Q3 2020 IHS Markit Ltd Earnings Call
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I would now like to have the topics over to your speaker today, Eric Boyer Senior Vice President Investor Relations. Please go ahead.
Good morning, and thank you for joining US I guess Mark in Q3 2020 every conference call earlier. This morning, we issued our Q3 earnings press release.
Metal materials side, just Martin Investor Relations website, our discussion on the quarter based on non-GAAP measures, our adjusted numbers exclude stock based compensation amortization of acquired intangibles and other items.
It's mark if we find GAAP results are used for enhanced understanding of our ongoing operating performance, but there are supplements to it should not be considered isolation from or as a substitute for GAAP financial information. As a reminder, this conference call will be recorded and webcast is copyrighted property of white as markets any rebroadcast of this information boring part without the prior written consent.
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This call, especially the discussion of our outlook may contain statements about expected future events are forward looking and subject to risks and uncertainties factors that could cause actual results to differ materially from expectations can be found and I asked this market.
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Web site after our prepared remarks, when he was chairman and CEO, John you're either <unk> Chief Financial officer will be available to take your questions with that it's my pleasure to turn Fogle Angela.
Okay. Thank you Eric and thank you for joining us for the <unk> chest market Q3 earnings call.
Today, well review, our Q3 performance outlook for the rest of the year and provide an update on our 2021 expectations that we introduced on the call.
In the second quarter.
In Q3, we delivered solid results as the markets. We operate in have begun to recover at varying speeds.
We are positioned to deliver results for the year that include recurring organic revenue growth strong margin expansion and double digit earnings growth on a normalized basis.
As a company, we do use the cobot environment to become more efficient by rethinking how we collaborate so.
Service, our customers and innovate we have.
We have adapted to a virtual work environment and are effectively utilizing technology to connect the new ways with colleagues and customers.
We expect this experienced a permanent changes in how we operate going forward, including more flexible work arrangements have reduced office footprint.
Lets travel and increased productivity.
The early cost management as a result of cold and accelerated some longer term actions that have enabled us to actually increase.
Our overall investments in growth related activities during 2020 over prior years.
This gives us further confidence in our ability to achieve our organic growth commitments in 2021 and beyond.
Let's move on to the quarter's results.
When we speak to normalize results.
We'll be excluding the impact of the aerospace and defense divestiture chains on growth rates for adjusted EBITDA and adjusted EPS.
As well as the Q3 biennial BPVC on organic revenue growth.
Let's look at the financial highlights from the quarter revenue of 1.07 billion, which is flat on a normalized organic basis.
Adjusted EBITDA of 486 million and margin of 45.3% up.
Up 460 basis points year over year due to strong and early cost management.
And adjusted EPS of 77 cents up 16% over the prior year on a normalized basis.
Let me provide some segment commentary for Q3 and rest of your assumptions.
Financial services provided steady organic growth of 4%.
5% recurring broke.
Performance was as expected led by a rebound in solutions and solid growth in information somewhat offset by lower Q3 volumes and processing.
Information key areas of strength included our core pricing services valuation services and index businesses.
Within solutions, we had a boost from the equity and municipal markets activity and some recovery in our managed services and implementation projects that were delayed due to corporate.
Strong performers and solutions included our monitoring services for private markets and loans and corporate actions data and services.
As expected processing was impacted by lower volatility within our derivatives business and lower loan volume year over year.
Going forward, we continue to expect mid single digit organic revenue growth for this segment in 2020 with steady Q4 growth in information and solutions and a return to growth within processing.
Transportation in Q3 had a strong start to its recovery with our.
With organic revenue growth that was flat.
Recurring revenue growth of 5%.
Revenue Carfax and automotive mastermind, both returned to growth as pricing for our new and used car dealer customers return to normal levels as those markets began to rebound.
Our dealer retention rates have remained very strong.
And we're pleased that our carfax for life free trials during the downturn are seeing strong conversion into paying customers.
No member Carfax for life, which helps dealers with their service loyalty operates in a large tam of over 2 billion and will be an exciting growth driver for our automotive business over the coming years.
As expected, we did experience a slower recovery in our new car business.
Servicing Oems and parts manufacturers as our customers work through lower new car inventories as a result of their Q2 cobot related production shutdowns.
Nonetheless, even in this part of our portfolio.
We expect to grow our subscription base in 2020 as the impact has been mainly in the nonrecurring items of revenue.
Our maritime and trade business.
Also performed as expected.
And we are gaining good traction from our new product offerings, serving the trade finance commodities markets.
Our organic revenue growth guidance for transportation for the year has improved slightly to it.
Two a decline now of low single digits for the year.
Let's move over to resources, which reported an organic revenue decline of 9% with the recurring down 5%.
Downstream recurring organic growth with strong well nonrecurring revenue was impacted by lower lower global demand.
Our upstream revenue was impacted by customers experiencing operation operational and financial challenges and we partnered with our customers to balance near term flexibility with longer term agreements, which support future revenue growth, while helping those customers through a difficult.
We did successfully increased the percentage of our upstream data revenue under long term contracts to now over 50%.
We expect normalized organic revenue growth for resources in 2020 to be negative mid single digits.
CMS organic revenue growth normalized for the BPVC was low single digits as expected with growth in product design somewhat offset by weakness in SCR and TMT businesses.
For the year, we continue to expect normalized organic revenue growth.
In the low single digits.
Overall, I'm very pleased and I feel we are well positioned to deliver solid earnings growth. This year and returned to strong organic revenue growth in 2021.
Which I'll discuss after Jonathan goes over our Q3 results in more detail Jonathan.
Great. Thank you as driving into Q3 results. We delivered revenue of 1.07 billion, which represents an organic decline of 1% and total revenue decline of 4%.
Normalized organic growth was zero percent with recurrent growth of 2%.
Net income of $163 million on a GAAP EPS of 41 cents.
Our adjusted EBITDA of $486 million, an increase of 9% on a normalized basis with a margin of 45.3%.
This represents a margin expansion of 460 basis points.
We also delivered adjusted EPS of 77 cents EPS.
An increase of 16% on a normalized basis.
