This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk02: Good day, everyone, and welcome to the Moody's Corporation second 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 the conference up for question and answers following the presentation. I will now turn the call over to Shivani Kok, head of investor relations.
spk00: Please go ahead. Thank you. Good morning and thank you for joining us to discuss Moody's second quarter 2021 results and our revised outlook for full year 2021. I'm Shivani Kark, Head of Investor Relations. This morning, Moody's released its results for the second 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 Sauber, 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 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, 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 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 Rob Fowler.
spk08: Thanks, Shivani, and good morning, and thanks to everyone for joining today's call. I'm going to begin by providing a general update on the business, including Goody's second quarter 2021 financial results. And following my commentary, Mark Kay will provide further details on our second quarter 2021 performance, as well as our revised 2021 outlook. And after our prepared remarks, as always, we'll be happy to take your questions. Rudy's delivered strong financial results in the second quarter of 2021. Revenue growth of 8% and an increase in adjusted diluted EPS of 15% highlighted the robust demand for our best-in-class integrated risk assessment offerings. Favorable market conditions and heightened M&A activity provided the backdrop for sustained leveraged finance issuance in the second quarter, and it supported growth in our ratings business. The ongoing expansion of our risk assessment solutions combined with strong retention rates drove MA's significant recurring revenue growth. Top-line performance as well as expense discipline contributed to adjusted operating margin expansion, and our cost-efficiency initiatives continue to fund key investments in product innovation that should support ongoing growth. As a result of our solid execution in the quarter, we've revised our full-year 2021 guidance and now forecast Moody's revenue to grow in the low double-digit percent range. Additionally, we've raised our adjusted diluted EPS guidance to be in the range of $11.55 to $11.85. Now, turning to second quarter results, MIS revenue grew 4%. That's despite the tough prior year comparable, while MA achieved its highest ever quarterly revenue, up 15% from last year. On an organic constant currency basis, MA revenue increased 8%. Rudy's adjusted operating income rose 12% to $861 million, and the adjusted operating margin expanded 200 basis points to 55.4%. adjusted diluted EPS was $3.22, up 15%. On the last earnings call, I highlighted that issuance volumes reached their highest level in over a decade. This quarter, as anticipated, investment-grade activity declined, as many issuers had already substantially fulfilled their funding needs in recent quarters. Although overall issuance declined by 16%, as you can see on the chart, second quarter issuance was still well above the historical 10-year average as shown on the blue line. While the growth in leveraged loans outpaced high yield bonds, the demand that we saw earlier this year from both asset classes persisted, albeit a bit slower sequentially. We also saw increased momentum in the CLO market driven by opportunistic refinancing as spreads remained tight. We frequently comment on our revenue relative to issuance levels, which relates to issuance mix. And in the second quarter, transactional MIS revenue grew 3%, while MIS-rated issuance declined 16%. And this chart provides an illustration of our second quarter issuance and revenue mix by asset class. So, for example, the dark green bubble on the bottom left corner represents investment-grade issuance. And you can see that issuance was down 68% in the second quarter versus the prior year. However, leveraged loans, which has a greater proportion of issuers on per-issuance or pay-as-you-go commercial programs, represented by the dark blue bubble on the far right, saw issuance up over 200%. And that significantly contributed to this quarter's favorable issuance mix. Similar to last quarter, favorable market conditions led issuers to access the debt markets for a variety of reasons. Credit spreads tightened as default rates trended lower, keeping the overall cost of debt low and allowing issuers to opportunistically refinance existing debt. And as economies started to recover and equity markets continued their strong run, we saw an acceleration of M&A as companies used a combination of cash balances and debt financing to acquire growth and position businesses for the post-pandemic economy. We expect this constructive environment to persist, providing issuers further opportunities to tap the markets. That said, we forecast activity for the remainder of 2021 to moderate from historical highs that we saw in the first half of this year. And Mark's going to go into further detail on our issuance guidance by asset class later in the call. Now, let's turn to MA. MA's growing recurring revenue base and strong retention rates demonstrate the market demand for our products. Our emphasis on renewable sales has increased the proportion of recurring revenue by four percentage points in the trailing 12-month period to 92%. We continue to see significant opportunities in know-your-customer and financial crime compliance solutions, as well as areas like insurance and asset management, both of which contributed to recurring revenue growth along with research and data feeds. We briefly discussed some of these businesses