穆迪 (MCO) 2012 Q2 法說會逐字稿

Good day and welcome, ladies and gentlemen, to the Moody's Corporation second quarter 2012 earnings conference call.

At this time, I would like to inform you that 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 Salli Schwartz, Global Head of Investor Relations.

Please go ahead.

Thank you.

Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's second quarter results for 2012.

I am Salli Schwartz, Global Head of Investor Relations.

Moody's released its results for the second quarter of 2012 this morning.

The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com.

Ray McDaniel, President 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, 2011, and in other SEC filings made by the Company which are available on our website and on the Securities and Exchange Commission's website.

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

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

I'll now turn the call over to Ray McDaniel.

Thank you, Salli.

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

I will begin by summarizing Moody's second quarter 2012 results.

Linda will follow with additional financial detail and operating highlights.

I will then speak to recent regulatory developments and finish our comments with our outlook for 2012.

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

Second quarter revenue of $641 million increased 6% of the prior-year period reflecting solid growth in public finance and structured finance as well as continued strong results from Moody's Analytics.

Expenses for the second quarter were $362 million, an 8% increase from the second quarter of 2011.

Operating income for the second quarter was $279 million, a 3% increase from the prior-year period.

Diluted earnings per share of $0.76 for the second quarter decreased $0.06 from the prior-year period which had included a $0.06 favorable tax impact related to a foreign tax ruling and a $0.03 legacy tax benefit.

Though market conditions remain volatile, we are reaffirming our 2012 EPS guidance range of $2.62 to $2.72 and still expect to be toward the upper end of the range.

Turning to the year-to-date performance, revenue for the first six months of 2012 was $1.3 billion, a 9% increase from the first half of 2011.

Expenses were $740 million, up 12% and operating income of $548 million increased 5% from the prior-year period.

Diluted earnings per share of $1.52 for the first half of 2012 increased $0.03 from the prior-year period which again had included a $0.06 favorable tax impact related to a foreign tax ruling and a $0.03 legacy tax benefit.

Revenue at Moody's Investor Service for the first six months of 2012 was $894 million, an increase of 5% from a year ago.

Moody's Analytics revenue of $394 million was 19% higher than the prior-year period.

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

Thanks, Ray.

I will begin with revenue at the Company level.

As Ray mentioned, Moody's total revenue for the quarter increased 6% to $641 million.

US second quarter revenue increased 9% to $344 million while revenue outside the US grew 2% to $297 million and represented 46% of Moody's total revenue, down slightly from 48% in the year-ago period.

Recurring revenue of $338 million represented 53% of the total up from 51% in the prior-year period.

And looking now at each of our businesses, Moody's Investor Service revenue for the quarter was $441 million, about flat to prior-year period.

Foreign currency translation unfavorably impacted MIS revenue by 3%.

US revenue for MIS increased 5% over the prior-year period while revenue outside the US decreased 5% and represented 42% of total ratings revenue.

Global corporate finance revenue in the second quarter declined 4% from the year-ago period to $192 million.

Revenue was down 4% year-over-year both inside and outside the US.

The declining global corporate finance revenue reflected weaker speculative grade bonds and bank loan issuance against a near record prior-year period.

Investment grade issuance for non-financial corporates was higher year on year, reflecting continued historically low borrowing rates.

Global structured finance revenue for the second quarter was $91 million, 5% above prior year period.

In the US, revenue increased 22% year-over-year primarily due to strength in ratings of collateralized loan obligations and asset-backed securities.

International structured finance revenue was down 9%, reflecting issuance declines in European covered bonds and asset-backed securities.

Global financial institutions revenue of $78 million decreased 2% from the same quarter of 2011.

US revenue was essentially flat as compared to the second quarter of 2011 while non-US revenue was down 3%.

Global revenue for the public project and infrastructure business rose 12% year-over-year to $81 million.

Revenue was up 19% in the US primarily due to gains in ratings for regional governments and higher education while non-US revenue declined 3%.

Turning now to Moody's Analytics.

