S&P Global Inc.
Q4 2020 Earnings Call Transcript

Published: 9 Feb 2021

[Operator:]

Good morning, and welcome to S&P Global’s Fourth Quarter and Full 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.

[Chip Merritt:]

Thank you for joining today’s S&P Global’s fourth quarter and full year 2020 earnings call. Presenting on today’s call are Doug Peterson, President and CEO; and Ewout 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.spglobal.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 announced on November 30, S&P Global and IHS Markit entered into a definitive merger agreement. This call will touch on the transaction. Please note, this call 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 such 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 will include a joint proxy statement and a prospectus. S&P Global and IHS Markit will file other documents regarding the post transaction with the SEC. Before making any voting or investment decisions, investors and security holders of S&P Global and IHS Markit stock are encouraged to carefully read this entire registration statement and proxy statement prospectus, which is available on our website and sec.gov. In today’s earnings release, and during the conference call, we’re provided 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 corporations business from the same perspective as managements.

[Doug Peterson:]

Thank you, Chip. Welcome to all of you joining today’s earnings call. The first thing I’d like to do is thank our people at S&P Global for their dedication and commitment throughout 2020, as the pandemic continues to take its toll across the globe, our people remain focused on supporting each other, our customers and our communities. Together, they continue to provide relevant, timely benchmarks, data, and research to help our clients navigate through this turbulent economy. So to all 23,000 of you, let me say thank you. Now, let me turn to the key financial achievements in 2020. S&P Global delivered 10% organic revenue growth in 23% adjusted diluted earnings per share growth. All four businesses contributed with growth in both revenue and adjusted operating profit. We generated $3.3 billion of free cash flow, excluding certain items and returned $1.8 billion through share repurchases and dividends. In addition to the very strong financial results, we made significant progress on our key initiatives as well. The expertise in technology that we’ve developed over a number of years enabled the creation of new products, product enhancements, and productivity improvements. By funding growth investments to leverage our technology, we were able to deliver the largest collection of new product launches I can remember. We also continue to expand our ESG and climate product offerings, including the new S&P Global ESG scores. I’ll share more about all of these new products in a moment. Another highlight was the completion of our Investor Day productivity target as we surpass the target and achieved $120 million of annual savings. Upon completion, we then initiated a new $120 million program in October, which is targeted to be completed in two to three years.

[Ewout Steenbergen:]

