穆迪 (MCO) 2018 Q2 法說會逐字稿

Good day, and welcome, ladies and gentlemen, to the Moody's Corporation Second 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, sir.

Thank you.

Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's' second quarter 2018 results as well as our current outlook for full year 2018.

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

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

The earnings press release and our 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 will call your attention to the safe harbor language, which can be found toward the ends 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 statements, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements.

I would also like to point out that members of the media may be on the call this morning in a listen-only mode.

I will 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 second quarter and first half 2018 financial results.

Steve Maire will follow with additional second 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 second quarter, Moody's achieved record revenue of $1.2 billion, up 17% from the second quarter of 2017.

This result reflected strong performance at Moody's Analytics, driven by contributions from Bureau van Dijk.

Moody's Investors Service record performance was primarily attributable to robust bank loan and collateralized loan obligation, or CLO market activity, as well as recurring revenue growth as 2017's new rating mandates became monitored credits.

Operating expenses for the second quarter of 2018 totaled $641 million, up 19% from the prior year period, including 11 percentage points attributable to Bureau van Dijk operating expenses, amortization of acquired intangible assets and nonrecurring acquisition-related expenses.

Operating income was $534 million, up 16% from the second quarter of 2017.

Adjusted operating income of $584 million was up 17%.

Foreign currency translation favorably impacted operating income and adjusted operating income by 2% each.

The operating margin was 45.4% and the adjusted operating margin was 49.7%.

Moody's diluted EPS for the quarter was $1.94 per share, up 20% from the second quarter of 2017.

Adjusted diluted EPS for the quarter was $2.04, up 32%, and excludes $0.10 per share related to amortization of acquired intangible assets and acquisition-related expenses.

Second quarter 2017 adjusted diluted EPS primarily excludes a $0.13 foreign currency hedge gain.

Turning to first half performance.

Moody's revenue for the first half of 2018 was $2.3 billion, up 17% from the prior year period, including 8 percentage points of growth attributable to Bureau van Dijk.

U.S. revenue was $1.2 billion, up 7%.

And non-U.

S. revenue was $1.1 billion, up 30%.

Foreign currency translation favorably impacted Moody's revenue by 2%.

Moody's Investors Service first half revenue of $1.5 billion was up 9% from the prior year period.

U.S. revenue was $885 million, up 6% and non-U.

S. revenue was $588 million, up 13%.

Foreign currency translation favorably impacted MIS revenue by 2%.

Moody's Analytics revenue for the first half of 2018 was $830 million, a 34% increase over the prior year.

U.S. revenue of $339 million was up 9% and non-U.

S. revenue of $491 million was up 58%.

Foreign currency translation favorably impacted MA revenue by 3%.

Organic MA revenue for the first half of 2018 was $676 million, up 9% from the prior year period.

Moody's Corporation operating expenses for the first half of 2018 were $1.3 billion, up 19% 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.

Foreign currency translation unfavorably impacted expenses by 2%.

Operating income was $1 billion, up 13% from the first half of 2017.

Adjusted operating income of $1.1 billion was up 15%.

Foreign currency translation favorably impacted operating income and adjusted operating income by 3% each.

Moody's operating margin was 44.5% and its adjusted operating margin was 48.9%.

The effective tax rate for the first half of 2018 was 19.4%, down from 27.8% in the prior year period.

The decline was primarily due to lower U.S. statutory tax rate and net uncertain tax position benefits related to a statute of limitations expiration and audit settlement.

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 will 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 second quarter was a record $1.2 billion, up 17%, including 8 percentage points of growth attributable to Bureau van Dijk.

U.S. revenue of $625 million was up 10%.

Non-U.

S. revenue of $550 million was up 27% and represents 47% of Moody's' total revenue.

Recurring revenue of $613 million was up 25% and represented 52% of total revenue.

Foreign currency translation favorably impacted Moody's revenue by 1%.

Looking now at each of our businesses, starting with Moody's Investors Service.

Total MIS revenue for the quarter was $752 million, up 10%.

U.S. revenue increased 9% to $451 million.

Non-U.

S. revenue of $300 million was up 10% and represented 40% of total MIS revenue.

Foreign currency translation favorably impacted MIS revenue by 1%.

Moving to the lines of business for MIS.

First, corporate finance revenue for the second quarter was $378 million, up 6%.

This result reflected strong bank loan issuance in the U.S. and Europe, partially offset by a decline in global investment grade and U.S. high-yield bonds.

U.S. corporate finance revenue was up 10% and non-U.

S. revenue was approximately flat.

Second, structured finance revenue totaled $142 million, up 19%, driven by broad strength in securitization markets, with particularly strong contribution from CLOs.

U.S. and non-U.

S. structured finance revenues were up 14% and 28%, respectively.

Third, financial institutions revenue of $121 million was up 18%.

This result was driven by strong contribution from the global insurance sector, as well as the U.S. and Asia banking sectors.

U.S. and non-U.

S. financial institutions revenue were up 24% and 13%, respectively.

Fourth, public, project and infrastructure finance revenue of $108 million was up 3%.