Global revenue from Moody's Analytics of $200 million was up 19% from the second quarter of 2011.

Slightly more than half of the growth was from the late 2011 acquisition of Copal Partners and Barrie & Hibbert.

Excluding the impact of foreign currency translation, revenue grew 21%.

US revenue grew by 23% year over year to [$85.8 million].

Non-US revenue increased [17%] to $114 million and represented 57% of total Moody's Analytics revenue.

Globally, revenue from research, data and analytics was $121 million, increased 9% from the prior-year period and represented 61% of total MA revenue.

We continue to see demand for credit research by our credit view offering and solid growth in data licensing arrangements.

Revenue from Enterprise Risk Solutions of $52 million grew 24% from last year reflecting the December 2011 acquisition of Barrie & Hibbert and growth in the base business.

Due to the variable nature of project timing, Enterprise Risk Solutions revenue remains subject to quarterly volatility.

Professional services revenue grew 84% to $27 million reflecting the acquisition of a majority stake in Copal Partners in November 2011.

Turning now to expenses, Moody's second quarter expenses were $362 million, an increase of 8% compared to second quarter 2011 or a 10% increase excluding the impact of foreign currency translation.

Compensation expense accounted for over half of the year-on-year expense increase and was due to increased headcount from the acquisitions in late 2011 and from growth in our existing business.

Incremental non-compensation expense was driven by higher information technology expenses reporting business growth and regulatory initiatives as well as purchase price amortization associated with acquisitions.

Moody's reported operating margin for the quarter was 43.5%, down from 44.6% in the second quarter of 2011.

Our effective tax rate for the quarter was 33.6% compared with 27.8% for the prior-year period.

The increase in the effective tax rate was primarily due to lower taxes in 2011 resulting from a favorable foreign tax ruling.

Now, I'll provide an update on capital allocation.

During the second quarter of 2012, Moody's repurchased 2.7 million shares at a total cost of $100 million and issued 300,000 shares under employee stock-based compensation plans.

Shares outstanding as of June 30, 2012, totaled 222.3 million, representing a 3% decline from a year earlier.

As of quarter end, Moody's had $800 million of share repurchase authority remaining under its current program.

We still expect full-year 2012 share repurchases of approximately $200 million subject to available cash, market conditions, and other ongoing capital allocation decisions.

As of June 30, 2012, Moody's had $1.2 billion of outstanding debt and $1 billion of additional debt capacity available under our revolving credit facility.

Cash and cash equivalents were $824 million as of June 30, 2012, a decrease of $114 million from a year earlier.

Approximately 85% of our cash holdings are maintained outside the US.

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

And, with that, I'll turn the call back to Ray.

Thanks, Linda.

I'll continue with an update on regulatory developments.

First, in the US.

We continue to expect the SEC will adopt final rules relevant to nationally recognized credit rating agencies by year end 2012 and publish its feasibility study on establishing an alternative system for allocating rating assignments for structured finance products by about the same time.

Both banking and securities regulatory authorities continue to assess their use of ratings and regulation and are in the process of developing potential alternative measures as replacements.

Turning to Europe.

Moody's was registered in the European Union in late October 2011 and our European operations are under the full examination and oversight authority of the European Securities and Market Authority or ESMA.

As discussed on previous calls, in November 2011 the European Commission released new regulatory reform proposals for the rating agency industry commonly referred to as CRA3 that seek to address, among other ideas, the use of ratings in regulation, business models, competition, rotation of rating agencies and liability.

If implemented as originally proposed by the commission, many believe CRA3 would likely have significant negative implications for Europe's credit markets.

Consequently, the debate among public policy makers and the private sector has focused on CRA3's potential damaging impact on the broader European economy and European issuers access to debt markets.

The European legislative process requires that the European Parliament and Council of Finance Ministers of the individual EU member states each produce its own version of the text and then enter into discussions with the commission.

During these discussions, the three institutions seek to resolve any differences among their respective drafts and once a compromised document is produced, put to a vote.

In May and June of 2012 the Council and the Parliament respectively finalized of their positions on CRA3.