Thank you, Doug. And welcome to all of you on the call. Let me start with our fourth quarter financial results. Organic revenue increased 6%. Adjusted Corporate Unallocated expense decreased 21%, primarily due to the timing of charitable contributions, lower professional fees and the reduction in the company’s real estate footprint. Adjusted total expenses increased 11% and I’ll come back to this on the next slide. Adjusted operating profit margin decreased 150 basis points due to the increase in total expenses. The decrease in the effective tax rate was primarily due to the successful resolution of various tax audits and true-up prior period taxes. Average diluted shares outstanding declined 2% and adjusted diluted EPS increased 7%. While total adjusted expenses for the full year increased 4%, for the fourth quarter they increased 11%. This was primarily due to increased incentives as a result of strong 2020 financial performance, expenses related to the acquisitions over Greenwich Associates by CRISIL and the RobecoSAM ESG data and analytics platform and investments in growth initiatives and productivity programs. The non-GAAP adjustments this quarter collectively generated a net pre-tax loss of $247 million. They included $138 million associated with office lease, equipment and software impairments, $55 million in restructurings across the company, $24 million in IHS Markit merger costs, $2 million for Kensho retention-related expenses, and $29 million in deal-related amortization. Determination of office and equipment leases and the restructuring actions will result in annual savings of approximately $70 million. Approximately $20 million of the savings apart of the new $120 million productivity program, the balance is related to separate business efficiency initiatives. This quarter, all four deficients delivered increased revenue with Indices achieving double digits growth. As I explained earlier, due to increased costs, adjusted operating profit margins were generally muted. For the full year, Ratings and Platts delivered superior adjusted operating profit margin improvement, Market Intelligence increased slightly with elevated investment spending and Indices decreased slightly, primarily due to higher legal expenses and ESG investments. Each year on our fourth quarter earnings call, we share changes in our headcount. In 2020, headcounts increased 2%. This year, we separated enterprise technology headcount from corporate headcount. Corporate was the area with the largest headcount increase at 16%. This was the result of insourcing about 130 order to cash positions resulting in annual savings of several million dollars. The only other area that had an outsized to increase was Platts, which increased headcount 5%. This was due to investment spending to expand their commercial presence in Asia and funds their benchmark acceleration program, as well as insourcing of IT contractors. Last year, we shared this slide and estimated that we would invest $150 million in growth initiatives in 2020. The projects that make up this total are listed on the left. We ended up spending $139 million, which was still an exceptional level of activity for the company. For 2021, we expect investment spending to moderate to $100 million. This activity coupled with the merger with IHS Markit should to keep the organization fully engaged with exciting new projects and opportunities. On our third quarter earnings call, we introduced a new $120 million productivity program to be completed over the next two to three years. I’m pleased to report that we’re off to a fast start, the $49 million of run rate savings already achieved. These were mainly from reduced real estate and changes to IT contracts as well as investments made to permanently reduce T&E. These run rate savings do not include the $20 million benefit from the impairments and restructuring actions taken at the end of 2020. Now turning to the balance sheet. Our balance sheet has low leverage and surplus liquidity. We have cash and cash equivalents of $4.1 billion. This is temporarily higher than necessary and will be reduced when we resume share purchases, debt of $4.1 billion and undrawn revolver capacity of $1.2 billion and no commercial paper outstanding. Our adjusted gross debt to adjusted EBITDA is consistent with our current leverage target. Free cash flow excluding certain items reached $3.3 billion in 2020, an increase of $714 million or 28% over the prior year period. In 2020, the company returned $1.2 billion to repurchase 4 million shares and pay dividends of $645 million. In aggregate, we returned 55% of free cash flow, excluding certain items. This fall short of our target 75% as we head to curtail share repurchases due to the merger. If there’s an open window and we have an opportunity, we will repurchase shares before the merger closes, if not, we anticipate resuming share repurchases after the merger is completed. Now let’s turn to the deficient results, starting with S&P Dow Jones Indices. The segment delivered 10% revenue growth, primarily due to gains in AUM linked to our indices and data subscriptions. In the fourth quarter, we reported an 8% increase in adjusted expenses, primarily due to incentive compensation true-ups, increased headcount and application development spending, and 11% increase in adjusted segment operating profits, and adjusted segment operating profit margin of 68.5%, an increase of 50 basis points. On the trailing four quarter basis, the adjusted segment operating profit margin decreased 40 basis points to 69.1%. S&P Dow Jones Indices delivered growth across all revenue channels this quarter, asset-linked fees increased 12% with gains in ETFs and mutual funds, exchange-traded derivative revenue increased 3%, data and custom subscriptions increased 7%, due to an increase in end of day ACC. Activity at the CBOE decreased in the fourth quarter with S&P 500 index options activity decreasing 13% and fixed futures and options activity decreasing 1%. This was in contrast to increase activity at the CME, where the equity complex volume increased 58%. Almost all 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 were essentially flat. Market intelligence delivered organic revenue growth of 7%, which strength in both renewals and new business. Usage of our key market platforms increased 13% year-over-year. Adjusted expenses increased 10% due to incentive compensation true-ups and higher commissions and royalties. Adjusted segment operating profit increased 2% and the adjusted segment operating profit margin decreased 160 basis points to 30.7%. On the trailing four-quarter basis, adjusted segment operating profit margin increased 30 basis points to 32.4%. Looking across the market intelligence components, desktop revenue grew 5%, excluding acquisitions and divestments. During 2020, market intelligence delivered significant enhancements to the MI Platform. These included improved visualization of customizable dashboard, integration of Kensho Omnisearch and upgraded mobile experience and the cloud based infrastructure for better performance. These enhancements help us meet the needs of many platform users and position us well for continued execution against our integrated desktop roadmap. Data Management Solutions revenue grew 10% and Credit Risk Solutions revenue grew 8%. Ratings reported revenue increased 7%, organic revenue increased 5%, excluding the acquisitions of the ESG data & analytics platform from RobecoSAM and CRISIL’s acquisition of Greenwich Associates. Adjusted expenses increased 17% primarily due to incentive true-ups and acquisitions. This resulted in a 1% increase in adjusted segment operating profit and a 370 basis points decrease in adjusted segment operating profit margin. On the trailing four-quarter basis, adjusted segment operating profit margin increased 460 basis points to 62.4%. Non-transaction revenue increased 15%. Organic non-transaction revenue increased 11%, primarily due to fees associated with surveillance, frequent issuer programs, Rating Evaluation Service on increased M&A activity, and high-end new entity credit ratings activity. Transaction revenue was relatively flat as increases in bank loan ratings revenue were offset by a decrease in bond issuance compared to a very strong fourth quarter of 2019. As we have seen time and time again, the various parts of the ratings business often move in opposite directions with some up and some down in any given quarter or year. This quarter non-transaction revenue was strong, while transaction revenue was unchanged. Non-transaction revenue is generally a steady source of growth, but the broke out to the upside in the fourth quarter. About the one-third of the organic growth in the fourth quarter was from surveillance fees and frequent issuer programs that are more occurring in nature, about one-third was from large jumps in RDS and new entity credit ratings, which we expect to continue to be strong in 2021 and about one-third was from other items. This slide depicts ratings revenue by its end markets, the largest contributor to the increase in rates revenue was an 8% increase in corporates. In addition, financial services revenue increased 6%, structured finance decreased 6%, governments decreased 3%, and the CRISIL and other category increased 8%. On the right side of the slide, you can see the changes in revenue within structure products. The largest change was in CMBS, which was due to a 64% decrease in global CMBS issuance. And now turning to Platts. Reported revenue increased 5% with core subscriptions increasing 6% and global trading services decreasing 5%. GTS revenue decreased mainly due to lower natural gas and iron ore volumes, partially offset by increased LNG volumes. Also due to COVID, our conference business revenue was down about $1.5 million in the quarter. Adjusted expenses increased 7% due to incentive true-ups and growth investments. Adjusted segment operating profit margin decreased 100 basis points to 51.7%. The trailing four quarter adjusted segments operating profit margin increased 230 basis points to 54.7%. The fastest growing categories during the quarter were petrochemicals up 18% and power and gas up 6%. Petrochemicals had a favorable comparison to a weak fourth quarter 2019. We recently filed the S-4 and received a handful of questions about the document. They were generally related to the two topics on this slide. The first question was, if the 2021 standalone adjusted diluted EPS in the S-4 was our guidance. If not, the $12.36 figure in the S-4 assumes that we will continue to repurchase shares in 2021 as a standalone company. However, as we have stated, we think that it is unlikely to oversew share repurchases before the merger with IHS Markit closes. Therefore, our 2021 guidance assumes no share purchases. The second difference is that the S-4 figures were based on our October internal forecast. Our initial 2021 guidance is based on our most recent internal forecast, which has improved outlook primarily due to increased growth in ACP and our subscription businesses and AUM in our Indices business. The second question was, why the cash flow figures in the S-4 differ from the figure stated on the merger conference call and our normal free cash flow reporting. These are two different views of free cash flow. The S-4 provides an unlevered free cash flow forecast typically utilized to value companies via a discounted cash flow analysis. The difference between the unlevered free cash flow in the S-4 and the free cash flow in our guidance and discussed on our merger call is that the S-4 definition includes stock-based compensation expenses and acquisitions and excludes interest payments. We’re not providing 2021 GAAP guidance because given the inherent uncertainty around the merger. Management cannot reliably predict all of the necessary components of GAAP measures. And this slides to picks our adjusted guidance. While we expect that the merger will occur in the second half of this year, we’re providing adjusted guidance on a standalone basis. Revenue increasing mid single digits, corporate unallocated expense in the range of $140 million to $150 million, an increase over the $128 million in 2020, due to some expected normalization of pandemic related cost savings. Deal-related amortization of $95 million to $100 million, a decrease from the $123 million in 2020 at certain assets have been fully amortized. Operating profit margin in a range of 53.8% to 54.3%, which is 50 to 100 basis points higher than in 2020. Interest expense, net, which includes both interest income and interest expense in the range of $120 million to $125 million. This is lower than the $141 million in 2020 due to the recent refinancing of a large portion of our outstanding debt. Tax rates in the range of 21.5% 22.5%, which is consistent with the 21.5% reported in 2020. Diluted EPS in a range of $12.25 to $12.45, a 5% to 7% increase over 2020, while this growth rate might see modest, it is 29% to 31% higher than our 2019 EPS. That’s an average of about 15% per year, we just happened to achieve most of this increase in 2020. Also keep in mind that these figures assume no share purchases in 2021. And finally, free cash flow generation in a range of $3.3 billion to $3.4 billion, which is flat to up $100 million compared to 2020 due to improved business performance, partially offset by normalizing cash collections, following a strong year with record low delinquencies in 2020. In addition to the slides that we have refute on this call, there’s an appendix with additional fourth quarter slides that can be downloaded from the investor presentation section of the investor relations website. In conclusion, 2020 was a very strong year for S&P Global. Despite the recession, all of our businesses grew revenue and we improved our adjusted operating margin by 310 basis points. Year after year, we have demonstrated our ability to grow revenue and adjusted operating margin and we don’t believe that we are close to being done. We remain encouraged about our future and if just introduced 2021 adjusted guidance that reflects our optimism. Finally, I wanted to echo Doug’s comments about our employees. They continue to perform at an exceptional level in difficult circumstances and Doug, myself, and the rest of the leadership team applaud their tenacity and innovativeness. And with that, let me turn the call back over to Chip for your questions.

