Q3 2020 S&P Global Inc Earnings Call
[music].
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.
All participants are in a listen only mode. We.
We will open the conference to questions and answers after the presentation and instructions will follow at that time.
To access the webcast slides go to investors that as peak level Dot com.
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I'd now like to introduce Mr. chip Merritt Senior Vice President of Investor Relations for S&P Global Sir you may begin.
Great. Thank you and thank you for joining us today for S&P Global's third quarter earnings call presenting on todays call are Doug Peterson, President CEO and he about 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 that SP Global Dot 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. gap.
This call, especially the discussion of our outlook can take 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 FTC and on our website before.
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 industry.
In this regard we direct listeners to the cautionary statements contained in our form 10-K's, 10-Q's, 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 worked 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, we do have some media representatives with us on the call. However, this call is intended for investors and we would ask the questions from the media be directed to date Greeno at 2124381471.
At this time I will turn the call over to Doug Peterson Doug.
[music].
Thank you chip good morning, and welcome to todays earnings call before I talk about our third quarter financial highlights I want to thank our people with S&P global for their dedication and commitment to these extremely unusual and challenging times.
Our people are being focused on supporting each other our customers and our communities to this ongoing endemic and I've been impressed with our people since that's.
Sure.
Navigate the uncertainty of the 10 gently.
We're fortunate to the vast majority of our employees can work remotely and continued to deliver higher 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 94% increase in U.S. high yield issuance.
During our first quarter earnings call. We explain the expense controls were 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 control. Most importantly, we've begun hiring given an open positions. In addition, our incentive accruals were increased substantially during the third quarter.
Reflect the strong performance and we're pleased to increase our full year 2020 guidance by 50 to 55 cents, which I will discuss in a moment.
I also like to share some additional highlights for the third quarter our investment in growth initiatives continues to result in new product launches additional data sets and new technology enhancements, we've made great progress across all four divisions in the U.S.G. is our recently launched products are getting traction in the market.
We also continue to be committed to running our operations in the most cost effective manner.
Introducing a new $120 million productivity program today, which David 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 for the future by incorporating technology solutions to transform how we serve our customers, where we work and how we work. The project is still under way and we hope to show the outcome with you on the fourth quarter earnings.
Cool.
To recap the financial results for the third quarter revenue increased 9% to $1.8 billion or adjusted operating profit increased 11% and our adjusted operating profit margin increased 100 basis points to 52.9%.
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 is important projects underway. This quarter lets start with ratings issuance trends during the third quarter global bond issuance increased 7%.
We also include bank loan ratings volume total global issuance increased 4% here are some key points regarding third quarter issuance first the first do we get from the March credit sell off the more investors had been purchasing weaker credits.
Second yields on U.S. nonfinancial, corporate at or near all time lows, bringing issuers to enter the market. In fact, there were two large investment grade corporates issued debt in September to replace that just issued in March.
And third despite the strong U.S. issuances as occurred in the last two quarters, we've identified more than 60 issuers didn't you should at least $5 billion between 2017, and 2019 that if not tap the bond market this year.
We're on the what we call or what are you waiting for list.
Turning to the data in the U.S. bond issuance in aggregate increased 9%, it's investment grade decreased 5% how are you.
<unk> increased 94% public finance increased 25%, reaching the highest third quarter issuance in the last 10 years and.
And structured finance decreased 12% with large reductions in filos and CMBS, partially offset by a gain and yes you.
Your P. and 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 optimistic ratings in China, bringing the total to date 18. In addition, the P b or C. 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 a train this capital Mark.
Yes. The draft policy includes suggested actions to simplify the market access process integrate access to interbank bond market and exchange, one market and reduce foreign exchange controls.
There are two major bond markets in China, what does the interbank market, where we received a license to operate from the PBC in 2019, the others the exchange market, which is regulated by the China Securities Regulatory Commission.
Just last week, we successfully filed a registration with the CSRC three products on Chinese exchange bond market.
Means we have the widest remit of any wholly for an own credit rating agency in the market and one that is on par with the domestic players.
Bank loan rating activities not capturing the issuance either.
It's an important element of ratings revenue, we'd like to disclose this bank loan rating revenue each quarter in the third quarter decreased 28% from the prior period to $58 million.
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, you noted global debt outstanding increased over $1.2 billion clearly a significant increase.
This is a slight we've shared with you in the past what is noticeably different is that the duration 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 yields contracting to close to seven years, while many companies and like to extend maturities to ticket.
Minutes 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 has increased significantly in 2020, most of that increases come from longer dated maturities, while the volume of debt outstanding with maturities of one to five years, it's 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 well. This is global data. If we look at the U.S. data, we find that in the full year of 2019 maturities coming due to the following year in 2020, we just like 15.
Percent all in the first nine months of 2020 maturities coming due in the following year 2021 region.
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 that pent demand that will depend on the individual company and impact of the pandemic on that company.
So we conclude there's been a slight increase in pull forward activity of 2021 maturities.
More pronounced as a surge in new issuance that was created an uptick in the growth of total global corporate debt.
