穆迪 (MCO) 2019 Q1 法說會逐字稿

Good day, and welcome, ladies and gentlemen, to the Moody's Corporation First Quarter 2019 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 and Strategic Capital Management.

Please go ahead.

Thank you.

Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's first quarter 2019 results as well as our current outlook for full year 2019.

I am Salli Schwartz, Global Head of Investor Relations and Strategic Capital Management.

This morning, Moody's released its results for the first quarter 2019 as well as our current outlook for full year 2019.

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 Mark Kaye, Moody's Senior Vice President and Chief Financial Officer.

During this call, we will also be presenting non-GAAP or adjusted figures.

Please refer to the tables at the end of our earnings press release filed this morning for reconciliation between all adjusted measures mentioned during this call and GAAP.

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, 2018, and in other SEC filings made by the company, which are available on our website and on the SEC's website.

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

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

I'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 2019 financial results.

Mark will then follow with comments on our outlook for 2019.

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

In the first quarter, Moody's Analytics mid-teens revenue growth offset issuance headwinds, resulting in a 1% revenue increase for Moody's Corporation.

As expected, Moody's adjusted operating margin contracted to 45.4% as the expense reductions from the restructuring actions we initiated in the fourth quarter of 2018 will not meaningfully affect the P&L until the second half of 2019.

Adjusted diluted EPS nonetheless grew by 2% year-over-year driven by a lower effective tax rate and a 1% reduction in share count from the accelerated share repurchase program.

In the first quarter of 2019, lower interest rates and tighter fixed income spreads led to improved issuance activity following the disruption in the fourth quarter of 2018.

However, issuance was lower than first quarter 2018 levels as a result of uncertain business outlook.

The inversion of the U.S. Treasury yield curve and reduced global growth forecast caused concern about economic weakness and contributed to more accommodative monetary and fiscal policies.

Geopolitical concerns around U.S./China trade negotiations and Brexit uncertainty continued to weigh on the market.

These factors led to a mixed issuance environment in the first quarter.

As I mentioned, while issuance improve significantly from the fourth quarter of 2018, year-over-year issuance was down 14%.

MIS revenue was down only 7%, demonstrating the continued strength of the business model.

MIS' recurring revenue base, supported by increased monitoring fees from recent new mandates as well as pricing, provided a partial counterbalance to the decline in issuance.

Similar to my comment on corporate expenses, we expect to start realizing MIS expense reductions from our restructuring program as we move further into 2019.

For the first quarter, the revenue contraction led to a decline in MIS' adjusted operating margin to 54.9%.

However, focusing longer term on a trailing 12-month basis, MIS margins were up 50 basis points to 57.5%.

I would like to spend another minute on investment-grade and high-yield bond issuance as well as bank loan issuance in the first quarter as these were significant drivers of year-over-year performance.

Due to the flattening of the yield curve in the first quarter, market preferences shifted from floating to fixed-rate instruments where lower financing costs increased investment-grade and high-yield bond issuance by 19% and 1%, respectively.

On the other hand, higher financing costs reduced bank loan issuance by 33% year-over-year.

While loan issuance for M&A activity remained relatively intact, refinancing activity was largely muted versus the prior year period.

For MA, each business delivered double-digit revenue growth, which contributed to 16% total MA revenue growth and a 350 basis point improvement in the adjusted operating margin.

Organic MA revenue was up 13% from the prior year period.

RD&A revenue grew 15% due to strong sales growth at Bureau van Dijk in the second half of 2018, contribution from the Reis acquisition as well as strength in core research and data products.

On an organic basis, RD&A also delivered double-digit revenue growth of 12%.

In ERS, strong fourth quarter 2018 and first quarter 2019 subscription sales drove a 19% revenue increase, and we continue to execute on the transition to -- as we continue to execute on the transition to a software as a service, or SaaS, operating model.

We're encouraged by this growth, however, we are not expecting increases of similar magnitude in every quarter.

Professional services revenue growth of 13% was driven by the contribution from Omega Performance as well as strong new sales in the Max business.

Organic professional services revenue was up 6%.

I would like to highlight the strong performance of ERS in the first quarter.

The increase in the ERS revenue base, which has grown by over $100 million since 2015, has been a large driver of MA revenue.

Recurring revenue as a share of total ERS business continued to tick up in the first quarter and reached 78% on a trailing 12-month basis.

Indicating that this trend will continue, trailing 12-month subscription sales have increased 12% while sales of the onetime products we have been deemphasizing increased 2%.