on the first quarter 2021 earnings call, And I want to further spotlight these two high growth areas. I'll start by highlighting a few key trends in the KYC market. First, as I've mentioned before, the pandemic has accelerated digital transformation in know your customer and customer onboarding. Second, regulators are requiring organizations to know more about their customers and suppliers than ever before. And finally, financial crime continues to become more sophisticated, which requires advanced detection and monitoring capabilities. Our industry-leading product offerings and solutions leverage information on hundreds of millions of entities and ownership structures, as well as detailed profiles on over 13 million politically exposed individuals. Using artificial intelligence, we combine our world-class data sets to map and analyze adverse media, together generating insights and identifying risks at a scale, speed, and precision that is difficult for others to match, and creating a compelling solution that is unique to Moody's and enables our customers to make better and faster decisions to combat financial crime. Similar to our Know Your Customer and Financial Crime compliance products, our expanding offerings for insurers and asset managers are contributing to revenue growth for MA and are a core part of our integrated risk assessment strategy. We initially entered the insurance customer segment by providing market-leading regulatory compliance software. We then moved into actuarial models to support global life insurers enabled by our acquisition of GGUI. We further expanded our capabilities to include asset and liability management and balance sheet solutions, portfolio analytics, and other tools to help address new accounting standards such as IFRS 17 and CECL. Now the data, analytics, and domain expertise from across our business enables us to provide insurers and asset managers with more comprehensive solutions to manage a wider set of risks. As the industry continues to evolve, our holistic approach allows us to build on our existing position in the insurance space, while at the same time provide a broader range of increasingly important analytics and insights, such as climate risk scenarios. Together, this has contributed to our ability to deliver 20% organic revenue growth over the trailing 12 months in this segment. And we're excited about the opportunity ahead to serve new and growing risk assessment use cases for insurers and asset managers, leveraging our vast data sets and analytic capabilities. I've also talked a number of times about the importance of innovating and integrating our data and analytics across our product suite. For example, this quarter we launched an industry-first ESG score predictor. This offering combines Moody's ESG scoring methodology with company-specific data and predictive analytics to produce ESG scores for over 140 million small and medium-sized enterprises. These scores allow our customers to screen ESG risks on public and private companies to monitor portfolio and supply chain risk and are a great example of integrating our SME and ESG capabilities to address a key market need, which is ESG assessment to support sustainable supply chains. Now, staying on ESG for a moment, there's been a proliferation of climate-related financial disclosures over the past few years, and we recently partnered with the TCFD to provide insight on the quality of climate disclosures leveraging our natural language processing and machine learning tools. In MIS, we expanded our proprietary ESG credit impact score coverage to companies in a broader range of industries, as well as to U.S. states and cities. And we believe this is a unique offering that will allow investors to understand more clearly the impact of ESNG on any issuer's creditworthiness and enhances our credit ratings relevance and thought leadership. In MA, as a leading provider of Know Your Customer data and analytics, our customers are increasingly needing to comply with regulations relating to modern slavery and human trafficking within their supply chain. Working with various stakeholders, we added new AI-enabled features to help our customers screen and track previously undetected instances of human trafficking and modern slavery risk across their supplier base. providing an opportunity to further broaden our KYC customer base beyond financial institutions. I'm frequently asked how we are differentiating ourselves in the ESG space, so I thought I would take a minute to provide a few customer case studies that illustrate how we're combining our capabilities to meet the risk assessment needs of different customer types. In the Americas, we worked with a leading global commercial real estate firm to embed physical climate risk analysis into their global funds and client portfolios. The detail and rigor of our climate scores and data on individual properties allowed them to analyze thousands of properties in a more sophisticated and a more efficient way. In Europe, a large government agency requested our expertise on their green bond financing framework. Through our second-party opinion, we assessed that the proposed framework not only aligned with their climate and environmental agenda, but also with the 2021 Green Dawn principles. And since 2012, we've provided hundreds of second-party opinions across 30 countries, with over 60 second-party opinions provided just in the first half of this year. On to Asia, a large regional bank, also an existing MA customer, recently selected Moody's to create a robust framework to quantify the ESG and climate risk of customers' portfolios, leveraging our ESG assessments, ESG and climate insights and data, and our ESG score predictor that I just talked