S&P Global Inc. Q1 FY2023 Earnings Call

Good morning. And welcome to S&P Global's First Quarter 2023 Earnings Conference Call. I'd like to inform you that this call is being recorded for broadcast. All participants are in a listen-only mode. We will open the conference to questions and answers after the presentation, and instructions will follow at that time. To access the webcast and slides, go to investor.spglobal.com. Operator Instructions were provided. I would now like to introduce Mr. Mark Grant, Senior Vice President of Investor Relations for S&P Global. Sir, you may begin.

Good morning. And thank you for joining today’s S&P Global first quarter 2023 earnings call. Presenting on today’s call are Doug Peterson, President and Chief Executive Officer; and Ewout Steenbergen, Executive Vice President and Chief Financial Officer. For the Q&A portion of today’s call, we will also be joined by Saugata Saha, President of S&P Global Commodity Insights; and Dan Draper, CEO of S&P Dow Jones Indices. We issued a press release with our results earlier today. In addition, we have posted a supplemental slide deck with additional information on our results and guidance. If you need a copy of the release and financial schedules, or the supplemental deck, they can be downloaded at investor.spglobal.com. The matters discussed in today's conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. Additional information concerning these risks and uncertainties can be found in our most recent Form 10-K filed with the U.S. Securities and Exchange Commission. In today's earnings release and during the conference call, we're providing non-GAAP adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the company's operating performance between periods and to view the company's business from the same perspective as management. The earnings release contains financial measures calculated in accordance with GAAP that corresponds to the non-GAAP measures we’re providing and the earnings release and the supplemental deck contain reconciliations of such GAAP and non-GAAP measures. I would also like to call your attention to a specific European regulation. Any investor who has or expects to obtain ownership of 5% or more of S&P Global should contact Investor Relations to better understand the potential impact of this legislation on the investor and the company. We're aware that we have some media representatives with us on the call. However, this call is intended for investors, and we would ask that questions from the media be directed to our media relations team whose contact information can be found in the press release. At this time, I would like to turn the call over to Doug Peterson. Doug?

