We're ready to go. We're good? Thank you. Welcome, everybody. It's Shlomo Rosenbaum, business services analyst with Stifel. I want to welcome you all, all to Stifel's 2024 Cross-Sector Insight Conference. I'm here with the CEO, Doug, of S&P Global. I want to welcome you. Thank you very much for participating.
Thank you, Shlomo. It's great to be here.
I appreciate-
Thank you so much for hosting this.
Yeah, very welcome. And just want to start off, S&P is a very multifaceted business right now. You've been here for a while, orchestrated a lot of the portfolio, and we certainly appreciate that. But I'm gonna start asking you about the ratings business for the simple reason, and that's the first question that I always get from investors. No matter what is going on, I always get the first question is, "What's going on with the ratings business?" And a very strong first quarter, and it looks like, you know, the second quarter seems to be shaping up pretty good as well. You know, you guys put out the data, issuance up 75% in April. We haven't issued out May, but we have our own tracker. It still looks really good in May.
I just want to ask you your view as to... You know, on the earnings call, you talked about, well, you know, a lot of—you're more conservative in the guidance because you were thinking that a lot of it was pull forward. But are you seeing signs that we might be starting to get more M&A, more IPO stuff, that might make this a little bit more of a sticky, you know, strong time?
Well, first of all, as you know, we increased our guidance in the first quarter. We increased the billed issuance range from 5%-9% to 6%-10%, and then our earnings ranged up to seven-
Mm-hmm
... to 9%. This is because of the strength we saw in the first quarter, what we've seen going into this quarter. But we've also believed that in the second half of the year, there are, there are different contingencies that we're gonna watch out quite closely. The fourth quarter, in particular, November, December, were very strong last year, so those are tougher comparisons. There's also interest rate volatility that we think could be coming. There's elections, there's some external, risk factors that we look at, macroeconomic, geopolitical risk factors as well. So we always feel that at the end, that second half of the year is always gonna be a little bit, difficult for us to, to, to map out and to look at. In addition, as you know, the third quarter is always the weakest quarter.
If you look at over my 13 years with the company, the third quarter is always the one with the biggest drop. It's a pretty weak quarter. But going back to where you were discussing, the second quarter had a very strong April, a 75% growth in billed issuance. In May... I don't have the final numbers for May. We'll publish them at the end of this month, but I can look at what's happening week by week, and we're also in double-digit growth of market issuance. I'm not sure of how it all plays out to billed issuance. But let me just take one step back and look at the longer term.
When you look at the longer term, over the next 3-5 years, there was a lot of issuance that was done 7, 8, 9, 10 years ago that accumulates from that period, 2025, 2026, 2027, 2028, 2029, and that is up about 11% in total, compared to where it had been last year. And so we look at that as our future pipeline. And if you ask me the question about what's gonna happen quarter by quarter, there's always a question about pull forward, interest rates, spreads, but in the long run, the most important driver of issuance is economic growth, so GDP growth. We look along with that as what's the pipeline, as we call it, a future potential pipeline of what's on balance sheets for refinancing.
And then interest rates and spreads play a role in the timing of that, and so that's why we have sometimes some lumpiness in the business.
Okay. And one of the things I also want to ask about is that almost universally, among the companies that I cover, you're seeing a trend in the CFOs of saying, "With interest rates going up, I'm gonna let some of this leverage trickle down." And so, you know, where companies might have been comfortable, and some of my companies in the upper threes, they want to be in the lower threes, or if you're, you know, below three in terms of leverage. How does that factor into your thinking in terms of the cycle, and how long... You know, will that weigh in terms of companies thinking, "Maybe I won't refi $1 billion with $1 billion, I'll do $1 billion with $750 million?" Like, how does that-
We haven't really seen that be too big of an impact. A lot of times when corporates want to leverage their balance sheet in different ways, instead of doing it at the bond market, they do that more typically with commercial paper or with the bank loan market. It's less likely they're gonna do it with the bond market because bonds are quite attractive. They're long-term, fixed-rate financing. They're much lower covenant than when you get with a bank loan or a private credit instrument. So we don't typically see people using that as the instrument that they flex their leverage with.
Mm-hmm. So you're not, you're not concerned about that.
It's-
You think it'll come out in a different-
And in addition to that, even when there is a company here and there that might lower their net debt, there's a lot of cash on balance sheets anyway. And in the long run, what we see is that over the very long run, for over 80 years, the amount of corporate debt in the markets grows at 4% a year. It's been very steady. It's about a 4% a year growth overall of corporate debt. And then, in addition to that, not only in the United States, which is a very large capital market, about 68%-70% of the corporate financing in the United States is done through capital market instruments. In Europe, it's the other way around, it's more like about 35%-40%.