[Chip Merritt:]

Thank you. Just a couple of instructions for our phone participants. Operator, we will now take our first question.

[Operator:]

Thank you. Our first question comes from Toni Kaplan from Morgan Stanley. You may ask your question.

[Chip Merritt:]

Toni, you might be on mute.

[Operator:]

Toni, your line is open.

[Toni Kaplan:]

Announcement of buying IHS Markit, what’s been the reaction from your largest customers and from your internal business units. Is there anything in particular that they’re excited about or conversely concerned about that maybe you weren’t expecting initially?

[Doug Peterson:]

Toni, hi. This is Doug. Let me take that. Well, first of all, thank you for joining the call today. And since we announced the merger with IHS Markit, it’s been great excitement from our customers. We have heard in particular from the financial institutions about all of the capabilities we’re going to be bringing together from the energy industry. We’ve also seen a lot of excitement from the people that are interested in ESG. Our employees are also very excited about that. We know each other. We had worked together before between our index business, their fixed income index business and our index business. People know each other there we’ve had great respect for Lance and for the team at IHS Markit. And so there’s excitement across the board and we see things are very positive. One final comment, as you saw in the slide, we talked about parallel paths. One of those is integration planning. So our teams have started to get to know each other through the integration work that we’re planning for. And again, there’s a lot of respect for each of the teams and a lot of progress being made there.

[Toni Kaplan:]

Great. Wanted to ask about the market intelligence strategy going forward. Historically, you’ve been positioned as the lower price competitor relative to peers. And with all the assets that you’ve purchased over the years and with the eventual integration of IHS’s data. Does your strategy change going forward? Would you expect to be at a higher price level or should we expect your growth to be more driven by adding more customers? Or maybe it’s both, just how do we think about the strategy there? Thanks.

[Doug Peterson:]

Yes. This is a really a little bit premature for me to be giving you the strategy. But if you think about what we’re going to be bringing together, market intelligence right now has a really strong base of installed customers, hundreds of thousands of users that are already using our information. So you think about that as one distribution channel for all of the very rich IHS Markit data. On the other hand, IHS Markit also has very powerful tools, which include workflow for financial institutions and for corporates and asset management industry, et cetera. So getting those two together is going to allow us to have a much more comprehensive strategy, both looking at the value that we bring, which you talk about is a price strategy. But I think of more as a value strategy that expands that. And then also ability to bring much more – many more products and services to all of the different kinds of customers that we serve.

[Toni Kaplan:]

Thanks a lot.

[Doug Peterson:]

Thank you.

[Operator:]

Thank you. Our next question comes from Alex Kramm with UBS. You may ask your question.

[Alex Kramm:]

Hey, good morning. Just going through the base business for a minute here on the Ratings side. I think you made the comment, Doug, that the 3% issuance forecast, we should not take that as an indication of revenue. So can you just flesh out the other pieces we should be thinking about? I mean, clearly there’s going to be a much different mix this year. You obviously have some pricing opportunities. And then clearly, the recurring revenues have been running along very nicely. And maybe talk about the sustainability of those. So anything that can help us bridge that gap to how we should be thinking about revenue there. Thanks.

