穆迪 (MCO) 2015 Q1 法說會逐字稿

Good day, and welcome, ladies and gentlemen, to the Moody's Corporation First-Quarter 2015 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 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 first-quarter 2015 results, as well as our updated outlook for full-year 2015.

I am Salli Schwartz, Global Head of Investor Relations.

This morning, Moody's released its results for the first-quarter of 2015, as well as our updated outlook for full-year 2015.

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

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

Also making prepared remarks on the call this morning is Linda Huber, Moody's Executive Vice President and Chief Financial Officer.

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

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

In accordance with the Act, I also direct your attention to the Management's Discussion and Analysis section.

And the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2014.

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'll begin by summarizing Moody's first-quarter 2015 results.

Linda will follow with additional financial detail and operating highlights.

As we have no legal or regulatory updates, I will conclude with comments on our outlook for 2015.

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

In the first quarter, Moody's delivered revenue of $866 million, an increase of 13% over the first quarter of 2014.

On a constant currency basis, Moody's revenue was up 18% year-over-year.

Excluding the 2014 consolidation of ICRA and our 2014 acquisitions of Lewtan Technologies and WebEquity Solutions, as well as the impact of foreign currency translation, Moody's revenue grew 16% year-over-year.

Operating expense for the first quarter was $494 million, up 14% from the first quarter of 2014.

Operating income was $371 million, a 12% increase from the prior-year period.

Adjusted operating income, defined as operating income less depreciation and amortization, was $400 million, also up 12% from the same period last year.

Foreign currency translation unfavorably impacted operating income by 7%.

Operating margin for the quarter was 42.9%, while adjusted operating margin was 46.2%.

Diluted earnings-per-share of $1.11 increased 11% from the prior-year period.

We are reaffirming our full-year 2015 earnings-per-share guidance of $4.55 to $4.65.

Despite our expectations for uneven global growth, as well as the strength of the US dollar at current exchange rates.

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

Thanks, Rick.

I'll begin with revenue at the Company level.

As Ray mentioned, Moody's total revenue for the first quarter increased 13% to $866 million.

Foreign currency translation unfavorably impacted Moody's revenue by 5%.

US revenue of $500 million was up 17% from the first quarter of 2014.

Non-US revenue of $366 million was up 7%, and represented 42% of Moody's total revenue.

Recurring revenue of $424 million represented 49% of total revenue.

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

Total MIS revenue for the quarter was $602, million up 14% from the prior-year period.

Foreign currency translation unfavorably impacted MIS revenue by 5%.

US revenue increased 18% to $372 million.

Revenue outside of the US of $231 million increased 8% percent, and represented 38% of total ratings revenue.

Excluding the 2014 consolidation of ICRA, MIS revenue increased 12%.

Moving now to the lines of business for MIS.

First, global corporate finance revenue in first quarter was up 13% to $299 million, reflecting increased investment grade issuance from heightened M&A activity.

As well as strong investor demand for high yield bonds.

Partially offsetting these gains, was a contraction and bank loan issuance.

US corporate finance revenue increased 13%, while non-US corporate finance revenue increased 14%.

Second, global structured finance revenue for the first quarter was $101 million, 6% above the prior-year period.

This increase was primarily the result of strong US commercial real estate issuance.

US structured finance revenue increased 13%, while non-US structured finance revenue decreased 6%.

Third, global financial institutions revenue of $94 million increased 10% from the same quarter of 2014.

Primarily due to increased revenue from US finance companies and insurers.

This benefit was partially offset by a decline in revenue from global managed investment issuers, who experienced elevated activity in the prior-year period.

US and non-US financial institution revenue increased 19% and 4% respectively year-over-year.

Fourth, global public project and infrastructure finance revenue increased 25% year-over-year to $101 million.

Resulting from increases in US municipal financing activity, and global municipal infrastructure issuance.

US public project and infrastructure revenue increased 37%, while non-US revenue increased 7%.

As a reminder, MIS other consists of non-rating revenue from ICRA, and Korea Investors Service or KIS.

MIS other contributed $8 million to MIS revenue in the first quarter, compared to $3 million from the prior-year period.

Turning now to Moody's Analytics.

Global revenue for MA of $263 million was up 11% from the first quarter of 2014.

Foreign currency translation unfavorably impacted MA revenue by 5%.

US revenue grew by 17% year-over-year to $128 million.

Non-US revenue increased 5% to $135 million, and represented 51% of total MA revenue.

Excluding the 2014 acquisitions of Lewtan Technologies and WebEquity Solutions, MA revenue grew 7% year-over-year.

Moving now to the lines of business for MA.

First, global Research, Data and Analytics, or RD&A, revenue of $150 million increased 9% from the prior-year period.

Growth reflected strong sales of credit research and licensing of rating status, and 96% customer retention rates, and the acquisition of Lewtan Technologies in October 2014.

Year-over-year, US revenue was up 13% and non-US revenue was up 3%.

Second, Enterprise Risk Solutions, or ERS, revenue of $77 million grew 29% from last year.

This increase resulted from strong project delivery across all product offerings, as well as the acquisition of WebEquity Solutions in July 2014.

Revenue was up 41% in the US, and 22% outside the US.

Trailing 12-month revenue in sales for ERS increased 28% and 24% respectively.

As noted in the past, due to the variable nature of project timing and completion, ERS revenue remains subject to quarterly volatility.

