S&P Global Inc. (SPGI) Earnings Call Transcript & Summary

Yes. There is a combination of some of the products like a Trucost, which is environmental data that goes back many, many years. It has algorithms which used to pull together climate, chemicals, water, waste usage, physical risk, et cetera. Even though you could go out and extract that data from public sources to go back 15 years, be able to pull it together in the use cases we have is quite difficult. So that's a case where there's a lot of judgment applied to extracting public data. We have other products in Market Intelligence like the banking and corporate products that are sold through Cap IQ Pro. That again, are -- you might say, well, they're coming from public sources, but it could be 50 or 60 different public sources that are extracting information, plugging them together, connecting them, making them visible, easy to use, with graphics, et cetera. Again, those are -- some of that data comes from public sources, but we turn it into proprietary solutions. And then some of the data we provide is truly publicly available data, but we deliver it in a way that it's really easy to use. So we kind of think about those different levels.

Got it. And before I forget that point on -- even though it's publicly available data, as you need time, money, compute costs, et cetera, I think we talked about this before, but just -- so it's not that easy, right, for a start-up to just come get the data and try and displace you?

No. We've looked at start-ups over the years trying to displace us. We -- first of all, we do have a venture investment program where we are investing in small fintech start-ups, those that are in spaces like the ones we're in. Over time, we bought some of those companies. Like I mentioned, Kensho was a company we originally invested in through our venture investment team. And then we bought Kensho. Trucost is an investment we made. So sometimes alternative data companies are so important or so valuable that we say, well, you know what, we can bring that in into our own company, and we can add on top of it a sales force or global reach, something that they won't have, the technology, to have the delivery or the scale of a team in India that can really help with the data discovery, et cetera. So even though we watch very closely, and there's some clearly always going to be threats in the start-up space, we watch that very closely and see if there's opportunities either to partner or buy as well.

Got it. All right. So then Commodity Insights, I mean, Platts is Benchmarks, so similar to Indices, but people I think are less familiar with the IHS assets you acquired. So how much of that data or what's the moat there in this space?

Yes. In this space, a lot of the -- what the data is there is forecasting. And forecasting obviously involves judgment. So the research and the forecasting is something that it's people oriented. It requires large data sets, which we can gather. We have access to because we've had them for hundreds of years, 50 years, 75 years, et cetera. So we have access to all of that historical data. But then what we're -- many times that we're selling beyond the benchmarks and the advisory business is the forecasting. And the forecasting is something that requires that expertise, the people, the models, et cetera. So to get into that business, yes, people could get into it. They're getting into all the time, but we have the scale, we have the global reach, we have the sales force and we have the experts and we have the brand. And you mentioned CERAWeek. CERAWeek is something where 8,000 people came together this year to understand what's happening in global energy markets and the transition there. And it was nothing like -- it was an incredibly unique opportunity, and that comes from S&P Global.

Got it. And then to wrap this discussion, the mobility side, just talk about CARFAX, Polk, kind of like how...

Yes. So CARFAX is a scale business with over 30 million consumers who are providing information about their own cars that then becomes an incredible source of valuable data for the dealers and for the OEMs. And then the interface with them as well. It's a unique source of information, along within Polk and automotiveMastermind, which are providing services for the dealers or for the OEMs. Think about it as if there's a set of tools that the manufacturers need for forecasting, for parts, for services, for supply chain, for interconnection, we provide those products. There's another set of products we provide to the dealers, so they can make informed decisions about their -- how they manage their lots, how they think about the supply that they need, the services they need to provide to the consumers that are buying cars. And then there's a bridge in between, which helps the dealers and the manufacturers decide if they need to provide rebates, how they're going to look at pricing. And if there's going to be recalls, we have services, we have tools that provide services to help an automotive manufacturer reach out to all the people that own cars to manage recalls. So about 80% of the business is subscription and 20% is some sort of services that could be variable. They're pretty consistent like recalls, things like that over time. But that's the way we look at the business. It's a combination of the OEM suppliers, the dealers, the bridge in between and all the different data services you can provide to them.

Got it. Thank you for that. Obviously, a lot of different businesses, important to touch on those. But I think one of the themes that unites the businesses is the ESG energy transition climate, the way you break it out. Can you just talk about some of the trends you're seeing there and more in the spirit of MSCI talked about some kind of temporary slowdown because of rules, regulations, political landscape. Are you seeing any of that?

