S&P Global Inc.

Welcome to S&P Global's first quarter 2021 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 S&P Global's first quarter 2021 earnest call. Presenting on today's call are Doug Peterson, President and CEO, and Ava Steenbergen, Executive Vice President and Chief Financial Officer. We issued a news release with our results earlier today. If you need a copy of the release and financial schedules, They can be downloaded at investor.sdglobal.com. 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. In addition, as we announced late last year, S&P Global and IHS Markit entered into a definitive merger agreement. In March, shareholders of both companies overwhelmingly voted in favor of the merger. The merger is pending regulatory approval and you expect to close in the second half of 2021. This call will touch on the merger but does not constitute an offer to sell or buy or the solicitation of any offer to buy or sell any securities. Nor shall there be any sale of securities in any jurisdiction in which this offer, solicitation or sale would be unlawful prior to registration or qualification under the securities law of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933. In connection with the proposed transaction, S&P Global and IHS Markit have filed a registration statement on Form S-4 with the SEC, which includes a joint proxy statement and a prospectus. S&P Global and IHS Markit have filed other documents regarding the proposed transaction with the SEC. Investors and security holders of S&P Global or IHS market stock are urged to carefully read the entire registration statement and joint proxy statement prospectus, which is available on our website and sec.gov. 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, 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. I would also like to call your attention to a European regulation that 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 delivered to Dave Guarino at 201-755-5334. At this time... I would like to turn the call over to Doug Peterson. Doug? Thank you, Chip.

Welcome to today's earnings call. Since the beginning of the pandemic, the essential nature of our products has demonstrated the resilience of our business model. As the economy improves, our colleagues continue to launch innovative new products to help our customers with the ratings, benchmarks, data, and insights they need to navigate the recovery. We continue to prioritize the safety of our colleagues, And I want to thank them again for their dedication and commitment in these extremely unusual and challenging times. Now, let me begin with our first quarter financial highlights. S&P Global is off to a great start in 2021 as we delivered exceptional first quarter results. Revenue increased 13% and all four businesses delivered revenue growth and adjusted operating profit margin improvements. ratings once again delivered the strongest revenue growth from a surge in leveraged loans, high-yield issuance, and structured finance. Adjusted expense growth was limited to less than 2% thanks to our ongoing productivity program and lower T&E. It's very rare when we increase guidance on our first quarter earnings call. However, we expect additional growth in ratings from strong issuance of high-yield and structured finance and in indices from the higher level of AUM and equities. Therefore, we're raising our annual guidance for 2021. Ava will provide details in a moment. I would also like to share some additional highlights from the first quarter. We issued a report highlighting the performance of our ratings in 2020, which demonstrated that our ratings showed their value as indicators of creditworthiness and relative default risk. Our investment and growth initiatives continues to result in new product launches, particularly in ESG, Platts Benchmarks, Kensho, and our Marketplace. Our China ratings business is gaining momentum, and we just entered into the first sustainability-linked banking facility in the U.S. information services space. We'll provide further details on all these accomplishments on today's call. The most important initiative of the year will be our upcoming merger with IHS Market. This is an incredibly transformative opportunity for our company and our customers. The combination of S&P Global and IHS Market creates a very strong company. We will have increased scale and world-class products across numerous core markets with a track record of deploying cutting-edge technology to accelerate our Powering the Markets of the Future strategy. Together, we can offer our customers differentiated data, analytics, research, and benchmarks important to the workflows of many of the world's leading companies. I'm incredibly proud of the team we've built at S&P Global, and I look forward to welcoming the talented IHS market employees to our company. There are three parallel paths that are underway to close the transaction and prepare for the combination. Our progress is on track, and we continue to expect closing the second half of 2021. The first was shareholder approval. The recent shareholder vote says both companies was overwhelmingly passed with 99% of the votes in favor of the merger. The second is regulatory approval. We're working toward regulatory approval in the countries listed. The third is pre-closed integration planning. The integration teams continue to prepare for day one readiness. We're working toward regulatory approval in the countries listed. The third is pre-closed integration planning. Integration teams continue to prepare for day one readiness. These teams are developing plans that focus on organization integration, real estate consolidation, technology scale and efficiency, cross-sell, and new product development. And the value capture work stream is preparing to pursue and track synergies. We've been doing a lot of work to make sure that when our companies are united, we have the culture, purpose, and values in place to position us for success. To recap the financial results for the first quarter, revenue increased 13% to $2 