Third, global Professional Services revenue decreased 10% to $37 million.

Primarily due to the year-over-year affects of exiting certain Copal Amba product lines in late 2014.

US revenue decreased 4%, and non-US revenue decreased 13%.

Turning now to expense.

Moody's first-quarter expense increased 14% to $494 million.

Primarily due to hiring in 2014 and the first quarter of 2015, as well as added operating expense from our 2014 acquisitions.

Foreign currency translation favorably impacted expense by 4%.

Excluding the 2014 consolidation of ICRA and our 2014 acquisitions of Lewtan Technologies and WebEquity Solutions Moody's expense grew 9% year-over-year.

Moody's reported operating margin and adjusted operating margin were both down slightly in the quarter to 42.9% and 46.2% respectively.

Excluding the 2014 consolidation of ICRA and our 2014 acquisitions of Lewtan Technologies and WebEquity Solutions, Moody's added more than 100 basis points of operating leverage year-over-year.

Moody's effective tax rate for the first quarter was 32.9%, compared to 28.9% for the prior-year period.

Primarily due to a benefit from the resolution of a foreign tax audits in the prior-year period.

Now I'll provide an update on capital allocation.

During the first quarter of 2015, Moody's repurchased 3.8 million shares at a total cost of $366 million, and issued 2.3 million shares under its annual employee stock-based compensation plan.

Outstanding shares as of March 31, 2015 totaled 202.2 million shares, down 5% from the prior year.

As of March 31st, Moody's had $1.2 billion of share repurchase authority remaining.

On March 9, 2015, Moody's issued EUR500 million of 12-year senior unsecured notes at 1.75%.

This transaction provides both cost-effective financing and a partial hedge for the Company's euro exposures.

At quarter end, Moody's had $3.1 billion of outstanding debt, and $1 billion of additional debt capacity available under its revolving credit facility.

Total cash, cash equivalents, and short term investments at quarter end were $2 billion, down $50 million from a year earlier.

Free cash flow in the first quarter of 2015 was $242.8 million, up 54% from the first quarter of 2014.

Due to the increase in net income and changes in working capital.

As of March 31, 2015, approximately 63% of Moody's cash holdings were maintained outside the US.

On April 17, 2015, Moody's announced a quarterly dividend of $0.34 per share of Moody's common stock.

Payable on June 10th to the stockholders of record at the close of business on May 20th.

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

Thanks, Linda.

I will conclude this morning's prepared remarks by discussing our 2015 full-year guidance.

Moody's outlook for 2015 is based on assumptions about many macroeconomic and capital market factors.

Including interest rates, foreign currency exchange rates, corporate profitability and business investment spending.

Mergers and acquisitions, consumer borrowing and securitizations, and the amount of debt issued.

These assumptions are subject to some degree of uncertainty, and results for the year could differ materially from our current outlook.

Moody's guidance assumes foreign currency translation at end of quarter exchange rates, including $1.48 to the pound and $1.07 the euro.

Moody's still expects full-year 2015 revenue to grow in the mid single-digit percent range.

However on a constant dollar basis, Moody's full-year 2015 revenue and operating expense growth rates would now both be 4% to 5% higher, up from the approximately 3% higher that we communicated in February.

The Company still expects diluted earnings-per-share in the range of $4.55 to $4 65.

For global MIS, Moody still expects 2015 revenue to grow in the mid single-digit percent range.

However, MIS's US revenue is now expected to grow in the high single-digit percent range, while non-US revenue is now expected to increase in the low single digit percent range.

Within MIS, both structured finance revenue and financial institutions revenue are now expected to grow in the low single-digit percent range.

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For global MA, 2015 revenue is still expected to increase in the mid single-digit percent range.

However, MA US revenue is now expected to grow in the low double-digit percent range, while non-US revenue is now expected to increase in the low single-digit percent range.

Within MA, Professional Services revenue is now expected to decrease in the low single-digit percent range.

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 Investors Service, and Mark Almeida, President of Moody's Analytics.

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

(Operator Instructions)

Manav Patnaik, Barclays.

The first question I had was just around the constant currency improvement.

So generally, maybe you can tie that -- was that increase more driven by the Moody's Analytics side or is that just more of the issuing thing better than (inaudible)?

Some color there.

Manav, I apologize.

I didn't hear the beginning of your question.

If you could repeat that, I'd appreciate it.

It was around the increased guidance on a constant currency basis.

So what the main drivers there were?

The underlying operating business is performing very well.

And if not for the decline of the euro against the dollar, obviously, as we communicated, we would have that even stronger performance in the first quarter.

Our current outlook, as we said, assumes the $1.07 to the euro.

And so that's absorbing some of the strength of the underlying operating performance.

I think that's really the story.

Okay.

Linda, on the expense side, you cited a favorable benefit of the FX on the expenses, and still it looked like it was up double digits.

So, A, is that maybe just because of the contribution of acquisitions?

And then can you help us bridge what you've given us before in terms of how we expect the expense to move quarterly to the end of the year?

Yes, Manav.

Your point is correct.

That the FX impact actually benefits us on expenses, and it's a 4% to 5% benefit for the rest of the year we think on the expense line.

In terms of the ramp for expenses for the rest of the year, this is one of the trickiest calls that we make.

And there are many things that can cause this number to move around.

