language processing, and machine learning are combined to drive extraction from even poor quality PDFs or image files in nine languages. Continuous learning ensures manual adjustments are applied seamlessly to future filings. Next, we've continued our expansion in the coverage of SMEs. This quarter we added data on 10 million European private company profiles with standardized financials to the market intelligence platforms. On our first quarter call, we featured the launch of the S&P Global Marketplace, our new open access platform where clients can browse and gain access to data sets from all four of our divisions, as well as curated third-party data and solutions from Kensho. This quarter reached the milestone of 100 data sets and solutions. We have also completed sales contracts with approximately 50 clients. During the quarter, we completed an enterprise-wide contract with Snowflake. Cloud-based delivery enables customers to simplify their data management and work with multiple large data sets more efficiently. Since Snowflake is cloud agnostic, the data on the S&P Global Marketplace is ready to query and is easily accessible via multiple cloud platforms. We released a beta version of the China Credit Analytics Platform. This is an integrated desktop solution that generates credit insights on more than 30 million Chinese private companies using differentiated context and localized analytics aligned with S&P Global Standard. The platform is available through a dual-language user interface that supports both Chinese and English. The CME Group launched a cash-settled PLATS South American soybean futures contract, which provides a risk management tool for market participants looking to hedge. The CME Group also launched a new long-grain white rice futures contract. As you know from earlier this year, we acquired Live Rice Index, One of the synergies of acquiring small price reporting agencies is that we are already IOSCO compliant. This helps us with the CME Group's decision to list this new futures contract. And finally, we're piloting a microgrid called DSTRO at the Port of Rotterdam for renewable energy. DSTRO is a marketplace that connects renewable energy and storage with energy users. It utilizes artificial intelligence and blockchain technology to solve the problem of intermittent renewable energy. It's great to be able to showcase how PLATS is bringing its core capabilities in pricing and powering energy markets to the unique landscape being created by the energy transition. Next, I would like to provide additional information as we plan for 2021. Let me start with the issuance outlook from our ratings research group. The initial 2020 forecast was for an increase of 5%, excluding international public finance. It now calls for an increase of 13%. So after issuance growth of 15% in 2019 and a forecast of 13% in 2020, our ratings research group anticipates that issuance will decrease 3% in 2021. While the forecast calls for a 5% gain in financials, non-financials, structured, and U.S. municipal issuance are expected to decrease 9%, 6%, and 1%, respectively. Please note that this is an issuance forecast, not a revenue forecast. As you see here, our economists forecast global GDP to resume growth in 2021 after a decline in 2020. While the correlation between GDP and issuance was severed by the pandemic, we expect a long-term correlation to remain intact. Our economists acknowledge a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available. which could be around mid-2021. The forecast anticipates unevenness in recovery both by country and by industry. As you've seen, we performed well during the pandemic and see business conditions in 2021 that should favor continued relevance of what we do across every business. But as I wrap up my remarks, I want to remind investors that despite the strong performance we've been delivering in the midst of the pandemic, we continue to monitor the macroeconomic and geopolitical landscapes for risk and contingencies that could impact markets, our clients, and possibly our company. These include the ongoing impact of the pandemic on business activity and the timing of approval and delivery of a vaccine, the speed of economic recovery across national and regional economies, the U.S. policy environment after the election, including bilateral and multilateral international relationships, public sector economic support through fiscal stimulus and central bank liquidity and interest rate policies, credit market characteristics, and commodity market supply, demand, and prices. I will now turn the call over to Evald Steenbergen, who is going to provide additional insights into our financial performance and outlook. Evald?
