Speaker 1:
From the Library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're Inside the ICE House. Our podcast from intercontinental exchange on markets, leadership, and vision and global business, the dream drivers that have made the NYSC an indispensable institution of global growth for over 225 years.
Speaker 1:
Each week, we feature stories of those who has plans, create jobs, and harness the engine of capitalism right here, right now at the NYSC and at ICE's 12 exchanges and six clearing houses around the world. Now, welcome Inside the ICE House. Here's your host, Josh King of Intercontinental Exchange.
Josh King:
We're just wrapping up those whirlwind weeks that hit the financial markets every 90 days, earnings seasons, when every public company reports how they're fairing and what lies ahead for the coming months. Intercontinental Exchange, just like the other 2,300 companies listed in the New York Stock Exchange, held their earnings call a few weeks ago. The numbers were big, revenue in the quarter at 1.3 billion. That was up 4% over the last year with consolidated net income attributable to ICE of 484 million, a profit of nearly half a billion dollars in 90 days. Imagine that.
Josh King:
Certainly tough to imagine for Jeff Sprecher, the founder of this outfit back in the late '90s when he was sleeping on sofas as he plied the country looking for backers for his idea to make power and energy markets more transparent. With time and success comes challenges every business faces, more employees, more offices, more competitors. How do you stay ahead of all of that and how do you create a company with core values built to grow and evolve over the long term?
Josh King:
That was one of the topics we explored a few weeks ago on this show when Levi Strauss' CFO, Harmit Singh, stopped by on the company's IPO Day here at the New York Stock Exchange. Harmit spoke at length about how he partnered with the company's CEO, Chip Bergh, to engineer Levi's turnaround by focusing not just on the balance sheet, but bringing a new culture to the company and laying out a tech-focused strategy for growth going forward.
Josh King:
I've often wondered about the role of the CFO, the bottom line focused straight man or woman keeping the CEO's dreams in check to ensure that when it comes to profit and loss, the L doesn't get ahead of the P. Every since the passage of Sarbanes–Oxley, it's the CFO's name that has to sign off on the numbers, but a guy like Harmit Singh in Levi's, he came across as much of a creative and a dreamer as anyone on the podium that day.
Josh King:
Our guest today, Intercontinental Exchange's CFO, Scott Hill, joined ICE in 2007 not long after that company's November 2005 IPO to help shape the company's growth and along the way bring some Texas swagger to the growing firm. To me, Scott shares with his CFO counterparts like Harmit the same commercial outlook that the best leaders employ, how to listen to your customers, how to give them what they want, and how to get the rest of the company's employees on the same page.
Josh King:
As we move rapidly through 2019, there's no better time for ICE's CFO Scott Hill to take his seat here Inside the ICE House and report on how things are shaking out so far this year and give us a look at what we might expect in the second half. That's right after this.
Speaker 3:
Now a word from Matthew McRae, CEO of Arlo Technologies, NYSC ticker ARLO.
Matthew McRae:
Arlo is a next generation smart home company that provides a super simple do-it-yourself home security solution with up to 48% market share and class-leading internet technology. We're looking at new products and even growing our national.
Matthew McRae:
The NYSC obviously has a tremendous history. The way that they actually bring the stock to market there's a human element that stabilizes the market and you could see that in the stock looking in today. Having a strong partnership to actually bring Arlo as a public company was really important to us. We only get to do this once.
Josh King:
For Scott Hill, the go big mentality has been a constant theme. A native of our nation's largest state in the lower 48 from Longview, Texas, he graduated from UT, cut his long horns at IBM and today oversees all aspects of ICE's finance and accounting functions, treasury, tax audit and controls, business development, human resources, and IR. He also leads ICE's global clearing operations, which, by the way, trading and clearing accounted for 49% of of our consolidated revenues of 2.4 billion in 2018. Scott, welcome Inside the ICE House.
Scott Hill:
Thanks, Josh. It's nice to be here.
Josh King:
How's it going?
Scott Hill:
It's going well.
Josh King:
What brings you to town this week?
Scott Hill:
Investors bring me to town. We often after we get done with our earnings calls, we'll go out on the road, Jeff, Ben, Lynn, and I, and talk to our investors here what they thought about the quarter, get their reactions, figure out which messages made it through, and which ones we need to hit on a little bit more.
Josh King:
You haven't had any of those one-on-one's yet, but you've read a lot of their notes. How did it come through in the first quarter for you?
Scott Hill:
I was really happy with the ultimate summaries that the analysts put together on the quarter because I do think the messages came through. We had our second best earnings and cashflow quarter ever in the first quarter. That's in a world that really is more of a soft trading and volume environment. So we've consciously constructed our business to have some more annuity-like revenues that provide stability to the company. We've diversified our business, 25% in fixed income, 40% in commodities and rates, 20% in cash equities. I think the analysts really saw the value of that business diversity that we've consciously constructed over the last 10 or 12 years.
Josh King:
It was a tough day to actually come out. I think the market was a little spooked by what might be going on with negotiations with China and what was happening in Iran. Also, ICE had had this pretty precipitous run up from $74 a share surpassing 80 before earnings, maybe a little bit of selling on that news.
Scott Hill:
Yeah. We weren't that far off, but we did announce into a relatively difficult market. Frankly, Thursday and Friday were both difficult days in the market, but as you mentioned, we did have that run up going into earnings. I think that was investors looking at the softer trading environment and asking themselves which are the companies that have taken the actions to protect them in those types of downturns, which are the ones that we look to their countercyclical. I think people started to, again, think back that that's the type of company that ICE's constructed and, again, I think you saw it in the results and to a large extent has validated what those investors anticipated going into earnings.
