穆迪 (MCO) 2018 Q1 法說會逐字稿

Good day, and welcome, ladies and gentlemen, to the Moody's Corporation First Quarter 2018 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 Steve Maire, 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 first quarter 2018 results as well as our current outlook for full year 2018.

I am Steve Maire, Global Head of Investor Relations and Communications.

This morning, Moody's released its results for the first quarter of 2018 as well as our current outlook for full year 2018.

The earnings press release and the 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.

During this call, we will be presenting non-GAAP or adjusted figures. To view the nearest equivalent GAAP figures and GAAP reconciliations, please refer to our earnings release that was filed this morning.

Before we begin, I call your attention to the safe harbor language, which can be found towards 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, 2017, and in other SEC filings made by the company, which are available on our website and on the SEC'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.

Okay. Thank you, Steve. Good morning, and thank you to everyone for joining today's call. I will begin by summarizing Moody's first quarter 2018 financial results.

Steve is going to help me out with the prepared remarks by following up with some additional first quarter financial details and operating highlights. I will then conclude with comments on our current outlook for 2018.

After our prepared remarks, we'll be happy to respond to your questions.

In the first quarter, Moody's achieved record revenue of $1.1 billion, a 16% increase from the first quarter of 2017, reflecting not only a strong contribution from Bureau van Dijk, but also solid organic growth for Moody's Analytics.

Moody's Investors Service contributed broad-based transaction revenue growth, particularly from structured finance activity as well as recurring revenue growth, as 2017's new rating mandates became monitored credits.

Operating expenses for the first quarter of 2018 total $636 million, up 20% from the prior year period, including 12 percentage points attributable to Bureau van Dijk operating expenses, amortization of acquired intangible assets and nonrecurring acquisition-related expenses.

Operating income was $491 million, up 10% from the first quarter of 2017. Adjusted operating income of $541 million was up 13%.

Foreign currency translation favorably impacted operating income and adjusted operating income by 4% each.

The operating margin was 43.6% and the adjusted operating margin was 48%.

Moody's diluted EPS for the quarter was $1.92 per share, up 8% from the first quarter of 2017. Adjusted diluted EPS for the quarter was $2.02 per share, up 35% and excludes $0.10 per share related to amortization of acquired intangible assets and acquisition-related expenses. First quarter 2017 adjusted diluted EPS primarily excludes a $0.31 per share gain from strategic realignment and expansion involving Moody's China affiliate, CCXI.

Our business remains well positioned to benefit from continued global economic expansion in 2018. And as such, we are reaffirming our full year 2018 guidance of $7.20 to $7.40 for diluted EPS and $7.65 to $7.85 for adjusted diluted EPS.

I'll now turn the call back over to Steve 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 first quarter was a record $1.1 billion, up 16%. U.S. revenue was -- of $598 million, was up 3%. Non-U.S. revenue of $529 million was up 33%, and represented 47% of Moody's total revenue.

Recurring revenue of $603 million was up 26%, and represented 54% of total revenue. Foreign currency translation favorably impacted Moody's revenue by 4%.

Looking now at each of our businesses, starting with Moody's Investors Service. Total MIS revenue for the quarter was $720 million, up 8%. U.S. revenue increased 3% to $433 million. Non-U.S. revenue of $287 million was up 17% and represented 40% of total MIS revenue. Foreign currency translation favorably impacted MIS revenue by 3%.

Moving to the lines of business for MIS. First, corporate finance revenue for the first quarter was $378 million, up 7%. This result reflected strong contribution from EMEA bank loans and U.S investment grade, as well as growth in recurring revenue resulting from an increase in new mandates in 2017.

U.S. and non-U.S. corporate finance revenues were up 1% and 20%, respectively. Second, structured finance revenue totaled $130 million, up 29%. This result reflected broad strength in securitization markets with particularly strong levels of new CLO formation. U.S. and non-U.S. structured finance revenues were up 30% and 28%, respectively.

Third, financial institutions revenue of $114 million was up 2%. This result reflected growth in issuance from the EMEA banks and U.S. insurance companies, partially offset by a decrease in activity from Asian and U.S. banks. U.S. financial institutions revenue was down 4% while non-U.S. revenue was up 7%.

Fourth, public, project and infrastructure finance revenue of $93 million was down 5%. This result primarily reflected a decrease in U.S. municipal issuance due to the loss of tax exemptions for advanced refunding transactions. U.S. public project and infrastructure finance revenue was down 15%, while non-U.S. revenue was up 13%.

Turning now to Moody's Analytics. Total revenue of -- for MA of $407 million was up 33%. U.S. revenue of $164 million was up 6%, while non-U.S. revenue of $243 million was up 60%, and represented 60% of total MA revenue. Foreign currency translations favorably impacted MA revenue by 4%. Organic MA revenue for the first quarter of 2018 was $333 million, up 9% from the prior year period.

Moving now to the lines of business for Moody's Analytics. First, research, data and analytics or RD&A revenue of $269 million was up 53%. U.S. RD&A revenue was up 11% and non-U.S. RD&A revenue more than doubled. Bureau van Dijk's revenue contribution of approximately $74 million included a $10 million reduction as a result of a deferred revenue adjustment required under acquisition accounting rules. Organic RD&A revenue was $196 million, up 12% from the first quarter of 2017, driven by strength in sales of credit research and ratings data feeds.

