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

Shlomo Rosenbaum, I'm the business and information services analyst here at Stifel. I welcome you all here to the Stifel CSI Conference. And I welcome Ewout, who's the CFO of S&P. And we're going to -- I'm going to open up with a number of questions over here. And I invite the audience to participate as well. Give me some kind of signal if you have something you jump in with. And I'm happy to take any questions from the audience. And with that, Ewout, I want to thank you for being here.

S&P is a very large company with a lot of different businesses and is very information-focused. And I figured I would just start out with a topical item over here, is just how does the company use AI and machine learning on its own? You bought Kensho like 5 years ago, and so want to talk to you a bit about that. Are you kind of ahead of the curve in there? And is there anywhere in your business that you're actually concerned because of kind of the opening up of AI and machine learning? Or do you feel like there's any perceived threats over the next 5 -- 3 to 5 years that you have to be concerned about?

Well, thank you, Shlomo. First of all, great conference. We're very happy to be here. I love this question because I think you know, I'm very passionate about this topic. I have the pleasure of overseeing Kensho. I can maybe talk the whole fireside chat on this one question. But I will try not to do that. But we are very fortunate that we have Kensho as part of our organization. We have, of course, also data science groups within each of the divisions. And we saw Kensho 5 years ago as really as an opportunity to accelerate innovation, accelerate new business models within the company. Because we really thought that this could be a catalyst for change and transformation. And it has worked very well for the last 5 years. It helped us in many different areas. I won't expand too much in details. But clear examples are the speech-to-text engine called Scribe that helps with earnings call transcripts but also with a lot of expert networks, and we're selling that externally, or Market on Close or improvements of data intake and linking, what we're doing, for example, about private entities, private markets, how quickly we can connect datasets within the company and many of those examples. So it has delivered a lot of value already today. But we are in an inflection point, what is happening with artificial intelligence. Because no one really had foreseen the power of those large language models. And that is effectively coming up over the last year or so that this really has accelerated. I see this really as a game-changer not only for our industry but in general. It's probably the kind of a moment similar to the introduction of Internet. Because those large language models are so powerful, what they're able to accomplish, and the developments are going so quickly that it will be really transformational in many different ways. We are now having the benefit of already 5 years of experience applying artificial intelligence within the company. We have still a Kensho team that is there, great talent, really talent in this particular field of machine learning and natural language processing. By the way, they are based here not so far away in Cambridge, Massachusetts. I visited them yesterday afternoon and had dinner with the whole team there. And the benefit of experience, having the team plus we are sitting on the largest training dataset for capital markets, for corporate markets, for energy markets, for mobility markets and so on. And that's probably going to be the largest differentiator. Because these language models, the algorithms become more and more open source over time. Then the computes, the compute is currently a low scarce, those very specific chips, the GPUs. But that will become more and more readily available over time. But ultimately, those models have to be trained on data. And high-quality training data makes those models better. And for our industry, it's important you can't train it on the whole Internet. It has to be really specific for our industry. It has to be 100% accurate. There has to be a link back to the source data because there needs to be older trail and so on. And we are having the benefit of sitting on the largest training dataset. So this is going to be ultimately a development that will have a large impact in a couple of different ways. One is it will help with efficiency, productivity. There are certain processes where we always keep the human in the loop. We always will have the expertise. We always have that human judgment. But a lot of the work before that will probably be supported by these language models as well as new proposition use cases that we are currently developing and testing and we'll bring to the market at some point in the near future. Last part of your question, and then I promise I stop with my answer, is about the biggest risks or the biggest concerns. I think there's probably two areas there. One is this will only accelerate the trends that generic data will become more and more commoditized. But we saw the strength already for a longer period of time. And this is one of the reasons why we are so focused on having an enterprise approach. We're bundling dataset. We have our overall Desktop products. We're bundling data and IP in our commodities business and so on. Because if you sell individual datasets, you don't want to have customers saying, "Okay, those three, we don't need anymore, only I want to keep those five." That is really proprietary data. That's why we want to bundle it because this will ultimately create a shift from my perspective in terms of consolidation of data providers. So the larger ones that can have an enterprise approach that can really keep up with the technology investments will be able to deal with that accelerated trend of commoditization of data. The second risk is around IP protection. I think there's a lot that is being discussed around this. I think this is still a very open field, from a legal perspective, how to deal with it. By the way, we are always focused on IP protection. We have teams that always are scanning the markets, is someone is using our IP and not paying for it? I think this is going to be a big area because obviously every IP-related company in our industry will make sure that, that IP isn't just readily available for everyone and they don't need to pay for it. But I think that's a very big, open field, where still a lot of case law has to be developed.