Thank you, Mark. As we look at this quarter's highlights, I want to remind you that the financial metrics we'll be discussing today refer to the non-GAAP adjusted metrics for the current period and for 2023 adjusted guidance and non-GAAP pro forma adjusted metrics in the year ago period, unless explicitly called out as GAAP. We're pleased to report 3% revenue growth in the first quarter compared to pro forma results in the year ago period. We continue to generate substantial synergies and manage our other expenses with discipline, as demonstrated by the 1% growth in total adjusted expenses in the first quarter. Our focus on top line growth and expense management resulted in an expansion more than 100 basis points in the adjusted margin and a 9% year-over-year growth in adjusted EPS. In addition to our strong financial results, we also made progress on many of the strategic initiatives we laid out for you at Investor Day. We continue to prioritize innovation in our technology budgets, and reached important milestones in our cloud migration. We also hosted a record-breaking CERAWeek in the first quarter, and we also expanded our lead in AI with Kensho releasing two more commercially available products built on our proprietary AI and machine learning platforms. We'll discuss these important highlights in more detail in a moment. One of the key messages from our Investor Day last December was the introduction of the five pillars that drive our strategy of powering global markets. Beginning this quarter, we’ll be discussing our results using that same framework. We use these pillars as a lens to inform our decisions on capital allocation and organic investment that impact our people, our customers and the communities in which we live and work. First, I want to start with our customers. Delivering value to our customers drives every decision we make at S&P Global. We constantly hear from our customers that they're focused on the same things we are. During the first quarter in almost every customer conversation I had, we discussed energy transition and sustainability, as well as our products that serve private markets. We continue to see evidence of the value we create for our customers. We saw strong and stable retention rates in the first quarter, with year-over-year improvements in Commodity Insights and several products in other divisions. As expected and previously discussed, retention rates in mobility have declined modestly, as automotive inventory levels and volumes start to normalize. We also saw some modest lengthening of the sales cycle in certain parts of the business in the first quarter, as some enterprise customers, particularly in financial services, are understandably focused on margin protection and managing their own expenses. This is a continuation of what we saw in the back half of last year. As I've met with customers over the last few months, including large automotive OEMs, retail companies, asset managers, banks and others, the recurring theme is that they want to do more with us. There's a large opportunity to raise awareness of the breadth of our product offerings, and customers have been consistently impressed by the products we've introduced to them. That should ultimately improve customer value and our results. We also look to create quality of life improvements in those customer relationships, and our Commodity Insights teams have done an excellent job of helping customers migrate to enterprise contracts. That migration reduces contract complexity for our customers, and enhances the overall customer experience in a meaningful way. Turning to our ratings customers. During the first quarter, global build issuance in aggregate decreased 7% year-over-year. While we saw strong sequential improvement from issuance levels last quarter, the uncertainty in the banking sector that emerged in March muted the impact to build issuance for the whole quarter. Refinancing activity was strong in the first quarter, particularly in high yield and bank loans, though opportunistic issuance remained muted. We're pleased that build issuance for investment grade increased in the first quarter, though this was largely due to a few very large deals. We're also pleased with the strength we saw in CLOs in the first quarter. The decision we made last year to preserve capacity and maintain the strength of our analytical organization is already proving to be the right call, as our growth in CLOs was particularly strong. Next, I'd like to focus on our strategic priority to grow and innovate. So far this year, we've launched several new products. An example of our product synergies, teams from Platts and IHS Markit worked together to integrate the Platts forward curve into our real-time analytics platform Energy Studio Impact. We previewed this innovation at our Investor Day, which provides clients with the most comprehensive and valuable data and insights in the industry while strengthening our customer value proposition and competitive differentiation. So far this year, we've also introduced new price assessments for black mass in Europe and Asia, and for R-PET in India to improve transparency in pricing of battery raw materials and recycled plastics. We remain focused and disciplined in our M&A, completing the acquisitions of TruSight and ChartIQ within Market Intelligence and Market Scan within Mobility. These tuck-in acquisitions strengthen our current offerings and we expect this type of M&A activity to be rare for the rest of the year. As discussed at Investor Day, we're introducing our vitality revenue metric which consists of revenue derived from new or substantially enhanced products. We're pleased that in the first quarter, vitality revenue constituted 11% of total revenue, consistent with our goal of maintaining a vitality index at or above 10%. Much of this growth will be enabled by enhancements to our own data and technology capabilities. As we optimize our technology spend to accelerate the pace of innovation, we're thrilled with the progress made in the first quarter. As we disclosed in February, we announced a strategic partnership with Amazon AWS to collaborate in product development and joint go-to-market initiatives. That partnership allows us to further transition workloads to the cloud and decommission our own data centers, three of which we closed just in the first quarter. Cross-organization teams also worked diligently to complete two software systems integrations to ensure that the combined company is operating on unified platforms in the most efficient way possible. Initiatives like these allow us to put more resources behind revenue-generating innovation as well, like the AI-powered products that Kensho has been developing for five years. There is excitement in the field of artificial intelligence, and we're extending our leadership and focusing on innovation that will benefit our customers and increase the value of our products. With the commercial launch of two new products in the first quarter, there are five Kensho-branded AI-powered products commercially available today on the S&P Global marketplace. We're very excited about the developments in this field, and we'll discuss our own launches in more detail in the coming months. Shifting now to how we lead and inspire our people, customers and communities. In the first quarter, we launched the ninth iteration of our people-first initiative, and made investments to expand resources for continuous learning, leadership development, and upskilling through our Central Tech programs. These investments in our people help us attract, retain and develop incredibly talented people, which ultimately lead to better financial results for our shareholders too. We also continue to lead and inspire the industries we serve as we power global markets. In the first quarter, we published the inaugural Look Forward Report, which outlines the expectations of our economists, analysts, researchers and data experts. This report is a product of our research council at S&P Global, which was formed last year to help us look beyond the near term, and explore the trends that will shape our collective future. Lastly, as I mentioned earlier, we hosted CERAWeek in Houston, Texas in March. This conference brought together over 8,000 leaders in the energy industry, who participated in over 650 events to help tackle global issues like energy security, energy transition and sustainability, as well as how to navigate the turbulent times in the commodity markets today. Now looking across the company, we're pleased with the strong execution of all our divisions this quarter. While we continue to see the impact of the issuance environment in our ratings division, we're also seeing signs of revenue stabilization as we begin to lap the challenging issuance conditions that began during the first quarter last year. We saw positive revenue growth in all of our other divisions in the first quarter, and continued to balance expense management with strategic organic investment to make sure we're well positioned to accelerate our revenue growth over the next few years. Expenses can of course be seasonal. So we look at the margins on a trailing 12-month basis, and we expect these figures to improve as we progress through the year. As we look through the remainder of the year, I'd like to touch on some of the factors influencing our company's performance. We continue to expect a mild recession this year, though the timing is more likely a few months later, relative to our initial expectations. We also expect to see volatility in various markets, including equities, credit and commodities. We see no change to the secular trends shaping the future opportunities for us, like the shift from active to passive asset management and energy transition. While these market expectations are mostly unchanged from February, we wanted to highlight the potential impact in the banking market. As we're all aware, the events around regional banks in the U.S. and a major Swiss bank added uncertainty to the markets in March. We do not have material direct exposure to the impacted regional banks, and we do not expect the events in that end market to materially increase the risk to our financial guidance in 2023, or to the medium term targets we laid out in Investor Day. We do see slightly elevated risk of default rates impacting the broader credit markets, particularly in high yield, which will also inform our updated issuance outlook. Our ratings financial results and guidance are closely tied to build issuance. And for 2023, we now expect build issuance to be up approximately 3% to 7% for the full year. Our latest ratings research group forecast calls for a decline in global market issuance. As a reminder, market issuance can differ materially from build issuance, as we've described in recent quarters, with much of the delta this year driven by declines in unrated debt and sovereign and international public finance, which don't impact build issuance. And now, I'd like to turn the call over to Ewout Steenbergen who's going to provide additional insights into our financial performance and outlook. Ewout?

