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

All right, everyone. We're going to get started. Good afternoon. Thank you for joining us. We are so pleased and honored to have here with us Doug Peterson, President and CEO of S&P Global. As you all know, S&P Global is a provider of credit ratings, benchmarks, analytics, and workflow solutions in the global capital, commodity, and automotive markets. The company completed the merger of IHS Markit a little over 2 years ago, and Doug has been CEO of the company since 2013. Doug, thank you so much for being here. We really appreciate it.

Thank you, Faiza. It's great to be here.

Excellent. So look, I wanted to start with, you just completed the IHS merger. It's been 2 years. Just curious from a leadership perspective, you run a very large organization with a lot of different pieces. I would love to hear your reflections on how do you ensure that the organization is still being run in an agile way, decisions are made fast, and you're not sort of running like a conglomerate that some people might think.

Right. Well, first of all, when we conceived of the merger with IHS Markit, it was based off of our expectations for where the markets were going to evolve and how they're going to develop, and why for S&P Global, it was better to do a merger with a large organization like IHS Markit as opposed to doing a lot of small tuck-ins or trying to build things from scratch. And we had a vision that there would be opportunities in private markets. At the time, we thought maybe a little bit more like private credit, we could see that starting to merge. And IHS Markit had incredible information and services, products when it came to reference pricing and credit analytics. I'd add to that what it meant for credit and fixed income indices. So there was this vision about what was going to happen to the credit markets and the index markets. Another one had to do with sustainability. We believe that sustainability, energy transition was going to be a really important area. And as part of that was also the commodity business as we had the Platts business, they had the ENR business. And we believed that putting those together was going to give us scale of a benchmark business with a research and analytical business. So thinking about the original proposition or the industrial logic of putting the two companies together, it's actually been playing out now over the last 2.5 years. Between the time we announced the deal and it closed, it took a long time. And so instead of complaining, we used that to plan. And during that time, we decided what our strategy was going to be, our vision, our values, the organization structure. And our management system, which has allowed us now since then to have in place a management system that allows us to be nimble, to move fast, to have accountability, to think of the company not as too large, but how do we keep it small and how do we make sure that we can make quick decisions and people can move forward. A couple of examples would be in the Market Intelligence business, where we made the decision to acquire Visible Alpha. I'm sure almost everybody here is a user of Visible Alpha. So that was something that we were able to do quickly. We were able to do it in a way that we can move fast with the team to be able to have the right business people involved as well as keep the Board informed along the way. And then another example of something like Fincentric, where we've decided it's not a great fit for the business so let's find a way to reposition it. And ultimately, we're going to divest. So this is the way we think about the company. It's got a management system in place. We're about -- how we think about management opportunities, how people are in charge, what they're responsible for. And it all comes back to that vision, the purpose, and the values that we discussed 2.5 years ago.

Great, great. And then just in retrospect, what has gone better than your expectations? And have there been sort of any downside surprises? I know you've done a great job with the cost synergies, most of those have been achieved. You're starting on the path for revenue synergies. But just talk about some of the positive or negative surprises along the way.

