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

All right. We will go ahead and get started. Thanks, everybody, for joining us right before lunch time here, really appreciate it. I'm Patrick O'Shaughnessy, the capital markets technology analyst here at Raymond James. And up next, we have S&P Global. And on their behalf, we have CEO, Doug Peterson. Doug, thanks for making the trip.

Thank you, Patrick. This is one of my favorite conferences, love to be here.

Appreciate you coming. So for the benefit of the generalists and the PMs in the room, maybe just kick it off with a brief overview of the company. What does S&P do and look like today? And how does that compare to what it looked like 5 years ago?

Yes. First of all, as I said, thank you for having us here. And let me go back and give you just a little bit of context. S&P Global has roots that go back to 1860. And obviously, since then, especially over the last 10 years, 5 years, we've shaped the portfolio to provide benchmarks, analytics, research and data for financial markets across credit ratings, indices, commodity information, market intelligence and automotive -- the automotive industry. We do this through an approach to managing the company that's disciplined. We look at a capital allocation model which is we think is very strong, something that we feel is important for us to have clarity around that. And over the last few years, we've put a lot of capital into AI, into technology, into data. This is critical for us to have that important relationship with our customers and upgrading our systems and our capabilities all the time. And finally, our brand really matters. And our brand is what opens doors. It attracts high-quality talent. And this is something that also gives us global scale with the brand S&P Global.

Terrific. Thanks for that baseline there. So Ewout Steenbergen was your longtime partner leading S&P Global. He served as CFO from 2016 through March of this year. What does the company lose with his departure? And how are you going to replace that?

When Ewout joined the company, I was looking for a CFO who would be a partner that would provide leadership for the company, in particular, leadership by building a strong bench of financial talent in the company as well as some of that discipline that I mentioned, the discipline of having approach to planning, which starts with the budget, starts with capital allocation. It goes through the year to make sure there's accountability to how we're performing, how we're managing and measuring the company. Ewout brought a lot of discipline. He brought a lot of vision. He was very strategic. He was a great partner. So we lose all of that. But at the same time, Ewout was a great talent leader. He's able to track and build a very strong bench in the finance team across the organization. We're able to continue to move along really well despite him leaving. And right now, we're doing internal and external evaluation of the markets to determine what direction we go. When I look towards the financial markets for a new CFO, whether it's internally or externally, in addition to having somebody that's an expert in the finance function, I'm also looking for somebody who brings that really strong leadership, the ability to attract great talent, the ability to have strong relationships and communicate well with the people in this room and with the analysts.

And so you've obviously completed several acquisitions over the years as CEO of S&P. But you've also sold a lot of businesses, Aviation Week, J.D. Power, the Engineering Solutions business that came with IHS Markit. More recently, you announced that you're exploring strategic fits for Fincentric. So what makes a business a great fit for S&P? And what makes a business not a great fit?

We start with some of the elements I've already spoken about of S&P Global. And that has to do with taking advantage of the brand. It's about scale. It's about leadership position in your market, which means that you're in the top 1 or 2, 3. Remember, that all Jack Welch thing at GE days that if you wanted to have a great business at GE, you had to be at the top of your market, of your field. And we want to make sure it's global. And it needs to be in the data and the research analytics business. Now that's a general framework for how it fits in S&P Global. But let's take one click down. And it has to do with customer and customer impact. Are we providing must-have information and must-have data for customers? Now does that data, does that flow, link with other parts of the business? Or sitting around the table with the management team, do we have things in common with what are applications we're going to be using for our customers, for the markets? Are we going to be able to leverage that expertise across the entire group? And then finally, we look at top line growth. We look at margins. And we want to make sure that we're a growth company, that we're delivering margins and that we can find ways as a company overall that this will be the philosophy that -- how we run it. This was part of our Investor Day that we ran in December 2022, where we announced our program called Powering Global Markets. That's our -- that's right now our vision and that's the plan that we're working against. So if you don't have that growth, you don't have the margin expansion opportunities, you're not going to be really fitting well with the capabilities of the company. You're not going to fit. Now the opposite is what are we going to do to have a company that fits? It's going to bring all those things together. It's going to deliver that growth. It's going to deliver the margin expansion. And it's going to be something that fits well with the entire portfolio.

And then speaking of acquisitions, you recently announced the acquisition of Visible Alpha, a tool that I use, and I imagine a lot of people in this room use. What makes Visible Alpha an attractive strategic and financial investment for S&P?

