Let's go ahead and get started. Really pleased to be joined by Ewout Steenbergen, CFO of S&P Global. Ewout, thank you for being here with us today.
Thanks, George, always.
So Ewout, let's start with a high level question. As a diversified financial services company, S&P, of course, has a broad read into the macro environment. What's your latest outlook for the economy over the next two to four quarters, and how sensitive is S&P to broader economic trends?
Okay. So let me first describe, how our economists think around the next period, and then I can specifically tell you what that means for our, our business. So our thinking is, the economy actually has been holding up very well this year, as we all know. Sometimes the discussion was, is it going to be a hard or soft landing? The reality is there was no landing at all, this year from an economic perspective. But the prediction of our economic group is that we definitely will see a slowdown of the growth in the first half of next year, for a couple of reasons. The first is there's still a lot of excess savings from households that have been built up during the pandemic. That will come down. There's about still $340 billion of excess savings there.
Most likely, households will run out of that somewhere in the spring of next year.
Mm.
So that's, of course, stimulus in terms of consumer spending that is going away. The second is there's still-- it is in the U.S., a lot of borrowing based on fixed rates, either in the retail side with mortgages or on the corporate side with respect to bond offerings. Those still have to reset to some extent. So the higher rate environment hasn't really worked through the real economy still at this point in time. And the third reason is real interest rates are probably going up in the first half of next year. If the Fed is going to pause and the inflation is coming down-
Mm
... real interest rates are going up. So those are three reasons why most likely, GDP growth is coming down next year. We'll see some uptake from an employment perspective, but staying below 5%. Probably credit losses will move up, but not to an extreme extent. But here, you get that very strange, I think, contradiction. I always call that bad news is good news, good news is bad news. So if we get some more negative news about the economy, the interpretation of that is, okay, the path for the Fed is becoming more clear.
Mm.
By the way, our economists are expecting perhaps one more rate hike this month, a pause, and then the Fed starting to cut from June onwards, maybe-
Mm
... three or four cuts for then the second half of next year. Moving then to S&P Global and the impact, for us, it will be really good news once the- is going to be clarity about the yield curve. Once the volatility around the yield curve is going away, that will definitely help debt market activity, issuance activity from a timing perspective. Most likely, that will also be a good environment for equity capital markets, M&A activity, and so on. So our market-sensitive businesses would definitely benefit from such a scenario. How strange it sounds, but slower-
Mm
... economic growth, clear outlook on the path of the Fed, actually is good for our market-sensitive businesses.
Mm.
For the subscription businesses, actually, we know that a little bit of variability on the economic side doesn't matter so much because it's largely the stability of the order book of business, the enterprise approach that we have with our customers, and so on. So all those underlying trends that we have always been talking about in terms of growing those businesses, will continue shortly also in in that economic outlook.
Right. Makes sense. At your last Investor Day, you introduced medium-term targets that included 7%-9% organic revenue growth, and at our Communicopia Conference not too long ago, you maintained those targets.
Yeah.
Given all that's happened with geopolitics and with interest rates, what's your stance on your medium-term organic growth targets?
Yeah. We're still there.
Okay.
which I think is really an important message because we are looking at short-term volatility, short-term uncertainty, if it is macroeconomic, what we just discussed, or geopolitical, and so on. But when we set out the 7%-9% growth for 2025, 2026, those were not CAGRs.
Mm-hmm.
Those were growth levels in those years, because we knew that the markets had to work through excess funding that happened during the pandemic, both fiscal and monetary stimulus, the... really, the pullback of debt in these years, the impact on the economy. But once we come out of that and we go more to a normalized environment for, for the markets, we believe that all the underlying secular trends in our businesses are still very healthy, very sound. So we think that 7%-9% is very realistic for, for the company in 2025 and 2026.
That's great. Now, you're on track to achieve 80% of your cost synergy target of $600 million total this year, but your revenue synergies are still very much in the early innings. Can you provide an update on where you are with your revenue synergies, what your realization sort of glide path is over the next couple of years, and what the top opportunities are from a product and bundling perspective?