Turning to our investments in growth initiatives, let me start with DSG, 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 end demand, we see increasing and accelerating demand for clear consistent and comprehensive yes, you did and solutions.
We haven't yet she strategy based off of leading products across all four divisions.
In ratings in the second quarter 15, yes, your valuations were completed or in progress in the third quarter. It was up to 61 in the second quarter, we completed three green evaluations and the third quarter, we completed 13.
In market intelligence, we recently launched the S&P global DSG scores and have closed seven deals to date.
Indices with $6.1 billion, yes, G.E.G., if you live at the end of last year as at the end of the third quarter 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 are true costs quite a bit the it'd 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.
Revenues, which include the market intelligence platform expressed feed and the cloud if.
If you'd like to better understand what content is available it 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 S.G. index.
Heatstreet, each year and see deal with options.
[laughter].
Yes, futures and options and insurance products, all reinforce each other to make the S&P 500, U.S.G. index more relevant to the markets.
Links or launched four new claim it each year based on S&P Dow Jones terrorists aligned climate indices, Dts will integrate the greenhouse gas emissions of the entire value chain of any given company. While also taking the physical risk 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 Platts platform is unique and that spans across multiple commodities platts 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 lunch pro spread this is remarkable product that many of you like find valuable as it eliminates a time consuming process of manual input of financial statement data into your workspace pro spread as a work flow tool that automates, the extraction and spreading the financial data from P.D.S.J. peg and other image files.
Optical character recognition natural language processing and machine learning or combined to drive extraction from even poor quality Pds or image files in nine languages continuous learning ensures manual adjustments or plane seamlessly to future filings.
Next we have continued our expansion of the coverage of this I mean this quarter. We had a date on 10 million European private company profile with standardized financials to the market intelligence platform.
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 kinship. This quarter reached the milestone of 100 datasets and solutions. We also completed sales country.
Yes, 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 as cloud agnostic the data on the S&P global marketplace is ready to queries 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 and more than 30 million Chinese private companies using differentiated content 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 cm eastgroup lunch to cash settled Platts, South American soybean futures contract, which provides a risk management tool for market participants looking to hedge.
Simi Group also launched a new long Green light place futures contract as you know from earlier this year, we acquired life Rice index.
One of the synergies of acquiring small price reporting agencies is that we are already IOSCO compliant. This helps us with the CMS groups decision to list this new futures contracts.
And finally, we're piloting a micro grid called distro at the Port of Rotterdam for renewable energy Distro is a marketplace that connects renewable energy in storage with energy users utilizes artificial intelligence and block chain technology to solve the problem of intermittent renewable energy.
It's great to be able to showcase helped platts is bringing its core capabilities in pricing and parent 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 issuance out look from a 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% to 2020.
Our ratings research group anticipates, an issuance will decrease 3% and 2021.
Well the forecast calls for a 5% gain in financials nonfinancial structure 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.
Economists acknowledge a high degree of uncertainty about the evolution of the krona virus endemic to current consensus among health experts is it cold 19 will remain a threat until a vaccine or effective treatment becomes widely available which could be around mid 2021, the forecast anticipates unevenness and recovery both by country.
And by industry.
As you've seen we performed well during the endemic in CE business conditions. In 2021. This should favor continued relevance of what we do across every business but.
But as I wrap up my remarks, I want to remind investors that despite the strong performance. We've been delivering that's endemic we continue to monitor the macroeconomic and geopolitical landscape for risks and contingencies that could impact markets, our clients and possibly or company.
These include the ongoing impact of the pandemic on business activity and the timing of approval and delivery of the vaccine.
The speed of economic recovery across national and regional economies, the U.S. policy environment after the election, including like lateral multilateral international relationships public sector economic support through fiscal stimulus and central bank liquidity and interest rate policies credit market characteristics and commodity markets supply demand in pricing.
Yes.
I will now turn the call over to eat up steenbergen who's going to provide additional insights into our financial performance and outlook.
Okay.
Thank you, Doug and good morning to all of you on the call.
Let me start with our fourth quarter financial results that corporate highlights a strong revenue and adjusted earnings per share growth I will take a moment to call for a few other items or 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 for 51 research and there will be equal send your seat range business expenses increased 5% much of this increase was due to a $54 million to catch up to our incentive compensation accruals.
Based on our strong performance. This year. In addition, we contributed $4 million for the S&P Global Foundation and increased our legal related costs indices as a management team.
Cautionary steps early independent makes to control expenses those actions, but 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 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, but also the impact on adjusted EPS of four 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.
$811 million included $279 million associated with premiums and fees paid to tender shirking notes outstanding $8 million in gains on dispositions, primarily from an office building in New Jersey, and an IR web hosting business that will spark.
CNL acquisition by $8 million associated with a technology related impairment $2 million for can show retention related expenses and $32 million and deal related amortization.
That's for all four deficient delivered increased revenue at three of the four delivered increased adjusted operating profit on a trailing four quarter basis, adjusted operating profit margin increased significantly in ratings and platts, 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 refinance a portion of our outstanding higher interest rate bonds with new lower interest rate falls the neck muscles work Inc.
Hello.
Playing golf balls up spending decrease in annual bumps interest expense was $26 million and 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 fall at the second.
