Q3 2019 Earnings Call
And well go to Digest markets third quarter 2009 earnings conference call.
All participants are in listen only mode.
[laughter] speaker's presentation, there will be a question and answer session.
You asked the question done, especially well need to press star one on your telephone.
Please be advised that todays conference is being recorded.
If you require any further assistance. Please press star zero now like to hand, the conference over to your speaker today or where head of Investor Relations. Thank you. Please go ahead Sir.
Good morning, and thank you for joining us religious market Q3, 2019 earnings conference call earlier. This morning, we issued our Q3 earnings press release and posted supplemental materials to digest market Investor Relations website. Our discussion on the quarter include non-GAAP measures are adjusted numbers, which exclude stock based compensation amortization of acquired intangibles and other items I just market believes now.
GAAP results are useful to enhance understanding of our ongoing operating performance, but they are a supplement to and should not be considered in isolation from or as a substitute for GAAP financial information. Please refer to our earnings release on our website for definitions of non-GAAP measures reconciliations to the most directly comparable GAAP measures. As a reminder, this conference call is being recorded webcast and is copyrighted property of <unk>.
This market any rebroadcast of this information horan part without the prior written consent of bite just market is prohibited this conference call, especially the discussion of our outlook may contain statements about expected future events that are forward looking and subject to risks uncertainties factors that could cause actual results to differ materially from expectations can be found NHS markets filings with the FCC and on nights as Mark website.
After our prepared remarks, Lance <unk>, chairman and CEO , Todd <unk>, Chief Financial Officer will be available to take your questions with that it's my pleasure to turn the call over to Lance who go to Lance.
Thank you Eric and thank you for joining us for the <unk> market Q3 earnings call.
Today I'll talk to the highlights of the quarter and then provide an update to our capital allocation framework, which looks to return more capital to shareholders through continued share repurchases and our intent to initiate a quarterly dividend pending board approval.
Included in our capital allocation section, we'll also discuss the divestiture of our aerospace and defense business, which we have agreed to sell subject to regulatory approval.
So now turning to the quarter.
I was extremely pleased with Q3 as our teams delivered another strong quarter of diversified revenue growth margin expansion and strong cash flow.
We also de Levered to within our target range and completed our promise repurchase of 500 million of shares in early Q4.
Finally, we closed the asset exchange with Informa and have already achieved early revenue synergies.
There's some key financial highlights of the quarter.
Revenue up 1.112 billion, that's up 6% on an organic basis and 11% overall.
Continued solid performance across our three skilled vertical transportation financial services and resources.
Adjusted EBITDA of 453 million and margin of 40.7%, which is up 170 basis points year over year.
And finally, adjusted EPS of 67 cents up 16% over the prior year.
Now let me provide some segment highlights.
Transportation perform within our range of high single digits with organic revenue growth of 7% in the quarter.
It's notable to point out that the recurring fixed.
Remained very strong at 10% offset by lower margin nonrecurring growth.
And some impacted by continued weakness within digital advertising.
As expected.
We also had slower low margin recall activity the automotive highlights in the quarter to shout out for performance include.
Our carfax used car listings driven by investments in search optimization driving market share gains, which we expect to continue.
Our carfax for like lunch.
Matt early targets with over 1100 unique dealers signed up today.
Our powertrain appliance offerings rising on increased regulatory demands and finally automotive mastermind benefiting from the first half launch up to additional automotive brands and ongoing enhancements in our product offering which now leverages many of our proprietary automd.
Dataset.
Let's move on to financial services, where we reported 6% organic growth with several several notable areas to call out.
Our pricing and index businesses, each with double digit growth on the back of recent investments.
Derivatives processing returned to growth in the quarter.
Our corporate actions and M. software sales continued their strong growth trajectory.
And finally, I Frio had a strong overall quarter with significant growth in private markets corporate solution.
I mean, that's the bullish.
After a tough start to the year due to market conditions. We're now performing more in line with our acquisition target level on a run rate basis, which I'm, particularly pleased about.
In resources, we delivered another solid quarter with 6% organic growth anchored by stable recurring revenue growth and strong nonrecurring revenue growth.
Strong performers in the quarter included our downstream pricing business opus as well as our chemical business.
Our upstream business continued its steady performance, we continued to make progress with recent investments in analytics and partnerships to extend our leading data and insight capabilities into new revenue streams.
We made headway on our integration of the agribusiness acquisition with our chemical and downstream businesses. This integration will build upon our existing data.
Pricing insights forecasting and new services within our resources segment.
Agriculture is the largest chemical end market in the world and this transaction expands our capabilities in the fertilizers and chemical crop protection, while expanding our capabilities and biofuels.
Finally, I'd like to call out a great example of our market leadership and capabilities in the wake of the recent Saudi Arabia oilfield attack.
On the Monday following the weekend of the attack our resources team hosted a webinar or which pulled together our experts across upstream downstream and economic and country risk to brief our customers on the potential implications.
Over 1700 clients joined lives with over 600 of those coming from the financial services.
Really great work by the team being able to pull together such a comprehensive briefing in a short period of time to help our customers, both corporate and financial market participants better understand.
