Q1 2020 Earnings Call
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I'll now hand, the call so to speak for today are employer senior Vice President of Investor Relations. Thank you. Please go ahead Sir.
Good morning, Thank you for joining US right just more Q Onefourteen 20 earnings conference call earlier. This morning mission or Q1 earnings press release imposed supplemental materials side, just Mark Investor Relations website or discussion on order based on non-GAAP measures are adjusted numbers, which excludes stock based compensation amortization of acquired in town tangible that all right.
I just Marty bleed on GAAP results are useful in word here understanding your ongoing operating performance for the or something like two which should not be considered in isolation from where as a substitute for Japanese confirmation. As a reminder, this conference call to be recorded webcast is copyrighted property of I just market any rebroadcast of this information horn heartfelt fire incentivizes markets derivatives.
This conference call, especially discussion of our outlook may contain statements about expected future events, therefore looking subject to risks.
Factors that could cause actual results could differ materially from expectations can be found eyes as markets filings with the I think would be I don't know except remark web site at her prepared remarks plans to go chairman CEO and Jonathan Gary VP, and Chief Financial Officer will be available to take your questions, but that is my wasn't turned over to land.
Yeah.
Okay. Thank you everybody and thank you for joining us for the Jets markets Q1 earnings call.
Before we get started I want to direct your attention to our supplemental slides posted on our IR website.
We will be referencing today.
We're certainly living an unprecedented times with the human and economic impacts of the Kobin I came pandemic financial markets in turmoil in oil and the Twentys due to both supply and demand challenges.
We've analyzed the changing dynamics within our markets.
We've developed a strong plan.
And our taken decisive cost action will mean take it maintaining and make your room for continued investment deliver double digits earnings growth this year and over the coming years.
In time, such as these I'm committed to providing even more unparalleled France transparency to all of my colleagues.
And to your shareholders.
Our markets are changing rapidly.
Parts of our business will be more challenge than others.
But on a whole we're extremely fortunate.
At our model will be resilient.
This is due in large part through our diversification across end markets and with in Oregon.
Must have products and services.
Low revenue concentration across products and customers.
Annual multiyear subscriptions with high renewal rate.
90, Paul Watts per cent recurring revenue.
Got a capex light model, the strong cash flow converge and strong balance sheet excellent liquidity.
And a firm wide culture that we hope to.
To drive efficiencies across that and continue to innovate even in challenging revenue environment.
Now with offices in Asia Pac.
We learn quickly.
How to manage the gold at 19 situation.
Conducting.
Early on business in fact reviews and ensuring that our IP infrastructure.
We've been investing.
Could support Oh, I mean, all 16000 employees working from home and were mostly as needed and we certainly been tested on that.
We're also using these child challenging times, it's an opportunity to be even more visible.
With our customers.
And our management seems to virtual cold and Webinars.
We have the benefit.
That needs environment, our customers need to hear from.
Even more to help them through these times of uncertainty.
Our expert.
Over 3000.
Our reach and thousands of customers every single day.
And we're using the current market conditions to make sure where there for them.
And developing opportunities and adjusting our models to support them through these challenging times.
Overall I feel good about our business model.
How we're managing the complexity of changing global conditions.
I think we feel good about how we're helping our customers.
During these times, it's essential activity.
Now Jonathan is going to go over Q1 results.
And then I'll go over a multiyear plan.
On how we're going to plan.
To achieve the earnings growth.
That we suggest.
Over do you have done.
Great. Thank you land Q1 results were indeed, very very strong included revenue of one dog Oh wait billion organic growth of 6% and total revenue growth of 3%.
We delivered net income of 484 million and a GAAP EPS of $1.20 adjusted EBITDA of 432 million, which had an increase of 8% normalized for the 80, a divestiture and a margin of 39 thought 9%.
And we delivered adjusted EPS of 56 cents, which had an increase of seven cents or 12% normalized for the ABS divestiture.
Regarding revenue, our Q1 organic revenue growth of 6%.
Due to strong recurring organic growth of 7%.
And nonrecurring organic decline of 5%.
This decline in nonrecurring was primarily driven by a tough year on your call in financial services.
Moving onto the second performance, our financial services segment drove organic growth of 7%, including 9% Hubert recurring in the quarter.
All three sub segments delivered strong performances.
Our transportation segments delivered organic growth of 9% in the quarter.
This included an excellent 12% recurring revenue growth and a decline of 1% nonrecurring driven by the expanded declined a one time in our auto business.
We saw exceptional operational metrics in particular from our carfax in automotive mastermind business lines.
Our resources segment delivered 1% organic growth, which is broken down as 1% recurring growth and 2% nonrecurring growth.
Our Q1 organic ACB increased by flipped $3 million.
And our trailing 12 month organic ACB remain up 24 million or 3%.
Our CMS segment delivered 3% total growth, including 1% recurring and a 50% growth in nonrecurring.
Our CMS total organic growth normalized for prior year Rootmetrics customer loss was impressive 4%.
Turning now to profit margins adjusted EBITDA was 432 million, which is up 24 million or 8% versus prior year your normalized for adss divestiture.
Our adjusted EBITDA margin was 39, Doc, 9%, which is up 90 bips.
Segment margins were inline with our expectations.
The adjusted EPS was 66 cents per diluted share, which is a seven cents or 12% improvement normalized for the divestiture.
Adjusted EPS also excludes the onetime gain on the sale of Ats of $372 million.
Our GAAP tax rate was 1% and our adjusted tax rate was 17%.
Q1 free cash flow was 117 million as is typical Q1 cash with seasonally low due to bonus payments.
Our trailing 12 month free cash flow was 966 million and represented a conversion rate of 54%.
Just a reminder, our trailing 12 month conversion rates were impacted by the onetime tax payments that we had in Q4 of 29 team.
Turning to the balance sheet, our Q1, ending balance was 5.2 billion and represented a gross leverage ratio of approximately 2.9 times on a bank covered basis, which is inline with our capital policy.
