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EDITED TRANSCRIPT
APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
CORPORATE PARTICIPANTS
Salli Schwartz Moody's Corporation - Global Head of IR and Communications
Ray McDaniel Moody's Corporation - President and CEO
Linda Huber Moody's Corporation - EVP and CFO
Mark Almeida Moody's Corporation - President of Moody's Analytics
Michel Madelain Moody's Corporation - President and COO of Moody's Investors Service
PRESENTATION
Operator
Good day, and welcome, ladies and gentlemen, to the Moody's Corporation first-quarter 2016 earnings conference call. At this time, I would like
to inform you that this conference is being recorded.
(Operator Instructions)
I will now turn the conference over to Salli Schwartz, Global Head of Investor Relations. Please go ahead.
APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
Ray McDaniel, Moody's President and Chief Executive Officer, will lead this morning's conference call. Also making prepared remarks on the call
this morning is Linda Huber, Moody's Executive Vice President and Chief Financial Officer.
Before we begin, I call your attention to the Safe Harbor language, which can be found toward the end of our earnings release. Today's remarks
may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the Act, I
also direct your attention to the management's discussion and analysis section and the risk factors discussed in our annual reports on Form 10-K
for the year ended December 31, 2015, and in other SEC filings made by the Company, which are available on our website and on the Securities
and Exchange Commission's website. These, together with the Safe Harbor statements, set forth important factors that could cause actual results
to differ materially from those contained in any such forward-looking statements.
I would also like to point out that members of the media may be on the call this morning in a listen-only mode. I'll now turn the call over to Ray
McDaniel.
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APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
US revenue of $480 million was down 4% from the first quarter of 2015. Non-US revenue of $336 million was down 8% and represented 41% of
Moody's total revenue. Recurring revenue of $452 million increased by 7% and represented 55% of total revenue.
Looking now at each of our businesses, starting with Moody's Investor Service, total MIS revenue for the quarter was $525 million, down 13% from
the prior-year period. Foreign currency translation unfavorably impacted MIS revenue by 1%. US revenue declined 10% to $336 million, while
non-US revenue of $189 million declined 18% and represented 36% of total ratings revenue. Recurring revenue of $231 million increased 4% and
represented 44% of ratings revenue.
Moving now to the lines of business for MIS, first, global corporate finance revenue of $240 million for the quarter was down 20% from the prior-year
period. This result reflected lower levels of global speculative grade issuance, as well as declines in the number of US investment grade bond
offerings and in the volume of European investment grade issuance. US corporate finance revenue decreased 10% while non-US revenue decreased
36%.
Second, global structure finance revenue for the first quarter was $91 million, down 11% from the prior-year period. This represented the lowest
revenue quarter for structured finance that we have seen in 10 quarters. US securitization activity slowed, primarily within the CMBS and CLO
markets, due to widening spreads, regulatory requirements, and reduced availability of bank loan collateral. US structured finance revenue was
down 15%. Non-US revenue was flat with a modest increase in Europe.
Third, global financial institutions revenue of $95 million was up 1% from the prior-year period. US financial institutions revenue was down 3%,
while non-US revenue was up 4%.
Fourth, global public project and infrastructure finance revenue of $92 million was down 9% versus the prior-year period, as US project finance
activity and European infrastructure-related issuance fell amid choppy market conditions. US public project and infrastructure finance revenue
was down 6%, while non-US revenue was down 14%. MIS other, which consists of non-rating revenue from Moody's majority-owned joint venture
interests in ICRA and Korea Investor Service contributed $8 million to MIS revenue service for the first quarter, flat to the prior-year period.
Turning now to Moody's Analytics, global revenue for MA of $291 million was up 11% from the first quarter of 2015. Excluding revenue from our
March 2016 acquisition of GGY, MA revenue grew by 10%. Foreign currency translation unfavorably impacted MA revenue by 2%.
US revenue of $144 million fell 12% year over year, and non-US revenue of $147 million was up 9% and represented 51% of total MA revenue.
Recurring revenue of $222 million increased 9% and represented 76% of MA's revenue.