Josh King:
If you look at our peers thinking back over the last year, there are a couple of days over those 12 months when you saw ICE's stock take a little dip perhaps on news coming out of Washington, D.C. of all places. Does that frustrated you and the team in Atlanta?
Scott Hill:
It does in the sense that we really can't control the headlines. When we've been a company that's been subject to headlines, pretty much every since I started 12 years ago, in the early days it was headlines on the price of oil or hurricanes blowing through that were going to affect the price of natural gas. These days, it's European regulation or something as you just alluded to that's coming out of Washington, D.C. Again, though, I think our management team does a really good job of thinking about the long-term and not the short-term. So when the headline comes out, we just put our head back down, go back to work, and know that if we deliver the results ultimately the valuation of the company will reflect it.
Josh King:
Put your head down and go back to work. I'm trying to understand where that ethos might come in a leader like Scott Hill. Longview, Texas sits in the middle of triangle between Texarkana and the Arkansas border, Tyler and Shreveport, Louisiana. I've been to Longview once, brought President Bill Clinton there on September 29th 1996, got the Kilgore Rangerettes to entertain the crowd before the perennially late president showed up. Classic downtown square. What was it like growing up there?
Scott Hill:
So Longview is a relatively large town in East Texas, which is to say it's a small town but big in the area. So we were probably 70,000 people in the town. Our football games on Friday nights, though, would probably have 6,000-7,000 people in the stance if you've seen Friday nightlights. I lived it for a big part of my high school life. My dad was a football coach there, so all aspect from the coaching part of it to the playing part of it.
Scott Hill:
The thing that you mentioned about the toughness, so you grow up in a small town in East Texas, you work for everything. If you want to get out of that small town, you have to make sure you put in the effort, you put in the work because otherwise nobody comes in to Longview, Texas and hand you your dreams. You really have to go attack it and go find your dreams.
Josh King:
You mentioned your dad was a coach. I think both of your parents were teachers. You came to ICE knowing very little about clearing and trading. Did having teachers as parents implant the gene for learning and picking up complex concepts with this?
Scott Hill:
It clearly helped, but I think more than anything else with my parents as teachers, what they effectively taught me was if you don't know something, you can go learn about it. Again, you have to put in the work. You have to make the effort. They also instilled in me a great amount of confidence that if you're willing to put in that effort, if you're willing to go learn, if you're willing to go take chances and be confident in yourself, the opportunity to succeed will exist.
Josh King:
What did you want to be when you grow up?
Scott Hill:
Right up until I got cut from the University of Texas baseball team my freshman year I was going to play professional baseball.
Josh King:
Another little fact about a town like Longview, the Big Inch pipeline began there. It was built in 1942 to support the war effort sending 261 million barrels of crude to the East Coast during the war at the time, the longest petroleum pipeline ever built in the world. Let's listen to a news reel from the time.
Speaker 6:
Constructing an oil pipeline from the Midwest to eastern points in the United States. Engineers are forced to cross many and mighty river. Big Inch as the line is called now has another waterway to hurdle. So they plant tons of dynamite to blast a bed for the pipe beneath the river's bottom. Now, hold tight and watch for the explosion.
Josh King:
Scott Hill, was there a certain sense of appreciation for what oil could do to win the war and change the world as you grew up perhaps more than folks in the East Coast can understand?
Scott Hill:
Yeah, I do. I don't think people consider East Texas a lot, generally, but it is actually a birthplace of oil. Till you played the clip I had never really put it together. The pipeline out of East Texas for me led to the Northeast. There's no question that oil then and I would argue now is still the most important commodity that exists. It's so much more. People think about oil and gasoline to drive cars, but oil is critical to a lot of the petro chemicals, plastics, that we all use every day.
Scott Hill:
It was fundamental to the success back then. I think it's fundamental to emerging markets today. As we look for cleaner alternatives, I see a long-term place for oil in a lot of places in our economy locally and globally.
Josh King:
So from those Friday nightlights in the baseball diamonds of Longview, the next stop is going to be the University of Texas at Austin. Did Austin seem then like the big city when you showed up?
Scott Hill:
Austin was definitely the big city, and it's a big university. Even when I was there, it's probably 50,000 people. So coming from a small town and I had a lot of friends that did have this happen, you go to a big place like that and you can get a little bit lost. The key for me was I guess number one I followed my girlfriend whom I had met in the eighth grade and subsequently married and remained happily married to to the University of Texas. Together with her around the sports, we made it small, and by making it small, we were able to benefit from all of the great opportunities that university provides, but at the same time have a really unique experience while we were there.
Josh King:
So John Akers is still the CEO of IBM in 1991 when you traded in your horns, eventually giving away to Lou Gerstner in 1993. Here's an ad that ran on network television around the time you showed up at Big Blue.
Speaker 7:
IBM is taking your personal computer somewhere it's never been before because IBM now brings you a remarkably affordable computer with the power you need to bring work home, yet it's also so exceedingly easy to use. It even teaches you how to use it. So here at last is a computer for the whole family that's simple to set up and comes right out of the box with so many popular options and software already included. Presenting the IBM PS1, a new kind of computer for the home, the kind you've been waiting for all along. With PS1, IBM brings it all home.
Josh King:
The PS1. Chart your path, Scott, through IBM for us. It took you to Paris and Tokyo. Your hometowns are getting bigger than Longview or Austin.
Scott Hill:
Yeah. So it's funny. When I joined in '91, and the PS1 I think is a really good example. IBM to some extent had lost its way and had become really inward focused. John Akers had grown up at IBM, very smart man obviously to rise to the CEO of IBM, but, again, a lot of inward-facing culture. We were in the middle of the biggest exercise in finance and accounting. When I started, it was trying to figure out how to implement a transfer pricing system because people didn't work together. People were paid on their own units results. So it wouldn't focus on IBM and it wouldn't focus on the customer. That PS1 ad, if you go back and think about it, what they were really advertising was a computer built for a business that they wanted you to put in a home. So they got out maneuvered on that.