Yeah. On the cost synergies, George, actually, on a run rate basis, we're even higher than the 80%-
Yeah
... we're at 98%. So materially, we are done, and we probably can declare that we have reached the target at the end of this year. We made quite some nice progress during the third quarter with revenue synergies. So we are now about a third along the way to get to $350 million of revenue synergies. We have always said this phase, for the first two years, is very much focused on cross-sell, where the sales force has an existing relationship with a customer, maybe from the legacy S&P side, and is being able to introduce a product from the IHS Markit side or the other way around. So a lot of cross-sell, which is, of course, the short-term opportunity, and that is going very well. The next phase of growth for revenue synergies is going to be about new product development.
You saw actually a really important acceleration of new product development during the third quarter, synergy-related, but also in general, in general, very high level of innovation during the quarter. Let me give you a couple of examples of that. We launched a new platform in Commodity Insights called Platts Connect. This is a platform where we combine all the data, prices, research of both the legacy Platts and the legacy E&R now together. Very seamless. If you would go there, it looks like this was always meant to be together. You wouldn't recognize what is coming from which legacy kind of organization. We would not have been able to build that just standalone, so that is really coming from the benefit of the merger.
Another example in market intelligence is a new product called Entity Insights, which gives an insight on private companies from many different angles. It is a combination of private company data. It is credit indicators that are there. It's our KY3P views on certain entities, and we bring that all together holistically. Again, that wasn't possible on a standalone basis, but now after the merger, we're able to introduce a product like that. So there's many more that we are introducing and that are to come. So that will help us to achieve the next two-thirds of the revenue synergies.
Right. Now, S&P is pushing forward with its various generative AI initiatives and, recently launched ChatIQ. Can you talk about, some of your key milestones, upcoming initiatives, and how you're planning to monetize generative AI?
Yeah. So generative AI is something that we are applying all across the company, both for functions, for businesses, for internal purposes, on productivity, for external purposes with our customers, and launching commercial new products that have a Gen AI tools on top of it. Traditional AI products, we have already for the last five years, so we have many AI products or AI-powered products already in place with customers. But we know Gen AI is something that is really a step up from that, really a game changer. ChatIQ is still being used internally-
Mm-hmm.
and tested internally, but at some point, at the beginning of next year, it should be ready for prime time to share with our customers. But it is really important when you do that, it's something that is revolutionary, high quality, really can be relied upon, high accuracy. So for us, it's really important we're at that state, production grade level, high accuracy, clearly links to source document and data, so there's an audit trail in order to launch that. But several other products that are powered by Gen AI are being prepared for launch at the beginning of next year. The second part of your question is, what does that do economically for the company? Actually, it's really early to say that at this moment. No one can really predict where that is, how that is going to play out.
It's definitely going to be a large benefit internally in terms of efficiency and productivity, but the expectation that we are having now is that will more come in gradually over time. It's not suddenly or from one day to the next, that productivity improvement is a very high percentage that will come in from one day to the next. That will come in gradually. And on the commercial side, the question is: Is this something that is just part of the total offering, at some point, it become table stakes? But because we get deeper embedded with customers, it is data plus workflow tools, plus AI, Gen AI capabilities on top of it. We're doing the whole day. We help to support this customer, this user, along the way. Now, we add so much value that ultimately creates some benefit from a commercial perspective.
That's more likely how that is going to play out.
Mm-hmm.
than to charge for a module, because even if it's something that is a unique module and no one else is having it, maybe in six-12 months time, everyone is offering the same, and then it will be very hard to monetize on a, on a standalone basis.
Right.
More likely, it's just going to be part of our overall proposition, but it makes our product so much more sticky, so much more embedded, and that will help retention level and the commercial proposition.