about. They also requested in-house training on how to integrate ESG and sustainability into their in-house risk management practices. So, it's a really great example of commercializing ESG and climate across our risk assessment offerings and our customer base. Before I turn it over to Mark, I also want to highlight a few examples of industry recognition that Moody's has received through the first half of this year. And these matter because they are independent third-party validation about the strength of our offerings across the firm. MIS was named Best Credit Rating Agency in multiple areas in the Global Capital Bond Awards and the Best Global Credit Rating Agency by Institutional Investor again. MIS was also ranked the number one securitization rating agency of the year in the Global Capital European Awards. As I noted, within MA, we are investing in our products to help our customers make better decisions on a wider range of risks. Industry participants recognize the pace of our innovation, awarding MA's credit sentiment score the best AI-based solution in the 2021 AI Breakthrough Awards. I'm pleased that we ranked number two on Chartas' Storm Top 50, demonstrating our position at the forefront of digital transformation in our sector. Moody's ESG Solutions also won the Climate Risk Solution of the Year Environmental Finances Sustainable Investment Awards. I'm also enormously proud that Moody's was named a Top 50 Company for Diversity by Diversity, Inc. And together, these recognitions underscore our commitments to customer delivery, innovation, sustainability, and diversity, equity, and inclusion, all of which are critical to our sustained success. And finally, I'm thrilled that Moody's joined the Fortune 500 earlier this quarter. This milestone is a testament to the dedication our employees have shown both to our customers and to one another. And on behalf of the executive team, I would like to thank all of our employees for their ongoing efforts, which contribute to these great recognitions. And with that, I'll now turn the call over to Mark to provide further details on Moody's second quarter results, as well as an update to our outlook for 2021.
spk06: Thank you, Rob. In the second quarter, MIS revenue increased 4%, supported by a 3% rise in transaction revenue, while global MIS-rated issuance declined 16%. As a result of favorable mix, corporate finance revenue declined 4% versus a 26% decrease in issuance. This was attributable to a surge in leveraged finance activity as U.S. and EMEA issuers opportunistically refinanced existing debt and funded M&A transactions. Investment-grade supply contracted compared to the prior year period, which had seen significant liquidity-driven financing caused by uncertainty over the unfolding pandemic. Financial institutions' revenue rose 6%, above the 1% increase in issuance. This is due to infrequent and mere bank issuers who sought to take advantage of the ongoing attractive rate environment. Revenue from public project and infrastructure finance declined 2%, compared to a 45% decrease in issuance. As increased non-U.S. project and infrastructure activity was offset by a reduction in U.S. infrastructure supply. Structured finance revenue increased 73%, supported by an over 200% growth in issuance. This is due to approximately 200 CLO deals this quarter, our highest on record, predominantly attributable to refinancing activity. In addition, CMBS formation further bolstered overall results. MIS's adjusted operating margin expanded 230 basis points to 66.3%. This was enabled by strong revenue growth coupled with operating efficiency initiatives and low illegal accruals, partially offset by higher reserves for 2021 incentive compensation. Moving to MA, the second quarter revenue rose 15% or 13% on an organic basis. In RDNA, revenue increased 19%. This is due to robust demand for KYC and compliance solutions, as well as strong customer retention rates and double-digit trailing 12-month sales growth in research and data feeds. For ERS, recurring revenue rose 16%, driving overall ERS growth to 5% or 3% organically. This reflected the demand for our insurance and asset management offerings, tools supporting upcoming accounting standards implementations, such as IFRS 17, as well as our SAS-based credit assessment and origination solutions. Additionally, ERS's recurring revenue comprised 88% of second quarter revenue, up 8 percentage points from the prior year period. EMA's adjusted operating margin expanded 310 basis points to 31.8%. This reflected the benefits of our recently completed restructuring program, which leads to the realization of incremental operating leverage in the quarter. 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 effects 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, as well as additional items detailed in the earnings release. Our full year 2021 guidance is underpinned by the following macro assumptions arising the 2021 U.S. and Euro area GDP to a range of 6% to 7% and 4% to 5% respectively. Benchmark interest rates will remain low with U.S. high yield spreads remaining below approximately 500 basis points. The U.S. unemployment rate will decline to under 5% by year end and the global high yield default rate will fall below 2% by year end. Our guidance also assumes foreign currency translation and end-of-quarter exchange rates. Specifically, our forecast for the balance of 2021 reflects U.S. exchange rates for the British pound of $1.38 and $1.19 for the euro. These assumptions are subject to uncertainty, and results for the year could differ materially from our current outlook. Following our better-than-anticipated second-quarter results, we are raising our full-year 2021 guidance across several