穆迪 (MCO) 2016 Q3 法說會逐字稿

Good day and welcome, ladies and gentlemen, to the Moody's Corporation third-quarter 2016 earnings conference call. At this time, I would like to inform you this conference is being recorded.

(Operator Instructions)

I would now like to turn the conference over to Salli Schwartz, Global Head of Investor Relations and Communications. Please go ahead.

Thank you. Good morning, everyone. And thanks for joining us on this teleconference to discuss Moody's third-quarter 2016 results as well as our current outlook for full-year 2016. I am Salli Schwartz, Global Head of Investor Relations and Communications.

This morning Moody's released its results for the third quarter of 2016 as well as our current outlook for full-year 2016. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com. 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 report 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 statement, 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.

Thanks, Salli. Good morning and thank you to everyone for joining today's call. I'll begin by summarizing Moody's third-quarter and year-to-date 2016 results. Linda will follow with additional financial detail and operating highlights. I'll then conclude with a litigation update and comments on our current outlook for 2016. After our prepared remarks, we'll be happy to respond to your questions.

In the third quarter, Moody's revenue of $917 million increased 10% primarily as a result of record third-quarter revenue from Moody's Investors Service, driven by higher-leveraged finance issuance in US public finance activity, as well as solid growth from Moody's Analytics. Operating expense for the third quarter was $520 million, up 7% from the third quarter of 2015, and included an $8.4 million restructuring charge associated with cost-management initiatives.

Operating income was $398 million, a 14% increase from the prior-year period. The impact of foreign currency translation on operating income was negligible. Adjusted operating income, defined as operating income before depreciation, amortization, and the aforementioned restructuring charge, was $439 million, up 16% from the same period last year.

The reported operating margin for the third quarter of 2016 was 43.3% and the adjusted operating margin was 47.8%. GAAP EPS of $1.31 was up 15% from the third quarter of 2015. Non-GAAP EPS of $1.34 was up 21%. Third-quarter 2016 non-GAAP EPS excludes a $0.03 impact from the restructuring charge. Third-quarter 2015 non-GAAP EPS excludes a $0.03 benefit from a legacy tax matter.

Turning to year-to-date performance, Moody's revenue for the first nine months of 2016 was $2.7 billion, an increase of 2% from the prior-year period. Foreign currency translation unfavorably impacted revenue by 1%. Revenue at Moody's Investors Service was $1.8 billion, a decline of 1% from 2015. Revenue at Moody's Analytics was $899 million, 8% higher than the prior-year period.

Operating expense in the first nine months of 2016 was $1.6 billion, up 5% from the prior year. Foreign currency translation favorably impacted expense by 2%. Operating income was $1.1 billion, down 2% from the first nine months of 2015. The impact of foreign currency translation was negligible. Adjusted operating income of $1.2 billion was down 1% from the prior-year period. Moody's reported operating margin was 41.8%, and its adjusted operating margin was 45.7%. The effective tax rate for the first nine months of 2016 was 31.5%, down from 31.7% in the same period in 2015.

In light of the strong third-quarter performance, coupled with continued expense management, we are increasing our full-year 2016 GAAP EPS guidance to a range of $4.76 to $4.86, which includes an anticipated non-cash foreign exchange gain of $0.18 related to a subsidiary reorganization, offset in part by a $0.04 restructuring charge. Excluding the gain and the restructuring charge, the non-GAAP EPS guidance range is now $4.62 to $4.72. I'll turn the call over to Linda to provide further commentary on our financial results and other updates.

Thanks, Ray. I'll begin with revenue at the Company level. As Ray mentioned, Moody's total revenue for the third quarter was $917 million, up 10% from the prior-year period. US revenue of $546 million was up 13% from the third quarter of 2015.

Non-US revenue of $371 million was up 5% and represented 40% of Moody's total revenue. The impact of foreign currency translation unfavorably impacted Moody's revenue by 1%. Recurring revenue of $460 million is up 3% and represented 50% of total revenue.

In looking now at each of our businesses, starting with Moody's Investors Service, total MIS revenue for the quarter, $612 million, up 12% from the prior-year period. US revenue increased 11%, to $391 million. Non-US revenue of $221 million was up 13% to the prior-year period and represented 36% of total ratings revenue. The impact of foreign currency translation on MIS revenue was negligible.

Moving to the lines of business for MIS. First, global corporate finance revenue for the third quarter of $300 million is up 21% from the prior-year period. This result primarily reflected higher levels of bank loan and speculative-grade bond issuance, as strong investor demand and tighter credit spreads drove debt-refinancing activity. US and non-US corporate finance revenues were up 16% and 32%, respectively.