Lowest coupon ever for a 40 year bumps in the U.S. second only to alphabet and our 10 year bond carries the same coupon as apples.
Now turning to the balance sheet, our balance sheet has low that friction ample liquidity, we have cash and cash equivalents of $3.2 billion debt of $4.1 billion off to our recent refinancing.
All right all the capacity of $1.2 billion and no commercial paper outstanding our debt ratios remain unchanged. Despite the recent bond 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.
He's an $11 million or share repurchases under the share repurchase program initiated in February 2020.
In light of our strong liquidity and increase 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 and sharpen team, including the pending U.S. election, running multiple shewmake share repurchases at this point in time.
Or we maintain our long term targets of returning at least 75% of free cash flow to shareholders and we will continue to monitor the markets for the right time and were soon share repurchases.
Now, let's turn to the fishing results ratings revenue increased 13% and excluding the acquisition of the exchange rate things business from Robeco Sem and Crystal acquisition of Greenwich Associates organic revenue increased 12%. This revenue growth was driven by an 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 east your maintenance business from Robeco Sem and crystals acquisition.
Authentic 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 a trailing four quarter basis adjusted segment operating profit margin increased 600 basis points to 63.4%.
On 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 right new back end markets the largest contributor to the increase in maintenance revenue was 16% increase in Corpus. In addition, financial services revenue increased 6% structured finance increased 4% governments increased 35% and a crystal and other category increased.
2%.
It's not often that highlights southern racing to revenue, but there was considerable growth this quarter as a number of countries, including Ecuador, Dominican Republic, Croatia, and Jordan that the debt markets.
The Rightside off the slide you can see that changes in revenue within structured products. The largest changes were in RMBS and CMBS.
Turning to S&P Dow Jones indices, the segment delivered 1% revenue growth due primarily to gains in AIU and linked to our indices and data subscriptions, partially offset by reduced exchanged Vegas Vegas if activity.
In the third quarter reported a 12 million dollar 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 nonrecurring a 7% decrease.
And adjusted segment operating profit and adjusted segment operating profit margin of 65.2% a decrease of 510 basis points.
On a trailing four quarter basis, you adjusted segment operating profit margin decreased 40 basis points to 69%.
Revenue growth was subdued this quarter, that's something fees increased 2% with gains in EG 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 8% due to a modest increase in end of day, and mealtime AC fee, partially offset by the timing of contract renewals.
However in this division over the past year EPS net inflows were $84 billion and market appreciation was $92 billion. This resulted in quarter ending ETF AUM of 1.7 trillion dollars, which is 11% higher compared to one year ago.
Our <unk> revenue was based on efforts and your win which increased 12% year over year sequentially versus the second quarter of 2020 Bcf net inflows associated with our indices totaled $5 billion, while market appreciation totaled $113 billion.
Activity at the CTO, we 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 C. I mean, where do you equity complex volume increased 38%.
The majority of the game at the Sea give me what's due to the successful launch of the micro you mean as it be 500 futures. Excluding this product volumes at the CMU equity complex increased 4%.
Market intelligence different reported revenue growth of 9% and organic growth of 7% while the Cove at 19 pandemic continues to have lengthened sales cycles usage of our key platforms increased 11% year over year.
Adjusted <unk> 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 14% and here 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 National revenue grew 3%, excluding acquisitions and divestments.
They got management solutions revenue grew 12% and credit risk solutions revenue grew 11%.
And now turning to Platts reported revenue increased 5% with core subscriptions, increasing 7% and global trading services decreasing 6%.
Yes revenue decreased mainly due to lower petroleum and gas volumes at ice and she gave me.
The recession has reduced oil prices, putting cost pressure on many of our customers bankruptcy filings or similar to recent years 38, U.S. exploration and production company filings year to date. This compares to 42 in full year can thousand 19 and 28 in 2018.
Despite this pressure on the industry had maintained overall when you roll rates in the mid Ninetys.
Adjusted expenses decreased 2% due to the divestiture of rig data and management actions adjusted segment operating profit margin increased 280 basis points to 55.7% the trailing four quarter adjusted segment operating profit margin increased 300 basis.
<unk>.
54.9%.
The fastest growing markets during the quarter were metals and act at 12% and petrochemicals at 7%.
After completing our lost productivity program in the second quarter, we had.
Then to fight a number of additional opportunities to reduce future expenses. They can generally be grouped into four categories real estate procurement you need an IP infrastructure, we've already begun implementing actions needed to realize these savings. However, it will take us two to three years to come.
All of these items when we had finished we expect to realize approximately 120 million in annual savings by 2019 baseline.
And now I would like to share our updated guidance with you with only one quarter remaining in the year theres no longer and needs to share various scenarios. They slept like you.
<unk> GAAP guidance.
This slide depicts our adjusted figures the second column is our new Twentytwenty adjusted guidance and all of the line items that changed our highlighted now let me review our new adjusted guidance, we increased our revenue guidance the way high single digit increase corporate allocated expenses.
Since has been decreased by $10 million to a range of $125 million to $135 million.
Operating profit margin increased by 100 basis points to a range of 62, and a half and 53.5% inter.