This result was primarily driven by contributions from EMEA infrastructure finance and sovereign and sub-sovereign issuers, partially offset by a decline in U.S. municipal issuance.

U.S. public, project and infrastructure finance revenue was down 7%, while non-U.

S. revenue was up 21%.

Turning now to Moody's Analytics.

Total revenue for MA of $423 million was up 35%.

U.S. revenue of $174 million was up 12%.

Non-U.

S. revenue of $249 million was up 57% and represented 59% of total MA revenue.

Foreign currency translation favorably impacted MA revenue by 2%.

Organic MA revenue for the second quarter of 2018 was $343 million, up 9% from the prior year period.

Moving now to the lines of business for MA.

First, research, data and analytics, or RD&A, revenue of $280 million was up 55%.

U.S. RD&A revenue was $118 million, up 16%, and non-U.

S. RD&A revenue of $162 million more than doubled.

Bureau van Dijk's revenue contribution of approximately $80 million reflects a $6 million reduction from the deferred revenue adjustment required under acquisition accounting rules.

Organic RD&A revenue was $200 million, up 11%, and was driven by strength in sales of ratings, data feeds and credit research.

Second, enterprise risk solutions, or ERS, revenue of $106 million was up 8% from the prior year period.

This result was driven by continued strong demand for subscription products, particularly in the risk analytics and insurance segments.

U.S. ERS revenue was up 5%, and non-U.

S. revenue was up 11%.

Trailing 12 months revenue for ERS increased 8%, while sales were approximately flat.

The ERS sales performance is affected by the shift in the business mix to higher margin products.

As this transition continues from onetime perpetual software licenses to SaaS, or software as a service subscriptions, there is a near-term impact on our overall results.

This conversion to subscriptions will contribute to a larger, more stable and more profitable base of recurring revenue.

To provide further transparency into our progress on this transition, starting with this earnings call, we are disclosing trailing 12-month sales and revenue by contract type.

At the end of the second quarter of 2018, trailing 12 month subscription sales are up 11% versus the prior year period, while onetime sales, inclusive of perpetual licenses and service fees, are down 25%.

During the same 12-month period, ERS revenue from subscriptions was up 12% and onetime revenues rose 1%.

Moving on to professional services.

Revenue of $37 million was up 5%, driven by strong new sales and improved customer retention.

U.S. and non-U.

S. professional services revenues were up 1% and 8%, respectively.

Turning now to operating expenses.

Moody's second quarter operating expenses were $641 million, up 19%.

11 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 1%.

On January 1, 2018, the company adopted the new ASC 606 revenue accounting standards using the modified retrospective approach.

The impact of adoption was immaterial to Moody's Corporation revenues and expenses in the second quarter and in the first half of 2018.

The impact of ASC 606 is expected to be immaterial to Moody's Corporation in the remainder of the year.

However, it could create quarterly volatility in revenues or expenses at the line of business or segment level.

As Ray mentioned, Moody's operating margin was 45.4% and the adjusted operating margin was 49.7%.

Moody's effective tax rate for the quarter was 23.7%, down from 32.1% in the prior year period.

The decline in the tax rate primarily reflects a lower U.S. statutory tax rate.

Now I'll provide an update on capital allocation.

During the second quarter of 2018, Moody's repurchased approximately 200,000 shares at a total cost of $38 million or an average cost of $167.05 per share.

Moody's also issued approximately 200,000 shares as part of its employee stock-based compensation plan.

Moody's returned $85 million to its shareholders via dividend payments during the second quarter of 2018.

And on July 9, 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 September 10, 2018 to stockholders of record at the close of business on August 20, 2018.

Over the first half of 2018, Moody's repurchased approximately 500,000 shares at a total cost of $81 million, or an average cost of $163.80 per share, and issued a net 1.4 million shares as part of its employee stock-based compensation plan.

The net amount includes shares withheld for employee payroll taxes.

Moody's also returned $169 million to its shareholders via dividend payments during the first half of 2018.

Outstanding shares as of June 30, 2018 totaled 191.9 million, approximately flat to a year ago.

As of June 30, 2018, Moody's had approximately $450 million of share repurchase authority remaining.

In June 2018, Moody's issued $300 million of 3.25% senior unsecured notes due 2021, the proceeds of which were used to repay a portion of an outstanding term loan.

At quarter end, Moody's had $5.3 billion of outstanding debt and $910 million of additional debt capacity available under its revolving credit facility.

Total cash, cash equivalents and short-term investments at quarter end were $1.4 billion, with approximately 76% held outside the U.S. Cash flow from operations for the first half of 2018 was $777 million, an increase from a negative $41 million in the first half of 2017.

Free cash flow for the first half of 2018 was $739 million, an increase from a negative $83 million in the prior year period.

These increases in cash flow were largely due to payments the company made in the first quarter 2017, pursuant to its 2016 settlement with the Department of Justice and various states' attorneys general.

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

Thanks, Steve.

I'd like to provide some highlights on our progress with Bureau van Dijk integration and synergy activities.

As we approach the August anniversary of the Bureau van Dijk acquisition, our integration activities remain on track.

The legacy Bureau van Dijk business continues to perform well as we align sales operations, practices and centralized shared service activities such as finance and human resource management.

