Moody's Corporation

Ladies and gentlemen, please stand by. 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 and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for questions and answers following the presentation. I will now turn the conference over to Sally 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 Sally 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.moody's.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 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 31st, 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 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. 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 Corporations. 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 forecasts 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 improved 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's 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's 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 percent. 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 M&A, 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 Dyke 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, our DNA 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 a software-as-a-service, or SAS, 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 one-time products we have been de-emphasizing 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's 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 REES, 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 Team 8 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 VigioIris to support our ESG initiatives. VigioIris 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, VigioIris 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. VigioIris 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 Moody's.com slash 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 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.