We expect the necessary compromised discussions to continue through the autumn months and for CRA3 to be finalized before year end of 2012.

It is still too early to assess what the likely outcome of these deliberations will be.

As always, we will continue to advocate for globally consistent approaches [aligned] with the G20 statements and directives.

I'll conclude this morning's prepared comments by discussing our full-year guidance.

Moody's outlook for 2012 is based on assumptions about many macroeconomic and capital market factors, including interest rates, corporate profitability, and business investment spending, merger and acquisition activity, consumer borrowing and securitization, and the amount of debt issued.

There is an important degree of uncertainty surrounding these assumptions, especially as they relate to Europe, and if actual conditions differ from these assumptions, Moody's results for the year may differ materially from the current outlook.

Our guidance assumes foreign currency translation at end-of-quarter exchange rates.

As I mentioned earlier, we are reaffirming our 2012 EPS guidance range of $2.62 to $2.72 and still expect to be toward the upper end of the range.

While we have reaffirmed our EPS guidance, certain components of 2012 guidance have been modified to reflect our current view of credit market conditions.

For Moody's overall, the Company still expects full-year 2012 revenue to grow in the low double-digit percent range.

Full-year 2012 expenses are also still projected to increase in the low double-digit percent range.

Full-year 2012 operating margin is still projected to be approximately 39%, including the full-year impact of our fourth quarter 2011 acquisitions.

Our effective tax rate is still projected to be approximately 33%.

As Linda mentioned earlier, we still expect full-year 2012 share repurchase of approximately $200 million subject to available cash, market conditions, and other ongoing capital allocation decisions.

Capital expenditures are still projected to be approximately $60 million to $70 million.

We still expect approximately $100 million in depreciation and amortization expense.

Incremental compliance and regulatory expense is still projected to be in the $10 million to $15 million range.

For the global MIS business, revenue for full-year 2012 is still expected to increase in the mid to high single-digit percent range.

Within the US, MIS revenue is still expected to increase in the low double-digit percent range while non-US revenue is still expected to increase in the low single-digit percent range.

Corporate finance revenue is now projected to grow in the high single to low double-digit percent range.

Revenue from each of structured finance and financial institutions is still projected to be flat to slightly up while public project and infrastructure finance revenue is still expected to increase in the mid-teens percent range.

For MA, full-year 2012 revenue is still expected to increase in the high-teens percent range.

Within the US, MA, revenue is now expected to increase in the high-teens to 20% range while non-US revenue still expected increase in the high-teens percent range.

Revenue growth is still projected in the mid single digit percent range for research, data and analytics and in the low 20% range for Enterprise Risk Solutions reflecting the December 2011 acquisition of Barrie & Hibbert as well as growth in the base business.

Professional services revenue is now projected to grow by approximately 75% inclusive of revenue from the late 2011 acquisition of a majority stake in Copal Partners and growth and MA's existing financial training and certification business.

This concludes our prepared remarks and joining us for the question-and-answer session is Michel Madelain, President and Chief Operating Officer of Moody's Investor Service and Mark Almeida, President of Moody's Analytics.

We'd be pleased to take any questions you might have.

Thank you.

(Operator Instructions)

We'll go first to Peter Appert with Piper Jaffray

Thanks.

Good morning.

So, Ray, just a couple of follow-up questions starting out on the regulatory environment.

So, what's your thought in terms of the move to replace ratings and regulations, in terms of the implications of that?

Are you seeing any changes in the portion of debt securities there issued that are rated versus not rated?

That was part one.

And then part two, with regard to CRA3, the liability issue seems like it might be the bugaboo.

What's your read on how that's going to play out?

Thanks.

Okay.

On the ratings and regulation, or reliance on ratings, there have been efforts both in the US under Dodd-Frank and as part of some of the European proposals and discussions to reduce or eliminate the use of ratings in regulation.

I think from prior calls you know that we are very supportive of that.

But, frankly, the progress on that has not been particularly strong, in my view.