Thank you, Doug. As a reminder, the financial metrics that we will be discussing today refer to non-GAAP adjusted metrics for the current period and for our 2023 adjusted guidance and non-GAAP pro forma adjusted metrics in the year ago period, unless explicitly called out as GAAP. For the first quarter of 2023, adjusted earnings per share increased 9% year-over-year. This growth was driven by a combination of 3% revenue growth, 100 basis points of operating margin expansion and an 8% reduction in the fully diluted share count. This is an excellent example of strong execution and prudent capital management combining to create long-term shareholder value, and we're pleased with the start to 2023. Revenue growth in the quarter was driven by growth in Market Intelligence and strong performance in Commodity Insights and Mobility. This was offset by a lower issuance environment compared to the first quarter of last year, though issuance improved sequentially from the fourth quarter. We'll walk through the divisions in more detail in a moment. Adjusted expenses were up only 1% year-over-year, driven by cost synergies and other operational efficiencies. Adjusted operating profit increased 5% year-over-year, as margins expanded to 46.2%. I'm pleased to report a sustainability and energy transition revenue increase of 27% to $69 million in the quarter, driven by strong demand in sustainability products in Market Intelligence's climate and physical risk products and Commodity Insights' energy transition products. Private market solutions revenue remained at the $100 million level, as growth in products from Market Intelligence were offset by declines in Ratings due to the timing of private market issuance. We still expect growth in private markets this year to be in line with the targets laid out at Investor Day. Vitality revenue, which is the revenue generated by innovation through new or enhanced products from across the organization, was $326 million in the first quarter, representing a 17% increase compared to prior year. Synergies are a key contributor to expense savings and margin expansion this quarter. In the first quarter of 2023, we recognized $131 million of expense savings due to cost synergies and our annualized run rate exiting the quarter was $552 million. And we continue to expect our year-end run rate to be approximately $600 million. We continue to make progress on our revenue synergies as well, with $17 million in synergies achieved in the first quarter, and an annualized run rate of $52 million. Turning to strategic capital allocation, we remain committed to disciplined capital management, including investing for long-term growth and returning excess capital to shareholders. We executed a $500 million accelerated share repurchase program or ASR in the first quarter, and we plan to launch a new $1 billion ASR in the coming weeks, leveraging the proceeds of the engineering solutions divestiture and cash on hand. We have been able to take advantage of market dislocations over the last year to repurchase shares at attractive prices, which allows us to reduce our fully diluted share count by 8% over that time period. Since the close of the merger last year, we have been able to repurchase more than 31% of the shares issued to complete the merger with IHS Markit. We continue to invest in organic growth as well and remain on track to invest $150 million in our 2023 strategic projects. Now let's turn to the divisional results. Market Intelligence revenue increased 5% driven by strong growth in data and advisory solutions and credit and risk solutions and favorable commercial conditions overall. That's improved 3.5% in the first quarter, driven in part by strong demand for new content and capabilities supported by the merger, though growth was tempered somewhat by a continuation of the modest softness in financial services that we called out last quarter. Renewal rates remain strong in the mid to high 90s. Data and advisory solutions and enterprise solutions both benefited from solid growth and subscription-based offerings. Credit and risk solutions benefited from strong new sales for Ratings Express and Ratings Direct products. Adjusted expenses were roughly flat year-over-year, as increases in compensation expense, cloud spend and T&E were offset by cost synergies and lower occupancy costs. Operating profit increased 16% and operating margin increased 300 basis points to 32%. Looking at the remainder of 2023, we know the comparisons will get easier as we progress through the year and we continue to expect improvements in those products within enterprise solutions that depend on capital markets activity. We also expect revenue synergies to begin positively impacting results in the back half of the year. We continue to recognize significant cost synergies as well and remain confident in our ability to deliver accelerating growth and full year margin expansion in Market Intelligence. While we are not changing the formal guidance ranges for revenue or adjusted operating margin, we do see increased uncertainty in the markets and within the banking sector specifically. As such, we may come in closer to the low end of these ranges. Now turning to Ratings, despite being down year-over-year, we're encouraged by the improvement we have seen in the issuance environment relative to last quarter. Revenue decreased 5% year-over-year. However, this is the second quarter in a row of sequential improvement in transaction revenue, as investment grade and high yield showed pockets of strength in the quarter, particularly in January and February. Non-transaction revenue declined 4% and 2% on a constant currency basis, primarily due to declines in initial issuer credit ratings (ICR) and rating evaluation services (RES), partially offset by growth in CRISIL. Adjusted expenses decreased 3%, driven by lower occupancy costs and outside services expenses partially offset by higher compensation expense. This resulted in a 6% decrease in operating profit and an 80 basis points decrease in operating margin to 58.3%. We raised our build issuance assumption for 2023, and expect issuance to increase in the range of 3% to 7%, reflecting the stronger issuance trend in the first quarter. We expect to see an improvement in full year transaction revenues compared to our initial expectations, though we expect the upside to be offset by slightly lower contribution from non-transaction due to ICR and RES headwinds. And now turning to Commodity Insights, revenue growth accelerated to 9% despite a very high comparison last year. Excluding the impact of the CERAWeek conference, revenue growth for Commodity Insights would have been approximately 6% year-over-year. Growth was partially offset by the loss of revenue related to Russia, which contributed $11 million in the first quarter of 2022. Advisory and transactional services increased 28% in the quarter, primarily due to CERAWeek official record attendance coupled with strong sponsorship sales. Upstream data and insights declined approximately 1% year-over-year, and subscription growth was offset by reduced one-time sales relative to last year. As we noted last quarter, we continue to expect low single digit revenue growth in upstream for the full year. Price assessments and energy resources data and insights both grew 8% compared to prior year, driven by strong performance in crude oil products and continued commercial momentum. Adjusted expenses increased 3% primarily due to higher event costs driven by conferences, T&E and compensation, partially offset by realization of cost synergies and lower consulting spend. Excluding the impact of CERAWeek, expense growth would have been only 1%. Operating profit for Commodity Insights increased a very strong 17% and operating margin improved 310 basis points to 46.1%. We expect Commodity Insights to continue to benefit from strong demand in price assessments and other subscription offerings, as well as the continuation of secular trends around energy transition and sustainability. As we saw from the incredible growth at CERAWeek, there remains a remarkable opportunity to further our leadership in the energy sector and in commodities more broadly. And we will continue to invest to capture that opportunity and drive multiyear profitable growth. In our Mobility division, revenue increased 10% year-over-year, driven by continued new business growth in CARFAX, strong recall activity and growth within planning solutions products. The Market Scan acquisition contributed approximately 1 point of revenue growth in the quarter and is recognized in the dealer category. Dealer revenue increased 10% year-over-year, driven by price increases and new store growth, particularly in CARFAX for Life and used car subscription products. Manufacturing grew 11% year-over-year, driven by our planning products and recall activity. Financials and other also increased 11% as the business line continues to benefit from strong underwriting volumes and a favorable pricing environment. Adjusted expenses increased 8% due to year-over-year increases in headcount, investment in software, and additional cloud usage, partially offset by lower incentive compensation expense. This resulted in a 14% increase in adjusted operating profit and 130 basis points operating margin expansion year-over-year. As we expected, we've seen expense growth rates moderate from fourth quarter, and we continue to expect margin expansion this year. We expect the Market Scan acquisition to contribute approximately 150 basis points of revenue growth in the full year, though we expect it to be modestly dilutive to adjusted margins in 2023. All of this is reflected in our updated guidance. Turning to S&P Dow Jones Indices, revenue increased 1%, primarily due to strong growth in exchange-traded derivative volumes, offset by declines in asset-linked fees. Asset-linked fees were down 6%, primarily driven by lower AUM in ETFs, which decreased 4% from the year ago period as price depreciation more than offset slightly positive year-over-year net inflows. Exchange-traded derivatives revenue increased 30% on increased trading volumes across key contracts, including an approximately 59% increase in S&P 500 index options volume. Data and custom subscriptions was flat on the quarter, though excluding the impact of some minor reclassification of revenue, as outlined on the slide, growth would have been 5% year-over-year, driven by strong demand for end of day and real-time data feeds. During the quarter, expenses decreased 7% year-over-year, driven by realization of cost synergies, lower bad debt expense and timing of discretionary spend, which was partially offset by continued strategic investments. Operating profit in Indices increased 4% and operating margin improved 250 basis points to 71.8%. As reflected in today's results, Indices will continue to face headwinds in asset-linked fees as the year-over-year depreciation in underlying asset prices impacts revenue on a lagged basis. Exchange-traded derivative revenue was well above our earlier expectations, though these volumes can be volatile and difficult to predict. We continue to invest to achieve the 2025 and 2026 target for 10% plus growth in Indices. And we expect those investments as well as the timing of certain expenses to drive margins for the full year back within the guidance range. In Engineering Solutions, we saw 2% revenue growth and 4% adjusted expense growth. As noted in our materials, we now expect to close the divestiture of Engineering Solutions next week. We're updating our guidance to reflect the accelerated timeline relative to our initial expectation for a June 30 close. I've had the pleasure of overseeing the Engineering Solutions division since the merger closed, and I would like to thank them for the incredible dedication and professionalism the teams have consistently demonstrated. We're confident that there will be a strong addition to KKR and wish them all the best. Now let's move to the latest views from our economists who are forecasting global GDP growth of 2.7% in 2023. While GDP growth is expected to be positive, our guidance still assumes a mild recession in the middle of the year and a modest recovery as we exit 2023. We continue to expect inflation above the target rates of central banks and energy prices like crude oil to remain above the historical averages as well. This creates favorable commercial conditions for many of our businesses, though it also contributes to volatility in the issuance environment, as we have been discussing over the last year. As we consider how all of this will ultimately impact our financial performance in 2023, let's turn to our guidance. Now that we have some certainty around the timing of the Engineering Solutions divestiture, we can introduce initial GAAP guidance. Adjusted guidance for the company reflects the first quarter results as well as the updated view on the macroeconomic environment, issuance trends, equity valuations and other key drivers, as previously outlined. Our full year guidance now assumes that strong revenue performance in the first quarter is offset by a lower revenue contribution from Engineering Solutions due to the accelerated timing of the divestiture. The only change to our consolidated full year adjusted guidance is in adjusted free cash flow, which has been reduced by approximately $100 million primarily driven by updated assumptions around cash taxes related to the R&D tax credit. We have provided granular guidance on corporate unallocated expense, debt-related amortization, interest income and tax rate in the supplemental deck posted to our IR site, though these are unchanged from prior guidance. The final slides in this deck illustrate our revenue and margin guidance by division, reflecting the drivers that I mentioned previously. In conclusion, despite the continued uncertainty in the macro environment, we've had a solid start to 2023 and remain confident about the outlook for the rest of the year. Before we open up for Q&A, I want to reiterate how excited we are as a management team when we consider the incredible opportunities we have to drive growth and innovation and the secular trends that continue to benefit our business, from key investment areas like energy transition and private markets through the inspiring breakthroughs that our Kensho team has driven in artificial intelligence and large language models. It's a privilege to discuss the many ways we plan to create long-term shareholder value in the coming years. It's also a privilege to share this stage with leaders like Saugata Saha, President of Commodity Insights; and Dan Draper, CEO of S&P Dow Jones Indices, both of whom we would like to invite to join us for Q&A. And with that, we'll turn the call back over to Mark for your questions.