The expense number for the first quarter has been $494 million, and from there, now we're looking at a ramp of about $30 million.

But again, I would emphasize that could be $25 million, it could be $35 million.

And it's impacted by a number of things, including our IT projects.

And of course, that is absent any changes to incentive compensation if we end up doing better.

So a good central scenario would be about $30 million.

But there is some flexibility around that.

And please keep in mind, it's one of the tougher numbers to predict that we have to give you.

It seems like you guys have had a pretty steady stream of these small tuck in type deals.

Is that pipeline still pretty active?

Should we be expecting more of these going forward?

As we've said before, Manav, we certainly are looking for opportunities to add attractive assets to the portfolio that we have.

There is -- so yes, we are actively looking.

But the opportunity to make good acquisitions at what we think are fair prices is lumpy.

And we had a series of those last year, more than we would normally have or have normally had an individual year.

So I would not draw from 2014 and try to extrapolate that into 2015.

Okay, fair enough.

Thank you, guys.

Andre Benjamin, Goldman Sachs.

The question is on ERS.

I know it was up 29% in the first quarter.

So I was just wondering if you could remind us why you're assuming such a sharp deceleration to hit mid-single digit growth for the year?

And how we should think about the puts and takes that would drive upside or downside to that guidance.

Sure.

I'll ask Mark Almeida if he wouldn't mind commenting on that.

Andre, I think it's just a matter of our looking at the projects that we've got underway in the ERS business.

And having pretty good visibility into what work is going to get done, and when it's going to be completed, and what kind of revenue recognition we are going to have.

So the first quarter was very strong.

It was largely in line with our expectations.

So again, it's really pretty straight forward and it's a function of the schedule of work that's being done and when we expect it to complete.

I would just add to that that it's also as much of a story about 2014 as it is 2015.

In that we had a very strong fourth quarter in 2014 in ERS, which is making for more difficult comparables in the back half of the year.

The other thing to add to that, Andre, is that we did have the web equity acquisition mid year last year.

So we're getting some benefit from that in the first half of this year.

We won't get as much benefit from it in the second half.

And then same business, the global Professional Services, I know you said part of the reason it was down was because of exiting certain products.

I was wondering maybe a little color on what that would have looked like if you had kept those products.

And I don't know how much FX is weighing on that business in particular given its more internationally exposed.

Andre, it's Linda.

And Mark and I are going to tag team on this, because I'm managing Copal Amba and he'll comment on some other factors.

As you saw in the earnings release and then also on the script, we had exited part of a business for Copal Amba.

And that leaves us a revenue deficit of about $8 million, $9 million that we are looking to catch up from, which makes it a little harder to have growth on that line.

And maybe Mark wants to talk a little bit more about the other components of Professional Services.

Yes, the other big piece in Professional Services is our certification business in Canada.

And the Canadian dollar has fallen pretty sharply, so we took a very big FX in Canada.

So between what Linda described and the FX impact on the training and certification business, it created a lot of headwind for Professional Services overall.

Thank you.

Alex Kramm, UBS.

Linda, I think every quarter you remind us what the pipeline is looking like, so pretty straightforward question.

Any updates you want to highlight in particular?

Sure, Alex, we can have it be pipeline time.

So what I'll do is I'll note that these are the comments we've gotten from a collection of US capital market's desks.

And what we're going to talk about here first is the US dollar markets, and it doesn't align with how Moody's thinks that revenue and expenses.

So I want to talk about three different areas investment grade bonds, high yield bonds and then leveraged loans.

And then I'll provide some comments on Europe.

The next let's look at the investment grade bonds first.

For the first quarter of 2015 we had $350 billion of US issuance, which was up 20% year on year.

For the full year, the banks are now expecting $1.1 trillion of US high grade issuance.

Note that that's up 10% from the forecast that we received in the beginning of the year that we had said at that time were about flat.

You'll note that these forecasts at the beginning of the year are always very speculative and they always move around.

So the state of the US high grade market is very strong, and in the first quarter of 2015 it was a new single quarter record for issuance in the investment grade bond market in the US.

There were jumbo acquisitions from AT&T at $17.5 billion at Oracle.

At $10 billion, we're anticipating a very busy May as investor demand remains strong.

So that's being driven by M&A financing, financial company and bank issuance, and opportunistic activity if in fact there is a Fed raise later in the year.

The current pipeline is described as robust, and we don't use that word too often with many jumbo transactions expected.

And the thought is that May could rival March terms of high volumes.

Again, March was at a $140 billion, so we've had some pretty heavy quarters here for US investment grade.

Let's look at high yield bonds.

For the first quarter of 2015, $100 billion of issuance.

That's up 20% year-over-year.

And for the full year, we're looking at $300 billion of issuance.

Again, the about flat outlook there is an upgrade from the prior down 10% view that we had seen at the beginning of the year.

So the state of the market is very strong.

Positive funds flowed throughout the year so far.

Revs are performing well, and the pipeline is described as average to robust.

Now leveraged loans, which in some sense, are a substitute for high yield bonds, are not looking as robust.

This is a result of some changes in what we're seeing from the Fed.

If you look at the Shared National Credit Program and a press release from November 7th, you'll see that it said, has some concerns about the high leverage levers in syndicated loans.

And again, this program covers loans of $20 million or more, with three or more banks in the deal.