And there have been probably as many changes in the use of ratings in regulation that would seek to increase the use of ratings, as there are to decrease the use.

So, net-net, I don't think there has been a lot of change.

If nothing else, what we would argue for is at least to reduce the mechanistic use of ratings in regulation.

So, it reduces some of the [quick risk] or pro-cyclicality that is associated with this, and we do have some views on how that can be done.

So, as I said, we are supportive of the overall effort, even if it has not made a lot of progress, and we don't see it having a negative impact on our business.

And then, with respect to liability, yes, we are paying close attention to the discussions in Europe around liability, and obviously, we will accommodate our business to make sure that we have the maximum protections we can have depending on what kind of liability regime the Europeans determine for our business.

And, again, there are ways for us to mitigate those risks, but we have to wait and see what the final conclusions are after these three party discussions go on in the Fall.

So, you're assuming, Ray, that there will be higher level of liability in the final version of this thing?

I think there's a good chance that there will be.

The question really is the degree and what we will do operationally to manage that risk back down.

And then specifically though, are you seeing a change in the percentage of publicly issued debt securities that are rated versus unrated?

No.

Except to the extent that there are issues coming in, domestic markets that might have previously not been issuers.

That's where we have to make sure we continue to provide coverage.

But for both the existing issuer base and for most of the new issues that are coming to market, we are providing -- we continue to provide very comprehensive coverage.

Okay.

And then, Linda, one other thing.

In terms of -- could you just talk a little bit about the pipeline in terms of what you guys are seeing currently in terms of issuance?

And then on the cost dynamics, the cost growth slowed considerably on a year-to-year basis in the second quarter versus the first.

What's the differential?

Sure, Peter.

Let me take the pipeline question first.

And the information that I'm quoting here is coming from Morgan Stanley.

Let me talk first about --

How insulting that you're quoting them.

(laughter)

Sorry about that.

Investment grade issuance first, Peter, and then high yield.

Year-to-date investment grade volume here in the US is $512 billion, which is up 6% from 2011.

First-half volume $469 billion.

It's the largest first half on record, 5% more than the first half of 2008, which was a recent high.

And (inaudible - technical difficulties) more than the first half of 2011.

The month-to-date volume has been $51 billion, and close to the July 2010 record amount of $59 billion; we may surpass that.

The last week has been okay, and the pipeline looks reasonably good.

Right now we have historically low interest rates.

I just saw before coming up here, the 10-year is at 1.42%, so we're sort of back to Eisenhower levels long-term rates.

So, that is helpful to the pipeline.

And high-yield year-to-date volume is $187 billion, that's down 13% versus 2011.

The first-half volume is $162 billion, which is down 25% from the first half of last year.

Leverage loans year-to-date volume $136 billion, which is down 30% from 2011 year-to-date.

And first-half volume was $123 billion, which is down 31% from the first half.

Now, high-yield market is grinding tighter.

We saw a little bit more activity recently, but the pipeline seems to be pretty well constrained right now looking at about $10 billion of visible high-yield issuance in the pipeline and $13 billion in leverage loans in the pipeline.

And, again, that is one view you're going to see a little bit of movement depending on who you source for information.

But generally, again, high-yield pipeline, limited; investment grade pipeline, pretty strong.

Now, on costs.

Peter, you are correct.

We did move down from the first quarter to the second quarter.

A couple of things going on there.

The first quarter had some unusually high expenses in it.

Our big comp quarter is the first quarter.

And the second quarter had some reductions in that.

The first quarter obviously was stronger, so we had higher incentive compensation amount, and the second quarter was a little bit more reasonable.

So, that basically is the main driver of what's happened with the quarter-over-quarter expenses.

Got it.

Thanks, Linda.

We'll go next to Jennifer Huang with UBS.

Hi.

Thanks for taking the question.

So, it seems like debt issuance in Europe looks pretty weak in the second quarter year-over-year.

And I think European MIS revenues were down about 5%, which seems rather stable.

So, can anybody just talk about what are some of the drivers behind the (inaudible) that you guys saw in the revenues in Europe in MIS?

