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spk02: Good day, everyone, and welcome to the Moody's Corporation First Quarter 2021 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 up the conference for questions and answers following the presentation. I will now turn the conference over to Shivani Kak, Head of Investor Relations. Please go ahead.
spk01: Thank you. Good morning and thank you for joining us to discuss Moody's first quarter 2021 results and our revised outlook for full year 2021. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the first quarter of 2021, as well as our outlook for full year 2021. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moody's.com. Rob Fowber, 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 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 referenced during this call and GAAP. I call your attention to the safe harbour language, which can be found towards 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 will 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, 2020, 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 will now turn the call over to Rob Falber.
spk06: Thanks, Shivani. Good morning, everybody, and thanks for joining today's call. I'm going to begin by providing a general update on the business, including Moody's first quarter 2021 financial results. And following my commentary, Mark Kay will provide some further details on our first quarter 2021 performance, as well as our revised 2021 outlook. And after our prepared remarks, we'll be happy to take any questions. Moody's delivered strong financial results in the first quarter of 2021, revenue growth of 24%, an increase in adjusted diluted EPS of 49%, supported by strong performance from both Moody's Investor Service and Moody's Analytics. Improving economic fundamentals and increased M&A activity drove robust issuance in the first quarter, particularly in the leveraged loan and high-yield bond markets. MIS generated over a billion dollars in revenue. That was up 30% over the prior year period. AMA's best-in-class subscription-based products and solutions drove revenue growth of 14% in the quarter. And amidst this growth, we're reinvesting back into our business by introducing new offerings and integrating our recent acquisitions. As a result of our strong performance in the quarter, we've updated our full-year 2021 guidance, and we now project Moody's revenue to increase in the high single-digit percent range. Additionally, we've raised and narrowed our adjusted diluted EPS guidance to to be in the range of $11 to $11.30. Now, turning to first quarter results, this is the first time that MIS's revenue has exceeded $1 billion in a single quarter, while MA has delivered its 53rd consecutive quarter of growth. Moody's adjusted operating income rose 41% to $914 million, and the adjusted operating margin expanded 680 basis points to 57.1%. adjusted diluted eps was four dollars and six cents again up 49 now we could not have accomplished these great results without the hard work and dedication of our employees across the world so on behalf of the entire management team i'd like to express our appreciation and say thank you i would also like to acknowledge the continued challenges faced by many of our employees across the globe due to ongoing pandemic conditions, and especially our colleagues in India. Now, turning back to the first quarter, issuance volumes reached their highest level in over a decade. While all sectors were active, leveraged finance was really the busiest of all asset classes, with leveraged loans and high-yield bond issuance increasing by 94% and 85%, respectively. Now, typically, it's unusual for both leveraged loans and high-yield bonds to experience this amount of growth in the same quarter. The issuers tend to favor one type of debt type over the other, depending on their outlook. But attractive refinancing opportunities, as well as improving M&A activity, supported both fixed and floating rate issuance this quarter. And additionally, CLO market rebounded from a quiet 2020 as issuers refinanced their existing securitizations to take advantage of tighter spreads. Now, the strength in the leveraged finance issuance in the first quarter stemmed primarily from an improving outlook for corporate defaults. In January, the global speculative grade default rate was expected to end the year at just under 5%. And by early April, this outlook had improved to approximately 3% to 4%. That was due to a more positive economic backdrop. And these lower default expectations led to tighter credit spreads and keeping the overall cost of borrowing low despite an increase in benchmark rates. And this created an attractive environment for opportunistic refinancing and M&A-driven issuance. We're often asked about what informs our longer-term views of issuance. And we've shown a version of this graph on the slide before. In fact, I think I showed it our 2018 investor day. And as you can see, the data shows that historically GDP is one of the best predictive indicators of issuance over the longer term. And while this relationship may not hold in any one year, there is a clear correlation that issuance tracks GDP growth over time. And we expect this to remain true going forward. Now, that makes intuitive sense as healthy