metrics, We now forecast Moody's revenue to grow in the low double-digit percent range. We maintain our expectation for expenses to increase in the mid-single-digit percent range as we balance reinvesting the benefits from our cost-efficiency programs against the opportunity for future growth-oriented investments. Given our improved revenue outlook and expense stability, we now project Moody's adjusted operating margin to be approximately 51%. We raised the diluted and adjusted diluted EPS guidance ranges to $10.95 to $11.25 and $11.55 to $11.85, respectively. We increased our free cash flow forecast between $2.2 and $2.3 billion, and we anticipate full-year share repurchases to remain at approximately $1.5 billion, subject to available cash, market conditions, and other ongoing capital allocations. On prior earnings calls, Rob has detailed our integrated risk assessment strategy of which investments and acquisitions will play an important role. To that end, we are focused on M&A opportunities in our addressable markets that will advance our strategy. As always, we don't comment on any specific potential acquisitions or divestitures and we won't comment on any deals that we are pursuing. We have not included the impact of any future acquisitions in our current outlook, but obviously a transaction could affect our guidance depending on the terms of any deals that we are able to reach. Under our long-held capital allocation policy, we prioritize organic and inorganic investments into the business before returning any excess cash via share repurchases. For a complete list of our guidance, please refer to Table 12 of our earnings release. Within MIS, following a strong second quarter, we now project aggregate global rated issuance to grow in the low single-digit percent range, up from our previous guidance of a low single-digit percent decline. We would like to reiterate that our guidance, similar to last quarter, does not factor in any potential impacts from the U.S. Infrastructure Bill proposals. We are raising our issuance forecast for leveraged loans to be up approximately 75% and for high-yield bonds to be up approximately 25%. These are meaningful increases compared to our prior outlook of up 55% and approximately flat, respectively, and is the result of better-than-expected second-quarter issuance, as well as ongoing favorable refinancing conditions and heightened M&A activity. We expect that the increase in leverage loan supply will continue to drive CLO creation and are therefore also improving the structured issuance outlook to be up approximately 75%. Following a very active 2020, full-year investment grade supply is now forecast to decrease by approximately 40%. That's slightly lower than our previous guidance, which anticipated volumes to decline 30%. Also, after a surge in activity in the second quarter, we are increasing our guidance for new mandates to be in the range of 950 to 1050. While we believe favorable market conditions will persist, we forecast issuance to moderate in the second half of the year to more of a historic sort of pattern, as we believe many issuers will fulfill the majority of their funding needs early in the year, and that liquidity-driven issuance will return to pre-pandemic levels. With our improved issuance outlook, we now estimate that MIS's revenue will increase in the high single-digit percent range. MIS's adjusted operating margin guidance remains at approximately 61%, as our improved top-line outlook is partially offset by higher incentive compensation accruals and an acceleration in ESG technology and automation investments in the second half of the year. For MA, we are maintaining our low double-digit revenue growth guidance, supported by a high single-digit constant dollar organic growth, given robust demand for our renewable products and stable customer retention rates, favorable movements in foreign exchange rates, and tailwinds from recent acquisitions. We are raising MA's adjusted operating margin guidance to be in the range of 30% to 31% as we continue to effectively manage our expense base while accelerating strategic investment back into the business. As I mentioned previously, we are reaffirming our full year 2021 expense guidance to increase in the mid single digit percent range. Although we expect higher incentive compensation accruals associated with our improved revenue outlook, many of our cost efficiency initiatives and organic investment assumptions remain in line with our prior update. This enables us to both fund our strategic priorities and reinvest back into the business. Finally, we want to reiterate that our spending for key organic investments will be heavily weighted towards the second half of the year. 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, delivering strong results again this quarter. Second, several areas of MA, specifically KYC and compliance, research and data feeds, as well as insurance and asset management, provided momentum for recurring revenue growth. Third, we continue to integrate and embed our holistic E, S, and G offerings within our products and solutions, enabling our stakeholders to manage an evolving set of risks. Fourth, our culture of continuous expense discipline enabled us to purposely reinvest back into the business And finally, following robust first-off performance and the ongoing global economic recovery, we are pleased to be able to upwardly revise our 2021 financial outlook. And with that, let me turn the call back over to Rob.
spk08: 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 are on 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 1 to ask a question. We'll go ahead and take our first question from Manav Petnik with Barclays. Please go ahead.