So the Fed talked about its concerns and that has had downward pressure leverage loans.

In any case, $100 billion for the first quarter of 2015, down 45% year-over-year.

$350 billion forecasted for the year, which is down 20%.

The market continues to see a little bit of weakness, as I said, because of the Fed oversight.

And issuers, however, have strong demand -- are showing strong demand for the paper.

The pipeline is judged to be average at this point, and we still see strong year to date CLO issuance.

$30 billion for the first quarter of 2015 versus $23 billion in the first quarter of 2014.

And the last two weeks have seen positive funds flows into leveraged loans.

So let's look at Europe and what we're seeing in Europe.

Investment grade in Europe, the first quarter saw a very heavy supply driven particularly by a surge in issuance from US-based issuers, wishing to lock in historically low rates.

As you probably saw, Moody's was part of that.

The pipeline looks to be above average in May.

Now some of that attractive spread level and the attractive issuance conditions in Europe has weakened a little bit.

The best conditions were probably in the first quarter, but we continue to see above average pipeline.

Now high yield, a bit different.

The market is very strong in Europe, up 30% over the same time last year.

A record Q1, strong April, good inflows into European high yield, and that market looks to be quite attractive right now.

So overall, US investment grade very robust.

High yield bonds robust.

Leveraged loans, not so much.

Europe investment grade, pretty good.

But maybe we saw a peak opportunity in the first quarter, and high yield continues to look pretty good in Europe.

So is that sufficient, Alex?

As detailed as anybody can hope for.

But maybe just a couple of things to add there.

Obviously, you highlighted the leveraged loans in the Fed.

And you also, I forgot the word that you used, but you said that high yield and leveraged loans sometimes work countercyclical, if that's the right word to use.

So if leveraged loans come into continued pressure, do you think the high yield market can absorb that.

and is that from a margin profitability perspective, in particular if you add the CLO side?

Are you comfortable that those two businesses -- that the high-yield market will be enough from your perspective?

And then secondly, on the European side, am I reading it right?

That you are actually feeling better about how Europe is going so far, but that it's really the FX that's the impact there?

To deal with your first question, Alex, I would say that high yield bonds and leveraged loans are substitutes for each other.

They are not countercyclical.

That's a little bit of a different thing.

So a substitution effect.

So we are pretty indifferent as to whether we rate bonds or loans, any kind of speculative grade security we're able to price a little higher of course, so we're happy with either.

We released a piece of research yesterday on this situation with the Fed and leveraged loans, and it might be interesting for people on the call to get that.

But what we see is that more capital has to be allocated to those leveraged loans.

And there's stricter lending guidance on the bulk of those leveraged loans, and it applies even if a loan it is sold to a CLO vehicle.

So we would expect that that would continue, and we're fine with the bonds being stronger.

In Europe, issuance conditions are pretty good.

And we would also note that we think that that market continues to look good from an issuance point of view.

I'll let Michel talk a little bit about what we're seeing potentially in terms of new mandates, and some other things.

Thank you, Linda.

In terms of new mandates, I think we have seen a bit of a slow down in the first quarter.

We see that as really something that is a cyclical essentially.

Overall, the level of growth in Europe is still very much subdued, there continues to be covered deleveraging.

So against that, we see we have a very low rate environment and we have a banking system that continues to struggle somehow.

So overall, we were very satisfied with the volume we've seen at first quarter.

The bank loan, we see a similar contraction into the one we've seen in the US.

But overall, I think we continue to see the searchable trends in our favor in Europe basically unchanged.

All right.

I'll leave it at that.

Thank you very much.

Denny Galindo, Morgan Stanley.

Can you talk a little bit about the share repurchases?

You bought back at an aggressive pace this quarter.

You paid a good price.

I know you use a grade to figure out exactly how much to buy at what prices.

But can you talk about the kind of metrics that would cause buybacks to go up and down in the quarter?

And does the fact that you bought more shares this quarter have any bearing on how much you might buy in Q2?

We do use a grid, Denny, as you point out.

But the details around that and exactly the pace at which we're going to be buying under that grid, as well as opportunistically outside that grid, is not something we would want to telegraph.

Denny, our guidance has been around $1 billion for this year, and the pace was a little heavier in the first quarter.

We are pleased with the price that we achieved in the first quarter.

$95.20 per share, the stock crossed $110 briefly this morning.

So we're pretty happy with that.

And we'll have to see.

As we always say, the total amount of buybacks is subject to a lot of different factors, and the pacing is something, as Ray said, and the actual grade prices are not something that we disclose.

Okay.

And then moving on to the PPIF group within MIS.

It sounded like that was pretty strong, and it's sometimes hard to get good information on that space.

Do you expect public financing to remain fairly strong over the next few quarters, and what types of issuers are really driving that strength there?

The real strength in the first quarter was coming from the US municipal sector of PPIF.

And that's municipalities taking advantage of a couple of things.

Obviously, low rates and attractive borrowing conditions.

But also the fact that a lot of the volume from the mid to thousands is coming off of lockup, and it's able to be refinanced as a driver as well.

We do think we're going to see a good year for PPIF for the full year, but realistically, the pace that we saw in the first quarter I don't think that's the central scenario.

Okay.

And then just one more longer-term question.

Longer-term and structured, we are starting to see some innovation in the stacker deals from the GSE are securitizing single-family rentals.