Yes. So along the way, positive surprises were all around. The quality of the people, the way we've come together with such a strong culture, those have been really positive surprises. People are worried, will there be a culture clash? It ended up there was not. We had this -- both companies had a complete belief in our people and our customers. These are the core values that we think about the most. How do we -- we kind of call the company that it's people first, customer-centric. And that was very similar for both cultures. It allowed us to move very quickly. We both believed in the quality of the brand, the importance of S&P Global as a really strong financial brand, something that opens doors. So what are some of the things that were the positive surprises beyond that? The quality of the products, the services, being able to cross-sell. I think that when you look at our revenue synergies, the cross-sell has gone faster than I would have thought. But there's amazing opportunities to take IHS products, for instance, and the Market Intelligence business and bring those into corporate clients or to different types of financial services companies that maybe not -- IHS Markit had not been calling on before. So the cross-sell has gone really well. The product development has gone well. You have some examples in the Index business where we've taken fixed income and credit indices and built some multi-asset class indices through the insurance chain. In the Commodity Insights business, we've seen incredible synergies, something like the CERAWeek Conference. It's now grown 2 years in a row at over 10%, and it is the premier global energy conference. And you take that and you add to what was that conference with the old Platts business, all of a sudden, you have this really powerful commodities and energy business. So when I look across the board, all of the revenue synergies are on track. Maybe they're coming a little bit different than I thought. Cross-sell is much stronger than I thought it was going to be. On the cost synergies, we were able to put in place a really robust plan. In fact, at the very beginning, we were meeting every single week. It wasn't the sort of thing where we said, "Let's meet every quarter and see how it's going." We're meeting weekly to have accountability. I was not happy if everything was green. That meant there's something wrong. When you're doing projects like that, you need to know what's off track or what's not working quickly. But we got the accountability, we got everything set up. So I was very pleasantly surprised by all of that. The only very minor area where I would say maybe that I was surprised the other way was that we had more businesses than I thought that were -- had some market headwinds. And market headwinds is part of it. But we've been able to adjust those quickly and really build those businesses in a way that we can understand what the market headwinds are and move quickly. But overall, I've been really impressed. I've been really pleased. And we've made progress that's faster than I would have originally expected.

Okay, great. Makes sense. Maybe I can pivot to just your -- from where your position is, you see a pretty big picture from a macro perspective. Just curious on how your views have changed maybe over the last few months or so. And how does that impact your business? It seems to have a pretty direct impact on your Ratings business, but talk about how you see the macro environment.

Yes. At the beginning of the year, globally, there was a lot of discussions about how fast our interest rate's going to come down. And let's use the Fed as the example. At the beginning of the year, a lot of large financial institutions were expecting that interest rates were going to come down 5, 6 or somebody even said 8 times this year. We said 3. Our original forecast, which we built our original guidance on was based off of 3 interest rate cuts starting in June. We've since adapted that for what we see are the current circumstances to 1 interest rate decrease in the fourth quarter, more likely towards the end of the year. We're calling what we see now a longer prolonged soft landing. We don't see interest rates going up. We don't see a recession coming. We actually see pretty robust growth in the U.S., which is one of the reasons rates aren't going to come down as fast as we expected. We think Europe rates will come down a little bit faster, maybe in England as well. The BoE might signal that rates are going to come down a little bit faster than the U.S. But we see a robust growth environment, although there's still risk in the environment. You've got political risk around the globe. You've got a couple of wars going on. This uncertainty around interest rates creates some issues. You mentioned specifically the Ratings business. The Ratings business had a very strong first quarter as there was a lot of capital that came back into the fixed income capital availability. And this capital availability meant that the rates for issuance were lower, the spreads were quite lower, and there was a lot of issuance across the entire spectrum of fixed income. Every single market had a lot of issuance, including also bank loans. So we see that, that sometimes, issuance can be determined by rates and spreads. But in the long run, over time, the most important factor which drives issuance is economic growth. that's -- if you think about underlying issuance in the Ratings business, it's going to be driven by, do I have confidence in my business that I can invest and continue to grow my business? Am I confident to do M&A? That's what drives issuance. Rates and spreads drive timing, but issuance is really driven by confidence in growth.

Okay. So on the Ratings business, right, like there's been a lot of volatility, I would say really since COVID. But curious, where do you think we are from a normalized perspective? Like is the issuance, are we in a normal environment at this point? You've talked about pull forward in 1Q, but at the end of the day, do you think '24 is normal? Or is there still a lot of pent-up demand as we look ahead over the next few years?