Scott Hill:
Mr. Gerstner came in and I had the opportunity to work with him only a little bit, but our careers paralleled each other, albeit very different levels. He was a required and necessary shock to the cultural system. That's one of the things I think at ICE made it so successful and one of the things at IBM that was such a challenge was the culture. He was able to come in and change a lot about that and get people focused back on the customer, focused on the parts of the business that they were really good at.
Scott Hill:
At the time, one of the big things was moved towards the services business. IBM has always been in services, maintenance of the computers they sell, et cetera, but at the time, they were starting to outsource the technology management for firms either on an IBM side or on their own side. They were also moving more and more into the consulting part of the business.
Scott Hill:
So I was very fortunate a couple of years in to be given the opportunity to move over into that services part of the business. People don't necessarily think of IBM as a particularly fast grower, but in those days, the services business was growing 15%-20% a year every single year. We were innovating for customers. In fact, Ginni Rometty, the current fantastic CEO of IBM helped really bring the Pricewaterhouse Consulting Group into that services business.
Scott Hill:
So I had the good opportunity to work my way through the services business. It took me to New Jersey for a year where I worked on site at Lucent Technologies, a company we had outsourced. It enabled me to go to Paris for a couple of years, where I looked at the more traditional maintenance and services part of the IBM business. Then over time as that services experience and the global experience started to pay off, I came back and moved down to Armonk and had an opportunity to work closely with Sam Palmisano and Ginni and many other great executives at IBM, and then finally had the opportunity in 2003 to move over to Japan, which was a fantastic experience as well.
Josh King:
Yeah. So Paris and Japan and these two experiences that you had, I mean, we're talking about the move from Longview to Austin, and then I think probably some of your first international forays. What did immerse in yourself in an international culture allow you to learn from, grow from, be able to bring that to what would be your next career step?
Scott Hill:
It's a great question. You hit the keyword, and ultimately it is culture because you do in each of the different situations, whether it was a Texas boy moving to the northeast or somebody from the United States moving to Paris or into Japan. What I found is you really had to take an opportunity to learn about the culture, to learn about the local business practices, to learn about the way things get done. The least successful approach that I saw in all the years I spent overseas was I'm from the US or from corporate headquarters and I'm here to help. That translated into you don't have any interest in our local problems, in the way we go about things. You're just here to tell us what to do.
Scott Hill:
So as opposed to that, I took the time to build relationships, to really learn and understand the way the local business ran and then work together to try and build teams to deploy those things that I had learned that could help successful improve a business. I think understanding the culture, being able to and willing to work more collaboratively with the people on the ground certainly was a life lesson. I mean, you look today, I think a couple of those things, the ability to collaborate, the ability to communicate, the importance of culture, all of those things I think have been critically important to the success of ICE over the last 20 plus years.
Scott Hill:
So I think one of the things that's hopefully allowed me to be successful in this role are the lessons that I learned in some of those international assignments in my IBM days.
Josh King:
I mean, still on some of those lessons from your IBM days, one of the people that you and I have in common is Randy MacDonald who ran human resources at IBM for many, many years. Among the very broad portfolio that you have at ICE is HR. So you can talk about the lessons from people like Sam Palmisano and Lou Gerstner and Mr. Akers, but the titanic functional leaders like Randy MacDonald, what are some of the lessons that they left with you, Ginni Rometty and some of your colleagues?
Scott Hill:
Yeah. So look, I think the thing with Randy, Randy was very focused on people development and the importance of consistently having a deep bench succession plan, skills development opportunities move people around to different business units, to different countries. Again, my words not his, but I think Randy had a view that for IBM to continue to be successful, the HR function was critically important in developing the future leaders. That's where I had the good fortune to work with Randy was in some of the development courses that he and his team designed.
Scott Hill:
You asked about Ginni. I had the good fortune to work with Ginni in the services business. When IBM, and I don't remember exactly when this was, but some time probably early 2000-2001, IBM bought the Pricewaterhouse Consulting Group. This was a time where the regulator for trying to break apart I think it was the big six at the time and they're consulting from their accounting, and IBM bought the consulting.
Scott Hill:
It was a very different culture. It was a culture of big expensive lunches and free coffee and free everything else in the office. At IBM, it was a little more tied down. Ginni did a phenomenally good job of merging the cultures. I would say that that deal doesn't work without her leadership, with her ability to walk with one foot on the IBM cultural side but at the same time to understand where those Pricewaterhouse consultants were coming from and their background and their culture that had made them successful. It's why IBM wanted to buy them. So she did a really good job. What I learned there again is take the best of both cultures and don't try to eliminate one and you'll end up with something better.
Josh King:
So Scott, that brings us now to 2007 and your arrival at Intercontinental Exchange. You had more than 16 years under your belt at IBM. It was the middle of this Palmisano years. Why get off that train and board ICE then, a much smaller concern?
Scott Hill:
Yeah. So look, I mean, there are professional reasons and there are personal reasons. I am a Texas boy. I never quite got used to six months of winter in the northeast and really was starting to think about trying to get a closer to home. My parents still live in Texas. My in-laws live in Florida and in Texas at the time. So I was thinking about getting home. Professionally, I could see my career at IBM continuing. I was on a good path, but the reality was I was probably seven to nine years away from being considered as a CFO at IBM, and I really wanted it now. At 38 years old, I wanted to go for it now.