In Europe, it's starting to creep up, especially after the ECB took some programs out called the LTRO, which was a liquidity program for banks. They stopped doing that, which meant that the banks now don't have this cheap liquidity, and they're starting to push their clients to the capital market. So there's more tailwinds out there in the longer run than worrying about a few companies de-levering.
Right. And one more on credit before I start moving on to something else. Just could you talk a little bit about what's going on in private credit versus the public credit, and, and how do you see that playing out in S&P's role across the different areas within credit?
... Private credit has been around for many, many years, and it typically had been focused on mid-market, mid-cap companies. In 2022, in particular, it filled a gap when the fixed-income investors pulled their capital out of the market as rates really started rising quickly, and private credit moved up into larger cap companies. During that year, the issuance level was very low of loans, of bonds, and the private credit filled a little part of that gap. We realized at that time that we needed to have a new thinking around that asset class. We worked closely with the private credit players to understand what their goals or objectives for managing their portfolios. They're not gonna buy and hold those loans forever. They're managing them as portfolios. They're gonna syndicate some of those loans. They're gonna securitize some of those loans.
They're gonna trade some of those loans, and as they do that, those get rated. In addition to that, they're looking for some private credit assessments, independent credit assessments, loss analytics, recovery analytics across their portfolios. All of that play to the strength of our rating agency. And then in our Market Intelligence business, we have the portfolio management tools like iLevel, which are used by GPs and LPs, and then we also have reference pricing opportunities for loans and swaps and things like that, that the private credit players are using as well to understand the portfolio. So net, net, this is a- this is an opportunity for us.
Okay, I want to shift a little in terms of just what's going on in the general financial services vertical. So, you know, what are you seeing in the sales cycles for, you know, your general Market Intelligence business? Maybe there's... You could talk a little about some of the subsegments taking longer for deals to close. Like, what's happening on the ground?
Well, this goes back about a year and a half ago. In fact, it goes back to the end of 2022, when we started signaling that there had been - at the time, we were calling it a longer sales cycle. That's the language we were using, because we were starting to see that some of the large, especially, sell-side financial institutions, investment banks, were starting to shrink their sales forces a little bit, shrink the number of bankers. And as part of that, they were also negotiating with us in terms of consolidating our contracts or thinking about the renewal of their contracts. It was taking longer, and so we started talking about that lengthening of the sales cycle. Now, that lengthening of the sales cycle and some of that downsizing, that's already built into our budget and our planning.
So to the extent you see our guidance that we gave for last year and this year, that was already built in. So we haven't seen anything that surprised us because we already expected that. And some of the consolidation that's taking place in the banking market, we had built that in before. Right now, we continue to see a little bit. And when I talk about the financial sector, I'd say that we see a little bit of that, a little bit in the asset management side, a little bit on the sell side, but we're not seeing that in insurance and in sovereign wealth funds and pensions. So that's not the entire part of Market Intelligence. Market Intelligence, in particular, has a really diversified set of clients. It includes corporates-
Mm-hmm.
—sovereign wealth funds, as I mentioned, insurance, pension. We're also very global, so we're not seeing it across the board, although we're seeing it in particular, I'd say, in desktop is where the most kind of pressure comes. But we have a diversified business, which helps offset some of that, and we've also been planning for that, going forward. It's built into our guidance.
Just want to touch on that desktop business a little bit. S&P has always been a little bit unique because a lot of the competitors are not as much in kind of corporate America, and you guys are more in corporate America. Are you seeing a little bit more of a shift in them trying to follow your lead into corporate America in terms of not just selling to financial services firms? And just so people know, so I'm talking about, like, Thomson and FactSet and Bloomberg and, and like-
Yeah, I haven't really noticed that. And you almost probably have to ask them that question. But we feel that it is an important part of our diversification, that we're on the desk of a treasurer, a CFO, a head of business development in M&A and corporate strategy, sometimes supply chain managers, et cetera. So we think that that's a, that's a really value-added opportunity for our business.
Okay, so you're not, you're not seeing that. It's not percolating to your level-
No
... if there's anything going on there. Okay. I just want to shift a little into AI. Just AI is a, you know, a very big focus nowadays, and one of the things that people kind of, I don't know if they fully understand, is that training the models is huge, and having your own proprietary data in order to be able to do that is huge. Can you talk about how you are leveraging AI and the different datasets that you have that other companies just don't have?