We closed the quarter with 144 million of cash and our Q1 Undrawn revolver balance was approximately 925 billion and represents a great liquidity position.
Our Q1 weighted average diluted share count was 404 million shares we repurchased $610 billion the shares the quarter, including completing our 500 million dollar MSR. We also lost a $250 million is our on March that first and now Lance.
I'll pass it back to you.
Okay. Thanks.
Maybe we can all go on to mute there we cannot predict with any certainty the length of disruption from co bit 19, and how long and eat the economic impacts are going to last.
To account for this uncertainty, we're providing for a wider than usual range of 2020 outcomes based upon threed scenarios that make assumptions on the macro economic and market specific drivers that may impact our business over the remainder of the year.
And these are laid out in the supplement.
We're also taking cost actions that will allow us to deliver double digit earnings growth, even under our worst case revenue scenario.
In all three scenarios.
We of course face pressure the reality of an economic slowdown.
Significantly lower oil prices and capex impacting our upstream rate resources business.
A general slowdown of new business and decision making.
Our near term shock to consumer spending impacting our auto customers had communities shutdown.
Now our first scenario, which is the upper end of our guidance requires the world to settle quickly.
And then this scenario, we'd expect Q3 recovery to begin.
Under the Q3 recovery scenario.
This is what you would expect to see in terms our businesses recovery.
Continued volatility that's driving demand.
For our pricing and valuation services.
And then we'd see a recovery of equity issuances coming in the second half.
Lower oil prices drive an opex plus to an agreement in Q3.
Brent would rise to the low thirtys by the year end and we'd have an average in the upper twentys.
New and used car buying.
Impacted now in Q2.
Would continue and then rebound in Q3.
Okay, let's look at the second scenario.
Second scenario.
Moves recovery to Q4.
Continued volatility drives demand for financial services solutions, but new equity issuance has been closed for most of the year.
Oil markets remain uncertain.
New Opex plus agreement is delayed until the ended the year, which would lead to an average Brent price a brand in the mid twenties.
The shutdown of auto sales in Q2 will be followed by a U shaped demand recovery with slow growth throughout the second half.
Now the third scenario, which I call with my team our worst case scenario.
Gives us a longer global recession.
With no recovery expected in 2020.
And recovery beginning in 2021.
Now I personally really believes that we've modeled here a worst case scenario.
This is a very challenged financial markets industry. Our customers are under continued profit pressure through 2020.
Without any normal Rick conditions, returning until 2021.
Okay Clos disintegrated, there's no sign of any agreement throughout this year and an average price a brand.
Well stay in the low twentys.
Into 2021 as well.
A sustained recession in the auto industry with sales of both new and used cars impacted throughout 2020.
Now for modeling exercises.
My view with this transparency that we're going to be providing you with each and every quarter and update new against it.
You can model off our worst case scenario, which will call the 2021 recovery scenario.
We're all working hard and there's many great story that can entice you in to the Q3 and the Q4 recovery and we'll keep those than mine as we update you read regularly.
But actually no we managed I just market since merger.
Very prudently.
And we're going to base, our cost assumptions and our cost measures against our worst case scenario.
In order to provide downside protection to be able to deliver strong profitability.
Regardless of our revenue outcome.
And we already put in process.
More than 250 million of 2020 costs.
Many of these costs.
A minimum of 50 million.
Our modeled as permanent cost reductions going forward.
There's also a variable portion of costs.
That we now have levers in place.
That as revenue recovers, we'll be able to bring those costs back to normal levels.
I will give us some examples.
The efforts that my team and colleagues have been making globally to deliver this robust financial plan.
Now of course, the variable costs that adjust with revenue, especially within the autos business, our natural level levers those are in place.
Last night My board might sell approved a set of executive salary cuts.
For my top 300 people.
And the board is also equally considering for our next board meeting in April.
A reduction.
Cash bonuses will be curtailed.
Workforce reductions.
Travel and entertainment non critical projects contractor spend.
And a freeze on both new and replacement hiring.
We're also optimizing.
Facilities and lease negotiations reduction in purchase expenses also being optimized.
In addition.
Providing double digit earnings growth in a challenging environment. These cost reductions now are allowing us.
The maintain investment in each and every one of our segments.
At the levels, we were investing at no investments have been caught around our alternatives business.
Our auto enterprise mastermind product, which the master my team had a whopping, 36% first quarter really great performance and recovery.
Our initiatives around climate.
Regardless of this current environment the challenges on the climate globally are not going away and I HF market will be prepared.
To build those services as we look forward into 2021 and beyond.
And then finally.
Our team working on a new asset management platform that will bring efficiency is.
In technology and operations to the asset management industry will still be fully invested.
Next.
We've been investing in our data Lake.
Teams of people from working globally to transform our technology stack to be able to offer new and exciting services to our customers.
That are already taken shape underway.
In revenue in the pipeline.
Our investment.
Our transformation to the cloud.
We'll carry on fully.
All of that is provided for within the plan presented in each of the three scenarios.
As well as.
In the 2021 and 22 guidance as you see us returning to growth.
Now let me provide you some color on how the current uncertainty may impact each of our different segments do you can understand the levers we're dealing with an equally gain confidence in the plan that we're providing let's start with resources.
We know the price of oil is under pressure from the largest disruption of global industry demand.
Increasing supply.
Our scenarios are going to assume an average global capex reduction of roughly 30% in 20.
And for the 15% 21.
Now with the bulk of the cuts in North America.
This will impact our upstream business and remember our upstream business is now only 60% of resources revenue.
Remember our upstream revenue is broken into three parts data analytics and our insights businesses, we expect the largest negative impact to be on our data business followed by analytics.
But our inside business includes market forecast analysis.
The insights business has held up very well during the last downturn and we expect even better this time.
The financial market.
Corporations governments are all calling us calling on a.
To provide information and scenarios to manage them through this difficult environment.
We're well diversified this time super majors national oil companies large midsize and small independent BNP companies.
There is.
And going to be the most pressure among our small independence.