Moving on to CMS organic revenue growth was 5% benefiting from the biennial oil pressure vessel code.
We continue to expect CMS organic growth to be in the low single digits for the year in line with our forecast.
Product design, the largest business within CMS continued to perform well with organic revenue growth of 4%.
Finally, I want to give an update to our capital allocation framework as we have completed our de levering post the IPO acquisition.
Our targeted leverage range is going to remain two to three times on a gross basis and will tend to operate at the higher end of the range.
Will target an annual capital returned to shareholders.
I have a minimum 50% and as much as 75% of our annual capital capacity through a combination of share buybacks and a cash dividend.
At our October Board meeting I tend to recommend I intend to recommend the board approved a new share buyback reauthorization and a quarterly dividend program beginning in Q1 20.
With an initial 1% dividend yield target.
We believe 2020 is the right timing for the initiation of a dividend for the following reasons.
First it will be over three years since the successful merger abide chess end market and we have confidence in our ability to continue to operate within our longer term annual financial framework, including 5% to 7% organic revenue growth 100 basis points of adjusted EBITDA margin.
Expansion and double digit earnings growth.
We believe this framework balance is the right level of investment and margin expansion to continue to maintain our organic growth range.
Second our business model generates ample free cash flow for both capital returns and M&A.
Third we have reduced our legacy market auction over overhang to now approximately 10 million outstanding options at the end of Q3.
And fourth we believe initiating a dividend is a great way to diversify our capital return discipline and to broaden the potential groups of shareholders that may be interested in I just market.
Now in terms of M&A, we will be focused on deploying capital within our scaled focus areas, including financial services resources and automotive.
Sizing of potential deals will fit within our updated capital allocation framework will also continue to evaluate opportunities to further rationalize our portfolio, which could provide incremental capital flexibility.
With that said we've entered into a letter of intent to sell our aerospace and defense business for 470 million to Montagu.
We believe this is the right long term moved from our shareholders and our aerospace and defense colleagues.
The combination of these points around capital allocation gives us a clear framework to operate within and to meet our financial objectives.
It provides our shareholders of at least approximately 800 million the capital return annually and our divisions ample acquisition capital to support our longer term financial targets and with this.
I will turn the call back over to cough Todd.
Thank you Lance.
Our Q3 results were in line with our expectations and included revenue of $1.112 billion, an increase of 11% and organic growth of 6%.
Net income of $39 million and GAAP EPS of 10 cents.
Adjusted EBITDA of $453 million, an increase of 16% with margin of $40, 7%.
And adjusted EPS of 67 cents, an increase of nine cents or 16%.
Relative to revenue our Q3 organic revenue growth of 6% included recurring organic of 6% and nonrecurring organic of 4%.
Looking at segment performance transportation revenue growth was 6%.
Including organic revenue growth of 7% and negative 1% FX.
Organic growth was comprised of 10% recurring and flat nonrecurring.
We expect recurring to continue to perform at the upper end of our high single digit organic growth range.
Non recurring was impacted by lower recall and lower digital marketing.
We expect nonrecurring to continue to perform at a lower level than recurring due to revenue reductions primarily in our lower margin recall business.
Resources revenue growth was 9%, including 6% organic and 3% acquisitive.
The organic revenue increase was comprised of 5% reoccurring and 15% nonrecurring.
Nonrecurring benefited in part from continued strength in our software business.
Our Q3 organic ACB increased $10 million and our trailing 12 month organic ACB increased $28 million to $757 million, which was up 4% versus prior year.
CMS revenue increased 1%, including 5% organic negative, 4% from divestiture and negative 1% FX.
Recurring organic was flat and nonrecurring organic increase to $8 million or 41%.
All in the nonrecurring organic benefited from the BPVC release, which contributed $8 million organic growth in the quarter.
Within the segment, our product design course, specs and standards business continued to perform well with recurring organic growth of 4%.
Financial services revenue growth was 21%, including 6% organic 16% acquisitive and negative 1% FX.
Recurring organic was 7% and nonrecurring organic declined $4 million or negative 15%.
Recurring revenue partially benefited from revenue catch up on past few renewals.
Nonrecurring decline was primarily due to lower enterprise software revenue.
Our information business organic growth was 6% due primarily to strong growth in our core pricing in index businesses.
Processing organic was flat.
Derivative processing was up but it was offset by decline in our loans processing business.
Solutions organic growth was 4%.
Led primarily by our EDI and corporate actions businesses.
I Priyal revenue increased $89 million and included one month organic revenue contribution in the quarter.
Turning now to profits and margins.
Adjusted EBITDA was $453 million of $62 million or 16% versus prior year.
Our adjusted EBITDA margin was $40, 7% up a 170 basis points on a reported basis and up 100 basis points normalize for IPO and FX.
Our year to date adjusted EBITDA margin was 43%, which was up 130 basis points on a reported basis and up 100 basis points normalized for IPO and FX.
We continue to track to our 100 basis points full year normalized margin expansion.
But expect an increased level of onetime investment in Q4.
Regarding segment profitability.
Transportation's adjusted EBITDA was $134 million with margin of 42 dot, 6% down 50 basis points.