spk05: Thank you. Good morning. I guess I was just curious, you know, in terms of, you know, all the moving pieces around issuance, if you could help us with, you know, what the cadence looks like. I know you said second half is moderate, but, you know, are you assuming that 3Q continues kind of the run we've seen in 2Q and then 4Q is kind of the big, you know, I guess we'll see what happens quarter. I was hoping any color there based on what you've seen would be helpful.
spk08: Yeah, Manav, good to have you on the call. You know, we're now looking at low single-digit growth in global-rated issuance, and obviously that's an improvement from our outlook for low single-digit decline earlier this year. And that really is driven primarily by our improved outlook for leveraged finance and CLOs, and we have an expectation for those sectors to remain active in the second half. Year-to-date global issuance has grown at something like, you know, 2%. versus the prior year period. And while issuance conditions we expect to remain favorable, our outlook for the second half of the year assumes moderating issuance and leveraged finance in the second half. And we just had a torrid pace of issuance in the first half. So, we're looking for issuance to be roughly flattish to slightly down for the second half of the year versus, you know, up, you know, just modestly for the first half of the year.
spk06: And then we don't necessarily provide specific forecasts by quarter, but the general idea is really for MIS revenue to be slightly down in Q3 and slightly up in Q4. And that would be consistent with the historical issuance sort of patterns that we've seen.
spk05: That's very helpful, Mark. Thank you. And maybe if I could just follow up, Mark, I think Last quarter, you gave us some numbers that I don't recollect, but I was just hoping, obviously, there's a lot of ESG activity going on. You guys have released a lot of new products and initiatives. Can you just remind us of what the run rate of ESG revenues are and how we should think about what you're targeting there?
spk06: Absolutely. Second quarter ESG revenues were up just shy of 30% compared to the same period last year, and that reflects growth both on a standalone basis and also how we're integrating our ESG risk metrics and analytics into our MIS and EMA products. For the full year, we're looking for roughly $21 million on a standalone basis and then another $5 to $10 million from integration into the two business segments. I also thought I'd just spend a minute on some of the commercial and product achievements this quarter on ESG, because I think they're definitely worth highlighting. First, on the commercial side, we saw very strong quarterly growth in climate, primarily in bank stress testing and physical climate risk assessments for commercial real estate, corporate facility and infrastructure clients. We also saw very strong market demand for SPOs, specifically for our SPO product, which has allowed us to drive success in that sustainable finance area. And then lastly, we've introduced on the commercial side a number of EU taxonomy offerings, which are going to really enable us to gain traction and have really supported some of the key wins we had in Q2. On the product side, a couple of really interesting new products to the market. The first is we launched the Regulatory Data Solutions, which has the SFDR, Principal Adverse Indicators, and that's really important because it's going to help investors with reporting obligations under the new EU Sustainable Finance Disclosure Regulation. We've also introduced the Climate Adjusted EDFs. And that allows us to integrate directly climate scenarios, which are based on the network for the greening of the financial system, into our banking and other EDF models. And then third is really the one that Rob spoke about earlier on the SME predictor score. This is something we're particularly proud of. We think it's, you know, a tool that's the first of its kind. It gives us a competitive edge. And most importantly, it really allows customers to access more than 140 million ESG scores, which are then integrated into our existing release products, like Orbist, like Compliance Capitalist.
spk08: Yeah, Manav. You know, it's still relatively early days for us in ESG, but as you get a sense from Mark's comments, there's a lot of investment and a lot of product development going on.
spk05: Makes sense. Thank you.
spk02: All right. We'll go ahead and take our next question from Kevin McVeigh with Credit Suisse. Please go ahead.
spk04: Great. Thanks so much. And let me add my congratulations as well. Hey, there's obviously a fair amount of cash that's been accumulating on a balance sheet. I know that's a high class problem, but any thoughts, Mark or Rob, as to kind of capital allocation just given where the current cash balance sits? Absolutely.
spk06: So first and foremost, our priority, you know, when managing the balance sheet is really to ensure the business has the capital necessary to grow and the flexibility to operate effectively. and beyond that you know we're going to seek to deploy the cash on our balance sheet consistent with our long-held capital allocation policy uh first reinvesting in our business organically and then seeking you know appropriate m a targets after that and then ultimately returning capital to shareholders by way of dividends and then share repurchases we do have a very strong corporate development team and we look at a lot of m a opportunities though you know Historically, we've executed very selectively, and we'll continue to do that, and that's demonstrated by our track record. That said, we do have some interesting larger bolt-on M&A opportunities, both in our addressable markets and consistent with our prior M&A approach, and they would fit well with our industrial logic and could meaningfully accelerate our integrated risk assessment strategy by bringing in new capabilities or by enhancing our current offerings and initiatives. Our outlook doesn't specifically include the impact of any future acquisitions, so to the extent we commit spending to and are actually able to action an M&A deal, we would assess the need to update our plans for returning capital through share repurchases at that time.
