穆迪 (MCO) 2010 Q2 法說會逐字稿

Good day, and welcome, ladies and gentlemen, to the Moody's Corporation second quarter 2010 earnings conference call.

At this time, I would like to inform you this conference is being recorded and that all participants are in a listen-only mode.

At the request of the Company, we will open the conference up for questions and answers following the presentation.

I will now turn the conference over to Liz Zale, Vice President Investor Relations.

Please go ahead.

Thank you.

Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's results for the second quarter of 2010.

I am Liz Zale, Vice President of Investor Relations.

Moody's released its results for the second quarter of 2010 this morning.

The earnings press release and a presentation to accompany this teleconference are both available on our website at IR.moody's.com.

Ray McDaniel, Chairman and Chief Executive Officer of Moody's Corporation, will lead this morning's conference call.

Also making prepared remarks on the call this morning is Linda Huber, Chief Financial Officer of Moody's Corporation.

Before we begin, I call your attention to the Safe Harbor language, which can be found toward the end of our earnings release.

Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

In accordance with the Act, I also direct your attention to the management's discussion and analysis section and the risk factors discussed in our annual report on form 10-K for the year ended December 31, 2009, our form 10-Q for the period ended March 31, 2010, and in other SEC filings made by the Company, which are available on our website and on the Securities & Exchange Commission's website.

These, together with the Safe Harbor Statement, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements.

I should 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.

Thanks, Liz.

Good morning, and thank you to everyone for joining today's call.

I will begin our remarks this morning by summarizing Moody's second quarter and year-to-date 2010 results.

Linda will follow with additional financial detail and operating highlights.

I will then speak to recent developments in the legislative and regulatory area and finish with comments on Moody's outlook for 2010.

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

Moody's results for the second quarter were strong, given the greater volatility and debt Capital Markets as compared to the first quarter.

Total revenue of $478 million, up 6% from the second quarter of 2009, were largely driven by the resurgence of US-based bank loan activity for refinancing and LBO transactions, plus growth across Moody's Analytics.

Operating income for the second quarter was $191 million, an increase of 2% year-over-year.

Diluted earnings per share for the quarter were $0.51, 11% above the $0.46 of the prior year period.

Excluding legacy tax and restructuring items in both years, diluted EPS for the quarter of $0.49 grew by 14% year-over-year.

Turning to year-to-date performance, revenue for the first six months of 2010 was $954 million, an 11% increase from the first half of 2009.

Expenses were $567 million, up 8% from the prior year period, and operating income of $387 million increased 15%.

Revenue at Moody's Investor Service for the first six months of 2010 was $664 million, an increase of 14% from the prior year period.

Moody's Analytics revenue of $290 million was 4% higher than the prior year period.

We are reaffirming our full year 2010 EPS guidance of $1.75 to $1.85, based on the sound first half performance, but we expect that uneven credit market conditions will persist during the second half.

I will now turn the call over to Linda to provide further commentary on our results and other updates.

Thanks, Ray.

I will begin with revenue at the corporate level.

As Ray mentioned, Moody's total revenue for the quarter was up 6% year-over-year.

The impact of foreign currency translation on revenue was negligible.

For the second quarter, US revenue increased 10% to $262 million, while revenue outside the US increased 1% to $216 million, representing 45% of Moody's total revenue.

Recurring revenue of $284 million represented 59% of total revenue, compared to 61% in the prior year period.

Looking at each of our businesses, Moody's Investor Service revenue for the quarter was $329 million, a 6% increase year-over-year.

US revenue was up 12% over the prior year period.

Outside the US, revenue declined 2% and represented 41% of total ratings revenue.

Global corporate finance revenue in the second quarter increased 19% from a year ago to $128 million.

Revenue grew 30% in the US, primarily driven by strong activity in high yield bank loans, which more than offset reduced issuance of investment grade bonds.

Outside the US, revenue increased 1% from the prior year period, with strong issuance in Asia and Latin America mostly offset by limited activity in Europe and Canada.

Global structured finance revenue for the second quarter was $73 million, 2% below the prior year period.

In the US, revenue declined 4% year-over-year, with reduced activity and derivatives and asset backed commercial paper programs partially offset by growth in commercial real estate finance issuance.

Non-US structured finance revenue grew 1%, with improved European covered bond issuance mostly offset by declines in other asset classes.

Global financial institutions revenue of $63 million decreased 6% from the second quarter of 2009, primarily due to issuance declines in the US and European insurance and banking sectors.