Resources, adjusted EBITDA was $101 million with margin of $43 per cent of 360 basis points.
CMS adjusted EBITDA was $31 million with margin of 22 dot, 4% up 30 basis points.
Financial services, adjusted EBITDA was $199 million with margin of 46 about 4%.
Up 240 basis points normalized for I. prioleau and on a reported basis.
Adjusted EPS was 67 cents per diluted share a nine cents or 16% improvement.
Our adjusted EPS excluded the 200 million dollar one time GAAP tax expense related to tax reform and also excluded a onetime gain of $112 million related to the sale of our TMT business.
Our GAAP tax rate was 86% and our adjusted tax rate was 18%.
Our GAAP tax included $200 million expense related to Treasury regulations issued in June 2019, the changed retroactive to fiscal year 2018, certain pre us tax reform deferral rules.
We expect to favorable offsetting 50 million dollar GAAP tax adjustment in Q4, resulting in a net 2019 GAAP tax expense increase of $150 million.
We have excluded this onetime GAAP tax expense from our adjusted tax expense.
This onetime GAAP tax expense essentially offsets the 2018 onetime GAAP tax benefit of $141 million related to tax reform, which was also excluded from our adjusted tax expense.
This change will not impact our going forward effective tax rate and in future years, we continue to expect a low teens GAAP tax rate and an adjusted tax rate of 18% to 20%.
Cash tax owed from this rule change is approximately $90 million.
Which will be paid in Q4 of 2019.
Despite the negative cash impact in 2019 tax reform has been an overall net positive to the company.
Our Q3 free cash flow was $343 million and our trailing 12 month free cash flow was $1.1 billion to $9 billion and represented a conversion rate of 65%.
On a full year basis, our cash conversion will be negatively impacted by approximately five points due to the onetime Q4 tax payment of $90 million.
Turning to the balance sheet.
Our quarter end debt balance was five dot over $5 billion and represented a gross leverage ratio of approximately 2.9 times on a bank covenant basis.
In the quarter, we completed a $350 million add on to our 10 year April 2029 bonds at an effective interest rate of 3.25%.
We closed the quarter with $124 million of cash.
And our Undrawn revolver revolver balance was approximately $1.6 billion.
In Q3, we completed the $200 million, sorry, and we executed a further $300 million sorry in Q4.
Our Q3 weighted average diluted share count was 410.9 million shares.
In terms of portfolio activities, we closed the acquisition of inform as agriculture business on June Thirtyth.
And we also closed the sale of a majority of our TMT market intelligence business to inform on August 1st.
As a result of the exchange our annual CMS revenue will decline by approximately $60 million, while our annual resources revenue will increase by $40 million.
The exchange is slightly dilutive to adjusted EBITDA.
And neutral to adjusted EPS.
Finally, as Lance said, we signed a definitive agreement to sell our AMC business to Montagu for $470 million.
The purchase price represents an adjusted EBITDA multiple of 14 to 15 times.
On a business with approximately 45% adjusted EBITDA margin.
We expect net after tax cash proceeds from the transaction of approximately $440 million.
The transaction will result in three cents of forward adjusted EPS dilution.
We will use proceeds from the disposition to reduce leverage which will provide us with further capital structure flexibility as we execute against our new capital allocation framework.
In regard to our new capital allocation framework as Lance said, we will target capital returned to shareholders of 50% to 75% of our annual capital capacity through a combination of share buybacks and dividends.
We define capital capacity as our annual free cash flow plus the additional capacity generated by adjusted EBITDA growth.
We are updating our prior guidance to provide for.
Revenue of $4.4 billion to $4.42 billion, which includes full year organic revenue growth of 5% to 6%.
Absolute revenue was lower than prior guidance range due primarily to higher drag from FX as we expect full year negative FX impact of $35 million.
And also due to the anticipated lower revenue from the TMT AG asset swap.
Adjusted EBITDA tracking above midpoint of prior guidance range of $1.75 billion to $1.78 billion.
We expect adjusted EBITDA margin expansion of 100 basis points on a reported basis and also normalize for FX and I presume.
Adjusted EPS at the high end of our prior guidance range of $2.52 to $2.57.
We have updated guidance items between adjusted EBITDA and adjusted EPS in our supplemental materials.
Finally, we expect cash conversion of approximately 60% due to the onetime tax payment in Q4.
We will provide detailed 2020 guidance in November . However, this time, we expect to deliver to our double digit adjusted EPS growth target taking into account expected dilution from the divestiture.
In addition to double digit adjusted EPS growth, we will see additional TSR benefit from our dividend initiation in 2020.
And with that I will turn the call back over to Lance.
Thanks Todd.
So in conclusion, another strong quarter and updated capital allocation framework to increase transparency and capital return to shareholders.
An updated guidance that puts us in a position for a very strong year. We appreciate your continued support and are pleased that so many of you have trusted us in executing post merger and beyond operator, we're ready to open the lines for questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
We ask that you please limit yourself to one question.
Please stand by while we compile the queue any roster.
Our first question comes from Manav Patnaik with Barclays. Your line is open.
Thank you good morning, and congratulations on the new capital allocation framework.