Moving on to revenue our Q3 normalized organic of zero percent included recurring organic growth of 2% and a nonrecurring organic decline of 22% or 18% normalized.
This decline in nonrecurring was primarily driven by three items slower delivery of proper implementation is driven by coveted contain.
Continued lower OEM auto activities, and finally, lower energy consulting and software sales.
Moving on to segment performance, our financial services segment drove organic growth of 4%, including 5% recurring in the quarter.
Information and solutions in particular has strong performances, delivering 4% and 7% organic growth.
While processing had an 8% organic decline due to the expected lower volumes year over year.
Within processing, we do expect a return to growth in Q4 and for the year to be in low single digits.
Our transportation segment delivered organic growth of zero percent in the quarter. This included growth of 5% recurring as pricing returned to more normalized levels for our dealer customers.
Any decline of 12% and nonrecurring primarily driven by continued delays in digital marketing and recall.
Our resources segment had 9% organic decline, which is comprised of 5% return decline and 39% nonrecurring decline Q.
Q3, or Q3 organic HCV decreased by $34 million in the quarter and our trailing 12 month organic ACB is negative 6% and has been heavily impacted by challenges in the North American energy market at last discussed.
Our Tms segment delivered 1% normalized organic growth for BPVC, including 2% recurring and a decline of 12% normalized nonrecurring.
Moving now to profits and margins adjusted EBITDA was $486 million.
$33 million versus the prior year.
Adjusted EBITDA grew 9% on a normalized basis with a margin of 45.3% for.
460 basis points.
Moving on to our segments financial services adjusted EBITDA was 226 million with a margin of 57% up 430 basis points.
Financial services margin was driven by strong revenue flow through benefiting from our Q2 cost reduction.
We do expect some moderation in financial services margin in Q4, due both to increase investments and a shift in product mix.
Transportation's adjusted EBITDA was 154 million with a margin of 51 dot 4%.
880 basis points, driven by a return of dealer revenue and a slower return our variable costs.
We do expect margins in Q4 to moderate at expenses tied to revenue come back with a return to growth.
It also increased investment spending which will drive future growth.
Resources adjusted EBITDA was 86 million with a margin of 41 dot fiber event, a decrease of 230 basis points.
And CMS adjusted EBITDA was $31 million with a margin of $25, 7% up 330 basis points.
This large increase was driven by the rationalization of the TMT product group posted divestiture and cost control measures across product design and SCR.
Our adjusted EPS was 77 cents per diluted share an increase of 16% on a normalized basis and 15% in total and our GAAP tax rate was 20% when adjusted tax rate of 18%.
Moving onto Q3 free cash flow, we delivered $339 million.
As a reminder, our trailing 12 month conversion rate has been impacted by several nonrecurring items, including the following.
A one time tax payment in Q4 2019 associated with changes in the U.S. tax provisions.
The settlement of our USA and UK pension plan.
Q1 payroll taxes associated with the exercising of a majority of the remaining outstanding options.
And finally onetime costs tied to the cost reduction efforts in Q2 of this year.
Turning to the balance sheet, our Q3 ending debt balance was five zero billion.
And represented a gross leverage ratio of approximately 2.7 times on a bank covenant basis and to not six times net of cash.
We continue to manage our balance sheet to provide liquidity and flexibility.
We closed the quarter with 157 million of cash and our Q3 Undrawn revolver balance was approximately $1.20 $2 billion, representing a great liquidity position.
Our Q3 weighted average diluted share count was 401 million shares under lifted the pause of our repurchase program, which we announced in March.
As we indicated during our Q2 earnings call, we didn't anticipate and expect to return to share buyback and we announced redemption of this program in August. We subsequently launched a $200 million MSR on September the Onest.
Moving on to guidance, we remain very confident in our Twentytwenty ranges. We are now trending to the midpoint of our revenue range of four to eight to Florida 3 billion. This.
This represents a normalized organic growth rate for the year of between zero and 1% led by recurring organic growth of 2% to 3%.
On adjusted EBITDA, We are also trending to the midpoint of our range of $1.82 five $1.85 to $1.83 5 billion. This represents a margin of 42% to 7% and applies quarter over quarter contraction as our variable cost or reintroduce due to the improving revenue.
And also due to increased product investment.
For adjusted EPS, we are trending to the high end of our two dot 76 to 2007, eight range, which represents 10% year on year growth.
And finally, we do expect free cash flow provided 50% of adjusted EBITDA.
And now I'll pass the call back Lance to talk about Twentytwenty one.
Okay. Thanks, Jonathan 2020 has been really an unprecedented period for operating a global information services company and consistent with Q2 I want to provide comfort in the return to normal in 2021.
So as usual, we'll provide our formal guidance in November but.
But we remain comfortable with the overall 2021 framework that we've already provided to you on our Q2 call.
The one item to point out is our decision not to hold physical events in 2021 and to move to a virtual model, which we talked about as a possibility on the last call.
Overall, we're looking for a strong year in 2021.
Let me tell you what that includes so organic revenue growth of 6% to 8%. So that now accounts for the lack of physical events. So strong organic revenue growth in 2021 in for.
In financial services the in line with the firm's growth still in the 6% to 8% range.
Transportation organic growth.
We're now looking at 12% to 15% as we finished 2020 stronger than expected, although the absolute revenue that we're going to have the amount of that revenue remains relatively the same.
Resources organic growth of down low single digits to account for the events.
And CMS in the mid single digits.
Our adjusted EBITDA and adjusted EPS. The remainder is ranges remain the same which imply a 100 basis points of margin expansion and 13% to 15% earnings growth.
In closing I feel very good about how we are managing the cobot challenges well continue to make while continuing to make the right long term decisions for the company shareholders and the communities that we operate in and serve.
Finally, I want to thank our shareholders for their support and our colleagues around the world for their continued efforts. During these unique times that we find ourselves managing through.
So now operator, we're ready to open up the lines for questions.
Thank you.
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Our first question comes from the line of Gary Bisbee with Bank of America. Your line is now open.
Hey, guys good morning.
Hi, Gary.
Rebound, particularly transportation revenue I guess my question is around the fiscal 20 guidance and I heard your commentary about spend beginning to come back but.