Our joint marketing efforts are starting to bear fruit, with significant recent sales wins in both the U.S. and Asia.

In the first half of 2018, we rebranded Bureau van Dijk's bank financials product to Moody's Analytics BankFocus, and continued to invest in content and functionality enhancements leveraging Moody's' expertise.

We are very pleased with the performance of the legacy business and the progress we are making against the synergies that we anticipated when we announced the transaction.

I will now discuss certain components of our full year guidance for 2018.

A complete list of Moody's' guidance is included in Table 12 of our second 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 $1.32 to GBP 1; and for the euro, of $1.17 to EUR 1.

Full year 2018 guidance is reaffirmed at $7.20 to $7.40 for diluted EPS, and $7.65 to $7.85 for adjusted diluted EPS, reflecting Moody's expectations for continued strong operating performance.

Moody's now expects revenue to increase in the high single-digit percent range.

Operating expenses are now also expected to increase in the high single-digit percent range.

Operating margin is now expected to be approximately 44%, and adjusted operating margin is now expected to be 48% to 49%.

Before turning to the Q&A, I would like to provide a couple of updates on Moody's' corporate social responsibility, or CSR strategy, as well as highlight a few awards that we have recently won.

First, on Moody's' CSR strategy.

Earlier this week, Moody's published its annual CSR report, detailing the company's progress in delivering on its goal of empowering people around the world to create a better future for themselves, their communities and the environment.

As part of its focus on empowering people with financial knowledge, Moody's recently announced Reshape Tomorrow, an initiative to partner with organizations around the world to help small business owners overcome some of the challenges of growing their enterprises.

The report details Moody's' ongoing initiatives to support financial empowerment, as well as each of its other areas of focus, activating an environmentally sustainable future and helping young people reach their potential.

I want to thank our employees for bringing Moody's CSR purpose to life through their time, expertise and passion.

For more information and to view the report, please see the CSR press release that we issued on July 24, or visit moodys.com/csr.

Finally, I am proud to mention some positive recognition that we have received in the market.

Moody's Investors Service was recently named the #1 credit rating agency in Institutional Investors' 2018 All-America Fixed Income Research poll.

This marks our 7th year in a row winning this title.

Additionally, MIS was recently named Best Credit-Rating Agency in Mexico in 2018 by Capital Finance International.

This represents our first such award in the Latin American region.

Moody's Analytics was named category leader in the prestigious Chartis Fintech Quadrant and RiskTech quadrant for our work in 3 product areas: credit risk, CECL technology and balance sheet management.

In the 2018 Risk Technology Awards, MA was also recognized as provider of the year in 3 areas: credit data; wholesale credit modeling; and credit stress testing.

For the second year in a row, MA's structured finance portal was named CLO Data Provider of the Year at the Global Capital U.S. Securitization awards.

And The Asian Banker cited Moody's Analytics as the best risk technology implementation of the year in 2 areas: regulatory compliance reporting and asset liability management.

So congratulations to our colleagues of both MIS and MA.

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'd be pleased to take any questions you may have.

(Operator Instructions) And we'll go first to Manav Patnaik at Barclays.

My first question is just to touch a little bit on the guidance.

It sounds like the total company revenue growth revisions is led by the Moody's Analytics business.

So I was wondering if you could just go through why the organic growth is lower?

I would've expected total obviously because of the FX.

But is there something else going on in there?

I'll let my colleagues weigh in with any color that they want to offer, Manav.

But really, I think the most important element of any of the revenue adjustments that we have made, or almost all of them that we have made, starts with a discussion about FX.

And while FX has been favorable compared to 2017, it is unfavorable compared to our beginning of year and Q1 assumptions for exchange rates.

So that has driven the adjustments in multiple lines of our guidance.

And we are able to continue to project EPS within the existing ranges because it's had an impact both on revenue and on expense.

And so they have moved in tandem.

Yes, just some additional context on the FX, Manav, just to highlight how it's impacting.

So the rate that we were using when we first put out our guidance in February, it was the spot rate at the time, which was $1.23 to the euro.

Our updated forecast is now using what are currently spot rates of $1.17 -- so $1.25, rather, and then it came down to $1.17.

So $0.08 have come off the euro since we put out our guidance in February.

So that's driving part of it.

And then the other thing I would point to as well, if you look at the euro price performance last year, in the first half of the year, it averaged about $1.08 and then strengthened pretty meaningfully, and it averaged $1.18 in the second half of the year.

So on both ends, it's been a challenge for us, and that's being reflected in what you're seeing on the guidance.

And I guess, just to follow up on that, so what is the FX impact?

How many points in the total company and by segment?

And I guess, does that answer also then imply the organic growth reduction in Moody's Analytics was also all FX?

Primarily FX, yes.

There's a small adjustment for ERS, but the rest of the story is FX, Manav.

Yes, that's right, Manav.

It's Mark.

It's almost entirely FX.

We had a couple of million dollars that we took down ERS.

But -- due to the underlying business, but substantially, it's 100% FX.

Again, and just the assumption of how many points FX is hitting the line?