spk02: Thank you, Doug, and good morning to all of you on the call. Let me start with our third quarter financial results. Doug covered the highlights of strong revenue and adjusted earnings per share growth. I will take a moment to cover a few other items. While some of the segments have a difference between reported and organic revenue growth, in aggregate they are the same at 9%. Adjusted total expenses increased 7%. Excluding the acquisitions of Greenwich Associates, 451 Research, and the RobicoSem EFC ratings business, expenses increased 5%. Much of this increase was due to a $54 million catch-up to our incentive compensation accruals based on our strong performance this year. In addition, we contributed $4 million to the S&P Global Foundation and increased our legal-related costs in indices. As a management team, we took precautionary steps early in the pandemic to control expenses. Those actions were mostly no longer in place demonstrated our ability to dramatically reduce expenses when necessary without employee layoffs. Adjusted operating profit margin improved 100 basis points based on strong revenue growth that outpaced higher expenses. The increase in the effective tax rate was primarily due to the timing of discrete tax adjustments. While the effective tax rate fluctuates from quarter to quarter, Due to the timing of discrete tax items, our full-year tax rate guidance has been lowered. During the quarter, changes in foreign exchange rates had a positive impact on adjusted EPS of 4 cents. The only meaningful impacts were in ratings and market intelligence, where adjusted operating profit was positively impacted by $10 and $5 million, respectively. The non-GAAP adjustments this quarter collectively generated a net pre-tax loss of $311 million. They included $279 million associated with premiums and fees paid to tender certain notes outstanding, $8 million in gains on dispositions, primarily from an office building in New Jersey and an IR web hosting business that was part of the SNL acquisition, $5 million associated with a technology-related impairment, $2 million for Kensho retention-related expenses, and $32 million in deal-related amortization. This quarter, all four divisions delivered increased revenue, and three of the four delivered increased adjusted operating profits. On a trailing four-quarter basis, adjusted operating profit margin increased significantly in ratings and plans, while market intelligence and indices had small decreases. As we have discussed, market intelligence investment spending remains elevated. I'll provide color on the individual business results in a moment. We recently took advantage of the low interest rate environment and refinanced a portion of our outstanding higher interest rate bonds with new lower interest rate bonds. The net results were an increase of about $2 million in bonds outstanding, a decrease in annual bond interest expense of $26 million, a reduction in our weighted average cost of debt to 3.1%, and an extension of our weighted average tenor to more than 18 years. In fact, our 40-year bond had the second lowest coupon ever for a 40-year bond in the U.S., second only to Alphabet. And our 10-year bond carries the same coupon as Apple's. Now turning to the balance sheet, our balance sheet has low leverage and ample liquidity. We have cash and cash equivalents of $3.2 billion, debt of $4.1 billion after our recent refinancing, an undrawn revolver capacity of $1.2 billion, and no commercial paper outstanding. Our debt ratios remain unchanged despite the recent bombed refinancing due to EBITDA growth. Free cash flow, excluding certain items, reached $2.2 billion in the first nine months of the year, an increase of $593 million, or 36%, over the prior year period. We completed $11 million of share repurchases under the Share Repurchase Program initiated in February 2020. In light of our strong liquidity and increased cash flow, we continue to monitor the status of our Share Repurchase Program in consultation with our Board of Directors. Due to near-term market uncertainty, including the pending U.S. election, we're not resuming share repurchases at this point in time. However, we maintain our long-term target of returning at least 75% of free cash flow to shareholders, and we will continue to monitor the markets for the right time to resume share repurchases. Now let's turn to the division results. Ratings revenue increased 13%, and excluding the acquisition of the ESG ratings business from Robico SEM and Crystal's acquisition of Greenwich Associates, organic revenue increased 12%. This revenue growth was driven by the increase in issuance Doug already discussed. Adjusted expenses increased 9%. Excluding changes in foreign exchange rates, adjusted expenses increased 11%. due primarily to increased incentive compensation, merit increases, and additional headcount, primarily from the acquisition of the ESG ratings business from Robico's M and Crystal's acquisition of Greenwich Associates. In fact, over one-third of the expense increase