We look at revenue EBITDA and earnings in all three cases.
Implies not a lot of sequential improvement in revenue growth in sort of a big step up in cost sequentially I guess any more color you can provide and really as we think about margins any color you can provide on.
Permanent cost savings that have come out of your initial comment plans on that versus.
It was sort of deferred spending we should see coming back. Thank you.
Right right, so well leave the costs that we don't see coming back in 2021 so.
So let's start off any offices that we close of course those are permanent closures and as I said earlier on the call. We continue to re examine our forward footprint and we do see with the flexible work arrangements that we feel will carry on forward.
We can reduce our footprint and so we'll continue to protect those six.
Fixed costs that have come out and will add to that the second big moves that was made through co bid was the move from contract based employees into permanent employees and we used to call. Good period to provide that organizational design in change and those are permanent savings that are.
Aren't going to come back.
Lower just lower cost per head and so those are that would be the second the third place I would say is that some of the variable costs with respect to travel and entertainment that have come out this year we.
We'd expect some of those to return, but not all of them and maybe less than we had originally thought.
So we see a continued.
Reduction there in terms of that.
Overall spend.
Where else, where we've done where we've made moves on.
On SAP.
Salaries those.
Those types of moves we've started to bring some of the salaries back to our employees and as we go into next year ex the the top executives of the company myself and the reports I would expect those to be back to normal and.
So I don't know Jonathan any other fixed takeouts I would say generally one last one before I hand, it to Jonathan.
I would say that organizational design, so our ability to flex our global location strategy has been a permanent change that I just think in this cobot period through attrition and.
The early works done.
Our investment strategies throughout the year the teams have really pushed.
Our location strategy and those are permanent with.
Reductions in average had at cost and average cost per head globally, Jonathan do you want to add anything that I missed there.
Yes, sure thing that the person is covered evolve as the two things I would add is when we think about the cost reductions. We took in Q2 three categories. There are the fixed costs, which are gone permanently and Atlanta that perfect opportunity or this future opportunities to continue to work our cost structure. There is a natural variable costs. This comfort.
With.
Revenue going up and down and then there is the revenue that we are the variable cost we chose to kind of squeeze squeeze down quite a bit in Q2 that will happen in Q3 is a good news story frankly, as the revenue, particularly in transportation payback faster than we expected and faster than as been our ramp back on that variable cost that we had squeezed.
The other thing I would call out investments, we did open up some additional investments starting in Q3 and heading into Q4. It will certainly will benefit us in 2021 and beyond that Gary when it comes back to when you see in Q4 youre going to see the margin.
The margin the second level come down a bit really the fact that our revenue performance was a bit better in Q3 than we expected certainly in transportation.
Hey, Thanks, John the next question.
Our next question comes from the line of Manav Patnaik with Barclays. Your line is now open.
Thank you good morning.
Last you talked a lot about some structural changes in the cost base I guess, what I was wondering is in terms of other items, whether it's your portfolio mix or maybe try to convert some recurring revenue subscription are there any other things there you feel like structure, we need to change in the business.
No I think the.
I think when you look at the energy markets I think you've got to look forward into 2021, then we have got a negative mid single digit this year and we're talking low single digit next year I really think you've got to look at the supply and demand around.
The.
Energy markets, so upstream will remain under pressure you're going to have.
Low lower capex and you're going to have some bankruptcies. So my view is is the $600 million of upstream revenues is the only place I feel is structurally challenged as we go into 2021.
And the remaining 400 million the energy Shouldnt.
The expected to grow.
No high single digits, 7% to 10%. So my view is that.
That's something that we're going to have to manage through in 2021.
Team has done a great job this year in terming out about 50% of the revenues to multiyear contracts, but in that discounting some of that will flow into 21.
They'd manage bankruptcies and most importantly, the stepped up for our key customers and help them through a tough period. So I actually think the energy guys really had to work hard this year to deliver the results they delivered but structurally they still will be challenged on that 600 million.
You know out of our whatever 4.6 billion that 600 million to still be challenged next year, but you know the downstream in renewables and agriculture and opus in chemicals, all all our healthy recurring revenue growth.
Expected and overall HCV positive so I'm.
I'm pleased with the performance there outside of that.
We.
Managed our portfolio well, we've increased our investments in all other parts of the business and so when I lay out the 68% organic growth yet next year margin expansion flowing through to 13% to 15% EPS growth.
I feel like we're in a really good position looking forward in 2021 and.
Hence the complete lock down.
Which would bring the you know the new car market in automotive and the dealer footprint.
Strained ex that my view is we've given you a real good look into 21 and throughout 20.
We've given you the revenue guidance, we told you what we're going to do on expenses. We managed earnings. We told you what is going to go into 2021, and so I really feel the team as.
Done an exceptional job here and set us up great for 21 so.
No real big changes to our normal.
Normal operating plan, Jonathan do you want to add I think.
I think that covered most of it than anything else no. Okay next question.
Thanks.
Okay. Thanks, yes.
Next question.
Thank you our next question.
Comes from the line of Bill Warmington with Wells Fargo. Your line is now open.
Thank you good morning, everyone.
So on a bill on annual.
On annual contract value.
For energy.
I wanted to ask in terms of the sounds like you made a number of improvements.
On that on that segment shifting upstream clients to longer term contracts.
You're talking about 22.
2021, low single digit negative organic revenue growth for resources.
Ask what you thought the trajectory of the curve is going to look like.
For the annual contract value growth.
The tip negative to minus 6% this quarter when do you think it bottoms and start to move Anup.
Yes, Brian do you want it we got Brian on here, Brian you want to handle that one.
You're not you.
You're muted Brian.
Hi, sorry about that so bill when you look at HCV.
Right now through the quarter.
Upstream group is showing negative HCV, but all the other groups are already showing positive. So we see a lot of strength in our.
Especially in our clean tech kind of guess.
This good demand for LNG analytics, good demand in plastics, and that's just going to continue through.
21.
Lance mentioned bankruptcies Theres also closures that also have been affecting upstream HCV. So in addition to bankruptcies you've had about 40 companies that have also just shut down you saw yesterday, Devon merged with WPS. So those are factoring into the HCV, but.