The small independent make up only 100 million of our upstream revenue.
Reside within North America.
And they're mostly caught customers of our data and analytics offerings.
And where they are stronger are still drawing on our insights to help them with their decision making through this tough period.
Moving to our downstream business.
Now, 40% of our resources revenue and very well diversified chemical power gas renewables agriculture.
And our office business, we expect these businesses continued to produce regular growth.
As the cuts commit more base is very diversified.
And mostly non NP customers in fact.
Now BNP industry is going to remain under pressure in the coming quarters, but at the company, where so much better positions.
Then the company that entered 2015.
Sure some of the reasons our resources business as I said is more balanced our fast growing downstream businesses are now 40%.
They were only 15% back in 2014.
Upstream revenue is only 15% of our total company.
Versus 35% back then.
International data cancellations, which led the decline in revenue the last time are much lower.
Large independents are mainly operating in the U.S. today.
Our team has been through this before they've got the playbook and we're operating with much better data and analytics due to all the investments we've made post merger and systems.
To help support us.
Given all this we expect our resources segment organic growth.
To be positive low single digits to negative low single digits.
Adjusted for the events the onetime events cancellation in 2020.
Okay, let's go to transportation.
Including Q1, which was absolutely stellar and I really want to congratulate the team.
For the results that they delivered we've been delivering and performing at a very high level.
With double digit organic revenue growth.
10 of the past 11 quarters.
Now in the current environment, our transportation business will experience headwinds.
And this is discussed in our scenarios.
As regions around the world enact stay at home policies to deal with the virus.
It's easy to know that consumers are not out buying cars.
We saw this in China during their shutdown period.
And we're now seeing a slow recovery.
The dynamic be now beginning in North America.
And traffic to dealerships.
We'll continue to do to decline significantly and put tremendous profit pressure on our dealer customers.
We do believe this is an unprecedented short term impact to the dealerships and not represented.
Brett representative of how the industry would perform during the normal cyclical downturn.
The range of the outcomes tied to our three scenarios is white and growth for this segment should be between positive.
Low single digits to negative mid single digits.
Let's move to financial services, which also performed exceptionally well in Q1 and have done over the past three years.
Just fueled by product innovation.
Market penetration diversification.
And a very strong team.
We now expect organic growth in the mid single digits.
And here's what we're assuming.
So you're going to have stable revenue across information. This is due to the high recurring revenue and all of these products are most tabs.
And even more so in these volatile.
Environments.
Our valuations are in full demand corporate actions corporate services, all very much needed with potential growth in demand.
In the coming quarters.
No processing she has been a challenging segment.
Of course is processing derivatives and secondary loan markets.
But two thirds of derivative processing and the volumes and of course, the ticket sizes are lower and the volumes are higher due to the volatility and we'll see some tailwinds there through the coming quarters.
We also expect though some weakness within solutions.
It's going to be due to longer software sales cycles lower volumes in some of the issuer services business.
We expect lower volumes through Q2.
For our equities bonds and humid municipal.
Which combined are about 70 million of our annual variable revenue.
In our best scenario, we start to see some improvement early in the second half.
With no recruit improvement in our worst case scenarios through 21.
Now finally within CMS.
And it's great to see CMS coming through and support not in this challenging time, but your hard work is paying off.
We see steady demand for our product design offering.
Continued demand for our economic and country risk offerings, where we provide.
No legend insight into the challenges across over 200 countries.
And our health site.
Hold on as well for advice through the pull that 19 pandemic.
All of our customers need increased support rapidly changing world and we expect organic growth in CMS to be in the low single digits now I'm going to turn the call back to Jonathan will provide detail on the 2020 guidance.
That's great. Thank you as their relative to our original guidance as a reminder, we previously announced the cancellation of event due to the covert 19 health concerns.
Again as a reminder, in cancellations will negatively impact Q2 revenue by $50 million and adjusted EPS by nine cents.
Approximately 40 million other revenue impact relates to the resources segment due to the cancellation of our Sir we can week events.
The remaining 10 million related to our transportation segment due to the cancellation of our TPN maritime and other events.
We have also adjusted for the change in foreign currency exchange rates since the beginning of year, causing a negative FX impact on revenue of approximately $25 billion.
In terms of our forward view for 2020, Atlanta stated due to the uncertainty we developed three scenarios to take into account different assumptions on how the virus the price of oil and economic situation to evolve over the next few months in quarters.
Our supplemental schedules detailed the three scenarios where the following ranges.
Revenue afford us seven 5 billion to Florida, four to 5 billion.
Organic growth of between one and 4% normalized for the impact of the Q2 events.
Adjusted EBITDA of $1.80 5 billion to was up eight 5 billion.
And adjusted EPS of $2, a 76 cents to $2 an 81 cents.
Atlanta has mentioned we went direct your estimate to the lower end. These ranges at this time.
Now in terms of cost actions, we are in the process executing approximately 250 million of Twentytwenty costs.
We do expect approximately $15 million these costs to be permanent go forward productions.
The variable portion of costs will return as revenue recovered in our auto businesses and salaries return to normal level in 2021 and Twentytwenty too.
Finally, we expect cash conversion of approximately 50% due to onetime costs with our cost reduction efforts.
Working capital capital delays due to market conditions.
All guidance items below adjusted EBITDA are unchanged from prior guidance, except for stock based comp.
Our original guidance raise call for full year stock based comp expense of 220 million started 220 to 225 million.
We now expect full year stock based comp expense to be approximately 30 million higher than our original guidance due to higher employer taxes from the UK national insurance expense on Twentytwenty option exercises.
This represents a one time increase in our got stock based comp expenses in 2010, 20 and will not impact our twentytwenty one expense level.
In terms of capital allocation given the current market conditions, we are focused on maintaining high levels of liquidity and capital structure flexibility.
We do plan to pause share buybacks and plan to maximize our capacity under our bank credit facility. However, the cash dividend, we initiated and paid in Q1 will continue as planned.
We maintain a very healthy is wrong balance sheet investment grade rating, a well positioned debt maturity ladder and a strong diversified bank group.