economies promote business growth and capital investment and also provides a positive backdrop for our business over the medium term. Focusing on 2021, we still expect overall issuance to decline, albeit modestly, from 2020's pandemic-related surge, and it will still be above the prior five-year average. Investment-grade issuance, which grew the most in 2020, is expected to face the toughest comparable. However, with GDP expanding, segments of the debt market most sensitive to improvements in the economy, like leveraged loans and structured finance, are expected to show corresponding strength. And Mark will provide some further details on our issuance forecast by asset class later in the call. Now, moving to MA, we're driving robust organic growth across multiple products and solutions. Credit research and data feeds delivered low double-digit growth, driven by continued demand for ratings data feeds, coupled with strong retention rates. KYC and compliance is growing in line with our mid-20% expectations, and that's led by our compliance catalyst and supply chain solutions. And we're continuing to grow in insurance and asset management. In addition to our IFRS 17 offerings, We're expanding our footprint with the buy side, benefiting from the enhanced solution suite that we obtained as part of our risk-first acquisition in 2019. In keeping with the theme of collaborating and modernizing and innovating that I discussed on the fourth quarter earnings call, I want to highlight a few recent examples that speak to how we're meeting our customers' evolving needs. Starting with ESG and climate, we're integrating ESG across all aspects of the business. In the first quarter, we launched a tool that provides climate-adjusted credit scores for approximately 37,000 public companies. In addition, building on our partnership with Euronext, our data powered the launch of their CAC 40 ESG index. In MIS, our analysts are enhancing our ESG analysis with the launch of ESG scores and tools, and that includes our proprietary ESG credit impact score that identifies the impact of ESG factors on a credit rating. And our first batch of scores now cover the entire rated sovereign universe. On prior earnings calls, we've discussed how we're integrating artificial intelligence and machine learning and natural language processing into our products to make them better and faster. One example is QuickSpread. It's our automated financial spreading tool that's now used by scores of banks around the globe. This tool has helped customers substantially reduce both the time and cost of spent spreading financial statements, and it's won multiple awards, including Best AI Technology Initiative at the 2020 American Financial Technology Awards. Another area where we're using innovative technology is sentiment analysis and scoring capabilities. Our customers tell us they need our help with early warning indicators that filter the signal from the noise. We're delivering monitoring tools that analyze news stories to understand sentiment across thousands of media outlets, and we're seeing increased interest in this use case across our customer base. Our acquisition of Acquire Media has further enhanced our efforts in this space, and we'll touch on that more in a moment. In addition to innovating for our customers, we're modernizing our own technology infrastructure to deliver greater operational efficiency and agility. Just last week, we were proud to be recognized with an honorable mention in the Red Hat Innovation Awards for the open source platform and agile process that we implemented within the rating agency. Now, turning to our recent acquisitions, we're making some good progress integrating and leveraging the capabilities that we acquired to enhance our offerings. For example, we integrated information and screening capabilities into our KYC solutions, specifically with our flagship private company database known as Orbis. We're giving customers curated information on individuals and companies in one place and dramatically improving their ability to make better KYC decisions and saving countless hours in the process. And as I mentioned a few moments ago, the AcquireMedia acquisition has accelerated our ability to generate scores that interpret the sentiment implied in news stories. We've already integrated the content from AcquireMedia into multiple products. That's improving our customers' ability to put facts into context, to focus their monitoring efforts and consider risks in a more holistic way. In commercial real estate, we've combined Reese and Catalyst to create Moody's Commercial Real Estate Solutions. We're developing new tools that bring together curated data and world-class analytics to support commercial real estate professionals with more integrated lending and investing solutions which are on track to launch this summer. And finally, We're pairing ZM Financial's asset and liability management solutions and loan pricing tools with MA's existing CISL capital planning and balance sheet software to help customers understand risks and opportunities across their treasury, accounting, and financial planning departments. And with that, I'll now turn the call over to Mark to provide further details on Moody's first quarter results, as well as an update on our outlook for 2021. Thank you, Rob.