Our first question comes from Manav Patnaik with Barclays. Your line is open.

Good morning. Doug, upfront you mentioned retention rates and mobility were declining modestly. I was just hoping you could provide a little bit more color there, perhaps with some numbers. But is that a trend you're seeing across your segments just given the uncertain macros out there?

Good morning. Thank you, Manav, for joining the call. The mobility question you have relates to some of the changes that are happening at a structural level in the mobility and transportation business. If you recall the last couple of years, we saw used cars became a very large sales aspect for the dealers and the automotive manufacturers. The OEMs were struggling to actually meet demand. So we're seeing a shift away from used cars to new cars. And we actually expect that there's going to be a lot of growth in the sales of automotive products around the globe this year. And where we're seeing some of the slowdown in subscription relates to dealers, as dealers don't necessarily have the same margin, they might be changing some of their approach to how they're working with the sales force they have. So we're seeing that that's one of the areas where we see some disruption in some retention rates that have started to drop. Other than that across the board and the rest of the company, we do not see any changes whatsoever to retention rates.

Got it. Thank you. And Ewout, just on the Ratings guidance, apologies if I missed this. I think you said more transactional revenue but offset by two items. I was just hoping you could elaborate what those offsets were?

Sure, Manav. Good morning. If you look at the dimensions with respect to market issuance and build issuance, actually we're seeing exactly the opposite of the pattern of 2022. So there are two large categories in market issuance that are down more that are not included in build issuance. So this is unrated debt, as well as frequent issuers. Frequent issuers are not included in build issuance because, as you know, they're on the fixed fee construct up to a certain level of volume. Therefore, we expect build issuance to be significantly higher than market issuance for the full year 2023.