Maybe just to follow up on the aerospace and defense sales I was wondering if you could just.
Walk through the rationale on why you picked that they obviously have really good margins can you maybe talk about.
The growth.
Fit and just wanted to clarify Lake is genes basically all of aerospace and defense or did more more than that goal in this deal.
No its just aerospace and defense and I guess, when we look at.
Transportation in.
I chess market Theres, three major components, so theres automotive maritime and aerospace and defense and when you look at the.
The big synergies revenue synergies areas to invest areas to grow.
Across the group.
Automotive in maritime.
Fit or not just.
Transportation, but across energy and into financial markets.
Whereas aerospace and defense stood alone.
It had a slight overlap with our economic and country risk.
Business, but.
In terms of forward investment and commitment to invest.
Further it fell outside of our capital allocation and therefore made sense for divestiture.
Next question.
Our next question comes from Gary Bisbee with Bank of America Merrill Lynch. Your line is open.
Hey, guys. Good morning could you just give a little more color on the nonrecurring revenue weakness at both the financial services and transportation business.
Just what really drove that and how should that kids are the reasons. Those those factors would continue going forward. Thank you.
Okay, maybe I'll start and then I'll pass to today, So I guess I don't.
See financial weakness in either division. So I know when you look in dissect numbers. If you take transportation for example, the big driver there.
Being automotive and when you look at automotive you've got 10% recurring outstanding performance across the group well diversified all sectors.
Across across the group.
When you look at the nonrecurring.
Pete you really have to you have about $600 million of nonrecurring.
To consider across.
The whole group about 20% of that is recall.
And a big piece of recall hit is lower margin, where we're doing recall in direct to the Oems and its a defined as we look to expand margins and look at our mix of business around recall, we want to do more direct activity.
With the Oems, which is higher margin and suits are.
Our overall.
Business that and a little bit less.
The indirect.
Business, we also had which we called out for several quarters now a bit of a slowdown in the digital.
Advertising side, and so those coupled together in the quarter for the slot a slight decline in.
Recurring.
Sorry, the nonrecurring, but in terms of the margin EBITDA and our forward growth profile Nothing's changed on transportation are very pleased with the.
The growth.
And diversification of it.
Financial markets.
You know I would have to say.
I had a real strong quarter.
But there is always lots of things within a quarter, we previous quarter, we had a large software sales that shut up that bodes well for a piece of revenue. This quarter. We've got I creo firing on all signal a cylinder that definitely helped and came into play a little bit.
We.
Really it's mixed Evan corporate actions Super strong, but even some of the software asset that haven't grown quarter over quarter. All are performing within expectations. So I think the message here is.
You should have no change in your forward outlook for any of our Threescale verticals. They are all operating exactly as we say each quarter don't see anything to change we generally moved the guidance up a little bit around.
At least the mid to upper ends of.
EBITDA upper ends of AEP and there and read the revenue we had to give up some revenue on the TBT TMT Agra swap and we've got $35 million of FX. So when I look at it all I think this is the best quarter since our post merger in terms of strong diversified.
Teams executing really well.
Let's go to the next question.
Our next question comes from Bill Warmington with Wells Fargo. Your line is open.
Good morning, everyone.
So I had a question about the particularly strong performance at IPO at 22% was there was this something there and the timing.
Or with deferred revenue that debt.
Made that particularly strong I just wanted to try to get an apples to apples.
Number there and.
The reason is I'm, just trying to get to.
What about steady state ongoing.
Organic revenue growth rate for that.
Well I think you.
Go ahead Todd.
Yes, I agree old contributed $5 million of organic in the quarter. It had a very good quarter.
The quarter was in the teens growth, we had one month of organic and it had a particularly strong.
Last month of the quarter.
I think when we've talked about I pre IPO.
We talked about a double digit growth so wouldn't expect all in of 22%, Although I think PCM performing very high.
Toward that.
Hi teams into the Twentys level, but.
I appreciate certainly we expect to be a double digit grower going forward Bill.
Thanks, Thanks, Todd next question.
Our next question comes from Andrew Steinerman with Jpmorgan. Your line is open.
Hi, I know you've already mentioned that the resources HCV is trending up 4% and could you just talk a little bit more about the energy backdrop right. Now is it is it conducive for acceleration.
Note that resources subs growth at 5% it is above the CV growth at 4%.
Right well I think the.
I think in all our divisions and I know in resources.
Vaulted Kyle.
Energy prices.
Makes many think that there should be more volatility within eye chest market, the same and Sars in automotive and I think for three years I've said I don't personally.
Spend a lot of time.
Focusing on.
A particular indicator to drive our overall performance. So what are we doing were doing consulting a piece of the business that actually in the quarter outperformed with anything and.
On that side its teams advising people that are making decisions in volatile markets and volatile prices that they're interested and should they lend to a project shouldn't they should they buy an asset shouldn't they.
Are there.
Do we have information in and around the energy market that can help people better model supply and demand and I'd say that the new data science and analytics around coupled with consulting.
Give us some.
Really.
Good market fundamentals around us not that I think we're going to be north double digits north of 10%, but I do think that we have a solid business that supports mid single digits and the other thing I would say is as you go in volatile markets the downstream pricing in new.