spk07: In the first quarter, MIS achieved noteworthy results in a strong execution, robust credit activity, and favorable issuance mix contributed to revenue growth of 30% compared to a 23% increase in global MIS-rated issuance. Corporate finance was the largest contributor, growing 34%, while issuance grew 37%. This was primarily driven by leveraged finance issuers both opportunistically refinancing debt and funding M&A transactions. In contrast, and in line with our expectations, investment-grade activity moderated as compared to the prior year period. The financial institutions and public project and infrastructure finance lines of business also benefited from strong opportunistic refinancing led by infrequent issuers. Revenues in these sectors grew by approximately 30% year-over-year, despite issuance growth in the single-digit percent range. Instructed finance, revenue grew 21% as tighter spreads drove elevated CLO refinancing and new CMBS activity. MIS's adjusted operating margin expanded 720 basis points to 67.7%. This was enabled by strong revenue growth coupled with ongoing cost efficiency initiatives and lower bad debt reserves, partially offset by higher incentive compensation accruals. Moving to MA, first quarter revenue grew 14% or 10% on an organic basis. RD&A's revenue rose 17% or 12% organically as KYC and compliance solutions delivered mid-20% organic growth. and customer retention rates remained high. ERS's revenue growth of 5% or 4% on organic basis led by a 15% increase in recurring revenue driven by insurance products as well as credit assessment and loan origination solutions. Recurring revenue growth offset the expected decline in one-time revenue as we continue our strategic shift towards more subscription-based products. MA's adjusted operating margin expanded 360 basis points to 32.9%. Strong top-line growth in execution of our in-flight restructuring program enabled additional operating leverage in the quarter. As Rob mentioned earlier in the call, Moody's adjusted diluted EPS grew by almost 50% to $4.06, primarily driven by our extraordinary performance in the quarter. Growth in operating income contributed approximately 94 cents to adjusted diluted EPS, with 85 cents attributed to MIS. Additionally, non-operating activities, including the resolution of uncertain tax positions, as well as the release of associated accrued interest, provided a 28 cent benefit. Turning to Moody's full year 2021 guidance. Moody's outlook for 2021 is based on assumptions regarding many geopolitical conditions, macroeconomic and capital market factors. These include, but are not limited to, the impact of the COVID-19 pandemic, responses by governments, regulators, businesses and individuals, as well as the effect on interest rates, foreign currency exchange rates, capital markets liquidity and activity in different sectors of the debt market. The outlook also reflects assumptions regarding general economic conditions, the company's own operations and personnel, and additional items as detailed in the earnings release. Our full-year 2021 guidance is underpinned by the following macro assumptions. 2021 U.S. and Euro area GDP will rise to a range of 6% to 7% and 3.5% to 4.5% respectively. The U.S. unemployment rate will decline to between 5% and 6% by year-end, and benchmark interest rates will remain low, with U.S. high-yield spreads remaining below approximately 450 basis points. Finally, the global high-yield default rate is predicted to decline to a range of 3% to 4% by year-end. Our guidance assumes foreign currency translation and end-of-quarter exchange rates Specifically, our forecast for the remainder of 2021 reflects U.S. exchange rates for the British pound of $1.38 and $1.18 for the euro. These assumptions are subject to uncertainty, and results for the year could differ materially from our current outlook. Following our first quarter performance, we are raising our full year 2021 guidance for most metrics as compared to the guidance provided on February the 12th. We now anticipate that Moody's revenue will increase in the high single-digit percent range. As we strategically manage our expense base, we are maintaining our expectations for cost growth in the mid-single-digit percent range. Given our improved revenue outlook and expense stability, we project Moody's adjusted operating margin to be approximately 50%. Our updated interest expense guidance is in the range of $160 to $180 million, and we reaffirm the effective tax rate projection of 20% to 22%. We raised and narrowed our diluted and adjusted diluted EPS guidance ranges to $10.40 to $10.70 and $11 to $11.30, respectively. Our free cash flow forecast is now expected to be between $2.1 and $2.2 billion, and we continue to anticipate full-year share repurchases of approximately $1.5 billion, subject to available cash market conditions and other ongoing capital allocation decisions. For a complete list of our guidance, please refer to Table 12 of our earnings release. Within MIS, we project full-year global-rated issuance to decline in the low single-digit percent range, up from our previous guidance of a high single-digit percent decline. Our guidance for high-yield bonds and leverage loans has been raised to approximately flat and up 55% respectively, as we expect robust issuance in leverage finance to persist into the second quarter, supported by low borrowing costs and sustained M&A activity. However, we anticipate supply to return to more normalized levels in the second half of 2021, as we believe many issuers will have fulfilled the majority of their funding needs earlier in the year. Full-year investment grade supply is still expected to decrease by approximately 30% following a very active prior calendar year. We forecast issuance from financial institutions to be approximately flat. We have not factored the proposed U.S. infrastructure bill into our assumptions regarding public project and infrastructure finance issuance, which we