Scott Hill:
So I started to look around for CFO opportunities that would move me a little bit closer to home. I tell my son all the time, I'll take lucky versus good, but you had to be good enough to put yourself in a position to be lucky. I got lucky to stumble across a company called Intercontinental Exchange, a visionary CEO Jeff Sprecher who in the first breakfast where I think we're supposed to meet for an hour, we ended up talking for three or four hours. It was clear he had the vision. It was clear that he didn't have a moment's pause for taking a first time CFO into the role because he valued the experience that I brought more than me having been or not been a CFO. It just felt like the perfect fit. It's hard to believe. 12 years had gone past, had gone by really quickly. It's been a lot of fun.
Josh King:
Did your perspective coming from IBM, which was a technology industry stalwart that was also going to be constantly under attacked from people trying to disrupt it to ICE's startup atmosphere that you're talking about Jeff help you understand how to best outperform and eventually acquire or replace the entrenched competitors?
Scott Hill:
Yeah. So it's funny because I actually looked at it as me having grown up in a growth-oriented part of IBM. Again, if you go back and think about the time that I was there after the first few years, '95 to '05, the services business is booming and I loved it. I loved the innovation of it. I loved trying to compete, and I really liked the opportunity where there weren't enough good people to do all the work that needed to be done. So we were given the opportunity to do more in the earlier point in our career.
Scott Hill:
So in looking at ICE, I saw the same opportunity. I knew there was a field there. I knew there were entrenched incumbents, but it was clear to me that Jeff had a vision on how things could be better. He sold me on that vision and, again, it was very clear that he was looking for partners to help him go and execute that vision.
Josh King:
You can walk us through some of the major inorganic moves that created what we now know today as ICE, but one of the biggest moves happened five years after you arrived, the purchase of this building we're sitting in today, the NYSC, everything inside it and everything connected to it and our data centers along with what comprised Euronext at the time. Was there anyone who said, "This is just too big to swallow. There's too many mouths to feed. This whole thing is just all too human to be ICE"?
Scott Hill:
Absolutely. I think the biggest concern that we had was ultimately could we go in and acquire a company that was three, four times our size in number of people, and could we align it with our culture. We knew that we could combine the businesses. We knew that we could successful IPO Euronext, that we could merge technology platforms on the life business. What we didn't know is could we harness the energy of the great people here and align it with our culture. Not too dissimilar to what I suggested I saw in my early days at IBM, I think this company had become a little bit inward-focused. I think it had started to take for granted, "Hey, we're the New York Stock Exchange. Of course, people will come list here." It almost seemed like it was viewed as a right.
Scott Hill:
So we did worry a bit about that, but, again, we thought we had a plan. I'll tell you when you come across people like Stacey Cunningham, Lynn Martin, Michael Blaugrund, people like that who really got it, their reaction as we came through wasn't, "Ah, these guys are breaking a lot of glass," it was, "Finally. Somebody is doing that. Somebody said that. Somebody asked that question. Somebody is giving me permission to go do what I wanted to do for a long time, and they've empowered me to go out and collaborate with our customers, to innovate on technology."
Scott Hill:
To some degree, there was a bit of self-selection in the people that stayed here. The people that are still leading the NYSE today were the people that saw that vision. By the way, similar to life, we now have Finbarr Hutcheson, who joined us with the deal running ICE Clear Europe, Stuart Williams running the ICE Futures Europe Business. So a lot of really good leaders that just needed to really be set free to go and drive the business, and that's what they're doing today.
Josh King:
You mentioned Stuart. You mentioned Finbarr. Tell me about the ICE that's been built since then. The ICE built on the economy's insatiable appetite for data and the network that it represents.
Scott Hill:
Yeah. So the reality is we've always been in the data business. When I started 12 years ago, about 12% to 15% of our revenue was in data, but to a large extent, we ineloquently talked about it as the exhaust of the trading.
Josh King:
I remember Jeff saying that many times.
Scott Hill:
Yeah. What I don't think we quite appreciated at the time is that exhaust actually informed the next trade because it let people know where price was. It let them know depth of book. It let them know all the things they needed to know to manage the risk that they were trying to manage.
Scott Hill:
I really think as we made NYSC acquisition that's really where that point started to get driven home even further because at that point, we went from 12% to 15% of our revenues to around 25%, and a really good business here at the New York Stock Exchange in the ETF space. It was very clear that that's where the industry was headed, and that's based on data. You build an ETF with the data of the constituents that are a part of that ETF.
Scott Hill:
I also think it gets back to a little bit of what does that data really represent. As we looked around at the next market, we had transformed energy markets, we had transformed CDS markets. As we looked around the next market, whether it was an ETF or electronic trading that really appeared poised for an analog, the digital shift was fixed income.
Scott Hill:
We could have come at it through our traditional means, which is, "Hey, we've got a trading platform. We've got a clearing house. Let's launch trading of fixed income," but we stepped back and asked ourselves, "Where does price discovery happen for bonds today?" The reality was that that price discovery happened at IDC, where we-
Josh King:
Interactive Data Corp.
Scott Hill:
Interactive Data Corp, that was the business we acquired in 2015. We talked a lot about that being the acquisition of data, and it did push data to being more than 50%, but that deal was really about acquiring a business, where the price discovery for fixed income occurred, 2.7 million securities that we priced 13 million securities, where we sell reference data. As you look at a market that is in the process of going from analog to digital, we're starting that at, yes, from a data standpoint, but really from a price discovery standpoint, and we think the relationships that that built up with our institutional customers along with the product knowledge will enable us to now take BondPoint and TMC and our Creditex bond business and really put that together to drive the electronification of the bond trading market.
Josh King:
So after all that, Scott Hill, here we are in 2019. Every CEO and CFO have a secret in how they handle earnings calls. A company that I once worked for would record their statements days in advance and then when the time came for the call, they just sit back and press play. How do you prep for a call?