Companies that went into bankruptcy are also coming out of bankruptcy now. So you have companies like Denbury Whiting Sanchez those companies are now emerging and they're buying our services.
Thanks, Thanks, Brian No I think the.
Energy guys have.
Really manage that.
Shifting business from upstream into the mid and downstream and we've just got to continue to do that here, we've got a great customer relations very deep.
All customers you heard shell announcement yesterday in terms of energy transition and their focus you heard.
BP talk about their net zero target and where they are headed.
We've got a lot to offer customers in and around clean Tech renewables and so my view is if I look at the Pam four.
Non fossil fuel driven energy analytics data scenario analysis climate scenarios EPS G. My view is we are the best firm in the world position to drive revenue growth into those segments as we go forward. So.
So.
All I can tell you is I expect the mid and downstream to grow high single digits to double digits and I expect that the upstream will wane through 21.
With recovery into 22 and beyond from a much lower base and so really we've got to be the architects of that.
That shifts didnt change, but.
Hey, Weve done this before and it the upstream is 300 million less than 300 million of data now and.
About 300 million of analytics and thought leadership. So it's not that it's not a big problem for the overall firm, but it is a challenge for Brian and his team and they're doing a great job next.
Next question.
Thank you. Our next question comes from the line of Jeff Mueller with Baird. Your line is now open.
Thank you good morning and.
Fully recognize your two largest segments performed well so apologies for piling on with another resources question, but.
The main the step down in recurring was pretty sizable relative to what we usually see in a subscription based business.
Business.
So I guess, what I'm wondering is are there temporary pricing concessions that quickly come back in resources like you had in transport because normally when I think about trading off for longer term contracts. It's more that you get the annual price escalator that kicks in.
As you trip over on an annual basis, so, but other temporary pricing concessions.
Anything else you could say and then I guess just a click.
Is the guidance for or the outlook for 2021 resources is it down low single digits I think I heard you say that on the call yeah down single digits down down low.
Yes down low single digits. So you know one two or three to me would be low single digits in terms of.
A negative number.
So let me go to the first part of your question. So.
You know I guess, well first of all I wouldn't compare what's going on in the energy markets to anything anywhere else in the firm.
So transportation.
You know here recurring rabbit, we've had declined in some nonrecurring revenue like recall, so government regulatory pressure has waned through co bid and therefore, the recall agenda has been sloan slowed down but in the future. We expect recall to be an active part of our business.
And we'll we'll take the lion's share of that when it comes our way the SEC.
The second thing, we would say is that.
With less cars on the loss and less cars being manufactured in 20.
Deal with cars in some ways I hate to say sell themselves because there is a lack of supply and therefore easier to sell the cars less money spent on marketing and audience building, that's a short term issue and.
And then in the used car market, we've seen that accelerate back and all other products showing.
Good demand, our our forecasting and ability to deal with shifts in in type.
Types of cars being manufactured and drive trains et cetera position us really well, so don't don't compare energy with automotive.
Or transportation.
When you get into energy I really think if you're sitting in my shoes today I think of this very simply.
We got whatever 4.6 $4.7 billion of revenues.
Jeff market.
I take it down to the 600 million of upstream.
Which is 300 less than 300 data and pre merger was more than 400.
This data in upstream the declining market.
And it's going to find its base and grow from there. So in our three year contract. After year, one we put in 7% to 8% growth on average into those datasets, but this is minuscule in the pitcher abide chest market. So it's not a dial mover it helps.
But it is not going to move the dial. So I think you have to take that 600 million the data and say, okay number one the way.
The world as long as anybody is on this call is going to live plus all your children are still going to be using fossil fuels. So we do have $600 million of revenue that's going to support that piece of the world economies. So.
So whether it's 70 80 to 100 million barrels a day, we need fossil fuels and nobody's connecting turn it on their life getting to work moving around without some piece up there.
The world's needs in fossil fuel so we're going to find our home in data somewhere around 200 250 million will be the world leaders will continue to support all of our customers and we are going to help them and leverage that position into energy transition.
And I feel really lucky that Weve got financial markets transportation and energy right at the core and the epicenter of decisions that are going to happen to drive the energy transition and the beyond zero net zero world that we're heading to.
The second thing I'd say is the existing players that remain so all the sovereign oil companies big National oil companies that still have committed resources and of course the small.
Entrepreneurial exploration activities.
Need help in analytics.
Cost management, they want the thought leadership, they want to understand pricing forecasting et cetera, So I think that our analytics.
So the non data piece of upstream will wane a bit into 21 through bankruptcies in difficult times, but again should return to.
A more normalized well we were as high as high single digits, but I would say looking forward I think of it.
3% to 5% mid single digit growth.
So net net.
Take the whole firm you take resources the billion or revenues next year put it at low negative single digits and expected to be low to mid single digits. In 22 led by the continued transition.
Both organically or through bolt on acquisitions that are going to drive our future energy growth and.
That's it that's how I'm running the firm that's how the teams been instructed to manage the challenges and when I put that together across the whole firm didn't there before and after.
And we just got to execute well I've got a great team, we got great customers and I think from a shareholder perspective, we do exactly what we tell were going to we tell you we're going to do and therefore, you've got great transparency into our our capabilities Im next question.
Our next question comes from the line of Kevin Mcveigh with Credit Suisse. Your line is now open.
Great. Thanks, Hey mentioned, Jonathan as you look to some of the expense savings some of that sounds obviously more structural as you think about it does that come to talk.
Talk to potential increases to kind of that 100 basis point target or d., we invest that back into the business, which would help to fuel organic growth or a combination of both is there any way to maybe frame what that potential could be and how you redeployed across the enterprise.
Yeah, well covance given us a real.
Great vision into our our cost footprint in terms of real estate in terms of where we can hire people to effectively do the jobs in the company so what's the location and.
Our ability to actively manage 16000 people working from home and I guess nowadays if somebody is in New York City in the finger Lakes.
Working in.
Touts, new Mexico or in their summer home in.
South of France, I can't really tell anymore.
Their backgrounds are walls, mostly or fake backgrounds, where they where they want to put one and so really we become experts at managing in this virtual new world and that's given us a chance to really look at our four word organizational design design and I believe.