Moving now to the lines of business for MA, first, global research data and analytics, or RD&A, revenue of $165 million was up 10% from the prior-year
period and represented 57% of total MA revenue. Growth was mainly due to strong new sales of research and data, as well as record customer
retention. US RD&A revenue was up 14%, while non-US revenue was up 5%.
Second, global enterprise risk solutions, or ERS, revenue of $90 million was up 16% from last year, primarily from accelerated project deliveries. US
ERS revenue was up 14%, while non-US revenue was up 17%. Excluding revenue from GGY, ERS revenue grew 13%. And as we've noted in the past,
due to the variable nature of project timing and completion, ERS revenue remains subject to quarterly volatility.
Trailing 12-month sales for ERS increased 1%, reflecting a very difficult comparison with the first quarter of 2015. Third, global professional services
revenue of $37 million was flat to the prior-year period. US professional services revenue was down 6%, while non-US revenue was up 3%.
Turning now to expense, Moody's first-quarter expense was $512 million, up 4% from 2015. The increase was primarily due to higher compensation
costs in MA, reflecting additional head count required to support business growth, as well as Moody's ongoing technology investments. Expenses
in MIS were down slightly compared to the prior-year period. Foreign currency translations favorably impacted expense by 2%.
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APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
As Ray noted, Moody's reported operating margin and adjusted operating margin were 37.3% and 40.9%, respectively, for the first quarter. Moody's
effective tax rate for the quarter was 32.3% versus 32.9% for the same period last year. The year-over-year decline was primarily due to a change
in New York City tax law relating to income apportionment.
Now I'll provide an update on capital allocation. During the first quarter of 2016, Moody's returned $334 million to shareholders via share repurchases
and dividends. The Company repurchased 2.9 million shares at a total cost of $262 million, or an average cost of $89.83 per share, and issued 1.6
million shares under its annual employee stock-based compensation plans.
Moody's also paid $72.1 million in dividends during the quarter, and on April 11 announced a quarterly dividend of $0.37 per share of Moody's
common stock, payable June 10 to stockholders of record at the close of business on May 20. Outstanding shares as of March 31, 2016 totaled
194.3 million, down 4% from the prior-year period. As of March 31, 2016, Moody's had $1.2 billion of share repurchase authority remaining.
At quarter end, Moody's had $3.4 billion of outstanding debt and $1 billion of additional debt capacity available under its revolving credit facility.
Total cash, cash equivalents, and short-term investments at quarter end were $2.1 billion with approximately 73% held outside the US. Free cash
flow for the first three months of 2016 was $211 million, down 13% from the first three months of 2015, primarily due to the year-over-year decline
in net income and changes in working capital.
And with that, I'll turn the call back to Ray.
APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
For Moody's Analytics, 2016 revenue is now expected to increase in the high single-digit percent range. US revenue is now expected to increase
in the low double-digit percent range, while non-US revenue is now expected to increase in the mid single-digit percent range.
Research, data and analytics revenue is now expected to increase in the high single-digit percent range as a result of new business and an increased
customer retention rate. Enterprise risk solutions revenue is now expected to increase in the high single-digit percent range, including revenue
associated with the March 2016 acquisition of GGY.
Before we move to the Q&A, I would like to highlight the MIS management change that we announced on April 4. Effective June 1, 2016, Michel
Madelain will retire as President and Chief Operating Officer of MIS and will assume the role of Vice Chairman for MIS. He will also remain on the
MIS Board of Directors and MIS European boards. Rob Fauber, who has been with Moody's for 11 years, will succeed Michel Madelain as President
of MIS. I would like to extend my thanks to Michel and congratulate Rob on his new role.
This concludes our prepared comments. And joining us for the question-and-answer session is Michel Madelain, President and Chief Operating
Officer of MIS, and Mark Almeida, President of Moody's Analytics. We would be pleased to take any questions you may have.
APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
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APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
Operator
We will now go to Andre Benjamin with Goldman Sachs.