If I go back to June last year, we delivered for Cap IQ Pro an upgrade and an update, which was something that we've been waiting for, actually a couple of years, we've been planning for it. This was almost like an overhaul of Cap IQ Pro. It took what was already embedded in the workflow of so many analysts, but it added in new features, new datasets that came from IHS Markit, new datasets we've been building over the years. It also added new features for plug-ins, for downloads, graphics, visualization tools. And as we looked at that, we said, "Well, what are the other datasets? And what are some of the opportunities we have to continue to enhance Cap IQ Pro?" That doesn't mean that Visible Alpha is going to only be plugged in through Cap IQ Pro. But we looked across what are the datasets that people like you need to do your job. And we want you to stay within the ecosystem of S&P Global. And the estimates is something that people use. And I knew that a lot of people are using -- in fact, our own people inside of S&P Global were having to use -- need Cap IQ to go get estimates somewhere else. We said this is a really -- it's unfortunate that we don't have that capability. So Visible Alpha is a fantastic franchise. It's a strong business. And it's also -- was started by 12 banks. There's 178 organizations that contribute their estimates. And the estimates are detailed down to the division level and even deeper than that, sometimes at product level. And we knew that, that kind of must-have data was a great fit for S&P Global. And we have really strong relationships with all 12 of those banks, which means that we'll continue those relationships. It gives us a way to have a strong market network. And we're really, really pleased that we were able to be the owner of this. We still have to go through some due diligence. We have to go through a review with the Department of Justice. But we're well on a path to bringing this into S&P Global.

And then going back to a past deal, IHS Markit, you're about 2 years removed from that transaction at this point. And a phrase that you used on the fourth quarter earnings call was you're transitioning from operational integration towards growth, innovation and execution. What are some of the opportunities presented by this new phase that you're particularly excited about?

I'm excited that as we move away from having a project management office, we call the integration management office, it's something that I -- that was really critical. We had high discipline around managing the company. In the last 2 years we're meeting with our integration management office, it was about things like our Oracle General Ledger, how do we get the companies completely integrated on the Oracle General Ledger? How do we make sure that our people systems are integrated, payroll, things like this? How do you make sure that the company is run in a way that everybody can communicate with each other? So if you're going to do a Teams call or you're going to send somebody an e-mail, it doesn't get rejected because it's outside of the company. I know this doesn't sound very glamorous. But it's really critical to bring the company together with a single culture, a single brand, a single operating approach. And as we've completed that work and also been able to deliver $619 million of synergies, it now means we can turn to saying, "What's the next round?" We've talked about the revenue synergies. Our target is $350 million. Right now, 2 years later, we're at a run rate of about $155 million, a lot of that from cross-sell, which was actually more interesting than we thought originally. And now what's exciting is taking this revenue synergies, getting everybody to focus on revenue, on growth, tie up some of the loose ends on some of the operational aspects of the deal but keep everybody focused on what do we bring together that makes S&P Global stronger with IHS Markit as part of it. And this is where we see a couple of examples. Last year, we took within the Commodity Insights business, Platts Dimensions Pro, which is a platform for the Platts commodity business, along with IHS Markit's Connect platform. We put those together, and we now have an unparalleled -- there's nobody else in the market that has a commodities desktop like we do with everything from analytics, from benchmarks, from pricing to forecasting to news. This is something that is a new product. It's one of those promises of the merger. Another one was capabilities we brought together called Power Evaluator between Market Intelligence and Commodity Insights for the power industry to bring together these tools that we couldn't have done before without having this merger. So there's so much more of this to come. We're really excited about the opportunities. And this is now shifting our focus to clients, to the markets. Not to say that we weren't, but now the entire organization can get past this detailed integration that we're working on.

And I think building off of that response, just a question about innovation more broadly. What is the innovation process at S&P?