[Ewout Steenbergen:]

Yes. Good morning, Alex. This is this is Ewout. As we have said many times about the Ratings business, it doesn’t always rain everywhere at the same time. So there are all these components that are growing up and several other components that are going down, but in aggregates, the outlook for Ratings looks always quite constructive. For 2021, overall from a revenue perspective, we expect low to mid single digit growth for Ratings, and that is particularly helped by non-transaction revenue. Non-transaction revenue, we’re currently estimating to grow at the mid to high single digit level in 2021, that is being held by higher surveillance fees based on more bonds outstanding based on the issuance levels last year, frequent issuer programs, Ratings Evaluation Services, which we expect to continue to be held by the M&A environment. And then in terms of a mix, there’s always some elements that are going up and down. And then in addition to that, we should also see some benefits from new products. So overall, I think a very constructive outlook for Ratings and again, overall from a revenue perspective for the full year, low to mid single digit revenue growth.

[Alex Kramm:]

Excellent, thank you. And then secondarily, Ewout, you made this comment briefly that in terms of share purchases, you could be doing something before the deal closes, if there was an open window. So maybe just flesh out what an open window means. And then related to that, what are your minimum cash requirements on a standalone and combined company. So we can dimensionalize that a little bit here. Thanks.

[Ewout Steenbergen:]

Yes, Alex. We would love to do share buybacks but our certain regulatory limitations that we are facing this year. I think for example, about the current period, where the shareholders vote is underway. So we would not be able to do share buybacks until the shareholders meeting on March 11. Of course, we have also closed windows with respect to our quarterly results, and then we should not be in possession of material non-public information. So a combination of those elements might make the windows that we can do buybacks quite limited. And therefore we think it is likely we can do buybacks. But if there is an opportunity and from a legal perspective, we should be clear we definitely would like to restart some of the buybacks. Otherwise, we will do that post-close of the merger. There’s definitely going to be at that point in time, some catch up buybacks, because of course we’re falling short towards our return targets at this point in time. And then as we have stated at the merger call, in terms of our new financial targets, we’re expecting to return at least 85% of free cash flow going forward for the combined company and the combined company from a free cash flow perspective should have a very strong profile north of $4 billion out of the gate in terms of free cash flow and growing to about $5 billion or north of $5 billion in a few years’ time. From a balance sheet perspective, we will have a very robust balance sheet in the future with leverage ratio in a range of 2% to 2.5%, of course, we will have some minimum cash, but absolutely we are currently excess cash, surplus cash that we’ll return to shareholders once we have the opportunity to do so.

[Alex Kramm:]

Fantastic. Thank you.

[Ewout Steenbergen:]

Thanks, Alex.

[Operator:]

Thank you. Our next question comes from Ashish Sabadra from Deutsche Bank. You may ask your question.

[Ashish Sabadra:]

Thanks for taking my question. So just on – as you’ve commenced your integration planning activities, obviously, you’ve given a pretty robust cost synergy targets as part of the merger. But are there areas that you’ve identified that could be potential incremental opportunities as you go through this integration planning? Thanks.

[Ewout Steenbergen:]

At this moment, the expense synergies of $480 million is still our best estimate at this point in time. Please keep in mind, we’re still in a planning phase and both companies are run separately and independently. You know versus management, you know our management philosophy and approach will always look for further opportunities, but the $480 million of expense synergies is the number we are committed to right now.

[Ashish Sabadra:]

That’s very helpful. And maybe just a quick follow-up to earlier question Toni asked. Just around the data as well as the Kensho’s data science. I was wondering how do you think about opportunities to further enhance the data leak that IHS Markit has the combining the data that S&P has, but more importantly applying Kensho’s data science on top of it. Wondering, if you could share any incremental thoughts on that front.

[Doug Peterson:]

Yes. Thank you, Ashish. And welcome to the call. I think this is the first time we’ve had you on the call. Well, first of all, this is one of the areas that we’ve got a lot of excitement about it. If you think about what is like to have the amount of data across both companies and you see the success we’ve had with Kensho the last few years. Today, we highlighted many of the new areas that they’ve been providing a great success. And we think about the data that IHS Markit brings, just as an example, there’s 50,000 customers in 140 countries, they’re serving 80% of the global Fortune 500, 94 of the largest companies in the U.S. And then on top of that, with the pricing data, the reference data, the private market solutions, the fixed income benchmarks and indices, and then all of that put together in a comprehensive data strategy with the data lake. That’s going to give us an ability to take the Kensho capabilities and develop all types of new products and services. If you think about that, though, in addition, IHS Markit also brings its own high-quality data sciences teams and across S&P Global, we also have other high quality data sciences team. So this is one of the areas of the merger that we’re most excited about. And we’ve got teams that have already started looking at what some of those possibilities are.

[Ashish Sabadra:]

Thanks, Doug. That was very helpful color.

[Doug Peterson:]

Thank you.

[Operator:]

Thank you. Our next question comes from Andrew Nicholas from William Blair. You may ask your question.

[Andrew Nicholas:]

Hi, good morning. Just wanted to ask maybe a bigger picture question, just wondering how you as a management team manage the different investment opportunities, growth initiatives, hiring plans for the standalone business with such a major merger expected to close later in the year. Are you a bit more hesitant to commit to multi-year projects, again, for the standalone business? Knowing that there could be hierarchy by opportunities that present themselves as a combined entity or do you just kind of keep your head down and run the existing business and address those opportunities when the time comes? I’m just curious any insight on how you plan and manage that during the waiting period would be helpful.

[Doug Peterson:]

Andrew, this is Doug. I’m going to start and then hand it off to Ewout. When we’ve been – as you’ve seen earlier, we spent $139 million last year on a budget of $150 million of a target. And this year, we’ve targeted $100 million for our incremental growth expenses. We have a process around that. I’m going to hand that off to Ewout to talk more about that. But what’s important for us is that we are managing the company for the long run. We think that there are opportunities for us to continue to grow in the Ratings business and Platts, Market Intelligence and Indices very specifically with the capabilities that we have today, expanding into new markets, like we’ve mentioned Asia or China. New product capabilities or customer experience that we think are very important to continue with our differentiation that drives our growth. So we’re committed to all of those organic investments that we see internally and to keep driving those. But as I just mentioned, there’s also so many possibilities of bringing the two companies together. It’s too early for us to plan those. As Ewout mentioned, we’re two separate companies, we’re managed separately. But we can start dimensioning those and working together to identify what those could be. That’s one of the reasons we pulled back the investment from $150 million to $100 million this year, because we didn’t want to overextend people on areas that they might not be able to deliver once we start focusing on the integration. Ewout, do you want to talk a little bit more about our investment planning.