anticipate will decline approximately 15%. Depending on the contents of the final legislation, if it were to pass, it could improve our expectations for the balance of the year. The expected increase in leveraged loan supply positively impacts new CLO creation. As a result, we predict structured finance issuance will increase 40%. In line with the surge in leveraged finance activity in the first quarter, we're increasing our guidance for new mandates in 2021 to be in the range of 800 to 850. We have updated MIS's revenue outlook to reflect stronger than anticipated first quarter performance. We now estimate that MIS's revenue will increase in the mid-single digit percent range, up from our prior guidance of approximately flat. We're also raising MIS's adjusted operating margin guidance to approximately 61%. For MA revenue, we are maintaining our forecast of an increase in the low double digit percent range. This is due to strong demand for our subscription-based products, stable customer retention rates, favorable foreign exchange rates, and a 2% to 3% percentage point tailwind from recent acquisitions. MA's adjusted operating margin guidance remains at approximately 30% as we expect underlying margin expansion to be partly tempered by an acceleration in strategic investments in 2021. Since we are maintaining our full year 2021 expense guidance in the mid-single-digit percent range, I would like to provide additional clarity and insight regarding our approach to expense management. In the first quarter, operating expenses rose 7% over the prior year period. Of this reported growth, approximately 4 percentage points were attributed to recent acquisitions and the unfavorable impact of movements in foreign currency exchange rates. Ongoing expense discipline continues to reinforce our operating leverage. As noted on last quarter's earnings call, by generating upwards of $80 million in cost efficiencies this year, we are able to self-fund our strategic priorities and reinvest back into the business. The majority of these strategic investments will occur in the second half of 2021. Before turning the call back over to Rob, I'd like to highlight a few key takeaways First, we successfully executed our strategic and business objectives against the backdrop of robust issuance, delivering meaningful results this quarter across both operating segments. Second, we are acutely focused on innovation and integration of new features into our products and solutions to meet our customers' evolving needs. Third, We are maintaining expense discipline through ongoing cost efficiency initiatives, which enable us to both reinvest in our key strategic priorities and expand our operating margins. And finally, we are pleased to revise upward our full year 2021 outlook as we drive operating leverage and create further opportunities for growth. And with that, let me turn the call back over to Rob.
spk06: Thanks, Mark. This concludes our prepared remarks, and Mark and I would be pleased to take your questions. Operator?
spk02: Thank you. If you would like to ask a question, please dial star 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset and make sure your mute function is turned off so that your signal reaches our equipment. We will ask that you please limit yourself to one question with a brief follow-up. You are then welcome to rejoin the queue for any additional questions you may have. Again, that is star one to ask a question. Our first question comes from Tony Kaplan with Morgan Stanley.
spk00: Thanks so much. You know, first quarter came in a lot higher than what I was expecting, driven by MIS. But when I look at the guide for the full year, I guess the raise is a little bit lower than what I would have expected, just given the strength in the quarter. And I know we're going to comp the strongest quarter in 2Q. So are you just waiting for that to be behind you? Or are your expectations for the rest of the year lower now than they were? Or are you just being conservative? Because I know we have a lot of positives ahead of us with strong GDP, et cetera. Thanks.
spk07: Tony, good morning. We have increased our outlook for the full year 2021 adjusted EPS to approximately $11.15 at the midpoint of the guidance range. That's around 6% higher than the guidance we gave on EPS back in February. The primary driver of that increase is really a reflection of the actual and the expected strong operating performance of MIS, and I'd call that around six percentage points. We also had small tailwinds of around 1% from some of the non-operating factors, like the settlement of the outstanding tax matter, which is a little bit more favorable than expected. And that's offset in part by FX. We're certainly happy to go into the issuance outlook and our views there as separately.
spk00: Okay, great. And just as my follow-up, you know, MIS margins were the highest ever, I believe, and not by an insignificant amount. You're guiding to 61% in the segment for the year or so. having a hard time getting down to that level after the 68 in one queue so just maybe help us drill down into the drivers of the lower margin for the rest of the year thanks we are guiding to your point to approximately a 61 for the mis margin for the full year
spk07: And that really means, if you put the 67.7% in the context of that, that you would expect a year to go, on average, margin for MIS of somewhere between 57% and 58%. And that's primarily driven by our year-to-go expectation for issuance activity, which would be down in the low double digits, given our full year guide of low single digits for issuance. And that, in turn, if I look at the underlying drivers, could be driven by tough comparables compared to the year-ago period, pull forward that we saw in the first quarter, a little bit of the sorted pattern. And, again, we're very happy to go into some of those drivers in more detail as the call goes on.
spk02: We will take our next question from Kenneth McVey with Credit Suisse.
