JS Earnings Call Notes 2.11.2016 – Broadridge & McGraw Hill Financial

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Broadridge (BR) CEO Richard Daly said they won a large deal with Barclays Bank

“I am particularly pleased to report that we closed Barclays for Europe and Asia under our strategic alliance with Accenture. Barclays is our third client on the Accenture Post-Trade Processing platform, also known as a APTP.  As you know, APTP combines Broadridge’s leading post-trade processing technology with Accenture’s renowned brand and global business process outsourcing capabilities. With the signing of Barclays, APTP is evolving as the common back-office standard across Europe and Asia.”

As well as another large European bank 

“During the quarter, Societe Generale went live in London using our technology through APTP. This achievement is a meaningful proof point to virtually every major bank that APTP is now fully live and the only operating common European back-office versus what appears to be only theoretical competitive proposals.

Their clients are looking to reduce cost

“The target market remains large financial institutions that are looking for ways to dramatically lower their operating costs and increase scalability, thereby allowing them to focus their financial and human capital resources on revenue-generating activities.”

While their client retention remains extremely high 

“Just as important is our revenue retention which we maintain at a solid 98% level.”

Broadridge (BR) CEO Richard Daly said the recent market volatility is not 2008 all over again

Let me take a moment to provide some perspective on the financial markets and what it means for Broadridge. Last month was a volatile time for investors. From where I sit, I don’t see anything that resembles the financial crisis of 2008. Regardless, we’re well-positioned with multiple paths to achieve our goals. At our essence, we remain an asset servicing business, not a trading business. This means short term market fluctuations and volatility don’t have the same impact on us. When you are a managed services leader for the books and records, you don’t meaningfully participate in the upside in strong markets, but you remain critical and necessary in all markets.”

And the company is benefitting from specific macro trends in financial services firms

“We clearly are not solely relying on revenue from market-based activities to fuel our growth. In pursuing the opportunities ahead of us, we have identified three major macro trends — mutualization, digitization and data and analytics — that we believe are both disruptive and transformative to the industry. Each of these brings unique challenges for our clients — challenges that Broadridge, with its decades of experience and unique vantage point at the center of the financial services industry, is well-positioned to address.”

They intend on taking their debt levels higher to increase shareholder returns

To address compelling market opportunities, we’re committed to paying a meaningful dividend and returning capital to stockholders through share repurchases.  In support of our capital stewardship priorities, we will target modestly higher debt levels while maintaining our investment-grade credit rating.”

Broadridge (BR) CEO Richard Daly said one of Broadridge’s core competencies is navigating a changing regulatory landscape

As anyone who has followed Broadridge knows, we’re very experienced at successfully implementing regulatory changes. As always, we will implement effectively and efficiently whatever new policy the SEC ultimately determines to be best for U.S. investors and our capital markets. We remain confident that the SEC will ultimately reach a conclusion that best informs and protects investors in the marketplace while making the process more efficient and cost-effective through the use of technology.”

And scaling a solution is one of their strengths

Scaling is something we do for living. If you’re doing $5 trillion to $6 trillion a day in settlements, you need to scale. You need to understand scale and you need to be able to execute.  We believe that is one of the key reasons why APTP has been successful, in that you take two very strong players, you bring the best they have to offer and again, it’s not a secret that the industry has been talking about the need to mutualize costs.”

 

 

 

 

McGraw Hill Financial (MHFI) CEO Doug Peterson said every operating subsidiary of the company increased their margins

Margin improvement was a big story for the year. Our cost reduction efforts and revenue growth combined for a 280 basis point improvement in adjusted operating margin for the second year in a row. Every business delivered at least 200 basis points of adjusted operating margin improvement.”

The company saw weak global bond issuance in the 4th quarter due to market volatility

The big story during the quarter was weak global issuance.  Let’s take a look at issuance. The two largest markets, the U.S. and Europe, both declined capping a weak second half of the year for issuance. Fourth quarter issuance in the U.S. was down across the board. Investment grade decreased 17%, high yield 41%, public finance was down 21% and structured finance also declined 26%, with the only bright spot being RMBS. In Europe, investment grade decreased 15%, high yield down 10% and structured finance increased 11% with declines in every asset class offset by growth in covered bonds.”

With profound weakness in Asia and Latin America

The rest of the world had even weaker issuance, with Asia declining 47% and the Americas outside the U.S. declining 46%. In total, global bond issuance declined 26% outpacing the 20% decline in the third quarter.”

McGraw Hill Financial (MHFI) CEO Doug Peterson said their indices and data business is benefitting from the global boom in Exchange traded funds

The ETF industry surpassed 2014 record inflows, setting a new record of $351 billion in 2015, a great trend. AUM based on our indices increased 9% sequentially from third quarter 2015 to $815 billion, but below peak levels of the end of 2014. During the quarter, we continued to innovate, launching 233 new indices and 26 new ETFs based on S&P Dow Jones Indices.”

McGraw Hill Financial (MHFI) CEO Doug Peterson anticipates bond spreads widening

With this economic backdrop, we expect global debt issuance to decline 1% in 2016 and for spreads to widen. Within the U.S., we expect speculative grade corporate issuers to see increasing borrowing costs in the coming quarters at the back of the Fed interest rate increase. While most higher-rated corporate entity should continue to have a favorable lending environment as investors could pursue moderate yields while remaining more risk averse.”

And he expects the European area to issue more debt which will benefit their ratings agency

More favorable lending conditions in Europe, supported by continued monetary accommodation by the ECB should result in increased bond and loan issuance in 2016. The Central Bank’s recent measures combined with a softening in the regulatory stance may also bode well for higher issuance of securitized products, with modest increases in borrowing from the public finance sector.”

McGraw Hill Financial (MHFI) CEO Doug Peterson said they are changing the firm’s name

And now I’d like to conclude with some big news. The board of directors has proposed renaming the company S&P Global. This name better leverages the company’s rich heritage and our powerful financial data and analytics brands while signaling that we have a strong global footprint and broad portfolio. The change will be effective pending a shareholder vote on April 27. In addition to changing the name of the company, we will also be changing the names of some of our divisions. For example, S&P Capital IQ and SNL will be renamed S&P Global Market Intelligence.”

McGraw Hill Financial (MHFI) CFO John Callahan says their business is one of ultimately selling data to customers 

“What I would say on maybe a broader level is that we increasingly see the demand for data and analytics growing because of the heightened need for regulatory reporting for – I don’t want to use a cliché, but big data needs of corporations. So banks, insurance companies, asset managers, pension funds, other financial institutions, oil companies, large industrial companies that are managing huge credit books that they used to not have to manage, there is increasing demand for tools and solutions and data for them to manage their risk and make business decisions. And we find that what we are providing is really essential for those decisions. And we are seeing increasing demand. Now, that requires us to have data and high quality and being able to identify those pools of customers et cetera. That’s really part of our future growth plans and how we’re trying to position the entire company.”