Okay, good. I want to jump to another one, just -- I covered IHS Markit for a long time. You guys bought IHS Markit. And I just want to ask you to talk a little bit about where you are in the integration right now. What's gone right, better than expected? What might have gone not as well as expected? And how are things going with that? Are you getting out of that acquisition -- do you expect to get out of it what you thought originally?

We are very happy with the speed of the integration. You saw at the end of the first quarter, we already achieved $515 million of run rate cost synergies. And integration and cost synergies are, of course, directly correlated with each other. Because what is the integration? Bringing the teams together in the same office space, largely done. Bringing our teams together on the same systems environment and doing a large system consolidation to bring the company to one system in a particular area, if it is ERP or in our HR systems or in our office space tools and so on. Then we have the combination of organizations' leadership, also largely done. And then we have the procurement space, where we are combining contracts, bundling contracts, getting better commercial conditions of our vendors. So a little bit of work still to be done, but we think somewhere later this year, we are able to say we hit the $600 million. We have completed the integration, which is really good. Because you don't want to have an overhang of integration. It creates anxiety. It creates uncertainty. We need to look to the future saying, "Okay, we are one company. Let's really go after the opportunities this one company can deliver to us." So your question about what's still there, it's very much around growing faster, going after the revenue synergies, which is at this point in time very much focused on cross-sell. But at some point, that will shift to more new product developments, combination of what both companies are bringing together in terms of new products. And that will help with the further growth of revenue synergies. But revenue synergies is probably more a 5-year trajectory until we hit that complete $350 million.

Sure. And whenever I see a big acquisition, I always look at it in two parts. It's the cost synergies that the blocking and tackling hopefully should be able to get. And then there's that revenue synergy part, which usually that's where -- if it's done right, that's where the magic happens. And so I wanted to ask you, like where -- what are the obvious places we should be looking for? How is the company positioned to be able to go after those revenue synergies? What does it take? Cross-sell is obviously the first part of what you do. What are the low-hanging fruit there? And then putting the two companies together, like obviously you can't divulge what new products you're going to come out with. But can you give us areas you're going to be going after?

So cross-sell, just to give a simple example, let's say there is a customer in Europe that uses a Desktop product of heritage S&P and that customer is looking for a KY3P solution. And that sales rep is saying, "Hey, we now have that product because that comes from the heritage IHS Markit," makes the introduction of product expert. And the customer is buying our product. That's a simple example. But it's a real life example. And those are happening hundreds and hundreds of times per month. So we're seeing a lot of good traction with those introductions. I think what is going to be next is really the interesting part of combining datasets together and creating some new products. We have some already currently out there. So think about a product that was launched by our index business called the EV Battery Metals Index. And why I like this example because we have an index out there that's being commercialized, but that links four of our divisions together because it starts with the Mobility business and the move to EVs with many of their customers. They are looking for new supply chain solutions because the EVs have a completely different set of components that go into it compared to the combustion engine cars. So they are looking for batteries as a part of their components. There's a shortage of some of the metals that goes into batteries. Here, the commodity business steps in. And then the index business is saying, "Yes, you know what, I'm developing an index around it." So here, we are combining expertise and datasets of four divisions and make it a commercial product. I love that example because that is really showing the power on a horizontal basis of the company. But there will be many of those. What I think is going to be very powerful is new proprietary datasets, deep industry vertical datasets on the desktops. Think about automotive data on the desktop. Think about loan pricing and bond pricing data and valuation data around that on the desktop that all will be coming. And the other way around, IHS Markit actually has a lot of workflow tools that it is bringing to the combined company. And workflow tools plus data can also be very powerful. So let me give you another concrete example. There is a workflow tool called iLEVEL. This is a portfolio management tool for private equity GPs. We're combining that now with private company data, private asset data. So those are automatically built into that system. They get updated. They get refreshed. If you're running your portfolio as a private equity firm in that environment, you have all the datasets that automatically come with it, it's a hard-to-beat proposition, hard to see that there's anything out there that can deliver that combination. So in other words, our product will become more valuable, more sticky. And ultimately, we'll see also the commercial benefits coming out of that. I think it's really exciting. We're finding so many new combinations within the company that we had not thought about before. And I think that's where we're really going after as a company over the next period.