Innovation is something that we want to see in two different ways. One way is we want people. We want the businesses just to find a great idea and go about it, get out there, listen to your customers, see what's happening in the markets, find an idea and within the business, within your day-to-day, innovate. And we think about innovation not just about what I mentioned like a Platts Dimensions Pro and Connect becoming Platts Connect. We also think about the innovation that somebody that does a job every day to do data ingestion and says, "Well, if I just learned some things on AI or I learned some new tools, I can make my job better. I can do this work faster." So we think about -- we celebrate that kind of innovation. And then we go all the way up the chain to new product and how we're going to create new innovation. One of the ways we do it is through a program we have, the strategic capital investment program -- the SCAP, strategic capital allocation program. As part of our budgeting process every year, we set aside about $100 million to $130 million of expenses that we want to be invested in new products and new ideas. We have a competition. So it's -- think of it as a capital allocation between the divisions. They come with their ideas. We look at the forecast. We look at our confidence for their ability to deliver these. And over the years, we've been quite successful with many of these. And so we see that this is a great opportunity for us. Sometimes we've shut them down because they didn't actually pay off or they didn't take off as fast as we thought. And one of the ways we measure the outcome is through what we call our Vitality Index. Our Vitality Index, it's a measure every quarter of the amount of revenues that are coming from new products and new services. Our goal is to have about 10% of our total revenues coming from these. Last year, it was 11%. And it grew at a rate of about 19%. So getting this kind of new growth, this new innovation, it energizes the organization, and there's a lot that we're excited about.

So you've now managed S&P through a couple of down cycles for the Ratings business. What did you learn from those down cycles that impacts how you manage S&P overall going forward?

Well, the -- one of the things at S&P that is a real privilege to have in the company is we are surrounded by world-class researchers, economists, people across every industry. Whether it's the commodity cycle, it's the people looking at the metals business, oil and gas, it's the people in the Ratings business, the equities business at S&P Dow Jones Indices, you can see in these businesses people that have insights because they're seeing what's happening in the market. And what's important, first of all, is to listen. Well, let's eat our own cooking. When our people are starting to see warning flags, they're seeing warning flags about economic growth or about interest rates, about inflation, I could say, "Oh, well, I'm not going to pay attention to it." They say, "Well, we have to eat our own cooking. Let's pay attention to that." So that's the first lesson. You need to look for those early warning signals and be ready for rough or choppy seas. The second is that when you see that, you have to figure out if you just want to do a small group of people or all hands on deck. And when we saw the last couple of cycles with the Ratings business, we went to the soft approach and then the all-hands-on-deck approach to say, "What do you think what is going to happen? How are we going to manage through this cycle?" And the third point is that there's always this critical decision about how fast and how deep you go to cut. We've had to, in the past, slowed down investment, rolled back some of our compensation programs, stopped some hiring, stopped traveling. We've done those kinds of things. But the real critical decision is, are you going to cut into core capacity? And we've always decided that we can maintain our capacity, we can maintain our strong people because we believe that the cycles are going to come out. And even if we have financial performance that's a little bit weaker than we'd like, we're better off being well positioned as we come out of the cycle so that we don't have to scramble again and rehire really talented people.

And to follow up on that, does the acquisition of IHS Markit kind of further give you confidence in that approach now that you have more subscription revenues, the business model overall is just more steady so that you can absorb the volatility in the Ratings or Indices or anything else?

Well, this is one of the advantages, one of the outcomes of the acquisition of IHS Markit was having about -- moving from the mid-60s to mid-70s percent of our revenue coming from subscription-like businesses. In addition though, even some of our market-based businesses are kind of subscription-like. Obviously, there's volatility in the index business based on the AUM fees. But there's still kind of a base of that, that's going to come through over time. Same with Ratings, we do have in our Ratings business a portion of the revenue is subscription-like because it's the nonrecurring fees -- sorry, recurring fees, which are based off of frequent issuer fees and some other fees that get in the Ratings business. So we've tried to structure some of our businesses, so we get -- in addition to volatile ones, to get some recurring nature to those as well. But we think this is something that helps the structure of the business, having that additional nonrecurring revenue -- sorry, recurring revenue, the subscription-based. And it's part of one of those advantages of the merger.

So within my coverage at least, S&P was really the first information services provider to really make a big investment in AI. And that was with your acquisition of Kensho in 2018. How would you compare your AI capabilities today and what gen AI provides versus what you've had for a few years? And I guess, the next step is, is your ability to monetize AI now different versus what you had in the past?