Yes, so in our current forecast, we've got about 1% to 2% on revenue and op income favorable, and about 1% unfavorable on expense.

So less of a tailwind than it was coming into the year.

Got it.

And then just one last one for me.

So it sounds like when you look at equities results, it sounds like FIG was the standout here in the quarter.

Is that something unique to Moody's going on, or is there -- is it one of those things that can fluctuate quarter-to-quarter?

Yes.

I'll let Rob comment on that.

But you're correct.

We did have strength in financial institutions, both in the insurance sector and in important parts of the banking sector.

Rob, do you...

Yes, that's right.

And I think we've described FIG as a, traditionally, a relationship-based segment.

But in recent years, as we've grown this franchise, we have expanded more beyond the traditional bank customer base and added more insurers, non-bank financial companies, asset managers and the like.

That contributed to the growth in 2Q because we had good revenue growth driven by a variety of factors here.

One was, as Ray just noted, strong issuance by the insurance sector, particularly in the U.S. and Asia.

And that was driven both by M&A and some balance sheet management activities.

In banking, we saw some increased supply from infrequent issuers, and remember that was a story we had a bit last year, as well as some solid issuance out of Southeast Asia.

And then first-time issuers such as FinCos and LeaseCos, so that's those non-bank financial companies I talked about.

And in terms of first-time mandates, just to give you a sense, in the financial institution segment, we've added some dedicated commercial resource to focus on this space, and we've signed over 100 FTMs globally through the first half of 2018.

First-time mandates.

Yes.

First-time mandates, sorry.

And we'll go next to Alex Kramm at UBS.

Just staying on the guidance for a minute.

If we can switch to Moody's investment services for a little bit.

Obviously, you moved a couple of things around there.

Can you maybe just give us a little bit of a sense where you may be a little bit more conservative in your outlook?

Where you may have more or less visibility?

And the thing in particular that some investors have brought up to me today, that they thought structured finance, you should have had a little bit more room to revise the guidance there.

So just wondering if you feel like that's an area in particular where you're being conservative, or what you're seeing out there.

Okay, Alex, I'll take that one.

You're right, overall, we had a few changes to the segments, and that was driven by a combination of, kind of, market conditions as well as the FX unfavorability that Ray mentioned.

Obviously, at the MIS level, that kept us within the mid-single-digit range.

In structured finance, no, I don't tend to think we're being conservative.

We're trying to be as accurate as we can here.

We've had a continuation of the trend we saw in the first quarter of '18 with further strength coming from CLOs, and that was the primary support for our guidance.

And we've said, I think, in terms of CLOs, we'll probably see a bit of a surge in activity once we get past Labor Day.

In corporate finance, again, similar trend that we saw in first quarter of '18.

We've seen some weaker issues, conditions in parts of the corporate finance market, and that's U.S. high yield in Greater China, along with, again, a little bit less FX tailwind than we had projected.

In the public, project and infrastructure finance segment, we've seen some continued softness in U.S. PFG, and that led to the decrease in our guide there.

But overall, we expect, just back to that FX theme, kind of little to no benefit in FX in the second half.

And that's versus the modest benefit that we had projected in April that Ray touched on, and that impacts all the segments and is factored into our guidance.

And let me just jump in, Alex and give -- provide the update that we typically do on these calls from what we're hearing from the investment banks.

Of course, we go around and query a handful of them to get their current market views and what they're saying.

And this is a slide that's up on the web deck -- webcast now.

Views are from a variety of investor banks, as I mentioned, and they're from both financial and nonfinancial.

It's U.S. dollar, at least this first slide is.

It doesn't necessarily align with Moody's revenue categorizations.

So it's not apples-to-apples, but hopefully, this will give you a little bit of a sense for what the banks are seeing.

So on investment grade, expecting full year to be down approximately 5% to 10%.

That's not a big shift from where they had been earlier in the year.

There's been increased volatility in the markets, as everyone is aware.

And that's sidelined some issuers.

Just for some color around the increase of volatility, the average for the VIX for all of 2017 was 11.

The average so far for 2018 has been 16, so -- or 2018, it's been 16.

So a pretty significant move up, just in terms of the total market environment volatility there.

Credit spreads have widened since the beginning of the year, but still remain relatively low by historical standard.

Looking at the Bloomberg Barclays agg, it's currently sitting about 20 basis points wide from where we were coming into the year.

But we were 10 basis points off the wides where we were a few weeks ago.

And -- but for some context there, the 10-year average, we're still 60 basis points below that.

So again, on a historical basis, still relatively attractive.

Some -- what we've seen some -- what they've seen, some cash repatriators have been out of the market, particularly in the tech sector.

Not surprising there.

Bank issuance has been strong recently, post earnings reports.

And they're expecting some nonfinancial corporates to hit the market, actually hit the market post Labor Day, which is -- would be the trend that you see.

I'd also comment that a large portion of the pipeline they're seeing is comprised of M&A.

So moving on to high yield, also down 5% to 10%.

Equity market volatility and interest rate hikes has slowed issuance in this asset class and issuance that they have seen has primarily been due to refinancings.

High yield spreads have widened from the beginning of the year, despite limited issuance.