Interest expense net includes both interest income and interest expense. It has been reduced by $7 million due to the recent changes in our outstanding balls that tax rate has been reduced due to tax benefits from foreign operations. These items results in a new adjusted diluted.
EPS guidance range of $11.30 to $11.45 and finally free cash flow generation has been increased to approximately $2.9 billion.
In conclusion, Twentytwenty is shaping up to be a very strong year for S&P global while the recession has crippled many industries and companies. Our unique collection of businesses has continued to thrive in a day.
Despite all of the heart shaped related to the pandemic. Our employees have continued to deliver the highest quality ratings benchmarks research data and analytics and delivered an unprecedented number of new product launches as always we remain committed to providing transparency for our investors to different sense.
Actual intelligence for our customers and to support sustainable development.
Communities and with that let me turn the call back over to chip for your questions. Thank.
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Operator, we'll now take our first question.
Thank you.
First question comes from Toni Kaplan from Morgan Stanley You May ask your question.
Thank you and God I love to see what are you waiting for less than I thought that was a financing I've heard in a long time.
I wanted to ask about guidance on until last quarter, you made a point to say that the guidance increase was partially due to the higher expectations for the rest of the year.
This quarter. It seems like everyone is more reflecting three Q b is that fair or have your expectations improved for the rest of the year as well.
Good morning, Tony and Thanks, you for for your comments, particularly on some of the analytics and the.
Issuance environments, and whether you're facing for list. If we look at the guidance I think it's both reflecting improved performance during the third quarter as well as also slightly improved outlook for the fourth quarter were definitely are more optimistic with respect to our business performance from there.
Remainder for the remainder of the year, we think that all businesses are doing well you see the subscription businesses showing quite good results with respect to add there are a renewal rates with respect to the overall book of business is going up and you see that both for platts and market intelligence.
Look at the issuance environment for October has been quite reasonable in terms of continued activity and then also we expect the index business that was facing shorts in particular more nonrecurring items into sort of quarter, we would see that coming back into fourth quarter as well so overall slight improvements for.
For the fourth quarter, a in our in our guidance. So overall, therefore, we're quite happy difficult race, our guidance for adjusted EPS by 50 to 55 cents.
Great and on the international.
Outside on international ratings revenue perform really well in the quarter and you provided.
Some of the issuance metrics with Europe.
County, Asia up 19, gross up 22 in the quarter for the full international piece.
Hoping you could expand on you know what drove the revenue outperformance relative to issuance I you know what that meant was it pricing or how do we think about that and I saw that in China, you completed a registration in China. Its exchange bond market yesterday, and she went I understand how that increases the opportunity.
For you in China, and how quickly you know that can start.
Starting to take shape. Thank you.
Okay. Let me take the first part of your question at the 22% growth in international revenue for ratings. Three main drivers that are behind that first we saw a investment grade corporate issuance very strong in Asia Pacific We saw increased high yield issuance in Europe and then.
Also sovereign ratings was up in quite a strong way during the quarter. So those sort of three drivers behind the international growth.
And Tony Let me give you some color on the China market as you know, there's two bond markets in China Theres. The interbank built on market Theres exchange on market. One is the first one the interbank market is approved by the PD L.C.. We received a license last year to operate issuing a credit ratings. There and then this week we received approval from the.
CSRC to also operate in exchange bond market. We are now the only wholly owned foreign rating agency that can operate in both markets. So we have a similar situation is as any other rating agency in China, but what's also really important in the last few weeks the regulators together the PBR see CSRC.
Safe, which is the state agency for foreign exchange they've issued some new guidelines about market access access to both markets for foreign players effects controls. In addition over the last few months, we've seen Blackrock fidelity JP Morgan others start getting more access to the Chinese market. So we look at this overall.
Knowing that we've put in place a very strong team. We've been we've started doing issuance of ratings in the markets. We built strong relationships with issuers as well as the investors as well as the the banks that are involved in the in the debt markets. We think that we're very well positioned as the Chinese market continues to reform further in their in their credit and debt Mark.
Yes.
Thanks, so much congrats on the quarter. Thank.
Thank you.
Thank you. Our next question comes from Manav Patnaik from Barclays. You May ask your question.
Thank you. Good morning, I was just hoping you know he keeps declining keep dislocations launch next year.
You just walk through maybe some of the moving pieces, particularly around.
Maybe the assumptions around the election outcome and thats rather than keep it between the two different policies out.
Yeah, Hi, Manav. This is Doug let me start with that so when we look at the issuance forecast for next year first of all we're coming off of two really strong years of issuance. It was 15% last year, we're expecting up 13% this year and as always there is there's a lot of moving parts between financial institutions corporate structure.
Finance et cetera. So we're looking right now at the forecast for next year of 5% up for financial institutions. This is that this is the data coming from our ratings research team corporates down, 9% structured 6% down public finance down 1% for an aggregate down 3%, that's what makes it up but.
But recall that that's just an issuance forecast, that's not or our revenue forecast and we're still working on that I don't think that weve necessarily taking into account what would be the what would be the factors that you would see.
