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

This is through choosing the areas, like I mentioned, the private markets business grew 15%. Our sustainability business grew 15% last quarter. This is by ensuring that we're also drafting into the most important opportunities, the most important new areas for investment in Market Intelligence. We've got the capabilities to already add in new services and new products as well as develop them ourselves. So this is going to be one of the areas. Now let me mention something that we recently closed. This is Visible Alpha. And Visible Alpha is -- was a business that was owned by 12 banks. It was a business that probably many of you in this room use. I know that you've been a user over time and something that people really appreciate having this consensus of estimates of over -- up to 180 different institutions that are providing their data into this estimates business. And the technology is high quality. So we bought this business to continue to manage on its own as well as to add into something that's almost like a must-have service as part of Cap IQ. So your question about how are we going to grow, we're going to be looking forward to see what are the trends, what are the areas we're going to move quickly into, and we have that innovation gene inside of the business. It's quite important for us to be driving growth through innovation.

Okay. You talked about the IHS deal. It's been a couple of years now. A pretty big deal at that time. Maybe as you step back here, what do you think has gone better than you thought? And what do you think has gone worse than you thought?

Well, let me start with the second part. I don't think there's anything that's necessarily gone really bad. There were a little bit of going into -- closing a deal into an environment where you had that really hyperinflation hit and these trades popping. There were a couple of businesses that maybe were a little bit more market-oriented than subscription-oriented. So we had some bumps along the way from -- just from the top line growth for a couple of quarters because of the market conditions. So there's a little bit of that in there. But the positive surprises have been many, many -- way outweighed anything to do with the negative surprises. And the positive surprises, most importantly, as we came together as a team very quickly, we have a strong culture. We have a strong management team that has come together with a management approach to lead the business, to grow the business. Because of that alignment, we moved really quickly with our synergy targets. We had an original synergy target of $480 million on the expense side. We took that up to $600 million, and we've now achieved $620 million, and we stopped counting. That doesn't make sense to keep counting much more above that because it's no longer really synergies anyway. It's now the way we're running the business. But we feel like the expense synergies, we achieved them faster than our target. We achieved our target and surpassed that. On the revenue synergies, I referred to already that the cross-sell was out-of-the-box far exceeded anything I expected. The S&P Global brand was really strong. And then having clients, for instance, corporate clients was really beneficial for the Market Intelligence business that came that's part of the IHS Markit business. So having that sales force, having that client base gave us a lot of really fast cross-sell. We also had a lot of cross-sell in between the clients the other way. We also had a lot of cross-sell with our energy businesses, which would be the one of the Insights businesses. That's probably where we had some of the fastest cross-sell. Another upside has been having fixed income credit indices as part of our Index business. We see a whole new set of products and services we're providing to the insurance industry, which are really beneficial with the kind of big trends that are happening with wealth management and with retirement. So across the board, all of our DLTs, what we call the industrial logic at the time is playing out, and we're seeing really strong execution. And as I go back to where I started, really, importantly, a great management leadership team that's come together and is very well aligned.

Okay. With IHS, obviously, came the automotive business, mobility, as you call it now. Fabulous business. Really nice top line growth trends. But it's not one that obvious to me in terms of the being in the mission of power and global market. So from a portfolio optimization perspective, how do you think about the Mobility business?

Well, first of all, the Mobility business is a really attractive business. It's got top line growth. It has must-have data for the automotive sector. The automotive sector is going through incredible transformation, and it's one of those industries that we can watch, and between now and the next 10 years, we'll have to see what will happen with autonomous vehicles and electric vehicles, with hydrogen, with hybrid. And we have must-have data for the supply chain, for the OEMs, for dealers, et cetera. So it's a very strong business. It has important data model. There's a lot of synergies across the group for supply chain, for sustainability as well as how we run the business. We're always doing reviews of our portfolio. And a couple of times a year, we take a step back with the Board and ask the question about what does fit. And as you see, I mentioned Visible Alpha for Market Intelligence, we also have a very small business called Fincentric that we originally did a strategic review of, now we're looking at divesting. But over time, you should know that we're going to continue the discipline we always have for the entire portfolio to make sure that it fits, and then we're going to get the most value from it and that we're the best owner.