The pipelines are light, with some rotation out of bonds into loans, which has really been the story so far this year.

So loans, their forecasts for full year is flat to down, but that's off a very high base; it was a record blockbuster 2017 for this product.

Leverage loan market remains robust, so spreads have widened a bit, similar to high yield investment grade.

Primarily that's being driven by just the amount of new issuance that's coming onto the market.

But floating rate issuance clearly does still remain attractive in a rising rate environment, which we're in here in the U.S.

Repricings and refinancing activity has continued to be the main drivers of issuance and M&A is cited as the next largest.

So full year, slightly down as I said from 2017 levels, but there could be some upside based on what we're seeing on the M&A front.

One thing I would point out here as well on funds flows into this asset class.

We've had $9 billion year-to-date.

And that compares to $10 billion for full year 2017.

So there continues to be a lot of capital coming into this asset class which has been supporting it.

Moving to Europe.

On the investment grade side, issuance is down double digits.

So far year-to-date, the pipeline's relatively soft.

The ECB is still in the market, although that's expected to end by the end of the year.

Although yesterday, they did comment that rates -- they don't plan to move rates until next summer at the earliest, of course, market and data dependent.

Spreads have moved wider, similar to the U.S. at the beginning of the year, but still remain tight by historical standards.

And the Euro area continues to see growth in GDP and corporate process, which is encouraging, of course.

On the spec rate side, both high-yield and leverage loan markets are fundamentally sound, as they describe it, though issuance levels face tough comps over what we saw in 2017, and spreads have also widened but remain attractive on a historical basis.

Healthy pipeline, M&A seems to be the driver there.

And then political uncertainty, potential for increased trade protectionism that we're seeing are causing some caution in that market.

So I hope that helps to round out a little bit.

And I don't know if, Rob, if you have anything else you want to add.

Yes.

And maybe, Alex, just to try to -- I'll start answering your question around our view on corporates.

Just given where we've seen high-yield so far this year and the rotation from high-yield into bank loans, I think we'd probably be at the, in our own view, be kind of at the lower end of those estimates, street estimates that Steve just gave you on high-yield and probably towards the higher end on bank loans.

That's great.

And then just maybe shifting gears quickly, to Mark.

On BvD, maybe it would be helpful to parse out the moving pieces here that you saw.

When I look at the adjusted numbers, meaning, adding back the revenue recognition math, I think, a, last quarter was $83.5 million.

You did $86 million this quarter, which is, I think, if you annualize it, it's nice double-digit growth, but you also had FX work against you.

And I think last quarter, you had some things slip.

So long story short, maybe you can just give us a little bit of a view what the kind of like clean growth rates are that you're seeing right now, healthy double digit, is it accelerating?

How do you feel about the remainder of the year?

Yes, Alex.

Happy to do that.

Apples-to-apples, Bureau van Dijk's first half revenue growth is just over 12%.

And that's in constant dollars, so there's no FX noise in there.

It reflects the add back of the haircut.

But we're very pleased with 12%.

That's a nice improvement over the company's growth rate prior to our having acquired it.

So the underlying business is performing very, very well.

We're very pleased with what's going on there.

We don't see any sluggishness at all.

In fact, just the opposite.

And we'll go next to Toni Kaplan at Morgan Stanley.

Can you give us an update on what you think's going on in issuance with respect to pull forward?

And also, can you talk about whether you see the widening spreads that you just discussed?

Has that made your MIS guidance a bit more cautious?

Do you see sort of the widening spreads continuing?

Yes.

It's Ray.

I do think we're going to continue to see spreads widen out a bit as we have a consensus view around, perhaps, 2 more interest rate increases this year.

If the markets continue to perform as they have, however, default rates are expected to remain low.

Our forecast for default rates has them declining on a 12-month forward basis.

So that is going to help constrain any substantial spread widening.

So we will -- we're expecting wider spreads, but we're also expecting, on an absolute basis, for borrowing conditions to remain attractive.

In terms of pull forward, yes, we have had a lot of pull forward of what would have been maturing debt in 2018.

That was pulled forward largely into 2016, 2017.

So what's really been supporting the market this year is M&A activity and borrowing for share repurchase, et cetera.

A bit of a tick up in capital expenditure as well.

Whether we will see pull forward of 2019, 2020 maturities into an environment where there are expectations for rising rates or whether corporations will more broadly choose to ride it out, we're just going to have to see.

So we obviously will pay close attention to that.

That's helpful.

And you've mentioned in the past that you probably see the most operating leverage within U.S. corporate finance.

I was wondering if you could talk about how much operating leverage you've got in the structure business and if there's a need to add staff when the market is going as well as it is now?

Yes.

I guess the -- my first comment, in terms of the operating leverage that comes out of any of our business lines, has to do with what the nature of the issuance environment is.

If we're getting a lot of first-time issuers, a lot of first-time mandates as we have been, there is less operating leverage because we are adding staff to address those new relationships, those new credits that we're rating.

If it is refinancing activity or additional borrowing by institutions that we already have rating relationships with and they are ramping up their capital markets activity, there is more operating leverage there.

I would also say, because of the transactional nature of structured finance, it tends to have less operating leverage opportunity.