Well, as you recall, when we started talking about ESG about 8 years ago, 7 years ago, 6 years ago, et cetera, I've always talked about it as 3, if you want to call it like a Venn diagram, 3 different bubbles that all overlap, ESG, energy transition and climate. And they're all interrelated, but they're quite different. And because we made major investments in all 3, we have seen some impact in the ESG world. It could become regulated. There's some pushback from some areas in the U.S. But that business is getting more sophisticated. There's more interest in the transparency of the kind of data space. We think that the demand is coming in the ESG area actually play to our strengths because we run our businesses with deep transparency, with information, high-quality core data, which is used to create a score or a rating or the research that comes around ESG. As this becomes regulated, we run our business as if it's regulated. So we think the ESG space as it transforms despite some of the weakness, it plays to our earnings. But we look at energy transition across all of S&P Global, we run the Sustainable1 business, horizontally. And you think about energy transition, we're providing data and analytics from what's the Commodity Insights business, about carbon, carbon oriented, oil, gas, energy transition happening there, the automotive sector, some of the things we can provide through Market Intelligence. And then within the climate space, we start with a really strong foundational base from Trucost which was an acquisition 7 years ago. We recently acquired a company called CICERO Shades of Green, which provides second-party opinions for bonds, for the bond markets through our Ratings business. We also have core basic data about energy transition, about physical risk. So we're able to provide data across the entire spectrum of S&P Global and all of these different businesses. So we haven't seen the same kind of impact because the biggest trend, sorry for such a long answer to your question, is that people are moving away from a single, simple, single point rating to understanding data. They want data. They want data that covers all of these different factors, and we can provide that.

Got it. No, thank you for that. So it's obviously growing really nicely. But in the scheme of things of your portfolio, it's still small. But how should we think about your current portfolio and kind of your vision and for the way these 6 companies sits together.

Yes. So think of it as if we have a business which the foundation of what we do is data. It's analytics. We're now adding in this AI component which has become more urgent. But fortunately, we're starting from a very strong position when it comes to the AI and the decision sciences tools. And we have that foundation of how we manage our data, how we link it and we serve markets. We serve people that make critical decisions tools where they're traders, risk managers, senior executives, CFOs, treasurers, supply chain managers, manufacturers, heads of sales businesses. And we do it for what are the most critical decisions they have to make. It's credit decisions. It's equity decisions. It's investment. It's in the supply chain for the automotive sector and others. And so we have the components in the Rating agency, Market Intelligence, the Index business, the Mobility and Commodity Insights to provide that information to the markets. And we're linked together by a core set of capabilities. As an example, how we think about managing the cloud, how we're thinking about AI. We leverage that expertise across the entire group. But at the end of the day, we also go out and we plan and we decide how we're going to run the company based on the customer in. And that's why we manage ourselves in the different products, in the different divisions.

Got it. And in terms of the future of the current portfolio, is that just standard kind of evaluation every year?

Yes. As you know, if you go back since I became the CEO 10 years ago, we're really relentless about pushing our businesses hard to make sure that they're delivering performance, that their investments that they're making are performing that we're delivering. We also look at the portfolio to make sure that what we're -- what's in it that we're the best owners, that it's a good fit, that we also have this discipline. So we're not going to lose that discipline.

Got it. One of the interesting things in the last call, I think you guys said that M&A going forward would be rare, I think was the word you guys used. It's interesting because a lot of our other companies are now talking about how they're seeing valuations come down and their pipeline pick up and they want to get more active. So just curious, from your point of view, why that different approach?

Yes, I'm not sure if rare is the right word to use. But maybe what we meant and what I'd like to say here is that it's not necessarily it's rare, but it would be rare for us to do something big. The types of deals that we've done over the last 6 to 12 months to 18 months have all been small, things like the climate service, CICERO, what we did with the small business market scan. All of these are small. They're tuck-ins. And each one of them have brought some source of value. As an example, CICERO, the second-party opinion business, which is really starting to grow in the debt space, is something that now we're positioned at the very top of the market because of what we were already doing and bringing CICERO. That allows us to accelerate the capability in the Ratings business that we can really move a lot faster and that we see happening. So that think about acquisitions are going to help us accelerate growth, they're going to accelerate the capability. But are we looking at something that's changing our entire way we think or buying new segments, things like that? That probably wouldn't be what we do right now.

Okay. Got it. Fair enough. In terms of the big merger, the integration going on, just to focus on the cost synergy side, first. I mean I think the 2 big areas are obviously Market Intelligence and Commodity Insights. So maybe starting with Market Intelligence, like what are the main buckets of those cost synergies? And how much is left?