From the election itself directly on that but we are looking at there's a lot of cash that's still outstanding we see that there's an M&A pipeline, which just started picking up there has been a very high activity high level of activity of ovens, a non investment grade high yield issuance and we see a lot in the pipeline. There. So it's a combination of all of those different factors and we.
Look at for this preliminary forecast for 2021.
Got it and then if I could just asking the platts side, I mean, I think mumbles sand.
Sam we saw.
He is doing I guess, what are we when you do that that is a tough backdrop as bina, we will and meanwhile, market as well should we be expecting any drop off any items to consider as we think about the growth going forward.
Well, if you look amount of ads at the different components of the platts and revenue growth in detour are quite pleased with what we saw this quarter.
Price reporting up approximately 6% as an analytics up somewhere 10, 11%, but then global trading services down, but we know that can fluctuate period over over periods and didn't listen this is overcoming some headwinds you might recall that last quarter, we're talking about very small conference business that saw its revenue.
News, except for rates in the current environment. So indeed, the platts results are solid we're quite pleased with it if you think about it the revenue outlook for the full year, probably mid single digits growth is to best assumption for the remainder of all this year and therefore for the full year outlook.
Got it thank you guys.
Thank you.
Thank you. Our next question comes from Andrew Nicholas from William Blair You May ask your question.
Hi, Good morning, as you think about the target to the goals for your U.S.G. business, which I believe you've outlined to be somewhere close to 270 million or so in 2024.
I'm wondering what you think are the main factors that will determine whether or not you achieve that goal and maybe asked another way if we fast forward to 2024, and your SG businesses, well above target why would that be and maybe the same question. If you were to underperform your expectations.
Thank you Andrew This is Doug well first of all we're very excited about the growth overall in the SG landscape itself. This is something that's four or five years ago not a lot of people are talking about and we're still trying to understand what the total addressable market is going to be and we think it's going to continue to get quite large and it will be expense.
Ending rapidly we've seen that over the last couple of years has expanded rapidly as more U.S. companies started embracing he SG. In addition, you see that during the pandemic theres been more interest in the S. Part of E.S.G., So thats, increasing which has brought more interest from U.S.G. itself and in addition, there is a lot of interest on the climate aspect of SG and.
Climate on its own so when we look at the where the growth is going to be coming from we think that any type of investor, whether you're an institutional investor or within the insurance industry you might be looking at climate change might looking be looking at physical risk if youre, a they an endowment or pension funds, you're starting to hear from them.
Asset owners that they would like to know more about the purpose of the investments and the destination of the funds there and what we see through these types of investors that they're starting to demand more and more clear consistent information that they can build into their models and so we see as you. If you as you've seen us prison present, we believe that there is a whole.
Set of product opportunities for cross for us across every single division as well as cross divisional solutions.
We have estimated as you know a 40% growth rate, we will be providing updates on that early next year, but we do see that we think that this market is and grow very rapidly and that we will be one of the main players in this in the E.S.G. space.
Got it thank you and maybe just a follow up to that I mean, where do you feel like you you are where you stand with respect to your data assets in U.S.G. I'm, obviously, the Rico Sam ratings business acquisition is a big piece of that pie.
Im just curious if there are gaps, but you're still looking at filling in and whether or not you'd you'd hope to do that organically or via tuck in M&A and where might those areas of opportunity be thank you.
Thank you well first of all both true cost and the real ecosystem. The sea US a capability that comes over Sam are both a top notch there a better than anybody else in the industry. So we have a a great start with both of those in a foundational level, where we need to continue to add to our portfolio, which is more likely organically is.
More and more data that comes from issuers themselves. As example, what we're doing with the SG evaluation products. It's in the ratings business there needs to be a much brighter broader set of data that is going to be used as a valuations we see the green bond market starting to grow that's not something you can go out and acquire that's something that you need.
To build the expertise and start building the datasets, but what's very important also is linking the data where we find that there is a lot of data sets, whether its internal external and it's a lot of or the investors and clients want to learn how they can lincoln better into their own needs. Finally, what I would say is that there are not clear standards yet.
Outside in the market. If you look at what are the disclosure requirements around the world there, they're very iffy spotty. If there are even any at all with TSG and so we're incredibly active across all of the different groups that are setting standards, whether it's as the task force for climate related financial disclosure it out as one of the founding members of it.
Counting for state sustainability in the U.S. branch and so we're very active in all of those groups. So we can be at the table as the standards are set and ensure that than what we're delivering is going to meet all those standards.
Got it thanks a lot.
Thank you.
[music].
Thank you. Our next question comes from Kevin Mcveigh from Credit Suisse. You May ask your question great.
Great. Thank you follow up on that 3% issuance declined versus you know the comet versus the revenue just any puts and takes on that obviously I don't want to get specific on revenue, but just any puts and takes to think about given the component to the issuance in 2019 and 20 being so strong just would you expect kind of the normal dealt.
Between you know issuance relative to revenue or just anything to call out other way.
Well first of all just related to that I gave some of the components about the forecast from our ratings research team for next year, but just to give you a couple of examples in the third quarter. The there was issuance, which was as high as up 94% for high yield and the U.S. and then if you look at another category.