Well, we started with an AI strategy 7 years ago when we made our first B-round investment in a company called Kensho, which is across the river, that had a traditional machine learning and artificial intelligence platform. About 120 engineers, computer scientists, physicists, mathematicians, et cetera, that were experts in artificial intelligence. That became what we call our Kensho data layer. The company is called Kensho. They're an inside captive and incredibly valuable capability to have. About a year and a half ago, we started shifting towards generative AI. We said to Kensho, "You need to continue to be our generative AI and our AI center of excellence for S&P Global." What we've done with that is build what we call the Kensho layer.
Manages our data approach, how we can tokenize information, how we can use it in models, 'cause it's not easy to understand how you can take data and then turn it into model-ready information to be used by generative artificial intelligence language models. As part of that approach, we've also have in the company a CAIO, a Chief Artificial Intelligence Officer. He's the CEO of Kensho, who also plays that role for us. So we have governance now across the artificial intelligence aspect of the company. But probably the next most important thing we've done is we've built an internal model management system, a co-pilot. It's called Spark, S&P Spark Assist. We've now built this in a way that we can bring the models inside of S&P Global. We're open architecture.
We're using the models that are being built by anybody who we can mention today, the hyperscalers and others, and open source models. We're bringing them in-house, and the reason we're doing that is that we want our data and our proprietary data to stay inside of S&P Global, to be used by models that we control, so that the output is something that we have. Or we don't want our data escaping out into the market, to being used by others. So we're very strict about use cases of our data and our proprietary data, and then we built this assist system that allows us to bring the models and test them to know which are the best to use them. And then our employees have opportunities to use the generative AI in tools.
The last thing I'd say is that I think that the generative AI models are gonna become eventually commoditized. There will be models that we settle in many, many models, but for different use cases. And we think that data is gonna be the key differentiating factor, and that the AI capabilities are gonna become table stakes for companies like ours.
Would you highlight certain data sets that you think are gonna be really stand out in three years from the fact that you, you know, you own them and you're applying AI to them?
Yeah, the data obviously, the data sets we already own. I would start with something that we might not necessarily talk about often, which is the information about energy transition. We have unique information that crosses all of S&P Global about sustainability, whether it's financial market information, it's the carbon attribution, it's carbon intensity, it's information about power systems and power grids, it's physical risk that many different types of companies are using. So something like that is a data source that in our company has been trapped in different silos of different businesses, and now we can use it and extract it from across the entire company horizontally. We've been working on that for the last few years with our Sustainable1 business, so we've got a way that we've already moved ahead on extracting that kind of information.
But if you take different divisions, and now you can pull out that information. We can do the same thing now with private markets information, where we've got it in different parts of business and start extracting it for new solutions. But we already have such incredibly important and valuable proprietary data in the ratings, in the indices, in the price information. These are the benchmarks that they're proprietary. We've got them, and we think that there'll be a lot of value used from those as well.
Great. I don't wanna make the same mistake I made in the last fireside chat, where I forgot to ask any of the people in the audience if they want to ask anything before I took this, the whole half an hour. If there's anybody out there that wants to ask anything, please raise your hand. We're happy to call on anybody. Like I've said before, this is not like an auction. I'm not gonna get it if you kinda wink or make a little note there in your hand. But if no one has it, I have enough obviously, a lot of my own questions over here. Okay, I'm gonna just take it out. The best companies, I would say, are very focused on new product innovation. And S&P has a Vitality Index.
There's only two companies that I cover that have a Vitality Index, and you're one of them. And can you talk about, you know, how does that work within the company? If something makes it into the Vitality Index, is it... How changed does it have to be from what it was before to really get counted as that? And from your view, like, what goes on operationally within the company to make sure that you are continuously innovating? Because to generate the kind of growth that you generate, for other companies, that's like producing a new company a year. So maybe you could talk a little bit about that.
Well, we know that for us to continue to grow, we have to be able to meet the needs and satisfy our customers. In order to drive pricing, in order to drive stickiness, as we'd call it, retention, you can't do that if you're not always continuously improving. We can't just sit back and say: We've got a great product which is embedded in somebody's workflow, and they're gonna always keep it there forever. It's a competitive market. Even in businesses where we've been embedded for 30 or 40 or 50 years, we still have to improve, and that means that it's the, it's the quality of our graphics or even things like page load speeds. You have to always be doing things better and better and better, but that's not what gets you into the Vitality Index.