Thank you. Our next question comes from Ashish Sabadra with RBC Capital Markets. Your line is open.

Thanks for taking my question. I just wanted to focus on the individual segment guidance. You raised the guidance for Commodity Insights, Mobility and Indices. I understand Market Intelligence is more towards the lower end. But even on the Ratings front, it looks like the build issuance guidance was raised by almost 1 point. Earlier was 2 to 6, now it's 3 to 7. But you reiterated the full year guidance, so I was just wondering within the full year guidance, do you have increased confidence on the range? Any color on that front will be helpful. Thanks.

Thank you. Good morning, Ashish. We are overall really confident around the outlook for the full year. We are very pleased, of course, with the results in the first quarter, and then also the confidence around what we are going to achieve for the full year. And you see that reflected in the overall guidance that, as you have noted, is unchanged. But you have to realize that we're taking out two months of Engineering Solutions revenues and earnings. So you could say implicitly, we've slightly raised our full year guidance. The changes by division as you were asking for are due to the following. If you look at Commodity Insights, that is driven really by the outperformance of revenue growth in the first quarter. If you look at Mobility, strong growth in the first quarter, but also the acquisition of Market Scan is helping there from a revenue perspective. And Indices as well, what we're seeing there is also a very strong first quarter, and that is therefore also reflected in the full year revenue growth outlook. In terms of Ratings, there is a shift that we have told you, a little bit higher transactional revenue, but a little bit lower non-transactional revenue. So net-net is still the same. Regarding margins, Mobility has been tuned down a bit. That is the dilutive effect of the acquisition. But on the flip side, for the Indices business, we see that the margins are actually up, given the strong performance in the first quarter. With respect to Market Intelligence, we have said that we come in more at the lower end of the ranges, both for revenues and margins. And that has to do with the macro environment, a bit of the uncertainty, the fact that we expect some of the capital markets products to come back later in the year because we now assume the recession is mid-year, as well as some of the impacts of the banking crisis, although we think that impact will be minimal for Market Intelligence.

That was very helpful color. And maybe as a follow up on Mobility. Manufacturing in particular was very strong. Overall growth in Mobility was very strong, but manufacturing historically which has been more in the 3% to 4% range was up 11% this quarter. So I was wondering has anything changed there structurally, which is driving significantly stronger growth in that segment? Thanks.

What's driving growth in that segment: if you recall over the last couple of years, supply chains had been disrupted. There was no access to different types of chips used in the automotive sector, including even things like key fobs. You also saw a lot of disrupted demand from the market as people were looking for cars, but they couldn't get them. So we're seeing that manufacturing is up. In fact, our total vehicle sales globally show strong growth: the U.S. around 7.5% growth, China about 6% growth, Asia including Japan and South Korea about 6.5% growth and Europe about 7.5% growth. So across the board, we see a lot of growth in production coming from a very depressed base. At the same time, it puts some pressure because demand is starting to decrease as well, given inflation and rising interest rates. So we see right now there's a lot of demand for information from our Mobility team, because we provide the forecasting and day-to-day dynamics. We're shifting dynamics from what had been a supply-constrained market to more supply in the market and shifts in customer demand, which all benefits our Mobility business because they provide the data and analytics that dealers, OEMs and suppliers need to make decisions.

Thanks, Doug. That was very helpful color, and congrats on such a strong momentum in the business. Thank you.

George Tong with Goldman Sachs, your line is open.

Hi. Thanks. Good morning. I wanted to focus on the Ratings side of the business. The revenues there declined mid-single digits year-over-year, and that came in much better than your main competitor, which saw an 11% decline. What are some of the factors that you believe drove this outperformance in delta in the quarter? And can these factors persist over the remainder of this year?

Thank you, George. This was a very lumpy quarter when you look at issuance. It started out quite strong; investment grade had started off strong, but through the quarter in the U.S. it declined 14% while in Europe it increased 3%. High yield increased in the U.S. 20% but decreased in Europe 2%. Structured finance in the U.S. decreased 48% while in Europe it increased 7%. We've been very adamant about having our sales and commercial people out in the markets. We keep our finger to the pulse of what's happening across the markets. We've been involved in supplying information for structured credit, particularly CLOs. We've been strong in the CLO market in the last quarter. Going forward, we think that for the rest of the year it's going to be mostly refinancing that will drive issuance. If you take a step back, we issued a slide last quarter showing the pipeline of refinancing on corporate balance sheets over the next five to ten years. You can see there was a lot of financing that took place over the last 10 years with typical maturities of five, seven, sometimes up to ten years. That's starting to mature now and we're beginning to see some of that pull forward. The question is what are the right conditions for people to come back to the market. That's something we're watching closely because there's a very large pipeline of refinancing that's going to come over the next three to five years, and we're watching that carefully including what's going to come this year.

Got it. That's helpful. And then wanted to ask about your synergy realization. You realized run rate synergies on the cost side of a little over $550 million, and then $50 million plus on the revenue side. Can you dive into where you're seeing most traction with revenue and cost synergy realization, and how you expect the progression to continue over the course of this year?

Of course, George. We're very pleased with the progress we're making with synergies. This is really a statement of execution across the company and the speed of implementation of our programs is impressive. We are at a $552 million run rate for cost synergies at this moment. These cost synergies span organizational and duplication of roles, real estate consolidation, vendor consolidation, and several other categories. This is all linked to integration. We like to get the integration behind us as quickly as possible so we can fully operate as a combined company going forward. We're not far away from the $600 million cost synergy mark. For revenue synergies, we see progress across divisions. The largest growth there we see in Market Intelligence and Commodity Insights, but there are contributions by all divisions. Revenue synergies will take more time. Right now the focus is mostly on cross-sell, and later this year and into the next few years we will shift to new product development. The lead time to develop and commercialize new products will take longer, but on both cost and revenue synergies we're pleased with where we are at this moment.

Thanks, George.