The deliberate shift we have made on the expansion of our subscription business will support scalability and drive MA operating leverage and margin.

Moreover, we are meeting our customers' demands by moving to a SaaS-based model due to its ease of use and lower cost of ownership.

This next generation of products will enhance the customer experience, improve adoption rates and shorten our sales cycles.

ERS' resumed revenue growth is a key component of ongoing adjusted operating margin improvement in MA for 2019.

I'd like to take a moment to highlight the recent acquisitions that are contributing to our strategic priority of pursuing growth opportunities in adjacent product areas.

In October 2018, we successfully completed the acquisition of Reis, a leading provider of U.S. commercial real estate, or CRE, data.

Since then, MA introduced the Reis Network, a platform of connected applications providing market participants access to CRE solutions for property research, investment and risk management.

We also launched Commercial Location Score, an advanced quantitative solution for evaluating CRE using data from Reis, allowing CRE investors, lenders and developers to evaluate the suitability of over 7 million commercially zoned parcels in the United States.

Also in October, we announced an investment in Team8 partners, a leading think tank and company-creation platform specializing in cybersecurity and data resilience, building on prior investments and initiatives in cybersecurity and emerging technologies.

And last week, we announced that Moody's had acquired a majority stake in Vigeo Eiris to support our ESG initiatives.

Vigeo Eiris is a leading global provider of ESG research, data and assessments and is a foundational asset for our broader efforts in the space.

Adding to the growing body of ESG analysis and research already produced within MIS, Vigeo Eiris brings Moody's an extensive database, a long-established presence in the ESG space and a wide product offering, which will help Moody's in its goal to become a global standard setter in ESG.

Vigeo Eiris will be an affiliate of MIS and continue to operate from its headquarters in Paris.

This investment is consistent with Moody's strategy of serving the evolving needs of financial market participants beyond credit risk.

This transaction is not expected to materially impact Moody's 2019 financial results or our capital allocation plans but is meaningful to our strategic objectives building on Moody's increasing efforts in the ESG space.

On that note, Moody's will soon release its annual corporate social responsibility report, which aligns with the Global Reporting Initiative, or GRI, Standards Core option.

You will be able to access this report at moodys.com/CSR.

Underpinning our strategic priorities, we are continuing to enhance our technology infrastructure to enable automation, innovation and efficiency.

Moody's is enhancing its data and analytical capabilities by utilizing alternative and unstructured data sources to supplement financial and CRE analysis.

Natural language processing and AI are improving the decision-making capabilities of our analysts and our customers through credit monitoring tools, customized training and loan application approval.

Machine learning, AI and natural language processing are also delivering efficiencies by allowing us to automate manual, repeatable tasks and the spreading of financial data as well as generate thousands of research reports on a small municipal issuers.

Finally, we are utilizing the cloud across the business to cater to customer requirements in an efficient and low-cost manner.

We will continue to enhance our processes and product offerings to meet our needs and those of our customers by embracing technological innovation.

I'll now turn the call over to Mark to review our outlook for 2019.

Thank you, Ray.

Moody's outlook for 2019 is based on assumptions about many geopolitical conditions and macroeconomic and capital market factors, including but not limited to interest and foreign currency exchange rates; corporate profitability and business investment spending, mergers and acquisitions; and the level of debt to capital markets activity.

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

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

Specifically, our forecast for the remainder of 2019 reflected -- reflects exchange rates for the British pound of $1.30 and for the euro, $1.12.

We are affirming the full year 2019 guidance metrics we laid out on the February earnings call.

We still expect revenue and operating expenses to each increase in the mid-single-digit percent range.

Operating expense guidance includes depreciation and amortization, acquisition-related expenses and restructuring charges.

Of note, we are not expecting a significant ramp in expenses from the first to the fourth quarter of 2019 as we start to realize savings from the restructuring program.

The 2019 operating margin and adjusted operating margin are still anticipated to be approximately 43% and 48%, respectively.

We continue to expect net interest expense in the range of $200 million to $225 million and a full year effective tax rate in the range of 21% to 22%, notwithstanding the low actual rate in the first quarter of the year.

Diluted and adjusted diluted EPS are still expected to be $7.30 to $7.55, and $7.85 to $8.10, respectively.

For a full list of our guidance, please refer to Table 12 in our earnings release.

For MIS, we continue to anticipate total full year revenue will increase in the low single-digit percent range with growth weighted more towards the second half of the year as the year-over-year comparable become easier.