[Ewout Steenbergen:]

Andrew, the way how we operate here is we have a committee – an investment committee that is built up by the business presidents and myself. And we’re looking at all the growth initiatives that are being put forward. These are initiatives that should drive revenue growth going forward and should have a minimum level of investments, because we don’t want to look at all the small investments. So these should be larger growth initiative for the company that you’ve helped with revenue growth in the future. And we make selections, which of those are the most interesting, where we would allocate our resources. It’s not only financial resources, more often, of course, product development resources, technology resources might be limiting factors there as well. And then ultimately, we allocate funding to those initiatives. And we are very encouraged about the growth of those initiatives. As Doug has mentioned during the prepared remarks, we have seen a lot of product launches in 2020, we’re seeing good traction of those initiatives. So we’re very encouraged at the level of innovation and new business development that we’re having within the company. And we’re continuing with that as well in 2021, please keep in mind that although the overall investment number is dropping, it doesn’t mean that those costs are going away. Because after two years, when an initiative is funded for a period of two years, it goes to a business as usual situation and those costs will become part of the normal business as usual bucket of the deficient. So it is not really a total expense drop, but the investments – the new investments in their first two years is going to be about $100 million in 2021. So still I think a very good number, a strong number, and all of these initiatives from our perspective, make sense independently of the merger, because they all are good initiatives that will help also the combined company in the future.

[Andrew Nicholas:]

Great, thank you. That’s helpful. And then as my follow-up in the index business, I know you’re still six to nine months away from closing. But I am curious, if you have any initial thoughts on kind of the strategy or change in kind of distribution approach that might be required as you kind of focus on building out fixed income and multi-asset ETF products. Just trying to figure out how those businesses might differ from equity ETFs and that kind of ecosystem, if at all. Thank you.

[Doug Peterson:]

Thank you. And there’s not a major change in the distribution strategy. Dan Draper, who joined us middle of the year, last year has put in place an excellent strategy to look across all of the different types of asset classes we want to be covering, which include multi-asset classes. Looking at what’s all of the major trends in the ETF markets, the mutual fund industry, as well as private investors and finding ways for us to bring the solutions that they need. As you can see from the growth in the markets, the growth is coming across many, many different types of asset classes, including fixed income and equities, global equities, commodities, real estate, et cetera. And so we want to be able to approach all of the different channels that we have with this broader set of capabilities and broader set of indices. And so it’s not going to be so much a change in distribution strategy. It’s a change in the capabilities and the breadth of the different kinds of products we’ll be able to provide.

[Andrew Nicholas:]

Got it. Makes sense. Thanks a lot.

[Doug Peterson:]

Thanks Andrew.

[Operator:]

Thank you. Our next question comes from Jeff Silber from BMO Capital Markets. You may ask your question.

[Jeff Silber:]

Thanks so much. Ewout, you were kind enough earlier to give us a little bit of color on the revenue guidance for the Ratings segment. I was wondering if we can get similar comments on your other three segments. Thanks.

[Ewout Steenbergen:]

Of course, Jeff. Mid single digit growth is the expectation for Market Intelligence and Platts, and then mid to high single digit revenue growth expectation for the index business and then on an enterprise basis mid single digits for this year.

[Jeff Silber:]

All right. Great. Sounds like you were prepared to answer that question. I appreciate that. Moving back to your slide presentation, I think it was Slide 19, where you talked about the shift in global issuance among the different aspects. I’m just wondering, is there a meaningful impact either on your revenues or margins because of this shift? Thanks.

[Doug Peterson:]

Let me take that one, Jeff. Well, first of all, as you know, there’s always a lot of shifts around the different kinds of issuance. And just a couple of examples in the fourth quarter, while the corporates were only up 2.7% and the U.S. financial institutions were up almost 27%. At the same time structured finance was down 27% globally. So you always see this kind of a mix in the aspects of the Ratings business, we see generally speaking fees based on the size of a transaction for a structured finance based on the complexity and size of structured loans of, if you look at leveraged transactions, high yield bonds, et cetera. Generally speaking, we do get higher fees from those types of asset classes.

[Jeff Silber:]

Okay, great. That’s really helpful. Thanks so much.

[Doug Peterson:]

Thanks, Jeff.

[Operator:]

Thank you. Our next question comes from Owen Lau from Oppenheimer. You may ask your question.

[Owen Lau:]

Good morning. Thank you for taking my question. Doug, you mentioned that there have been some high profile default in China, and there’s an increased sensitivity in the quality of local rating. Could you please talk about your recent conversation with China on this topic? Is any short-term solution and does it accelerate the timeline for China to open up its capital markets? Thank you.

[Doug Peterson:]

As you know, we’ve been encouraged to China bond market continues to develop. This is something that despite me saying that there have been some defaults. It’s not that I’m encouraged about to default, but what you see now as the regulators are really starting to pay attention to the quality of the Ratings in the markets, as well as the market participants. We have seen recently that the regulators have started to put in place some new discussions around eliminating AA floor for the insurance industry. They’re also looking at seeing if they’re going to have a new approach to regulating the Ratings industry. So there’s also been some interest among specific market participants at a recent report. We put out which showed what the spread would be of a different bonds that you compare them to a rating scales. So we’re very encouraged at the Chinese bond market. It continues to develop the regulators are focused on it, and most importantly, investors themselves are looking at seeing how they can drive a much higher quality credit ratings industry.