As the number of transactions increases, again, we need more people to rate those transactions.

So there are circumstances where we can get additional operating leverage in structured finance.

But I don't think that's a natural condition of that business as volumes increase.

And our next question is from Joseph Foresi at Cantor Fitzgerald.

This is Mike Reid on for Joe.

I was wondering if you could go into some detail on QuantCube and the investment there.

Yes.

Sure.

Yes, it's Rob.

We made a small minority investment in QuantCube this quarter.

They're a firm that focuses on artificial intelligence with a big data platform, and we started to work with them around collecting alternative data and building models and insights into both macro, and also we're working with them around some of the environmental, social and governance initiatives that we have underway.

So it was a way for us to kind of partner with an innovative technology company and augment our capabilities and get some, ultimately, we think some interesting data that we can work into our analytics and our research.

Okay.

And then, could you give us any detail on the outlook and progress in Asia and if there's anything new there to call out?

Yes.

The Asia business overall is doing well.

We -- you saw that we benefited from, in particular, in the financial institutions area in Asia this quarter.

I guess, more structurally, China continues to be an important area of focus.

We are in the process of applying for a domestic license in China to rate in the domestic Chinese bond market.

The pace at which that application will be evaluated and hopefully, ultimately approved, is uncertain.

And it's also, honestly, some of the uncertainty comes from the macro environment and the geopolitical environment, and whether there will be any delays or breakthroughs on that front, which could have an impact, not only on ourselves, but on the pace of entry for foreign firms in a number of areas and the pace of opening of the Chinese market.

And we'll go next to Peter Appert at Piper Jaffray.

So Mark, at the risk of sounding ungrateful for all your hard work, it feels like the margin performance in analytics continues to lag relative to what we might expect given the magnitude of revenue gains and the incremental contribution from BvD.

So can you talk about the trajectory in margins?

Yes.

I guess we see it differently, Peter.

Bureau van Dijk is definitely helping the MA margin, and that's despite the fact that we are spending money to bring Bureau van Dijk up to public company standards.

And it's also despite that continued haircut on the top line that we've got due to the accounting.

For the first 6 months of this year, if you look at Bureau van Dijk just on a standalone basis, its margin is north of 30%.

And the legacy MA business, ignoring Bureau van Dijk, is just about 23%.

So in the aggregate, we're about 25%.

So we are seeing some good lift from Bureau van Dijk.

And if not for that deferred revenue haircut of $16 million year-to-date, you'd see Bureau van Dijk's margin would be up over 35%, and that would take MA up above 26%.

So all of that is consistent with what we've expected.

And again, I'd remind you that we are spending money at Bureau van Dijk as we move them from being a private equity owned company to a unit of a public company.

Also, keep in mind, we've owned the company for less than a year.

And the P&L impact of our expense and revenue synergies are only just starting to hit the P&L.

So I think there's a lot more positive margin impact that we're going to see from Bureau van Dijk, especially as we get into next year.

You also have to bear in mind that Bureau van Dijk, it represents, thus far, represents less than 20% of total MA revenue for the first 6 months of this year.

So as profitable as Bureau van Dijk is, it's just not having that much impact yet.

It is having good impact.

As I said, its impact is consistent with what we expected.

We're very pleased with how things are going there.

And we think there's more runway for us on the margin.

And then also I'd add that on a standalone basis, we're continuing to do our work in the rest of Moody's Analytics to expand the margin, and we like the trajectory we're on there.

We're continuing to make good, steady, gradual progress to raise the margin.

Again, I'd remind you to look at our adjusted operating margin on a trailing 12-month basis rather than looking at discrete quarters, because it's not unusual to have a little bit of idiosyncrasy on the expense line in any given quarter.

But again, on a trailing 12 months basis, we're making very steady progress.

And we expect to continue to make very steady progress.

Just as a point of emphasis, Peter.

I would also underscore Mark's initial comments about the investment we're making in Bureau van Dijk to make sure that its systems and processes are consistent with a public company asset.

And it's not one-off expenses.

Those expenses, even the ones that will continue, are not going to grow as Bureau van Dijk grows.

We're going to have those installed, and that's an expense that we are taking on now that is going to form a base going forward that doesn't have to grow as the overall Bureau van Dijk business grows.

And I would also emphasize, this is all consistent with our acquisition model and the performance we have been expecting to see.

It's coming through.

Right.

And of course, also the synergies that we talked about when we acquired the company.

So I guess, just 2 quick follow-ups, Mark.

The implication would be then, as we cycle through the deferred revenue issue in the second half, we should see a pretty dramatic step-up in terms of the year-to-year, and I guess, quarter-to-quarter margin performance.

So something -- from what you said earlier, it sounds like something like 500 basis points perhaps of incremental margins, specifically from BvD.

So that was point 1. Point 2 then is, maybe I'm remembering incorrectly, but I thought that BvD pre-acquisition was closer to 50% margins.

So is the haircut in margin that dramatic from the incremental cost of being part of a public company?

Well, again, I think that we did not expect or intend to continue to run Bureau van Dijk at anything like the kinds of margins that it was running at when it was owned by private equity.