spk08: Great. Thanks so much, and congratulations. Hey, I wonder if you could give us just a little context, you know, on the insurance and commercial real estate opportunities specifically within M&A. You know, obviously there's been some reinvestment back into the business, but, you know, do you balance the reinvestment versus the base mortgage exchanges? you know, obviously the opportunity that insurance and commercial programs may give you within an MA, and certainly to the entire enterprise.
spk06: Yeah, Kenneth, this is Rob. Yeah, thanks a bunch. Good to have you on the call. Let me talk about each intern here. So let's start with commercial real estate. It's really a major asset class for our financial institution and investor customers. And you know, what we're hearing from customers is that they're looking for the integration of just a wide range of data and analytics to give them better insights and make better decisions, especially given all the underlying, you know, kind of turbulence in the market. So, you know, we acquired Reese a few years back to give us some market and property-level data that we could integrate into our offerings for our customers. And Given the importance of that data to both lending and investing decision-making, we then bought Catalyst, and that helped us further build out our national property coverage. By the way, we're very pleased with how Catalyst is, and we're building out those data capabilities in new markets even a little bit faster than than we had anticipated. So you put that together along with our in-house products. We've got something called commercial mortgage metrics. And all of that forms what we call our CRE solutions offering. I touched on it in our prepared remarks. And as part of that broader CRE solution suite, We're building out lending and portfolio construction and management tools that really address some of these customer pain points in the industry. Like I said, our customers want more content integration. They also want a more digitized and automated and really connected approach that reduces the underwriting time and enhances the borrower experience. On commercial real estate, I'd say, you know, we're making some investments. We're encouraged by our progress around product development and the early receptivity we're getting from our customers. Like I said, it's a big asset class for them. So let me turn to insurance just for a moment. And, you know, we've called this out on a few of our prior calls, and we're seeing some very nice growth in our insurance business. The core driver of that is around insurers seeking our solutions to help them with this IFRS 17 compliance. And Our acquisition of a company called GGY a few years ago, it really enhanced our capabilities in this area because it gave us an actuarial software solution that's widely used by insurers for everything ranging from pricing, reserving, asset liability management, financial modeling, hedging, and so on. So it's part of the kind of core risk processes at these insurance companies. And over the years, we've been able to build out our suite of offerings to insurance companies. That includes, you know, ALM, regulatory reporting, you know, business analytics. And, you know, our view is that our risk assessment capabilities in areas like credit, like commercial real estate, you know, ESG and climate are all offering us further opportunities to deliver really even greater value to our insurance customers and give us runway for some future growth. So, we feel good about both of those opportunities.
spk08: That's super helpful, Robin. Just within the context of that, maybe you and Mark, maybe talk about just, you know, the M&A opportunity. Obviously, there's been a couple acquisitions across the sector. You've got a ton of capital. How are you thinking about consolidation within the sector, whether it's within MIAS or just across MA? Any thoughts on that would help as well, just given some of the activity in the space?
spk06: Sure. I'm sure you can appreciate we can't comment on potential acquisitions or divestitures, but I can give you some insight into generally how we're thinking about M&A. And we're really looking for assets that I think of as on strategy and are going to advance you know, our risk assessment capabilities that we talk a lot about. So, you know, you think about our customers' needs are changing, right, around a wider range of risks. So we're really focused on high-value data and analytics that are critical to customer workflows, and helping them, again, with a wider range of risks. Historically, we've been very focused on credit, and our customers are asking us for help with more. So, we've been pretty clear about the areas where we're investing and building, and we're trying to get scaled businesses. That includes KYC, and I'm going to say even more broadly, financial crime. private company data, a lot of demand for private company data, commercial real estate data analytics I just talked about, and, you know, of course, ESG and climate. And so that's really kind of how I think about content. And maybe just for a moment, how I think about distribution, because I think it all ties into how we think about acquisitions. You may have heard us talk in the past about thinking about our ERS business as what we call kind of a chassis, right, a distribution platform for our risk content to financial institutions. And if you think about it, we've got a huge customer base of banks and increasingly insurance companies that are using our SaaS solutions. And it's a great platform for up-tiering our relationships, and as I said, helping our customers with a wider range of needs. So there's some further opportunities to continue to build out really our comprehensive offering for banks and increasingly insurance companies, and that's both organically and inorganically, and all just building on that installed customer base and growth in the space. So hopefully that gives you a sense.
spk02: We will take our next question from Judah Sokol with J.P. Morgan.