Well the will be negative impacts from the current external challenges, we do have a model to absorb the risks and as far as yet still deliver solid earnings growth and where that Lance I'll turn the call back to you.
Okay. Thanks, Jonathan.
As our supplemental slide lay out our cost cutting action are going to anchor our 2020 earnings to double digit growth, regardless of which revenue scenario unfold in the coming quarters.
We're not providing.
Formal guidance for 2021 22.
Based upon our scenarios in cost actions.
We would expect.
Each of those forward years organic revenue growth to return to our longer term range of 5% to 7%.
Adjusted EPS growth double digit.
And as we move through the year, we'll update you on our progress with our cost actions and the conditions within our end markets against guard scenarios.
Now finally, I want to thank all of my colleagues around the world.
We've been working tirelessly to manage the rapidly changing dynamics within our markets local communities and to continue to serve our customers.
And to your shareholders I want to thank you for your support and give you my commitment of this unparalleled level of transparency.
In our progress against our multiyear plan during these uncertain times.
My commitment will be to continue to update you against scenario, one two and three our worst case scenario and project those.
Into 2021 in 22.
And show any adjustments needed on a quarterly basis now with that.
Operator, we're ready for questions.
As a reminder to ask a question you need to press star one or your telephone withdraw your question press the pound key.
Yes. Thank you please limit yourself.
Please standby in composites you any roster.
Our first question comes from Gary Bisbee with Bank of America Merrill Lynch. Your line is open.
Hi, Gary.
Hi, good morning, and thanks for all the color lands and team I appreciate it I feel like Thats a lot more than a lot of companies are giving obviously, taking a lot of work. So so we appreciate it.
You know given how rapidly things are changing and frankly just out dramatically things have changed in the last 10 days, what's your confidence level around the scenarios in particular, the worst case and.
And and especially revenue being able to bounce back to that mid to high single digits. So quickly.
If the if the recession coming out of this persist for awhile.
Right.
So I guess, if you have to look at.
The numbers, how I've worked in with the team. The first thing that I wanted to do with the team is make sure that.
That decisive nature of our response is early.
And protects us.
Through our worst case scenario.
And then sets us up very well for the recovery, but also is protection given the variable nature of some of those.
Cost returns.
Can protect us indefinitely looking forward. If you wanted to ask me about might probabilities on scenarios 123.
My view is is that.
The scenario, one with 4% organic growth is my lowest probability scenario and I'd say that say you know, 10% chance that we were able to deliver that scenario that depends on the recovery time.
But also it it will depend on some of the new revenue initiatives that are are in place and the demands on some of our existing services that you know have some silverline linings and difficult periods. So let's put a tenor maximum 15% on that scenario.
I'd also say that our scenario to with a recovery going into the ended the year.
Probably had the similar profitability on it up 10% to 15%.
And so therefore.
What really made me focus on our worst case scenario, which I really do believe.
At a 95% competence level.
It's more than enough.
To protect us through all the environments that I'm looking at in terms of the modeling today with my team and I really wanted to put that out on the table.
To eliminate a lot of the shareholders fears about the what EPS. So.
So when we come back next quarter in Q2, I'll update you on those costs.
And I will share with you the total revenue impacts and how we're tracking against each of those scenarios and I think would that color Gary.
We'll be well positioned.
To managed through this year, but also will give us a great base level to start 2021 next question.
Our next question comes from Bill Warmington with Wells Fargo. Your line is open.
Hi, Bill.
Hello, everyone Bill.
I want to go out how you doing.
Good.
We're all on virtual so we were having to give each other ham signals to see who is going to take your toughest [laughter].
I know it used to be that working for home was stigma associated with it and the the dog would bar can give you away, but I think it's pretty much.
The new norm on these days so.
I was also say I appreciate the detail around the scenario analysis Thats very helpful constructive way to clean up the guidance.
I wanted to ask about the assumptions that you have around the CV and resources and how maybe you could repeat the comments around where ACB finished up in Q1, and how you think thats going to unfold and the different scenarios.
Okay, well I've got all of my leadership team on your virtually Brian Edward data.
And Jonathan so.
I'll pass that to Brian's worked up is models and.
He can answer that question not directly Brian.
Okay can you hear me yes.
Hey, Bill So, yes, we see HCV, we see.
Just a little but only that segment I mean, just segments that we model for are really just the data business and mostly we've taken by customer.
We really drilled into it and so we're really focused on the drilling segment of our customer base. So.
That coupled with saying.
Future, our we've taken down.
Our projections on new sales literally into that segment.
The nice thing is.
Lin said earlier business is a lot more diversified now we're seeing a lot of strength Phil.
In our downstream businesses, which are growing you know hi.
Single digits.
Thanks, Brian Jonathan you wanted to add to that.
I was just give you the numbers bill so as I mentioned, the Q1 organic ACB increased by $3 million and the trailing 12 month organic HCV is up $24 million or 3%.
Thanks, Jonathan next question.
Our next question comes from Jeff Miller with Baird. Your line is open.
Yes. Thank you I just hi, good morning, I just wanted to confirm on transport that so the figures that you gave us the public figures are for the full year and total including.
I guess the strong growth that you saw in Q on meeting the Q2 through Q4 numbers are implying something lower just want to make sure I am I understanding that right and then just any color you could give us within transporter autos by the different product lines in the outlook would be appreciated. Thanks.
Okay. So the numbers are for the full year and I have Edward to burn Yale and he'll give you sue a bit of color on the automotive and maritime segment.
Great. Thank you. Thank you launch thank you Jack for the question.
So in terms of called as we've said historically a business is resilience to what I would call cyclical downturns, but this as long said is not the normal cyclical downturn.
And as we work with many retailers across the U.S and Canada, we aren't seeing first hand, the impacts of community is jumping down on automotive reset. So dealer partners also within that he's been an unprecedented consumer demand.