We knew there was work that we were going to have to do, particularly in the short run.

But the nature of the business is such, and this was Ray's point, the nature of the business is such that there is an awful lot of operating leverage to be realized as we accelerate the growth on the top line.

We've seen good top line acceleration, as I mentioned earlier.

And we feel very confident about sustaining that over the coming years.

So I don't know that we'll be at the levels that the company was at when it was in the hands of private equity, but it will be a very nicely profitable business and additive to the margin of MA overall.

And one comment I would make on that as well, Peter.

It's not an exact apples-to-apples comparison, because the number you're citing was in IFRS accounting, and there's some accounting differences between U.S. GAAP and IFRS that impact the margins, specifically the cost of developing software were capitalized under IFRS, and they're expensed under GAAP.

It doesn't meet the criteria.

So that has shaved a couple of points off the margin from -- versus what you saw there.

So it's not exactly apples-to-apples, I guess, is the only point I would make.

And we'll move next to Jeff Silber at BMO Capital Markets.

I know that [these] don't have a direct impact in your business, but I'm curious, with all the noise and uncertainty going around with trade wars and tariffs, are you seeing any pushback or perhaps uncertainty on the part of your clients to issue more debt, or any other part of your business being affected?

It's hard to tell specifically who might decide to sit on the sidelines who otherwise would have issued debt as a result of tariffs or trade friction.

What we can look at though and what our economists can forecast are the implications for GDP from different kinds of trade scenarios.

And in terms of the tariffs that have already been announced, the impact is very, very minimal in our forecast, 0.1%.

If other elements of the tariffs that had been discussed, but not implemented, were implemented, that would add another 0.1%.

And if we had a full out trade war, as our economist says, trade armageddon, that would start moving us toward a 0.5% impact, in their estimation.

So just to give you a sense of dimension of this.

Right.

That's very helpful.

And I think you've always said that the issuance trends can be more tied to changes in GDP, if I remember correctly.

Yes, over time, absolutely.

I think that's what we would link it to.

Correct.

Okay, great, and then just, sorry to go back to guidance for just one small question, and this is minor.

But you took your CapEx guidance down for the year.

Is this something that's being deferred to next year?

Or maybe you could just give us a little bit more color.

Yes.

We're deferring a couple of projects that are not essential to the growth of the business.

And we're probably going to take some of those projects in and modularize them, take them on in pieces.

So we just paused and we're going to be looking at that in the context of our 2019 planning and budgeting.

And we'll go next to Tim McHugh at William Blair.

Just one question, maybe the reasons for the ERS being a little softer than you had, I guess, planned?

Yes, Tim.

It's Mark.

It's very much as Steve described earlier on the call.

The situation, as we make this transition from selling traditional software sold on a perpetual license basis and doing these large implementation projects, moving more to a SaaS model, what we're seeing is the tradeoff there is that the first year fees, when you're selling on a subscription basis, are just at a much lower level than the fees we would've been realizing if we were selling on a perpetual license basis.

Now we make that up over a couple of year period, because we're charging those subscription fees year in and year out.

So over a 3 or 4-year period, we're even, and then we pull ahead after that.

So as that transition is occurring, what we're seeing is that the decline in those onetime fees is happening a little bit more quickly than we're seeing the ramp up in the subscription fees.

So it's really just a timing thing of not getting the onetime fees and not realizing the subscription fees at quite the same pace that we had based our guidance on.

So as I said, that's a couple of million dollars on the ERS line.

And so that, together with the FX impact, has caused us to bring down the outlook there.

We'll take our next question today from Craig Huber at Huber Research.

Ray, would you -- or Rob, give us a little bit more update on the -- your outlook, I guess, on the bank loans that you are expecting in the second half of the year, just above and beyond what you said the investment banks are thinking.

What do you guys think the outlook is here for the second half of the year?

How will it impact your ratings business?

And I have a follow-up.

Sure.

Rob, do you want to take that?

Yes.

So I think, first of all, just in terms of where we are on bank loans.

Obviously, bank loan issuance picked up in the quarter pretty significantly versus the first quarter of 2018.

And Steve mentioned we've seen a rotation out of high yield and into bank loans with some very strong demand for that floating rate paper, given speculation about the path of U.S. interest rates and a very strong bid from CLOs.

I'd note that the use of proceeds has shifted from the first half of this year -- in the first half of this year versus the first half of last year.

We're certainly seeing more M&A-driven financing, while the refi and amend and extend has declined as a percent of the total.

In Europe, pretty similar drivers and a particularly notable pickup in that acquisition financing, which continued the trend that we saw in the first quarter of 2018.

There's a nice backlog of M&A financing in the European leverage finance space.

I'd also note, this area has been a real focus for us.

We've got a very experienced leverage finance and CLO team.

We've added some commercial resource to focus in, specifically, on the loan market, both in the U.S. and Europe, to make sure that we're addressing all this demand.

You mentioned kind of view for the second half.

It's interesting that when we look at what issuance did last year, we saw actually a fairly meaningful deceleration in bank loan issuance in the second half of 2017 from the first half of 2017.

And so we're expecting something similar this year.