Yes. Let me -- I'm going to answer the question slightly at a broader level. When we first were looking at the merger, we had -- believed there would be about $480 million of synergies. When we closed the merger, we bumped it up to $600 million. That's our target. We're now at a run rate after this last quarter, it came out at about $550 million run rate. We should be close to the $600 million by the end of the year at that run rate. So we believe we've achieved this pretty fast. Before I talk about the divisions, the first thing right out of the bat is we were able to save immediately overhead costs, the corporate center costs, look at things like real estate and vendors. And that was something that was a concerted effort. It was a team effort across the entire company to work together to move as fast as possible on these kinds of savings with a really strong organization in place that was very clear about what each of us were doing and what our accountability was. You take that philosophy now move to the divisions in something like Market Intelligence, there's a combination of the overhead expenses. You have a combination of data, how you're going to bring together servers, the back-office opportunities, the data integration opportunity. So there's not one single thing. It's actually a whole series of small things coming together allow you to drive very, very large savings. And at the end of the day, a lot of it's people. And you haven't seen us have to do any sort of a major layoff like a lot of other companies have because this was a natural consequence of the actual merger. We did have layoffs as part of the merger, as part of the synergies, but we've also been able to continue to grow without having to hire. So this is what we have for something like Market Intelligence. It's something similar for Commodity Insights. It's lots of small things that add up to big numbers.

Got it. It sounds like you're going to pass the $600 million pretty easily. But is it at a point where you don't -- like we shouldn't expect another raise of the cost synergies because it's also...

Yes. It's already a year past the time when we closed the deal. It's over 2 years since we announced the deal. I don't think it's fair for either us or you to keep trying to make it sound like we're getting so much additional juice. You'll see it just by our performance. Last quarter, our expenses only grew by 1% year-over-year. So you know that we've always been very judicious about expenses. We will keep that discipline. I talked about cash flow discipline. We also have a lot of expense management discipline. But we also want to take some of that expense management discipline and invest it for growth. That's part of our philosophy is that we've got these golden opportunities around us, and you've heard about some of them. I didn't talk about capital markets transformation. I talked about energy transition, but we also see huge opportunities in the capital markets space, whereas something like Europe is starting to move away from the dependency on the ECB for long-term investments, long-term liquidity injections to the banking system. They're moving to the capital markets. You have the shift between private markets and public markets, what's happening there. You have the Asia and emerging markets are moving towards capital markets. So there's huge trends that benefit us that can drive our growth. And we don't want to lose those trends by only worrying about expense. So we want to achieve the $600 million that we said. We will go beyond that, but we're not going to announce it because a lot of what we're going to be saving we're going to reinvest as well.

Got it. And so maybe switching to the revenue synergy side. Typically, investors tend to be skeptical about revenue synergies. But you guys sound pretty confident in the $350 million, I think, target that you set out there. Can you just talk about your visibility there? And why you guys are so confident about that number?

Yes, there's 2 ways that we think about that number. The first is cross-sell and the cross-sell is simple. It's just get in there and sell a product. Let's say, in the Commodity Insights business, a Platts client sell them IHS Markit services and vice versa, same with Market Intelligence. Those got off to a really fast start. And the S&P Global brand is 1 of the reasons. It was very easy to open the door for -- using the S&P Global brand and getting in there to sell these new products and learn from our customers. So cross-sell was what we move the fastest on. And over time, that will be about 50% of those synergies because we see that accelerating and moving quite fast. The other 50% is going to be from new products and services. As an example, we've launched a product where we take Platts forward curves, which, in a sense, is forecast of prices and volatility in energy markets and move those into the IHS Markit delivery platform. So you're taking data from 1 business, moving into other and creating a brand new product. That is something that's actually quite fun. We see an opportunity in the Index business, and we started launching some new already because I can talk about them, products for the insurance channel, which are geared towards taking equities and fixed income and bringing those together. So it's the S&P 500 and S&P oriented equity products with iTraxx, CDX, which are credit and fixed income and putting those together for the insurance channel. That is a synergy. And so we're -- right now, we came out of the last quarter at a $52 million run rate, and we expect that will get -- the bulk of that is going to come in year 3 and 4. But we're off to also a really strong start on that.

Got it. Just to touch on 1 risk point that we always get asked on, and perhaps just because we've covered the business so long, is regulation basically, right? I don't see anything that's of risk, but just curious. You obviously go to DC. You meet a lot of regulators. Is there anything around regulation that we should be keeping an eye on?