Right. Yep, that makes sense. Let's turn to the ratings business. So in the third quarter, ratings revenue surprised to the upside, but fourth quarter debt issuance has been volatile quarter to date. What are your latest views on debt issuance trends, and how confident are you in achieving your 6%-8% ratings revenue guide for the year?
We are confident that we will hit that for the following reason. This whole year, in terms of the forward assumption that went into our guidance for 2023, we always have been very prudent.
Mm-hmm.
In terms of the expectation from an issuance perspective. That was deliberate, because this year, as we have seen during the whole year, it was a little bit run and stop, run and stop. Days with super high issuance and day with super low issuance. This whole start-stop was very prominent this year, as we expected, because it just was just lumpy with the uncertainty around the interest environment, the volatility around the yield curve that we have seen moving around a lot. I've always said we would see really stable debt issuance returning once the volatility is going away around the yield curve. So again, when the path of the Fed is clear, the market is clearly having a consensus around it, then the volatility is going away.
That would be really the right environment for a lot of issuers to come back. That's more likely going to happen at some point in 2024, but we haven't seen it so much in 2023. Yeah, October was stronger. We actually put out bond issuance numbers recently, 47% growth, mostly driven more by bank loan volumes, the amend to extend that we have explained during our last call. Issuers that are waiting or push back in terms of converting floating to fixed rates.
Mm-hmm.
So that is business that will come back the second time, most likely in 2024. November looks like a little lighter. December, always, there's not a lot of activity, but again, for us, it doesn't matter so much. We know that the refinancing walls are very healthy over the next few years, and that is business that will come to us, and will provide some nice, healthy tailwinds for the ratings business.
Right. Now, S&P's ratings business outperformed Moody's MIS business from a growth perspective, each of the past three quarters. What would you attribute that outperformance to, and how sustainable is that going forward?
Yeah, I always prefer not to talk about others, but only about ourselves. Our growth is driven from a couple of, I think, explicit management reasons and decisions. One is, you heard us saying last year that we are preserving analytical capacity in the ratings business. Our perspective was, last year, the decline in the market was temporary, it was coming back, and we've seen in certain periods of higher volumes and higher growth this year, that we had the capacity in place to serve our customers well. So that was definitely one of those benefits. The other is a bit of mix shift. There's always mix, but certainly in certain areas of structured finance, where we are having higher market relevance, we have seen also some higher growth this year.
So that has also benefited with the overall growth of the ratings volumes in 2023.
Right. Makes sense. You talked a little bit about the strong debt refinancing pipeline. It's particularly strong in the high yield category. Can you talk a little bit about how you expect the refinancing pipeline to sort of evolve in high yield, but then also outside of high yield? Because investment grade's refinancing pipeline is strong, but not as strong as high yield.
Yeah. We're looking at this really in combination. If you think about the next three years, $8 trillion of refinancing activity that will come to the market. The next five years, $13 trillion. So it's really massive volume. It will very much depend on when this exactly comes to the market. As I said, at some point, we expect in 2024, there's really less volatility around the yield curve, and that most likely will also pull forward some part of refinancing activity of 2025, more into 2024. It's hard to say exactly when it's going to happen. We call them market time, but we know it's there. So we believe overall, the backdrop of the ratings business is, yeah, these were a couple of really unique years, 2021, 2022, and going in very opposite directions.
This was a little bit of a transition year, start, stop, but probably at some point, we start to get in a more normalized environment in 2024. We very much believe the business model of ratings is completely intact in terms of the growth drivers, in terms of the economics, so we would expect to see that coming back over the next period.
Right. And do you have a preliminary outlook for what 2024 issuance might look like?
There is an outlook published by our research group with respect to market issuance, but I wouldn't look to that and draw too big of a conclusions out of it, because we have seen there's a large difference between market issuance and build issuance.
Mm.
It's also still very early in the year. What they are saying is low single-digit growth-
Mm
... in general, but that includes, international public finance, it includes China domestic ratings, and many other areas. So I wouldn't look at that too much and draw big conclusions out of it, or apply large correlations. We will come back at our fourth quarter earnings call with the first outlook with respect to bond issuance for 2024.