Use of all these refined products having.
Daily price is weekly forecast.
Monthly reporting and insights it really is a place where I just market has had and continues to support high mid to upper single digit growth and that's around opus, it's the new agribusiness. So it's.
Downstream chemicals into.
Agriculture, it's our chemicals business itself and all the inputs into.
Various supply chain, we really do have a strong position and then you add renewables on top of that which is is that.
Segment, all around clean tech that we're playing into so I really think it's a great mix and the only piece where I look at over the last five years, where there is out.
Or underperformance is taking our core you know few hundred million, so 30% of the division pure data assets that support the overall division and I would say that you know that.
That is where you get a bit of this volatility, but the division operating and being managed effectively can more than support up flat to up five or even down five on that $300 million and that's how I look at it Andrew So I think that volatile.
What is our friend in terms of advice, but it can take away some of the desired to explore and expand into new international projects, but you know we have more than enough skin in the game in the in this big marketplace to support mid single digits growth.
Next question.
Our next question comes from Andrew Jeffrey with Suntrust. Your line is open.
Hi, Good morning appreciate you taking the question.
A little bit of a hypothetical I guess for you Lance but.
But the person I think timely regardless.
I know complexity.
In auto sort of generally AIDS.
Your your growth in demand for your services I Wonder if you if you think about what's happening.
In the us.
This sort of bouncing around emissions and.
And the deal the California with four major auto manufacturers.
Sort of a side deal just to federal definitely changing federal emissions laws can you talk about how that might affect your auto business. If you have sort of two major U.S. markets.
Right well we are.
Our.
Our.
Advisory around regulatory reporting in automotive actually had quite a good quarter not purely because of that just because of our position there, but I also have our head of automotive here with me today in the room Edward to Bernie So I'll let him.
Jumping on the question that you asked specifically.
Great. Thank you Lance and generally the short answer to your question is regulatory uncertainty creates risk for customers and that creates demand for our services demand for the on demand for a little bit advisory. We can provide the run scenario planning and simulation. So generally speaking tough environment for customers.
We can help them through them suddenly.
Thanks, Edward next question.
Our next question comes from Kevin Mcveigh with Credit Suisse. Your line is open.
Great. Thanks, Hey, congratulations on the asset sales I guess two things.
Is the aerospace and defense is the sale in the guidance or is that something that will be adjusted going forward and then just you know it sounds like Lance you're taking a more focused field across the scaled verticals does that imply anything for the for the remaining CMS business or how should we think about that within the context of scaling up.
Obviously, which three real nice assets.
Okay, I'll, let Todd do the guidance after I just talked about the divestiture so.
Yes, very focused I have to say very focused on our automotive financial markets and energy related scaled verticals. Those are the very large verticals of the firm and they are the ones that were strategically.
Investing in in terms of for organic growth.
Putting capital to work, we have a lot of data science analytics and.
And.
You know.
Investment into each of those areas and.
We've made bolt on acquisitions that we think are effective in supporting our longer term growth targets in supporting our customers.
So within CMS, we have divested the very the.
The non core portion of TMT.
And we've now divested.
Aid DNS from transportation and so one thing I did call out today is that we will continue to look within this capital allocation framework at.
Potential other divestitures and I guess, what I want to say to both shareholders and the employees inside the firm that this has to be a very thoughtful process. We have to we have to think about the overall long term potential for our firm up but we're not going.
To make short term decisions that are careless or reckless rather we're going to invest in the assets. The people of the assets that we may think are non core and we'll look for opportunities.
To make different business decisions going forward and we're not afraid of analyzing our own portfolio.
It's the backdrop of.
Many acquisitions over many years and.
Where we want to know that we win every day is in the scaled verticals that were building for long term and outside of that we've got to take a very careful respectful approach to our assets our shareholders, our customers and our people, but theres no no lack of strategic.
Not from myself or my management team Todd do you want to add on the guidance side.
Yes, the disposition of a and D is not included in the guidance that hasn't closed its subject to regulatory filings and approvals I did provide I think sufficient information.
No in terms of the revenue EBITDA and forward adjusted EPS.
And certainly as we guide in 2020, we will.
We'll be very clear on the impacts that are embedded or have been adjusted out of the 2020 guide for a indeed.
Okay next question.
Our next question comes from Alex Kramm with.
Your line is open.
Hey, good morning, everyone.
Hopefully I'm not repeating anything but I was hoping that you can just flesh out the capital return a little bit more so bear with me for a second so if I if I hear you correctly and I do my math right. The dividend is now basically 25% of your free cash flow and you got another 25 to 54 share buyback and then another 25.
Sandra so for whatever M&A et cetera, So I'm just wondering.
The buyback I guess is the low end of the buyback to 25, and then is that guaranteed or for the right deal you would say like alright buybacks. We can certainly go for yourself, we need to or does everything has to come out of new leverage and and then I guess a percentage off by that and then also talked very quickly.
Said say using the proceeds for deleveraging I guess the I guess the question is why it seems like Youre kind of thinking that range now. So why did you choose deleveraging for the for the incremental and could you go to 100% capital return in the in and they give US well. This is the last one heck of a lot of quest.