Our next question comes from Toni Kaplan with Morgan Stanley. Your line is open.

Thanks so much. I wanted to talk about ESG first. Thanks for the quarterly disclosure. We have seen some slowdown in new sales from a competitor of yours talking about the political and regulatory landscape. Have you also noticed any change in investor behavior in ESG, particularly in the new sales, any areas that are slower versus more resilient, because I know it's sort of a topic that spans your whole business. So maybe there are some areas that are doing fine and resilient versus others that maybe you are noticing a new sales change? Thanks.

Thank you, Toni. If you take a step back, markets for sustainability and climate products have been developing over the last five to seven years, while we at S&P Global have products that go back decades. Because of our Sustainable1 organization and coordinated investments in sustainability products, energy transition and climate across the company, we're seeing strength across much of the portfolio. We're seeing a shift toward climate in the U.S. and globally. This momentum is driven by corporates, governments, regulators and financial institutions. We have products from Trucost and our ESG data suite, bond referencing prices, physical risk, and we're engaged in important dialogues with regulators globally about disclosure. Let me hand it over to Ewout to provide more on the numbers.

Toni, when we look at the first quarter revenues for sustainability and energy transition, this was very strong for the company. We remain confident that for the full year the growth will be in line with our medium-term expectations. We have diverse revenue streams underneath sustainability and energy transition. For example, in Mobility there's electrification and EV supply chain questions for OEMs; in Commodity Insights we're seeing new price assessments around hydrogen, carbon and biofuels and recycled plastics; and in Ratings there are second party opinions. Trucost grew more than 50% in the quarter, which is one data point that reinforces the strength. Overall, we are confident about future growth in this area.

Perfect. And hoping you could on another topic just give us an update on how you're utilizing AI or any of your other advancements in technology, whether it be through Kensho or other areas as well?

We believe we're ahead in this area. We acquired Kensho five years ago and have embedded many of Kensho's products and tools within our businesses. Our intention is to stay ahead and be one of the winners in this market. We told you this morning we have five Kensho products in the market for external customers, and internally there are many more. The efficiency opportunities Kensho has created are substantial. For large language models and generative AI, three areas are critical: compute, algorithms, and training data. Training data is a differentiator. We have one of the largest training data sets for financial markets plus the Kensho team. We can do this in-house and you can expect more announcements later this year.

Thank you, Toni.

Our next question comes from Alex Kramm with UBS. Your line is open.

Yes, hi. Hello, everyone. Just wanted to come back to the Market Intelligence commentary and the outlook there. Clearly, you sound a little bit more cautious. Although, Doug, I think initially you said it should be fine. But I think Ewout's comments are clearly pointing towards the low end. So I guess the question is, what specifically is it that makes this thing a lower end? Is it just an expectation of a slowdown, or is it actually something that you're already seeing in new sales? We're just curious about if this is more an expectation or something you're already seeing in the pipeline, because obviously the uncertain environment. Then specifically, you mentioned the Swiss bank, which obviously is something I'm paying attention to as well. Just wondering, you said it wouldn't have an impact, but is it a question about maybe this year not an impact because it may take some time? Or is it just the exposures are very small, just maybe you can dimension it a little bit since it is the first time we've had something like this in like 15 years?

Alex, I will start and then hand it over to Doug. Generally, we are confident about Market Intelligence for the remainder of the year because of several reasons. First, growth of the subscription book of business—renewals remain healthy. We have good revenue synergies coming in. We're expecting a capital markets recovery at the end of the year, which should help enterprise solutions. Comps will become easier and FX headwinds will ease during the year. Regarding the banking impact, it's manageable and not material for Market Intelligence. The customer base is diverse: only about 10% of Market Intelligence revenue comes from commercial banks, and these are global commercial banks. We have multiyear subscription contracts with those customers. We tuned guidance to the lower end given uncertainty and our expectation of a shallow and short recession mid-year, but overall we still expect to come in within the range for Market Intelligence for the full year.

Alex, I've been on the road this year meeting clients. The feedback has been strong about the value Market Intelligence is bringing with data integrated into platforms. The customer base is diversified—it's not only financial institutions. I've had conversations with corporates about data we have in Market Intelligence, investor relations coordination, supply chain console, and other products. Customers see the combined value of the company and the client dialogue has been encouraging.

All right, thanks for that. And then just a very quick one on the Ratings side, and I asked your primary competitor this also, but maybe have a different view, which is really what's going to happen with lending by regional banks, right? I know they're more focused on middle markets. And that's not really where you play. But if we make the assumptions that these companies are going to be more constrained because of regulation or capital requirements, is there an opportunity for you or are you thinking about an opportunity that could lead to more disintermediation that you actually have a role as that remaining lending in the U.S. may more go to capital markets? Or is it just too small for you and it will go to other channels like private credit, for example?

We have much lower exposure to that sector than some competitors. We watch it closely because it affects credit dynamics overall. We do see in the U.S. potential slowdown in credit, which is one reason we're cautious on our economic forecast. We expect a mild slowdown mid-year, and some of that could be caused by a slowdown in credit. Overall, exposure is low. Some lending could be picked up by private markets or securitization, and we might benefit from activity in those areas.

Okay. Thank you very much.

Thank you. Our next question comes from Craig Huber with Huber Research Partners. Your line is open.

Great, thank you. Can you touch on, if you would, your outlook for bank loan issuance this year and high yield issuance just given the huge uncertainties on the macro side please?

Let me give a broader sense. Our credit research team forecasts across categories that overall market issuance would be down about 3.5% this year, while we expect build issuance to be up about 3% to 7%. We don't break out leveraged loans versus high yield in the build issuance number, but in the first quarter, high yield build issuance was up about 6% and bank loans were down about 33%. These can be substitutes: some issuers choose floating-rate loans or fixed rate bonds, others go to private markets. There's a dynamic market and issuance tends to be opportunistic—floods of issuance can happen over a week or two, then markets can pull back. Our credit research team sees corporates up about 8.5% for the year. The broader point: we expect substantial capital deployment over the long run driven by infrastructure, the CHIPS Act, the Inflation Reduction Act, energy transition, and related public/private investment. We expect to benefit over the long run.