billion. Our adjusted operating profit increased 23%, and our adjusted operating profit margin increased 450 basis points to 57.6%. As you know, we measure and track adjusted operating profit margin on a trailing four-quarter basis, which increased 300 basis points to 54.5%. In addition, diluted shares outstanding decreased 1% over the past year, contributing to a 24% increase in adjusted diluted EPS. Each quarter, we highlight a few key drivers to our business and important projects underway. This quarter, let me start with ratings bond issuance trends. During the first quarter, global bond issuance increased 9%. Turning to the data, in the U.S., bond issuance in aggregate increased 4%, as investment grade decreased 17%, high yield increased 111%, public finance increased 9%, and structured finance increased 17%, mostly due to a 63% increase in CLOs. European bond issuance increased 23%, as investment grade increased 22%, high yield increased 53%, and structured finance increased 6%, mostly due to more than a tripling of CLO volume. In Asia, bond issuance increased 11% overall. The data on this slide only debates bond issuance. When we include bank loan volume, overall global issuance increased 13%. Since bank loan ratings are an important element of ratings revenue, and they're not included in our bond issuance slide, we like to disclose this bank loan rating revenue each quarter. In the first quarter, bank loan rating revenues surged 70% to $148 million. In fact, first quarter revenue from leveraged loans is more than half the leveraged loan revenue in all of 2020. The next two slides look at the combined high yield issuance and leveraged loan volume for the U.S. and Europe. Data is not readily available for the rest of the world. This slide shows that over the last three years, the combination of global leverage loan and high-yield issuance has averaged $244 billion per quarter. The first quarter of 2021 reached a quarterly record of $465 billion, nearly twice the quarterly average for the past three years. This slide depicts the combination of high-yield issuance and leverage loan policy in terms of the use of opportunities of bond raise. The category with the largest increase was refinancing. some of which could include pull forward, M&A and LBO activity, and buybacks and dividends also increased. The CLO market had the busiest quarter on record in both the U.S. and Europe, with twice the volume of new issuances the first quarter of last year. We believe that investor demand for floating rate instruments, their search for yield, and the relatively strong CLO performance during 2020 pandemic have contributed to increased CLO issuance this year. While it's exciting to see increases in issuance, what's always more important to us is how our ratings perform. 2020 was a tumultuous year, yet our ratings performed as designed. In February, S&P Global Ratings issued a report entitled Credit Trends, Review of Ratings Performance Highlights Resilience in 2020. We pulled this chart from the report. you can see that the level of issuer defaults was in line with the bank order of ratings with lower-rated issuers having higher levels of default. You will notice that the graph only includes high-yield issuers. This is because in 2020, not one single issuer that was rated investment-grade by S&P ratings at the beginning of 2020 defaulted. Importantly, amid challenging economic circumstances, our ratings in 2020 showed their value as indicators of creditworthiness and relative default risk. Turning to our investments and growth initiatives, let me start with ESG. We continue to make advances with our ESG franchise across the board. After recording ESG revenue of $65 million in 2020, we're off to a good start in the first quarter with revenue up more than 40% to $21 million. In ratings, in the first quarter, we completed 18 ESG evaluations, six green evaluations, and 53 SAM benchmark engagements. This compares to 40 ESG evaluations, 24 green evaluations, and 76 SAM benchmark engagements completed in all of 2020. We also launched new social and sustainability framework alignment opinions. In market intelligence, our ESG scores have been enhanced. 400 data points have been made available for each company that we score. The additional data points will provide clients with a better understanding of companies' environmental reporting disclosures, biodiversity commitments, CO2 and greenhouse emissions, waste and hazardous disposal, energy consumption, and water usage. For the social dimension, it will now be possible to determine whether companies disclose safety policies, human rights commitments, code of ethics, and whether social reporting disclosures have been independently audited. The new data sets will also provide greater insights on the governance and economic dimensions and help obtain better understanding of companies' codes of conduct and policies addressing anti-crime, corruption and bribery, governance of the board and executive competition, ownership, materiality disclosures, risk and supply chain management, and tax strategy and reporting. Market Intelligence also launched an ESG data solution to support the European Commission's sustainable finance disclosure requirements, enabling market participants to meet these disclosure requirements. In indices, we had $22.9 billion of ESG ETF AUM at the end of the first quarter. This is an increase of more than 400% since the end of the first quarter of last year. Our indices business also launched ESG versions of our S&P Mid-Cap 400 and S&P Small Cap 600 indices. In addition, UBS licensed the S&P 500 ESG Elite Index for a new ETF. and Barclays licensed the S&P Euro USA 50 low-carbon ESG Select Equal Weight Index for use in structured products. PLAS has been very active as well to the assessment of carbon-corrected topography. You may be wondering why we include a copper assessment within the ESG product. It's because this new assessment will help support the need for increased solar, wind, energy storage systems, electric vehicles, and EV charging stations