spk09: Hi. Thank you for taking my question. From the first question, I was hoping to take another stab at Tony's question. As you just look at the rest of the year following the first quarter, how did your outlook for quarters two through four compare to how you were thinking about quarters two through four when you gave guidance in February?
spk06: Yeah, Judah, this is Rob. Maybe I'll kind of start with, you know, issuance because that's an important foundational piece here. we've raised our issuance outlook given the strength of the first quarter with global issuance up 23%. But, you know, let me peel the onion back a little bit in terms of the rest of the year. So, you know, I think Tony acknowledged in her question that, you know, Q220 was when we saw that huge surge of investment grade, infrastructure, sub-sovereign issuance. And those three asset classes were up almost 90%. in Q2, that's sequentially, not year over year. And investment grade was by far the biggest contributor. So with Q1 issuance up 23%, we think that Q2 is going to be inevitably down off this very tough comp. Somewhere in the same zip code that Q1 was up is kind of generally our thinking. Mark mentioned this sawtooth pattern. We do think we're going to experience a slightly slower summer. In the past, we used to talk about this sawtooth pattern where we'd see a little bit slower third quarter. So we do expect a modest decline in the third quarter off of what, remember, was also a record quarter for issuance in Q3 last year. and then growth in the fourth quarter. And that implies that issuance for the second half of this year is going to be down modestly off of the second half of last year.
spk07: And then if I were to translate the issuance outlook that Rob spoke to at a high level on an MIS revenue perspective, you could think about Q2 and Q3 being down in the mid-single-digit decline range, and then Q4 being approximately flat year-over-year for revenues.
spk09: Oh, that was really helpful. Thank you for that cadence visibility. Maybe, you know, I guess as a follow-up, any ability to do something similar or just give us a little bit of perspective in terms of pace through the year as far as margins go and also as far as MA goes, that would be appreciated. Thank you.
spk07: Judah, thank you. I'll start a little bit with MCO, and then I'll work my way through to MA. MA's, sorry, MCO's adjusted operating margin for the quarter was 57.1%. On a trailing 12-month basis, that would equate to 51.6%. And so if I think about attributing that to the approximately 50% guidance that we've given for the year, you could think about really four primary buckets, the first being operating leverage, which is positive creation of margin in a range of around 100 basis points, and that's from things like scalable revenue growth, the benefit of the incentive accrual resets, slightly lower new bad debts expense this time around, offset by the expectation of higher travel and entertainment expenses as we invest in further interactions with our customers of around 50 bps, offset in addition by acquisitions of around 50 bps as well, And then finally, and most importantly, sort of those strategic investments we want to make back into the business in the second half of the year into ESG, KYC, CRE, et cetera. And that's probably an offset of around 160. That's at the MCO level. If I step back for a second and I look at MA, you know, the Q1 margin expansion was really led by very strong 14% reported revenue growth. I'd also say that expenses for MA were lower, primarily related to our announced restructuring at the end of 2020. And that's part of our overall expense management that creates those opportunities to reinvest back into the future of our business. MA is certainly taking the opportunity in 2021 to accelerate the investments in several of our key strategic priorities in the CRE and KYC space. And as we ramp up those investments, we expect that our margin will remain in line with that 30% full-year guidance. If I put just a few numbers around that, you could think about on a full-year basis for MA, underlying margin expansion of around 390 bps, offset maybe by two large categories, those strategic investments of around 240 bps in MA and then acquisitions of around 130 bps.
spk02: We'll take our next question from Simon Critch with Atlantic Equity.
spk05: Hi, I appreciate you taking my question. I was wondering if we could just dig a little bit into the breakdown of MA's organic growth this quarter. I was wondering if you could break down what we saw from the acquisitions you had, the previous acquisition of Bureau Van Dyck and that KYC complex, as well as the other key drivers of that growth.
spk06: Yes, Simon, happy to do that. Obviously, we've got some very steady and good growth in MA, and there's a few different drivers of that. First, credit research and data feeds. There's just continued demand for those ratings data feeds and some very high retention rates. for the research and data, and that I think reflects the importance of the content when you've got these times of, you know, real market stress and uncertainty. You touched on KYC and compliance. You know, there's demand for both greater precision as well as automation of all this customer vetting. And we're also seeing some heightened customer focus on now using those kinds of tools for understanding things like supply chain resiliency and the risk profile across not only customer base but supply chains. We actually had a major U.S. corporate recently who subscribed to our Orbis data to help them really better assess the regulatory and reputational risks, like I said, of both their customers but also their suppliers. And then you've got our ERS SaaS products, and Mark touched on it in the prepared remarks. Strong recurring revenue growth, you know, 15% across all three areas of ERS, and that includes credit assessment and origination, insurance, and risk and finance. So, you know, we've got a – and we've also got an active product development pipeline, and, you know, I think we're going to continue to have opportunities in these areas.