Well, as you mentioned, I became the CEO in 2013, I joined the company in 2011, and I'm not sure if there's ever been a normal quarter. Every quarter, there's different ins and outs of Ratings, but it's very steady when you look across the trend. Clearly, you're right to point out that COVID had a couple of bigger shocks to the financial markets as well as to the Ratings volumes. And then in particular, after COVID started changing, there was a huge impact from inflation across the globe and a lot less issuance when inflation really started kicking in and rates started going up. We do think we're heading back to a more normalized level of issuance. We're getting back to what was more like 2018, 2019 trends. And there's a very large backlog of refinancing, which is going to be coming into -- kicking in, in 2025, '26, '27, and '28. And so when you see that, you can see that there's a large backlog of refinancing that's going to kick in over the next few years. When we talk about pull forward and what's the timing, sometimes that's driven by confidence, by rates, et cetera. We did see pull forward in the first quarter from what we'd expected sometimes later this year. We didn't see a lot of pull forward from later years. But over time, almost all issuance ultimately kind of is pulled forward in the way that people don't wait until the last minute to refinance their debt. They're always pulling forward. They pull forward it a year, a quarter, 3 quarters. So I'm not sure about the timing on that. But we saw a very strong first quarter, and we're expecting in the second half of the year lower levels of issuance given all of the circumstances that I've been describing.

Yes, yes. And you do have difficult comps as well because last year...

Difficult comps as well in the second half of the year.

Yes, there was a lot of activity. So if I look at your medium-term guide, right, which you had put out maybe 1.5 years ago of 6% to 9% for the Ratings business, and I know at the time, there wasn't a base, necessarily. I guess my real question is, is that sort of the right -- like do you think '24 is going to be a base that you can grow off of on that 6% to 9% sort of medium-term rate from here?

As we've said in our earnings call as well as more recently, we're still confident in the numbers that we put out. That was December 2022, we did an Investor Day. The ranges that we gave for all the divisions are still on track.

Yes. Okay, okay. And then there's been a lot of activity around private credit, right, a lot of conversations. Just what's your view? I know you've talked about that potentially as a delayed revenue stream. Just any updated thoughts around how much that could be a contributing factor to just Ratings revenue, Ratings growth? How do you...

Yes. Private credit is an area that has been around for a long time, but we didn't really start talking about it until more recently. And I think it came into the public awareness in 2022 when the fixed income investors withdrew their capital from the markets. They were looking at an environment where interest rates were starting to go up really quickly and very high. And if you're a bond investor, the last thing you want to do is own bonds when rates are going up. And so they pulled their capital out, and the private credit pools replaced the traditional investors in large-cap fixed income, and they went into these private credit pools. Private credit has been around for a long time, especially for SME and mid-cap credit. And so they moved up into a higher tier and there was a lot of capital available for that. When I think about the business for Ratings, as you've heard me say before, it was delayed revenue because I don't know of any investor that has a pool of any kind of asset that doesn't eventually want to trade it, reposition it, look at concentrations. And as we started working with the private credit organizations, they were talking about needing to either syndicate or securitize or to find new ways to manage the risk. And we felt that all of that was going to be opportunities for our Ratings business. But beyond that, in our Market Intelligence business, we've got really strong reference pricing. We have a product called iLEVEL, which is providing GPs and LPs information about the portfolios. So we think that there -- the opportunity for private credit and private markets generally goes across the entire portfolio. So it's not just a Ratings opportunity, it's also a big opportunity for Market Intelligence as well.

Okay, great. Okay. Maybe we can talk a little bit about gen AI, right? You've been investing behind that. Curious what your vision is as we look ahead. Sort of more short term and then more longer term, sort of where do you think will be 3 to 5 years from now? Is there anything that you've seen in terms of the testing that gets you personally most excited about the gen AI opportunity?