Second, global structured finance revenue for the third quarter was $104 million, down 7% from the prior-year period as reduced US CMBS and CLO activity was only partially offset by increased US RMBS and REIT activity. US and non-US structured finance revenues were down 9% and 4%, respectively.

Third, global financial institutions revenue of $96 million was up 7% from the prior-year period as a result of decreased -- as a result of, excuse me, increased Asian banking issuance. US and non-US financial institutions revenue were up 2% and 11%, respectively.

Fourth, global public, project and infrastructure finance revenue of $105 million was up 16% versus the prior-year period, primarily driven by strong US public finance issuance. US public, project and infrastructure finance revenue was up 29%, while non-US revenue was down 8%. MIS Other, which consists of non-rating revenue from ICRA in India, and Korea Investors Service, contributed $8 million to MIS revenue for the third quarter, up 4% from the prior-year period.

And turning now to Moody's Analytics, global revenue for MA of $305 million was up 6% from the third quarter of 2015. US revenue of $154 million was up 19% year over year. Non-US revenue of $150 million was down 4% and represented 49% of total MA revenue. Foreign currency translation unfavorably impacted MA revenue by 3%. Excluding revenue from our March 2016 acquisition of GGY, MA revenue grew 3%.

Moving now to the lines of business for MA. First, global research data and analytics, or RD&A, revenue of $168 million was up 6% from the prior-year period and represented 55% of total MA revenue. Growth was mainly driven by strong sales of credit research and ratings data feeds. US RD&A revenue was up 14%, while non-US revenue was down 4%. Foreign currency translation unfavorably impacted RD&A revenue by 3%.

Second, global enterprise risk solutions, or ERS, revenue of $102 million was up 10% from last year. Growth was driven primarily by the March 2016 acquisition of GGY, as well as growth in the credit assessment and stress testing product lines. US ERS revenue was up 39%, while non-US revenue was down 3%. Foreign currency translation unfavorably impacted ERS revenue by 4%. Trailing 12-month revenue and sales for ERS increased 10% and 5%, respectively. As we've noted in the past, due to the variable nature of project timing and completion, ERS revenue sales remain subject to quarterly volatility. Third, global professional services revenue of $36 million was down 3% from the prior-year period. US professional services revenue was up 6%, while non-US revenue was down 7%.

Turning now to expenses. Moody's third-quarter expense was $520 million, down 7 -- excuse me, up 7% from 2015. The increase was primarily attributable to additional headcount in MA to support business growth and from the March acquisition of GGY, the restructuring charge, and increased incentive compensation across the Company. Foreign currency translation favorably impacted expense by 2%.

Moody's reported operating margin increased 140 basis points, to 43.3% in the third quarter. Adjusted operating margin increased by 250 basis points, 47.8%. Moody's effective tax rate for the quarter was 30.5%, down from 32% in the third quarter of 2015.

Now I'll provide an update on capital allocation. During the third quarter of 2016, Moody's repurchased 1.9 million shares at a total cost of $193 million, or an average cost of $103 per share, and issued 798,000 shares as part of its employee stock-based compensation plan. Moody's also paid $71 million in dividends during the quarter.

On October 18, Moody's announced a quarterly dividend of $0.37 per share of Moody's common stock, payable December 12 to stockholders of record at the close of business on November 21. Over the first nine months of 2016, Moody's repurchased 7.1 million shares at total cost of $679 million, or an average cost of $95.51 per share, and issued 2.7 million shares as part of its employee stock-based compensation plan.

Additionally, Moody's returned $215 million to its shareholders via dividend payments during the first nine months of 2016. Outstanding shares as of September 30, 2016, totaled 191.2 million, down 3% from September 30, 2015. As of September 30, 2016, Moody's had $787 million of share repurchase authority remaining.

At quarter end, Moody's had $3.4 billion of outstanding debt and $1 billion of additional borrowing capacity under its commercial paper program which is backstopped by an undrawn $1 billion revolving credit facility. Total cash, cash equivalents, and short-term investments at quarter end were $2.1 billion, with approximately 80% held outside the US. Free cash flow in the first nine months of 2016 was $772 million, down 7% from the first nine months of 2015, primarily due to lower net income. And with that I'll turn the call back over to Ray.

Okay. Thanks, Linda. As we disclosed in today's earnings release, on September 29, we received a letter from the Department of Justice indicating that it is preparing a civil complaint against Moody's, alleging violations of the Financial Institutions Reform, Recovery and Enforcement Act in connection with ratings MIS assigned to RMBS and CDOs leading up to the 2008 financial crisis.