Second, enterprise risk solutions, or ERS, revenue of $100 million was up 4% from the prior year period. This result reflected strength in software subscription revenues, partially offset by a revenue decline for onetime projects and licenses. U.S. ERS revenue was down 4%, while non-U.S. revenue was up 11%. Trailing 12 months revenue for ERS increased 6%, while sales were approximately flat.

We continue to make progress on shifting the mix of the ERS business to emphasize higher-margin products, with trailing 12-month product sales up 5% and service sales down 14%. Recurring revenue represented 81% of total ERS revenue in the first quarter of 2018, up from 76% in the prior year period.

Finally, professional services revenue of $38 million was up 5%. U.S. professional services revenue was down 4%, while non-U.S. revenue was up 10%.

Turning now to operating expenses. Moody's first quarter operating expenses totaled $636 million, up 20% from the prior year period. 12 percentage points of this increase were attributable to Bureau van Dijk operating expenses, amortization of acquired intangible assets and acquisition-related expenses. Other drivers of expense growth included additional compensation expense for merit increases and hiring.

Foreign currency translation unfavorably impacted operating expenses by 3%.

On January 1, 2018, the company adopted the new ASC606 revenue accounting standard using the modified retrospective approach. The impact of adoption was immaterial to both revenues and expenses in the first quarter of 2018.

The impact of ASC606 is expected to be immaterial to Moody's Corporation in the remainder of the year. However, it could create some quarterly volatility.

As Ray mentioned, Moody's operating margin was 43.6% and adjusted operating margin was 48%. Moody's effective tax rate for the first quarter of 2018 was 14.6%, down from 23.4% in the prior year period. The decline in the tax rate reflects a lower U.S. statutory tax rate, net uncertain tax position benefits related to a statute of limitation expiration and a higher benefit related to the tax accounting for equity compensation.

Now I'll provide an update on capital allocation. During the first quarter of 2018, Moody's repurchased approximately 300,000 shares at a total cost of $43 million, or an average cost of $161.10 per share. Moody's also issued a net 1.2 million shares as part of its employee stock-based compensation plan. The net amount includes shares withheld for employees' payroll taxes.

Moody's also returned $84 million to its shareholders via dividend payments, and on April 24, the Board of Directors declared a regular quarterly dividend of $0.44 per share of Moody's common stock. This dividend will be payable on June 11, 2018, to stockholders of record at the close of business on May 21, 2018. Outstanding shares as of March 31, 2018, totaled 191.9 million, approximately flat to a year ago. As of March 31, 2018, Moody's had approximately $500 million of share repurchase authority remaining.

At quarter-end, Moody's had $5.5 billion of outstanding debt and $910 million of additional borrowing capacity available under its revolving credit facility.

Total cash, cash equivalents and short-term investments at quarter-end were $1.4 billion, an increase of 16% from December 31, 2017. Cash flow from operations for the first 3 months of 2018 was $392 million, an increase from negative $512 million in the prior year period. Free cash flow for the first 3 months of 2018 was $377 million, an increase from negative $531 million in the prior year period.

These increases in cash flow were largely due to payments the company made in the first quarter of 2017, pursuant to its 2016 settlement with the U.S. Department of Justice and various state's Attorney General.

And with that, I will turn the call back over to Ray.

Okay. Thanks, Steve. Before discussing the changes to our full year guidance for 2018, I'd like to provide some highlights on our progress with Bureau van Dijk integration and synergy activities.

After nearly 9 months since closing the acquisition, our integration efforts are on track. We've met our legal and regulatory requirements and executed cost reductions without disruption to the business.

In March, we completed a rightsizing program to realize efficiencies across the combined employee base, thus, reducing compensation expense. Having colocated Moody's Analytics and Bureau van Dijk's staff in 7 cities, and with consolidation of additional offices expected through year-end, we are well positioned for significant reductions in real estate costs.

We've applied Moody's Analytics sales operations practices to Bureau van Dijk in order to gain increased sales productivity. By pursuing joint marketing efforts in specialized product areas, we are building a solid pipeline of near-term, cross-selling opportunities.

In short, we're making good progress on the synergies that we anticipated when we announced the transaction and the legacy Bureau van Dijk business continues to deliver results consistent with its historical performance.

I will conclude this morning's prepared comments by discussing the changes to our full year guidance for 2018. A complete list of Moody's guidance is included in Table 12 of our first quarter 2018 earnings press release, which can be found on the Moody's Investor Relations website at ir.moodys.com.

Moody's outlook for 2018 is based on assumptions about many geopolitical conditions and macroeconomic and capital market 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 could differ materially from our current outlook. Our outlook assumes foreign currency translation at end of quarter exchange rates. Specifically, our forecast reflects exchange rates for the British pound of $1.40 to GBP 1, and for the euro, $1.23 to EUR 1.

We are now expecting corporate finance revenue to increase in the mid-single-digit percent range. Structured finance revenue is now expected to increase in the high single-digit percent range.

Before turning the call over to Q&A, we'd like to provide an update on Moody's corporate social responsibility strategy.

Earlier this week, we launched a global approach to CSR, focused on empowering people around the world with the information, resources and confidence they need to create a better future for themselves, their communities and the environment.

We also announced Reshape Tomorrow, our signature financial empowerment initiative to help people succeed in growing small businesses. Reshape Tomorrow will provide small business owners access to vital information about the credit process and help them connect with sources of financing.

Moody's is seeking partnership proposals from organizations for Reshape Tomorrow programs and resources that provide essential financial knowledge to increase their chances of success.