As you know, we don't see an increasing number of state that issue in the at home mandates were taught communities on something down in these conditions dealers may no longer be able to sell vehicles some of them of how to close temporarily others have seen a dramatic decline in the revenues. So as all Q1 earnings showed.
We are incredibly well positioned to support the industry going forward and we look forward to expanding our long term partnership with North American automotive dealers them. However in the short term all business is being impacted by depressed levels of new business.
Increased levels of cancellations.
And in some cases temporary price concessions to dealer partners. During the month of May when deal no longer able to operate business normal conditions.
In terms of carmakers and supplies.
The entire supply chain is facing challenges in the face of Cobiz 19 disruption and we continue to be very well positions to help them through this crisis, including helping them manage disruptions in the supply chains.
Thanks, Eduardo next question.
Our next question comes from Manav Patnaik with Barclays. Your line is open.
Thank you good morning, Hey, Hey landscape on it guys and thanks to the color as well but.
Just on the financial services assumption for the full here I was just hoping you could help us with you know how much of that mid single digit organic growth is driven by your expectations of processing volumes, helping you guys in the next couple of quarters.
Given the volatility there.
Yeah, I wish I'll, let Adam speaking a moment, but.
I couldn't have a more conservative leadership team and every time I say the derivatives volumes that were starting to see here, we should see that through the rest of the year they put them back to flat so in the.
In the models that were showing you like.
There is a modica upside in terms of processing. So there's really a real bad is that we maintain our current business, we have a really strong pipeline.
And the financial markets are maintaining.
The need for the information the rollout of new regulations and the demand incrementally for second and third pricing services through this volatile period, and we saw something similar in awake and we're seeing some of that now we have modeled out though that other.
Pieces of demand of course will decline and Adam why don't you give like Brian The network done just a bit a color on financial services in a bit more detail.
Sure. Thanks Lance.
No I think I think last captured the bigger picture very well I think when you think about our business, it's a pretty well diversified business across the different types of financial services customers and services and products. We provide so in volatile times like this that they're looking for processing, we will see places within our.
Processing business with outsized performance to the upside volatility does drive credit markets and some interesting ways, but in this moment, you're also seeing a real hot lumped in equity issuance.
Real fits and starts and other fixed income issuance. So like I tend to think of it as a balance package there maybe opportunities on the upside as we go through the year, depending on how long things last and what markets look like over the next several months you may see aggregate downsized the full year vision that we've given bakes in what we think as a conservative estimate of what would.
Happened in each of the three scenarios.
[laughter].
[laughter].
Thanks.
Thanks, Adam next question.
Our next question comes from Hansa Mazzarri with Jefferies. Your line is open.
Hi, Hams and hi, good morning. Thank you for the color as well you guys spoke about the business being you know much more diversified you talked about downstream upstream being lower.
And also you have sort of the downturn playbook from from the last cycle, maybe if you could touch on our youre contracts structured differently versus last cycle or do you have more multiyear contracts is the cancellation order spirit, the Sams and and then just versus the last downturn.
Playbook.
Is there anything different you can do on the cost side. I know you mentioned grew 50 million of costs and then 15 billion permanent so maybe just compare their downturn, but playbook you have this time, how it's different from last time and that maybe any changes to contract structure. It hurt all thank you.
Okay, I'll pass that to Jonathan first and then he can pass it to Brian.
If necessary.
Sure. It just as a couple of comments on kind of where we are in the cycle emphasize some things Atlanta said in his earlier comments first of all Q4 in Q1 are heavier renewal cycle period. So you kind of gotten through through those two to pair is obviously is helpful. The second thing and I'll comment Brian.
Team they've done an excellent job of going through customer by customer understanding their position, where they are in the renewal cycle and also where they are in the oil patch in identifying where we see potential risk really get a customer by customer level. So again, I think we have far greater transparency for analytics and control kind of where we are in this in the cycle.
So Brian anything you want to that.
No. The plan is coming out of the last downturn, we did focus on multiyear agreement. So we have increased our percentage. So we feel pretty good about where we are in those and we continue.
To sell those as well.
Excellent. Thank you next question.
Our next question comes from Kevin Mcveigh with Credit Suisse. Your line is open.
Great. Thanks, Hey, Kevin just real quick Hey, let's great job really just.
Well pump.
I want to clarify.
On the capital allocation did you see are you going to draw down on the revolver number one and then number two Jonathan on the US or are you going to complete that 500 million dollar is shorter that's on hold as well yeah.
Okay, I'll start and then I'll pass the Jonathan So we.
We completed the 500 MSR. We started a 250 assets are that's been going through the quarter, which will be completed.
Probably sometime in April.
We have a.
Halted any further Rick.
Asrs until we see a better site into the forward.
Marketplace.
We in our modeling looking forward into next year and the following year with a return to growth we modeled in about a billion a buybacks in each of those years and.
We're not going to drawdown on our liquidity lines, we've got a diversified bank group that strong and we've talked to them all and we don't see a need to draw down on those bank line.
So that's a that's what I'd say Jonathan add to that.
He will that you covered a very very well and the thing all again emphasize it is we have are very very strong.
Bank group over 20 banks in that group Atlanta have you spoken to everyone. We really friendly don't have a need to add to drawdown of this so so we don't have any led this points to do it but again, we certainly have the liquidity there should we choose to the future.
Thank you next question.
Our next question comes from Andrew Steinerman with Jpmorgan. Your line is open.
Hi, two questions and I and I and the 2020 guide in the third scenario, which is the plus 1%.
What's your assumption around subs versus non subs organic revenue growth and I always have a second question what needs to happen during 2020 to set yourself up to get to that 6% to 7% organic revenue growth that you painted in 21 and 22.
Right. So I guess I look at our 2019 performance I look at our Q1 performance.
I look at the investments, we're making it into incremental growth in well demanded areas.
And I look at a lot of our must have services across you know all of our divisions and even the you know.
Investments made to put a CMS on a stronger footing.
I really.
Felt a lot of confidence going into this year of our.
5% to 7% and having you know ample opportunity to be in that range and even at the top of that range.