was related to these acquisitions. This resulted in a 16% increase in adjusted segment operating profit, and a 130 basis point increase in adjusted segment operating profit margin. On the trading four-quarter basis, adjusted segment operating profit margin increased 600 basis points to 63.4%. Non-transaction revenue increased 4%. Transaction revenue increased 22% due to very strong high-yield issuance in the U.S., gains in global sovereign debt, and U.S. public finance partially offset by weakness in bank loan ratings. This slide depicts ratings revenue by end markets. The largest contributor to the increase in ratings revenue was the 16% increase in corporates. In addition, financial services revenue increased 6%, structured finance increased 4%, government increased 35%, and the crystal and other category increased 2%. It is not often that we highlight sovereign ratings revenue, but there was considerable growth this quarter as a number of countries, including Ecuador, the Dominican Republic, Croatia, and Jordan, tapped the debt markets. On the right side of the slide, you can see the changes in revenue within structured products. The largest changes were in RMBS and CMBS. Turning to SAP Dow Jones indices, the segment delivered 1% revenue growth, due primarily to gains in AUM linked to our indices and data subscriptions, partly offset by reduced exchange-rated derivative activity. In the third quarter, we reported a $12 million increase in adjusted expenses due primarily to increased legal-related costs, higher compensation from increased headcount and incentives, as well as higher professional fees. About $8 million of the 12 is non-recurring. a 7% decrease in adjusted segment operating profit, and an adjusted segment operating profit margin of 65.2%, a decrease of 510 basis points. On the trailing four-quarter basis, the adjusted segment operating profit margin decreased 40 basis points to 69%. Revenue growth was subdued this quarter. Asset-linked fees increased 2% with gains in ETFs and mutual funds, partially offset by decreased over-the-counter derivative activity. Exchange-traded derivative revenue decreased 7% on reduced trading volumes. Data and custom subscriptions increased 3% due to a modest increase in end-of-day and real-time ACV, partially offset by the timing of contract renewals. For our indices division, over the past year, ETF net inflows were $84 billion and market appreciation was $92 billion. This resulted in quarter-ending ETF AUM of $1.7 trillion, which is 11% higher compared to one year ago. Our ETF revenue was based on average AUM, which increased 12% year-over-year. Sequentially, versus the second quarter of 2020, ETF net inflows associated with our indices totaled $5 billion, while market appreciation totaled $113 billion. Activity at the CBOE decreased in the third quarter, with S&P 500 index options activity decreasing 22% and fixed futures and options activity decreasing 38%. This was in contrast to increased activity at the CME, where the equity complex volume increased 38%. The majority of the gain at the CME was due to the successful launch of the micro e-mini S&P 500 futures. Excluding this product, the volumes at the CME equity complex increased 4%. Market intelligence delivered reported revenue growth of 9% and organic growth of 7%. While the COVID-19 pandemic continues to lengthen sales cycles, usage of our key platforms increased 11% year over year. Adjusted expenses increased 6%, due primarily to acquisitions, compensation, and royalties. In addition, investment spending continues and is beginning to pay off with some of the new product launches that Doug discussed. Adjusted segment operating profit increased to 14%, and the adjusted segment operating profit margin increased 160 basis points to 33.8%. On a trailing four-quarter basis, adjusted segment operating profit margin decreased 10 basis points to 32.9%. Looking across the market intelligence components, desktop revenue grew 3%, excluding acquisitions and divestments. Data management solutions revenue grew 12%, and credit risk solutions revenue grew 11%. And now turning to PLATS, reported revenue increased 5%, with core subscriptions increasing 7%, and global trading services decreasing 6%. GTS revenue decreased mainly due to lower petroleum and gas volumes at ICE and CME. While the recession has reduced oil prices, putting cost pressure on many of our customers, bankruptcy filings are similar to recent years, with 38 U.S. exploration and production company filings year-to-date. This compares to 42 in full year 2019 and 28 in 2018. Despite this pressure on the industry, we have maintained overall renewal rates in the mid-90s. Adjusted expenses decreased 2% due to the diversification of RIC data and management actions. Adjusted segment operating profit margin increased 280 basis points to 55.7%. The trading four-quarter adjusted segment operating profit margin increased 300 basis points to 54.9%. The fastest-growing markets during the quarter
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