Sure.

Yes.

Europe was softer in the second quarter, and there were a number of lines that saw year-on-year quarterly decreases.

But this was mitigated by the fact that we do have a large number of frequent issuer pricing agreements in Europe, and those provide a steadier base of revenue.

What we're missing though is the growth opportunity in Europe that comes from issuance, and that's why we would look for whether market tone and sentiment improves in the second half or remains as volatile and choppy as it has been in the first half.

Because that would bring more of the speculative grade credits to market, and those are the credits that are less likely to be under frequent issuer pricing agreements, and would increase our transaction-based revenue.

Also, to the extent that there is strengthening in market tone in Europe, I would expect that is going to be good news for structured finance issuance, so we would have to keep a close eye on that, and that is transaction-based revenue for the most part.

Okay.

And then, in terms of the structured finance products, can you just talk about the profitability of those deals?

Are they still -- are they higher than from the corporate side?

It's similar.

There are not market differences in profitability subject to cyclical upturns and downturns.

So, if we have a downturn in structured finance and an upturn in another area, that obviously will be more profitable.

But looking through those cycles, I wouldn't identify any significant differences.

Okay.

And then, I just have one more on the expense side.

I think from the last -- from the first quarter, you mentioned you expect some ramp in expenses throughout the year to the tune of about $40 million.

Is that still your expectation looking at the full year now?

And, if so, just wondering how much flexibility you have in that?

Because it seems like in the second quarter you [were] able to manage the expenses down quite a bit.

Jen, it's Linda.

Let me talk about the back half of the year as compared to the first half of the year.

And let me start by saying that we don't give quarterly guidance.

You are going to have to do the math on some of those.

On the revenue side, we expect that our revenue pattern will lay out approximately like it did last year, with our revenue coming in with a balance toward the first half of the year with a little bit of weakening toward the second half of the year.

So, the split on that we're thinking is about 52% first half, 48% back half.

So we do, at this point, expect revenue in the second half of the year to be a little bit slower.

Now, on the expense side, you're right.

We had talked about a $40 million ramp, [$377] million first quarter expense number.

We did do better in the second quarter.

We do expect $40 million expense ramp from that $377 million as we get to the fourth quarter.

And obviously that would result in a tick-up in expenses in the third quarter, and another move up in the fourth quarter.

Now, the reason for that is we have more headcount coming on in the second half of the year.

We also have raises that come into play in the back half of the year, and some other expenditures that we have to make in terms of IT, particularly to get ready for Dodd-Frank compliance.

Many of those are expensed items, so they are changes to existing systems, which have to be expensed as opposed to building new systems which are, of course, capitalized.

So, yes, we expect the continued expense ramp.

We expect that revenue may weaken a bit, and traditionally our pattern has been that the third quarter is the most challenged on the revenue side.

So, that might make for a little bit of a tougher situation in the third quarter.

So, that is how we see it laying out at this point.

Okay, thank you.

(Operator Instructions) We'll go next to Craig Huber with Huber Research Partners.

Yes.

Hi.

Thank you.

First, a couple cost questions.

What was the incentive compensation expense in the quarter?

Sure, Craig.

I think it's $27.5 million.

So, it was basically flat with the first quarter.

Correct?

That's right.

Last year -- just interestingly, Craig, last year we had a different pattern.

Last year we had in first quarter $29.4 million, and ramping up to $35 million in the second quarter because, of course, the second quarter was very strong last year.

So, as you said, this year $27.5 million is flat first quarter to second quarter.

And then also back on the overall second-quarter costs.

Remembering your remarks from three months ago about how you thought the cost pattern would go, and also looking at history here, based on what I can see here over the last 10-plus years you've never had a quarter where costs in the second quarter were down from the first quarter like we had here sequentially.

What changed in your mind versus your original budget you were talking about three months ago that costs were actually down versus the first quarter?

Sure.

Of course, we're looking to accrue incentive compensation based on how we do against our forecast.