As we look at this year Andrew This is an unparalleled situation and I think what I've said since merger is that.
We were in a good position to be able to manage this company.
Expand margin and provide.
Double digit earnings growth.
Even if we fell down to a.
4% ongoing.
Organic revenue growth.
And in this case, even in our worst case scenario as we fall down to 1% growth combination of.
Strong decisions by my team as well as putting us in a strong position next year.
You can see that.
We got those levers to manage the company well so going to your next question, which is on that 6% a lot of what we do is multi year recurring revenue.
I must have the variable portion of our business is quite low we're very diversified across customers and very diversified in all divisions across products.
I'm not assuming that the recovery the code that 19 pandemic playing into that global recession.
Continues on right through 21.
But if that's the scenario that you would like to put into our model then I would suggest that.
You see a 2% to 4% revenue growth in 21 with a long protracted recession.
And you will see see us maintain the variable costs that were showing in our model in the supplementals could be rolling back in as staying out and you'll can Cindy continue to see.
Margin expansion.
And double digit earnings growth as we navigate or some of the tough challenges ahead of us, but we've got a resilient model that can respond differently than many of our peers and customers.
I think the team has really.
Putting the efforts and the tough decisions now that are going to ensure that if youre scenario. If that's what it is a protracted recession into 2021 and beyond.
We've already cost management in place.
To be able to manage that and the variable cost would stay out of course, the revenue would come down and.
Hopefully some of the new initiatives around climate around asset management cost reduction platforms in place around our alternatives business that we expect will be still it key part a future financial markets and of course dealers trying to return to save.
Sales will need us further incentives planning advertising.
Building audiences and I have to say I feel.
Very committed to that forward plan and I'm very confident that even if we do go into a protracted revenue.
Lower than the 6% at a lower single digit level, we can manage the company and deliver exceptional results.
Thank you next question.
Our next question comes from Andrew Jeffrey with Suntrust. Your line is open.
Hey, good morning, guys.
The shape of taking the question.
Certainly unprecedented times hopefully.
Relatively short lived anyway.
I wonder if I could dig down a little bit and in the cost savings projections.
Look at my model there they are pretty significant.
From a margin standpoint, and in absolute terms to it.
I mean, how how comfortable are you taking out the costs, you bar, which presumably would be at an accelerated rate compared to more normal environment that that doesn't impair your ability to return to growth on the other side evolving.
Right. That's that's a good question well so to me there's two pieces of these cost take outs one piece of them are permanent take outs. So as we described that's about 50 million.
The second piece of this is a variable cost takeout that will need to return with the revenue, but they are scaled against that returned to profitability.
So you know we have had a big cost base.
4.5 billion, a revenues and more than a.
Two and a half billion of costs. So we've got a big cost base. So to take 50 million out in terms of fixed means that we've had to dig deep and look at things that are some nice to have things that we're working on.
That werent Werent revenue based initiatives, but maybe where you know and expansion of an office.
Maybe they were.
Some of the nice to Habs, we have around.
A lot of social activities in the firm things around.
Higher priced contractors that we might have been using to accelerate our growth which in this environment.
We will look to move to our better cost locations and bring back in house. So we're ready for that returned to growth. So about 50 million, which is a you know a couple percent of our our overall cost base that we've taken out permanently the rest is variable so what is that very.
Travel and entertainment.
It's the salary cuts that by led with my executive team.
It's our forward events calendar, which will be will come back slowly over time, it's our.
It's our.
Some of the things around our revenue that's tied that has a tight cost base. So marketing expense that we using carfax to support used car listings that will be off so we there's a bunch that our variable and they'll just come back and naturally and we've modeled those in for you. So you can see.
How that works.
But we have taken out 50 million fix I forgot also some of the purchased expenses we've already renegotiated we put in some Oh, we got a 130 offices there were several million around leases that we've either extended now at lower prices or actually decide to.
Eliminate and.
Carry on with a.
Work from home strategy going forward. So we've I think the teams done a great job on that and I'm not worried about the 50 and I like the variable nature of the other costs because as Andrew asked in the previous question. It gives me the level of levers to protect earnings if the revenue slower than planned Jonathan do you.
Want to add some to that.
Sure as a great summary, last one thing I would add is that the that part of our business, which is being most affected in this and it narrowed here is our automotive business, particularly our support from marketing efforts for both you and new cars and that happens to be the part of our business that has the most variable costs, the flex up and down with revenue. So there is a natural.
Rule and significant flex down the comes naturally as our dealers need less traffic. There. There's also close that got comes back down there will naturally come back, but I think the key thing that we've all done as executive team has meant team has done here, we've been very focused and as Lance mentioned in his opening remarks, we're still are investing.
In the key growth levers and drivers it'll take us into the growth in 21 and beyond.
Good thanks, Jonathan the not that's that probably last point was the most important is we've got kind of for great long term growth levers that further diversify us and take us to new levels and.
You know, we're quite pleased to be able to announce that to our teams that we wouldn't be cutting any of those initiatives whatsoever. In the forward plans because they are they are important to that our future. The other thing that I think some important on the cost side is that we've really.
Made a decision around in had severance and focus on any workforce reductions to ensure that nobody's.
Sent home with less than a less than a year up continuance in terms of.
There.
Their compensation through this period and again.
That's an important.
Leadership, but decision that my teams collectively made.
Our next question.
Our next question comes from Alex Kramm with Tvs. Your line is open.
Hey, good morning, everyone.
Maybe too so going back to the guidance.
What I don't think anybody's assets, but like what would be the thing that you would look for two to not make that double digits growth in 2020, I guess what are the.
Factors that could still get you below that way you just can't find any more offsets and I guess you could ask the same question about 2021 as well.
Yeah honestly the way produced this guidance for you guys now in these scenarios I don't I don't really.
It's a low to me, it's a low single digit probability to not yet.
Double digit earnings growth in 20 and 21.
Next question.
Our next question comes from Seth Weber with RBC capital markets. Your line is open.
Hey, good morning, guys.