Or like a covered bonds in the worldwide. It was down 40% as structured credit or see a lows were down 40% globally. So you saw some really big swings around the globe with different types of issuance, what weve seen right now between credit conditions themselves between rates with spreads there's a lot of movement across the different.
Asset classes around the world in different regions and so we're trying to balance all of those as we make our as we make our as we make our forward looking approach to this but even looking at some other comments and Kevin Let me built on but ducs to offset the bridge between at bond issuance and ready.
On your growth there are many elements that go into the mix. What you have to think of for example, those bank loan bank loan volume stuff some foreign relative a relatively low base in Twentytwenty you have non transaction revenue that definitely is going up as you know and I'm a mother space year over year.
Year and for example, you have to think about surveillance over the larger bond issuance that has been done this year. The recent M&A environment, our new product launches star commercial condition. So there's many of those elements that go in into the mix in order to bridge from bonds issuance outflow to ultimately racing's revenue growth.
That's very helpful. And then just a quick follow up are you starting and Im sure Youre kind of structural changes and just the data consumption within market intelligence and Platts just you know post Cove. It just.
It just seems like there's definitely more increased frequency of data query and things like that anything to call out.
The only thing to call out right now is that we've seen a dramatic increase in usage over the last six months of across every different type of platform. We have as you know we have not been doing of conferences, but all of our webinars or up 300, 400%. There's huge increases in our conference attendees, we see issue.
We see an increase in the visits to all of our websites. We had a free covance micro site that is every single day, there's a lot of business that with research that we have around cove it but one of the most important questions that I hear myself and we pick up from our clients really goes to the core of what you started your question with and that is how do I link.
Data with your data how do I link data across different sources. So I can use it in my modeling to make decisions and that's something that we're spending a lot of time on and you can see some of the tools that we've launched over the last six months or last year. So we've been looking at this very carefully. This goes back to why we bought can show and some of the things that they've been delivering white.
Today, we talked about pro spread which is a new tool that allows analysts to extract data from j. pegs, and Pds and put it into their modeling. So we see that the data modeling data linking is really a critical need for our clients and we're trying to make sure that we can be at the forefront of that.
Thank you.
Thank you thanks.
Thank you. Our next question comes from Hamed SAP Massaro from Jefferies. You May ask your question.
Hey, good morning. Thank you. My first question is just around yea.
Sure. It's specifically what is your market share today in structured finance and maybe how has that changed over time and where do you think that can go.
Well, let me start with I don't necessarily really track market share and structured finance or any of the different any of the different products. What I can say is it across different products. There. Some like covered bonds is a product that we are very inactive in around the different markets around the world, but things like.
ABS CMBS.
CMBS those are those are areas that we're very active in there might be some quarter, where the type of activity of CMBS doesn't necessarily favor the type of expertise that we have so sometimes we might not see the same level of market market share, but what we're always looking for is that investors are looking at the highest quality.
Syria and outcomes of ratings and in fact, one of the things that we're measuring of very closely during the pandemic is the quality of the performance of our ratings. We had made a major overhaul of our criteria. After the financial crisis and since then we're watching that the performance and this is a place since being test.
Got it and and our criteria is holding up and that's one of the reasons you will see investors asking issuers to ensure that there is an S&P rating on the debt when this issue.
Got it and just my follow up question.
I know you outlined 120 million savings plan and we can see the breakdown between Relistor procurement Guinea, and an IP infrastructure, but but but maybe just two questions on that one how is this different versus you know the prior 100 or 120 million siblings man.
You achieved and then it seems like you know every two to three years you have this $120 million bucket is there more to go after this as well after another two to three years.
Good morning, I'm sorry. This is said this is a about first on your question. How does this differ from the lost productivity program. There are a couple of overlaps and a couple of areas that are different the area, where we see an overlap is a technology infrastructure, we're still working through older infrastructure.
Yeah that was very Federateds technology debt and some clean up all of that so that's also part of the last program and this continued to be a parts off the current program real.
Real estate was a part of the Las program, but I think that was more reducing real estates, where we had excess real estate at certain locations that were not used here. We see that we are going to be far more surgical with respect to real estate going forward for thinking about new models, how we will operate how level.
Interact new structure at hybrids working models going forward and that will give us the opportunity to optimize our real estate over the next few years. So it's in the same docket in the same category, but a slightly different approach and.
Last time, we were focused on the functional groups and we saw opportunities to optimize to functional groups. That's not part of this particular program. That's we are going to really focus now on our external spends a procurement I think is a component of the current program because we believe that we can improve our debt.
Management's internationally as well as also our contract negotiations going forwards and then a travel is coming down which is the same as with respect to real estate that has also to do with new models of working going forward. So yes. There are components that are similar but there's also new components that.
We have added Fortis productivity program with respect to your second part of your question is there more to go I think you have heard me, saying that before I think there is a lot of room, we have as a company to optimize and we're going to continue to do that if a lot of operating leverage. So you may expect us as a company never be satisfied and never.
Her say this is enough I think there's always opportunities to further challenge ourselves what we can do better in the future.
There are some <unk>. Thank you.