Great. Now you talked about loan and bond data. So I want to make sure I touch on that. That's usually -- when I talk to investors, they usually start the conversation with, "What do you think is going on with issuance?" So I'm actually going to bring that up right now and just -- what are you hearing from the investment banks that you talk to and like the best that you could see in terms of your kind of crystal ball? Like we had a little bit -- the stuff that was going on with Silicon Valley Bank. And then you had kind of a poor April. And at least from the data that I looked, it looked like May looked pretty good. And I think that May was probably a lot of people also trying to get ahead of any debt ceiling issues as I suspect. I don't know, maybe you had more data on that. But how are you expecting this to kind of play out through the year? And how good is your crystal ball when you think about it?

Yes. We expected that this year would be still a little bit start-stop, start-stop, or the traffic light, red-green, red-green, depending on some market conditions, uncertainty, volatility events happening. I think you were touching on the regional bank situation. That definitely was an element of impact, particularly in the month of March. May was a stronger month again. But we have always seen issuers being a little tactical around which windows and pockets it is a good period to go out with your issuance. I think we should look at our company and our industry more from a medium- and long-term perspective. To some extent, it doesn't matter. Yes, well, so maybe some front-running because of the debt ceiling discussions in the month of May, but in the end, it's business that would be coming in. And it would be coming in, and it doesn't matter if it comes in, in May or June or July. What is more important from a medium- and long-term perspective is what still will come to the market over the next few years. And we know there is $7 trillion of debt that has to be refinanced over the next few years. That will be coming. The big wall will start in 2024 and 2025. Maybe some part gets pulled in the second half of this year, depending, of course, again on market circumstances. But I really believe that once we see the markers coming down for debt issuance and being really stable, depends a little bit, I think, also on the next decisions by the Fed, of course, then we will see a lot of activity coming back to the market. We believe the Ratings business in terms of its activity is completely intact. We believe that the market circumstances are still healthy. Interest rates are not punitive for the vast majority of issuers. We believe there's still a really large demand for Ratings out there. The refinancing walls are high. I can't tell you exactly when it's going to happen. But we have definitely seen very encouraging pockets and windows when there was relative calm in the markets that the activities were very high this year as a proof point, as a point of evidence that we should see this business coming back completely over the next couple of quarters.

So the company refers to these refi walls. And $7 trillion sounds like a lot and a big number. But what I struggle with is how do I translate that into the amount of tailwind that actually gives your company? How do -- like when you look at that relative to what you've seen in the past, is there a way for the average investor to look at a refi wall and say, "Yes, that's good," or, "Hmm, I'm not sure how much of a difference it's going to make"?

Well, that's a fair question. Because refinancing is only part of what is happening in the debt market. It's usually -- it's the majority of the debt market activity is refinancing of existing debt. But it is sometimes hard to really to look at it. Because if a company can get away with the purpose of the debt financing, what is called general corporate purposes, they will do it. But often, a big part of that is also used for refinancing. But other elements you can look at is M&A activity because that's a big part of funding as well. General economic activity, if there's higher GDP growth, that will help also with the level of overall debt that is outstanding. So coming back a little bit to the general algorithm for the Ratings business, we still very much believe it is GDP plus pricing plus new initiatives that go on top of it. Think about Second Party Opinions in the sustainability space. We are very much focused also in relevance, building further relevance back in Structured Finance. So there are several of those other areas that we are focused on driving growth in the Ratings division.