For more information and to submit a proposal, please see the CSR press release that we issued on April 24, or visit moodys.com/csr.

This concludes our prepared remarks, and joining Steve 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 may have.

(Operator Instructions) And our first question comes from Conor Fitzgerald with Goldman Sachs.

Just wanted to get a little -- dig in a little bit on the recurring revenue on the ratings side, where you had a pretty good quarter, particularly in corporate finance. Just can you talk a little bit about the trends you're seeing in this space? And how sustainable you think the pace of growth is?

Sure. Happy to, Conor. And I'll ask Rob Fauber to offer some initial thoughts on that.

Yes. So I think your first question was around the recurring revenue. So similar to the fourth quarter, among other things, we saw increases in monitored credits. Particularly in Europe and Asia, where we're seeing some very strong first-time mandate growth and we also got a modest benefit from FX. And as you recall, we had over 1,000 first-time mandates in 2017. So that's helping support the recurring revenue growth. And I think your second question was around corporate, generally. So looking at corporate issuance, globally it was down somewhere in the neighborhood of 20%, obviously our CFG revenues were up. We benefited from some favorable mix, some good commercial execution, the higher new mandates that I mentioned, monitored credit growth and FX. We also saw some good growth in other transaction revenue and that includes our Rating Assessment Service that's typically driven by M&A activity. And the rest of world, the issuance declines were really largely confined to the European investment-grade issuers, which mitigated the revenue impact to some extent.

Yes. And I would just add that, as far as recurring revenue at MIS, to the extent that is driven off of new rating mandates and we're benefiting from the strength of that in 2017, we do expect another robust year for new rating mandates in '18.

And Conor, let me take the opportunity to give an update on what we're hearing from The Street as we do every quarter. And again, keep in mind, these are consolidated consensus views from a variety of different large investment banks. It includes both financial and nonfinancial. Though, it doesn't necessarily align with the way we categorize revenue. But hopefully, we'll be instructive to, at least, what we're hearing on the ground in the bond markets here in the U.S. And then EMEA. So for investment grade, guidance for full year levels are about $1.2 trillion. That's down roughly 5% to 10% from our record levels in 2017. Overall conditions remain stable and fundamentals remain relatively strong, and they're seeing a solid pipeline out front. This week, for instance, I know it was around $20 billion of investment grade, I think, calling next week for slightly higher than that, as earnings blackout start to roll-off in May, which is typically a fairly active month, as from what we're hearing is shaping up to be so. Credit spreads have widened in the first quarter given equity market volatility. But rallied a bit in April. The Barclays Bloomberg Aggregate Bond Index is roughly 10 basis wider here today though. So it's -- the round trip is showing some modest widening on a year-to-date basis. And then another thing I'd point out, some cash repatriators have been out of the market so far in Q1. So let's keep an eye on that. Moving to high yield. The forecast for full year volumes, $275 billion. That's about flat to 2017. Equity market volatility and interest rate hikes, we've already seen one so far this year. The Fed is -- or futures market is pricing in between 2 and 3 incremental hikes. Likely, the next one will be in June with a 90%-plus probability. Issuance today is primarily been driven by refinancings in the high-yield bond market. But demand from investors remain strong, and on the credit spreads there, I would say a similar story to investment grade in terms of the journey that they've taken year-to-date, given the tightening in January and then selling off in February, March. And then some rallying over the last several weeks. But year-to-date, relatively unchanged on credit spreads for high-yield bonds. On leverage loan side. Full year forecast that we're hearing is roughly $500 billion. Again, this is flat to down 10% on what was really just a gangbuster year for this asset class in 2017. So a very high base. The leverage loan market does remain strong, spreads are narrow. And it's obviously an attractive asset class in a rising rate environment. Repricing and refinancing activity, it still remains robust. That was a big driver last year and we're seeing that trend continue. Full year 2018 expected to be slightly down, as I mentioned, from what was a record 2017, with some potential upside if we see M&A activity accelerate, or rising rates creates a more demand for floating-rate paper than we've already seen. Moving to Europe, the investment-grade side, issuance has picked up from the beginning of the year. The band remained solid is what we're hearing. As spreads have moved a bit wider from the beginning of the year, but remain tight by historical standards. So similar dynamic to what we're seeing on U.S. dollar spreads investment grade. The euro area continues to see strong growth in GDP and corporate profits. So that's a happy condition. On spec rate side, both high yield and leverage loan markets are in good shape, though issuance levels faced tough comps over what was a strong 2017. And spreads are narrow due to strong demand fueling opportunistic issuance. The pipeline is healthy and similar to the U.S. driven by refinancings and reprices. So hope that helps.

That's very helpful. And then just one on capital and capital return, cash was up at the end of the quarter. I know you got some debt paydowns coming in. And as we get through the rest of the year. We just wanted to get your updated thoughts on what you're thinking about doing with the free cash flow. I think based on your guidance, you still have a little extra wiggle room if I just put all the moving pieces together for buybacks, debt paydown, et cetera. So just want to get your updated thoughts.

Yes, our thinking there really hasn't changed, Conor. We've been very upfront, really since we announced the Bureau van Dijk acquisition that our near-term priority would be deleveraging from the debt that we took on to finance that acquisition. We haven't come off that. As you know, we took down our share repurchase target for 2017 to $200 million, 2018, the same amount. And that's enough to offset dilution from employee share issuance. So we're still marching along those same lines to the extent that we are able to reach our leverage targets sooner than we expected. I would say at this point, we are a bit ahead of pace than we had initially thought, then we'll of course reevaluate what we want to do there. But right now, near term, it's absolutely prepaying debt.