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APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
I think the overall view on the more speculative asset classes across the world would be keep an eye on spreads. If they continue to tighten, we
may see the outlook improve and, conversely, if they widen, particularly as we go into the Brexit vote, that will be detrimental. So hope that's helpful
to you, Andre.
Operator
We'll now go to Manav Patnaik with Barclays.
APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
We were thoughtful, but it was worse than we thought. And as we said, there are a number of factors that make the rest of the year a little bit tricky
to predict. With that, I'll turn it over to Michel to have him perhaps give some more thoughts about how we're viewing the balance of the year.
Michel Madelain - Moody's Corporation - President and COO of Moody's Investors Service
Thank you, Linda. I think what I was going to say is really in terms of the numbers we are seeing, this is really the result of market volumes. And
that I think, as Ray alluded earlier, our coverage has remained very consistent, which we've seen in the past. As market improve, we should see a
pickup in our own volumes. That's what I was going to add.
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APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
Manav Patnaik - Barclays Capital - Analyst
All right. Thanks a lot for that color. I would just like to congratulate Michel and Rob on their new roles.
Operator
We'll now go to Warren Gardiner with Evercore.
Operator
We will now go to Joseph Foresi with Cantor Fitzgerald.
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APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
Joseph Foresi - Cantor Fitzgerald - Analyst
Hi. I wanted to ask about some of your assumptions, because it sounded like you're touching on them in some of your earlier points. Is it fair to
think you're building in a steady environment in Europe in your non-US assumptions? Then I've got a couple other ones.
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APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
For example, for the first quarter last year, incentive compensation was $38 million, and this year in the first quarter it's come down to $32 million.
So, we pulled down incentive compensation pretty hard to deal with this new lower forecast. And if we're not going to hit our numbers, the
employees are not paid as well. That's just the way it goes.
In terms of the $32 million number, we would see that it will ramp a bit as we go into the fourth quarter if things go right. But if we do considerably
better than the $4.60 we're predicting now, Joe, you would expect that we would take incentive compensation back up. So $4.80 was 100% and
$4.60 is below that, so we've cut incentive comp accordingly.
Operator
We will now go to Vincent Hung with Autonomous.
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APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
Vincent Hung - Autonomous Research LLP - Analyst
Great, thank you.
Operator
We'll now go with Denny Galindo with Morgan Stanley.
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APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
Operator
We'll now go to Peter Appert with Piper Jaffray.
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APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
Operator
We will now go to Craig Huber with Huber Research Partners.
APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
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APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
Linda Huber - Moody's Corporation - EVP and CFO
Sure, Craig. I'll start with the corporate sector and investment grade. We're looking at Q1 2016 compared to 2015. For investment grade in 2016,
we had $66 million of revenue from investment grade. That was 28% of the total for CFG, which is $240 million. Last year we had $87 million in
investment grade and $298 million in corporate, so the percentage stayed about the same at 28%.
Spec grade is where the story is. For the first quarter this year, we had $30.3 million. That is less than half of last year's $62.7 million. And this year
we're looking at spec grade being 13% of the total.
Bank loans, down a bit, $41.3 million versus $44.5 million last year and 17% of the total. And other, about flat, $102.6 million and 43% of the total
for CFG.
Going to structured, again, quarter over quarter, 2016 versus 2015, ABF, asset backed securities, pretty close, about $20 million for the first quarter
this year versus $21 million last year. Percentage is about flat at 22%. RMBF, also not that much movement. In fact, this was up in the first quarter
of 2016 to almost $21 million versus about $18 million last year. Percentage was up to 23%.
Commercial real estate, here again was where we saw a more dramatic difference, about $28 million in the first quarter of this year versus $33
million last year. Percentage is about 31% this year. Structured credit, also a more dramatic change, $22 million this year versus almost $29 million
last year, and 24% of the total. So that's the story in structured.
FIG -- not too much difference in FIG. Total of $95 million for the first quarter of 2016. About flat to last year, about $94 million. FIG does not move
around as much as the other lines. For banks, we're about $59 million. Last year, it was about $63 million. Percentage is about 62%.