We are now expecting higher contribution from U.S. corporate bonds but lower contribution from loans and, to a lesser extent, from CLOs and U.S. public finance issuance.

We continue to believe that issuance will be flat to down 5% in comparison to 2018.

We also expect approximately 900 first-time mandates in 2019.

The MIS adjusted operating margin is expected to be approximately 58% in 2019.

For MA, we still anticipate total revenue to increase in the low double-digit percent range as we recognize the strong sales growth at Bureau van Dijk and benefit from the stability of recurring revenue from the core RD&A business and ERS transition to a SaaS-based model.

The MA adjusted operating margin is still expected to expand 250 to 350 basis points to 29% to 30% range in 2019.

I'd like to spend a moment discussing our approach to capital management.

We remain committed to long-term leverage anchored around a BBB+ rating, which we believe appropriately balances our cost of capital with financing flexibility.

Our debt maturities are well distributed with no significant debt coming due until September 2020.

As I've noted previously, we have a robust and disciplined approach to capital allocation.

As a first priority, we invest or reinvest in activities that support our strategic priorities.

Following that, we look to return excess capital to our shareholders through dividends and share repurchases.

Before turning to Q&A, I would like to note a few key takeaways.

We remain confident in Moody's ability to deliver revenue growth and margin stability in 2019.

We will continue to defend and enhance our core ratings and research businesses.

At the same time, we will keep pursuing strategic growth opportunities both down the corporate credit pyramid and across into new geographies and adjacent product areas, remaining grounded in technology-enabled products, businesses and capabilities.

Finally, we will maintain our disciplined and thoughtful approach to capital management and the return of free cash flow.

Thank you, Mark.

This concludes our prepared remarks.

And joining Mark and me for the question-and-answer session are Mark Almeida, President of Moody's Analytics; and Rob Fauber, President of Moody's Investor Service.

We'll be pleased to take any questions you may have.

(Operator Instructions) We will take our first question from Manav Patnaik with Barclays.

First question was just around that credit pyramid and business adjacency slide that you had.

Commercial real estate and ESG, those make sense.

Can you just help me understand the cyber risk aspect of it?

And then maybe just briefly, what other areas would you consider as business adjacencies?

Sure, Manav.

We're really looking at areas of financial markets where we think that they are underserved in the form of standards that help to understand, measure and manage risk.

So certainly, the interest in certain areas of ESG and cybersecurity are things that have drawn increasing attention from investors, from regulatory authorities, and as a result, are important -- increasingly important for the issuer community on the MIS side and for a variety of institutions that Moody's Analytics serves.

And we believe that as adjacencies to credit risk, areas of ESG and cybersecurity are going to be folded into the overall financial analysis and investing that is done on a going-forward basis.

So really, what we're looking at is trying to align our products and services with what investors and customers are increasingly focusing themselves on and where we believe standards can be implemented that is going to create more efficiency in markets and among customer transactions.

That's really the thesis here.

Okay.

Got it.

And then if I could just follow up on the capital allocation.

So with leverage already at, I guess, 2x, and I think you said in the slide that you expect leverage to keep declining.

So does that mean the focus is still on deleveraging versus buybacks?

Or maybe there's some M&A in the thoughts there as well?

Sure, Manav, and thanks for the question.

Leverage ticked up a little bit in the first quarter really due to the lower first quarter adjusted operating income in some of our commercial paper borrowing.

And we do expect leverage to decline over the remainder of the year.

Of course, this is subject to market conditions and other ongoing capital allocation decisions.

Our approach to capital allocation remains consistent with that we've followed historically.

So primarily looking firstly for investing in growth opportunities, either through reinvestment in the business or through acquisitions, and then to the extent those opportunities are not available, certainly to return capital either through dividends or through share repurchases.

We'll now hear from Toni Kaplan with Morgan Stanley.

When you look at the first quarter, outside of the lower tax rate, I guess, were results in line with your expectations?

And where I'm coming from is I think top line, you had sort of the weak structured results, but that was offset by strong ERS.

But margins were a little bit lighter than what I was thinking.

And I know MIS was pressured by the revenue decline and it's just MA didn't really offset that.

So I guess given that you're not expecting the tax benefit to sustain through the year, did you contemplate lowering guidance?

Or did your expectations for the rest of the year get better?

I think the fairest answer, Toni, is that our expectations have remained largely the same.

So within -- the fact that we affirmed guidance really across the board for both MIS and MA and then Moody's Corp as a whole indicates that the first quarter was not a surprise to us and is pretty much in line with where we expect it to be overall.