What gets you in the Vitality Index is something completely new or a product which is really enhanced with all kinds of new features, new technology, big releases that come out. We have a group of people that look at this once a year, and they decide what is gonna be put in the Vitality Index. But the approach in the Vitality Index are, we want it to be 10%, more or less, of our total revenues, and they need to be the kinds of products that are growing in double-digit ranges. Last year, the Vitality products grew at a range of 18% for the full year, so it helps pull up the revenue growth for the whole company. These are the sorts of things that we hear when we speak with customers.
You don't-- You're never gonna find out what are the problems we need to solve for our customers if you don't spend a lot of time with them, and you listen to what are the things on their minds. And the things on their minds link to all the themes I've been talking about. It's sustainability and energy transition and private markets and what's happening with supply chains, with risk management generally. These are, these are the themes that we hear, and then how do you apply technology, and how do you manage data? And so these are the, the themes that are gonna be producing the new products and new services, which will be part of the Vitality Index. But it's high growth, it's gonna be customer responsive, and that's what we're gonna put in that, that set of products, and they've got to be growing fast.
So just to segue a little bit into that, so the company, I think, made a comment that you know, we're starting to get to where we're gonna get more of the revenue synergies that are new product revenue synergies from that IHS Markit acquisition. And, I think the comment was you guys are a little bit ahead of where you thought you were gonna be. Can you talk about, like, what's resonating there? What are you doing now that you weren't doing, that they couldn't do before? How, you know, it obviously took a couple of years to put it together and generate. What's happening?
The first round of the revenue synergies from the IHS Markit acquisition were really in cross-sell, and we talked before about the corporate segment. IHS Markit had a very strong franchise called the Financial Services franchise, within the, basically, the Markit business of the IHS Markit. But they weren't selling a lot of their services to the corporate sector. We have a large corporate client base and a great sales force, and they were able to immediately identify some of these products could easily be sold to the corporate sector, and that's the first round of the revenue synergies we got for that. Same thing with fixed-income indices into our equity indices franchise, the S&P products within our commodities business that were things like, selling research to Platts clients, et cetera. A lot of cross-sell.
But along the way, listening to the customers and having some things we already knew in advance, we felt that there were gonna be some products where you take a platform and put new data on it, or you take two sets of data and put them together, and you have a new product. That's where we are right now, and I'll give you a couple of examples of those. I'll start with something in our index business, where we found now that having credit and fixed-income indices, along with our equity indices, has given us a whole new set of products for the annuity industry. The annuity industry in the United States, which is through insurance companies, is selling products to the newly retiring and soon-to-be-retiring population, and they're looking for blended products, multi-asset class products.
We didn't have that capability, ability before without going outside of our own house, and so this is early wins that we're having, and these take a little while for the revenues to start kicking in, but the revenues are starting to kick in slowly. But this is an example where we weren't able to do that before. Another example in the, in the, Commodity Insights business, we had a Platts platform, and Commodity Insights, their business at IHS Markit had a platform. We put those together, and by putting them together, you can get out of the same platform now, prices, you can get research, you can get analytics, you can get forward forecasting, et cetera, something that nobody else has. We never had that before.
These are some of the examples of products like that that are the new products that are being launched, that we couldn't have done that before.
Yeah, that's. It's interesting. There are two very high-class energy products that came together. I used to cover IHS Markit, and I remember someone asking Jerre Stead about buying Platts, and he said, "I've never, ever heard that it was for sale, nor do I ever expect it to be for sale.
And, it wasn't, and it's not.
But, just, you know, so going back to some of the businesses that you got with IHS Markit. So we talked about the financial services. We just touched a little bit on the energy. Can you talk a little about Mobility? Mobility was their fastest-growing business, and it was very exciting, and the question we always got was, how long can this growth last? It's going on and on and on. And maybe you could talk a little bit about the growth, runway for that business. And then also, it's a little bit different than the other businesses you have. How does it fit in with the overall S&P family?
Yeah, so starting off on the business itself, if you, if you think about the automotive industry and mobility industry globally, it is going through a massive transformation. And it's exciting to be in a data and analytics business when you're serving an industry that is shifting from ICE, internal combustion engine, systems to electric, potentially hydrogen, to hybrid. And what that creates in the entire supply chain, all the way down to the consumer, is doubt and uncertainty, and what does this mean for me? What does it mean for a manufacturer? And we provide the data and analytics for them to make informed decisions.