That means that despite a decline in issuance volumes in the second half of this year from the first half, on a sequential basis, we do think we can see revenue growth over the same period last year, and we've included that in our guidance.

And that then also ties back to this mix shift I talked about.

That revenue growth is going to be supported by the shift to this more M&A-driven activity and less of the refi.

Like I said, that's true in the U.S. and especially in EMEA.

And then my other question, Ray or Rob.

In the corporate sector out there, are you seeing anything out there?

There's a lot worries with some investors there's too much debt in the corporate market.

Are you seeing any signs at all, whether it be in the U.S. or Europe, that there's too much high yield investment grade debt out there, with the various ratios, of course.

And I guess somebody should ask, what's an update on the CFO search, please?

Okay.

Well, with respect to leverage levels, again, we are not seeing anything that would indicate a dramatic increase in leverage.

To your point though, Craig, the markets have definitely been open for increasingly lower-rated credits.

And so, even though we may not see leverage increasing by rating category, we are seeing lower-rated credits getting into the market, and those will be riskier names, obviously.

So that's how we're lining it up.

As far as the CFO search is concerned, I think we'll be in a position to make an announcement shortly.

We'll take our next question from Bill Warmington at Wells Fargo.

So a couple of questions for you on BvD.

Ray, in your comments initially, you mentioned some U.S. and Asia sales wins, and I was just going to ask for some color there, and don't hold back.

It ain't bragging if you've done it.

Well, as long as we're going to claim credit, I'll let Mark do that.

Bill, what we're talking about there is, we're seeing some very nice wins by leveraging the Moody's Analytics sales and distribution capacity in the U.S. and Asia.

That's been -- that was an area that we had identified as a potential synergy, given our customer relationships in those markets being deeper than those of Bureau van Dijk, our brand having more resonance and recognition among customers in those markets than was true at Bureau van Dijk.

So we've had some very nice sizable wins in both markets, and we feel very good about what's happening there.

So we just wanted to highlight those because, as I said, they were consistent with some of the plans we had going into this project from the outset.

And you'll recall that at the time of acquisition, about 75% of Bureau van Dijk's business was in Europe.

And so getting sales outside of that area of real strength for Bureau van Dijk historically is particularly interesting for us.

Yes.

And I should add to that as well, Bureau van Dijk had a product, has a product that competed with a product that we offer in ERS.

We've joined forces there.

One of the big wins we had in Asia recently was where we went to market with a joint proposal, offering the -- both the Moody's Analytics option as well as the Bureau van Dijk option.

And we had a very successful win there.

So we're seeing good progress on a couple of different fronts through our collaboration with Bureau van Dijk in Asia.

So we're very pleased with that.

You had also mentioned the rebranding of the Orbis Bank Focus as Moody's Analytics BankFocus.

I was hoping to ask for an update on the 2018 launch.

And then also, you had talked about targeting the interbank credit market initially.

Is that still the go-to-market strategy there?

Yes.

That's a fundamental part of what we're doing with BankFocus.

I would characterize it as early days.

We're -- I think we're making good progress there, again, both on reaching out to the market, getting in front of our customers.

By our customers, I mean, Moody's Analytics relationships, introducing them to the product, applying some of the -- both the Moody's Analytics know-how to that product and adding some new features and functionality to the product.

So I think there's good work going on, both on the sales side as well as the product development side.

And as I said, it's early days, but we like the trajectory and we continue to be bullish about the opportunity there.

And we'll go next to Vincent Hung at Autonomous.

Just one for me.

So you gave us the first-time mandates for FIG.

What are the new issuer trends like for the other ratings categories?

Yes.

Let me see if I can get Rob to give you some color on that.

Yes, very strong new mandate growth that continued from the first quarter into the second quarter, also up versus the prior year quarters.

So both on a sequential and a prior year basis.

We're now looking at -- we now have over 600 new mandates through the first half of the year.

We had last year something like 1,040 for the full year of 2017.

So a very strong pace in the first half of '18.

We did get the question earlier about pull forward.

We may have seen a little bit of pull forward of these first-time mandates into the first half of 2018 from the second half from this, obviously, a rising rate environment and spreads no longer narrowing.

So there may have been a little bit of pull forward within the calendar year, but very strong.

The regions outside the U.S. have slowed from what was a pretty torrid pace of growth last year.

And interestingly, first-time mandates in APAC actually declined in the second quarter of 2018 versus the same period last year.

And that's primarily as we saw the kind of cooling down of the market conditions for corporate finance in Greater China in the first half of 2018.

But overall, a very good story.

And with no additional questions at this time, Mr. McDaniel, I'll turn things back over to you, sir.

Okay.

I just want to thank you all again for joining today's call, and we look forward to speaking with you in the fall.

Thanks.

And once again, this does conclude today's Moody's Second Quarter 2018 Earnings Conference Call.

As a reminder, immediately following this call, the company will post the MIS review breakdown -- revenue breakdown under the Second Quarter 2018 Earnings section of the Moody's IR homepage.

Additionally, a replay of this call will be available after 3:30 Eastern time on the Moody's IR website.

Once again, that concludes today's call.

Thank you for joining us.