And in the first quarter, we put up heavier incentive compensation view because we had a greater amount of completion.

So, in the second quarter that was a little bit lighter.

We also had some other issues involving FX, which were a little bit better for us in the second quarter.

But, generally, we are being careful with expenses.

We're being careful with hiring.

We're being very thoughtful about how we are managing the business.

And with the market outlook being as choppy as it is, we have to be very thoughtful about what we are doing and how we are doing it.

So, I think those would be the main drivers.

And I'd ask Ray if he had any further comments he'd like to make about that.

No, just to emphasize that I think part of the pattern that you're seeing that's different Q1 to Q2 is really explained by Q1 as much as it's explained by Q2, because we did have the higher incentive accruals in the first quarter based on the strength of the markets at that time.

Versus your budget you are saying, because it's the same number in both quarters, of course?

Exactly.

Okay, and then let me ask some questions.

Within your four main segments within ratings, can you break out, Linda, the transaction percentage versus non-transaction across the four segments, please?

Sure.

For corporates, Craig, we will do as usual transaction first and relationship second.

For CFG we are running 70/30 transaction relationship, structured is 57/43, FIG is 35/65, and PPIF is 62/38.

Total for the rating agency is 60/40, MA is the reverse, 20% transaction revenue and 80% relationship.

Total for MCO is 47% transaction and 53% relationship.

And then also breaking out the revenues differently, can you do the similar percentages like within corporate finance, high yield, bank loans, investment grade, and monitoring CP medium-term notes, do that for all the four segments?

Yes, sure.

Starting with corporate finance, Craig, the total number for corporate finance dollar amount for the second quarter is $191.5 million.

Investment grade made up 22% of that revenue in the second quarter.

High yield made up 17% of the revenue, bank loans 18%, and other accounts 43%.

Going on to FIG revenues, total amount of 77.8%, again, FIG is pretty consistent quarter-over-quarter.

Banking 67% of that revenue.

Insurance 27%, and managed investments 7%.

Going on to PPIF, the total number was $81.2 million, and 54% of that came from public finance and sovereigns.

Again, that was an increase in what we usually see.

Muni's at 6%, project and infrastructure at 40%, and again, $81.2 million was the total.

And then I think we missed structured.

Total number of $90.7 million, asset-backed securities 32% of that.

Residential mortgage-backed security is 24%, commercial real estate 20%, and derivatives 24%.

Great.

Thank you.

And we'll go next to Doug Arthur with Evercore.

Yes, Ray, just on international trends.

If Europe stays choppy for the balance of the year, can you talk about [trends outside of Europe and] emerging markets, Asia, Latin America, and how it builds strength in or continues to be strong or how significant that could be to your MIS international?

Sure.

We are expecting the international business outside of EMEA to be relatively stronger than Europe or EMEA.

And the concern will be the extent of any contagion from Europe, and what that might due to business confidence and business expansion in other international markets.

Frankly, that is a tough call to make.

So, we think that Other international is going to perform reasonably well for the second half.

It is smaller than our European business, but it's subject to at least some of the choppiness and volatility risk that we see in Europe.

And I will ask Michel Madelain if he has any additional comments he'd like to make on that?

Thank you, Ray.

This caliber of business overseas is quite different in Asia and Latin America compared to Europe.

But we see that as much more stable and robust than we see the choppiness we see in Europe today.

Yes.

Can you put a ballpark range around the scale relative to Europe?

Yes.

Europe, of overall Moody's Corporation business, Europe represents about 30%, and Asia represents about 0.5 of that -- Asia and Latin America.

Okay.

Great.

Thank you.

That concludes today's question-and-answer session.

At this time, I will turn the conference over to Ray McDaniel for any additional or closing remarks.

Okay.

Before we end the call, I just want to announce that Moody's will host its investor day on Wednesday, September 12, in New York City.

Attendance is by invitation only, and the event will be webcast, and further details will be provided on our investor relations website www.ir.moodys.com.

Thanks a lot for joining the call today, and we look forward to seeing many of you in September.

This concludes Moody's third-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.