Scott Hill:
So what you described was I had a lot of experience working at IBM and that's how it ran. We would record the comments. Mark Loughridge was the CFO when I was there. We'd record them. We'd listen to them. We'd say, "Oh, you sounded sad there," or too happy and we'd have to go back and edit it. It was a process. Then just as you said, we'd push the button and we'd sit back for 20 minutes and wait for the Q&A to start.
Scott Hill:
I think it worked. Mark did a great job. John Joyce before him did a great job and it still. It's run by Patricia Murphy, who's a fantastic IR Executive. So it's still working for them, but ours is I guess is, too, a lot of things at ICE. Ours is a little less formal than that. We, typically, a week or so before the call, we'll take a look at a script for our opening remarks. We record our opening remarks as well.
Scott Hill:
Jeff will typically take his portion of it and I will take mine, and if you will put the language into our own words, our own voice. Then we'll together in a room with some of our colleagues and we'll read it, and we'll get their feedback on it. We'll go back away for a couple of days and tinker with it a little bit more. We'd get together. We sit in a room and it's usually the day before earnings. We read it again and go through one session on Q&A, "Hey, what questions do we think are coming? Who's going to answer which questions? What are the key messages that we want to make sure we get out?" Then we show up the next morning. We turn on the call. We read our scripted remarks and then we sit back and do the Q&A and figure out what our investors want to know and hopefully give them good answers to the questions.
Josh King:
Some of that Q&A for the first quarter when the analysts piped up and they were queued up and you took them one-by-one, a lot of them focused on softer volumes seen across the industry. Why is that in your view?
Scott Hill:
Well, it's still half our business. I think you mentioned earlier in the session about 49% of our business is our trading and clearing business, so it matters. So it's also the most transparent part of our business. If you want to know how that half of our business is doing, you can know today and you can know tomorrow and you can know the day after that because all of our volumes are out for the world to see every single day. So it's an easy part to track. Again, it is a higher incremental margin business, and so those revenue dollars are a big driver of cash and earnings, and so appropriately a focus.
Scott Hill:
I think there was also a lot of focus because people were looking at the diversity of the products that trade on ICE. I mean diversity of products, but also geographic diversity. So if you think about it, we're not US oil. We're global oil, and that could be Brent. It could be Dubai. It could be any of the 500 products that hang off of Brent. It could be diffs between Brent and NWTI. We're natural gas, but we're not just US natural gas. We're TTF in the Netherlands, and we're NBP and the other hubs. Frankly, TTF is slowly but surely becoming really a global benchmark as natural gas globalizes.
Scott Hill:
We are the European emissions market. Really, I think one of the things the analysts were trying to understand is how can you be in a quarter where volumes are down 12% and yet your energy revenues are roughly flat. It's really the diversity of the business that we had that distinguished us. Again, that really came out in the summary analysis or the summary reports that the analysts put out the day after the earnings. They saw the value of that diversity in our volume-based business. So even in a softer volume environment, we were able to generate better than typical results.
Josh King:
I want to quote Jeff Sprecher directly from what he said on the earnings calls. He said, "Our first quarter performance demonstrated the strength of our model highlighting the inherent value of a diverse and balanced business mix," as you were just saying, Scott. "Despite softer volumes," Jeff goes on, "across our industry, we grew revenue, earnings per share, and free cashflow, and we returned nearly 600 million in capital to shareholders."
Josh King:
I want to hone in on that phrase just again, a diverse and balanced business mix. Take me back 10 years or so to 2009 right in the smack middle of the financial crisis. Could ICE have made the same claim back then?
Scott Hill:
We were building our way there, but absolutely not in those years because if you go back then, I mean, we had bought the New York Board of Trade in 2007, which it diversified us from energy to energy and ags and a little bit on the financial side. We had completed our acquisition of Creditex, which for some people was a bit of a head scratcher, "Why is ICE an electronic trading and clearing platform? Why are they buying a voice broker?" but what we were really buying was the product expertise because we saw a world where our clearing capabilities we thought could bring necessary transparency to the CDS market and, frankly, that market needed it if it was to survive and now we're the largest provider of CDS clearing services in the world.
Scott Hill:
To some extent, it was energy, it was ags, it was trading and clearing, it was moving towards clearing in CDS, but not what we are today. I've heard the phrase, "You never step in the same river twice." I would argue, I haven't come to work at the same company two years in a row in the 12 years I've worked here because, again, energy and then energy and ags and then CDS, and then interest rates, and the New York Stock Exchange, and then the big push into data. So no. We back in '08-'09, we're definitely not able to point to the diversity that we can today.
Scott Hill:
Again, I think it's important that people understand that was a conscious effort. This is a business that we consciously constructed to be diverse and to really demonstrate the stable revenue, the stable earnings, the consistent growth of earnings and cashflow that you saw in our first quarter results, that you saw in our 2018 results.
Josh King:
At the end of the CEO's opening comments, Scott, it's usually a bunch of platitudes before the rough and tumble the questions come in from the analysts, but this quarters, something Jeff said caught my ear. He said, "Our integrated platform enables us to drive efficiencies across our technology and operations." What's the secret sauce here? A lot of asset classes under one roof?
Scott Hill:
Well, a lot of asset classes that run on an integrated technology platform. The reality is we operate multiple exchanges and multiple clearing houses around the world and they run on one technology. So that generates a lot of efficiency. It allows for not just efficiency of the obvious, of the technology and the resources that support it, but its efficiency of process, its efficiency of aligned policy. It's not dissimilar. In the New York Stock Exchange, we're rolling out pillar, a single technology that will allow us to run all of our equity and options exchanges eventually on a single technology platform.
Scott Hill:
So when an upgrade needs to happen, it happens once. When a change needs to be made, it's changed once. This is the history of ICE, running single technology platform supporting multiple exchanges and multiple clearing houses.
