Moody's Corporation

Good day and welcome, ladies and gentlemen, to the Moody's Corporation fourth quarter and full year 2019 earnings conference call. At this time, I'd 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 question and answers following the presentation. I will now turn the conference over to Shivani Kak, Head of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thanks for joining us on this teleconference. discuss Moody's fourth quarter and full year 2019 results, as well as our outlook for full year 2020. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the fourth quarter and full year 2019, as well as our outlook for full year 2020. 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 Kaye, Moody's Chief Financial Officer. During this call, we will also be presenting non-GAAP or adjusted figures. These 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 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, 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.

Okay. Thanks, Shivani. Good morning, and thank you, everyone, for joining today's call. I'll begin by summarizing Moody's fourth quarter and full year 2019 financial results. and provide an update on the execution of our strategy. Mark Kay will then follow with further details on our results and comment on our outlook for 2020. After our prepared remarks, we'll be happy to respond to your questions. I'd like to start with a few highlights. First, Moody's achieved 16% revenue growth in the fourth quarter of 2019, with Moody's investor service rebounding from the market disruption we experienced in the prior year period. as well as strong organic performance from Moody's Analytics, which delivered double-digit growth for the fourth consecutive quarter. Second, in the fourth quarter of 2019, adjusted operating margin of 45.3% was up 30 basis points as compared to the prior year period. Next, we are pleased to introduce our full year 2020 adjusted diluted EPS guidance range of $9.10 to $9.30. This guidance includes the expected dilutive impact of the Regulatory Data Corp, or RDC, acquisition, as well as projected share repurchases of $1.3 billion. With the announced RDC acquisition, we continue to expand our risk assessment offering, helping an increasingly wide range of customers make better decisions. The combination of RDC's compliance data with Bureau of Van Dyke's capabilities positions Moody's to become a leader in the Know Your Customer, or KYC, standards. And finally, I'm pleased that Moody's has continued to enhance its sustainability engagement and disclosure as a corporation and to invest in important new ESG tools for our customers. I'll talk more about the work we are doing and the progress we are making in these areas shortly. During the full year 2019, Moody's achieved a 9% revenue growth driven by 13% and 6% increases in MA and MIS revenues, respectively. Moody's adjusted operating income of $2.3 billion was up 8%. Adjusted diluted EPS increased 12%, driven by strong business performance. Moving on to fourth quarter 2019 results, robust performance across both business segments contributed to a 16% revenue increase for Moody's overall, with 21% growth in MIS and 10% growth in MA. Moody's adjusted operating income of $559 million was up 17% from the prior year period. Strong revenue growth combined with ongoing cost discipline drove 60 points of organic adjusted operating margin expansion. This was partially offset by a 30 basis point combined impact from acquisitions and the divestiture of Moody's analytics knowledge services, or MACs. Adjusted diluted EPS of $2 was up by 23%. Over the course of 2019, credit market sentiment became more positive. This was especially evident in the fourth quarter in comparison to the significant market disruption experienced in the prior year period. Favorable progress on certain overarching geopolitical concerns, as well as generally benign macroeconomic backdrop with accommodative stances from central banks allowed for low benchmark rates, tight spreads, and active debt capital markets activity. Notably, High-yield bond issuance improved substantially following a period of minimal activity in December of the prior year. I'd like to spend a moment discussing another active sector, U.S. public finance, where MIS saw rated issuance grow by 84 percent in the fourth quarter versus 2018. The favorable low-rate environment incentivized public entities to issue taxable bonds as a source of refunding as lower benchmark rates offset tax disadvantages. This resulted in levels of issuance not seen since the U.S. Tax Cuts and Jobs Act was enacted at the start of 2018. We expect the tight credit spreads and low benchmark rates will continue to support elevated refinancing activity in 2020, which Mark will discuss shortly. Our capacity to operate successfully in the capital markets depends on our ability to provide trusted insights and standards that help decision makers act with confidence. To that end, our performance and historical rank ordering drives investor demand for our credit ratings. We remain focused on analytical expertise and robust credit methodologies to provide predictive, predictable, and transparent ratings. As you know, our strategy is focused on continuing to enhance our core ratings and analytics businesses while