Okay. Let's move to innovation and maybe AI. Why not? Vitality Index kind of measure I actually quite like a lot and -- which is the percentage of revenues from new products. We're in about 10% of that [ NP ]. Where are you seeing the greatest source of innovation at S&P? And long term, what do you think that number should be?

Well, we have targeted that we want 10% of our revenue growth to come from new products and new service or enhanced products, things that have been really substantially improved or updated. And we think this is important because it continues with that culture of innovation. But innovation as ideas doesn't mean anything, unless you're actually delivering it, and it has an impact for clients. What we do then is we identify new investments, strategic investments that we want to make. We start tracking those. We put them into the Vitality Index, and then we want to see what kind of growth we're getting. The last few quarters, our Vitality Index has grown 15% to 18% -- or sorry, the products within that 10% have been growing at 15% to 18%. So we want to see that kind of higher growth. It helps push the entire portfolio to have faster growth by having those new products and services. Over the last year or so, we've had products and services in the Vitality Index that are growing at that fast rate from every division. Some of them have been in energy transition and Commodity Insights. We've seen some from the Index business. We've had some new indices that have really been moving fast in the automotive business, Mobility. There are some products and services where it's sort of seeing the dealer markets that have been growing very fast. We also would have in there some of the things I've talked about, sustainability, private markets, et cetera. So these are the products that we're using to drive our growth. And go back to what you were asking before about why has the IHS Markit deal gone so well, it's because we have accountability. And one of the ways we have accountability with management is ensuring that we're tracking and measuring our investments in new products and services. So when we give the capital to somebody in the company to build a new product, if it doesn't work, we pull the plug. We don't want things to go on forever. But by having this intense approach to looking at the investments, ensuring that they're profitable, we can get the Vitality Index and at the same time, have accountability when something is not going along quite as well.

I was going to ask the question in terms of how do you drive the culture of innovation around the firm. Is the Vitality Index part of compensation? And how do you make sure this is -- it's part of the culture?

Yes. So the Vitality Index is part of the scorecard of the divisions and the Presidents, along with Net Promoter Score, which, as you know, is a customer metric. We have some other customer metrics we use depending on the division. But we want to make sure that we have growth, which is being driven by these capital investments, which is in the scorecard. We also want to make sure that we have customers that we're responsive to, that they're satisfied with what we're doing. We have metrics that we use. So those two are really critical to driving our performance. It's the innovation, and it's also how do our customers see us and are they actually buying our products or services, are they satisfied with how we're serving.

Pivot to AI. You guys recently launched -- also I was interested in S&P AI benchmarks, which I believe is a way to assess the ability of LLMs to answer financial questions. I'm curious how you think about that as an opportunity over time. Obviously, you're known for benchmarks. That's a key competence. Is that something you can expand to other sectors? How big are you thinking that opportunity is?

The proposition of the S&P Global benchmark, so you can look up on our Kensho website, is to understand that there are literally hundreds of models popping up. We hear a lot about OpenAI and Anthropic. Those are probably the 2 most prevalent right now. But there's a lot of large language models coming up. And we decided that there should be an opportunity for people in the business sector, especially the financial sector, to have a benchmark that allows them to understand what's the quality of these models that are in the market. So we have 600 standardized questions, which are asked of a model, and then we grade them on how accurate are the answers, what's the quality, the numeracy of the answer. Because most models today don't do a very good job with numbers. And we then come up with an aggregate score, and then we rank them. You can look at how we're ranking the models right now. Right now, it's free. We're not getting paid anything for that. But what's really important, the secondary opportunity of that is we have an open architecture model. We're not maintaining with one single company or one single model. We have an open architecture system. We built an approach, so that we can bring models into our firewalls. And then all of the work we're doing with large language models, we've done inside of our firewalls, protecting our data, protecting our intellectual property. And one of the ways we know which models to use and what's the best use case for them is by the work that's being done with Kensho. So we see this as a -- it's a positive loop, and we're sharing our -- what we're learning with the markets through the benchmark. But then we're actually using that same information for determining which models we're going to be using through our own R&D and our own products.