As we had previously disclosed, following the global credit crisis in 2008, Moody's periodically receives subpoenas and inquiries from various governmental authorities, including the DOJ and states attorneys general. The DOJ has advised us that their investigation remains ongoing and may expand to include additional theories. A number of states attorneys general have also indicated they expect to pursue similar claims under state law. Moody's is continuing to respond to the DOJ and states' subpoenas and inquiries. As I hope you'll appreciate, I'm not going to be able to add anything beyond what I've just said and what we disclosed in our earnings release.

I'll conclude this morning's prepared remarks by discussing the changes to our full-year guidance for 2016. A full list of Moody's guidance is included in our third-quarter 2016 earnings press release which can be found on the Investor Relations website at ir.moodys.com.

Moody's current outlook for 2016 is based on assumptions about many geopolitical conditions and macroeconomic and capital markets factors including interest rates, foreign currency exchange rates, corporate profitability and business investment spending, mergers and acquisitions, consumer borrowing and securitization, and the amount of debt issued. These assumptions are subject to uncertainty, and results for the year can differ materially from our current outlook.

Our guidance assumes foreign currency translation at end-of-quarter exchange rates. Specifically, our forecast reflects exchange rates for the British pound of $1.30 to GBP1 and, for the euro, of $1.12 to EUR1. Post-third quarter movements in foreign exchange rates have had no meaningful impact on the full-year 2016 outlook.

As I noted earlier, Moody's is increasing its full-year 2016 GAAP EPS guidance range to $4.76 to $4.86. Excluding the foreign exchange gain and restructuring charge I mentioned earlier, the non-GAAP EPS guidance range is now $4.62 to $4.72. The Company now expects share repurchases to be approximately $750 million, subject to available cash, market conditions, and other ongoing capital allocation decisions.

Capital expenditures are now expected to be approximately $120 million. For MIS, Moody's now expects 2016 revenue to be approximately flat, reflecting increased guidance for non-US MIS revenue, which we also now expect to be approximately flat. US revenue is still expected to be approximately flat.

Corporate finance revenue is now expected to be approximately flat and structured finance revenue is now expected to decrease in the mid-single-digit percent range. Financial institutions revenue is now expected to increase in the low-single-digit percent range. For Moody's Analytics we are not anticipating any changes to the outlook items we provided on September 28, 2016.

This concludes our prepared remarks. And joining Linda and me for the question-and-answer session are Mark Almeida, President of Moody's Analytics, and Rob Fauber, President of Moody's Investors Service. We'll be pleased to take any questions you might have.

Thank you.

(Operator Instructions)

We'll take our first question from Peter Appert from Piper Jaffray.

Good morning. So Linda, perhaps could you talk about what we should think about in terms of incremental legal cost potentially on a near term basis, and also how you think about the pace of buyback activity given the potential call on your cash?

Sure, Peter. Good morning. We're not going to comment on incremental legal cost because as Ray said we've just received the piece of correspondence.

Also, calls on our cash, we have said that we are going to repurchase $750 million of shares this year and so we'll go from there. As you see on page 13 of the earnings release, we do have $2 billion of cash on hand and we do have our borrowing lines and CP program.

Got it. And then one other question. The guidance for Q4 would imply a bit slower operating environment. Can you just talk for a second about what influences you're thinking in that regard?

Sure. Maybe we'll turn that over to Rob.

Peter, it's Ray. Just I'll let Rob comment on this in more detail. I think the punch line is we do think that some of the strength in the third quarter was pulled forward from the fourth quarter.

We had a very strong close in late September and some of that issuance appears to us to have been opportunistically pulled into a very attractive issuance environment. Rob, I don't know if you have any more detail you can add to that?

That's right. I think I would characterize -- there's continued good market access here in the US and we expect that will continue through the election and even potentially beyond. Selective access I would say in Europe, and healthy issuance in Asia.

And we have a healthy new mandate pipeline as well. But as Ray said, we've incorporated some potential volatility and fewer what we call, go days in the fourth quarter into our thinking.

Very good. Thank you.

We'll take our next question from Toni Kaplan from Morgan Stanley. Please go ahead.

Hi. Thanks so much for taking my question. Just wanted to ask about just given the strong performance in corporate finance, any way to frame the pull-forward that you just discussed? How much was from fourth quarter, how much maybe from 2017 or maybe just how much larger it was than you were expecting in third quarter?

I think broadly speaking we think the strength in the third quarter was pull-forward of near term issuance that would have been occurring probably in the fourth quarter and early in 2017 otherwise. Looking out into 2017, we think that issuing conditions are probably going to be attractive and that may encourage pull-forward from 2018 and beyond.

Part of the reason why we're optimistic about the current outlook for issuance conditions is driven by the fact that we think the default rate in speculative grade arena is probably peaking right about now over the next month or so. And it's going to moderate and come down, which should help spreads. So even if official rates are moving up somewhat, we think there's an opportunity for spread tightening and an attractive issuance environment.