Well, first of all, we're always watching the regulation very closely. The main -- there's a couple of main themes on regulation going on right now that are active. One of them relates to ESG. There's a lot of discussion. And with ESG, there's 1 angle, which is coming from the point of view of disclosure. There is a group called the ISSB, which is the International Sustainability Standards Board. They're looking at global standards. It'll probably start in Europe. That will -- that's probably beneficial to us because the more standardized disclosure there is from companies on their ESG footprint, the more that gives us standardized data to build products from or have analytical tools, which companies and investors can use in a standardized way. So that's -- net-net, that's beneficial to us. There could be some regulation related to ESG services, ESG scoring. Again, we already run our business as if it's regulated. We have the experience from our Ratings business on firewalls, on segregation of duties, on conflicts of interest, et cetera. We already run our business like that. So I don't think there'd be any major impact there. And then there's dabbling here and there around the world, people looking at index, potential index regulation here and there or how maybe the next round of could there be another round of rating agency. There's nothing out there right now that's far enough along that we probably need to worry about right now.

And in an ironic way, regulation is also a competitive advantage for you guys, right, because you -- I mean, that prevents other people from entering the space.

Well, the way we think about it, no matter how we're going to run our business, our major clients globally expect that we operate our business as a very high level of assurance. And so whether regulation comes in or not, we're always going to run our businesses with high quality controls because if our largest financial institutions, corporate customers, government customers, they're going to expect that that's the way we run our businesses. So regulation is something that in some ways we can always live with.

Got it. And then just last question to end here. We talked about M&A, but just maybe just a broad starting point on how you approach capital allocation with the tons of cash that you throw out.

Yes, we go back many years ago when Ewout first joined us. And Ewout and I had a lot of discussions with our finance committee and our Board about how do we want to think about capital allocation. And I wanted to have a standardized framework that you could understand, our shareholders would really understand that, and there wouldn't be surprises. You'd say, well, why are you doing this? Or why are you doing that? So we have a very standardized framework. And that is that as we generate cash, our free cash flow, we have a target or a guideline that 85% of that will be returned to the shareholders, of which that will be through dividends and through stock buybacks. The other 15%, generally, we think about it for investments, for M&A. If we don't have anything to do with it, we're going to return it. if we needed more of that dip into the 85%, we dip into the 85% because it's really guideline. But that's a guideline we have and we want to be able to return cash to our shareholders. We also want to be able to invest for growth and invest for innovation. And we think that, that balance of that 85%, 15%, has given us that capacity to invest for growth and invest for the future and also ensure that we're returning really very nice returns to our shareholders. So that's the approach. As you recall, before the merger, our threshold was 75%. So that's one of the benefits of the merger. We've had a lot of corporate finance benefits from the merger. We don't talk a lot about but we've had a lower tax rate. We've had the ability to refinance the balance sheet at much lower interest rate level. We were able to work on a capital framework, which increased our free cash flow target from 75% to 85%. So if you look at that aspect of the deal, we don't talk a lot about. From a corporate finance point of view, it's been also a really successful deal because it allows us to have a more efficient approach to capital return, lower tax rate, et cetera. So this is also something that's been very positive from the deal.

And maybe one more quick one. You talked about invest for innovation and the scale and the data the deal brings to you. I know we touched on it a little bit throughout the conversation, but you guys are always very targeted with where and the goals. So just talk about maybe quickly the focus areas there.

Yes. So before I talk about the focus areas, if -- first of all, if we look at our total spend, and then we'll be away from free cash flow to our spending, we to-date spend -- about 73% of our technology and operations spend is on maintenance. And we want to lower that to a level more like 60%. So we can take that additional 13% and allocate it into investment in growth, investment in R&D, investment in innovation. Now the areas of innovation we're already investing in. We look across each of the divisions. We also look at something like Kensho for our expense in AI. And we actually internally debate, very rigorous debate about what's -- where is the right place to put it. And we've talked about the themes of where we're putting it today. It's in private markets. It's in ESG. It's in sustainability. It's going to be in new sorts of commodities and new sorts of benchmarks. If we saw opportunities in the Index business, it's going to be geographic expansion. So these are the areas where we're going to be investing. And then every once in a while, we do something that's completely new, something like a Kensho or something where we want to try and experiment this, way out on the edge of something completely new, and we like to pull a little capital there. We can pull back quickly if it's not working and move quickly it is. But the growth themes, the investment themes are the one we've talked about, private markets, sustainability, international expansion, continued investment in fixed income, benchmarks, growth in the -- from active to passive, et cetera.

Got it. All right. Great. We're just about out of time. So thank you, Doug, for being here and thank you, everybody.

Thank you, Manav. Thanks, everyone.