Yes go ahead, Todd if you want to start and I can always add just to stop.
Capital capacity of the company in the capital return element so when I.
Think about it we have circa annual cash flow of call. It 1 billion to 50 a year.
And then we have additional capacity that we generate from adjusted EBITDA growth. So you can take the EBITDA growth and and the leverage ratio the three times and called out $400 million. So essentially the baseline capital is a billion six.
And we've said 50% of that will go to capital return at a minimum up to 75%.
So you know in terms of the the allocation between dividend and buyback at a 1% dividend yield we would think of that as a 275 million dollar annual dividend and that leaves a minimum of.
525, or 550 of share buyback, so that would be the baseline minimum capital return.
That we will execute on an annual basis.
As far as.
Additional cash like from the.
Hey, Andy Slash chains disposition.
We would expect that that capital would be available.
From a strategic perspective to potentially acquire other assets and so that's why we're in the near term going to bring leverage down a bit to have a little bit of dry powder.
But ultimately as Lance said in his opening comment we're going to run the company in the high twos and so.
You know if we don't have opportunity to deploy that capital. We would then look at increasing the level of the buy back above the $500 million to $525 million level.
Yes Hello.
Yes, I think that that wasn't so thanks Todd that.
I think it's really important for us we've listened to our shareholders over the past three years.
And.
Defining a capital framework that were completely happy to provide to you and be transparent with and then live within that.
The guideline.
Is what we've what we've done today and so you've got the minimum levels and then from that.
Yes, we'll adjust on the annual basis based on the the best remaining opportunity for us as a firm.
Let's go to the next question.
Our next question comes from Jeff Silber with BMO capital markets. Your line is open.
Thanks, So much you had talked earlier about the impact of volatility I believe in your energy business Im wondering with everything that's been going on in the overall market. What did you have seen on the financial services side is that impacting maybe some buying decisions going forward. Thanks.
So are you referring to private equity.
Advice that we may provide to private equity that may be investing in energy related assets.
Is that it was that your question.
I was interested more in the financial services vertical.
Okay, So, but financial services with respect to our advising and selling them energy related products or just overall in financial services.
The latter as possible, but if you want to give a little bit on the former as well that would be great.
Okay. So I do find financial services a growth ever since the merger one of those revenue revenue synergies that's been a growth driver for us.
And it's really coming from twofold, one we have the financial services customers that I guess standalone didnt have deeper relationships. So we're definitely have that wind on our back in terms of opening doors and participating the second thing I'd say is private equity had been very active.
In terms of investments.
In and around the energy market third I'd say that when you look at.
Growth in renewable.
And.
Solar wind et cetera, and you look at the investment profile and where the investments are coming.
In those projects a lot of them are are being driven out of the financial markets and private equity is playing a big role in terms of investing so we have some really nice growth.
Parameters coming from our relationship with financial markets and then too.
The.
The investments whether it was in the Permian, but now in terms of the whole renewable space, where we've got.
Expertise to help.
On the advisory and on the subscription data sides.
In those non fossil fuel related areas. So that's been good for us.
Volatility in energy means our financial market clients want more.
Information and support that's also good for US overall, what I would say in financial markets is the last few quarters and I feel is a great bellwether for it is that you see.
First off what you see is there's been a fairly buoyant equity market issuance and if you look at IPO and you go where design creo have volume related or transaction related nonrecurring upside it's around equity market issue and that's been very good loan.
Lower interest rates also encouraging municipals to get out there and lock in and we've seen a large.
Issuance of municipal bonds, and where we've been hitting some record numbers. There and then finally I called out derivatives processing and whenever there is volatility in FX or rate you get volatility in and around the processing and activities of derivatives not that theres more total debt.
Dollar value, but there is more transactions.
Lot of times are smaller and we've seen.
Some increased activity there so net net.
I think that.
The financial markets.
And the general geopolitics and global dynamics around the markets we're in.
Have been good for an information company that has a lot of quantity quality and different types of data to offer to our customers. So I think its bode well for us and it's been quite a diversified quarter that I'm, particularly pleased about next question.
Our next question comes from Shlomo Rosenbaum with Stifel. Your line is open.
Hi, Good morning. Thank you for taking my question I, just wanted to ask a little bit about the divestitures and the portfolio positioning that you guys have been doing a good job of could you discuss how fast the LNG business had been growing revenue wise and then in a similar vein can you talk a little bit about the components of what's left to CMS.
Yes, and how fast they have been growing.
Okay.
So.
Aerospace and defense has been a low to mid single digit grower with good margin and a super strong brand position with Super strong.
You know.
Engaged employees in that business and.
And what's great about it really is James is one of these 100 year old brands that has.
People that are just passionate about.
Defense.
Military spanned new weaponry, and we really do have you know kind of industry experts in around that asset.
But it needs to grow and it has potential to grow at upper single digit even double digits.
With increased investment and.
The home for that at Montagu is a better home them with us.
Because if I look at if I look at our investment priorities across the whole group.
I'm I'm looking at where we have.
Our scaled verticals, but then also how do those scale verticals with data science and analytics play across each other into our financial market.