Obviously, the strength in Moody's Analytics was very welcome, but we had expected some challenge with MIS given the very strong first quarter that we saw in 2018.

We did expect it to be off from that level.

Okay.

And based on that, I guess, it sounds like you are sort of expecting that MIS was going to be roughly around where it came in.

I guess are you more or less confident maybe in the MIS revenue guide of up of -- for the year?

And was structured worse than you expected in the quarter?

How do you think structured sort of plays out from here?

I know you mentioned the different mix of -- versus what you were maybe originally expecting, but maybe, Rob, you could give us a little bit of commentary on sort of the environment now.

Yes.

This is Rob.

So we can expand on that, but I would say supporting the guidance, we're still holding to our overall outlook for issuance of kind of flat to down 5%.

And again, we can talk a little bit about that.

Touching specifically on structured, the first thing I would highlight is we had the reclassification of REITs from structured into corporate finance.

The big story in structured this quarter was really around CLOs.

CLO formation -- new CLO formation held up pretty well, generally in line with the prior year quarter, but it was really around refis and resets that was a significant decline in activity.

And that's as we saw wider AAA liability spreads, and that really weakened the deal economics for CLOs.

That said, looking forward for structured finance, we -- the pipeline, I would say, is generally improving, and that -- this includes CLOs.

We've seen improvement in deal activity in CLOs each month of the quarter.

From a very slow start in January, we've seen CLO instruments really pick up in March.

This continued to be active into April.

We have an active pipeline of CLOs, but as I said, that -- the refi and reset activity continues to be significantly below prior year levels.

And then the other kind of big piece of structured finance is around CMBS, and market activity was pretty good there in the first quarter.

The mix was skewed heavily towards these single asset -- single borrower deals versus conduits, and that resulted in some smaller deal sizes and we're continuing to see that.

So we're seeing good inquiries and engagement but smaller deal sizes in CMBS.

Alex Kramm with UBS has the next question.

Maybe this is for Rob as well, but can you just broaden your comments a little bit on your expectations for maybe the corporate issuance environment?

I think a quarter ago, we asked about increasingly hearing CFOs saying they want to delever.

I mean you yourself are saying you're keeping leverage pretty low.

So I guess what are the -- what are still the items that you are watching?

And what are you hearing from issuers?

How they're thinking about leverage levels, appetites to -- for CapEx, M&A, et cetera?

Alex, thank you for the question.

This is Mark.

Rob and I are actually both going to comment on this particular question.

I'll first provide the perspective we're hearing externally from some of the banks, and then I'll turn it over to Rob who will follow up with our internal viewpoint.

On the banking side in the U.S., the banks primarily notice the dovish Fed commentary, still low yields and tightening spreads, which they believe has supported a strong start to the year for investment-grade bonds and, to a lesser extent, high-yield bonds.

While the tone from banks was quite positive on the start of the year, a concern does remain around potentially slowing economic growth and recession risk, which is, I'd say, briefly accentuated by the temporary inversion of the yield curve.

As a result, expectations are now for U.S. benchmark rates to remain lower for longer.

This view on benchmark rates is one of the factors that we believe, or at least the banks believe, contributed to a lower U.S. leveraged loan issuance and a shift towards high-yield bond issuance.

If I turn to Europe, what we heard from the banks is that the investment-grade market is seeing similar rate dynamics to U.S. investment-grade, and you can see this is the 10-year Bund, where the yield recently went negative for the first time since mid-2016 and is obviously currently hovering around 0. Correspondingly, the banks are seeing a sharp decline in the number of investment-grade floating-rate issuances year-to-date compared to the same period in 2018.

And there is favorable relative value dynamics that continue to encourage reverse Yankee issuance.

The banks estimated around 30% of supply year-to-date has come from U.S. companies issuing in Europe.

And then lastly in the high-yield bond market, issuance did start the year slow but saw considerable pickup in March.

And of course, Brexit remains a focus and a potential downside.

Yes.

Maybe to add to that, Mark, I don't think we've seen a structural shift since we put together certainly our views for the year in terms of how companies are thinking about financing.

As I said, we're continuing to hold to that 0 to down 5%.

The biggest risk really to the current issuance outlook is probably around bank loans.

Mark noted in regards to The Street views, less opportunistic refi, the flattening of the yield curve and this issuer and investor rotation out of bank loans, and that's all contributing to the softness that we're seeing there.