Got it. And then on the margin side, MIS margins were strong. It seemed like that was mainly revenue flow-through. Anything else to can call out there?

And then in MA you've had, I guess, margin contraction year over year for the last two quarters, partially because of the corporate allocation, things like that. But should we be expecting, I guess, similar contraction in MA margins in fourth quarter? Thanks.

Thanks, it's Linda. You're right. MIS flow-through is very helpful to us. You'll note that we also called out continued expense control and as you saw, we put $0.03 through in a restructuring charge.

We are seeing good results from the cost controls that we mentioned before. Those are particularly in effect for MIS and for shared services.

And we feel that's, as I said, starting to have impact on our numbers, which is great. For Mark, who will comment in a minute, the unfortunate result of Mark's success is that he does get to carry more of the overhead burden, and he will talk a little bit more about the margin outlook for his business.

Yes, Toni, you're right, the MA margin was held down by the increased share of overhead allocation that we're getting this year, and also remember we have the GGY acquisition which is hitting us this year. So I can tell you that when we adjust for those things, the work that we do and looking at this on a pro forma basis and adjusting for the acquisition and assuming that we had the constant share of overhead expense, we see modest margin expansion so far this year.

Terrific. Thanks, guys.

We'll take our next question from Tim McHugh from William Blair. Please go ahead.

Yes, thanks. Ray, just want to follow up the comments as you looked into 2017 and I guess also the comment about pull-forward. You've talked before about the refinancing potential in 2017. Is that part of what you felt got pulled forward or was it really just timing within the quarters? I guess trying to think about that going into next year.

As I mentioned, our belief is that it was more fourth quarter and maybe early 2017 issuance getting pulled into the third quarter. So I do not anticipate that there was -- that we're going to see a large amount of 2017 refinancing having already gone through in the third quarter of 2016. And again, if issuance conditions are as we are speculating, that is probably going to encourage pull-forward out of 2018 and into 2017.

Okay. Thanks. And on ERS, the trailing 12 month sales numbers have kind of been in the mid single digits for two quarters. I know there's the rolling 12 month number so different things drop in and come out of that number.

I guess recent bookings, are we -- I'd be curious for any more color there. Is it still supportive of kind of thinking about that business as a double-digit organic kind of growth business as we go into next year or is new sales activity -- is that more representative of what we should think about for ERS?

No, Tim, I think it is -- we do continue to think of this as a double-digit growth business, particularly, and recall what Steve talked about at Investor Day, particularly focusing on those areas of the business that we're really trying to drive, particularly around software licenses, software subscriptions, and software maintenance.

As we told you, we're de-emphasizing the implementation services business, that low margin business that frankly we don't particularly want and don't particularly need given our market position now. So when we focus on the core aspects of the ERS business, we're seeing good strong bookings there certainly in the double digits and getting up toward the mid-teens.

Is that for the -- when you say double digits to mid-teens, is that for the total ERS or are you saying the software piece is growing at that pace but total practice revenue might be lower because you're not doing as much of the implementation?

Correct. Yes, it would be the latter. It's the -- if you --ignoring sort of the flatness that we're seeing in the implementation services business and just looking at those parts of the business that we're emphasizing, that's where we're seeing the double-digit or mid-teens type growth.

Okay. Thank you.

We'll take our next question from Andre Benjamin from Goldman Sachs. Please go ahead.

Thanks. Good morning. I guess on the issuance side, as you talk to your capital markets [test] counterparts to form the view about the pipeline that underpins your forecast, can you maybe talk a little about the level of confidence or lack therefore that you're hearing from them around those ranges as they talk to their customers? And this is really more a question around [talent].

Are they really confident in the baseline that comes from re-fi, M&A, and [all those] products, et cetera, or could you sense a greater uncertainty relative to say a month or two ago or whatever time frame you want to use as reference?

Andre, it's Linda. I'll take a shot at this and I'll talk about the views that we get from the various investment banks. The view, first we'll cover the US and then outside the US. This is financial and nonfinancial US dollar issuance.

Before I start that, though, I think the market is cheered by some larger M&A deal talk that has happened today and recently. So I think that tends to improve confidence. But let's go through these categories.

Investment grade third-quarter 2016 issuance was up 20%. Issuers are taking advantage of historically low rates and strong investor demand. We do expect, though, lighter periods of issuance expected in the fourth quarter because of the following three factors.

Earnings blackouts will continue through October. The US elections obviously are November 8. And the federal -- the Fed Open Market Committee meetings are December 13 and 14. For the rest of 2016, we -- for full-year 2016, excuse me, we expect issuance to end the year up 10%.