Josh King:
After the break, Scott Hill and I continue our conversation about the assets and data around them that drive the modern economy and what we can expect for the remainder of 2019. That's right after this.
Speaker 3:
Now a word from Cussion Kar Shun Pang, CEO of Tencent Music Entertainment Group, NYSC ticker TME.
Cussion Kar Shun Pang:
Tencent Music Entertainment Group is the largest online music entertainment group in China. We operate the four largest online music apps, including the social entertainment part. We are serving more than 800 million users. The user experience on TME platform is extremely great. I look forward to have a long-term partnership with New York Stock Exchange. Tencent Music Entertainment Group is now listed on New York Stock Exchange.
Josh King:
Back now with Scott Hill, the Chief Financial Officer of Intercontinental Exchange. Before the break, Scott and I were tracking his journey from Longview, Texas, and it is a long way from Longview. As I mentioned in the intro in the first part of the show, you oversee ICE's clearing operations. Helping to generate 2.4 billion is no small fee, but looking at the bigger picture, how does the trading and clearing segment of ICE complement the data business and vice-versa?
Scott Hill:
So the clearing business is particularly important for our futures and options business because at the end of the day, if you and I traded a stock, we're going to largely settle it not clear because you want the stock, I want the cash. We make that trade. You get the stock, I'd get the cash. Our futures markets are really about managing the risk in the future. So when I fly Delta to New York, which I frequently do, I want to book the ticket out in time to get the best price. The way that Paul Jacobson, CFO at Delta, can price that ticket is by locking in the cost of oil, which is that's a large part of their overall cost and to the extent, he can create stability in that important cost factor. He can more confidently price my ticket.
Scott Hill:
So largely, customers that are managing risk out in time need to ensure that, "Hey, if I bought oil six months from now, somebody is going to show up with oil," or if I paid for that, that somebody is going to show up with the cash. That's what clearing really does. It steps into the middle of that trade and it ensures each counterparty that there will be oil or there will be cash at the time that there's supposed to be.
Scott Hill:
So it's really fundamental to the operation of the futures and options markets that we run, but those clearing houses can't mark a single position without a really important data point every day and that's priced because the day that you and I if we did a trade six months from now, the price was X. The next day it's something different than X, and two weeks from now, it's something different than that. So that price, that data moves. So it's critically important for the clearing house to have that data point to mark the position.
Scott Hill:
That clearing house, when it steps into the middle of the trade, it collateralizes what it sees as the risk of that trade. So from each counterparty it says, "Hey, look. Based on our statistical models, the risk of your position creates X dollars' worth of risk that I need to collateralize from you." Those risk models are all based on data. They all have to be back tested when they're reviewed by regulators and our customers. So it's vitally important that we have accurate data to feed into our risk models because the old adage, "Garbage in, garbage out," is 100% true, and when you're running a risk model for clearing houses that clear billions of dollars, you can't afford garbage in, and that's fundamentally data.
Scott Hill:
So it's data that feeds the clearing model, and those prices at the clearing house also create data that as I said earlier then inform that next risk management trade that our customers may want to make.
Josh King:
Some big news from ICE clocked in just as the quarter announcement was about to go out. It was hot off the presses. ICE wrote a check for $345 million to acquire a Utah-based company called Simplifile. What's Simplifile, Scott?
Scott Hill:
So at its simplest no pun intended form, Simplifile is a network throughout the United States that allows mortgage documents to be filed in local counties. So you can think about it the next time you write a mortgage, as you sign that mortgage, those documents are going to need to show up in a county office somewhere so that it's on file that Josh King has a mortgage on this house, in this property, and probably you'd think of all the documents you do around a mortgage, a credit check, a title document, et cetera. So Simplifile is the plumbing into counties that represent 80% of the population in the United States.
Scott Hill:
I think what you see with it is not dissimilar to what you saw when we finalized the acquisition of MERS towards the end of 2018. Again, it's a little bit different in that MERS is the database where 75% of the mortgages in the United States are registered, but in each of those instances, it's the plumbing of a market that today is very analog in a world that's very digital. So we believe that there is an opportunity. Simplifile had this vision. At MERS, we came in and rebuilt that database. We believe that by positioning ourselves in the plumbing we can, and the connectivity, by the way, in that plumbing to thousands of title agents and lawyers and servicing agents and mortgage companies that through that plumbing, with that customer connectivity, we can help a still relatively inefficient market become more efficient.
Josh King:
I mean, it seems like a playbook we've seen before from this company.
Scott Hill:
It is our playbook. I mean, it's what Jeff and Chuck Vice did when they started ICE 20 years ago in the energy market. Jeff was looking for a place to buy and sell his power, not to start up a trading exchange, but he looked and thought, "This is crazy." We're moving to a world where this is happen on a screen and there's not a screen. So he built the screen.
Scott Hill:
I talked earlier about the CDS business where I can remember in '08 watching CNBC and people running around with their hair on fire thinking the world was going to end because it's something nobody had ever heard of called CDS. The reality was the CDS wasn't the problem, the lack of transparency was. So we came in and we transformed that market with clearing.
Scott Hill:
I mentioned earlier fixed income. Again, we're looking at a market going analog to digital. We made a big bet with IDC back in 2015 and now last year, a billion dollars on two trading platform to really facilitate that. Simplifile immersed at the beginning of a similar strategy in the mortgage space, and it is a playbook that we've run, run well, and run successfully.
Josh King:
I mean, you mentioned fixed income. Those two companies were bond point and TMC bonds. Yet, there had not been much written about it or talked about the electronification of the fixed income space. Is the world just waking up to the fact that the corporate and municipal bond space is still somewhat stuck in the 1990s ready to leave the telephone behind and get fully electronified?