US financial institutions revenue was down 9%, while outside the US, revenue declined 4%.

Global revenue for public project and infrastructure finance business grew by 6% year-over-year to $64 million.

Revenue increased 13% in the US, with higher revenue in the public and project finance sectors.

Non-US revenue declined 8%, primarily due to lower issuance volumes in European infrastructure finance.

Turning now to Moody's Analytics, global revenue for Moody's Analytics of $149 million was up 6% from the second quarter of 2009.

US revenue grew by 6% year-over-year to $67 million.

Non-US revenue increased by 7% to $82 million and represented 55% of total Analytics revenue.

All lines of business grew over the prior year quarter, led by risk management software, which generated the majority of the quarter's revenue growth.

Globally, revenue from research, data, and analytics of $105 million increased by 3% from the prior year period and represented over 70% of total MA revenue.

The return to growth for these businesses reflects further stabilization among our Capital Markets customers, as disruption from the financial crisis recedes.

In our more transaction sensitive businesses, revenue from risk management software of $39 million grew 16%, while revenue from professional services of $5 million increased 14% from the prior year period.

Growth rates in both of these business units are subject to significant quarter to quarter volatility, due to the variable nature of project timing and the concentration of revenue in a relatively small number of engagements.

Turning now to expenses, Moody's second quarter expenses were $287 million, an increase of 9% compared to the second quarter of 2009.

The increase was primarily due to greater head count and incentive compensation, as well as higher spending related to legal and regulatory requirements.

Excluding minor restructuring related items from both periods, Moody's second quarter 2010 expenses increased 10%.

Excluding restructuring items in both periods, operating margin for the second quarter of 2010 was 39.9% compared to 42.2% in 2009.

Our effective tax rate for the quarter was 31.1%, compared with 36.4% for the prior year period.

The decrease was primarily due to a reduction in unrecognized tax benefits and other tax related liabilities resulting from the closing of various tax audits, lower taxes on foreign income, and the favorable resolution of a legacy tax matter.

Now I would like to turn to an update on capital allocation and stock buybacks.

During the second quarter of 2010, Moody's repurchased 2.8 million shares at a total cost of $70 million and issued 0.1 million shares under employee stock-based compensation plans.

Outstanding shares as of June 30, 2010, totaled 234 million representing a 1% decline from a year earlier.

As of June 30, 2010, Moody's had $1.3 billion of share repurchase authority remaining under its current program.

At quarter end Moody's had $1.1 billion of outstanding debt and approximately $644 million of additional debt capacity available under its revolving credit facility.

We used a portion of our cash flow to reduce total outstanding debt by $16 million during the second quarter.

Net debt was essentially unchanged at approximately $620 million.

We remain committed to using our strong cash flow to create value for shareholders, while maintaining sufficient liquidity.

In 2010, we expect to continue share repurchase at modest levels, subject to available cash flow, market conditions, and other ongoing capital allocation decisions.

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

Thanks, Linda.

I will continue now with an update on legislative and regulatory developments.

In the US, last week the President signed into law the Dodd-Frank Wall Street Reform Act, which establishes a revised legal and regulatory infrastructure for the US financial system.

We believe that regulatory reform is healthy for the markets, and we're committed to implementing the provisions that are specific to our industry as quickly and effectively as possible.

The intent of the law, regarding credit rating agencies, is to increase transparency and accountability through a number of measures.

The majority of the provisions seek to enhance the regulatory environment for nationally recognized statistical rating organizations, or NRSROs, and will be implemented through rule-making by the SEC.

Certain of the provisions, however, are effective immediately, including the revised litigation pleading standard provided for by section 933, and the recision of rule 436 G.

Section 933 provides that the initial complaint in a federal securities fraud case against a credit rating agency will be sufficient if a plaintiff adequately alleges that the rating agency knowingly or recklessly either failed to conduct a reasonable investigation of factual elements relevant to the rating or failed to obtain independent third party verification of factual material relied upon for the rating.

This provision changes only the pleading standard for bringing a case, not the liability standard that sets forth what a plaintiff will ultimately be required to prove.

Moody's analysts have always investigated the factual elements relevant to our ratings, including, in many instances, a review of information that has been verified by independent third parties.

In response to the revised pleading standard, however, we're undertaking certain processes and operational changes, which include enhanced documentation of some of our existing processes and seeking additional third party verification where appropriate.

We're also considering other possible actions that is may help mitigate some of the potential risks of this revised pleading standard.