spk04: Super helpful. And then just a quick follow-up. You know, given how much success you've had on the ESG side and just the incremental market, are you investing enough, fast enough? Just any thoughts around that, given the amount of kind of strategic initiatives that are out there today?
spk08: Yeah, Kevin, this is Rob. I do think we're – how are you doing? Good to have you on the call. I do think we're investing enough and fast enough. As I said, you know, Mark's – comments about the new products that we've been rolling out, you know, give you a sense of the breadth of product development going on. And we've got integration going on across really every part of the business. So we're very focused on investing to meet the needs of our entire customer base around ESG and climate.
spk06: I would simply add to that we should expect to see an acceleration in expense and currents really in the second half of the year as we pick up the pace of organic strategic investment. You'll see a rather large increase in third quarter versus the fourth quarter related to expenses to support those activities.
spk04: Thanks so much.
spk02: All right. We'll go ahead and take our next question from George Pong with Goldman Sachs. George, please go ahead.
spk07: Hi, thanks. Good morning. You mentioned that you now expect low single-digit growth in global issuance versus your prior forecast of a low single-digit decline this year. How has your outlook specifically for the second half of that issuance changed over the past quarter? In other words, does the updated outlook reflect just flow-through of 2Q performance, or has your outlook for the second half also improved?
spk06: I'll start, George, really just from an EPS perspective, and then certainly we can go further into this in more detail. So really the primary driver of our increase in full-year 2021 adjusted EPS to sort of $11.70 at the midpoint of the latest guidance range is really the reflection of the actual and expected strong operating performance of MIS of 4% in the second quarter against what we thought is a very difficult prior year comparable. We have increased our EPS outlook versus the first quarter forecast by four to five percentage points really to reflect that. If I look specifically at the year-to-go 2021 adjusted EPS versus the prior year period, the guidance that we provided implies that that will be down in the low single-digit percent range, and that's really due to three factors. I'd say the approximately flat implied MIS revenue output for the second half of the year. We can talk more about the comps and pull forward if you would like. Secondly is the acceleration of the strategic investments that we have into the second half of the year. And then if there's just a small M&A hangover, maybe a percent or so there.
spk08: Yeah, and the other thing I would add is just, you know, given what we've seen with the leveraged finance markets in the first half of the year, I think that's where you've seen our outlook for the second half of the year as, you know, we've carried some of that strength through and seen an improvement versus what we had projected, you know, earlier in the year.
spk07: Got it. That's super helpful, Collar. And then just a quick follow-up, focusing maybe on MA, certainly strong performance there. Can you dive a little bit deeper into what's enabling success and growth there and where you're investing and if you believe you're investing enough to sustain the growth that we've been seeing in MA?
spk08: Yeah, sure. So, you know, MA has demonstrated a very strong track record for delivering success you know, kind of high single-digit organic revenue growth. And, you know, on these calls, we've been talking about some of the areas that are driving that. Know your customer, obviously, one. The recurring revenue growth that we're seeing in our enterprise risk solutions, kind of risk as a service business. also in our core MIS research and data feeds business, as well as our private company data solutions. So just kind of touching on each of these a little bit to give you a sense of the nature of the demand and what's driving the growth. You know, we've talked about KYC and compliance. We just – there's this demand for greater precision and automation of customer vetting. And we've got this emerging demand for understanding supply chain resiliency alongside that. So all of that is, you know, we talked about in the webcast deck, driving, you know, kind of mid-20s growth in that KYC space. Credit research and data feeds, we have some very high retention rates for that credit research, lots of demand for the data feeds. And, you know, I think that just reinforces the critical nature of that content when we're in times of market stress and uncertainty. The other thing I, you know, I called out on my opening remarks, you know, inside of ERS, you've got areas like insurance and asset management, and we thought it was worth calling out this quarter, you know, not only we got ongoing demand for the IFRS 17 solutions, but increasing penetration of the buy side. This is defined benefit pension plans in the kind of risk technology and portfolio design space. And that was really enabled by our acquisition of Risk First. And all of this is kind of coming together and helping to drive some very good growth rates in that space. So, We've got a very active product development pipeline across all of MA, and we expect we're going to continue to have opportunities to fill in product gaps and extend our capabilities to support ongoing growth.