Okay. Maybe I'll shift a little to Market Intelligence. That's an area -- I cover one of the other companies that you compete with in some of the areas, like FactSet. And I was just wondering, there's a significant amount of investment that goes into that unit in particular. And how should we think about that investment? Like how much of the investment is required to keep up with competitors? And how much of the investment is really to get ahead of the market? How should we think about that?

Well, we believe now, in the combination with IHS Markit, we have the scale. And scale matters in this particular industry. Because it means your product gets better, you have more datasets, you have more platforms, you have more tools for customers. And that makes your product more unique, more sticky with your customers. So scale matters also with respect to reinvestments because reinvestments are very much in terms of technology. I think technology is a huge part of the reinvestments and new product development. In all of our businesses, we can't be complacent and say, "Okay, we're in a good position. We don't need to innovate. We don't need to renew ourselves." We need to do that in all of our businesses in order to develop propositions. Because we, in general, are active in a competitive space. I think if you look at, therefore, the margins of Market Intelligence, we should be able to drive that up because we have operating leverage. We have the benefits of the synergies of the merger. That should help there. So what we have said is we are now, on a trailing 12-month basis, somewhere 32%, 33%. And in 2025, 2026, we should bring it up to 35%, 36% in terms of margin. So we think we can reinvest, we can grow product development, technology but also still expand margins over the next period, given our market position.

Do you think you're getting ahead of the competitors in that area, where you would in general? I mean, there's a lot in Market Intelligence. So it's kind of a broad question. But maybe we can dive into that a little bit.

We always aspire to be ahead of competitors. But we have, I think, very strong competitors, very respectful competitors. And everyone has probably very much a niche where they're operating. For example, we're not active on the trading floor. We're not really focused on real-time data. So that's something that we are not active in. But I think we have our expertise in other areas. I think we have particularly very deep industry proprietary data that no one else is having. And I think that really differentiates us.

Okay. I want to shift a little to commodities because the combination of Platts and what was going on with IHS Markit. Typically, with IHS Markit, when the kind of the cycle was turning with oil, you saw a lot more sales of consulting. You saw, all of a sudden, more software, people kind of experimenting a little bit more. Are you seeing that now? Or are we seeing kind of a sustainable upward trajectory in kind of the legacy IHS business?

In the legacy IHS businesses but also in the legacy Platts business as well. This is generally, from a macro environment, a very healthy environment for the commodities business. Why? Because prices in general are quite constructive for many of our customers. We have to realize we have always customers both on the producing and the consuming sides. So it's not always that higher prices are better. But we think where they are at this point in time, generally healthy for most of our -- for our customers. We have the benefit that the world is focused on traditional energy. I think with energy security over the last year, clearly the world has recalibrated about traditional energy. And that will stay for a certain period of time but also moving to new energy. And there's a lot of focus on energy transition. So we're playing on both sides. And I think that gives us a lot of tailwinds. Plus to your point, I think the combined business, like in many of our other businesses, is able to offer more to customers. And we have a lot of customers that are telling us, "We're really intrigued by your company now after the merger. What more can you do for me? What more can you deliver for us?" I think one of the strengths of the heritage IHS Markit is they had a little stronger C-suite relationships. And some of it was also based on that one-time business that you were telling. So the fact that we have those relationships with very senior executives at those large firms is helping us to now really open doors with some cross-sells and new products that we can deliver to those customers. So I think generally, this business is having a lot of tailwind at the moment.

Okay, great. What about Mobility? Mobility, the collection of assets in Mobility is very interesting, the CARFAX. You ask investors, "Does anyone know the #2 player to CARFAX?" And like 99.5 out of 100 will not even know who #2 is out there.

I don't know.

It's Experian. It's my job to know. But it's just so interesting what's out there. And the growth for years and years and years has been really, really healthy. And the #1 question that has always been for investors is how sustainable is this growth? It's been going on for like high single-digit to low double-digit for so many years. How do you do it? And how do I know we're not going to cliff?