True attrition, so not having to let people know, but just managing attrition and managing a forward location strategy leveraging technology.
There's no issue with us thinking that we can expand 100 basis points per annum.
Now your second bit is is can you have more and my view is an information services company that was that's diversified like we are and diversified means that if you do.
Five things usually one out of the five is you've got to be.
Focus and it's a bit challenged and.
We've always had that.
My view is we can grow.
Sadly at mid single digits, you know, 5% to 8% or 68% I really feel good about our ability to manage our revenue levers, but they all include services that overtime.
Wayne in growth as they become saturated and those products end up falling to 2% to 3%, 1% to 3% revenue growth. So you got to be fueling the new growth products. So investment is key this year, we've invested seven and a half million dollars more than we invested in the previous year.
In what we call investments in organic growth both within each of the divisions, but even layering some additional ics.
Expense over the top so the teams got to invest so much in my view is I look forward I don't really want to expand margin faster than a 100 basis points, if it ever going to cost me.
A slippage on organic growth, but.
Below 5%.
So therefore I want to invest make sure that we pushed to the high end of our organic revenue growth range do it consistently invest smartly measure our approach and.
You know what a 100 basis points margin expansion, it's good margin expansion and it helps us give you double digit earnings growth that you can expect.
For the next three to five years and I guess at merger, we were negative two to flat on revenue growth and zero to two two to four four to six five to seven we need a couple acquisitions, we push to six to eight havent missed a thing promise to 100 basis points every year.
Never missed it.
Promise double digit earnings growth.
Every year.
So the fact is is just expect that's what we're going to do and we will manage through the $600 million of resources challenge put it behind us drive on growth and new business organically and make sure that we deliver the returns a vibrant company service our customers well I think.
All the metrics are strong and bode well for 21 next.
Next question.
Our next question comes from the line of Andrew Steinerman with Jpmorgan. Your line is now open good morning lab I wanted to hear more about I Prio, which I know is now sub segment into solutions and file.
How did I pre I will contribute to organic revenue share in the third quarter and should I, probably still have a double digit organic revenue profile over the medium term and why.
Good well start I think Adams on with May not sure but.
I'll start and then if he comes on he can join in with me. Okay. So first off.
Alternatives markets Super strong private market's growth.
We've got the leading asset in that space, Andrew and as far as I can see forward.
We're going to grow double digits in that alternative space. So a piece of that came from.
IPO, which was the high level piece, we were already doing valuations were already doing private debt markets Ws. So.
Clients et cetera, so that net net altogether.
I don't I don't see any of that waning and if anything we're continuing to build into that on the actual volumes across muneeza equities.
Fixed income.
In terms of the IPO businesses and the corporate solutions I'll, let Adam give you some color on Adam.
Sure. Thanks Lance.
Just maybe as a starting point, we deeply integrated IPO into our businesses at this point. So we're not forward at measuring organic growth within that business.
Business.
Part of a much larger whole perform.
Performance has been good over the years as Lance mentioned capital markets continue to be open volumes have been strong their private markets business is growing at or above our expectations of it I think we continue to see it as a large contributor to our growth and I think even looking out farther we think those areas will.
Yes.
Adam in my.
My remarks, I called out communities in the quarter like just in terms of volumes.
How how are the are the muni markets through this year.
And municipal markets have been strong local governments look to address their own capital requirements and low interest rate environment. Most in his abilities of look to refinance their debt and those have been very strong markets over the last.
Six months even ex.
Equities markets now.
Got it obviously that at all when the Covance endemic first it but as everyone on this call knows over the last month, we've seen accelerated equity markets again, we are seeing a extended volumes. There in equity markets are one where volume is is helpful. For us lot of those a lot of those relationships or are volume dependent.
For good reason.
So.
Okay. Good thanks, Adam next question.
Our next question comes from the line of Ashish Sabadra with Deutsche Bank. Your line is now open.
Hi, Thanks for taking my question congrats on the solid quarter, you're going to see that are bound in transportation.
And that's thanks for providing the details on the quarter effects what life, maybe if I can have a two prong question just on the auto dealership you've introduced a lot of new products and continue with the last few years can you just talk about the penetration for let's say a man what contracts Dot com.
Your existing customer base, how much room do you have and how do you access the dock.
And then quickly on the.
Good.
Insight you provided some good color there.
On the call that digital marketing when should we start to see that come back as well. Thanks.
Okay, good blood, but Edward on.
On with me and where do you want to take that one.
Yes, if you thanks for your question and Great point so.
We do work with the vast majority of dealers in the North American market, one way or the other the great News is we have a portfolio of products as you mentioned with different levels of penetration for each of those products. So if you take a mature product like contract advantage then.
Approaching kind of maximum penetration the great news is we have products like contract you just call. These things will come back for life, which has plenty of runway and which we see growing for a number of years ahead of a same story for most of mine.
Most of mine has been growing its penetration rapidly over the past two years.
But frankly, we still have most of the markets to go up there and we are continuing to introduce new offerings like our used car capability. This summer, which gives us plenty more growth for the future.
Thanks, Edward next question.
Our next question comes from the line of slow Mall Rosenbaum with Stifel. Your line is now open.
Hey, Thank you for taking my question to win.
Your message over the last several years has definitely been that you're focused on the long term more sustainable organic growth and in that same can you talk a little bit about the nature of the stepped up investments that you've made during kobe of work.
Getting the technology to be cloud native where you are kind of the three year plan in what's going on with kind of the day.
Kind of the data week commercializing just kind of an overall update where you are in the investments.
Okay excellent okay, so I'll break that into and then.
Adam sorry, if yes.
Our club wants to come in after me if I leave anything out on the data lake or check journey.
Be happy for you to add to that so the first.
Thing I would say is every year since merger we've increased the absolute dollars we spend on.
Organic growth investments so all of our divisions have in their regular planning cycle are incrementally investing in their business, but every year. We also run almost like a shark tank approach to what we call incremental investments that can be above our.
Our internal rate of return.
You know targets for.