Insurance did perform better, close to $30 million in insurance versus $25 million last year. That's 31% of the FIG total. Managed investments, about
$4 million flat to last year in dollar and percent. Other, also flat in dollar and percent at about $2.5 million and 3%.
And PPIF, again, this was another less than pleasant surprise. Last year in the first quarter, PPIF in 2015 did $100 million. This year we have a little
bit less than $92 million. PFG sovereigns is about $55 million, about flat to last year's $56 million.
Project and infrastructure is where we saw some weakness, about $36.5 million versus last year's $44.5 million. So that's about 40% of the PPIF line
and about an 18% decline, which was obviously not helpful. Then the other line is negligible for PPIF. Again, PPIF in total, down 9% year over year.
We had three out of four of the businesses having some challenges, with corporate down the most in dollar and percent terms. Structured, which
is our second biggest business, off. And then PPIF off 9%, as well, with banking about the same. Again, if we have one of these engines has a bit of
a challenge, we can usually figure it out and make it up somewhere else, but three out of four of the MIS engines down, that's a little bit tricky, so
you see the results in the quarter numbers.
Operator
We will now go to Doug Arthur with Huber Research Partners.
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APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
Doug Arthur - Huber Research Partners - Analyst
Thanks. Two questions. Ray, there's been a bunch of indirect questions on this on the call, but just trying to get a better sense of the trend in
mandates globally right now. Then I've got a followup.
Operator
We will now go to Bill Warmington with Wells Fargo.
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APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
it was a combination of a number of things. Customer retention continues to improve, so we got a little bit of a bump from that. New sales production
has been very strong, so that contributed. Pricing has been good.
On the RD&A side, one way to say it is we're firing on all cylinders. We're doing quite well there. And as I mentioned earlier, we're doing well all over
the world. The business is just quite strong and it added to the expectation for the year and prompted us to just move the guidance up.
Operator
We will now go with Jeff Silber with BMO Capital Markets.
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APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
Operator
We'll now go to Tim McHugh with William Blair.
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APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
words, we've just taken out about close to $20 million in incentive compensation for the first quarter and the rest of the year. That is the result of
our pulling down the guidance.
We will look at now how we perform according to where we are, with the mid point being $4.60. The next thing that would happen on $50 million
is we would be about evenly split between another $25 million in incentive compensation if our performance is weaker than we expect now, and
some other cost cuts that we could make.
We probably need to keep with some essential hiring, less so insured services, but certainly in MIS. We would like Mark to continue with his hiring
plans in MA because they are doing really well, as he's outlined. And we've got to be thoughtful about what we're doing with our technology
spend. Projects that we could postpone or dial back, I think we've largely done that. We're taking another pass through that. But again, there are
certain things we need to do around here and it gets harder with the second pass.
Again, we've had tough conditions in the first quarter. We view that as cyclical. We have better coverage proportionately in structured finance,
which has been hit hard in the first quarter, and we're waiting to see what happens for the rest of the year. So, we think we're being prudent. And
incentive compensation is what we're going to do in order to keep the margin from being hit.
We've moved the margin guidance down from about 42 to about 41, so we are holding the margin, for the most part, down 100 bps, perhaps, in
the guidance. But the first hit goes to incentive compensation. We would like the shareholders to note that it is our intention to hold the margin
at about 41%, which is still pretty healthy. So, I hope that helps in terms of your questions, Tim. If I missed anything, let me know.
Operator
And we will go to Patrick O'Shaughnessy with Raymond James.
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APRIL 29, 2016 / 3:30PM, MCO - Q1 2016 Moody's Corp Earnings Call
Patrick O'Shaughnessy - Raymond James & Associates, Inc. - Analyst
Great. That's helpful. Thank you.
Operator
And it appears that there are no other questions at this time. I will turn the call back over to Mr. McDaniel for any additional or closing remarks.
Operator
This concludes Moody's first-quarter earnings call. As a reminder, a replay of this call will be available after 3.30 pm Eastern time on Moody's website.
Thank you.
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