And I think we're going to need to see some further spread tightening to improve bank loan issuance volumes for the rest of the year.

So we remain cautious on the bank loan space.

Along with the decline in bank loans, softer outlook for CLOs.

Again, record refi activity in 2018, and that's really begun to decelerate, again, amidst these wider spreads that I talked about.

I think some modest upside to our original outlook in investment-grade, and that's supported by opportunistic refinancing, again, with rates coming in, spreads coming in and M&A activity as well.

We've -- continue to see very healthy M&A activity underpinning the market.

We also see some upside to high yield, and this is the flip side of the rotation from bank loans into high yield.

And we're keeping an eye out on U.S. public finance.

Again, we all know that was impacted from the tax law changes around the advanced refundings.

As a result, first quarter of 2018 was a pretty modest comparable because we had pulled forward into 4Q '17.

So that's an area where we have been expecting higher growth relative to the other -- higher issuance growth relative to the other sectors.

And all in all, I think as I think forward to the just now the next several months, I think the risk from bank loans and CLOs is probably modestly outweighing the upsides from U.S. investment-grade and high-yield.

Okay.

Just very quickly on ERS.

I think you gave a lot of good detail on this whole move to more recurring, but maybe I missed this.

But can you just talk about the first quarter and the near-term outlook here a little bit?

Was there a bunch of onetime-ish stuff that happened in the first quarter?

Was it a little bit more transactional and maybe flesh out why?

And I think about this business now as maybe growing consistently sequentially versus very seasonally as it's more SaaS-based.

But I guess my question is, is the second quarter a little bit of a sequential downtick maybe because there was something big in the first quarter?

Alex, it's Mark.

The answer -- the short answer to your question is no.

The first quarter strength was really driven by very good results on the subscription side of the business.

So that really is what drove the 19% growth.

And we just had very good strength across the business.

All of the regions were up double digits, all of the product lines were up double digits.

So we did quite well across ERS in the first quarter.

As Ray said, we don't expect that the first quarter result is something that we'll be able to sustain through the full year, but we are expecting a strong year in ERS, particularly coming off of a down year last year because as we said at the end of last year, we feel like we've made the transition and we've turned the corner from being a predominantly SaaS-oriented or subscription-based business.

And the runoff in the onetime business is now being offset by very good strength and continued growth on the subscription side.

So we feel good about what we are.

I think it really validates our whole product strategy in ERS.

I'd just remind everybody that the strategy behind ERS is that we use the ERS product to deliver Moody's Analytics' specialized data and analytical capabilities to -- and we engineer platforms that address very specific customer problems.

For example, we're working with many customers in the United States who need to adopt the CECL accounting standard.

That's analytically rather complex and it draws very directly on specific capabilities that we've got in Moody's Analytics.

And so ERS has engineered a platform aimed directly at that customer problem.

We've got a similar situation with insurers who are having to adopt the forthcoming IFRS 17 accounting standard, similar story there.

More broadly, we work with a lot of banks who are working hard to digitize and bring efficiency to their loan origination and credit assessment processes, particularly around lending to small- and medium-sized enterprises.

Our new CreditLens platform is designed to enable that kind of digitization and efficiency.

So I think the results you're seeing are really a validation of the strategy that we're pursuing in ERS.

Peter Appert with Piper Jaffray has the next question.

Just sticking with Mr. Almeida.

Mark, can you talk about the longer-term targets, please, for the Analytics business?

Any new thoughts in terms of where you think it can go given the strength you're seeing currently?

And then I'll give you my follow-up in advance, also for Mark.

On Reis and BvD, just an update in terms of what you're seeing in those business, the size of the Reis opportunity and whether you're continuing the same new sales momentum at BvD you enjoyed last year.

Peter, on the margin, we feel good about the margin.

We feel like we continue to make very good progress there.

The first quarter was particularly strong, but we have not set a specific target or sort of a ceiling on where we think we can go with the margin.

We continue to pursue expense management efforts as well as continue to drive growth in what is increasingly a subscription-oriented business, so that implies lots of scalability.

So if we can drive good growth on the top line, we ought to be able to continue to add to our expanding margin.

So I think the first quarter, we had a bit of a benefit from the elimination of that deferred revenue haircut in Bureau van Dijk last year.

Frankly, that only accounted for about 1/3 of the margin expansion that we're reporting.

So most of the margin expansion was coming from the rest of the Moody's Analytics business, and a very significant chunk of that was from ERS.