Thanks for that. My other question: Mobility obviously had a very strong start to the year with solid outlook for the rest of the year. Can you just touch upon the businesses within that division that you think will help drive it for the rest of the year, and any significant changes from the trend you saw in the first quarter that might go better or worse as the year goes on? Thank you.

We're positive on all the underlying revenue drivers within Mobility. For dealers, there are two effects: margins are coming down a bit and inventory levels are going up, so retention is a bit lower. On the flip side, there's more demand for sales and marketing products because dealers need to proactively reach customers. CARFAX continues to innovate and launch new products, which helps growth. Manufacturing benefits from planning and recall products and the EV transition. Our data also flows to insurance companies, banks and other lenders that need data for pricing. Overall, we expect continued healthy growth this year.

Great. Thank you.

Thanks, Craig.

Our next question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Thanks so much. I know it's late, I'll just ask one. Nobody's asked about the pricing environment. And I know it varies by segment, but if you can just give us some general comments in terms of the ability to pass through pricing, we'd appreciate it?

Absolutely, Jeff. Most of our products are must-have products deeply embedded in customer workflows and day-to-day activities. We add a lot of value, which gives us an opportunity to pass on cost increases due to inflation in a responsible and balanced way, generally gradually at contract renewals. Overall, we think it's reasonable to pass on cost increases and still expect to expand margins in the current environment. Dan or Saugata, if you want to add specific color for your businesses?

Yes, Jeff, it's Dan. We align pricing with the value we create for customers. For Indices, the secular shift from active to passive management is a major trend. We work closely with clients and aim to represent value. Over 26 years, our three core indices have saved investors over $400 billion in management fees. Pricing is a strategic tool to align growth and client interests.

All right. Thanks so much for the color.

Our next question comes from Owen Lau with Oppenheimer. Your line is open.

Good morning and thank you for taking my question. Going back to Kensho, Doug and Ewout, you mentioned five products are commercially available. Could you please talk about the early traction there and your expectation about these products? Who are your major clients? Would that be banks, or can you expand to other verticals? Also, please remind us the revenue model—mainly subscription-based model? Thank you.

Kensho has been focused on product development, speed to market, and customer experience within S&P Global and is now turning more externally because many products developed are attractive to external customers. We have more than 50 external customers including asset managers, large banks, hedge funds, and corporates. Products include Link, Nerd, Scribe, Extract and Classify. I'll hand over to Saugata for examples in Commodity Insights.

Thanks. Owen, Kensho is foundational across Commodity Insights. For example, Kensho built a tool used in our price assessment process—specifically for the market on close process—that compressed workflow time by about 70%. That frees up time for researchers and price reporters to do other productive things and helps us get information out to the market faster. AI is a broader theme. Energy Studio Impact, for example, covers 6 million North America wells, of which for about 1 million wells we do real-time live forecasts. That product involves more than one trillion rows of data, and computing that without leveraging AI and machine learning models would be nearly impossible. That's just one example of how we're using Kensho, machine learning and AI to develop and demonstrate additional customer value.

Got it. That's very helpful. Thanks a lot. And then on Indices on the expense, I think it was lower than our expectation, but the margin was higher. Was it mainly driven by lower comp because your revenue line gets lower? Also, could you please give us an update on your key market and investment or expense assumption for the rest of this year on Indices? Thank you.

In Indices, we had difficult comps and asset prices impact asset-linked fees on a lagged basis. The outperformance was in exchange-traded derivatives driven by volatility and increased trading volumes. Exchange-traded derivatives have higher gross margin than asset-linked fees, but these volumes are volatile. We also lapped incentive compensation reductions last year and had some one-time non-recurring items. We continue to invest to achieve the 2025/2026 targets, and we expect mix and timing of expenses to drive margins back within guidance for the full year.

Okay, sounds great. Thanks a lot.

Thanks, Owen.

Our next question comes from Andrew Steinerman with JPMorgan. Your line is open.

Hi, Ewout, I know this is a small item, but it would help our model. Could you just give us what the total acquired M&A revenues were in the first quarter? I definitely heard you call out the 1 point of M&A revenues in Mobility from Market Scan. But there have been other tuck-ins already completed. And if you could also on the same basis with the acquisitions already completed, could you give us what the M&A revenue assumption is for the '23 guide?

Andrew, Market Scan's impact in the quarter is around 1 point—around $3 million to $4 million—which is immaterial for the company as a whole. The other tuck-ins like ChartIQ are immaterial for Market Intelligence as well. From a modeling perspective, I wouldn't put any large number into your model. Note that divesting Engineering Solutions two months earlier reduces overall impact on our plans. The net of the divestiture and acquisitions is actually a negative, hence the comment earlier that implicitly we're raising the guidance for the full year by holding the overall company range the same.

Right. But you do account for all of the M&A, right?

Yes, that's correct.

Okay. Thank you very much.

Thanks, Andrew.

Our next question comes from Jeff Meuler with Baird. Your line is open.

Yes, thanks. Doug, Ewout, good to hear from you. Within Indices, maybe if you could talk about your vitality or what new products are really resonating or you think have the highest potential?

Hi, Jeff. In Indices, sustainability is a big theme and a huge opportunity as we expand in Europe and Asia. Factors and income-generating solutions are also resonating—our dividend franchises, like the Aristocrats, are seeing demand in developed markets where aging populations need retirement income. Combining our dividend franchise with credit to offer multi-asset solutions is a big opportunity. We're leveraging partnerships across S&P Global—Commodity Insights and Trucost—to create products like an electric vehicles metals index combining unique proprietary datasets. These multi-asset and sustainably oriented solutions are major drivers of future growth.