[Owen Lau:]

Got it. That’s very helpful. And then in terms of your blockchain initiatives, I think, Doug, you also mentioned Distro previously for the renewable energy. Could you please give us an update on that project? And then also, I remember like two or three years ago, you also mentioned a project at the Port of Fujairah. Could you please also give us an update as well? Thank you.

[Doug Peterson:]

Yes. W we think that blockchain is one of the areas that will continue to develop and financial markets from the point of view of contracts, specialized contracts, the ability to gather data in a way that becomes reliable and it becomes unchangeable. And so the place that we’ve been working on this in the company is through Platts. The first application was in the Fujairah Port, where now all of the participants in that major port provide all of their data through a blockchain application that goes to the regulators. And then we have access to that to be able to use it for pricing, for references as well as for news. And then we recently worked on the Distro project, which allows us to also get that same kind of information in another market as we advance this, it’s something that we’re learning across the company. We think blockchain will be an area that with IHS Markit, we can advance our work. And we’re very pleased that we were able to have some initial wins in especially with Fujairah and then in Rotterdam.

[Owen Lau:]

Got it. Thank you very much.

[Doug Peterson:]

Thank you, Owen.

[Operator:]

Thank you. Our next question comes from Craig Huber with Huber Research Partners. You may ask your question.

[Craig Huber:]

Great, thank you. Two questions. Maybe I’ll start with Ewout or Doug, maybe talk about this merger of the playbook or the similarities you guys are going to put in place here. I’m trying to think about this versus where your company was at versus say three, four, five years ago, when all the changes you guys put in place to raise margins, increase the efficiency at S&P legacy and what you learn there. And you plan on applying on that side of the business over IHS going forward. You talk – touch on that briefly pleased the playbook.

[Doug Peterson:]

Yes. So Craig, let me start. This is something that we’ve thought a lot about. And when we were working on this idea with our management team and our Board of Directors, one of the most important questions that I asked and we had good discussion with the Board is do we have the capacity to undertake a transaction like this and that includes our management capacity, our people, our team, our technology, what are the lessons learned we’ve had, do we have in particular, the ability to undertake an integration like this. And one of the other questions that we asked is, and what kind of talent will IHS Markit bring as well. And as we did our due diligence and we already knew the team, but as we got to know them better, we were impressed that they were also going to bring a really high quality management team that would be complimentary to ours and that together we could actually undertake something like this. But one thing that we’ve done over the past five years is we put in place a very disciplined approach to managing the company. And it starts with an annual plan that we look at with the Board of Directors. We agree on, it then leads to goals and objectives, which feed into our own performance, individual performance goals, as well as our divisional and functional performance goals. Those include areas that our customer operations people. So it’s not only driven by financial performance. We also include operational targets, which includes risk management targets. So we put in place a management system, which we think will be work very well with the IHS Markit team. And if we wouldn’t have had the confidence that we had that, that process in place now for many years that we’d been delivering and that we had the capacity to do something like this and along with the quality of the teams coming along, we would not have undertaken something like this.

[Craig Huber:]

And then my follow-on question is more of a nitpick here. The non-transaction line within ratings, you touched on this brief with that obviously is up 15% or so year-over-year. It was also up 15% coincidentally versus the average of the first three quarters as you know. You talk about guidance for this New Year, I think about mid-to-high single digits for non-transactional ratings for the New Year, which is higher than generally runs that. But if you just annualize that 451 yet for non-transactional ratings and you apply that for all of next year on a year-over-year basis, that would be up at that 11%. So clearly there must be something sort of one-time in nature that benefits you guys in non-transactional ratings in 4Q. If you could just touch on that, I just want to understand that great increase you had there. Thank you.

[Doug Peterson:]

Hey Craig, that’s a great observation. 15% is the non-transaction reported revenue growth. 11% is to organic non-transaction revenue growth. The difference of the 4% is driven mostly by CRISIL and CRISIL’s acquisition of Greenwich Associates. Greenwich Associates has a certain pattern in terms of recognizing revenues and expenses that is mostly in the fourth quarter of every year, given their level of activity. So that’s why that difference between organic and report at non-transaction also bates larger than normally you would see in a particular quarter, but that’s what’s driven by that particular acquisition. Therefore 11% is more what you should look at from an ongoing basis organically. And then we set those one-third is coming from the – revenues coming from non-transaction revenues from surveillance and another one-third from a rating evaluation surfaces that we also expected to be strong in 2021. So therefore to mid-to-high single digit growth outlook for non-transaction this year.

[Craig Huber:]

Thank you.

[Doug Peterson:]

Thanks, Craig.

[Operator:]

Thank you. Our next question comes from Hamzah Mazari from Jefferies. You may ask your question.

[Hamzah Mazari:]

Good morning. Thank you. My first question is just on Market Intelligence margins. Could you Ewout talk about how you’re thinking about margins here? Is this sort of a cross margin and we bear it from here? Just given some of the investment spend and just given your longer-term target for this segment being I guess mid-to-high 30s.

[Ewout Steenbergen:]

Good morning, Hamzah. If you look at the Market Intelligence margins for 2020, they were for the full year up 30 basis points and what you see is underlying growth from operations and the normal operating leverage that the business is having. But then the offsets were some of the acquisitions that were margin dilutive, for example, the 451 Research acquisition, as well as the investment spent. The investment spend should translate in 2021 to additional revenue growth. So we should start to see the benefits of those investments spend in 2021 and also overall the investment spend for Market Intelligence will come down a bit. So overall we should expect that operating leverage will be stronger, and therefore also the margin expansion will be stronger for Market Intelligence in 2021. So what we overall expect is Market Intelligence margins to see quite a nice increase during this year.

[Hamzah Mazari:]

Great. And then just a question on the deal, is it fair to say that don’t expect any new information until the deal closes around sort of synergies, revenue synergies, cost synergies, cash integration costs or do you expect to sort of release information as you’re going through this pre-planning phase?