Mm
... which is, I think, the best indicator.
Right. As part of your medium-term framework, you've established 2025, 2026 ratings growth targets of 6%-9%, which comes a little bit above historical growth rates. What do you think has changed in the debt capital markets to support that structural step-up in growth?
It depends, George, if you look backwards over which periods you analyze the ratings growth. So prior to 2022, if you look at the 10 years before that, actually, the ratings growth was within that 6%-9% kind of range, even slightly at the high end of that, of that range. So exclude 2022 and 2023 as quite unique years. So we're not looking at the future and say we have heroic expectations that are above a more normalized level when markets were more on a steady state in the past. Due to the fact, what I said before, because we think refinancing is healthy, we expect GDP growth to be positive, maybe for the short term, a little bit less positive we see this year, but over time, that will come back.
We see drivers around other revenue streams, refinancing and structured finance, emerging markets activity, sustainability-related propositions, like second-party opinions and many others. So that will be all going into the algorithm to lead to that, to that growth number.
Right. And, how does the structurally higher interest rate environment factor into the 6%-9% growth target?
We believe that these kind of absolute rate levels are not punitive for market participants, maybe with exception of the far-end, low-quality, high yields, and some idiosyncratic kind of reasons. But for the vast majority of the markets, these circumstances are still healthy. It's still the cheapest form of financing, and particularly, if we would see the rate environment coming down after some cuts by the Federal Reserve, and that get priced in into the yield curve, I think it is still a very attractive environment. So I don't think that will impact that growth rate.
Got it. Let's talk about some of the non-ratings businesses. Market Intelligence last quarter delivered healthy 8% growth, and ACV growth actually outperformed revenue growth for the desktop business. Can you talk a little bit about client spending behaviors, what you're seeing there, and particularly given the Market Intelligence business has historically been a little bit more macro sensitive than other areas of the business?
Yeah. Generally, we have talked about lengthening of sales cycles this year, and that was due to a couple of reasons that actually all are good reasons, but it just takes longer to ultimately close certain deals. So reasons are, we're of course combining datasets, products in enterprise contracts, post-merger, so that takes a little bit more time to get that all documented. The second reason is, if you think about customers, there's definitely a trend of consolidation of vendors. So this is another part that, in many cases, that consolidation comes to us, and that is a benefit. But again, to document that and to formalize that takes a bit longer. We also see the situation with many customers that they need more higher level of approvals in procurement processes, but in the end, that is all coming through.
We don't see deals falling through-
Mm.
It just takes a little bit more time. But the outcome is often larger contracts that we have with customers. So let me give an example. I was this fall into Asia, met an asset manager, very large asset manager. They had probably only one key product of us. The contract renewal, they said: "We would like to pause because we want to rethink the total relationship." It took much longer, and we ended up with a contract that was three times-
Mm
... larger than we had before, but it took more time.
Right.
But they deliberately bought several other of our products from us. So there's many of those examples. So we're actually quite optimistic what that means for the growth of the book of business in force of Market Intelligence over the next few quarters.
Right. But within Market Intelligence, in Q3, you also saw a re-acceleration in your sustainability and energy transition business. Can you provide an update on that part of the business, and how comfortable you are with your medium-term outlook for revenues, and by when you would attain those medium-term targets?
Yeah. This is a, and continues to be, a very attractive growth opportunity for the company in total, and also for Market Intelligence, in particular. What we have seen this year with respect to ESG sustainability revenues, it has been lumpy.
Yeah.