So we're going to continue doing what we've been doing, which I think will allow us to continue on the path of consistent but gradual improvement in the margin from quarter-to-quarter.

Again, the best way to look at that will be to look at it on a trailing 12-months basis because in any discrete quarter, we're probably going to get some -- we can get some weird behavior either on the top line or on the expense line.

But the -- on a trailing 12-months basis, I think you'll see -- you'll continue to see good margin expansion in MA.

To your questions about Reis and Bureau van Dijk, I'll take Bureau van Dijk first.

The business continues to perform very well.

We're very happy with what's happening in that business from a -- on a stand-alone basis, if you will, as well as with respect to cross-selling and product synergies that we are pursuing in a very disciplined way.

So BvD continues to perform well.

I mean, frankly, the -- if you look at the Bureau van Dijk basis, we took a pretty big hit on FX in the first quarter.

But on an underlying basis, on a constant currency basis, we still had very strong growth in Bureau van Dijk.

So the underlying business is performing quite well.

And as I said, our cross-selling and product synergies are starting to kick in very much in line with our expectations.

Within Reis, I'd say that business is also going very much according to expectations.

I think what we are hearing very clearly from our customers is that they very much welcome Moody's involvement in the Reis business.

There's clear interest in the opportunities to combine the Reis data, which is quite extensive and very unique, with some of the specialized content and analytics that Moody's offers.

People -- the customers have indicated to us that they fully subscribe to and validate the hypothesis that we've had about the impact that we can have in bringing more insight and more analytic capabilities to the commercial real estate business.

So we're very encouraged by the response we're getting from customers.

Having said that, there's still a lot of work for us to do there, but we feel very good about the path we're on and the opportunities to grow that business.

Now moving to a question from Joseph Foresi with Cantor Fitzgerald.

I was wondering, sticking with Analytics, how much of this is the change in the business model versus, I guess, strength in demand.

I'm just trying to get a sense of whether there was an uptick for the products in general or, as you've said, BvD is being integrated and you're starting to see some of the SaaS-to-services change take place.

I would say it's definitely both.

I think the -- some of the shift that we've made in business model, particularly in ERS and also to some degree in our training business, is definitely enabling us to deliver much more scalable and, therefore, profitable solutions.

But having said that, the underlying demand for the kinds of things that we're doing that are driven by new accounting standards, that are driven by banks' desires to improve the efficiency of their SME lending practices, those -- that underlying demand is also a very important element of this as well.

Got it.

And then my second question is just on the margin opportunity.

You talked about the second half potentially being better than the first half.

Maybe you could give us a cadence there.

And I'm just wondering, should we think of this as guidance on the margin side as set for what the expectations are on a top line from issuance, and anything above would be beneficial to the margins, or we'd see further expansion.

How should we think about that in the second half of the year?

Yes.

I mean -- it's Ray.

Generally speaking, yes, if we see an uptick in issuance, particularly if it's issuance from institutions that we already have a rating relationship with, that's going to be a margin-friendly scenario.

We've talked about on previous calls a little bit about the desirability of the new mandates because they create new relationships, which benefit us in the going-forward years.

But it's -- in terms of the highest margin uptick, it would come from existing issuers, rated issuers who choose to go back into the market.

Our next question will come from Bill Warmington with Wells Fargo.

So first question on MIS.

Issuance excluding -- for the overall market, issuance excluding sovereign debt was down about 14%.

MIS revenue was down about 7%.

That would seem to be some notable outperformance there, and I wanted to see if you felt that was a fair assessment.

Are there specific factors you feel enabled you to outperform the market this quarter?

Or is it really a function of mix or other extraneous factors?

Bill, it's Rob.

I'll take that.

And I think you got to keep in mind that about 40% of the revenue is recurring, and that revenue this quarter was growing at about 1%.

That provides a nice kind of ballast.

The transaction revenue was down 11% compared to that issuance down 14%.

And if you allow for, call it, low single digit price, the mix factors this quarter were, I would say, a minor contributor to the delta.

Got it.

And then a question for you on ESG.

We noted the Vigeo Eiris acquisition.

I just wanted to ask if you could frame what you consider to be the ESG opportunity for Moody's.

When does it actually start to move the needle?

Has it started to move the needle?

I'll lead off, and then Rob may want to add.

In terms of the commercial opportunity, it's early days.

We will have to see how much the increasing investor and customer interest in ESG translates into a robust commercial opportunity, and we'll obviously keep you informed as we move forward with that.