Thank you. Our next question comes from Alex Kramm from you'll be asked you may ask your question.
Hey, good morning, everyone.
Quick one start on the index business, you mentioned the year over year kind of changes there, but can you talk about quarter over quarter in particular on the U.M. site. If my math is right average AUM was up 13% from the third quarter from the second quarter, sorry, but I think.
Revenues were only up 2%. So it wasn't the same kind of areas that you highlighted on the on a on a year over year basis or or what really drove the slower increased quarter over quarter.
Alex Good morning, it's the same kind of elements that you see quarter over quarter as year over year DTF slow speed T.F.A.U.M. <unk> continued to develop in a favorable way a mutual funds also continues to develop in a favorable way.
The main difference is exchange traded derivative volumes, we have seen market volatility coming down and therefore also etwo D volumes coming down and that is really driving the lower growth in this particular category on a sequential basis.
Thank you. Our next question comes from Craig Huber Huber Research Partners you May ask your question.
Great. Thank you Doug.
I'll be curious to hear your opinion here is we sort of.
Think out but.
Implications of the election.
On slide wins versus the other what it does to policy changes out there and stuff that potentially might happen.
It would impact your outlook you should think about for next year in particular in the ratings business.
Yeah, well, thank you for that and obviously as you saw when we put up some of the risks and contingencies that were looking at we are going to be looking carefully at the outlook outcome from the election and no matter how the election comes out we'll be able to work with any administration in the United States and we think that there will be a different types of policies for.
<unk> growth around the globe right now one of the most important things to matter what the outcome of the election is is to see if theres going to be another stimulus program. The first stimulus program. The P.P.P. the pay text for pay check protection program. It it helps save 13.5 million jobs and as long as the pandemic is continue.
Going to have some impact on the U.S. around the globe, we think that that right now that probably has a larger impact on outlook for the economy than the election itself and so what will happen after the election for for any kind of stimulus what would be some of the policy measuring measures coming out we believe that we could work with either administer.
Ration no matter, what they come what they come up with but clearly we will be watching if theres any additional oversight of the regulatory side, what are going to be the international implications of cooperation multilateralism et cetera.
And so these are the types of issues that we should be watching carefully to see what would be the impact or to the business side from a new administration.
And then my other question.
What's your feeling on the M&A environment out there as it pertains broadly to the retains mortgage think about Europe in the U.S. During this very low interest rate environment as things progressed, we get better on the economic front are you guys expecting M&A.
Deal flow out there to pick up materially you should think out over next year or so and what does that mean for your ratings business. Please.
Yeah. This would this is one of the things when a that was talking earlier about what are some of the factors that we look at to see what would be the some of the drivers of revenues in the ratings business that even in a lower issuance environment M&A would definitely one of those we do see a pent up demand for M&A, we see a lot of deals that have started getting done this.
Right the pandemic and despite social distancing the the pipeline of M&A was really weak and dropped to almost all time lows in the in the second and third quarter. This year, but it started picking up and what we see in the pipeline is also starting to pick up M&A typically will bring along with it a potentially a ratings evaluation services.
There could be a bridge loan there could be a depending on what type of high yield or a or a investment grade type of transaction that is there could end up being another rating that comes out of it. So M&A is always a very positive leading indicator for the ratings business. One one final thing I'd say that we're also looking carefully at M&A.
Hey, I would call it M&A, it's a little bit different lets call it restructuring but.
Cause there is a lot of restructuring going on it's a it's a deeper end of the credit crunch.
Credit and so higher yields credits that are going through bankruptcies and restructuring because those also end up usually leading to additional business as well for the in the ratings business because once something's restructure they go back out for new loan rating than potentially a of a bridge loan which goes to a loan rating, which then could go into the bond rating. So M&A is.
Very important leading indicator for us and we do see it starting to pick up thank you.
Thanks, Craig.
Thank you. Our next question comes from Jeff Silber from BMO capital markets you May ask your question.
Thanks, so much.
Doug at the beginning of your remarks, I don't we were joking, but you talk about the what are you waiting for list. What do you think those companies are waiting for are they concentrated in the specific industry. That's under pressure I'm. Just curious if there are any attributes that you see in these companies do we expect this companies to get off and that she that thanks.
Yeah. It is it is a joke that I said that but when we there is no specific characteristic of those companies that haven't come to market. Yet there are a lot that have are sitting on a large amounts of capital. We there's a couple of possibilities. One is that they have more than enough liquidity already where they're not industries that are strained at all by the.
By the pandemic it could also be that they already issued more recently in the last couple of years is as you know we're in an environment, where interest rates have been low for a while especially in Europe and in Japan, you seem very low interest rates in those markets for a long time and even in the U.S. interest rates have been low. So there is probably that they have enough liquidity they don't.
Have a need for a lowering their interest expense or they've got other more more immediate demands, but we're we're expecting though so one of the things that we would expect is it some some point in time Cfos and treasurers might start asking the question well shouldn't go ahead and restructure my debt or issue new debt at these kinds of rates. So that's.
What we're watching that as a potential pipeline in the future for issuance.
Okay, Great. That's helpful. And then you talked about.