And we'll take our next question from Toni Kaplan with Morgan Stanley.

So you had a good quarter in corporate finance. Revenue up basically 7% globally. And really difficult comp in that business. So I think I was just a little bit surprised that the revenue guide for the year, you lowered it. And so can you just talk about, I guess, you just talked about like what's going on in the markets. But I'm just not totally sure as to what to think for the rest of the year, given the lower guide but okay first quarter.

Yes. Rob may want to provide some additional color. But the high-level answer is, we do have a moderation of issuance expectations for U.S. high yield and EMEA investment-grade bonds. And you add to that, what we anticipate will be an adverse shift in foreign currency translation. And that's really contributing to the modest reset in our guidance.

Great. And then for Moody's Analytics, we noticed that the margins were maybe about 200 basis points -- were up about 200 basis points. But they were down sequentially from sort of the second half of 2017. And so we were just wondering if you had to sort of look at the legacy business margin expansion as opposed to just BvD being included. How should we think about the legacy margin expansion, if you exclude that?

Yes. Mark, do you want to try and address that?

Sure. Yes, Toni, we did have what we felt was good year-on-year margin expansion. And moreover, we've got another quarter of margin expansion on a trailing 12 months basis. I think that's 5 consecutive quarters now that are on a trailing 12 months basis. The margin is expanding. And that's really the number that we focus on, because you can get some weird things going on with the numbers if you look at any one discrete quarter. But the margin expansion is coming from both the legacy business as well as from Bureau van Dijk. Both pieces are contributing to expansion. And that's in spite of the haircut on the Bureau van Dijk revenue associated with the accounting. And also the extra overhead allocation that Moody's Analytics is now attracting because of the growth and the scale of the business relative to MIS, with the addition of Bureau van Dijk. So we -- we're -- actually we're quite pleased with the way the margin is expanding. And we feel like we really are delivering on what we talked about, with respect to delivering consistent gradual progress in expanding the margin. And again, focusing very heavily on the trailing 12 months performance rather than the discrete quarters.

I would just comment to Toni on the deferred revenue haircut, Mark just mentioned. We experienced $10 million of it this quarter. So we're most of the way through it. We've got about $5 million and some change left. $5 million should likely hit next quarter. And then Q3, it'll be largely gone. And after that, it goes away. So that'll be a nice little uplift for us.

And our next question comes from Alex Kramm with UBS.

Staying on, I guess, BvD and Analytics for a minute here. I think a lot of people were surprised this morning by the revenue performance in RD&A, and in particular, in BvD. So maybe you can talk about a little bit more why maybe some of us got that wrong in terms of the seasonality? And how this will ramp throughout the year? But maybe most importantly, I think the adjusted number for BvD was flat quarter-over-quarter. So I guess, I would've expected some growth, in particular, given that FX was helpful. So maybe a little more color would be great.

Sure. Mark?

Yes, Alex, taking the -- your second point first. The Bureau van Dijk numbers, if you add back the haircut to what we reported, you're right that it's flat from the fourth quarter to the first quarter. What you're missing there is that we did take a hit to the top line in the first quarter because of the transition to the new accounting standard, ASC606. That did hurt us on the top line. We also had some timing delays in closing some of our renewal contracts. That really relates to operational matters as opposed to commercial matters. We don't have issues with the customers or with the business. But we just didn't get some of those contracts booked in the first quarter as expected. But we expect to get them shortly and we will see an acceleration, we'll have a catch up on the revenue recognition once we get those booked. So that's what's going on there. The underlying business is performing well. As Ray said, it's very much in line with, if not better, than the historical stand-alone performance of the business. So we feel very good about what's happening there. And then on the other point, I think that what you're seeing is that we do expect RD&As growth rate to accelerate, particularly in the second half of the year. You need to keep in mind that what's happening here is that in the -- as we get into the third quarter, Bureau van Dijk's numbers will start to roll into our organic calculations. Because we will have had them in, in the half of the third quarter and the full fourth quarter of '17. And as Steve just pointed out, that deferred revenue haircut will go away. So we're going to see very healthy growth in the organic RD&A figures as we get into the second half of the year.

And then, I guess, just one other point I would make, Alex. You made a comment about expecting a nice lift from FX. The average rate on the euro really wasn't materially different in Q4 versus Q1. Obviously, the euro strengthened pretty meaningfully last year, but most of that took place sort of early to midyear. So it was relatively flat quarter-on-quarter.

Okay. Fair enough. I thought it was up 4%, 5%. But it's okay. I'll double check. Anyways, and then secondly, just quickly, I think when you gave the update on the issuance outlook, leverage loans were still cited as an area of strength. And I think your colleagues said this yesterday too, with flows to bond funds and demand for variable paper. But LIBOR has certainly been coming up a lot. So while spreads are tight and there's demand. What about the corporate side? Is -- are we -- is there a point where some of these high-yield issuers are seeing the variable rates just too high or do you think it was still pretty far away from that? Any color would be helpful.

Yes, and this is Ray. Just the absolute borrowing costs are still attractive. And I think there is room even in a rising rate environment for borrowing conditions to remain attractive. We may see later in the year some rebalancing between the relative attractiveness of floating versus fixed-rate paper. Really depends on both policy and market reactions to policy on interest rate. So we'll see. But we do see a broadly positive environment for borrowing continuing.