Well, first of all, one thing that you just implied in your question, the AI that we bought with Kensho was more like traditional machine learning and artificial intelligence. And now we're moving into a world of generative AI. But because we have over 100 dedicated, really talented, high-quality people that work in Kensho, they even haven't been sitting still for the last 6 years. They themselves have become experts in gen AI. But let me go back to the original decision 7 years ago to put some A round and B round capital into Kensho, which was a startup that's focused on data and analytics using AI for financial markets. We weren't the seed investors. The seed investors were some banks and a couple of AI experts in Silicon Valley. We came in, in the B round and in the C round. And as we learned what they were doing, we developed two core thesis, and this was 6 years ago. One was that all of us, everybody in this room and everybody that we work with, would -- their roles would be enhanced by artificial intelligence tools. Our hypothesis was that we weren't going to be replaced, but we would be enhanced, that what we did would be able to be automated, we'd be able to move faster, you can get more information synthesized, you could get better visualization tools, et cetera, through AI. And the second is that AI, in order for it to be successful, you had to have a really strong data platform. Data had to be clean. It had to be able to be linked. And so over the last 6 years, we played that out. And Kensho brought to us a whole set of tools. And many of them, you can actually get on our Marketplace, like Scribe or Link or NERD. And these are tools that we built internally that now we monetize to the markets, which are used to manage data or to take what would be voice and turn it into digitized text, which then can be managed, it can be analyzed, it can be -- you can use it in ways to build completely new services around it. We came up with ways to extract data from PDFs that allow you to do new kinds of analytics. Now the reason I gave you such a long answer is that we believe that AI to be successful, especially generative AI, you have to have data, which is clean, it's linked, that you can tokenize so that models can ingest it to use it for the large language models. Now last thing I'm going to say is we put in place a governance structure, which starts with cleaning our data and protecting our data. We want our data to be used inside of S&P Global, inside of our firewalls, not out. And we have on top of that a layer of Kensho, Kensho oversight of data tools, of data linking tools. We have a centralized approach to how we're looking at models. We're not linking up with one single provider. We're working with everybody that's building models. We're testing them. We have an approach to understanding what are the best models. And then internally, as people want to start using models, they can go to this model garden and understand which one is going to give the best capabilities for what they're trying to get from that. And then we have an approach right now, I can't give you any numbers, but we believe over time, this is going to enhance our revenues, the ability to have higher retention rates, sticky -- more stickiness in our products, hopefully some pricing power and then some productivity, especially when it comes to things like generating code, generating language, et cetera. So this is our vision. We're moving very fast. We're very pleased. And we believe that with Kensho as part of S&P Global that this gives us a base that we start from a very strong position.

Would you envision gen AI having application across your segments? Or would it be mostly focused on Market Intelligence?

This is -- right now, we have maybe too many POCs across the entire organization. We're trying to winnow those down to the ones that are really going to make a difference. But we think it's going to be applied everywhere, maybe a little bit more Market Intelligence on a commercial point. But all of our businesses, especially our researchers, who can use this to look at data in completely new ways or they can use it to generate a draft of report or things like these, we think this will be applied everywhere. Right now, we're looking at it to extract resumes and to evaluate resumes from students that we're getting resumes from. So I think it's going to be used in the businesses, but the functions are going to be using it as well.

Got you. Maybe taking a step back here. So during your interactions with investors, and in particular, your biggest long-term shareholders, I don't want you to share any confidences, but just in general, what are they asking of senior leadership? What do they want you guys to do?

Well, they want us to keep doing what we're doing, which is a commitment to having high-quality leadership, having a vision for the company, delivering our vision, not straying off the path. As you know, you mentioned Ewout earlier, when Ewout joined, he and I sat down and said one of the things we really thought was important in our company was to have a capital allocation model. And as you know, our capital allocation model at S&P Global pre IHS Markit was to return 75% of our free cash flow to our shareholders through dividends and repurchases. That's a guideline. It's not a policy. It's not a promise. But we've generally stuck to that, and in fact, in many years, gone well over 100% of capital return. So we think that the shareholders want to see great leadership. They want to see us continuing to use the discipline to allocate capital to make the decisions. We've already talked about a couple of them like divesting of divisions, how we think carefully about acquisitions. They want us to be able to say no. I think that's one of the most important roles of me as a CEO is to say no. There's a lot of acquisitions people have brought to my desk and I said no. They said, "Oh, this is amazing. It's going to transform our business." But I think our large shareholders expect that we have that discipline to say yes when it makes sense, to say no when it makes sense, to deliver on our algorithm to allocate capital and to make sure we have great leaders in the company.

So that's what your existing shareholders are asking of you. How about new shareholders? And what do, I guess, your existing shareholders really understand about the company that people who are newer to the story might not yet?