Regarding the other litigation-related provision, as a result of the recision of SEC rule 436 G, if an NRSRO provides consent for a rating to be including in the 1933 Act registration statement or prospectus, the NRSRO is subject to expert liability.

Moody's, like several other NRSROs, has stated that we are not able to provide that consent without further study of the legal consequences.

However, this in no way limits our rating activity or the public availability of Moody's ratings through our website or press releases or other market uses of our ratings in the differing -- in the offering process.

While the recision of 436 G is applicable to US public securities offerings, it does not cover securities offered outside the US, or US private placements or municipal bonds.

It is most relevant to limited sectors of the market where there is a regulatory requirement to include ratings in a registration statement or prospectus.

As we have discussed for more than a decade, Moody's supports the removal of ratings from regulation and believes it is in the best interests of all market participants.

In Europe, as noted on previous calls, we're in the process of implementing the new European Union credit rating agency regulation and continue to communicate with national and regional authorities charged with providing guidance and oversight for this regulation.

We're completing our application to register under the new EU regulatory regime for credit rating agencies and anticipate that additional European regulatory review will be ongoing during the second half of the year.

Finally, as regulatory reviews and activity occur in other jurisdictions, we will continue to advocate for globally consistent approaches that align with the G 20 statements.

I would like to conclude this morning's prepared remarks by discussing our full year guidance.

Moody's outlook for 2010 is based on assumptions about many macroeconomic and Capital Market factors, including interest rates, corporate profitability in business investment spending, merger and acquisition activity, consumer borrowing and securitization, and the eventual withdrawal of government sponsored economic stabilization initiatives.

There is an important degree of uncertainty surrounding these assumptions, and, if actual conditions differ, Moody's results for the year may differ materially from our current forecast.

As I mentioned earlier, we are reaffirming our full year 2010 EPS guidance in the range of $1.75 to $1.85.

However, certain components of 2010 guidance have been modified to reflect our current view of credit market conditions and implications for the Company.

My comments will primarily focus on those components that have been revised, and we refer to you our earnings release for a full review of our guidance.

Our full year outlook assumes foreign currency translation at exchange rates as of the end of the second quarter.

For Moody's Corporation, we now expect revenue to grow in the mid-single-digit percent range, and expenses to increase in the mid-to-high single-digit range.

As previously discussed, we expect operating expenses to increase throughout the year, and we continue to believe incremental compliance costs related to new regulation will be approximately $15 million for this year and $15 million to $25 million for next year.

The Company still projects the full year 2010 operating margin in the high 30% range and now expects the effective tax rate in the range of 34% to 35%.

At Moody's Investor Service, we expect global revenue growth in the mid-single-digit percent range.

Reduced issuance activity and challenging credit market conditions in some key markets abroad are expected to continue going forward.

In the US, we expect MIS revenue to increase in the low double-digit percent range, while non-US revenue is expected to decline in the low single-digit percent range.

Corporate finance revenue is projected to increase in the high teens to low 20% range.

Structured finance revenue is expected to decline in the high single to low double-digit percent range, while revenue from financial institutions is expected to be relatively flat.

Revenue from public, project, and infrastructure finance is projected to increase in the mid-single digit percent range.

Moody's Analytics, we continue to expect full year 2010 revenue to increase in the mid-single digit percent range.

Revenue in the US is now expected to grow in the mid-single digit percent range, the same rate of growth as outside the US.

We continue to project revenue growth in the low single-digit percent range for research data and Analytics, while growth for risk management software is now expected to be in the low double-digit percent range.

Professional services expected to grow in the mid-single digit percent range.

That concludes our prepared remarks.

Joining us for the Question and Answer Session are Michel Madelain, the Chief Operating Officer of Moody's Investor Service, and Mark Almeida, President of Moody's Analytics.

We would be pleased to take any questions you may have.

Thank you.

Today's Question and Answer Session will be conducted electronically.

(Operator Instructions) We'll take our first question from Peter Appert of Piper Jaffray.

Thanks.

Ray, I think it is noteworthy that your revenue performance in the ratings business is quite a bit better than both S&P and Fitch.

I understand there is differences in terms of mix from a transaction versus relationship based pricing model.

Do you feel that perhaps you're gaining market share?

I mean, it is certainly possible, Peter, but I don't think that one quarter's performance is really sufficient for us to make a strong statement about that.

As you say, it could be some timing differences.

We also had a strong quarter from the rating of bank loans, in the US in particular, and that is a more transaction-based part of our business, and accounted for a lot of the strength.