And we'll take our next question from Manav Patnaik with Barclays.

I guess, you answered my question I had on BvD. But maybe if you do the rest of the Moody's Analytics business, I guess, the -- I think the organic growth of 9%, you called out. I believe that includes FX benefit, right? So if I assume, it's about 4% to 5% growth. I guess, can you just help understand, it feels a little slower than we would've expected. Any moving pieces, maybe timing in the other pieces of RD&A, ERS and so forth?

Yes, Manav. There was -- there's a little bit of timing there. And like I said, we do expect acceleration in the growth rate as we get into the second half of the year. But bear in mind, we guided to low double-digit growth for MA organically. And we came in at 9% in Q1. So -- and of course, our guidance includes our expectations about FX. So I think things are running substantially as we expected. We don't see a big deviation from where our guidance is and where we see the business performing.

That's fair. But I guess if I do a true organic constant currency number, that 9% is probably 4% or 5%. And I was -- so I was just -- we've always thought that it should be more high single-digit growth. So is there some -- so does timing explain why that isn't higher? I suppose, I guess was what I was trying to get at?

Well, RD&A organically, constant currency is up 7% in the first quarter. So again, it feels pretty solid to us.

Okay, that's fair. And then just a follow-up maybe just on the backdrop. It sounds like you guys still remain constructive on the issuance backdrop as you were at Investor Day. Maybe just on the structured side, like how much do you think -- it was pretty strong, obviously, in the quarter. Like how much of that do you think was pull forward and you see weakness and so forth. I know pull forward is a word we've been using for many years now. But just some thought there would be helpful.

Yes. As we talked about a little earlier in the year, our expectations for a robust issuance environment, we're relying more on global GDP growth, economic momentum, mergers and acquisition activity as opposed to refinancing that was going to be needed because of maturing debt in 2018. That being said, you're correct. We've had a continuing pull forward narrative and dialogue. And so as interest rates increase in 2018, we have to look out to 2019, 2020 and see what corporations are thinking about the utility of refinancing in 2018, with rates where they are now versus their expectations for rates in 2019, 2020. And we will have to watch and see where those decisions get made.

And we'll take our next question from Joseph Foresi with Cantor Fitzgerald.

I was wondering if you could be a little specific on what caused the renewal delays or timing in RD&A and how you rectified it?

Mark?

Sure. It's really -- it's pretty simple. And frankly, we've seen this before with some -- when we've acquired subscription businesses. The practices at Bureau van Dijk have not historically been as rigorous as we do things in Moody's Analytics. And we haven't quite gotten the discipline around getting our renewal contracts signed and booked in a -- on a timely basis. I think we're making progress in getting them with the program and getting that work done the way we get it done across Moody's Analytics. But we haven't quite gotten them to the level that we'd like. So that's really what I was referring to. It's not a massive amount of business. But it does affect our numbers a little bit in the first quarter. But as I said, we fully expect to get those sorted out in short order and we'll have the revenue catch up once they get booked. I should note that attrition in the business is holding very steady at kind of their historical experience. So we don't see any problems with the underlying business. It's really just an operational matter.

Okay. And just to go back to guidance, why not raise the guidance, at least on the margins or the earnings side of things? Is there a change you're expecting to the cost structure or was that due to the lower revenue outlook you mentioned a little bit earlier?

Yes, it's -- we -- I hope we are being cautious on the top line outlook. But we have some robust comps that we're going to be lapping in for the rest of the year. And we are in an environment where rates are moving up, at least, modestly spreads have widened out a bit. So we're taking a -- I think, a prudent, but you might say, cautious approach to what the top line opportunity is for the rest of the year.

And, Joe, I would just add, we -- just to give an update to help you with your modeling on the expense ramp. We are expecting it still to increase between $60 million and $70 million from Q1 to Q4. So the starting point is obviously now $636 million. Which is actually right in line with what we talked about on the last call. So we're still expecting growth as we move through the year. So that's part of why we're being thoughtful about our guidance on the margin.

And our next question comes from Peter Appert with Piper Jaffray.

So, Mark, I want to make sure I fully understand the impact of deferred revenue at BvD on the profitability. Is it correct to say that you're deferring revenue but all costs have to be recognized as incurred? And therefore, you're perhaps understating the margins currently, and we might anticipate some fairly meaningful spike in margin in the third and fourth quarter? Do I have this right?

Yes, you understand that perfectly, Peter. I mean the only tweak I might make to what you said is just the -- I forget now what the -- exactly what word you used, but you maybe said it with a bit more vigor than I would have in terms of the amount of additional margin we'll see when we stop haircutting the top line with these accounting adjustments. But yes, absolutely. We're absorbing and we're recording all of the expense. But we're not recording all of the revenue on the P&L.

Is it possible to quantify that a bit more then, Mark, in terms of, for example, in the first quarter, you deferred $10 million of revenue. Would that imply if this is a 40% margin business? The operating income would've otherwise been $4 million higher?

You did the math right, yes. I mean it was...

Peter, just to clarify, the deferred revenue haircut would have added $10 million to the top line. And there would be taxes on that. But otherwise, there's no additional expense associated with it. We're recognizing all of the expenses.