For investing in every year that number's been higher since merger, so we're getting increasing confidence in our ability to invest and then execute a result that leads to the expanded organic growth and I'd mentioned a bit and maybe if we do an investor day, we could really dig into.
Our internal totality score and our vitality score is our measurement.
This year's organic revenue.
Coming from internal investments made over the last three years or is longer than the last three years, they've never been less than double the firms organic growth.
Result, so if we produced 5% organic growth, we wouldnt, we would leave it in if it was better than 10% because sometimes our investments take a bit longer to come in but if they are operating at double our firm growth. We feel they are still adding to the totality of the company.
Every single year since merger the fatality measurement has improved the.
The absolute dollars, a fatality revenue and the percentage of revenue from fatality has improved so I feel really good that organic growth investment in <unk>.
Just market has a great cadence and a great story and.
And it's it's really impressive I was with a Reg and compliance had John Barnes said the other day at a board update on.
Organic.
Some of the new investments, we've made and describe the product with circa 1 million of investment over the last.
Year, that's already has run rate.
Heading over $5 million and we'll have actual revenue next year of 10 million now not every investment we make of a million drives 10 million. The new revenue that was the case, we'd be growing at 10%.
But the fact is is the better we get at organic investment above.
The better this company is their tracks more it tracks better people, it's more exciting to work and it's got more of a buys and people feel they're part of investing in their products with technology to be better so I'm super happy with that and I wish I had a.
50 million every year to incrementally add but the fact is we don't have that but incrementally we are continuing to invest at what I would say is a growing cadence well measured well manage the second thing I'd say when we merged the.
We merged with I. chess.
Market night chest and after merger you find you have got technical debt you've got all.
Old technology stacks that.
You don't want to just connect to new technology, you actually want to rip them out throwing away and build something brand and that's been the app ups job and Yakov is taken.
The last you know three.
Three and a half years.
Building out a world class data Lake with a half a billion.
Partnership with Amazon, which puts us completely not.
Cloud native its long term seven year deal.
Which is the.
The data Lake is built and now all the products are going cloud native and the connectivity of all of our key datasets to product development.
Customers out of the data Lake.
And to our cloud native strategy is changing the profile of Hs market.
Substantively and so those investments are made they're in our numbers.
We managed to do the Capex Opex switch, which is very difficult for cuts companies, we map that into our investments with Amazon and I just think the team here again not to keep bragging about them, but.
This big shifts in info security.
Cloud Native software and data Lake architecture, that's what the best companies in the World are doing and our teams have orchestrated that yeah, maybe you just want to.
Tell the our shareholders and our analysts here just a little bit about how.
How how you see the journey image.
Improving our client connectivity, our organic revenue growth project development and it just anything maybe five minutes you want to add around.
Around.
Our.
You know our.
Cadence for.
Excellence.
Thank it on so I'll just talk about I'll start with the data Lake just to give an update on that and this time I will go into technology. So first of all.
After extensive internal use of data lake by internalized just market advanced analytics team and some of the business lines. We went to market in may this year, making multi tenant data lake available to our clients as well as extended outreach to potential partners.
We have several signed clients we've got roughly 15 clients inhibitors of innovation and we'll go to 150 active client conversation.
We are leveraging our existing broad based sales force and account management team in the region Galka client base gold wide.
We are now building out a multi million dollar.
Engagement pipeline because of your data Lake and offline.
Client engagements in the context.
On the financial services energy and automotive client base.
The Lake is domain agnostic.
Well have injected into the data leg being tied you have I just market structured and semi structured data.
This process is ongoing and is ultamate that from day one.
The footprint is expanded by way of adding new business domains business.
Business and similar.
At the end of November we will at least next version of a day today, which will contain that on just shy of $1 million on structured data items.
The research documents and on that is the pools that will be catalog discoverable and curated in a similar way both structured data content.
In addition, we will provide some advanced features such as documents summarization and other advanced machine learning and AI feature engineering base benefit.
This type of functionality Thomas Bob impossible for unstructured data in just pipeline.
But end of Twentytwenty, we will achieve the centralization and discoverability of our data estate across structured and unstructured data and provide same functionality to our clients.
There is one more step I would like to mention plus to deliver to complete the data the journey as in connecting didn't have and data adults across our entire data state. So I'll talk for a moment.
Yeah, great. So a lot lot going on and great question, but key for US has been this tech investment over the last three years and.
We're seeing the results and.
I think the team has done a great job next question.
Our next question comes from the line of Andrew Jeffrey with Truest Securities. Your line is now open.
Thank you good morning, I appreciate you squeezing me in here towards the end of a long productive call.
My question is high level Lance around.
Pricing and I'm thinking about a few areas carfax for life stands out as a monetization opportunity.
I'm also wondering about pricing trends and pricing power within your financial service business and broadly 68% of the organic revenue growth goal.
Possible to parse out how much of that is coming from.
Recognizing that your price value.
Yes, I think historically, we've always said.
One or 2% of our overall growth across the whole firm.
Comes from price and.
I don't know if Jonathan you want to add any further detail on that but I.
I think thats generally when you look across the whole firm, we'd get about one and 1% to 2% or.
Organic organic growth for the.
Related to price, Jonathan do you want to add to that.
Yes, I wouldn't be real brief answers when you think about our buildup on the subs line, maybe start year at Harborside, we have.
Yes, cancellation reverie than our renewal rate as being kind of low to mid Ninetys you build up from there as lance that pricing, we do and it does vary by end market that condition to end markets think about option right now is more difficult to capture capture price given the challenges there, but typically about a couple of points to get from.
Right. The biggest part really gets on the build up is really on cross selling and Upselling products and certainly the focus as Weve talked on this call is Ron introducing.
Divesting dollars innovation, and driving new product into that customer base and into our channel, but think about just for modeling purposes about a couple of.
Okay. Thank you next question.
Our next question comes from the line of hands on Lazaro with Jefferies. Your line is now open.
Good morning, Thank you.
I was just hoping if you could just talk about how you're thinking about free cash flow conversion for next year I think youre talking about 50%. This year. So you know any puts or takes so think about around free cash flow for next year I know you have sort of the.
EBITDA framework you laid out.