Participants and automotive and energy are two huge asset classes that financial markets invest in private equity bank lending insurance.
Asset in index inclusion or exclusion and we have just so much that offer whereas aerospace and defense is just it just plays a much more specialized smaller role and we don't get the same leverage across the group.
Therefore, we classified it as non core and we decided several months back.
You know to to look at.
The divestiture.
We.
We did similar when we.
Took the piece of TMT and did the inform a swap and that worked out very very well. So here, we had to thoughtful divestitures with a lot of care around.
Our teams in our group and.
And we think the homes are better for them where they are.
When you get into other assets and I get asked this question regularly and because CMS is less scale than the others of course, it's always on the question Board.
In terms of shareholders and all I can say is if I made a divestiture in another piece of the company.
It could be a year could be two years could be five years could be never what I will promise you is that well, we're managing our assets, they're going to be properly manage properly careport, we're going to focus on the margin we're going to focus on the people, we're going to pay our people well look after them well serve our.
Customers that have served in those markets, where many many years and if there is an opportunity for a divestiture that makes sense.
Were I hope you can see we're we're not afraid of divesting in asset if all the right pieces come together and.
All I can say is on aerospace and defense and the TMT swap those pieces did come together and.
And therefore, we were able to execute.
Next question.
Our next question comes from Ashish Sabadra with Deutsche Bank. Your line is open.
Hi.
Good morning.
We saw some pretty robust margin expansion looking financial resources.
You also talked about some onetime investment in the fourth quarter can you just provide some more color on those investments and then maybe just going forward. The margin profile has been trending much better can you just talk about the potential for better margins going forward. Thanks.
Right.
Well I'll start and Todd if I leave some note I guess I just want to really.
Once again, just put the line in the sand.
100 basis points since we merged.
We've been off operating off of 100 basis points of margin expansion and that both in internal.
Discipline and an external promise so that's what we've made up the discipline is for our teams to grow at 5% to 7% and half of that 100 basis point will come from revenue growth and the other half has to come from them organizing.
Their strategy Accordingly, and we feel that we can move to mid Fortys margins over the next four or five years.
Many occasions, our teams outperformed 100 basis points margin.
But what my motivation to my internal teams are is delivered the disciplined for the 100.
And improve your investment capacity above that and Thats the mantra Thats, how we run the firm that's how all our teams operate.
It works very well and I think it's a fair distribution of our efforts to shareholders and our team in terms of reinvestment and that's how we run the firm.
Next question.
Our next question comes from George Tong with Goldman Sachs. Your line is open.
Hi, Thanks, Good morning, your guidance for free cash flow conversion from EBITDA was updated from mid Sixty's to 60% can you discuss why your free cash flow expectations are more muted now.
Todd you want to add.
Yes, I talked about this on the call. That's the one time tax payment of $90 million in Q4, we'll reduce conversion by five points.
We don't see an impact on the forward conversion.
Got it thank you.
Thanks, George next question.
Our next question comes from Joseph Foresi with Cantor Fitzgerald. Your line is open.
Hi, This is drew coming on for Joe just curious if you could talk about the acquisition pipeline and if you're seeing plenty of opportunities still out there.
Well there is love, there's yes, it's always lots of opportunities not necessarily.
Price, where we would be able to make them work in terms of our own return on invested capital.
So.
You know its interesting as Weve I would say the year. After our merger we had lots of work to focus on integration.
As we went into year two we saw a lotta lots of places, where we had gaps in our strategy as we look forward in our scaled verticals and we made a few.
No.
You know acquisitions I would say right now we're in the strongest point, we've ever been to support consistently our organic growth targets and.
I don't I don't ever wake up in field. There is something we have to do.
Were at the time of the merger, we all felt as a team that we had some gap.
Around alternatives around being on the dealer floor around expanding and diversifying downstream our energy.
And natural resources and I think we've done.
An excellent job of filling those gaps broadening the diversification and consistently delivering the organic growth. We say, we're going to do and I think if I look forward I just feel really.
Comfort in that you know mid single digit revenue growth.
And you know how I think on that site sometime I wouldn't be upset if we're at four and I wouldn't be bragging. If we were at eight or nine my view is we've got a strong up support very diversified for five to seven and I think we can consistently deliver that for the next several years.
High single digits autos mid single digits.
Energy and mid to upper now in financial markets.
With the alternatives and IPO piece of the puzzle so that makes me.
Feel pretty confident that we don't have to do a lot of acquisitions bought.
I like the fact that we have $500 million to $750 million in potential acquisition capital in the framework and we're going to analyze those bolt on acquisitions on a regular basis, we're going to be in the no. We're going to know what's going on if we divest will create additional capital.
And then we'll either moved to the upper end of our capital allocation framework buyback, we may de lever short term.
For a an opportunity we see forward, but expect discipline expect the framework to be in place and.
We.
We are I think we're in a really good position.
To focus on our scaled verticals and grow those accordingly.
Next question.
Our next question comes from Toni Kaplan with Morgan Stanley . Your line is open.
Thanks, so much.
Transportation you mentioned.
Advertising slowdown.
Just wondering.
That is temporary.
You see that.