all of which require large amounts of copper. For example, an electric vehicle uses approximately 175 pounds of copper. Platts also launched hydro-treated vegetable oil price assessments. HVO, also known as renewable diesel in America, is a biomass-derived fuel suitable for diesel engines. It is made of non-petroleum renewable resources such as natural fat, vegetable oil, and greases. and can be blended in traditional diesel or used as a substitute. And finally, Platts launched daily assessments for low-carbon aluminum and zero-carbon aluminum, which will complement existing Platts European price offerings for high-grade primary aluminum. These prices are designed to help the market quantify costs and manage risks for the opportunities associated with a growing focus on carbon reduction strategies amid increasing global regulations. On Earth Day last week, S&P Global launched a new ESG brand, Sustainable One, your single source of essential sustainability intelligence. With the wide array of ESG capabilities that we have and the fact that many of our customers are interested in multiple products from different divisions, we have unified our ESG efforts across the company. This includes product development, technology, channel partnerships, distribution, marketing, sales, and client support. We believe that this new brand will help convey S&P Global's commitment and leadership position in ESG. Outside of ESG, let me highlight a few other new product launches and product enhancements. We launched Kensho NERD, short for Name Entity Recognition and Disambiguation. NERD was developed by the company's natural language processing team, which specializes in machine learning research and engineering related to analyzing and understanding human language. This is the first entity extraction system specifically optimized for business-related documents. NERD makes it easier for users to analyze unstructured text, for example, investigating suppliers and competitors mentioned in company filings, and enables them to drill down instantaneously to the documents they need to see. we launched the S&P Maya Stroke 5 Index, which is designed to measure the performance of a multi-asset risk parity strategy with a 5% target volatility. The index allocates risk equally among seven equity, fixed income, and commodity indices and further mitigates equity market volatility by dynamically allocating to S&P VIX future indices. With about 100 different data sets available on the marketplace we launched last year, we created Product Finder to help clients find what they're looking for based on their job function, topic, use case, and workflow. For example, someone working in investment banking and deal origination can receive different results from a search than a corporate client in the supply chain world. Platts expanded its presence in shipping with the new ASPE 5 Dry Bulk Weighted Index for Supermax Class Bulkers. APSE 5 is the dry bulk freight market's first regional weighted average index capturing the Asia-Pacific trade on Supermax bulkers. This product continues to fill out our shipping products. One of the most important aspects of managing benchmarks is to ensure that they are periodically updated to reflect underlying market conditions. When streams of oil that feed a benchmark become depleted, they need to be replaced. After consulting with market participants, PLATS is progressing work to add West Texas Intermediate Midland as an additional stream to dated Brent. Since the 1980s, Dated Brent is active as the benchmark for and is currently used to price approximately 60% of global waterborne crude. This change will provide significant additional volume and ensure the continued robustness of the Brent complex. Let me now turn to our outlook for global issuance and GDP. After issuance growth of 15% in 2019 and 17% in 2020, our ratings research group initial 2021 forecast called for a decrease of 3%. The updated forecast issued earlier this week now calls for a decrease of 2%, excluding international public finance. There were two changes. Structured finance went from a 3% gain to a 6% gain, and non-financials went from a 9% decrease to a 7.5% decrease. Please note that this is a bond issuance forecast. This is not a revenue forecast. For example, it doesn't address non-transaction revenue and doesn't include leveraged loan activity. There are clearly puts and takes when we think about 2021 issuance. For example, the bulk of the first quarter's corporate issuance came from repeat issuers who may have exhausted their funding needs early this year on the anticipation of rising rates. However, there are several items that should support upcoming issuance, including a rebound in economic growth, very favorable financing conditions, large amounts of sovereign debt with negative yields, and a growing pipeline of pending M&A deals. We have revised our 2021 global GDP growth forecast up by 50 basis points to 5.5%. The economic recovery looks set to accelerate in mid-2021, particularly in the U.S. on back of a massive fiscal stimulus plan, although a high degree of unevenness and uncertainty persists. At issue is the pace of vaccinations and the spread of virus variants. The U.S. and U.K. have taken the lead in vaccinations. A slow rollout is hampering the rebound in Europe, and we expect slow vaccination rollouts to cause the recovery in several key emerging markets to lag. Our economists view orderly reflation as a positive development for both the economy and credit. They also believe that rising yields on the back of a robust recovery is a positive and as opposed to rising yields solely on inflation concerns. Moving away from very low rates lessens the search for yield and lessens distortions to financial and non-financial asset prices. And finally, PLAS is forecasting that oil will remain above $60 a barrel through 2022. This bodes well for the health of the oil industry. I will now turn the call over to Avout Steenburgen, who is going to provide additional insights into our financial performance and outlook. Avout?