I think every market participant has seen it has been quite lumpy, but it's not always a linear trend, but we underlying see very healthy growth. And why is that the case? Because our proposition actually is very much in areas where the market is moving to. The market is very much moving to climate, climate data, climate risk assessments, physical risk assessments due to climate events, many other focus area around the topic of climate. Actually, we probably have the most important and well-respected assets in that space, like Truc ost. So we're very well positioned, and that is a nice, healthy, large growth area. The other is we see many customers on the buy side moving away from buying off-the-shelf ESG scores of providers, and instead going to proprietary methodologies, but they need the raw data-
Mm-hmm
... that goes into that. Actually, we have the best raw data in this space because we have something that's called the CSA, the Corporate Sustainability Assessment, a product that we bought a few years ago from another provider. So we have very detailed information around several thousands of corporates around the world, and we see a lot of our customers really looking for those kind of datasets. So actually, the market is moving in our direction. It's probably going to stay a little bit lumpy, given different developments, regulatory, political, and so on. But as I said, over time, we think this is going to be a healthy, very healthy and nice opportunity. $800 million revenue target by 2026, we announced with our second quarter earnings call.
Mm-hmm.
We haven't reinstated that. We are going to hit $800 million, most likely not by 2026. We don't know exactly by what date, but that number is still there.
Mm-hmm.
It's purely a timing question.
Commodity Insights, switching gears a bit, delivered relatively strong growth of 11% in the past quarter, and that comes above your medium-term target of 7%-9%. What would cause the growth there to normalize back to that high single-digit range, especially considering your revenue synergies and Commodity Insights should ramp over the medium term?
Yeah. There are a few reasons why it's growing so well. It is a movement that we are seeing, that there is traditional energy and there is energy transition, so we have two trends at the same time. I think the world has recalibrated. They're probably staying some level of traditional energy for the next decade or longer. But then also, our customers are preparing and embarking on energy transition, so we're benefiting of those two trends at the same time. The second reason is, there's a lot of really enterprise contracts that we're now combining the propositions of both sides of the company. So those contracts get much larger because our value add to the customers get much larger, and that is a nice upsell that we are able to achieve at this point in time as well.
The third reason is, as you might recall, the upstream business that historically was part of the IHS Markit portfolio, was a negative drag. There has been-
Mm
... some turnaround of that business, so it's closer to zero. So in the short term, actually, to take out a drag is, of course, for the overall growth a positive. We are very much still believing that the 7%-9% is realistic for Commodity Insights from a medium-term perspective-
Yeah
... because, as I said, I think there's a lot of really good positive momentum in that business, and many of those trends that I explained are expected to continue.
Right. Switching to the index business, you're looking for roughly 2%-4% full year growth there, which is the slowest growth across all the segments of the business. Can you talk a little bit about what you're seeing there, what market assumptions you're embedding in your guide, and if you're seeing any competitive dynamic shift in the current market environment there?
Yeah. Well, first of all, why is it lower than all the other segments? It's purely the comp base, because, of course, equity markets started to fall during the course of last year. So year-over-year, it's a difficult comp for the index business. The flip side is, of course, now as well, that we've seen over the last few weeks, the equity markets in a kind of a mini rally, and that obviously is a positive for the index business. So, from our perspective, the assumption that we have put in, into our guidance at every point during this year was from the end of the period for the rest of the year, flat equity markets.
Mm.
So, of course, the guidance we now provided with our third quarter goal was flat markets from the end of September to the end of December. We're in a better territory, so obviously, that should help the index business. The other important thing to realize is, the starting AUM level at the beginning of the year is really important for the index business, what that will mean for the following year. So it looks like if markets are holding up, that we will start at the beginning of 2024 at a really good level for the index business, and that should help with the 2024 growth of S&P Dow Jones.
Right. Makes sense. And then last, the Mobility continues to be the strongest growth segment within S&P, guided it be up 9%-10% full year, driven by a number of products like CARFAX, CARFAX for Life, Automotive Mastermind, et cetera. How sustainable would you say the current growth trends are within Mobility?