This is, actually, Ray, your second quarter of outperformance, so I think it's an emerging trend perhaps.

How about, Ray, on pricing strategy.

You have talked in the past about the possibility of being a little more aggressive in the context of the higher costs you're facing with the new regulations.

Any further thoughts on that?

Yes.

As we've said before, there are certainly additional costs that we are dealing with this year and that we expect to deal with next year.

We do anticipate that pricing increases will be appropriate in some areas of our business, as they have been this year, and so, yes, we will price where we have additional costs, but we're, as we always are, most interested in aligning price with the value creation, and that's going to be the primary focus.

Okay.

And then just one last thing.

You're offering somewhat more cautionary guidance from a revenue standpoint here for the back half.

Does this imply you're seeing something in terms of issuance activity near term that drives that, or is there something else we should be thinking about?

No.

Actually, I think market tone, both in the US and in Europe, has been better in July than -- certainly than it was in May and the early part of June, but we have experienced a couple of months this year where the markets have turned pessimistic and spreads have widened.

We saw that in February, we saw it in May and the early part of June, and issuance declined, and we're anticipating that there're going to continue to be these periods of pessimism from time to time given the degree of uncertainty and somewhat the degree of fragility that we have seen in the debt Capital Markets.

Okay.

Thanks, Ray.

Thank you, Peter.

Our next question comes from Michael Meltz of JP Morgan.

Thank you.

Two questions.

Ray, clearly the issuance data that we all look at, I don't think it's ever really tracked all that well to your revenues and this quarter especially, so the bank loan or syndicated debt portion of your business, can you talk about trends specifically there?

How did you exit -- was it really just a strong start to the period or how did you exit?

And then I have a follow-up.

Well, the bank loan issuance activity was stronger in the second quarter than in the first quarter, and to some extent bank loan activity and speculative grade bond activity offset each other, so we see strength in one versus the other at different points in time.

But the loan activity was a combination of corporations finding the opportunity to refinance, and because there was more LBO activity recently than we had seen for a while, and so that was driving the bank loans, and again particularly this was true in the United States.

Question for you on legal and DNO.

We have seen a lot of reaction from your firm and competitors now that the reform went into effect.

How have your discussions gone with your insurers?

Any update you can give us on that?

We don't discuss our discussions with our insurers, but as we have said before, we think we carry very appropriate levels of insurance and we'll continue to do so.

Okay.

Thank you.

Our next question comes from Sloan Bohlen of Goldman Sachs.

Thank you, good afternoon.

First a question for Ray and Mark on the Moody's Analytics side.

The growth that we're seeing in the recovery value products, is that mostly just sort of demand for the products?

Are you actually starting to see some growth from new hiring at financial institutions and new seats being added?

Yes.

Let me ask Mark to comment on that.

No.

We're really not seeing any material increase in staffing at our customer accounts, so that's not really driving our revenue growth.

What's driving our revenue growth is good, not extraordinary, but good demand for our products and services, and very clear stabilization in the customer base, and higher customer retention.

We had a problem with customer retention when we were in the throws of the financial crisis, and that situation has improved a lot since the middle and end of last year.

I guess, for that customer retention, are you finding that new customers are looking for those products as well as certain of those types of assets are coming back to trade in the market?

Yes, yes.

We're seeing good demand from new customers and good demand from existing customers as well.

Okay.

And then just a question for Linda on the buyback.

Just wanted to get a sense of how the size of the buyback was determined and then maybe a comment on timing relative to when fin reg was passed.

Sure.

We determined our size by looking at our financial ratios and making sure that we had an appropriate amount of money to spend in keeping with our modest guidance.

We handle these things systematically, Sloan, so there isn't much to say in terms of timing with financial regulation.

Okay.

Fair enough.

Thanks.

Our next question comes from Craig Huber of Access 342.

Yes, good morning.

My typical question first, if I could, could you break down, if you would, the breakdown of your revenues transaction versus non-transaction across your four broad categories?

Yes, we certainly could, Craig.

Let me see here.

We'll do transaction and then relationship for structured finance, transaction revenues were 40% and relationship revenues were 60%.

For corporate finance CFG, 70% transaction, 30% revenue.

Relationship, excuse me.

FIG was 32% transaction and 68% relationship, and PPIF was 58% transaction and 42% relationship.

For MIS as a whole, we were at 54% and 46%, and for Moody's Analytics 12% transaction, 88% relationship, and for the Corporation as a whole, 41% transaction and 59% relationship.