spk07: Very helpful. Thank you.
spk02: All right. We'll take our next question from Tony Coplin with Morgan Stanley. Please go ahead. Thank you.
spk01: I wanted to ask about the ERS business. We've had about three straight quarters of low single-digit growth, and I know a lot of this is related to lower one-time sales, but I guess when does that fully get worked through? And when you look at sort of next year and beyond, what's sort of a normal baseline growth rate for this business?
spk08: Yep. Tony, good to have you on the call. The key figure this quarter for ERS is recurring revenue growth, the recurring revenue growth rate. And that represented about 88% of total ERS revenue in a quarter. That's why we're so focused on that number. And recurring revenue is in ERS was up 15% on an as-reported basis and something like 9% on an organic constant dollar basis. And looking at the drivers of that recurring revenue growth, we had double-digit recurring revenue growth in both insurance and our risk and finance solutions. And I talked a bit just a minute ago about what's driving our growth in the insurance space. In risk and finance solutions, We've seen customers continuing to leverage a range of different offerings. We've got products, Risk Calc, Risk Frontier, all the support, credit loss reporting requirements, and asset and liability and balance sheet management, and a recent acquisition of ZM Financial. enhance that. Tony, you're right. So, 15% recurring revenue, but overall revenue growth was 5% in the quarter. And that 15% recurring revenue growth was dampened by an almost 40% contraction in one-time business at ERS. And to the last part of your question, in regards to one-time revenue. I mean, we've got increasing customer preference for SaaS solutions. So, that's naturally going to lead to a continued decline in one-time revenue for the foreseeable future. That said, I would expect that the rate of decline for one-time revenue will decelerate in 2022, and eventually level off at some relatively de minimis level for our ERS business overall. We will still have some customers who want on-prem solutions, and we may decide to service that. But I think you're going to see that decline decelerate and then level off sometime next year.
spk06: Maybe, Tony, just add a couple of numbers around that. Think about the one-time revenue, at least for 2021, for both RDNA and the ERS lines of business as being around $20 million a quarter.
spk01: Very helpful. And then I wanted to turn to my favorite topic, MIS margins. Slide 22 is really helpful with the bridge for the overall versus the prior guide and from last year's expenses. But when I look at it, first half MIS suggested operating margins were 67%. You're guiding to, I think, 61% for the year. So that implies like 53% margins in the back half. So this is obviously way below last year's margins. And last year included some non-recurring items like severance and some extra incentive comp. And I know you're building in sort of more incentive comp in second half, but How should we think about pacing of investment spend? How much of this is conservatism? Just what are the pieces there?
spk06: Sure. Good morning. Our updated guidance for the full year 2021 MIS adjusted operating margin to a point is approximately 61%. And that is 130 basis points higher than the actual 2020 adjusted operating margin of 59.7%. That is in addition to the MIS margin expanding by another 170 basis points in 2020. In the first quarter, we spoke about the primary drivers of our MIS margin and what we're seeing in Q2 which were partly flowing through to our full year outlook, is again an increase in operating leverage above a normalized run rate. And that's driven by better than expected issuance volumes and mix. It's underpinned by the expense discipline that you're observing. And it's important to keep in mind that we are planning to deploy part of that operating leverage really towards strategic investments in the second half to advance ESG capabilities, our technology stack, and it's really for the benefit of our customers to do that. We expect those actions really will bring down the third and fourth quarter MIS margin to a point below the 61% that we're guiding to for the full year. It's also worth just finally noting that MIS is carrying additional incentive compensation accruals associated with the better-than-expected issuance that will reset in 2022. So if we think about combining some of the one-time costs and incentive comp, the key point that I'm making here is that the go-forward expense run rate for 2022 is going to look a lot more like the first half of this year than necessarily what we might see in the second half of this year.
spk02: Thank you. All right. We'll take our next question from Alex Cram with UBS. Please go ahead.
spk03: Yeah. Hey. Hello, everyone. Just coming back to the issuance MIS outlook, I kind of want to ask a little bit more holistically. And I think if you put the last 12 months into context, I think, Everybody on this call, including you guys and myself, to be honest, of course, was obviously grossly wrong by a right margin in terms of how the environment played out. I think things have definitely been a lot better than everybody had thought. I'm just curious, from your perspective as a manager, what would you isolate as the biggest factors that have driven that upside? When you think about the next 12, 24 months, How do you feel about that? How do you think that outlook has changed? Do you feel much less confident now that some of these upside drivers that you've seen can continue to play out? And if so, which ones would they be?