Thank you. And then on Commodity Insights, there was a comment about an opportunity to further sector leadership. Maybe just a high level comment, how was CERAWeek different with IHS now part of S&P? And should we look to the event as a meaningful cross-selling catalyst if you just talk about the pipeline build coming out of the event? Thank you.

Jeff, CERAWeek is our marquee energy event and more broadly an important commodity and energy thought leadership event held in Houston in March. It brought over 8,000 attendees, including C-suite executives and policymakers. It's not primarily a selling venue but a forum to showcase thought leadership, talent and the work we do. We use it to shape research and products. Takeaways: energy transition is here to stay; it's complicated because customers balance transition, security and affordability; customers are upbeat and looking for solutions; and we walked away with targeted opportunities to serve clients. CERAWeek helps shape strategy and product development, and combined with other events and the merger, it enhances our ability to interact with customers.

Got it. Thank you.

Thanks, Jeff.

Our next question comes from Russell Quelch with Redburn. Your line is open.

Yes. Good morning. Following on from the previous question, I haven't seen any new products in the fixed income benchmark index space from S&P yet post the acquisition of IHS. I did hear Dan's comments earlier, but can you be more specific about the time to market for new fixed income index products that bridge the brand and S&P's corporate data sets? Do you have aspirations to challenge competitors in that market? Any further comments? And how much does new product growth drive the 10% medium-term target in Indices?

We launched a notable fixed income product in Europe: the Paris-Aligned & Climate Transition (PACT) indices in fixed income, aligning with our equities offerings. There's demand to expand these indices regionally and globally. Multi-asset solutions, combining the IBOX franchise with our equity franchises, are important, especially for channels like insurance and retirement where active management has been strong historically. We have already launched multi-asset products in Japan and are developing more globally. This is competitive, but we aim to expand our first-mover advantage by bringing proprietary data sets to market.

Regarding contribution of new products to top-line growth: at Investor Day we said new initiatives would contribute about 80 basis points of overall growth for the company, and vitality is an important metric indicating healthy innovation. Products rotate off the vitality index after three to five years as they become business as usual. We saw double-digit vitality levels across businesses this quarter—Market Intelligence, Mobility, Commodity Insights, and Indices—which is positive.

Thanks. As a follow up, you talked about investments and synergies. Can you speak to the seasonality you expect in the cost line in 2023? Is that similar to historical averages or different?

There are two kinds of investments: strategic program investments of $150 million for the year, which are gradual and not particularly seasonal, and the 'cost to achieve' investments related to revenue synergies which come in over time. Those are connected to integration and revenue generation and won't show as unusual seasonality in our reported results.

Thank you.

Our next question comes from Simon Clinch with Atlantic Equities. Your line is open.

Hi, Doug. Hi, Ewout. Thanks for taking my question. I wanted to ask about the competitive environment and your comments about lengthening sales cycles and stresses in financial services customers. Are you seeing any competitive response or would you expect responses on pricing from the industry? How would you expect to fare if that were to happen?

We are in a competitive environment and respect our competitors. Our response is to provide the most relevant, newest, fastest, highest-quality information, investing in AI and machine learning to deliver information faster and more effectively. Competition keeps us on our toes and makes us better—we must always meet market demands and stay ahead of competitors.

Okay, thanks. And just a follow-up: on revenue synergies and their timing, should we expect cyclical variations? If there were a prolonged downturn, does that impact timing of recognition of revenue synergies? Any flavor would be useful.

We said revenue synergies come over three to five years: about 45% from cross-sell (mostly early) and 55% from new products (years three to five). You should see a ramp over the next few years. We saw a nice jump from Q4 to Q1 and are at a $52 million run rate. Revenue synergies take longer than cost synergies but are progressing.

Thanks.

Our final question comes from Stephanie Moore with Jefferies. Your line is open.

Hi. Good morning. Maybe taking a high level view of this year and your expectations embedded in your guidance, I think you called out that it does call for an improvement or some recovery in the back half. Just trying to think of the levers or opportunities you have to pull, say if the macro ends up being a bit weaker. Can you talk about some of those levers and some of the counter-cyclicality of your business in the various segments that would be helpful? Thank you.

Thanks, Stephanie. Our assumption is strong Q1 performance followed by a short, shallow recession in Q2–Q3 and a recovery exiting 2023. We're running a tight ship on expenses and investments and are ready to invest in growth. The downturn levers are the usual: variable/discretionary spend, hiring and investment spend. Cost controls are strong—expense growth is minimal in Q1—and we're prepared to take action if needed. Ideally, we can continue to invest in future growth to deliver medium- and long-term shareholder value.

Great, thank you so much. Appreciate the color.

I'd like to make a quick closing remark. Thank you everyone for being on the call today and for your excellent questions. I also want to thank Dan and Saugata for joining us. We're very pleased with how our year has started. As you recall, in December we had an Investor Day where we launched a new strategy called powering global markets. It's fantastic to be off to such a strong start. A lot of that has to do with our engagement with customers. We've been out talking to customers, listening to them, and understanding how they see the combined value of the company. I've been traveling globally speaking with key customers across industries and businesses, and I'm more confident than ever about our strategy. Their feedback validates our priorities, investment in technology and AI, and the quality of our people. I'm excited about what we're seeing. I want to thank all our people for helping us launch 2023. They are phenomenal and it's why we're off to such a strong start. I look forward to sharing more on our next earnings call. Thank you everyone for joining us today.

That concludes this morning's call. A PDF version of the presenter slides is available for downloading from investor.spglobal.com. Replay of the entire call will be available in about two hours. The webcast with audio and slides will be maintained on S&P Global's website for one year. The audio-only telephone replay will be maintained for one month. On behalf of S&P Global, we thank you for participating and wish you a good day.