Yes, So 60 to 65, we return back into the Sixtys, mainly we had some one offs. This year with the pensions that we closed profitably that seems the job there we had some of the restructuring for cold dead.
So the tax costs that were left over from the Trump changes I think are.
Our view is as we go into.
2021, we'll be back 60% plus Jonathan that accurate.
I'll just add to that Lance Lance as several one off this year. The arms you mentioned the pension being that there hasnt covert related impacts to working capital working capital typically as positive as we sign a new contract and bill upfront and to support some of our clients in auto and auto Oems and energy.
Supported by the mid terms, but looking towards next year at least cycle through look what's happened with our contract onetime items will flush through we expect to be back up to mid Sixtys next year.
Great. Thank you.
Thanks, Thanks, Jonathan next question.
Our next question comes from the line of Seth Weber with RBC capital markets. Your line is now open.
Hey, guys. Good morning, Thanks for keeping the call going just real quickly on the financial services business. So.
Solutions flip back positive here in the <unk> in the quarter I know last quarter, you talked about the pipeline being strong do you feel like we've turned the corner here.
In the solutions business and can you just give us any any kind of commentary for how your customers are thinking about that business. Thanks.
Yes, yes, no definitely.
Installing so.
Software solutions through co bid.
It's been strained but the team.
We did do a good job getting.
Getting us through 2020, we have the strongest pipeline, we've ever had across the business and Adam might want to add a few.
Sales into that picture Adam.
Yes, thanks, Lance it isn't historically lumpy business, you do see variations quarter to quarter, but we continue to deliver into that high single digit and in some cases touching double digit growth through that group over this past year, we've actually been focusing more on larger more comprehensive relationships with.
Our customers.
Focused our product team to be able to develop capabilities to week by dust, but even more value in larger solutions for seeing that start to pull through.
Lance talked about an exciting pipeline.
Really not not just more deals, but larger deals and I think once we get past the co that interruption because it obviously it interrupts our customers ability to do larger implementation I think as we pull through that we will see continued acceleration there.
Thanks, Adam next question.
Our next question comes from the line of Alex Kramm with UBI EPS. Your line is now open.
Hi, Good morning, maybe just rounded out on capital allocation and returns I don't think Weve touched upon this today you mentioned the $200 million Asrs. Some some folks to reach out to me that they thought there was a little bit small so maybe just talk about how you think about buybacks and general beyond that $200 million. Then M&A you mentioned on the research.
So just think still thinking about tuck ins is that is that an across the board in other segments, as well or or or how is the environment looking for your general as you think about M&A in this in this environment coming out of it.
Okay. No. Good question, we haven't had that one for a bit.
So first off on buybacks.
We committed the 50% to 75% so.
So thats nothing has changed on that.
I think you can look forward at us and be thinking.
Two to 300 million a quarter is a reasonable cadence for buybacks, while maintaining our leverage you know sub three times.
I think that.
That leaves US you know.
Half a billion plus.
In terms of bolt on acquisitions and anything above that.
Would require us to.
To increase our leverage.
Before de levering again, and so we we had worked.
We're good acquirers, we we made great acquisitions in the past.
And we're always monitoring the markets, but if you ask me the return on invested capital on organic growth versus acquisitions I'd say when the teams are doing their jobs, we should always be going up to the organic growth and we definitely increased our cadence the borgata.
Growth.
Over the last.
Three four years, so I'm pleased that we don't need to acquire to support our long term objectives.
What I would say is.
Scale matters, and I feel a lot better about being a $30 billion company versus being a 10 billion dollar company and I think that scale matters in tough difficult world that we operate in and so we've done a great job.
To grow the company grow our free cash flow and then use it accordingly, and so the dividend is great for our shareholders. They liked that certain cash flow share buybacks is another way to pay back and.
We think given 50% to 75% of our cash our cash back to share.
Shareholders is a good strategy and it's great M&A is there we've got ample room for bolt ons and we have some room on leverage if we wanted to do something a bit bigger so you know.
I can't I can't say more than that except that our strategy of that combination is both did well and we're very.
Cautious on the return on invested capital.
All those different strategic alternatives and so you know it kogut brings the cost of assets down somewhat that could be good but actually our multiples you know I'd love to see our multiple two or three turns better so things.
Things look a lot cheaper to us.
So that's where we are I wouldn't expect any strategic change.
Short term.
But you should expect this to always look at what's best for the company and best for the long term goals of the company and shareholders.
Next question, we must be getting near the end operator.
We do have three questions left in the queue.
Question comes from Okay. We will then answer all three of them.
Perfect.
Our next question comes from the line of Jeff Silber with BMO capital market. Your line is now open.
Thanks, So much for squeezing me in I'll be quick I know, you're not giving 2021 guidance towards year end off but if we look at the quarters and using your outlook for the year does it make sense that you will see year over year growth and margin expansion in your fiscal first quarter next year, that's the last comp pre co that thanks.
Yep, Okay, Jonathan do you want to grab that in terms of our forward model.
Sure So and obviously on top of my head a bit here, but for Q1 year on year up 21 compared to 20.
I think we likely will see some more.
The margin expansion just because.
Lots of our cost reductions took place going to be an impact in Q2 Q3 to Q4, So Q1 year over year can be before all the coke cobot impact that take place certainly.
Certainly for the year, we do expect to drive over the course of the year.
Margin expansion.
Thanks, Jonathan.
Our next question.
Our next question comes from the line of Toni Kaplan with Morgan Stanley. Your line is now open.
Thanks, a lot.
Can you talk about any potential implications you're thinking about from the upcoming U.S. election, if there's upside and when maybe that helps globalization by that could impact resources and any transportation, giving more stringent climate policies or do you view that as the transition happening anyway. So maybe it's not as.
Another factor.
Actually if you could help us think about the implications of the energy transition for transportation I know, we just saw that California ban on sales of gasoline powered cars starting in 2035. So just what are you providing too.
Customers you know in terms of helping with those policies. Thanks.
Right. Okay. Thanks, Tony So I think biden drives green and so in terms of energy transition everything we're doing around supply chain.
Maritime measurement of the EPS achieved the maritime fleet.
Our SG advisory and products around our indices in the financial markets I think biden.