spk08: Hey, Alex. It's Rob. Maybe let me talk a little bit about how we think about kind of the the upside and downside to issuance. And you're right. It's been quite challenging to, uh, to forecast for all of us. Um, and then I, I might also touch on, uh, this question around pull forward. Um, because I think that's a, you know, that's, there's a bit of that at, at play and it gets into how we start to think about, um, the outlook on a go forward basis. But, um, You know, obviously, we've seen very strong activity in leveraged finance, and I think that's also part of a key in terms of how we're thinking about the second half of the year in terms of the issuance outlook. We've anticipated that there is some moderating of leveraged finance issuance in the second half of the year, as I said earlier, from the very, very strong levels we've seen in the first half. If post-Labor Day we see financing costs and market conditions where they are now in a continuation of the kind of issuance that we have seen for the last few months, particularly in leveraged loans, that could present some upside. Infrastructure, and I understand there may be some breaking news around potential agreement or bipartisan agreement around an infrastructure bill. That could, I think it may have some impact in 2021, but more likely to have a positive impact to issuance in 2022. Then as we kind of think about the downside, and I was certainly hoping we were done with this topic, any escalation of impact from another wave of infections or restrictions due to the Delta variant. I have to note we've got a potentially challenging comparable for the second half of the year. We had a very strong third quarter last year as spreads had tightened. And that even continued into the fourth quarter. We had a pretty strong end to the year. You know, any increase in equity market volatility, that leverage finance activity is often correlated to equity market conditions and equity market volatility. So that's something we're going to watch. And, of course, any market disruptions due to an unanticipated trajectory of inflation or interest rates.
spk03: Okay, great. And then maybe just shifting gears here quickly, I'm curious about some of the proactive M&A commentary you've made, and in particular, the comment around larger bolt-ons. So I would love you to define some of that a little bit more. I mean, with BVD, I think you did the largest deal in history, but when you talk about larger bolt-ons, can you dimensionalize how big something like this could be and what capacity you have and then maybe related to that be great if you can just remind us what you're looking for in terms of growthiness of some of these companies. You've done a great job doing some of these smaller deals and really accelerated them. But if you're talking about larger bolt-ons, I mean, is this something that also needs to accelerate the top-line growth, or is a lot of accretion something that you care about? Maybe just remind us. I mean, you have an M&A history yourself, right? What do you look for financially?
spk08: Yeah, so... Alex, maybe I'll first kind of clarify what I think of and I think what Mark means when we say larger bolt-on. I think of our acquisitions of, you know, RDC and Vera Van Dyke as a range of larger bolt-on deals. And, you know, I know we've provided – we've gotten a number of questions about M&A over the last couple quarters on these calls, and certainly, you know, refer everybody back to that. But I'm going to come back to we're very focused on M&A opportunities in our addressable markets that are what I call on strategy and that are going to advance our risk assessment capabilities to better serve our customers' evolving needs. And you've seen us make acquisitions of high-value data and analytics that are critical to customer workflows and risk assessments. processes. That's why they end up having such high retention rates. We've been pretty clear about the areas where we're investing in building scale businesses. That is KYC and financial crime, where I think we've already made some very significant investments, and as a result, have a very strong position in that market. Private company data, CRE, data and analytics, commercial real estate, is an area that we've talked about on and off over these calls, and we see a large end market and demand from our customers. And then, of course, ESG and climate, and climate in particular. Climate is an area where there's a lot of near-term demand to understand the physical risk related to climate change from our customers. Within our ERS business, there are some further opportunities to continue to build out a more comprehensive offering for banks and expanding our offerings for insurance companies. You saw us do that with a very small acquisition of ZM Financial. We're doing that both organically and inorganically and building on both our existing customer base and growth in this space. So hopefully that gives you some color.
spk06: And Alex, just to the second part of your question, from a capacity perspective, we are continuing to anchor our capital allocation and cash positioning policies really around that BBB plus rating. To give you a feel, our own needs calculation Puts on net debt as of the end of the quarter at roughly $3.4, $3.5 billion against a trailing 12-month adjusted operating income of around $3 billion. So we're looking at roughly 1.1 times at this point.
spk03: All right. Very good. Thanks, guys.
Disclaimer