The level of interest though in ESG, cybersecurity, cyber scoring is very high.

It's particularly high in Europe, and it's growing everywhere.

So that says to us that if we can develop standards, if we can develop the vocabulary on a rigorous, consistent, analytically robust basis for communicating to the marketplace about developments with entities in ESG, that the likelihood of us having a promising commercial opportunity is quite high.

So Rob, I don't know if you...

Yes.

I mean that's right, Ray.

I mean it's a -- it's still a relatively small, fragmented, evolving industry, as Ray said, looking for standards.

I would say, for us, there's a stand-alone commercial opportunity, as Ray described, but it's also increasingly relevant to the work that we're doing in the rating agency and also more broadly across the MA customer base.

If you think about banks, insurance companies, corporates, professional services firms, all increasingly interested in some form of ESG or cyber kind of content, that's what's driving it.

And I would just add, there is also increasing regulatory interest and policymaker interest in disclosure around ESG and measuring ESG factors of various kinds.

And when you get that kind of regulatory push, historically, in other areas, that has translated into product and service opportunities for us.

So I would be hopeful we would see that same phenomenon here.

Jeff Silber with BMO capital markets will have the next question.

I was hoping you could give us an update on some of the progress that you've made, if any, on ratings in China.

Sure.

I think as we've talked about on previous calls, we do have a joint venture in China, entity called CCXI.

It is the largest rating agency in China.

It has been the most successful rating agency I think both in terms of its coverage and financially.

So we are very interested in continuing with that joint venture relationship.

What that translates into in terms of having a separate license for Moody's to operate in the domestic market I think is uncertain at this point.

It may be that the Chinese would prefer us to operate either through CCXI or on our own as Moody's, and we will just have to see.

As their thinking evolves, we make our views as clear as we can.

But we are very interested in staying with the joint venture, and that would influence how we think about the domestic market opportunity.

Now that being said, we still have very good coverage in the cross-border markets for Chinese institutions that are active internationally.

We expect that to continue.

And we've had good growth in that stock of rating relationships.

So that's all continuing as it has been.

And I guess just the last thing I would add is one of the attractions of the joint venture is it is actually licensed to operate in both the interbank market and the exchange traded market.

And so the interbank market being larger, the exchange traded market being the faster-growing market, and that makes that platform, again, particularly attractive to us.

Okay.

Great.

If I could shift gears to your outlook for this year, forgive me, I don't have last quarter's press release in front of me.

But if I compare the details on your table this quarter to the last quarter, is there anything to call out besides just the changes in FX rates?

There are no changes in our outlook or our guidance that we're providing today vis-à-vis what we provided in mid-February, save for exchange rates.

Craig Huber with Huber Research Partners will have the next question.

I'll start with China as well.

Ray, is your preference to be allowed to operate as a Moody's stand-alone in China and also have the JV separately?

How do you -- what's your ideal situation?

Or how this could be structured from your vantage point, knowing things are complicated with this JV arrangement you have?

And along those same lines, can you just talk a little bit further about, in China, how you kind of view the corporate market, for example, of any potential pent-up demand for, say, call it, third-party or U.S. rating agencies to come in there where there's a lot of pent-up demand for ratings being called out by the companies out there and stuff that are really looking for that?

Yes.

Craig, I think the -- I think rather than what our preference is, it's probably best to look at this through lens of what the priorities are for the Chinese policymakers in terms of their thinking about how they would like to see participation in their market and what the nature of that participation would be.

Certainly, they don't want to see disruptive activities with respect to their market, and so they're conscious of participants in the market operating in ways that are going to be conducive to smooth market growth and the steady development of credit risk analysis and related solutions that might come from institutions like Moody's Analytics.

They're also interested in attracting foreign capital.

And in attracting foreign capital, they are certainly aware of the fact that international investors interested in deploying capital into China would be interested in hearing from international institutions, such as Moody's, about risk and related research.

So the agenda that includes attracting foreign capital, includes market stability, includes a desire for a reform without disruption, all of that has to be placed into a mix.

And I think -- honestly, I think it's still relatively early days in terms of how exactly that will play out.

There's probably an element to the trade negotiation that factors into this as well, but we'll just have to see as that moves forward.

Then also if I could ask on the cost side.

As you sort of -- Mark, you sort of think about the cadence for cost growth over the remaining 3 quarters of the year relative to what you've had here in the first quarter and how it gets a little more -- you said back half of the year will be helped by the restructuring you guys have done here last couple of quarters and stuff.