Which are both ways to bring private money into financing single family homes.

Could you talk about these deals or any other areas of structures which could boost the growth rate in structured products, or in that RMBS bucket specifically?

I'll make a couple of comments, and Michel or Linda may wish to make remarks as well.

Certainly, innovation has always been a feature of the securitization market, as you said.

Now some of the new product that we are seeing is bringing private money into portions of that market.

Also, changes in regulation are going to have an impact on that market going forward, and it will undoubtedly drive further innovation.

Whether it's the rules for 2016 that are impacting the CLO market and how the market adjusts to that, the leverage limits that are being put on banks.

The activity in the banking sector that's being curtailed with a move to capital raising and liquidity raising into the structured sector, could all be characteristics of this market going forward.

Really though, for the shorter-term, looking out of the next couple of quarters, I think we'd be looking for upside coming from existing product.

And from a resumption of securitization activity at more robust levels coming out of Europe.

Michel, I don't know if you want to add anything to that?

One quick correction --

Maybe if I may, just one comment on single-family rental.

It's a sector where we have been active.

But just in terms of number of transaction, I think that remains a fairly small sector.

Although again, we've seen innovation with new structures with multiple [OG and HO] deals, so that's a sector where we are present, yes.

Denny, I think you may -- we will double check this, but I think you may have confused one concept.

Stacker deals are deals that come out of the existing portfolios.

There's a similar type between Fannie and Freddie, so that is to move from the government balance sheet into the capital markets.

That's not really a new product, and it has nothing zero to do with private capital.

That's moving balance sheet exposure for the US government into the private markets.

It's not new private market origination.

So you might want just to think about that a little bit.

We're not super excited about the innovation in the RMBS market at this point.

There are some of those products, including single-family rental, but these things are few and far between.

And what we're really looking for is the resumption of the jumbo mortgage markets, the private label jumbo markets.

But the US government is still backing the vast majority of mortgages in the US.

So still rather limited private capital participation at this moment.

Thanks for taking my questions.

Joseph Foresi, Janney.

I wonder if we could talk first about just the trajectory of the margins in the Analytics business.

I know it's been an area where you're trying to scale up on the software side, and this quarter might of been affected by some one-time changes.

But could we just -- maybe could you give us a little color on what you think that might look like for the back half of this year?

Mark, would you like to comment on that?

Yes.

I'll comment on what we're doing with the margin generally.

But as you observed and as Linda explained earlier, we had some changes that we made in the Copal Amba business and some integration costs that we were dealing with there.

If you exclude Copal Amba from Moody's Analytics, the margin for the rest of the Moody's analytics business actually went up in the quarter.

And that's even taking into account the drag we had from the two acquisitions that we made.

So we did have margin expansion on that basis in the quarter.

That's the third quarter -- third consecutive quarter of margin expansion in MA.

So I think it's consistent with what we've been talking about and the efforts we've been making to drive margin in MA.

That continues to be a focus.

We think it's achievable.

But as we've described before, we expect this to be a very long-term effort and something that is going to occur in a meaningful way over a number of years.

And not something that you're going to see a dramatic change in over the next couple of quarters.

Okay.

So should we think of that as a small creep?

I think what that implies, and unfortunately what you see in our models sometimes, we extrapolate some of the historical and just run it through going forward.

So is that a small creep year-over-year, or do you think that momentum each quarter, obviously excluding the one times, carries through the back half of the year?

Again, what I'm describing was a modest increase in the MA margin, ignoring the Copal Amba business in light of the changes that we were making over there.

So I think given that we don't really guide to margin for the business, I think that's pretty much all we could say there.

And there will continue to be some noise on a quarterly basis just based on the mix of activity that we are seeing there.

Got it.

And then a larger question on the issuance side.

For a number of years, people have been talking about the amount of corporate debt out there.

And I think starting next year and heading into the back half of that year and going forward, that's all going to come due.

Do you have any sense of how that plays out from an interest rate perspective and then mixes it to the issuance market?

We've talked before about the refinancing walls that we can see on the horizon.

This is particularly pronounced in the US, and particularly in the spec grade area.

So beginning in 2016, but then really, really more of a 2017 and 2018 story, we are going to see substantial refinancing needs in the corporate sector.

That's true also in Europe and in Asia.

Albeit, to a lesser degree than what we see in the US.

And I'm not anticipating a dramatic increase in interest rates over this period, certainly at the longer end.

So I think even though I keep saying this and I keep being wrong, even though I would expect rates to increase on a going forward basis.

I don't expect that to be the kind of increase that would make absolute financing terms unattractive.

Got it.

Okay.

And then last one from me, any comments you have -- I know you said you really didn't have anything on the regulatory changes?

Any comments or updates there?

Thanks.

No.

Nothing really new to report on the legal regulatory side.

We'll be filing our Q very shortly, but again, nothing notable that I would point is to as of right now.

Thank you.

Bill Bird, FBR.

Ray, I was wondering if you can talk about what you're seeing right now in the reverse Yankee Bond market?

Are you seeing that pipeline build?

Do you anticipate more companies following your lead and tapping this market?

Thank you.

Sure, Bill.

I'm actually going to hand this over to Michel, and let him offer his thoughts on this.

Thank you, Ray.

I think this is really a matter of two factors.

One, the currency play, and two, the rate differential that exists and the spread differential between the US and European markets.

