Moody's Corporation

Please stand by. We're about to begin. Good day and welcome, ladies and gentlemen, to the Moody's Corporation fourth quarter and full year 2018 earnings conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers following the presentation. I would now turn the conference over to Sally Schwartz. Global Head of Investor Relations and Strategic Capital Management. Please go ahead, ma'am.

Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's fourth quarter and full year 2018 results, as well as our current outlook for full year 2019. I am Sally Schwartz, Global Head of Investor Relations and Strategic Capital Management. This morning, Moody's released its results for the fourth quarter and full year 2018, 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.moody.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 Kay, 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 release filed this morning for a 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 Discussion and Analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2017, and in other SEC filings made by the company, which are available on our website and on the SEC's website. These, together with the Safe Harbor Statement, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statement. 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, Sally. Good morning, and thank you to everyone for joining today's call. As we begin, I would like to note that we have revised our approach to our earnings call to focus more of our commentary on the factors underlying our financial results. We hope you will find this helpful and, as always, welcome your feedback. Additionally, we have changed our disclosure of certain guidance metrics in an effort to provide greater transparency in areas that are most relevant and predictable. Mark Kay will go into greater detail on the guidance changes shortly. I will begin by summarizing Moody's full year and fourth quarter 2018 financial results. Mark will then follow with comments on our outlook for 2019. After our prepared remarks, we'll be happy to respond to your questions. During full year 2018, Moody's achieved strong results driven by robust performance at Moody's Analytics, prudent expense management, and the benefit of a lower effective tax rate offsetting weaker-than-expected global debt issuance in the fourth quarter. Full year 2018, adjusted operating margins increased across the corporation, including at both Moody's Investor Service and Moody's Analytics. Adjusted diluted EPS grew 22% year over year. In the fourth quarter, Moody's total revenue declined 9%, As you are aware, we experienced a difficult issuance environment with high-yield bond activity the weakest since the global financial crisis. MA revenue, which does not correlate with debt capital markets activity, grew 5%, led by strong RD&A performance. Despite top-line softness in MIS, Moody's Corporation adjusted operating margin increased by 40 basis points for the quarter. Our improved operating leverage, combined with a lower effective tax rate, grew adjusted diluted EPS by 8% year over year. As you can see in the charts on slide seven, adjusted operating margin increased in both MIS and MA by over 150 basis points in the fourth quarter of 2018. This was due to expense efficiency initiatives across both businesses, lower accruals for incentive compensation in MIS, and the roll-off of Bureau Van Dyke's deferred revenue haircut in May. On our last earnings call, we announced a restructuring plan. The restructuring charge we took in the fourth quarter of $49 million exceeded our previously announced range of $30 to $40 million due to the acceleration of staff reductions and acquisition integration, which together also allowed for real estate rationalization. Our total restructuring program is now expected to be in the 70 to $80 million is expected to be 70 to $80 million through the first half of 2019. We are increasing our anticipated annualized pre-tax savings to a range of 40 to $50 million, which is $10 million higher than the range we previously announced. We will begin to realize the majority of the annualized run rate savings in the second half of 2019. These savings will create financial flexibility for various capital market conditions and provide options to reinvest in our business or bolster margins. We believe that the restructuring charge, acquisition synergies, and other cost management efforts will contribute to margin stability in full year 2019. After announcing the Bureau Van Dyke acquisition, we focused on deleveraging and successfully reduced our net debt balance in 2018. In December, we issued $800 million in bonds. The pie chart on the right shows that $450 million was used to pay down senior notes that were coming due in July 2019. A portion of the proceeds was also used to pay down our remaining outstanding term loan and commercial paper. As a result of this financing, we do not have further debt maturing until September 2020. In the fourth quarter of 2018, issuance was impacted by a variety of geopolitical and macroeconomic concerns, leading to market and interest rate volatility as well as widening spreads. Notably, there was no U.S. high-yield bond issuance activity in December. Even with these challenges, economic fundamentals remained sound in developed markets, with stable U.S. and European economic growth and unemployment rates at multi-year lows. The drop in global debt issuance of almost 30 percent in the fourth quarter of 2018 led to a smaller decline in MIS revenue of 18 percent, demonstrating the strength of the business model. MIS's revenue was buttressed through its recurring revenue base, which was supported by increased monitoring fees from recent new mandates, as well as pricing. For MA, total revenue grew 5 percent in the fourth quarter, or 7 percent, excluding the negative impact from foreign exchange. RD&A revenue grew 17% due to Bureau Van Dyke, strength in the core business, and contribution from the REIS acquisition. Bureau Van Dyke added $90 million of revenue in the fourth quarter at a 48.2% adjusted operating margin. As expected, ERS revenue declined by 17% in the quarter as we continued the transition to a software as a service, or SAS, operating model. We anticipate ERS revenue growth to resume in 2019. I would like to provide additional details about our progress with the SAS transition in ERS. The chart on this slide illustrates 2018's slight decline in total revenue as 15% growth in subscription revenue was offset by a 28% decline in one-time revenue from software licenses and services. Due to the shift in product mix, recurring revenue as a share of total ERS, as a percent of the total ERS business, reached 77% in 2018, up from 69% at the end of 2017. Expansion of the recurring revenue base will drive ERS revenue growth in 2019, despite our expectation of a further contraction in one-time revenues. This year's revenue outlook is supported by 12% growth in 2018 sales of subscription products, which lifted aggregate ERS sales by 6%, despite a 10% decline in sales of one-time software licenses and services. The acceleration in total ERS sales growth since early 2018 indicates that we have worked through the inflection point in the SAS transition. Importantly, the expansion of our subscription business enhances the profitability of ERS, contributing to our expectation of further improvement in MA's adjusted operating margin in 2019. In terms of business fundamentals, our outlook for ERS reflects solid demand from banks and insurers for analytical tools that enable adoption of new accounting standards, and next generation products that support automation trends. Before turning the call over to Mark to discuss our full year 2019 outlook, I'd like to take a moment to review Moody's ongoing strategic priorities. We continue to defend and enhance our core ratings and research businesses while pursuing strategic growth opportunities both down the corporate credit pyramid and across into new geographies and adjacent product areas. We are focused on providing information, insights, solutions, and standards to promote market transparency and fairness. Both are necessary conditions for market confidence, which in turn supports healthy financial markets over time. Underpinning these efforts, we are enhancing our technology infrastructure to enable automation, innovation, and efficiency, and remain supportive of a diverse and inclusive workforce. A recent acquisition of REIS, which closed on October 15, 2018, is a good example of expansion into an adjacent product area. REIS, a leading provider of U.S. commercial real estate, or CRE, data, has built a unique data set over 40 years. We have observed growing demand from our asset management, banking, and insurance customers for a reliable source of integrated information and analytics to support management of their substantial exposures to CRE. By combining RISA's proprietary data with MA's specialized expertise, Moody's is powerfully positioned to meet the need for standards that enhance operational efficiency and analytical precision in this market. I'll now turn the call over to Mark to review our outlook for 2019. Thank you, Ray.