In terms of share repurchase or potential share repurchase that you're you're monitoring the markets for the right time to resume please share with US what are you looking for exactly before starting to repurchase shares. Thanks.
Yes, Jeff what we are looking for is more stable market conditions to enter into an accelerated share repurchase program in our assessment over the next few weeks, we might see a higher level of volatility with U.S. elections with a resurgence of Gulf its cases around the world. So we are.
Closing, we're watching it very closely and will determine what the starlight moments to restart our share repurchase program.
I would like to add to our Jeff. That's overall, our capital framework remains unchanged. So you are still having to targets of a return of 75% of free cash flow overtime. So we will continue with that as you know our balance sheet as rock solid we have a high level of liquidity they have low leverage high cash balance.
And so this is really to do with timing. We watch this very closely and when do you expect that future volatility is coming down we think it's the right moment to restart.
Okay. Appreciate the color. Thanks, so much.
Thank you. Our next question comes from George Tong from Goldman Sachs. You May ask your question.
Hi, Thanks, Good morning, I wanted to dive deeper into your issuance forecast for next year, you talked about corporate issuance being down 9% can you elaborate on your investment grade and high yield expectations within corporate in the U.S. and international markets.
I don't I don't have enough detail to do that yet and what I'd like to do is when we come back in the next earnings call, we're going to be providing you. The 2021 guidance, let us bring back a little bit more color on that at that point in time.
Okay got it and.
Then as it relates to your new $120 million savings program can you discuss how these savings will be distributed among the four segments and if you expect the full $120 million in savings to flow through to margins or if they will be partially offset by reinvestments.
Yeah, that's a great question George.
If you look at the way, how the $120 million will flow through the different segments I think the best assumption should be in the same way as you see the overall expense base for the company at at the moment. So the highest expense base is in market intelligence at any rate.
Thanks, and then the other two deficient so as a proxy I would say that's probably the best assumption at this moment why because market intelligence has the highest number of employees. So they will benefit from the real estate production as well as from the travel a reduction but also ratings will take a large uh huh.
Our off of that so definitely its going to be an element that will help future margin expansion.
Your question about the Reinvestments, we are of course banking debt and we're doing some reinvestments are already at this year think about the investments in our digital infrastructure and working from home setting up our employees' digital in for <unk> interactions with our customers.
There might also be certain investments with respect to impairments that we would expect over the next period. So an impairment for example, some real estate into fourth quarter and the first half of next year in order to achieve the run rate savings going forward.
Got it thank you.
Thank you we will now take our final question from a one mile from Oppenheimer you May ask your question.
Yeah. Good morning, Thank you for taking my question.
Could you please expand a little bit on the China part of it and I'll, Let next program.
How much additional investment we expect to spend on am I in China, and the opportunity of our market intelligence in China and more color would be helpful. Thank you.
Oh and the investments that we are already doing and our parts all the overall investment program of market intelligence.
The investments for the analytics platform in China, you already see into current results of market intelligence. So market intelligence, it's taking a little bit more than half of the overall investment spends off a of the company. So if I look at the investment spend in the third quarter in total.
Total and that's for all initiatives for the company 30 million 30 million and done a little bit more than half decent market intelligence, so and of that the market intelligence. Its just supporting multiple initiatives at the SMB initiative. The marketplace initiative and also the China credits initiative I'm not going to give you the.
Big number for China credits, but you should expect it's a couple of million of dollars, but again, it's already into current levels off the results that you see at this moment.
No and let me add that based on some of the information I shared with you earlier, we see that the Chinese financial markets are still going to be undergoing lots of reform the reform that the of the domestic regulators would like to see a more global market they'd like to see a more transparent market and this is going to play to all of our divisions and obviously.
We were out front right now with the rating agency and market intelligence is building a very strong platform is delivering data and analytics similar to what we deliver and other markets around the world.
Got it that's very helpful. Just one final question on.
Spends guidance.
How much percentage off the run rate, we should expect S&P can save maybe in 2021 and 2022 and finally a.
Hundred personnel that I, just wanted to get a dog.
Uh huh.
Components of it will come in quite quickly and that has to do with the fact that certain initiatives already in flights at the moment.
And again, we are taking the 2019 expense levels asset base. So for example, we would not expect at the travel and entertainment expenses to come up and that level. So that would be basically safe. We have already realized at this point in time also some other elements that will come in quite quickly.
That's for the remainder we need the next two to three years. So I would say this is a.
Reasonable part next year and then the rest will come in.
It's gradually ofer over the next two or three years.
Got it thank you very much.
Thank you Ellen and with that let me close first of all on a think all of the investors who joined the call today for your support thank the analysts for joining and your questions. As usual you always asked very good questions that help us run our business better.
Throughout the pandemic, we've been able to accelerate our digital transformation, we've been able to deliver very innovative products and meet the needs of our clients and the markets with all of the uncertainty they have been looking for more and more analytical information for research and we're pleased that our people have been able to deliver that but we would have never been able to do this without the hard work that.
Occasion, and perseverance of our employees and I want to thank them today on this call. So thank you to all of our employees and thank you all who have joined the call today.
That concludes this morning's call.
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