It's one of the high growth businesses in the portfolio, and there's no reason, from my perspective, to believe that that will change-
Mm
... for a couple of reasons. The first is, again, there is a structural trend within this industry. I mean, this is the biggest revolution in this industry for the last century or so, where traditional car manufacturers have to think about the move to EVs and hybrids, have to rethink their production line up, their supply chains, where they put the factories, where they source the batteries. So they need a lot of help, and this is exactly the type of support and data and research that we can provide to them, our planning solutions for them. So that is the first reason why this is a business where there's a lot going on, and usually, if there's an industry, there's a lot going on, that's good for us.
The second is, what we're seeing underlying is retention levels are coming down a bit to more normalized levels with inventory levels going up for dealerships and OEMs. But the flip side is, because the inventory levels are going up, we also see that the OEMs and the dealers are spending more money on sales or marketing activities. And that is actually that Automotive Mastermind business.
Mm.
That is the sales or marketing engine behind many dealerships and OEMs. If you get a mail package and with a proposition or an email and so on at home, that's probably coming from our engines that we, that we provide as service to, the dealerships and, and OEMs. So this business actually is seeing more activity, so that is a healthy growth. And then lastly, is an incredibly well-run, highly entrepreneurial business. A lot of new product launches that they are doing. There's no reason to believe that that is not going to continue. So I think overall, very nice, positive dynamics in that business also for the next, next phase.
Makes sense. Let's talk a little bit about margins. Your guide implies that operating margins will step up year-over-year, much more so than it did in 3Q, due in part to the comp base of incentive comp accruals. Can you talk a little bit about some of the puts and takes you're seeing with margins for the fourth quarter, and also beyond 4Q, looking ahead to 2024, 2025, and what you expect there?
Yeah. And I know this year is a little bit messy and noisy on the margin side, particularly year-over-year.
Mm.
But it comes from a good reason. It comes from the reason that we very actively managed expenses when the market started to see a downturn from March onwards in 2022. We pulled back in discretionary spend, we pulled back in headcount, hiring, we pulled back in incentive compensation, and so on. So we preserved margins, I think, in a very strong way last year, particularly in the second and the third quarter. So that is really creating some noise year over year in the comparison. Last year, what happened was we actually wrote back up incentive compensation quite a bit at the end of the year because the ratings business had actually a really good end of 2022. Therefore, this year, we don't expect that so much to happen, that big swing.
We would see more normalized and steady margins, but compared to much lower margins in the fourth quarter of 2022, there will be a nice margin increase in the fourth quarter. But you basically have seen the opposite over the last 2 quarters. Again, we are very happy that this is more a year where we see more a steady base, so it will be much easier in 2024 to use this as a base, as a normal comparison.
Right. And how would you think about margins, framing them beyond 2020... or beyond 4Q?
Yeah, the best I can do is to point at the Investor Day margin targets that we put out for 2025, 2026. We're on a really a gradual path-
Mm
... to get to those margin targets. Once we hit those, then, as we have always done, we determine what should be the next aspirational margin targets in the medium term. We set those targets, and it's an then a three-four-year path to hit those, and then we raise the bar again. I think that's a really nice active process, because you don't want to set margins too far out.
Right.
You want to set it out that is achievable in a certain period of time, you hit it, and then you think about what, what should be next.
Right. Then last question, capital allocation. You're targeting to return 85% of your free cash flow to shareholders in the form of buybacks and dividends. The remainder would go to M&A. Are there specific areas of M&A you're particularly focused on?
Very much centered around the strategic priorities of the growth areas that are important for the company: sustainability, energy transition, private markets, credit and risk management, supply chain, anything where we have already a market position, but where scale could be really beneficial. But nothing new that we haven't mentioned before, nothing new that is a new vertical that would add something that we don't have today or have identified today as core for the company. And I would say all more at a tuck and bolt-on level. We know we have to focus on still delivering, particularly on the revenue synergies, the growth, the Investor Day targets. That should be really the focus for the next periods.
There should be also a focus on some level of simplification of the company, some portfolio focus that we have in the opposite direction. So those are really the areas that we would like to execute on over the next period.
Great. Thanks so much, Ewout.
Great to join you.