And then my other housekeeping question, if I could, could you further breakdown your revenues within corporate finance of the four main categories, high yield, bank loans, investment grade, et cetera?

For --

I know it is a lot of numbers.

Thank you.

Okay.

For corporate finance for the second quarter, investment grade was 16% of our revenues, and again total corporate finance revenues were $127.9 million, so 16% of that was investment grade.

22% of that was speculative grade.

20% of it was bank loans, and 43% of that was other.

Anything else?

Yes, if you could just do the other three broad categories too, structure finance, finance institutions, PPIF.

Sure.

Let me do structured.

Total structured revenue was $73.1 million, and asset backed category was 31%.

Residential mortgage backed securities was 22%, commercial real estate 18%, and derivatives 29%.

Do you want PPIF or FIG?

Yes, both, please.

Okay.

Getting to the right page here -- For FIG, total revenue $63.2 million, banking was 70% of that.

Insurance was 23% of that, and managed investments was 7% of that.

And let us find PPIF.

For that, total of $64.4 million, public finance and sovereign was 52% of revenue.

Municipal structured finance was 8%, and project and infrastructure was 40% of total revenue.

I think that's all of them.

Yes, that's all of them.

And then, could you also speak about the debt maturities you're looking at, I guess on a worldwide basis for 2011 and what you think could be a pull forward effect of some refinancing into the fourth quarter and how you're thinking about that versus your guidance?

Yes.

We -- I mean, I think we have certainly seen pull forward already, and there is -- there remains a significant amount of debt that needs to be refinanced, not just in 2011 but 2012 and '13 as well, so the -- I guess I am less sensitive to whether there is a pull forward into later this year with 2011 debt because of the amount of debt that's still outstanding maturing in 2012 and 2013, and so as a result it looks very opportunistic at this point.

Spreads come in and issuance activity is substantial, but when spreads widen out, as they did in May, there is not much activity because the debt is not due now.

It is being pulled forward.

And then lastly, you touched on briefly your thoughts on the European regulations.

If they do open up, the European regulations for the credit rating companies again further, what would you expect them to focus on here?

I would expect that they're focused on many of the things that they either looked at before or that have been looked at in the US, in terms of managing conflicts of interest, looking at the business model, the transparency, accountability, reporting, and I hope, although I don't know this, but I would hope that we would also see a look at harmonization, because, again, even if we are dealing with a more intensive regulatory environment, it is helpful if that environment is one that we can operate in, in a consistent manner globally.

Great.

Thank you.

(Operator Instructions) Our next question comes from William Bird of Bank of America Merrill Lynch.

Thanks.

I was wondering if you could tell us what the incentives comp accrual was in the quarter?

I can tell you the percentages here, Bill, which is how we prefer to do it.

Total comp expense for the second quarter was $176 million.

Of that 10% was incentive compensation, and about 7% stock-based compensation, and the rest salaries and benefits made up about 82% of compensation, and that's approximately how we have been running and how we expect to run for 2010.

And can you also just talk about the tax rate?

Does the 34% to 35% for the full year, does that include the legacy tax item, and what do you expect the sustainable tax rate to be beyond 2010?

Sure.

The 34% to 35% would include what we see for the rest of the year going forward.

We had a very good quarter regarding the tax rate.

Obviously we had some beneficial one-off situations, and then we also work hard on making sure that we're providing the correct tax structure for the Corporation, given that, in general, 50% of our revenues are now overseas.

So we've worked hard on our strategy, and then, also, we have been fortunate this quarter to have a few things that have worked our way in terms of closing certain audits that were outstanding and so on.

So, 34% to 35% is our best thought going forward.

Still, I would not be so brave as to venture anything for 2011.

We've got an administration in the Congress which is considering some pretty major changes to tax legislation, and for us to give any guidance at this time I think would be a guess at best, and perhaps a bit irresponsible.

So, let's see where the politicians go, and we'll update you when we do next year's guidance.

So, just to clarify the 34% to 35%, it sounds like it includes the legacy tax item?

Yes.

We can't be certain on when legacy tax items are going to be resolved, but what we can see for this year, that's what we have in there.

Thank you.

And at this time there are to further questions.

I will turn the call back to Ray McDaniel for any closing remarks.

Okay.

I just want to thank everyone for joining the call today, and we look forward to speaking with you again in October.

Thanks.

This concludes Moody's second quarter earnings call.

As a reminder, a replay of this call will be available after 4 PM Eastern Time on Moody's website.

Thank you.