expanding our risk assessment capabilities into adjacent product areas and across new geographies. On that note, I'd like to take a few minutes to review our recently announced acquisition of RDC and highlight our presence in the Chinese market. Starting with RDC, as I mentioned earlier, the acquisition provides Moody's with a strong leadership position in the know-your-customer market. RDC has a specialized and unique data set of over 11 million curated profiles on individuals and is expected to act as an accelerator for Bureau Van Dyck's already fast-growing set of compliance products. Together, they will offer a more efficient, one-stop customer solution that otherwise would be time-intensive and costly to build. Together, on a pro forma basis for 2019, Bureau Van Dyke's compliance products and RDC generated sales of approximately $150 million. We expect this figure to more than double by 2023. In addition, their combined capabilities have the opportunity to establish a global assessment standard for a market that was worth $900 million as of 2019. This market has been growing at a compound annual growth rate of approximately 18% over the last five years. We are very excited about the future opportunities the RDC acquisition presents and its alignment with Moody's core purpose of bringing clarity, knowledge, and fairness to an interconnected world. Moving to China, I want to first note that we are obviously following developments relating to coronavirus very closely and have been working to ensure that we are supporting our teams in impacted areas. Our main concern is for the health and safety of the local populations and our employees. In this spirit, the Moody's Foundation has donated to Give to Asia, a nonprofit organization serving health needs in the area to combat the spread of the outbreak. While the initial and most concerning impact is on human health, The risk of contagion could affect future economic activity in global financial markets. The immediate and most significant impact is in China itself. However, given its importance as the world's second largest economy, a broader slowdown is certainly possible. That being said, Chinese and other authorities have substantial policy tools at their disposal to mitigate the impact of global GDP. The situation remains fluid, and we will continue to monitor it actively. I'll next take a moment to discuss the U.S.-China phase one trade agreement. The development of the domestic Chinese market is an important driver of our long-term growth opportunity. We are therefore pleased that China has taken important steps towards opening the market to credit rating agencies, and the bilateral trade agreement acknowledges and enshrines certain commitments which we support. Moody's views the trade deal as a positive for both Chinese and U.S. growth. MIS rates both the cross-border market and in the domestic market through our 30% interest in CCXI, one of the largest domestic rating agencies in China. And as China's financial market continues to expand and deepen, we continue to explore ways to better serve customers and contribute to the development of that market. China-related revenues, including from cross-border activity for MIS and MA, totaled $176 million in full year 2019, up 17% from the prior year. In addition, Moody's attributable income from CCXI totaled $17 million in full year 2019, up from $15 million in the prior year. Before I turn this over to Mark, I'd like to highlight some of the key initiatives that we have undertaken that underscore our commitment to our stakeholders and to a sustainable future. We joined the UN Global Compact, or UNGC, and enhanced our voluntary ESG-related disclosures in our securities filings, consistent with guidelines from the Sustainability Accounting Standards Board and recommendations from the Task Force on Climate-Related Financial Disclosures. These disclosure enhancements were well recognized by the FTSE for Good and Bloomberg Gender Equality Indices, for which Moody satisfied the requirements for inclusion for the first time. On the business front, we made strategic investments in our ESG risk assessment capabilities, which are becoming increasingly important to investors and other stakeholders. In 2019, Moody's acquired majority stakes in Vigio Iris and 427. We have now integrated data from 427 with research from MIS and the RIS network in MA. In addition, Moody's acquired a minority stake in Fintau Green Finance, which provides ESG data and ratings to the Chinese market. We believe that these investments enable us to offer our customers a more holistic Moody's product suite, which our customers continue to recognize as industry-leading. Employee diversity and inclusion remain integral to our culture and essential to our future growth prospects. 2019 was yet another strong year for third-party recognition of our achievements in this area. We continue to work towards the goal of embedding our CSR strategy and mindset throughout our communities and I'm pleased to report that Moody's was verifiably carbon neutral during 2019. In 2020 and beyond, we will continue to differentiate, evolve, and demonstrate thought leadership in these areas. I will now turn the call over to Mark Kay to provide further details on our fourth quarter performance and our outlook for 2020.