[Ewout Steenbergen:]

Hamzah, of course, we are going through the planning phase, a lot of work is underway, more work to be done up to the point that we will close. At this moment, this is the information that we can provide to you as you know the S-4 is now effective and would expect some updates closure to the close of the merger itself or post the merger itself. So we are not really planning to give any changes in updates between now and the close.

[Hamzah Mazari:]

Got it. Thank you so much.

[Doug Peterson:]

Thanks, Hamzah.

[Operator:]

Thank you. Our next question comes from Simon Clinch with Atlantic Equities. You may ask your question.

[Simon Clinch:]

Hi everyone, thanks for taking my question. I was wondered if I could just going back to the fantastic sort of innovations products that you outlined from your Kensho capabilities. Could you just talk about how those kinds of new innovations feed through to actual incremental revenue opportunities for your over time in terms of the sort of process of distributing them to customers and when you actually start monetizing them. And then are these the kinds of things that are built into your expectations for revenue synergies in part for the IHS merger as well?

[Doug Peterson:]

Yes. First of all, let me mention that when we talked earlier about some of the growth that we’ve seen in the Kensho indices where we grew 10 times in the spider Kensho indices new economy indices. That’s something that directly drives revenue. We have other areas where something like our OmniSearch, which is a ability to have an intuitive search tool on a Market Intelligence platform. That’s something that drives traffic and it drives retention. It gives you a superior ability to gather data from the markets until link it. And so that again is something that drives a retention. And another example would be something like we talked before about being able to ingest $11 million new company data from groups like Preqin into our private capital information and something like that drives the ability for us to have unique data faster than any other organization. Another example of that would be something like market on close in Platts, where we started off with one pilot, now we’re up to 80 different commodities that are using a new process. It gets our information in the market 80% faster. So we think that all of these whether it’s efficiency, it’s data linking its actual products themselves that are being delivered by Kensho all of those at the end of the day, help drive customer experience or directly drive revenue.

[Ewout Steenbergen:]

And Simon, if I may build on Doug’s answer, the revenue benefits from Kensho you see now within the division. So it’s all recognized within the divisions. I think over time, you would see more also external revenue coming from Kensho again, some of Kensho capabilities are now offered on the marketplace or sold directly to certain customers. So that’s a benefit that will come in. So Kensho was pivoted more internally for the first period, but we see a little bit of change more pivot to an external focus, again over the next periods. And then to the last part of your question, what could this do for the merger. At this moment in terms of the merger synergies, we had not contemplated any benefits from Kensho. So we’re actually also excited to see what Kensho can do, and I cannot wait to see if we can unleash Kensho, and we have had some first planning meetings around that as well. So Kensho is definitely going to be a very interesting element to the merger and some of the upsides of the merger going forward.

[Simon Clinch:]

That’s really useful. Thanks very much. And I guess my follow-up question tend to the ESG business. And I guess what I’m thinking about is obviously the evolution of your business particularly with the RobecoSAM survey asset that you have involving that over time to become something more nimble and more flexible as opposed to just an annual survey and how you might be able to use that to really service and leverage that in terms of servicing the corporate clients for various needs over time perhaps you could talk about that opportunity.

[Doug Peterson:]

Yes. This ESG is definitely one of the most exciting areas for us at the company. As you saw, we had $65 million of revenues last year, which had been growing at a 40% pace. And when you bring the capabilities of IHS Markit together, we’re going to have scores and time series, workflow platforms. We’re going to bring emissions data from IHS Markit. IHS Markit also has the fixed income indices, and they’ve got information about plastics and other sorts of model of metals that are used in batteries. So bringing these together are going to be something that are really new for us. And let me give you a couple examples, just imagine if you were a Chief Sustainability Officer, you mentioned the corporate clients, corporate clients are increasingly either through their treasure or directly as sustainability officer looking at how their own company is going to perform and what is their own individual approach to running their sustainability programs. We’re going to have the tools to provide them a rating. We’re going to build them. They’re going to have the CSA. We’re going to have the ability to provide them with more data to have benchmark against other third-parties. And then when you think about IHS Markit, ESG reporting repository, the carbon data that they bring that it will allow them to have the workflow tools. We think that this is one of the areas that will actually allow us on our own. And then together with the IHS Markit would be really building a very relevant, very powerful ESG model. One thing I would end with is that we just launched a new ESG website. I would recommend that everybody go look at it. You can immediately look for ESG scores of companies on it, and then it has tiles of all of the different capabilities that we have. And so this is something for us. You’re going to see a lot of investment here, a lot of focus on ESG. It’s one of the most exciting growth areas in the company.

[Simon Clinch:]

Great. Thanks so much.

[Doug Peterson:]

Thanks, Simon.

[Operator:]

Thank you. Our next question comes from George Tong from Goldman Sachs. You may ask your question.

[George Tong:]

Hi, thanks. Good morning. You expect global debt issuance to be up 3% in 2021. Can you elaborate on how you expect individual debt categories to perform including investment grade high yield loans and structured?

[Doug Peterson:]

Sure. George, this is Doug. I’m not quite sure if I can give you all of those categories, but what we’ve looked at in 2020 is, as I mentioned earlier, it’s about a 2.7% or let’s say a little bit close to 3% decrease for the year. But that includes financial services that we think will be up 3.5% structured finance up 2.5% offset by corporates, which will be down a little bit over 8% and U.S. public finance down about 5%. We do see a lot of demand coming from the M&A area. We think that between SPACs and what we see there, the activity from SPACs and other general M&A that pipeline is growing. And typically a lot of that is more in the high yield area, but in terms of high yield versus other types, I don’t really have anything further on that, but we do see that this year there should be a very different mix than we’ve seen in prior years.

