Moody's Corporation

and welcome, ladies and gentlemen, to the Moody's Corporation Second Quarter 2020 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 Shivani Kak, Head of Investor Relations. Please go ahead.

Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's second quarter 2020 results, as well as our outlook for full year 2020. I'm Shivani Kar. This morning, Moody's released its results for the second quarter of 2020, as well as our outlook for full year 2020. The earnings press release and a presentation to accompany this teleconference is 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 from the call this morning, Kay Moody's 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 this morning. mentioned during this call in GAAP. Before we begin, I call your attention to the safe harbor language. which can be found towards the end of our earnings release. Today's remarks contain forward-looking statements within the Securities Litigation Form 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 10A for the year ended December 31, 2019. Our quarterly report on Form 10Q for the quarter ended March 31, 2020, and SEC filings made by the company, which are available on our website and on the SEC's website. These, together with the safe harbour statement, set forth important factors that could cause actual results to differ clearly 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 will now turn the call over to Ray McDaniel.

Thanks, Shivani. Good morning and thank you everyone for joining today's call. I will begin by providing a general update on the business, including Moody's second quarter 2020 financial results. Mark Kay will then provide further details on our second quarter performance and also comment on our revised outlook for 2020. After our prepared remarks, we'll be happy to respond to your questions. I want to start off by both acknowledging by both acknowledging that the strength of Moody's has always been in our people and reiterating our appreciation for the hard work and dedication of our employees around the world. During this challenging time, we remain committed to our corporate social responsibility efforts as we and the rest of the world deal with both the global COVID-19 pandemic as well as civil unrest. Our mission to provide trusted insights and standards that help decision makers act with confidence has never been more relevant and our operating results reflect that. Echoing the first quarter, Moody's strong second quarter was once again driven by robust top-line growth at Moody's Investor Service, as issuers sought liquidity and opportunistic refinancing amid broadly receptive credit market conditions. Also aligned with our long-term strategy, we continue to build toward the future as we embrace our sustainability efforts and develop new products and solutions that meet the evolving needs of our customers. As the second quarter exceeded our expectations, we are raising and narrowing our full year 2020 adjusted diluted EPS guidance range to $8.80 to $9.20, while still expecting debt issuance to taper in the second half of the year. Amidst the global pandemic and with the emergence of civil unrest focused on racial equality, the safety and well-being of our employees remains Moody's top priority. We are committed to providing a safe work environment for everyone, As such, we've been conducting awareness and training campaigns and encouraging our employees to speak out and engage with each other on these important topics. We are also building better programs to attract, retain, and advance black talent. We pride ourselves on being an inclusive firm where diverse viewpoints lead to better decisions and where everyone's contributions matter. On our prior earnings call, we noted how our early adoption of technology enabled us to transition transition smoothly to a virtual environment. We are building on this experience by working with our employees to design our future workplace models. We believe this approach will enable us to attract and retain the best talent, not only in locations in which we have a presence, but potentially anywhere. Moody strives to be a constructive force in all of the communities in which we operate. We mentioned in our prior earnings call that in response to COVID-19, we made our research, insights, and certain products accessible to the public at large, including our customers and policymakers. These offerings within the first half of the year translated into about $12 million of in-kind contributions. In addition, we've committed $1 million to promote equal justice and the advancement of the Black community, while also increasing financial support for our partners focused on empowering Black-owned businesses and enhancing diverse recruiting. Finally, before I get to the results for the quarter, I would like to draw your attention to the recent announcement made on the enhancements to our environmental sustainability program. As part of this effort, we have committed to remaining carbon neutral, agreed to procure 100 percent renewable electricity, and set science-based targets for reducing our greenhouse gas emissions. Through these commitments, we are proud to further Moody's purpose to bring clarity, knowledge, and fairness to an interconnected world. Moving on to second quarter 2020 results, Moody's achieved a robust 18 percent increase in total revenue, with 27 percent growth from MIS and 5 percent growth from MA. Moody's adjusted operating income of $766 million was up 28 percent from the prior year period. Strong revenue growth combined with ongoing discipline and expense management drove 410 basis points of adjusted operating margin expansion. Adjusted diluted EPS of $2.81 was up 36%. I will now provide an update on the credit markets in the second quarter. The pandemic has had a significant negative impact on the global economy, resulting in widespread unemployment, negative global GDP estimates, and other recessionary conditions as countries shut down their economies in order to contain the spread of the virus. This morning's reported second quarter U.S. GDP contraction of nearly 33 percent is a stark reminder of this. To mitigate the economic impact, governments have undertaken unprecedented global monetary easing efforts and fiscal actions, which have thus far enabled supportive fundamentals and robust activity in the credit and equity markets. Most recently, we've observed the EU proposal to raise debt to fund a 750 billion euro stimulus plan to aid its member nations hardest hit by the pandemic. In the U.S., the