Pushing a green agenda forward is good for US I also think the biting.
Pushing a regulatory compliance driven agenda is also good for a firm like ours.
So those two things are.
Things that might bode well.
I think that.
More free flowing globalization and better global relationships could be a wind fried just market as well, but I have.
But I have to say volatility and challenging market places fuel financial markets services providers and.
That hasnt.
Hurt us through code in terms of the automotive sector.
Edward can add to it but you know people people need as much.
Advice and solutions.
And used a new car advice around shifts to ease as they do on combustion engines.
And we do provide a lot of services around the drive train and.
And that shift from combustion DBS, but.
Edward do you want to drive a little bit deeper detail on that.
Yes, a couple of quick Whetstone in response to your question. So as loans said policy and regulatory uncertainty drives a need for data for decision, making by customers. So in that sense. This is interested in volume.
Interest rate environments to create new data assets and new products you mentioned the California on you could have mentioned also that you revised targets for emissions reduction by 2030, which were published last week.
All of this creates a need for large scale simulation of what does this mean for my business what does it mean for my portfolio.
Lance mentioned innovation.
Say this whole area of emissions compliance and electrification is probably the most innovative area of our portfolio I'll give you a couple of examples next month were releasing monthly rolling full cost of compliance versus you, China and U.S. regulations, which then you tracking and monitoring tool.
Customers and in January we're very excited about this we're launching a simulation tools that will allow our customers.
Hans make us as well as carmakers to really run a variety of simulations on the portfolio that competitors portfolio to understand how the chief compliance cost effectively so very exciting area for us for customers and the states in which we are focusing a lot of resource.
Thanks, Edward next question.
Our next question comes from the line of George Tong with Goldman Sachs. Your line is now open.
Hi, Thanks. Good morning, you mentioned that you can grow steadily 5% to 8% or 6% to 8% organically driven by consistent if not elevated reinvestments is this an increase to your long term organic growth framework and then related to your long term framework Youve talked about several drivers of permanent cost savings how do those permanent savings in.
Dr Framework for long term EBITDA margins in the 45% to 47% range.
Yes, so 5% to 7% you know has been our long term forecast for driving the firm and then when we acquired I Prioleau.
We have boosted the no sorry were 4% to 6% and when we acquired I pray.
I Prioleau Weve boosted financial services to six to eight and therefore, we raised the overall.
Organic growth forecast of the firm.
The 5% and I still believe five to seven.
Right let.
A level of conservatism in terms of what we provide to shareholders our expectations across the firm and I have to tell you that there is nobody in the firm that doesn't want to be at the high end or beating that range, but you know there is always something that.
Across our company that might.
Put us in six instead of seven or five instead of six and so.
The five to seven as we go through the year you can see from our forecast right now on revenue, we've got to pin down to like a five.
$5 million spread so we know our revenues and our ability to achieve the very very well.
So I think five to seven is the right level.
As we grow things like alternatives renewal.
Renewable energy energy transition.
Our app.
Asset management related platform activities, our roles in Reg and compliance these are.
These are areas that are growing double digit as.
As those grow and gain additional cadence and the firm and investments play through I expect those areas to push us up to the higher end and I would love one day to come on here and say six days, but for 2021, we can say six day, because we're coming off a poor year in terms of.
Comps and so really I think six or eight next year is not it's just it's not the highest order. It's it's a return from a really challenged year and therefore.
I think the more interesting year is.
2022 are we back in line for the five to seven and I have to say hand in my heart I think we got more than enough target addressable market to do that so I don't worry about our long term ability to grow revenue I think we're leading edge with our customers. We're we've got great and.
Claiming practices, even improved right through coping with our diversity and inclusion measurements our.
No.
Our our community scores with our employees and our community scores with our our customers. So feels boy it feels good I feel great about that.
When you grow at the top end of the range you start to grow margin automatically.
But we have a business that's very global can easily work from home can easily deliver many of our solutions virtually and leadership virtually we just got to use more technology. So we've been investing in more technology, and therefore, I see no problem the digest.
Market being one of those 50% margin companies like many of our peers do a damn good job they manage expenses they grow revenue and they find their home around that high fortys to 50% margin and I expect us to be there as well and I don't want to.
Rush it because I want to make sure that we're constantly investing in those new market opportunities and I think we're doing that just fine.
And then when you look down through earnings. This year, we've always had double digit earnings I, just said earlier in the call 13% to 15% because all of a sudden we were fully termed out on our debt. So no rising interest costs good.
Good management of depreciation.
Excellent tax team, that's given us a good adjusted tax rate and so I have to have to say that so all of those mechanisms are in place and so.
So as the last call today, although I can say to you is.
You know I'll reiterate again.
Competence in revenue growth confidence in expense management confidence in the double digit earnings growth.
Our portfolio has been adjusted over the three to four years since merger, we will continue to fuel the strengths and.
And less an impact some challenged markets.
We'll grow through that and.
We have ample opportunity.
With the free cash flow, we have to invest back into our shareholders or into the company for new opportunities. So I think were nothing's really changed except that we've been through the most are real period of our lives. It's been tough for customers. We help them been tough for employees and we've reached out to them and delivered.
For our teams.
It's been tough to build new products virtually but the teams have managed to do it. So next year. The only thing I can say to you is you know if we get a complete shutdown or locked down and we have to keep people at home locked up and they're not out on the dealer floors and auto buying cars.
There's there's nobody out drilling for oil.
The financial markets will continue to operate the proven they can do that it will be a.
It will be another tough year.
Ill give you crystal clear transparency in what we're doing every quarter.
But I actually think the world is heading towards and east walk down situation not that they're not going to lock down regional I think there's going to be all sorts of regional walked out, but I don't see us come into a complete standstill again.
In terms of our forward forecast and if that happens when we give you our guidance in November we'll have to update it but at the moment I think.
Got it.
As much knowledge as.
As I do and I hope the transparency is appreciated and thank you for all your support at this point, Eric will end the call.
And we thank you for your interest lines as market coffee accessed via replay by 5592, there are five six or international dial in four there are four or 537 reported there are six.
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Ladies and gentlemen, this concludes today's conference call. We thank you for your participation you may now disconnect.
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