And I think the both of these fronts, I think we continue to expect to see favorable factors for such a trend.

So we don't have a number to offer here, but I think the conditions that have been favorable to date are expected to remain in place at least for the short term, medium-term.

Bill, let me just add something.

We show, in terms of our revenue performance, the revenue is based on the location of the issuer rather than the market into which it is issued.

So think about that in the context of our US versus European corporate revenues.

Thanks for that clarification.

Linda, could you also give us the incentives comp accrual for the quarter year-over-year?

Sure, Bill.

Just a second while we look that up.

For the first quarter of 2015, the incentive comp accrual was about $38 million.

And that's up from last year's $29.5 million.

And we're running about on target with where we expected to be at this point in the year.

That number is one that obviously bounces around.

If we're doing worse, that number is smaller.

If we find ourselves doing better, of course that number would become a bit heavier.

But $38 million for the first quarter.

One final question.

You are more moderate growth outlook for structured and financial institutions, is that just currency or is there something else?

We're really currency.

As a matter of fact, most of the outlook story, the changes, relate to currency.

Thank you.

Bill Warmington, Wells Fargo.

So I wanted to start out by asking about the very strong muni issuance, up 37%.

Just wanted to see if you could talk a little bit about the conditions that have produced that, and your thoughts on the pipeline there going forward for the rest of 2015?

The 37% growth is really driven again by the US municipal market, which had a very strong quarter.

We expect that the US market is going to continue to be strong through the year, although not at first quarter levels, as I think I mentioned earlier.

And again, it's a combination of refinancing with the opportunity to do so in an attractive rate environment, and the expiration of lockup periods for some of the municipal bonds.

Got it.

And then on the -- I noticed the MIS relationship revenue growth at about 3.7%.

It just seemed particularly low.

And I wanted to ask how much of that is being distorted by FX, and if there's anything else going on there that would explain that?

No, it is, again, an FX story.

I know this starts to sound like a broken record.

But we have reasonably large recurring revenues coming out of Europe.

A lot of frequent issuer pricing arrangements and the monitoring fees that go along with that.

We're seeing growth, but that growth is really being impacted by the decline of the euro.

Got it.

And then one last question for you on Research, Data and Analytics there.

Just wanted to ask about how price increases were trending so far in 2015?

What your expectations were going to be there for the year.

They are running pretty much in line with the way they were through 2014.

So we continue to get a nice kick from price, and we anticipate that continuing.

Excellent.

Thank you very much.

Peter Appert, Piper Jaffray.

Ray, your market share performance relative to peers has been really strong certainly in the first quarter, I think even for the last several years.

Can you call out anything in terms of what you see driving that performance, or any particular categories where you think you are picking up share?

Our coverage has been strong, and obviously, we are -- we would attribute that to a combination of the work we're doing on our Analytics.

And the demand that that is creating from the institutional investor immunity for issuers to get Moody's ratings.

Beyond that, I think it's really a matter of operational execution, and we're paying a lot of attention to executing well.

Nothing fancy about that.

No particular asset class?

So I was thinking about, for example, in CMBS, one of your competitors has had some issues and maybe that's helping you?

Ironically, not really in that area.

And your correct, the Structured Finance area in particular shows some coverage volatility.

It always has.

Rating shopping is more prevalent there.

But the area where we are strong in the commercial mortgage backed securities area, in terms of multi-family or multi-property deals.

We've been strong in even before there were where there was a moratorium on the ratings from one of our competitors.

And so the strength continues, but it hasn't really changed in terms of the mix we are picking up because of external events.

Okay, great.

Thank you.

And then just one other thing.

It feels like maybe that the banks in Europe are getting a little bit healthier, or at least they seem to be scraping by on their version of the stress test.

Wondering if you think that has been implications in terms of this whole disintermediation thesis?

In terms of just the competitive pressure from banks being able to better lending requirements.

I guess the short answer, Peter, is no, I don't think so.

The demands on financial Institutions globally in terms of meeting stress tests, capital requirements, liquidity requirements, the businesses that they have been curtailed from.

Are all continuing to put pressure on profitability, willingness to make loans.

And I think also are increasing the awareness from corporations and municipal entities that they need access to multiple forms of liquidity and capital.

And so the bond market is -- it's not a substitution for bank relationships, an alternative and in addition to the banking relationships.

So 2% to 3% is still the right number in terms of incremental revenue from disintermediation, or do you think maybe even better than that?

I think that's probably a fair number.

It's going to vary quarter to quarter cyclically, but structurally, I think that's very much intact.

Great.

Thanks, Ray.

Craig Huber, Huber Research Partners.

Yes, I've got a few questions.

Linda, if I could ask you just to breakdown the revenues by your four segments?

High yield versus bank loans investment grade for the three sectors to start off please?

Sure, Craig.

We're looking at the first quarter 2015 over 2014.

Investment grade at $87 million was running at 29% of the almost $300 million we saw in the CFG for the first quarter.

That 29% is up from last year's 18%.

So as we said, investment grade has been running hot and strong, and the jumbo deals are really terrific.

Spec grade at about $63 million is up from last year's $53 million.

Percentages are about the same, 21% versus 20%.

Bank loans are down, both absolutely and in percentage terms, about $45 million versus last year's $67 million.

15% of the total gross of last year's 25%.