spk05: Okay, thanks. And so did I hear that the KYC portion of your business is growing in that mid-20s kind of pace at this point? Is that right?
spk06: That's exactly right. In line with our expectations that we talked about on the prior call.
spk05: Okay. Thanks. And I was wondering for you to follow up, would you be able to just give us an update on your Chinese strategy, strategy in China, and particularly in terms of the current status of that market and what you're seeing right now and what CCXI is actually allowed to do at this point.
spk06: So the license suspension at CCXI is over. And, you know, as I think you know, CCXI continues to be the leading domestic rating agency in China. And we're also continuing to have a very strong position in the cross-border rating markets. As we think about China, so we continue to address the domestic market through our position in CCXI, the cross-border market opportunity through MIS. Like I said, we feel like we're very well positioned in both. And then there are some emerging opportunities in China that we've talked about a little bit in the past. We've made some investments there to help us with our positioning. One area that we see a real opportunity in China is around ESG, but more specifically, I'd say green finance and sustainable finance. We made an investment several years ago in a small company called Shentau. Think of that as kind of the same strategy that we employed with our investment in CCXI years ago, and we're working with Shentau to help the market in its evolution around sustainable finance. We also made an investment in a company called Neotech. which uses some very sophisticated technology to capture unstructured data around both ESG as well as KYC. So that, you know, again, two focus areas for us. So, you know, we're looking at how we can start to address the market beyond just the, you know, what I'd say is the core ratings business as well as our core business internet.
spk02: Our next question comes from Alex Cram with UBS.
spk03: Yes, hello, everyone. Apologies in advance for coming back to the same topics that was asked a couple of times on MIS Outlook, but I don't think you directly answered a couple of those questions. So thinking about the outlook change again on the MIS top line, and I know you don't give a quarterly forecast, but it's it does appear if you're thinking about a typical seasonality for the year, right? Obviously, the comments you just gave a couple of questions ago with a down and 3Q and 2Q and 3Q obviously makes a lot of sense. But in terms of how the outlook for the remainder of the year has changed from what you said at the beginning of the year, maybe you can just explicitly say if you changed anything or if it's unchanged, because it does look like from a seasonal perspective, you got a little bit more conservative. And if so, the question would be obviously why, given the economic backdrop and everything else improving. So sorry to beat the dead horse, but I don't think you've explicitly addressed it. Thanks.
spk06: All right, Alex, you're keeping us honest here. No problem. You know, look, I do think it's true that we, in thinking about our issuance outlook, we have factored in the consideration around the potential for some pull forward out of the second half of the year into the first quarter and first part of the year. And that was, you know, as you saw, benchmark rates kind of tick up in a surge of issuance. And, Alex, maybe let me anticipate a question also and kind of get to what might be the upside and downside to this, because I think that also kind of gets at where you're headed here. You know, a lot of times we talk about, I guess I use the phrase, you know, puts and takes, but I guess I would say there are probably more puts than there are takes. just given what we're seeing right at this moment. So, you know, that I think means there's some factors that could contribute to some upside to the outlook. So, you know, I think this quarter, second quarter, is really a key one to watch because, you know, we talked about second quarter 2020 being a really tough comparable with the surge in issuance, especially from investment grade. But if the strength of the leveraged finance markets continues through the quarter and makes up some of that liquidity-driven issuance from the second quarter of last year, and then on top of it contributes to the positive mix from a revenue standpoint, that could provide some upside. Like I said, we've been trying to think about pull forward. You could see pull forward even from, depending on what happens with rates and spreads, you could see pull forward from next year. Faster recovery and economic growth really outside of the U.S. could provide some upside. And then, you know, Mark touched on it, but you know, potentially around infrastructure, depending on what kind of, you know, ultimately what kind of bill we see, you know, that might provide a boost to infrastructure issuance and municipal issuance the back half of the year. You know, on the downside, you know, we've got to watch mix. And, you know, any kind of escalation of, you know, a third wave of infections that you know, that ends up impacting the global markets. So, that's really what's on our minds.