You'll recall that originally these projections had been for issuance to be sort of flat to down 10%. So this is better than had been anticipated at the beginning of the year. Our yield third-quarter 2016 issuance was up 35% which is a very big number. There again, strong investor demand, good pricing, and opportunistic issuance coming through very favorable factors.

Issuance volumes, though, have moderated over the last two to three weeks as spec rate market activity has shifted in favor of loans, in other words shifting towards leveraged loans versus bonds. And for the full year we're expecting that the year will be down 5% on high yields which is less bad than some of those initial indications had been back in January.

Leveraged loans third-quarter 2016 issuance up 50%, a very large number. Leveraged loan market continues to exhibit strength on the back of an opportunistic wave of refinancing activity and growing CLO issuance.

Our CLO pipeline is very strong right now. And full-year 2016 issuance expected to end the year up 10%. Again, that's far more favorable than what was predicted at the beginning of the year.

In Europe, investment grade ECBs purchasing program continues to underpin the market. COEs purchased program also has officially begun, and so you see a lot of US corporates doing reverse Yankee issues over in Europe as the heavy component of the supply there in Europe. The high yield market is also accommodated for issuers and a large portion of deal flow is coming from refinancing activity.

September of 2016 on the high yield front in Europe was the second highest month on record, and we do have some caution driven by concerns around potential ECB tapering and the timing and extent of any US rate rises, some renewed speculation on hard Brexit and its rhetoric and regional European referendums and elections coming up. So I think generally much better than we had expected.

I think Rob might want to comment a little bit that we continue to see growing strength through the middle and the end of September which was perhaps a bit better than we had expected even at Investor Day. So Rob, you want to comment?

The only thing I might add to that, Linda, is that in the investment grade space we've seen continued interest from foreign investors who are looking for yield. It's interesting when you look at the funds flow, both in high yield, while last week we saw a small outflow, the prior two weeks were $4 billion in inflows and over $11 billion in inflows year-to-date.

Similarly on the bank loan side, that asset class has seen its 11th straight week of inflows. That's the longest streak since 2014. And almost $3 billion over the last 11 weeks. So I think that really supports the market technicals.

Thanks, Andre. Anything else we can do for you on that front?

No, that was it.

We'll take our next question from Warren Gardiner from Evercore. Please go ahead.

Thank you. I was a little surprised to see the recurring revenues and ratings were down I think a couple percentage points sequentially just given the strong debt issuance you guys had last quarter and of course this quarter as well. So just kind of wondering how to think about that into Q4 especially given some of that strong issuance we had towards the end of the quarter?

It was really a combination of a few factors. We had a couple of one-off items this quarter that negatively impacted Q3 recurring revenues.

We also saw a little bit of softness in CP outstanding, and that's due I think in part to some of the money market regulations, and that in turn dampened the activity fees that's show up as recurring revenue for us. And we had a little bit of FX drag. So all that kind of contributed. If you exclude those items, that recurring revenue would have been between 3%, 3.5% which I think is fairly comparable to last quarter.

Okay. Thanks. And then could you just remind me what your leverage cap is and where you guys stand today with respect to keeping your current rating and maybe where you could go and still maintain investment grade?

Sure, Warren, it's Linda. I think we're pretty happy with our current leverage levels and given our ratings by other companies. We have some room but we're pretty comfortable with where we are right now.

We do have, as several people have noted, a piece of debt coming due in 2017. We continue to take a look at that. That does have a call feature on it and so we would have to look at the break evens there. We continue to watch that one.

And we are as you know now able to issue CPs. We're paying some attention to that. That allows us to tune the dials a little bit more finely than a large public debt issuance, a term issuance might provide.

So we'll see. But we're pretty happy with where we are and we like our rating where it is. So really no change.

Okay. Thank you.

We'll take our next question from Manav Patnaik. Please go ahead.

Good afternoon, guys. Just on the issuance front, can you just touch on the structured outlook that you increased a bit?

I think you talked obviously [positively] on the Investor Day. Was there anything incremental to that? Like was it those (inaudible) spectrum bonds or whatever that's been coming to the market? Just curious there.

Yes, I mean, probably the biggest contributor to the improved outlook is CLO activity. The pipeline for CLOs is quite strong right now. Rob, I don't know if there are any other factors that you would point to?

That's right, Ray. We've seen a mix of some of these resets deals. The leveraged lending market has obviously picked up and that's supported greater supply in the market and we've seen a good Asian bid for some of the CLO assets that have supported that activity.

Okay. And then Mark, just in terms of the non-US RD&A business that declined, just curious what's going on there.

Yes, it's -- one, we got crushed by FX. The pound took a beating. You're seeing that in the numbers. We also had kind of an odd ball one-off. Last year in the third quarter we had a strong third quarter last year, reflecting some one-off business that we had done, some large one-off business that we had done, in some of the smaller segments of RD&A.