And other is at $104 million, which is up from last year's $97 million.

But on percentage terms, down to 35% versus last year's 37%.

So the big change there is the increase in percentage from investment grade, spec grade bonds, and percentage terms up a little bit, bank loans down.

Very important for everyone to note.

We can do okay with a changed mix, and we're doing pretty well despite the fact that the investment grade piece was stronger in the first quarter.

Looking at structured, first quarter 2015 versus 2014, looking at asset-backed securities.

Absolute numbers, about $21 million, about flat from last year's $23 million.

Percentages, it's 21% of the total for structured of $101 million, down from last year's 24%.

Residential mortgage-backed securities, which does include covered bonds, about $18 million.

Flat from last year's $18 million.

Percentage-wise down to 18% versus last year's 19%.

Commercial real estate, up $33 million from last year's $29 million.

In percentage terms it's also up to 33% versus last year's 31%.

Structured credit, which is primarily CLO's, up to about $29 million from last year's $25 million.

Percentage-wise, up to about 28% versus last year's 26%.

And then FIG, first quarter 2015 versus 2014.

$94 million in revenue versus last year's $85 million.

Banking about $63 million, up from last year's $57 million.

That stayed flat at about 67% of the percentage total.

Insurance, at about $25 million versus last year's $21.5 million is up to 27% from last year's 25%.

Managed investments, $3.5 million versus last year's $6.6 million is down.

That's 4% of FIGS total versus last year's 7%, and then others about 2%.

And then lastly, PPIF, total is $100 million versus last year's $80 million, that's a big jump.

PFG and sovereign, up absolutely to $56 million from last year's $41 million.

Up in percentage terms 56% versus last year's 51%.

Project and infrastructure, also up about $45 million from last year's $40 million.

Percentage-wise, down to 44% from last year's 49%.

And that's the total for PPIF.

So that's the whole view on the ratings business.

We have the MIS other line, which is something new, Craig.

That includes KIS and ICRA, so that's up little bit from last year because the ICRA consolidation, $7.8 million versus last year's $3.3 million.

And of course the ICRA percentage at 56% of the total is higher, because we didn't have that view as of last year.

And sorry, just for clarification.

The MIS other is ICRA's non-ratings businesses.

The ratings agency has its revenues rolled up into the lines of business that we have for MIS already.

Thanks for that clarification there.

And if I could ask a simpler question.

On the currency side, Linda, I think last quarter you got up about a 100 basis point spread between the impact on revenues versus your costs.

I believe you said in the second quarter you're expecting an impact of 4% to 5% for each.

Is it just rounding, or you really are thinking almost on top of each other this quarter?

It's rounding, Craig.

This is pretty hard for us to forecast.

So what we're looking at, it's a negative 4% to 5% in revenue.

It's positive 4% to 5% in operating expenses.

As we talked about before, our main exposures are the euro and the British pound.

At the end of the first quarter, the pound was at $1.48 and the euro was at $1.07.

And we had run this year with the euro at $1.15, was what we've had in our forecast.

Now, a very happy phenomenon from me as the CFO, is the euro this morning is at $1.12.

So we are kind of coming back in the right direction, and Ray and I talk about the euro every day.

So what that all boils down to is, you were to see the euro to further weaken, a $0.05 decline in the euro would cost us another $20 million in revenue but help us $4 million on the expense side.

So the net would be we'd be down $16 million or about $0.05 on EPS.

So this is actually pretty simple.

The shorthand we use is if the euro falls another $0.05 versus the dollar, it'll hit us $0.05 in EPS which is a pretty simple metric for you to use.

I guess I'm also asking, Linda, the 7% hit as you guys calculated it n your operating profit line in the first quarter from currency.

Are you expecting a similar type hit here on the profit line from currency?

It could be, Craig.

It depends what happens going forward.

As I said, we're slightly cheered by the fact that the euro is up a little bit, but this is bouncing around far too much for us to put a tight range around this.

And as you saw, we held guidance.

And we don't like to move guidance after the first quarter, that would be a correct observation.

But this currency piece makes it a little bit harder to know where we are going to go.

So we are going to have to just watch it.

And the euro could continue to strengthen, or it could weaken from here.

And those two situations don't look the same.

That's why we're being a little bit thoughtful, and we'll see where we get to as the year goes on.

Lastly, Linda, is there anything else besides you incentive compensation that you would call out on the variable cost side to help offset any potential weakness at some point down the road?

And on the revenue side, anything else of significance?

I think we view, Craig, we always have our sort of $50 million in expense flexibility if things we got difficult.

We can slow down on things, and certainly slowing hiring would be the first thing.

But I always want to put some perspective on this, because Moody's is a growth Company and you need to think about us that way.

We're looking at 72% of the S&P 500 have reported so far, and sales growth for the S&P 500 all-in, is minus is minus 4.1%.

And if you take out the energy companies, if you want to make that the argument, the growth is up 2%.

We just put up 13% growth, and 18% percent on a constant currency basis.

So in order to do that, we are spending some money.

But as you know, our shareholders have been telling us if we can get growth, we should do that.

And I think we've demonstrated pretty effectively we are able to do that, despite some pretty hefty currency headwinds.

We think we've had a pretty good quarter.

Understood.

Thanks, Linda.

(Operator Instructions)

Tim McHugh, William Blair and Company.

Most of my questions have been asked.