Scott Hill:
I think there's some truth to that. I also think there's a large element of some of the capital changes that happened after the crisis. Prior to that, a lot of the large banks and financial institutions would carry fairly large inventory of bonds. So if you wanted to make an investment, you could turn to those players and you could make that investment. In a world where those institutions are more capital-constrained, they hold less inventory, they still participate but to a lesser extent. I think particularly on the smaller sized trades, they're looking for a more efficient way to facilitate investments in fixed income.
Scott Hill:
That's where I think TMC particularly in the muni space and bond point and corp as well really will help us, really enable the transformation in that market that's already occurring.
Josh King:
Scott, you've been one of those CFOs who isn't content to just keep the books account for the profit and loss and watch over the treasury. You also run a part of the business as we've been talking about, a big part in fact. You had our clearing business. Why take on duties in addition to already a very large role as Chief Financial Officer?
Scott Hill:
So when I joined ICE in 2007, we were coming off $150 million of revenue, probably had 300 people, give or take a little bit. I was leaving IBM that I don't remember, but probably had done $90 to $100 billion of revenue and had 300,000 people. I can remember my wife Hilary looking at me and saying, "What I worry about is you're going to be bored in two years."
Scott Hill:
12 years later, I'd actually take a couple of days of boredom. It's been a phenomenal ride. One of the things that I think distinguishes ICE is not a single one of our senior leadership does only one thing. All of us wear multiple hats. So when Jeff came to me in '08 and said, "Hey, we're building ICE Clear Europe and London, the first two clearing house in 100 years. We just bought a clearing house with the New York Board of Trade Acquisition. Scott, you're leading the deal on Creditex and we're going to build a CDS clearing house. We need somebody to oversee all that. What do you think?"
Scott Hill:
I'm like, "I'm in. Absolutely."
Scott Hill:
As you alluded to earlier, I knew absolutely nothing about it at the time, but as my mom and dad taught me, if you're willing to learn, you can figure it out. Over time, thanks to a lot of really smart colleagues who did get the business implicitly and we're able to run the clearing houses. It's been a lot of fun.
Scott Hill:
So never a moment's hesitation. In fact, I would tell you that one of the many things that I'm most appreciative of Jeff is that he gave me that opportunity, an opportunity to be more than just the CFO of the company. Very proud to be our CFO, but also very proud to be associated with our world-class clearing operation.
Josh King:
Over the 20 years of the company's history, it's become actually quite a big company. How does the culture change over that time, but also try to stay faithful to Jeff's original entrepreneurial mindset when the headcount goes from 100 folks to over 6,000?
Scott Hill:
Yeah. Again, it's all about maintaining the culture. The reason that we've continued to be successful is because we continue to focus on customers and solving their problems. We continue to collaborate. We continue to clearly communicate and we work as a team. Those may sound a little bit like buzzwords, but when we develop the core competencies, if you will, of our company, there's no third-party that we brought in to do that. Chuck, and Jeff, and Mark Wassersug, and David Peniket, and David Goone, and many of the people that originally started ICE sat in a room and said, "How did we get here? What made us successful?" and we wrote it down.
Scott Hill:
So that was an important step, but more importantly, because I remember one of the things that Lou Gerstner said early days when he was trying to figure out the IBM culture was, "I can sit here and I can tell you what the culture is, but if that's not what you see, it's not what it is." So more importantly than writing it down, I think what's allowed that culture to continue is the senior leadership team whom you see and everything they do and every act they take is guided by those core principles.
Scott Hill:
So I like to think that our employees on balance see that culture every day when they come to work and importantly, we're a very flat organization. So if they don't see it, there are more times than I can count where I've had somebody show up in my office and say, "Hey, you say this. I'm not seeing it. We need to work on it." Same thing with Jeff, and Chuck, and Stacey here at the New York Stock Exchange.
Scott Hill:
So it really is that we continue to focus on the culture that's made us successful, but most importantly, we continue to live it and we expect it of ourselves and our colleagues.
Josh King:
Let's wind our conversation down, Scott, to the point at which it began back in Texas. You've watched the Texas Longhorns go from national champions in 2005 under Mack Brown through some really tough years, but now with Coach Tom Herman, they're poised to open this season in the AP top 10. Let's hear a little of Coach Herman's philosophy.
Tom Herman:
If we're going to tell our players all the time that the single greatest motivating power in the world is love and that we're going to have it spread throughout our team, and I'm going to sit in a living room and tell a parent or tell a recruit, "I'm going to treat your player like my son," then I'm going to treat your player or this player like my son. I hug my sons. I kiss my sons. I tell them I love them. I also punish my sons. There's also a lot of tough love that goes on in my house, but-
Josh King:
From Coach Herman, tough love, the good and the bad, but ultimately it comes down to communication. What have you seen as the keys to the revival of the Texas program?
Scott Hill:
Again, I listen to that segment and I've listened to Coach Herman in a number of other occasions. Again, it goes back to culture. It's a culture of accountability. You heard him say it right there. I'm going to reward you when it goes right and I'm going to punish you when it doesn't go right, but I'm going to expect you to do the right things the right way, and that's culture. It's a culture of toughness. You hear him talk about it all the time, "We're going to be tougher and we're going to be in better shape than the people on the other side of the ball. I'm not as a coach going to be the only one that can hold the team accountable. I need every teammate to hold every other teammate accountable to that culture."
Scott Hill:
Look, I don't think at the end of the day it's any great secret. I think great organizations have great culture and have high expectations and expect to win, know how to win, know how to learn from defeats, and don't like the taste of that defeat and resolve, never to let it happen again. I think that's what Coach Herman has brought back to the University of Texas.