And we didn't have -- those didn't recur in the third quarter this year. So that's really what you're seeing there. But the underlying business continues to be quite strong. We feel very comfortable with where we are there.

Do those one-offs continue or was that just this quarter's performance?

They were one-offs in the third quarter -- that were recognized in the third quarter of 2015. So we had kind of the lapping phenomenon.

Okay. And then just broadly, I just wanted to understand how you guys define material information and materiality. Just trying to understand, because I presume after this request it's going to be a lot of back and forth and I guess is that why you toned down the buyback program because I guess you're not allowed to do that while that's going on? Just curious on how we should think of that.

We currently have a programmatic repurchase plan in place. That continues. When we come to renew that we'll look at all the appropriate conditions and information that we normally do in terms of renewal. So that's the story on the buyback.

Manav, to expand a little further on that. We're operating our share repurchase program under a pre-existing 10b5-1 plan as you know, and we're in the market today and we'll take a look.

We said we think we'll spend about $750 million this year and we're pretty happy with that. So I think that's about it.

So the reduction in the buyback then, is that fair to assume it's from the discretionary aspect of the buyback that you had to that 10b5-1?

I think saying that we're going to do $750 million for this year is probably about what everybody needs to know in order to model that, and we're pretty comfortable with where we are. We've reduced the share count from [high 3%] from last year September as we said in the script.

All right. Thank you guys.

We'll take our next question from Bill Warmington from Wells Fargo Securities. Please go ahead.

Good afternoon, everyone.

Hi, Bill.

A shout-out to John Goggins. Just when I thought I was out, they pull me back in, so. First question for you on the strong Asian issuance. I just wanted to ask if in terms of what you're seeing there, how much is going forward refinancing of the debt and whether you're seeing some portion of that go to fund some investment that could actually spur some growth?

Yes, I mean, it's -- a lot of the activity was coming from Chinese banks, asset management firms, and of course there is refinancing included in that. But I do think we were seeing new money issuance coming out of Asia and, yes, I would say that's -- all things being equal, that's a good sign for potential growth. Rob, I don't know if there's anything else to add to that?

Little bit of a mix shift from onshore borrowing to offshore in this quarter, cross-border issuance from the Chinese property sector which had been going into the domestic markets a bit in the second quarter. We saw some of the big oil and gas corporates across APAC and some increased issuance from Australia and some healthy first time mandate activity.

So the second question for you on margins. We talked at -- you talked at the Investor Day about a five year target getting to the mid-40s for the operating margin. You had very strong flow-through this past quarter.

Potentially you have some higher legal expenses coming. I just wanted to bring that up as a question in terms of does it change the trajectory of that margin target?

Bill, it's Linda. We don't expect that it will change the trajectory. I think as we noted at Investor Day we are being prudent about what we think for 2017 and 2018 margin expansion. I think we had noted we expected that to be perhaps back end loaded over the next few years and you're right, we do expect to get back to the mid-40s on the simple margin.

I want to state very clearly that we've been very careful on our cost controls. An interesting thing for you to think about, Bill, just looking at headcount growth year over year at the end of September, the rating agency's headcount has grown only 1% and shared services headcount has grown only 1% from this time last year.

We have invested in growth for Moody's Analytics because that business is moving along really nicely, but we are being very cautious about what we're doing in terms of headcount growth because that's the major component of our expense increase as you know. We're being very cautious and legal expenses will fall as they do, but nothing that exciting to comment on there other than that we're all being very careful about the pace of expenses.

Thank you very much for the insight.

We'll take our next question from Vincent Hung from Autonomous. Please go ahead.

Hi. [So I'm guessing that] this one's probably no, but any sense on timing on this DOJ stuff? Would you expect it to be as prolonged as what S&P experienced?

We don't really have any information I can give you on that at this time.

Okay. And last one. How many new mandates did you get this quarter?

About 225, 227 new mandates. It was up from the second quarter and up from prior year.

Great. Thanks.

We'll take our next question from Joseph Foresi from Cantor Fitzgerald. Please go ahead.

Hi. As you work through the planning for next year, what are some key areas of investment you're looking at and is there any difference between what you're expecting in 2017 for investments versus 2016?

Sure, Joe. It's Linda. It looks pretty much the same. We're looking to invest in technology to support what MIS is doing to ensure that our rating analysts are as efficient as they can be and that we're handling our regulatory requirements as efficiently as we can for those analysts. That continues.

We're pleased that perhaps that rate of technology spending might be largely having peaked in 2016. So we'll have to see how that goes but we don't have the forecast for 2017 baked yet fully.