So first of all, very entrepreneurial business, so therefore, a lot of new product innovation that we're seeing. Secondly, I think it is a business that also has a lot of positive secular trends. We're facing now the largest transformation of the automotive industry probably in a century. Because all these OEMs, car manufacturers are asking themselves the questions, "How can I really make a change to EVs and hybrids? Maybe someone else is ahead of me. Where do I have to put my new plants? Where do I get all the sourcing from in terms of the components?" And we are helping them with planning solutions around this. Some of these car manufacturers are thinking about, "I need to have a pricing approach to go direct to the consumer and sell more online." We are actually having solutions for them in that space. We have businesses that helps with sales and marketing activities for OEMs and dealerships. And we see with now inventory levels moving up, actually that business has been more activity now -- seeing more activity now than over the last few years. CARFAX is a phenomenal business. And by the way, it's not one product. They are all the time introducing new products. So there is, for example, a product called CARFAX for Life, where you're basically being helped as a consumer with all your alerts when you have to do maintenance, what is happening with your car, if there is a recall activity and so on, so really deeper penetration in ultimately that end market as well. And then we are reselling all of the data to the buy side. We're selling it to insurance companies that want to make car insurance propositions, to companies that provide auto loans and so on. So I'm actually really optimistic about the outlook of this business because there is so much going on. And as usual, with most of our businesses, when there's a lot going on, there's a lot of demand for analytics, for data, for insight, for research. And that's exactly what we are providing to all the market participants.

So you feel good about the outlook that we're not going to see some kind of slowdown or something...

Absolutely, yes.

Okay, great. I just want to take this opportunity, we have about 3 minutes left, to ask if there is anyone in the investor audience here that wants to ask any questions. Because I obviously prepared to keep this going for hours if necessary. But yes, just get -- okay, so it doesn't look like there's someone out there. But I want to ask you, going back a little bit more just on the debt side, many of the companies that I cover that have debt, let's say, on information services that's above 3x leverage is looking to lower their debt to 3x or below. And I was just wondering, how do you guys think about that in terms of the interest rate environment that the combination of higher rates and leverage that was there because of lower rates, how does that come into your thinking in terms of how the market should develop over the next year or so? Because I mean, I have CFOs that tell me, "Hey, if it's between share buybacks and leverage, and I get the same ROI on both, I'm going to delever because then I get the leverage down." So how do you think about that?

That will happen a bit over the next few years. But we think it's not going to be a massive shift overall in the market for a couple of reasons. I think in general, CFO is always saying, "I would like to delever," at the beginning of the year if they have some surveys. And then if you look at the end of the year, what actually took place is very different than the original intentions. Secondly, I think for most companies, they still are still focused on optimizing their corporate leverage structure, their corporate financing structure. This is the cheapest form of financing still that is out there. So as long as we have growing economies, where companies have growing balance sheets, they need to invest in new initiatives, they need new funding and leverage is the cheapest way of funding. There are some companies that are over-levered. They have to bring it down, maybe some low quality, high yields that can't survive anymore and really have to shut down businesses. But we think again for the vast majority of the market, in a positive economy that we will most likely will see over the next few years, in that environment, we think that delevering is going to be happening in a relatively modest way. But generally, that we will see continued growth of the debt markets based on the general trends in economic activity.

Great. I want to squeeze in one more about Indices. And just -- how should investors think about the efforts on the likes of like a BlackRock or Fidelity to create their own indices so that they can have their own ETFs and things like that? How do you see that impacting your business? And how should investors think about it?

This will be not a large trend for the reason that index providers need to be completely independent, need to have compliance and regulatory processes that are completely segregated from the product development and stock selection by itself. And therefore, it is really important for the market to have independent indices, where any provider behind that has no position in the market, has no interest on the composition of those components, has no optics of conflicts of interest. Plus we own already those benchmarks that are really important for market participants. So it is a trend we have seen for many years, it was not really taking off. And we believe that independent providers of indices ultimately will remain the most important parties in the market in this space.

Great. Thank you very much, Ewout. Much appreciated.

Thank you, Shlomo.