A couple of quarters.
Largely done.
Really what what's what's sort of.
Going.
Thank you.
It's a good it's a good question Tony I kind a.
And Edwards here with me today, so it's a one week.
We talk about regularly.
We had a strategy in digital marketing that was very aligned.
To the social media platforms, Facebook interest, Google et cetera.
And our teams.
Did a great job and it gave us a strong growth lever.
For the last several years.
On the back of the Cambridge, Analytica and some of the changes haven't the middleman type relationship into the social media platforms is one that.
Has had a complete re adjustment and so we've had to check back and then start to grow again.
My My my view along with the automotive team is is that they use.
Building audiences from.
A comprehensive registration data and we have the most comprehensive comprehensive data of anybody coupled that with our carfax assets in our mastermind assets.
We really we have all day.
The ingredients to cook up to bat.
Audience for the best strategy and campaign in the marketplace and so my personal view.
Which is shared by Edward and he may want to add to this in a moment is that.
This is a growth driver of long term and we're well positioned to.
Go after that growth.
But we've now had.
Three four quarters of that realignment up your strategy to change how you position and enter into the.
Social media arena, but we do.
If you take our audiences versus an audience still purely from social media without registration data a more based on taste and preferences of search we outperform that 50% to 100%. So we are very very strong and no reason, we shouldnt grow and I can't wait to get on the call and.
They automotive had a super strong quarter on the back and digital.
Marketing I, just haven't we haven't been able to save for three quarters, and you're right to call. It out Edward do you want to add.
Nothing really to add other than we have the best audiences. Our customers know we have the best audiences, but we are pivoting our business model and the way, we monetize those audiences and thats taken a few quarters.
Thanks, Toni next question.
Our next question comes from Andrew Nicholas with William Blair. Your line is open.
Hi, good morning, its actually Trevor Romeo in for Andrew Thank you for taking our questions.
I think Lance you mentioned that you've already seen some early revenue synergies from the agribusiness group.
Can you just give us a sense of the initial customer response, there and more detail on what's driving those synergies. Thanks.
Yes, so it's really the as you go down into the agricultural.
Business of course, it's the refined chemical products that are feeding into the.
Into the customer base.
And what we found.
Some of the really like I'm talking within days of our teams coming together and visiting.
Customers were up with us being able to build out a couple of really interesting chemical based consulting projects.
From.
Customers have.
Of.
You know the acquired company and ourselves and so I see a lot more of that as we look forward again like us selling a DNS are selling our noncore TMT.
Asked us receiving the.
The agribusiness from Informa. It's the same thing it was non core to them. So all of a sudden.
They are inside a firm that has customers that look like their customers.
Which is exciting to people that talk there lingo.
Chemicals, phosphates and potash and all the.
Feedstock into.
Into.
Agricultural product bio fuels.
You've got consultants in the space, you've got researchers and you've got people that know how to price and build benchmarks and indices. So it just is the enthusiasm of the marriage of the assets and.
For the customer base that we're visiting together and so the teams had some really nice early wins and I wanted to call them out on the call. Thank you.
Next question.
Our next question comes from Joseph.
This canaccord your line is open.
Oh, Hi, good morning, Thanks for taking my question.
Just a follow up on the agribusiness.
This year.
Obviously, the there's good synergy on on the chemical side.
Relatively small business now for you but.
Very large industry does.
Does does this acquisition provides the capability to perhaps.
Over invest in this area and move into areas, such as commodities and other things away from chemicals and more on the on the output side rather than the input side. Thanks.
Right no good good question and.
Exactly what were thinking when we did this asset swap is that.
If you if you think of agriculture as a.
You know a world a world need and then you look at.
The need for the fertilizers crop protection, the resultant bio fuels et cetera.
No. This is a big big Tam and so when we modeled out the Tam.
For the agribusiness it was substantively larger we we've taken in a business with approximately $40 million of revenues and so I think if you if you're if we're sitting here in three to five years and we don't have more than 100 million I'd be really.
I'd be disappointed that we didn't invest we didnt build the revenue synergies, we didnt take the the power of our global positions and apply it to agriculture, because for a company to earn.
100 million in revenue out a four or $5 billion of revenues in agriculture.
It just seems really small for the Tam So I'm with you feed our capabilities from.
Upstream or mid to downstream products in dagger culture make sure we're capturing all the input.
Benchmarks.
No signals factors supply.
And demand characteristics of all the inputs and outputs.
I think there is a lot for us to do there and it's a big market. So.
We have high hopes.
It's not.
I can say that Thats just in the mid single digit forecast of our billion dollar energy.
Business, but it is definitely a bright spot that we think should be upper upper single digits to.
Double digits in the early years of.
Post acquisition.
Next.
Next question.
And I'm currently showing no further questions at this time I'll turn the call back over to Eric Boyer for closing remarks.
We thank you for your interest in I just market. This call can be accessed via replay 85559, 2056 or international dial in 404 by 373 406 Conference I'd 4399, Athree one beginning in about two hours and running through October Tobar first 2019. In addition, a webcast will be archived for one year on.
Our website at Www Dot Hs market Dot com. Thank you and we appreciate your interest in time.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.