spk03: Male Speaker 1 Very fair. Thank you for that. And then just maybe for Mark, and this is a quick one, on the expense side, I think you mentioned incentives higher, but I think that was a very easy comp last year, so not a surprise. So, maybe just if you haven't mentioned it yet, what was the incentive comp for the year, but then most importantly, how do you think about incentive comp for the remainder of the year because again it does look like you had such a strong first quarter but by my by my thinking you you probably under accrued a little bit on incentive comp if if the year continues to to play out as as we all expect alex uh thanks for the question and uh good morning
spk07: The incentive comp accrual process, very simplistically that we follow, is roughly 25% of the full year expected incentive comp payout, primarily because we're in the first quarter. So we're really looking at roughly a quarter of the full year expected amount. In the first quarter itself, we accrued for a $61 million in incentive comp. And looking forward to the next three quarters, you would expect or we expect to see around $60 million per quarter due to the improved full-year revenue and margin outlook. And that's slightly higher than what we had provided in February, which was a range for between $50 and $60 million. So certainly we are accruing appropriately in the first quarter.
spk03: All right, now that clears it up. Thank you.
spk02: And we will take our next question from George Tong with Goldman Sachs.
spk04: hi thanks good morning i wanted to follow up on the earlier question on pull forward activity with that issuance can you discuss how much of the upside surprise versus the guide was in fact reflective of refinancing pull forward compared to say an improvement in macro or balance sheet pre-funding and what the implications could be for issuance across the various categories over the remainder of the year
spk07: George, maybe let me start here just by sharing a little bit about what we're hearing from the banks in terms of their issuance outlook, because I think that will help provide additional context to the comments that Rob made a little bit earlier. If I start with the U.S. investment grade, although the year-to-date activity was below the prior year period, we heard from the banks that they noted that issuance in the first quarter was still very robust. I mean, that was driven by factors we've already discussed, imminent activity, near historically tight spread, etc., The banks did also highlight that they thought that borrowers likely opportunistically pulled forward some of their 2021 funding plans to take advantage of the favorable rates that they saw this quarter, especially if you saw that interim or mid-quarter uptick in rates themselves. The banks overall expected U.S. investment grade issuance to decline around 30% over the course of the year, and that's very much in line with our forecast for that line of business. On the U.S. spec grade side, tight spreads, low default rates certainly drove the impressive start to the year for high-yield bond and leverage loan issuance. The volume year-to-date for both of those categories has significantly surpassed the prior year period. And so the outlook that we're hearing from the banks here is that they expect the speculative grade market to slow. as many issuers, at least in their early perception of the year, have completed their refinancing needs in the first quarter. And we've taken that view into consideration in our applicant for U.S. spec grade. On Euro investment grade, there was The relatively light supply in the quarter as issuers did enter 2021, to your point, with strong cash balances, right? We saw a lot of reverse Yankee issuance as a focus throughout the first quarter. Again, the same factors, favorable M&A backdrop, low rates, et cetera, could also support activity later on in the year. And then the banks here forecast European investment grade issuance to be down in the mid-teens percent range. And then finally, on the European SPIC rate side, Similar to the U.S., issuance volume year-to-date did surpass the prior year period, but that was driven more by a pickup in some of the private equity and buyout activity as issuers were looking to take advantage of the low-rate environment. And again, the banks here expect refinancing considerations to remain positive. I hope that provides sort of additional market color that you were looking for.
spk04: Yeah, well, that's very helpful. And just to follow up, and you touched on this a little bit earlier, interest rates are moving higher, but certainly the macro environment is also getting stronger. Can you just perhaps talk a little bit more about the puts and takes around how these factors will influence and drive issuance activity?
spk06: Yeah, George, this is Rob. I think our general view on this is that, you know, we touched on in the prepared remarks, you know, it's economic growth and You know, that really is what provides the strongest driver for our business over the medium and long term, right? It's about business investment. It's about M&A activity. As we think about rates, obviously rates are a factor. They were certainly a factor last year. But it's the – I think it's really the pace of rate increases and whether the rate increases are accompanied by economic growth and whether they're anticipated by the market. So, if you think back to the taper tantrum back in, what, 2013, that was where the market was surprised. It was kind of a rapid increase in rates, and you saw a real pullback in issuance. But To the extent that the Fed is able to be transparent about this, as we see very strong economic growth, we think that this will ultimately be manageable from an issuance perspective.
spk04: Very helpful. Thank you.
spk02: Our next question comes from Craig Huber with Huber Research Partners.
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