Let's talk about cloud margin, AWS, because about a year ago, you announced that. Can you talk about any the financial payoffs that you've gotten so far or you anticipate the next few years coming from that?

When we took a step back after the merger and looked at all of our vendors and -- we were already, at S&P Global and at IHS Markit, both of us were on a cloud transformation. We were quite advanced in both companies, and we all had multi-cloud strategies. As we look towards the next 3 to 5 years, we have -- we're a very large client. We have a large spend as a data company, as an analytic company. We want to make sure that we have a strong partnership with the cloud providers. And as part of that, we ended up with the strategic partnership with AWS. It's a contract that -- it's quite large. It's over $1 billion. And because we were already starting to negotiate related synergies merger, we said, "Well, let's take this beyond and not just think about the merger synergies. Let's take this beyond as a longer-term strategic relationship." It's a very strong relationship. We have savings that are coming through. It's already built into our guidance. It came from the synergies, plus the ongoing savings that we will have. It's a strong relationship, and AWS is a really good partner. At the same time, we haven't dropped everybody else. We have multi-cloud strategy overall. We think it's important that we have relationships across the board. It's also good for us to understand what's happening with different service providers. They're also our clients as well. So we have good relationships across the board with the technology sector and the cloud sector as well as the AI sector we just talked about. But it's important also for us to have a really solid base of a large service provider that can give us visibility.

Okay. Maybe we can switch over to expenses and how you think about expense management for the company. How do you balance sort of near-term expense management versus longer-term investment? And I think it's a particularly important question at the moment given AI and potential translational sort of power that, that could have. So I'm curious how you think about that.

Yes. There's -- I'm going to throw it into 3 buckets. The first bucket is our annual budgeting that we've been doing for a long time. This goes back to when I first became CEO is as we talk about positive jobs. We start out in June and July with some framework, and then by the time we get to October, we're pretty much baked with the budget for the next year. And then into the next few years, we've got a good idea of where we're headed. And one of the requirements is that you come in as a President of a business with a higher top line growth and you have lower expenses. So it's -- I don't want to see people come in with an expense growth rate that's higher than their revenue growth rate. That's just isn't the way we manage the company. So we start there. The second bucket has to do then with investments. If somebody would say, "Well, I have some specific opportunities that I want to invest in," we then have this program with strategic capital allocation and we will have a certain amount. It's usually -- and you know this because it's -- we talk about it, about $125 million a year that we allocate. It's part of the expenses, but we allocate that to new innovation opportunities to get built into the budget. And we're able to keep positive jobs, even with that $125 million that we distribute to different businesses. And many of our innovation that we just talked about in the innovation index, the -- is really part of -- is part coming out of those investments. So think about -- the first one is how we manage the budget, the second is allocating capital. The third is, as you know, we generate a substantial free cash flow, and we have a guideline that we're going to return 85% of that to our shareholders through stock buybacks and through dividends. So that leaves 15%, which is up for acquisitions, for other types of capital usage. And we try to find the best uses for that, $600 million more or less this year. Many years, we're returning more than 100% of our capital because we didn't have a good use for that. Other years, we return maybe a little bit less. 85%, used to be 75%. But the approach is that's the third lever for growth capital is we have that already available. It's something that's in our targets. We don't use it, we don't use it, but it's the third area for investment. It's how can we do acquisitions or tuck-ins or things like that.

On the sort of incremental investment spend, are you seeing more pressure from your heads of businesses coming in and asking for bigger budgets, again, given some of the transformation technologies that we have out there?

Oh, it's nothing new. That's all -- everybody always wants more capital than we have, which is one of the fun things about my job is to try to make sure that we find the best opportunities for that investment. So there's always more than -- always more is asked than we have capital available.

A question on your management style. The company has grown tremendously under your leadership, 10 to 11 years as CEO. How has your leadership evolved over that time? And then when you think about picking the leaders for the firm, what are you looking for in those leaders?