Hey, just I guess, maybe just first a clarification on the on the 50 million a permanent cod is that should we assume that that's skewed to resource.
On a relative basis versus the other segments.
No not not at all actually.
Look at all our teams are.
They do a great job expanding margin each year, one thing you should know, but our margin expansion a lot of it has come through our attrition.
And then replacing attrition in near and offshore locations, which have substantial gains for you know our operational development testing and other other roles. So you know we we've got 16000 people about 4000 of them.
In.
Up better.
Cost of living locations and that gives us more than.
Probably 100000 per person fully costed. So we've been doing that naturally and the teams have been expanding staff, but reducing costs and that margin by.
Leveraging our footprint, which is now you know very well developed and so a lot of what we're doing here across the whole firm is accelerating some of those initiatives and that means we've got to look at everything across the firm whether its finance HR.
Tech.
Development.
Whether its a.
Product people and product development folks, we really have to leverage that footprint globally and that's across the whole from Brian It's already running a lean meat energy team, which do a great job and.
Our view is the diversification there across upstream midstream and downstream gives us.
Ample opportunity to deliver great results for the firm, it's actually quite interesting when you when you actually look at what's happening to us through this period as we gave you a worst case scenario actually the worst case scenario is being driven by our best performing division, which is automotive.
Because they have the variability around the used car in the did listings businesses around carfax and Carfax, Canada.
So here, we are in an environment, where everybody is worried about our energy market performance, but the energy market performance would have been completely absorbed in the outperformance of financial markets, CMS, and ER and and automotive, but it's the combination.
None of this worst case scenario that puts us in a place where the cost initiatives.
Our I think prudent because they put us in a very flexible position for 2020 profit delivery, but also with variable return of expenses were now actually well positioned for 2021, and 22 and I just really felt it was important to give you.
You guys.
Our models, which I don't think is going to be the norm across companies out there, but we basically shared with you my planning tool, how why managing the company and I'm going to update you on that every quarter and as far as you know since merger. We you know I guess beside one little blip.
We've never missed a single number we've given to you. So don't expect us to do that going forward. We plan to hit these numbers and hopefully be able to surprise.
Okay next question.
Our next question comes first.
Stifel. Your line is open.
Hi, Thank you for taking my questions and again I appreciate the detail around the forecasting.
Can you talk a little bit about what you've seen so far in.
Asia Pac in China Oh.
Oh, you've seen see things play out in how your how you believe that might be applicable to what we're seeing in other areas of the world or where do you think it may not be applicable.
Right.
So it's very impressed and that's a great question in probably one that takes us a little bit away from the script and the call but at the same time, you can see how where we're covering can happen. So.
Started in China, We said everybody was sent home working from home. We're testing our systems. We're learning about the challenge is I've not being able to travel into a region trying to complete deals closed deals and make things happen.
Today, our people are mostly back in the offices and.
They manage this through a very serious.
A use of social distance in hand watching use a mass people people that don't where the mass or shutting that in Asia and the ones.
That were them are respected we have the opposite problem here in the UK and I think you haven't North America, you know people get a funny look if there were in a mask is if there are the the challenge and.
You know the ones that don't where the mass or are are.
Going to prolong the recovery so in Asia, we've had.
We had China recover first Hong Kong now you know our office is back and running but again people are very careful about their social distances and cleanliness in terms of mass them and but theyre back working together.
Actually sales and our pipeline.
Is actually quite strong a bunch a new pipelines.
Orders in businesses.
Coming from Japan, China, Hong Kong, Singapore, if anything it gives you a lot of smoke.
For our scenario one.
But actually I think with such a Democratic Society in Europe, and and North America, I actually think that I can't bet on the Q3 recovery and therefore I wanted to share with you a Q4 and even up full year.
Lack of recovery.
But if we followed the Asian path you would quickly go to our Q3 recovery and say, yes, you got it right and you do you know as well as I do that when I talked to many people, including you know the U.S. President and you know on online last night is you know.
I want to get back to work quick and soon and.
No not that I necessarily you know I believe that that the reality, but there are still many people that don't think that staying at home and.
You know staying out of out of danger is going to be a way to get to a recovery and get to the other side. So here. We are you got a Q3 optimistic view, that's what I. That's that follows the Asia path and it follows probably what I'm starting to hear the Italy, Although you see big numbers.
In Italy, when I talk to you know colleagues and others in the land I start to see that people are starting to see some optimism in the control.
If you don't believe that pushed into Q4 recovery.
If you don't believe that go to our worst case scenario lever your models off of that bad on the earnings that I'm showing you and then you have to decide the recovery, but what's nice about the recovery. If we don't hit the revenue our costs are now variable rolling back in and we will protect earnings.
And I've got lots of levers for growth when the right opportunity comes but right now I want to make sure I keep the company strong be able to pay all our people well protect our liquidity and delivered great results for you guys next question.
Our next question comes from George Tom with Goldman Sachs. Your line is open.
Hi, Thanks, Good morning, I'd like to go back to the topic of cost reductions can you discuss the timeline for when you expect to complete your permanent cost reductions and when you might expect to return to your prior longer term guidance of 100 bits of annual EBITDA margin expansion.
Yeah, well as you've seen in all scenarios this year, you'll have a in excess.
Of that margin and if you look forward into 21 and 22, we also forecast a.
A continuation of the 100 basis points. So our view is even though we're going to have a strong outperformance, we still have ample scope for our organizational design that we've been working on and we expect that to continue.
Into the future. So my perspective, the margin story and the earnings story is really strong.
This is a story about revenues that are just going to.
Come off at some unknown level and so therefore, we need to set a set of costs.
Reductions in place that will be constructed.
To never return and to come back and return on a variable bases with the revenue. So I feel we got a perfect model set up for the go forward.
What I would say on the permanent reductions.
The 50 million that we talked about.
We are already in full execution mode and I'd expect those.
To have an eight month impact for this year I'll pass and full impact for next year Jonathan.