Correct. And also, just a reminder to everyone, how that works. The majority of that was taken in Q3 and Q4 last year. So it was roughly $50 million all in. About $39 million of that was taken, a little north of $50 million. $39 million was -- that was taken in '17 in Q3 and Q4. And so the remainder of the $16 million is left in 2018. And again, we recognized the $10 million this quarter. Projecting $5 million next quarter. And then there is just a very trace amount.

And we'll take our next question from Jeff Silber with BMO Capital Markets.

I was wondering if we can get on the update on the CFO search?

Sure. It's ongoing. We've seen some excellent candidates. We have good candidates, both inside Moody's and we are conducting an external search as well. I hope to be able to close out the search in the near future. But it's still in process.

Okay, and when you say near future, can you remind me have you put a time expectation on that beforehand?

Well, I'd like to have it done today. But I want to make sure that we get the best possible candidate. So I'm not going to put a deadline on it. I'm just going to keep working at it.

I understand. I appreciate that. And just one quick numbers question. I know the tax rate was lower this quarter. You highlighted some of the items. What should we be using going forward for the tax rate for our models?

Yes. No, that's fair. It was quite a bit lower and we commented on the last call to expect exactly that. We had estimated an excess tax benefit related to stock comp accounting of roughly $40 million for the year. And we said that, that was going to be weighted towards the first quarter. In fact, it was. It was about 75%, the $30 million was taken in the first quarter. There's $10 million or so remained, that will be fairly evenly spread out. So that was one piece that was impacting the tax rate. Another item that you really wouldn't have visibility into, but there was an -- also a net benefit that we received in the first quarter, from a statute of limitations expiration on certain tax -- on certain tax positions that we had reserved for. So we reversed those out. So that further brought down the ETR. So going forward, Jeff, obviously, 14.6% in Q1. We haven't changed our guidance of 22% to 23%. So the math would indicate that it's going to likely have to be slightly higher than that 22% to 23% for the remaining quarters in order to average out to the 22% to 23% guidance.

And we'll take our next question from Craig Huber with Huber Research Partners.

Ray, would you mind just talking further about your outlook here for bank loan issuance for the rest of the year here. I know you talked with the investment banks, I think it would be down -- it'll be flat to down 5% in the U.S. What is your thought for the year on how that will play out here in this environment?

We -- as you saw for bank loans, we had a good first quarter. There was a lot of strength in our European bank loan business and I will let Rob provide a little more color on that. But overall, we are looking at flat to slightly up revenue expectations for bank loans for the full year, which would be a little bit better than what we're expecting in terms of the direction of issuance volume, which would be slightly down. So we think that we have opportunities to increase our coverage in bank loans. And again, I would point to the strength in Europe that we've seen. And Rob, I don't know if there's anything you wanted to add on that.

Yes. That's right, Ray. And I think we're seeing a very active bank loan market. I think we have to keep in mind when we're talking about the issuance outlook for the full year, we're coming off a year where global issuance, last year, was something north of 30% growth, I believe. The bank loan market has been a bit more active than the high-yield market. We're seeing a lot of first-time issuers come through the bank loan market. We're also seeing a lot of issuers that are rated very low in the credit spectrum. As Ray said, in Europe, we saw some nice revenue growth in bank loans on generally flattish issuance this quarter. The issuance mix worked in our favor there. Leverage loan volumes in Europe, while again, kind of flattish, are at a record pace. And there's very good M&A activity supporting the loan volumes there compared to the prior year quarter where we saw a bit more refi activity. And also in Europe, we've got institutional investors and CLO originators that have got very strong bids for these loans. So that's driving down the funding cost and keeping spreads tight for issuers there.

And one thing I'd add on to Rob's comments is, with some of these bank loan borrowers profiling at -- as high-credit risk, low-rated entities, there is some potential volatility that could enter the equation if the default rates don't continue to decline. We believe they will through the year, but if there is an increase in default rates, that makes those deep speculative-grade names less attractive and they may not have market access.

Then also if I could just quickly ask 2 quick ones, if I could. For BvD, what was the underlying growth rate you put aside the revenue adjustment for accounting purposes? And then also, the up 7.7% Ratings revenue growth for the whole division, how much of that would you tie into being directly from the new mandates? Was it half of it coming from there? Roughly how much please?

I think it's going to be less than that, Craig. I don't have a number for you right away, but we can check on that. But it's not going to be the majority, no.

On Bureau van Dijk, Craig, we're not disclosing the precise numbers for Bureau van Dijk on a stand-alone basis. But suffice to say, it's performing at a rate that is very consistent with what we would've showed you when we announced the acquisition in terms of its historical growth rate.

Mark, that historically was what, 9%, 10%? So it's roughly in that ballpark.

Yes, it was running in the high single-digits, around 9%.

So you're suggesting pretty close to that then?

Yes, absolutely.

And our next question comes from Bill Warmington with Wells Fargo.

So the first question for you on the structured finance segment. You highlighted the CLO and CMBS demand being particularly strong, but it also looked like the demand was really pretty broad and I wanted to ask about what was driving that and then also to ask if there was any pull forward there to highlight?

Yes, Rob?