For Moody's Analytics, Mark is running a very nicely growing business and we'll continue to invest in that business. And for the commercial operation for Moody's Investors Service, we want to be thoughtful about the ability to do business with us in a constructive way. So we might continue to invest there.

But the investment outlook, I suspect, will look pretty much like it has, but again, very cautious eye on expense control and we will talk more about potential for margin expansion for 2017 when we give guidance for 2017. But we would like to be able to show some margin expansion but we're going to have to see. And I don't know if Ray or others of my colleagues want to comment any further on that.

No, the only thing I would say is probably a notable variable would be as we look at some of the international markets and market openings and some key emerging markets like China, if that occurs more quickly that might invite investment sooner. If it continues to be at the pace it has been at, we probably would accommodate that with the spending that you've seen already.

Got it. And as you run through your -- the economic variables for 2017, I know you talked about it potentially being a positive issuance environment. Can you give us any early thoughts on what your expectations are for some of those variables like interest rates or others that could impact issuance in 2017?

I mean, at a macro level just looking at GDP, the GDP growth is I think we're anticipating it's going to stabilize, albeit at fairly low levels in the developed markets. So somewhere around 2% in the US, less than that in Europe. And then for the G20 emerging markets, more in the 5% range.

So it's good in that there is growth in the key markets that we operate in, but it is not going to be fast-paced growth in our estimation. We would also expect to see a gradual normalization of monetary policy in the US, but I think that will be gradual.

And we're going to continue to see accommodative monetary policy outside the US. So I think that's going to feature in continuation of low rates in a number of markets.

Got it. Just a last one from me. Can we get any updates on your outlook for Brexit in Europe? Thanks.

Yes, it's going to be continuing uncertainty, I think. There's a certain amount of rhetoric that is contributing to the uncertainty. I think the rhetoric may be a bit stronger than the reality when we finally see what kind of negotiations go into the divorce and remarriage in Europe with the UK.

But the reason I say I think we're in for some prolonged uncertainty is really driven by the -- just the political timing with elections in key countries throughout next year, and I think that's going to impact the pace at which negotiations can be conducted. Those countries include the Netherlands, France, Germany, so we'll probably see more progress late next year than we will early in the year.

Okay. Thank you.

We'll take our next question from Alex Kramm from UBS. Please go ahead.

Hey, good morning. Heard your comments on DOJ obviously, but I'll ask my question anyway so just hopefully broad enough that you can answer it. Two questions, actually.

So one, when I read your disclosures this morning you mentioned (inaudible), you mentioned RMBS and you mentioned CDOs which sounds fairly consistent with what S&P settled on. So you've studied I'm sure their case very detailed.

So anything in the letter that you saw that suggests that it's a different scope or beyond the scope or less of a scope? And then secondly, maybe just can you just remind us -- you've been very strong on not settling cases in the past. You have settled a few. Maybe just a general view and how that has evolved over the last few years as you've seen some of these cases. Thank you.

No, I don't think it would be appropriate for me to comment on this at this point. The disclosure we made was based on the letter we received and that's about as much as I can say. I do understand the curiosity and I realize that it's probably frustrating for me to keep referring you back to our disclosures, but I think that's the most appropriate course.

Fair enough. I get it. Secondly, somebody brought up the Sprint deal that just went off this week. Rob, maybe this is for you.

Any more detail you can give us in terms of do you think this is something new and do you think there's another pipeline of deals like this that could go off? And by the way, is this captured in IG or is this a structured deal? How does it work from a financial perspective?

I'm not sure I would say this is a trend. This was one particular transaction. This was in the structured area. We have seen some esoteric types of transactions. We've seen handset transactions and so on. So there's some of that kind of activity going on, but I'm not sure that what Sprint did would be a trend.

Lastly, real quick for Linda. You mentioned the expenses a few times. I think every quarter you've updated us on kind of the ramp you expect. Can you just give us -- I know there's only one quarter left -- but can you just give us your latest and greatest in terms of absolute dollars and how that's changed over the course of the year? Thank you.

Sure, Alex. We had said the expense ramp from the first quarter to the fourth quarter would be $25 million to $35 million and we expect that, that will hold maybe toward the higher end of the range.

All right. Fantastic. Thank you very much.

We'll take our next question from Jeff Silber from BMO Capital Markets. Please go ahead.

Thanks so much. In the release you talked a little about increasing incentive compensation across the Company. Can you just give us a little bit more color? Is that something we should expect to continue going forward?

Sure, Jeff. Incentive compensation for the third quarter we did have to take up a bit. In fact, that incentive compensation was about $43 million and that ran ahead of the second quarter of $35.6 million and also ahead of last year's $32.9 million.