Well, first of all, if you go back 6 or 7 years ago, we made a venture capital investment in a company called Kensho, which at the time was owned by a combination of banks and some venture capitalists from Silicon Valley. And they were building models using traditional machine learning for financial institutions. We made an investment and then became a client, and then along the way, decided that we had a vision for artificial intelligence, that it was going to replace a lot of routine basic work. It was going to be an automation tool. It's going to be allowing a company like ours as a data company to automate a lot of work that today -- was being done by humans in a way that sometimes is quite basic work. So we decided to buy Kensho and bring it in and leave it completely separate as our artificial intelligence wing of S&P Global with its own brand, with its own work style, hiring its own people. And now 5 years, 5.5 years later, generative AI has now become the new big artificial intelligence opportunity as opposed to machine learning. So Kensho has been able to pivot. And the CEO of Kensho is now the Chief Artificial Intelligence Officer of S&P Global. So let's now go back to your question about the vision. There's two aspects to the vision. One is this replacement of analytical work that's going to allow all of us to think more, to act differently, to use inputs in ways we can get a lot more information before we make decisions. We think that humans will still make the decisions. And we also think that AI is going to become embedded in everything and it's going to become a must-have tool. So your question about 3 to 5 years from now, we think that AI tools are going to become a table stakes. That anybody who's using any kind of information service is going to want to have a query tool that allows them to look at what-if scenarios. Whether it's your travel agent, you're getting ready to plan a trip somewhere or you're in a very sophisticated hedge fund looking at analytical aspects of how you're going to manage your portfolio, we think that, that's going to become a table stakes tool, and that we need to be on the leading edge of being able to start experimenting and building around that. We put in place a governance structure. For us, it's really important that we protect our data. Our data is our gold. And our data across every single aspect, you mentioned earlier that it's pricing, it's benchmarks, it's analytics, it's news, it's research, et cetera. That is data and that's our gold and we're going to protect it. And so we're building tools so we can bring models inside the company and we can test and build using our data inside of our own firewall so we're not going to be losing control of our data, we can continue to control our IP. That's something along the way. But our vision in the medium to long term is that it will improve our productivity, it will improve our product opportunities. We'll probably get some new products out of it. But it will become table stakes, especially when it comes to getting query and understanding what's inside big data sets.

Do you think it's something -- just given that everyone seems to be investing behind gen AI type of products, and you mentioned the word table stakes. Like does that suggest -- like is there an incremental revenue opportunity from stand-alone gen AI products? Or do you worry that it's something where, just the cost of new product innovation is going higher and you may or may not get a return on it? How do you think about making sure that you're competitively differentiating?

I'm not too worried about getting a return on it, but I'm more worried about expectations set so high that we don't get this huge hyper-growth out of it. But when I think about the benefits from AI, we've seen them tremendously from Kensho over the last 5 or 6 years. We've seen productivity opportunities. We've built products. I don't know if any of you ever used transcript services while you're listening to an earnings call. But you can see our Scribe, which is transcribing earnings calls, you actually can see the transcription faster than the voice comes over the webcast. And so that's the kind of a tool that we built that was looking at hundreds of -- 30,000 hours of transcripts, and then Kensho built on top of that a transcription tool that is now used by a lot of organizations. It's used to transcribe earnings calls. And then on top of that, that becomes a completely new kind of data set, that transcription, it's not just words now. That text becomes data which can be analyzed in large language models. So I'm very optimistic that it will impact in growth. Growth will be faster, customers will be more loyal. We'll see better retention. We'll see better, higher-quality products. I just can't promise you yet how it's going to show up in our revenue stream.

Okay. And then how quickly do you think you can get the productivity benefits, right, internally? Like is there a margin target -- I know you haven't publicly said anything, but how quickly do you think we can get there, where they can actually be productivity...

Yes, we don't have any margin targets yet. We're still sticking to our guidance that we gave in December 2022. This is the sort of thing that we're talking about a lot within our Executive Committee. In fact, at our Executive Committee, now every single meeting we have, we talk about generative AI. It's a standing agenda item. We're not just going to hope that things happen. We have to manage it and manage and control our future. We're starting to see a lot of benefits for developers, in particular, with gen AI. But it is improving the speed to be able to write some code, but at the same time, they're finding new ways to use their time, and they're reinvesting that productivity in other ways. So we haven't seen anything yet that's built into our guidance.