Let me take that and I think you're right. Generally, we saw broadly higher securitization volumes and you're right, we've called out U.S. CLOs but we've seen -- experienced some robust activity across a number of other sectors. Just to touch on CLOs, because it was such a big driver for the quarter, we've seen very strong refi activity on tighter spreads. We also saw a higher proportion of new CLO formation as a percent of total deals in the first quarter, higher than any quarter that we had in 2017, and that's helped in part by using risk retention. The U.S. obviously, a bigger market for structured credit but a similar story in Europe, with European CLO volumes supported by refi and as I have said earlier, also a very hot leverage loan market. We saw an uptick in CMBS deals and very robust ABS volume on very strong investor demand. In Europe, we saw RMBS volumes up, particularly in the U.K. and the Netherlands, and the U.K. really benefiting -- volumes were benefiting from the conclusion of the Bank of England's Term Funding Scheme in February, which was a cheap source of funding for banks. I would also note that Q1 '17 was a little bit of an easier comp for structure. If you think all the way back to Q4 of 2016, we did see some pull forward because of the implementation of risk retention in beginning of 2017. So it was a little bit of an easier comp as well.

And also I would just add on to that, after this call, we will post on the IR website as we always do after earnings calls, the breakdown of the components for the lines of business of revenue for the rating agency. And you'll see CLO quarter-over-quarter, Q1 '17 and Q1 '18 structured credit line is up 58%, ABS up 24%, RBS up 19%. So broad-based strength across pretty much all the asset classes.

Got it. And then for my follow-up question, I wanted to ask about the war for IT talent, which seems to be intensifying as you see tech services companies across verticals looking to leverage our artificial intelligence and machine learning. And I wanted to ask whether you're finding that you're able to get the talent you need and whether there's any changes that you're thinking about making to ensure that you continue to get the talent you need?

Well, I think, broadly speaking, we do feel that we're able to attract very talented IT professionals, whether it's in our centralized IT function or embedded in the businesses. A lot of this is how attractive the opportunity is in terms of what we would have people working on, whether it's robotic process automation or product development, it is an attractive offering. You're correct that there is a lot of competition for the best people. So we've got to stay on top of that. We will adjust to make sure that we continue to retain our best people and recruit the best people and those adjustments, they may be financial, they may be in terms of job content, but we're paying attention to it like almost any organization today would. Mark, do you want to add to that?

Yes, I'd just add that what we're also seeing is that there is a lot of talent available in many different locations around the world. Certainly, it's quite challenging if you're recruiting in San Francisco and New York City and some other major centers, but we've got operations in many different places around the world. We've got a big operation in Omaha, for example, and we find that to be a terrific source of talent. And in many of our other operational centers around the world, we're able to attract the kinds of talent we want. So I think having the broad-based footprint that we have, really helps us in that respect.

And we'll take our next question from Tim McHugh with William Blair & Company.

What numbers -- can you just updated on incentive comp, how much you accrued in the quarter? And I guess any change to the outlook versus what you're expecting for the full year now?

Yes. Sure, Tim. Happy to provide that. So for the first quarter, incentive comp was $45 million. That was down 13% from first quarter of last year and 37% sequentially. As you know we had to take that up pretty significantly in the back half of 2017 as we raised guidance given the performance of the business. Going forward, I would say it's sort of the $50-ish million number is probably the best way to think about it. But as you know, that will likely change depending on how the business performs, depending on what we do guidance but that I think is probably a good starting point.

Okay. And then ERS product sales on the trailing 12-month basis was actually a little slower. I get why services sale is something you've been deemphasizing, but I guess, I was a little surprised about the pace of product sales growth. Was there anything happening there that you can elaborate on?

I think, Tim, it's performing pretty much as we expected. I mean, I think we've got a number of new product launches that we've put into the market recently that have been very well received. Our new loan origination product is doing quite well. The product that we have in the market to help our customers comply with the new CECL accounting standard is being very well received. We have a very nice pipeline building there. And so we're -- if you drill down a little bit more into these numbers, you see that we've got continued double-digit sales growth for renewable products, which is really where we're putting our emphasis. I think we've got at least 5 or 6 quarters now of double-digit growth in renewable product sales. So I think things are going very much in line with our expectations there. As we've told you, we expect 2018 to be a fairly soft year for ERS as we work through this transition. But we feel very good about some things that are happening in the business and that should play out very nicely for us over a longer period of time.

And our next question comes from Vincent Hung with Autonomous.

How much of the nontransaction revenue comes from Rating Assessment Services? And if you can't give us that, what was it up year-over-year? Because I think S&P said it was up 40%.

Our revenue from Ratings Assessment Services is not very significant, to tell you the truth. I don't have the year-on-year growth rate in front of me but again, it's not a material number.

Okay. And on RD&A, if we think about the core RD&A excluding BvD, should we be looking at 12% organic as the right run rate for the rest of the year?

12% -- well, again, our guidance for RD&A organic is mid-teens for this year. And we did 12% in the first quarter. We expect that to accelerate, as I said, because we'll be layering in Bureau van Dijk, which is going to help. So I guess you're asking me, will -- am I expecting 12% growth from RD&A on an organic basis excluding Bureau van Dijk. Is that the question?

Yes, exactly.

Again, that's -- I don't really have -- I don't think we can give you guidance at that granular level. But I would expect that the RD&A business organically would continue to perform at a level similar to what we did in the first quarter, if you were to pull out the Bureau van Dijk business. I don't see it. Put it this way, I wouldn't expect that business to -- the growth rate to be slowing.

And our next question comes from Shlomo Rosenbaum with Stifel.

First, just a regular numbers question. What was the organic constant currency growth for the whole company? If you just kind of strip out both Bureau van Dijk and then the positive impact from FX, some of which went into Bureau van Dijk.