But two quick one, I guess.

Copal, you said the $8 million to $9 million hit from shutting down products.

Since there's different pieces in there with the certification business, I just want to circle back to an earlier question.

What's the underlying trend?

Are they seeing still good growth, good demand if you adjusted for that?

Is it possible to strip that out and look at how it's performing without that change?

I'll comment a little bit, and then Mark may want to comment.

I guess we've had the confluence of two frustrating events in the Professional Services line.

And I'm managing the Copal Amba business, Mark is managing the rest of Professional Services which includes CSI.

But the two really have nothing to do with each, other than they are reported up through the same line in Moody's Analytics.

I did mention the product line that we decided to reduce in scope for Copal Amba.

But we very much like the trends and the outlook for Copal Amba.

I think I've mentioned before, it has generally Moody's like growth rates and close to Moody's like margins.

And right now as banks are looking to reduce costs, being able to offshore knowledge processes is growing at a pretty terrific rate.

We are very pleased with what we are seeing at Copal Amba.

We were just out in India last week, a group of us, and we're very pleased with the opportunity that that business presents.

So just a little bit of a lapping problem.

And I don't know if Mark has anything more to add about CSI than what he's already said.

Mark?

I would just add that in training and certification, ignoring the currency impact which is quite substantial, I would say the underlying business is okay.

It's not growing as well as the rest of Moody's Analytics, so it's below trend in that respect but it's all right.

Mark, I guess on ERS.

I don't know if I missed it, but I think in the past you've given a trailing 12 month sales activity or sales growth rate.

Can you give that?

And I apologize if I missed it.

Yes, I think Linda did mention it.

Trailing 12 month sales is 24% growth.

Does that include WebEquity or is that in organic?

That includes WebEquity as well.

Which would be a small piece.

Yes, it's a small piece.

A couple of points.

Okay, thank you.

Vincent Hung, autonomous)

I just want to piggyback on the question of market share from before.

So I'm really curious as to your strong growth in MIS, so it's up 12% excluding ICRA versus 6% at S&P.

I think one of the sources of dispersion is your non-US result, where you saw a good year on year increase, even if you exclude MIS other and S&P saw year-on-year decline.

And can you give us some color on the non-US trends you saw this quarter?

I can talk about Moody's.

I don't really know anything more that you do about how other firms got to their performance levels in the first quarter.

We have talked about the Moody's story pretty extensively here.

So, Vincent, I actually don't have a lot to add to that.

I apologize.

Fair enough.

And then just last question, do you think it would be harsh to say that leverage lending is structurally impaired?

Yes, I think that the banks have got to work through an evolving, regulatory and profitability environment.

That is going to have an impact on lending.

It's also I think going to continue the disintermediation trend that we've been seeing.

And so I think that's structural as well.

Vincent, it's Linda.

I'm going to read to you from the Fed's press release on this topic from November 7th.

It says, the annual Shared National Credits Review found that the volume of criticized assets remains elevated at $340.8 billion or 10.1% of total commitments, which is approximately double pre-crisis levels.

So let's assume that the banks are listening to the feds on that front, and perhaps they are tamping down leverage lending in this higher risk category.

Because they've got to hold more capital against these loans, as we said, even if they put them into CLOs later.

So it's pretty important that that situation be understood, and I would urge you to take a look at what the Fed is saying and also at the research we've written on this topic.

Okay, thanks a lot.

Doug Arthur, Huber Research.

One quick question.

Linda, can you just clarify I think you threw out a figure of $35 million as I believe you were referring to the quarterly trend in costs Q1 to Q4?

Can you just clarify that figure?

Is that revised given the somewhat heavier Q1 costs, or is there's no change?

Thanks.

First of all, congratulations, Doug, on your joining Hubert Research.

And the mid-case the base case we're looking at now is $30 million of expense ramp.

And our first-quarter expenses were $494 million.

I think on an earlier call, we had said maybe $500 million for the first quarter, and I think we had had a steeper ramp originally that might have even been $40 million to $50 million.

So we are kind of backing off on that.

Again, I would caveat, this is probably the number I dislike giving the most because it can vary based on a whole bunch of different things.

And this is cutting a pretty finely to give that midpoint of $30 million of expense ramp Q1 to Q4, but that's our best guess as of right now.

Great.

Thank you very much.

Patrick O'Shaughnessy, Raymond James.

The first question is, with the reverse Yankees, I appreciate you saying that you'd book it as US revenue.

But how are you charging reversed Yankees?

Are you actually generating revenues in euros on that, and having to translate it back to dollars?

No.

If these are US issuers, US domiciled companies, we would be charging those in dollars.

Thanks.

And then a follow-up, S&P or McGraw-Hill in there talked about the dollar issuance environment was very strong, but the breath of issuance was not very good.

So that had ramifications on their growth.

Certainly, that doesn't seem be something that you guys talked about our showed up in your results.

So can you just maybe talk about do you tend to have a preference for a lot of smaller deals versus a few bigger deals?

And what's the recent environment look like in that regard?

When we look at volume and we look at headcount, obviously, we are pleased when both are up.

But because of the way the pricing is structured I would say as a general rule, seeing more smaller issuers, a higher count, would make more of a difference than a higher dollar volume.

All right.

Thank you.

At this time, this concludes Moody's first-quarter 2015 earnings conference call.

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

Thank you.