I think that the -- sometimes new potential shareholders, new shareholders, first thing might be that they think of us as a rating agency. So they start off with S&P Global is a rating agency and we start there. And I will guarantee you that our rating agency is a phenomenal business. I love it, but I love all of our businesses. So one thing is to come in and say, "Well, S&P Global is a rating agency," and not spend enough time to understand the rest of the businesses. And I'll start with one that people don't necessarily spend a lot of time on is Commodity Insights. This is a business that has a really strong position in benchmarks. And now with the merger with IHS Markit, it also has a combination of research, data, analytics, news. And these two together have a really strong platform. So my goal with new shareholders is to disavow them of this belief that we're just a rating agency, to spend time on the other divisions. And so that's really the point. The other thing I'd say is that we have -- in the Market Intelligence business, there is one part of it which is market-dependent. We think about it as being a subscription-based business. And it does have a part within the Enterprise Solutions, which does have a little bit of volatility that we saw the last year. So each of the divisions has a couple of specific characteristics that are important to know. But my key message is get to know the whole company, don't just put us in a bucket of being a rating agency.

All right. Now it's probably a good point for me to pause and see if there's any questions in the audience.

[indiscernible]

Yes, let me start with China. It was very well known a few years ago, when we were the first rating agency to get a license, to have a wholly owned rating agency by a foreign company in China. Right at the time we got that, it was right before COVID, the Chinese markets got quite slow. But we've maintained our commitment to the Chinese market to have a wholly owned rating agency using globally consistent standards of ratings. When we started the business there, we built it in a way that was based on global standards. We didn't just hire three people to do three ratings. We started with a scale of business with 30 analysts and with a full contingency of compliance and control and firewalls. We've been in China for over 30 years with our inbound businesses. So we have a large offshore Ratings business. We have a Commodity Insights business. We have Indices. We have a large Market Intelligence business. We are -- we do grow along with the market. The market has been pretty tough pre COVID, but we see it starting to pick up again. India is a land of opportunity for us. We own 68% of the largest rating agency in India, it's called CRISIL. It's the largest rating agency. We own 68%, which means the other 32% is traded on the stock market in India. But that business is a rating agency. And it's also an outsourcing business for research, for financial institutions, for banks. Right now, with the growth rate of India, we see a major economy is growing at about 7% this year. It's the top growth economy globally. It also is expanding into manufacturing. They built a lot of investment in infrastructure in the last few years. They've got a great service economy, software economy, et cetera. We see India as a priority market for us. We've added some new senior management there. So China and India, emerging markets, that is one of our priorities. When you look at our growth priorities, emerging markets is on that. And India and China are at the top of the list.

Anything else in the room? All right. Well, let me ask one more then maybe before we wrap it up. So you mentioned a few times your capital allocation plan and how that -- returning capital to shareholders is very important for you. How do you guys think about optimizing for free cash flow versus some other metrics?

Well, first of all, when we start the year -- let's go back. I start the year when -- I believe I start the year in October, not January. Because October is when we go to our Board of Directors. And through June, July, August, September, et cetera, we've been working on our -- what's our next version of our 3- to 5-year plan. We have a plan in place, like as I've mentioned before, Powering Global Markets, we launched in December 2022. We want to make sure that we're still in line with that plan. Are there any tweaks we need to make, et cetera? Then we build our annual budget. So last year in October, we built our budget for 2024. That's where we look at that capital. That's where we look at our cash. And we want to understand how much cash we're generating for our operations. This is where the margin comes through. This is where we also look at these investments, the SCAP program, strategic capital allocation program, how much we're going to put there. This is where we start some of the discussions about acquisitions, how we might have acquisitions. But we also have the dialogue about divestitures. Are there things in the portfolio -- you mentioned Visible Alpha. But when we announced the Visible Alpha acquisition, we also mentioned Fincentric, which is we're looking, exploring strategic options on. So we also look at what could be cash that could be generated as well. So we look at cash flow. I'm a cash guy, I love cash. It's something that we spend time on looking at. We also look at things like, believe it or not, receivables and days in receivables. Are we having any pockets of weakness of generating cash or getting paid back? So cash flow is critical for us. We do have our treasury organization CFOs across all the divisions. They have metrics around cash conversion. And so we have an approach to making sure we have strong cash conversion. It fits in with our budget and our planning. We measure it on a quarterly basis. And then it fits into our broader capital allocation program, the 85% to return in S&P Global is our target and 15% to redeploy in the business. If we don't have something to redeploy the 15%, we'll use that to also return to our shareholders. So it's a whole philosophy. It's how we run the business. And it's embedded in what I call our management system at S&P Global.

Terrific. I think that's a good spot to end. So thank you, everybody, for attending. And thank you very much, Doug.

Great. Thanks, everyone. Thanks, Patrick.