Sure, Shlomo. Stripping -- so we had said that 16% top line for Moody's Corporation. Half of that was due to the contribution from Bureau van Dijk. And the FX impact on all that revenue was 4%. So if you strip that out, they get you down to 4%.

Yes, the thing is, as data predict MIS at 5%. And then MA seems to be kind of 9%, when you take out BvD, it would imply it's a little bit higher than that. That's what I'm trying to get at a number, it seems to be a little bit higher.

No, that's the math all, at least for the first quarter.

Okay. Can you comment a little bit on the dichotomy in the performance for -- which in the U.S. and outside the U.S. for ERS and professional services?

Yes, sure. I'll let Mark start with this and I might add a couple of comments on to it.

Yes. I think couple of things going on there. First, we had some pretty significant FX benefit, which is obviously impacting the business outside the U.S. Also, we had some very strong sales growth outside the U.S. in -- particularly in ERS last year related to work that we were doing associated with our customers adoption of the IFRS 9 accounting standard. So that gave us some very good sales growth outside the U.S. last year, relative to the U.S. which I think is now showing up in the U.S -- non-U.S. revenue results.

And professional services?

Again, a similar story. But in our 2 businesses within professional services, they both tend to be a little bit more heavily oriented toward customers outside the U.S. than in the U.S. So I think it's just the nature of those businesses is such that we've just got a bigger base of customers and a bigger base of business to work with outside the U.S. and to the extent that those businesses are performing better. We're seeing most of that improved growth outside the U.S.

And we'll take our next question from Patrick O'Shaughnessy with Raymond James.

So what's been the impact of tax reform on synthetic repatriation bond issuance thus far in 2018? I was reading the other day that the 10 largest holders of overseas cash haven't tapped the U.S. bond market so far this year. After issuing roughly, I think it was $80 billion or so last couple of years, but obviously, that doesn't seem to be weighing on your corporate finance revenue so far.

Yes, well, this follows up on a brief comment that Rob had made earlier that it is providing at least a modest headwind, but it is very concentrated in terms of number of firms that have large cash hoards overseas and may not feel they want to tap the debt markets given that repatriated cash. So the numbers -- if you look at the dollars, you might think it provides more of a headwind to our business than in fact it is. And I would just add that with so much of our business being in the spec-grade sector, those are not companies that typically have a lot of overseas cash to bring back. So again, it is a headwind, not a serious one at this point.

And we'll take our next question from Alex Kramm with UBS.

I actually had a follow-up on the tax rate but that was answered already. But a couple of things, while I'm here, I guess. One, I know you don't really give near-term guidance but would be interested with the commentary you've said in terms of the updated outlook, how you think about more near term. I mean, the one -- first quarter had -- on the MIS side is right, had a little bit of volatility, some of that volatility has persisted. But typically the second quarter gets a little bit of a seasonal bump from the 1Q. So I'm just wondering if you feel like seasonally the second quarter should be stronger than 1Q just given seasonality, maybe some things were delayed and are coming in the second quarter? Or if it's just too uncertain of an environment. I guess, I would say, you probably see the pipeline developing pretty real time. So any color will be great.

Yes, let me try that Alex. So I'm going to talk a little bit about kind of the pipeline and market tone and kind of what we're seeing, what we're expecting. I think, in general, I would say the pipelines look healthy. We've -- I would note that we've worked through a good bit of the big M&A backlog that we had earlier in the year, but we are also seeing M&A deals in kind of preliminary stages and we're seeing that through our Rating Assessment Service. We've also got a very good pipeline of first-time mandates. So that gives us some visibility. We talked about in the spec-grade market, spreads remain very tight and as I said, we're seeing a lot of low-rated issuers tapping the market. A very strong CLO bid for that kind of paper. I would also note just in terms of fund flows, so on a high-yield side, after we saw a lot of outflows earlier in the year, we're starting to see some inflows back into high-yield funds. We saw $3 billion inflows last week, that was the largest week since mid-December 2016. And on the loan side, inflows continue to be strong. We've had now 9 consecutive weeks of inflows. So I think we expect -- in the investment-grade side, we're coming out of blackouts. We're seeing good activity and I think we would expect steady issuance here in the second quarter.

Great. And then maybe just lastly, Ray, I think M&A hasn't really come up as a topic. I know you're pretty busy integrating BvD still, but just curious about appetite right now as you look at the world and maybe also what the environment is like for deals in areas that you are interested in. I mean, is this -- is there a good bid ask or are things just too expensive or it's just not really anything out there that you are taking a look at?

Well, things are always too expensive. So there is the starting point. Well, we have an active Corporate Development function at Moody's M&A function. We look at a lot. As you know we don't pull the trigger very often. So there are things that we're looking at, that are of interest to us, but it would be the same thing I would answer in any other quarter. There is nothing unusual going on in the M&A environment that is causing us to either step back and say, it's too rich for us, or to say, we've got to act right now. This is the moment in time to pull to trigger. So we're being disciplined. We are looking, and we'll see if something attractive is offered at a fair price.

And it appears there are no further questions at this time. Mr. Ray McDaniel, I'd like to turn the conference back to you for any additional or closing remarks.

Okay. I just want to thank, everyone, for joining today's call, and we look forward to speaking with you again in the summer. Thanks.

This concludes Moody's First Quarter 2018 Earnings Call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the first quarter 2018 earnings section of the Moody's IR homepage. Additionally, a replay of this call will be available after 3:30 p.m. Eastern time on Moody's IR website. Thank you.