We also provide the information for the dealer and the dealer groups to work with the OEMs, the manufacturers, on how much are they going to manage inventory, what's gonna happen with rebates, what's gonna happen with interest rate subsidies that are gonna take place in that industry. We have the products and services that are used to manage things like recalls for the automotive industry. And then, on the Carfax product, we've got the information about used cars, and just think about the second that a new car leaves a lot, it's a used car. One second after it leaves, it becomes a used car, and there's value in having that kind of individual information about the automotive, about the automobiles, which is used for buying and selling, but also the aggregate statistics are very valuable.
One of our client sets we really don't talk a lot about is insurance and financial institutions that use this to make decisions about underwriting, about lending, et cetera. So we have a very broad set of customers. It's an industry that's going through massive change. It's been growing quickly. And then, as a data and analytics business inside of S&P Global, that's what we are. And so there's been a lot of advantages when it comes to technology, to artificial intelligence, to data extraction tools. We've seen a lot of benefit from the S&P Global portfolio.
The customers, especially some of them, are not necessarily the same end customers, but we're always evaluating the total portfolio, especially kind of at the product level, what makes sense and what fits, but this is a really good business, and one that's, for us, it's a strong business to keep learning about in the portfolio.
So I just... You know, I covered S&P—I mean, IHS Markit, I think nine years ago, when they bought it, or whatever it was, eight years ago, I forgot how many years already it was. The main question was... Is there enough runway for this growth to continue? And I think that the main question right now is still, is there enough runway for this, the growth to continue in that business?
If you look at what's happening with the different environments. So let's go back a couple of years, the pandemic years. The manufacturing of automobiles, it was a huge struggle, right? Nobody could get chips to build cars, and there was problems with the supply chain for all kinds of automotive parts. Well, what happened? The used car market completely took off. It became a used car market, and the automotive business, the Mobility business, kept growing because it had the ability to provide the information to the manufacturers, to the bankers, to insurance companies, to the dealers, et cetera, for that shift to the used car market. In fact, benefited tremendously from it.
So I think as long as that industry is going through this much transformation, as long as people keep buying cars, I think that we have a lot of room to grow. And I'll make one quick comment. We've made an acquisition in the business of a company called Market Scan, and this is a specialized business for the automotive sector that has the best information about value of cars, pricing and value of cars. So the Mobility business had the information you needed about what cars were gonna be in demand, what cars to build, what cars people were gonna buy, when they were gonna buy them, but not how much they would pay, and not what the value is, at kind of a market value of automobiles. So we've added that to the portfolio.
So we now have a very complete set of information and data for the Mobility business, and I don't know if there's any other company that's like us. I don't... You know, you follow us. Is there anybody who has that set of capabilities and assets that can provide that entire supply chain information?
No, I mean, if you look at Experian has, you know, a competitor in the UK, and then you've got some of the in- software and the insurance companies do some valuation here and there, but, you know, no one has got that-
That, the total picture. It's hard to recreate that, and it's a very unique, very valuable asset.
Okay. I want to poll once again, 'cause we're coming towards the end of the session, 'cause if I get in one more, that's gonna be the end of it. If anyone has to ask anything... Okay, then I'm gonna finish it off here. Just, it was a big focus of S&P on their ESG offering, and we've seen, at least in the U.S., it's not as emphasized as it was several years ago amongst some of the asset managers. Can you talk about where that offering is right now, what the growth rate is, and what the focus of the company is on that, that side of the business?
We put in place—we put something that was a group called Sustainable1, S1, that was horizontal across S&P Global about 5 years ago, 4.5 years ago, because we felt that this is a global trend, and it's important to asset owners, to the banking system, to the asset managers. It's very important to regulators around the world. The market a few years ago was heavily focused on scores. This was, people were saying: "Well, what's my ESG score gonna be, and how am I gonna think about that?" But it's really shifted heavily the last few years to data, and especially climate data. Now, this plays to our sweet spot.
We bought a company called Trucost about seven years ago, which is the best company when it comes to carbon attribution, to climate data, to water usage, waste, chemicals, et cetera. We've also made some other acquisitions along the way of some carbon and other climate data information. And then because of Commodity Insights, we have fantastic information about energy transition, about carbon attribution, carbon intensity, et cetera. So as the market has shifted away from scores to core data and core analytics, we're, we're benefiting from that. The pushback in the United States is actually waning a little bit, so that's, that's actually not such a bad thing. Europe, it's actually picking up a lot. It's moving fast. And I do think that if you take the long-term view, energy transition and climate change are here to stay.
There's a lot of people that care about it, and we have a fantastic set of data and analytics to support the changes in the markets in that space.
Great. Thank you all for joining. Doug, thank you very much for participating.
Thanks, Shlomo.