So first of all, it's interesting to ask about how things have evolved over 10 to 11 years. As a CEO, there's things that have not changed at all. My belief, and it's important to have a strategy and a vision, the quality of the team is critical, having core values in the company. Our core values are integrity, partnership and discovery. Those sorts of things haven't changed at all. I have [ books ] on those. I've mentioned accountability before. So there's certain core aspects to how I lead and what I've admired in other leaders that I've tried to incorporate in the way that I lead the company. But one thing that's changed a little bit is how I spend my time. As a very new CEO, I wasn't quite probably well prepared of what it meant to be a CEO. I spent a lot of time in maybe the wrong places. I now spend most of my time with clients and people and shareholders. Those are the 3 areas I spend the most time with. It's important that I do that. I spend less time with bankers and consultants. At the beginning, I probably spent too much time with bankers and consultants.

Well, you were a banker first.

Yes. I was a banker, so I knew all the bankers, and they all were calling on me. But it's something that's important for me how I spend my time. So that's been kind of a shift. To your question about talent and leadership in the organization, we have an approach to thinking about the succession for all of our leadership positions. It's important from the Board and to the management team that we always think about succession. But the way we think about succession is through development. So we invest in our people through coaching, through leadership programs, through training programs, ensuring that people are getting to build a network across the company. I really like it when we can bring a group of leaders together that spend time to get to know each other. But also we push them on how they're going to learn and be better leaders and know their business better. So this approach to development is something that's critical to me. When I talk about people, I also think about growing leaders and growing people and allowing them to reach their full potential.

Okay. I just received a question from the audience. It's around sort of pricing in the Ratings business. How do you think about the opportunity to maybe take more price in Ratings?

Well, first of all, when we think about pricing in the Ratings business, it's always been based on somewhere around what's happening with inflation or general economic growth. That's always been the foundation of what we've done in the business. In addition, across all of our businesses, this is not just Ratings, we have a philosophy that pricing is allowed or driven by the quality of what we provide. If we provide the same old service every year, a tired service that's not being updated and upgraded, it doesn't have new features, new technology, new quality upgrades, if it doesn't have something where we're providing the best service and the most responsive service available, we can't price. So we've got to start with a philosophy that we're not going out to try to price. We're going out to try to wow our clients and have them see our products as something that they must have. When you get to that, you get a virtuous cycle and you're able to get the pricing. Pricing follows excellent service and really satisfied customers. So that's the way we think about pricing.

Okay, okay. Last one from me. The stock is obviously tremendous over your tenure. But I would say, over -- recently, maybe lagged a little bit or has been somewhat stagnant. Curious what you're hearing from investors. And any ideas, any plans to address those?

Yes. So first of all, there's potentially a little bit of wait-and-see after a deal this big. People sometimes see a company do a very large merger and they say, "Well, let's wait and see." Do they actually deliver the synergies, which we have? Check that box. Did we put in place a great leadership? Check that box. Have we made some important [ hopeful ] moves? We started doing some of those, as you've seen a couple of very small acquisitions, a couple of small divestitures. So there are some questions that always come along with a large merger. And so I think that could be one of the areas that we do hear from many people in this room when we meet with them. They're saying that they're pleased with what they're seeing, but they want to see a little bit more. So that's one of the areas. And then we've had -- you started off your questions about -- a little bit about what's been the cycle in the financial services sector recently, a little bit slower sales cycle, et cetera. So there might be some people that have taken a step back at that. But when I go back to what we're hearing from investors, there's a lot of enthusiasm, especially when you look at the long run. When you look at the biggest trends that are taking place in the financial markets and the corporate sector having to do with artificial intelligence, with private markets, with sustainability, with supply chain analytics, with globalization of markets, with the flattening of market, every single one of those trends is something that we have huge benefits and we play into. We're well positioned for them. And that's the way I think about the company, not looking at next quarter and even the rest of this year. Obviously, we deliver. That's one of the hallmarks of our company is that we do deliver. But what's more important to me is the way we position ourselves for the long run.

Fantastic. I think we'll end it there. Thank you very much, Doug.

Thanks, Christian. Thanks for having me.