Great and Echo, what you said lands and George what we're seeing it even in our worst case scenario.
Respect to see a couple of hundred bits of improvement.
From 19 to 20, and then continue to have a 100. This all the way through 2022, so were no way back in our margin improvement commitment.
Thanks, Jonathan.
Next question.
Our next question comes from Ashish Sabadra with Deutsche Bank. Your line is open.
Thanks for taking my question and lunch. Thanks, Thanks, a lot for all the color that you provided.
Maybe just a quick follow up as you mentioned there is the biggest reliability is on the auto the used car listing side and thanks for providing a lot of color on that front. My question. There was just as we think about the cadence there.
Given the visibility also is it fair to assume that you will see the most impact and then maybe second quarter and even in the worst case scenario you should see that part of the business bounced back quicker than other parts of the businesses and fee acts of the fastest growth.
Is that correct way to think about or.
That's exactly how we think about it but again if you model off of that worst case scenario. We're saying you know you don't have any of that recovery until next year.
But.
Our view is that bounces back very quickly we've got a super strong model and maybe Edward wants to add some additional color to that.
No I think you're spot on loans, obviously the sets the is very very responsive to consumer demand. So it will take the bigger hits right now in Q2, we've seen activity levels declined precipitously in the phones two weeks some but obviously, we think this sector would rebound before the others because as soon as consumers, who tuck ins dealership.
The the customers I'll do the softness we require our tools and solutions so absolutely.
Excellent. Thank you next question.
Our next question comes from Joseph Foresi with Cantor Fitzgerald. Your line is open.
Hi, Thanks for the scenarios in the call.
Just on oil have you seen any real time changes in oil cut.
Capex spending budgets being opened up and what are you building in for.
M&A and failures or any possibility of the deal.
This morning's thanks.
Yeah, I'll pass to Brian in the second but clearly in our worst case scenario, we see the smaller independents are really struggling potential mergers a potential.
You know failures to pay potential bankruptcies. So therefore, I think we it's 100 million of out of all that revenue.
And we definitely.
I think modeled appropriately.
For that piece of the puzzle, we do see shell came out with there.
Announcements and.
You can see that capex.
We'll be curtailed we put actually a 30% followed by a further 15% cut on Capex, which we think is significant.
Given that the theres going to be a built up obviously supply that needs to get June through in the future, but ultimately.
There is a still a robust demand for product.
Still longer term and that needs to be brought out of the ground. So I.
I think our models fairly robust and Brian maybe you want to add some additional color on that.
Yes, I think so.
Obviously capex goes down further certainly in the U.S. does overseas.
But I think.
Actually helps us out to some of the oil was hedged in the U.S. So those those.
Small independents will stay around and try to weather the storm, okay. So I think well cap ex.
Exactly accelerate and will decelerate in that area.
These companies, it's not oil goes down to 20, and these guys what a business. So there will be there will be a lag before we start to see deterioration.
Thanks, Brian next question.
Your next question comes from Andrew Nicolas with William Blair. Your line is okay.
Hi, Thanks for taking my question.
How is the shift to working from home affected the various internal projects you have underway, whether it be the data Lake project or the hiring practices tied to your shipped to the employee base to lower cost regions or really any other projects that might have previously ride more heavily on face to face interaction and then same time.
Dick or early it's related Lee.
If you could provide any color on the expected impact of virtual work on your salesforce his ability to sell new business and build your pipeline that'd be helpful.
Yeah No. That's that's a good question I've never been I have to say I've never been.
Celebrate or of the work from home and so.
Im learning lessons here the the proper way.
But actually what's funny is.
Your productivity working from home without interruptions is actually.
Substantives Lee improved for many for others that have a challenges in terms of you know.
Adrin family et cetera in that work from home environment that becomes.
Something that you have to work with but I found productivity.
For myself has improved and my connection with people.
Has been substantives.
And so I'm actually very pleased if anything it's made me rethink.
Some of those policies in Flexibilities that many companies would like to have we also have put in we've been in early we're in the middle post the.
The Asian move.
We started to look at the workplace analytics tools and tools that.
Measure productivity, so we actually have the.
Have some early BPO season, I think what we can see is productivity at home is pretty damn high and people are working very hard and our pipelines in results are showing that on developers and people working on projects.
Most of our developers sit side by side with headphones on and.
You know are in their own focused world doing their jobs and they are quite.
Happy to not have the commute and be able to focus on the work in hand, we have some professional services people that actually have to go on site with our customers and of course. This is curtailed and so we put in for slower or implementation of some of those activities, but in a lot of times the the.
The customers virtual.
Acceptance has actually increased and again, it's very focused so decision making is happening effectively so.
For a non believer in work from home I become a de lever pipeline that I'm working more hours sitting here at.
Mike dining room table, then I care to admit.
And.
Really my colleagues around the world has been impressive and I have to say that.
They are holding up before it very well, let's hope we get some social interaction back in our lives again said next question.
Thank you I'm showing no further questions at this time I turn the call back over to Eric Boyer for closing remarks.
Okay and just before.
Just before you go Eric I, just really want to say to all of our shareholders that all of you represent in the shareholders that are on the phone.
So for US it was a big decision in terms of opening it up the transparency in this detail as well as giving you that detail into 21 and 22.
But I did feel that in times like this.
Making decisions day to day, you're interested to invest people's money and you need to make sure that.
You don't have to second guess, what's happening in the company's you're investing in.
So this level of transparency.
We'll be updated every single quarter.
Until we feel we're back when normal situation when we get back to the normal situation.
I ask that you except that I'll turn that.
Like Volvo off and go back to manage the company, how we always yet.
And hopefully if your trust in both myself and my management team will remain at the highest level.
And thank you for your support Eric.
Okay, great. Thanks for your interest lines as markets. The coffee access via replay by 559 to use your five six or international dial in for there are four or 537 report jurisdiction conference I'd for 6566, Fivenine beginning in about two hours and running through March they've recently 20 physician webcast will be archived when youre website. Thank you.
We appreciate your interest in time.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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