So given the strong performance, particularly at MIS, we have had to accrue about $10 million of additional incentive compensation which did offset some of the other cost savings that we had. Going forward for the fourth quarter, this is a bit of a wild card. I would model about $40 million is probably a reasonable number, but we could break a few million dollars either above that or below that.

Great. That's helpful. I'm sorry to go back to the DOJ issue. But can you tell us what the reserve policy has been, what you've reserved against cases similar to this, and also historically what insurance would reimburse you for typically for these if there are any settlements? Thanks.

Just quickly, then Ray will comment. US GAAP, we can't reserve for anything that is not probable or estimateable, and since we don't have any information on that front we can't have any reserves on this matter. Also, we do have insurance coverage but we're not going to comment on that either. And I'll see if Ray has anything further to add.

No. I don't on those items.

Okay. Thank you.

We'll take our next question from Craig Huber from Huber Research Partners. Please go ahead.

Yes. Thank you. Linda, the restructuring charge you guys took in the quarter, it's been quite some time since last time you did that. Can you just give us a little more detail what part of the Company that's pertaining to, please?

Sure. The restructuring charge was modest, $8 million and change. We don't do that too often. As we had said before, we're watching expenses particularly carefully, and I think I commented earlier on what we're doing with headcount management both in MIS and shared services. I think, Craig, it's fair to say that most of that restructuring charge accrued to shared services and to MIS.

And it was in multiple areas, modest actions in multiple areas.

Okay. And then, Ray, in terms of the outlook for structured finance just as we think out over the next six plus months, maybe RMBS, CMBS, what are some of the -- your sort of outlook there, some of the underlying factors that might drive it materially better or worse than we've seen here in recent quarters? During --[multiple speakers].

Rob may want to comment on this, but what I would look for really is how some of the work being done to structure transactions in light of the risk retention rules and efforts being made to try and create structures that are still economically attractive and comply with those rules is going to be the big variable going into 2017. We've begun to see some ideas and actions around how to address the risk retention rules, but again, we just have to watch and see what the arrangers, what the banks ultimately land on.

The only thing I might add to that, Ray, is so we have a healthy CMBS pipeline, you asked about CMBS right now as issuers are looking to get in front of the risk retention deadline. So while January could be a bit light, I think we'll see a healthy issuance in the first half of 2017 in CMBS supported by this upcoming maturity wall that we can see.

I also was going to ask about the maturity walls on the corporate finance side here data you show, increasingly so for the next four years. Ray, just remind us in the transaction revenues for the corporate line historically what's the general range of how much that business historically comes from refinancings?

Rob, do you have the --

I think we said at Investor Day for US and European fundamental, which is what we showed, I think it was in the 35% of transaction revenue.

30% to 40%.

Something in that range.

Okay. Great. Whatever your litigation costs are in the fourth quarter, I assume that's obviously embedded in your outlook here for your costs for the full year, right?

Yes, our legal costs are included in our outlook, yes.

Okay. Great. Thank you.

We'll take our next question from Ashley Serrao from Credit Suisse. Please go ahead.

Good afternoon. I just wanted to first clarify the messaging on expenses here. In face of elevated litigation costs, is the message that there isn't a lot you can do on the incentive front in the near term or accelerating some of the future expense saves talked about at the Analyst Day, or given this letter are you re-evaluating some additional levers you can pull?

Just to adjust the premise of the question, we have not said that we have increased litigation costs. We have not commented on that.

Ashley, it's Linda. We will continue with our expense plans. The guidance for the remainder of the year includes everything that we can see right now. Again, we're being very cautious, particularly on headcount.

We're being very thoughtful on the businesses that have had, and the support services that have had, perhaps more challenging conditions earlier this year. But we're continuing on doing what we're doing. The conditions in the business, both of the businesses, are very good.

The third quarter was quite strong as you can see, record MIS revenue in the third quarter. So we're going to keep doing what we're doing and in early February we'll give guidance for 2017.

Okay. And I don't know if you can answer this, but I'm going to try. So how should we think about the maximum settlement you can fund today given your US liquidity sources without having to repatriate foreign cash?

As we said, we've commented to the extent that we feel is appropriate in our disclosures already.

Just a final question, what's your view and current appetite to do M&A as long as these investigations continue?

Well, we've been engaged in M&A activity on a regular basis. I think we would continue to look for attractive assets to acquire. So I don't see any change in our thinking or behavior going forward than what you've seen in recent years.

Okay. Thank you for taking my questions.

I would like to turn the conference back over to Ray for additional remarks.

Okay. I just want to thank everybody for joining us and we look forward to speaking with you again in the new year. Thanks.

This concludes Moody's third-quarter 2016 earnings call. As a reminder, a replay for this call will be available after 3:30 p.m. Eastern on Moody's IR website. Thank you very much.