Josh King:
Your favorite book is by Ayn Rand. John Allison, the former CEO of BB&T, that's NYSC ticker symbol BBT, also felt her philosophy was important for anyone in business to reflect on. Let's hear from John Allison.
John Allison:
One of the most powerful aspect of Rand's philosophy is that it's fully integrated. She starts with understanding the nature of reality, man's means and knowledge, and the kind of ethics that are appropriate to an independent thinking being. We talk about people having integrity, but if you don't have integrated principles, you can't have integrity. If you have inconsistent beliefs, you can't operate consistently with inconsistent beliefs. Rand's philosophy is a fully integrated system.
John Allison:
The second most powerful attribute that the philosophy has is it works in the real world. A lot of people whole beliefs don't work in the real world so they can't live consistent with those beliefs. So she has a real world philosophy that's fully integrated, which is a very powerful competitive advantage in life.
Josh King:
We've talked a little bit about the philosophy of Coach Tom Herman. Now the philosophy of Coach Ayn Rand. What are the benefits of her teachings to a business' success?
Scott Hill:
So from my standpoint in an overly simplistic manner, what I've always read her to say is as an individual, you have a responsibility to go out and do the most you can with the talents that you've been blessed with, and that you have the integrity, as was mentioned in that set of remarks, not to need somebody to force you, if you will, to do the right thing, to maximize your contributions, to maximize the use of your ability, and that's what makes, to me, great businesses.
Scott Hill:
Jeff is a great CEO, and he and Chuck are great founders of this company, but they're not good enough that if the people that worked at ICE weren't all fantastic individuals, it wouldn't work. We couldn't do it at 300. We certainly can't do it at 5,000 or 6,000 people. We can't go and make sure every day that every person is doing the right thing, that they're focused on customers, and they're working well with their colleagues. We have to trust that they have the integrity and that they're maximizing their individual talents.
Scott Hill:
People are good at different things, but everybody is good at something. So figure out what you're good at and go and use those talents to make our company better, to make our country better. Again, simplistically, I think that to me was what she always said.
Josh King:
How did you come face-to-face with Rand for the first time?
Scott Hill:
Actually, I came face-to-face. One of my first managers at IBM recommended the book to me, and it really struck me at the time because, again, I was young, I was motivated, and what it said to me is if you're willing to go out and work hard and to use the talents that God's blessed you with, you can be successful, but don't look for somebody else to necessarily give you the opportunity. Go get the opportunity. Don't look for someone else to come in and tell you what you should do. Go ahead and figure out what it is you want to do. Again, figure out what you're willing to do. Figure out what you're good at and go leverage those talents to their maximum ability.
Josh King:
At a JP Morgan Investor Conference last fall, you told analyst Ken Worthington that when you started at ICE your son was in fifth grade. He's now a senior in college. I wonder at what point he's going to read Rand if he hasn't already. Are you ready for the graduation ceremonies?
Scott Hill:
Yes. So I am and I'm not. Jacob is, as you said, fifth grade when I started, graduating from William & Mary second week of May. It's a bit bittersweet I guess is the way to put it. He's a great kid. He's done well at university, and he's ready to move on, but recently, I was in the process of taking some stuff out of the house to move to his new location in Washington, D.C. and hit me that I was moving him out. So Jacob was with us in France and he was with us in Tokyo. So yeah, again, I'm ready for him I guess is the right way to say it because he's ready, but I'm a little less ready for me.
Scott Hill:
The good news is I've got a wonderful 16-year-old daughter who keeps me on my toes. Sophie is a great athlete, and there's nothing I love more than watching her play. So she'll help Hilary and me with the transition, but it's Jacob's time. He's ready and he deserves what's in front of him, but it will be hard to let him go.
Josh King:
So, Scott, as we wrap up, ICE and you are at a different stage in life. Your son was still in elementary school when you came aboard, but he's now preparing to graduate college. Is ICE now a mature company or do you still view it as a startup through the lens that you saw it the first time?
Scott Hill:
We're a more mature company, but we still have a lot of opportunity to grow and serve our markets and our customers. I think that's been one of the things that always distinguished ICE is every single quarter we deliver strong results. Every single year since we've been a public company we've grown earnings. The earnings in the current year were bigger than the earnings in the prior year. The chart that Jeff ends on every single earnings call is the demonstration of that success, but that success comes because while we're delivering in the quarter, we're building on the future. We're building in the fixed income space to help that market move analog to digital. We're investing in the mortgage space as that inefficient market needs to become more efficient, needs to move from analog to digital.
Scott Hill:
We've investing in BACKED to bring trading and clearing and custodial services to the cryptocurrency world. Again, I think that's a distinguishing factor of ICE is as we deliver in the current quarter, as we deliver in the current year, inside our expense is a lot of investment that's about growth two years out, three years out, five years out. I think there's a lot of room to run. Again, it's one of the reasons why. 12 years ago my wife said, "You're going to be bored in two years." 12 years later, I can't wait for the next 10.
Josh King:
You are certainly not bored, Scott Hill. Thanks a lot for joining us in the ICE House. Best of luck for the rest of the first half and the rest of the year.
Scott Hill:
Thanks, Josh.
Josh King:
That's our conversation for this week. Our guest was Scott Hill, Chief Financial Officer of Intercontinental Exchange. If you like what you heard, please rate us on iTunes so other folks know where to find us. If you've got a comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us, @icehousepodcast.
Josh King:
Our show is produced by Theresa DeLuca and Pete Asch, with production assistance from Ken Abel and Ian Wolff. I'm Josh King, your host, signing off from the Library of the New York Stock Exchange. Thanks for listening and I'll talk to you next week.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor its affiliates make any representations or warranties. Expressed or implied as to the accuracy or completeness of the information and do not sponsor, approve or endorse any of the content herein. All of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of legal clarity.