But normally, things go up if costs go up as the year goes on, particularly in the fourth quarter sequentially and stuff.

How do you see that cadence playing out this year in the scheme of being up mid-single digits for the full year?

And then my housekeeping question is what was the incentive comp in the first quarter versus a year ago, please?

Craig, thanks for the question.

The most prominent factors in the expense growth that we saw this quarter were related to hiring and merit, and this is primarily due to the impact from hiring in prior periods.

Obviously, we've spoken about our ability and our desire to continue to invest selectively in lower-cost locations.

I'd also note that the expense growth was due to the inorganic activity from Reis and Omega, and then certainly our restructuring charge.

Thinking forward, we are not expecting a significant ramp in expenses from the first to the fourth quarter, specifically as we start to realize savings from the restructuring program.

If I had to quantify that, I'd say expenses would ramp somewhere between -- or somewhere around $10 million from the first to the fourth quarter, and I don't think this will necessarily be linearly.

And then just by way of comparison, last year's expense ramp was $50 million, so there is a meaningful reduction this year.

On the housekeeping item related to incentive comp, the amount that we booked this quarter was approximately $47 million for the quarter.

That is very much in line with the guidance we gave in February around -- which is around $50 million for the quarter.

Our next question will come from Timothy McHugh with William Blair & Company.

Just following up a little bit on the expense side.

I guess talk about why the expense is taking -- I guess the savings from the restructuring are taking time to flow through.

Is it people didn't leave the business immediately after the restructuring?

I guess just help me understand, I guess, the timing aspect of the savings.

Sure.

And again, thank you for the question.

We did communicate at the time that we announced our restructuring program that we would begin to see those savings emerge really in the second half of the year, and that's because the restructuring savings encompass really 3 areas.

Those are real estate management, second relates to people, and third really relates to ongoing oversight of various projects and initiatives.

We are on track, I would say, to achieve the total restructuring plan target that we had updated earlier in the year, and that would lead to an anticipated annualized pretax savings amount of $40 million to $50 million.

I would say that we do expect a larger Q2 restructuring charge to be booked vis-à-vis what we see now in Q1, and that may push us to be slightly above the high end of the previously communicated $70 million to $80 million range.

So in brief, I would say that we are certainly on track.

This is playing out exactly as we expected, and we are executing the actions that we have committed to.

Okay.

And then can I follow up?

As we think about then the expenses not ramping as much as normal, is it simply that, I guess, the savings from that restructuring charge?

Or is there any change as we think about the ongoing hiring and pace of investment across the year?

I guess are you also constraining how quickly your kind of incremental investments from here are going to happen as we go on?

Or is it simply the savings will flow through later in the year?

Trying to understand the ongoing kind of investment and spending levels for the rest of the year now in this environment.

Sure.

I think there's certainly an expectation that both variables will impact the ramp, which obviously increases the timing of hiring.

There is also the element of incentive compensation, which we'll flex based on how the external environment emerges.

And we are certainly in both businesses actively utilizing the opportunities available to us in lower-cost locations.

And I think a combination of those factors is really what's influencing the fact that expense ramp this year is relatively flat, especially vis-à-vis past years.

We'll now take a question from George Tong with Goldman Sachs.

You have [Ryan] on for George.

In regard to issuance guidance for 2019 that you reiterated, could you discuss any changes within the guidance as it relates to the composition of MIS revenue?

There are some adjustments we've made internally.

For example, expectations around the volume of floating-rate versus fixed-rate debt in the corporate finance area.

But overall, it's netting out so that our expectations remain consistent.

The adjustments are incremental and offsetting.

Ladies and gentlemen, this does conclude the question-and-answer session.

I'll turn the call back over to Mr. Ray McDaniel for any additional or closing remarks.

Okay.

Thank you very much, everybody.

And before we go, I just would like to note 2 additional items.

First, we are amending our quarterly quiet period to now run from the 16th of the last month of each calendar quarter to after that quarter's earnings call.

So I've been asked to tell you to please consider this timing when contacting Investor Relations to request meetings and calls.

Secondly, we expect to attend the conferences listed here in the next 2 months in New York, London and Chicago.

And please contact your representatives to request a meeting with Moody's management at these events.

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

And this concludes Moody's First Quarter 2019 Earnings Call.

As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the First Quarter 2019 Earnings section of Moody's IR homepage.

Additionally, a replay of this call will be available after 3:30 p.m.

Eastern time on Moody's IR website.

Thank you.