[George Tong:]

Got it. That’s helpful. And Doug, it’s been two months since you announced the merger with IHS Markit. What additional findings have you had on the strategic opportunity during the course of due diligence? Would you like to call out?

[Doug Peterson:]

Well, there’s a couple I would call out that are maybe beyond what we’d originally thought. One of them is what I call private assets or being able to support the private equity industry. When we originally looked at this, we started looking at areas that were maybe a little bit more obvious in financial institutions and what we could do for debt capital markets for corporate treasures. One of the areas that I see a lot of upside is in what we call private markets, private equity, think about how much longer assets are staying private before they go public or the information that people would like to look at for their supply chain. And when you put the two companies together, you have tools that at IHS Markit, which for valuation IVAL and QVAL, they’ve got portfolio monitoring tools, high level. As you heard, we talk about earlier, we’ve been ingesting data from people like Preqin into our tools. And then we’ve got the information from 451 Research from money market directories, our Market Intelligence platform. And you put all these together and it’s going to be a very complete set of services of workflow tools, valuation tools, reference data, fundamental data about corporations that we wouldn’t have been able to do alone. And so that’s one of the areas that I was quite excited about. I also mentioned what we’ll be able to do with ESG that’s another area that’s the upside, I think there is higher than what I originally would have thought. And then finally, when we look at energy transition, which I – sometimes I think of energy transition as part of ESG, but for climate change and the interests that this is generating, it’s not always directly the same thing as ESG. This is another area that between what we’ve got in Market Intelligence and Ratings, but add that in with what we have between Platts and the resources business at IHS Markit. There’s going to be a lot of opportunities in new energy, new energy investments all of the things that are involved in EV, which also will bring some of the capacities from the transportation business at IHS Markit. So on energy transition, I think this is also another area that is well beyond what I probably originally contemplated.

[George Tong:]

Very helpful. Thank you.

[Doug Peterson:]

Thanks, George.

[Operator:]

We will now take our final questions from Manav Patnaik with Barclays. You may ask your question.

[Manav Patnaik:]

Good morning. Thanks for squeezing me in here, guys. Just to follow-up on the ESG, I apologize if I missed this earlier, but the $65 million in revenue for the year, how do you break that down between your research and data and perhaps in the indices and just some thoughts on the growth rates and the potential mix changes you anticipate as that portfolio evolves.

[Ewout Steenbergen:]

Good morning, Manav. If you look at the $65 million, which is 47% over 2019, we’re not really breaking it out for each of the divisions and initiatives, but directionally, how you should look at it is the Platts energy transition initiatives are a significant part of the revenues today. But what we are seeing is particularly high growth or new initiative the ESG scores, green evaluations, ESG indices fees. So particularly all the new initiatives are growing very fast and all of that together is driving this revenue growth up going forward. And Doug has given you some of the statistics and data, for example, underneath some of the ETF AUMs that are using our ESG indices. So overall I think it’s really across the board, but at the current macro level, I think Platts is a significant component of the overall revenues.

[Manav Patnaik:]

Got it. That’s helpful. And then I guess just staying on track mid-single digit growth, I guess estimated for 2021, Platts has historically always been pretty resilient to what happens in the energy markets, but the IHS asset has been much more sensitive. I was just curious how you guys look at 2021 and perhaps even beyond in terms of how that energy market fits into your strategy.

[Ewout Steenbergen:]

Yes, we are very encouraged about the opportunities to bring the resources business of IHS Markit and Platts together. I think it’s very complimentary. I think that will be a very large benefit for our customers with Platts having particularly a focus on price reporting as you know, and that is quite steady and stable. The resources business of IHS Markit that is going through a transition from more upstream to more downstream. The upstream business has seen some headwinds and might continue for a shorter period of time, but particularly downstream analytics is doing very well. So the opportunities to bring that together and to look at the commercial opportunities for the combined company is actually very attractive. Think about what we can do with respect to metals and mining, think about what we can do with respect to the analytics platforms, bringing that together for our customers, think about what we can do with the Data Lake and Platts analytics roles by unlocking the value of the data of IHS Markit resources. So we’re actually very encouraged and we think despite some of the changes, structural changes in the industry, that we can help our customers particularly also with energy transition.

[Manav Patnaik:]

All right. Thanks a lot.

[Doug Peterson:]

Thanks, Manav. Thank you very much. I’d like to just provide a couple of closing comments. I want to thank everybody for joining our call this morning and for all your questions and your support as always. As you saw 2020 was a very strong year for us during difficult circumstances. We made a lot of significant progress along the way with areas that we’d been in investing in over the last few years. As you know we had put in place investment programs and we started seeing them pay off as we called it the year of the product launch. And it has to do with our technology, our innovation, productivity programs that we put in place. We’re very proud about what we’re doing in China and the progress and advances that we’re making there. Our ESG program is starting to really take off and we think we’re very well-positioned. And then our own internal environmental performance and social outreach and our own ESG approach, we think is something that’s very important for our company. And of course, what is really most important for us this year is to continue to stay focused on the IHS Markit merger. We’re so excited about that. We’re always impressed with the people we meet with the capabilities, with the products, with the reach that they have and we think that that’s going to allow us to have a very strong opportunity in 2021 and beyond. And as I’ve said all along during last year and before we could’ve never made this progress without our people and the talented people that we have that are working very hard especially in 2020 during uncertain and difficult circumstances. I want to thank all of our people again. Everyone’s done a fantastic job. So thank you, everyone for joining us again today. And we look forward to continuing to talk to you throughout the year. Thank you very much

[Operator:]

That concludes this morning’s call. A PDF version of the presenter slide is available now for downloading from investor.spglobal.com. Replay of the entire call will be available in about two hours. The webcast with audio and slides will be maintained on S&P Global’s website for one year. The audio-only telephone replay will be maintained for one month. On behalf of S&P Global, we thank you for participating and wish you a good day.