Federal Reserve has extended its emergency support facilities to the end of the year, and the U.S. government is in discussions to extend fiscal stimulus measures. As the credit markets continued to read through severe economic stresses and governments quickly took actions to mitigate them, the dichotomy with the real economy remained. Investment-grade issuers responded to economic uncertainty by shoring up their balance sheets with record levels of bond issuance. Additionally, after being inactive for most of March, high-yield bond issuance surged as spreads tightened. The leveraged loan market reopened but has been slower to recover. Looking towards the second half of the year, we expect issuance to moderate as many countries and institutions have completed their balance sheet and liquidity strengthening initiatives, and governments may see less of a need to intervene in support of their economies. As I just noted, given uncertain economic conditions, companies looked to bolster their balance sheets in the first half of the year while capital markets were receptive. As you can see from the chart, working capital and debt refinancing became more prominent drivers of issuance, whereas mergers and acquisitions has historically been a more often cited use of funds. This rush to liquidity also helped to explain the dichotomy between the performance of the economy and capital markets. as many issuers took advantage of low rates to create fortress-like balance sheets to help see them through this period of uncertainty and stress. I'd like to further highlight second quarter issuance, specifically within the corporate finance sector. As you can see, second quarter corporate investment grade issuance was up significantly, together with solid high yield supply, but bank loans continued to lag. This mix caused the rate of corporate finance issuance growth to outpace transactional revenue growth, due to larger, more frequent issuers coming to market. Despite this headwind, issuance growth was beneficial to our operating results, and MIS exhibited significant top-line growth, which Mark will discuss further. COVID-19 has had wide-reaching impact on nearly every sector of our global economy. In the second quarter, the default rate rose, and as Mark will touch upon later, our guidance assumes it will continue to do so through the end of the year. During these turbulent times, the quality and consistency of ratings becomes even more important. Therefore, investors look for transparent methodologies that follow a measured, thoughtful, and systematic approach. These processes ensure that we are consistent and rigorous in delivering our rating opinions and research. Our starting point is to assess and rank the impact of an event, such as COVID-19, and what it has on various sectors. This then flows through to the underlying issuers, as shown in the chart on the bottom left. which lists the most impacted sectors and the percentage of issuers downgraded within each of those sectors. It is important to note that ratings quality remains MIS's top priority, and we continually strive for exceptional ratings performance. As you can see from the graph on the bottom right corner, Moody's ratings have performed very well on an ordinal ranking basis, with lower-rated debt exhibiting higher default rates for the trailing 12 months as of the end of June 2020. Through Moody's long history of ratings quality, investors have come to expect their ratings to look through the credit cycle so that in uncertain trends like these, investors can compare ratings not just by issuer, but also over time. Turning to MA, I want to update you on how the business continues to adapt to the current environment. Last quarter, we discussed how COVID-19 could impact our customer renewals and new sales activity. We are encouraged by the observed trends in both of these categories as they are proving to be better than expected. MA's retention rates remain strong at 94%, demonstrating the relevance of our products during times of stress, while sales grew despite the lack of in-person meetings, providing us with momentum as restrictions begin to ease outside the U.S. Looking toward the sales pipeline for the second half of 2020, we are more optimistic than in our prior outlook as compliance and accounting products have provided better-than-expected growth opportunities despite current headwinds. Throughout this challenging time, we've remained focused on our customers' rapidly evolving needs for integrated and holistic risk solutions. This slide highlights some of our second quarter innovations and enhancements that increase the collective value of our offerings. I will focus on the recent additions and improvements to our ESG and climate product suite, as well as the new Pulse tool. Thought leadership in ESG and climate risk remains a key strategic priority for Moody's. as its importance for our customers continues to grow, and we are encouraged by the demand for these products. In the first half of this year, VigioIris completed 29 issuer-paid sustainability ratings, 46 second-party opinions, and nine sustainability-linked loan assessments. During the second quarter, VigioIris launched its enhanced second-party opinion service, which enables more impactful issuer communications and provides increased transparency for investors. We are also excited to announce that through partnerships with Euronext and Solactive, we continue to build our presence serving the index space, including the creation of the new Euronext ESG 80 and Solactive VE Develop Markets ESG Quality Indices, which use Visual Iris data to screen its constituents. In addition to these new ESG and climate risk initiatives, we are further integrating Visual Iris and 427 content into multiple MA platforms, including Moody's.com and Reese, which should provide additional channels for exposure and monetization. Moving on to Pulse, this tool was launched by the Moody's Accelerator to help our customers quickly consume and digest the ever-increasing news flow. Pulse utilizes machine learning and natural language processing to gauge sentiment around news, such as COVID-19, on a chosen company or sector, enabling investors to more quickly assess the impact of a news article on their portfolios. We continue to invest in these types of product innovations, which allows us to provide better value and insights to our customers to help them make better decisions. I will now turn the call over to Mark Kay to provide further details on Moody's second quarter results and our revised outlook for 2020.