Moody's Corporation

Hey, everyone, and welcome to the Moody's Corporation fourth quarter and full year 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 questions and answers following the presentation. I would now like to turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

Good morning, and thank you for joining us to discuss Moody's fourth quarter 2021 results and our guidance. I'm Shivani Karp, Head of Investor Relations. This morning, Moody's released its results for the fourth quarter of 2021 and our outlooks for full year 2022 and the medium term. The earnings press release and the presentation to accompany this teleconference are both available on our website at ir.moody's.com. Rob Falber, 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 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 U.S. GAAP. I call your attention to the safe harbor language, which can be found towards the end of our earnings release. Today's remarks may contain forward-looking statements within the meanings 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 SBC's website. These, together with the safe harbour 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 Fowler.

Thanks, Shivani, and good morning, everybody, and thanks for joining today's call. I'm going to begin by summarizing Moody's full year 2021 financial results, and then I'll provide an overview of our business and strategic direction. And following my commentary, Mark Kay will provide some further details in our fourth quarter 2021 results and share our outlook for 2022 and also our new medium-term financial targets. And after our prepared remarks, as always, we'll be happy to take your questions. Our employees' resilience and commitment and hard work produced some exceptional results in 2021, and I'm proud to share that for the first time, we've surpassed $6 billion in revenue, with record revenues from both MIS and MA, and adjusted diluted EPS grew at 21% in 2021. Over the past several years, we've invested to build our businesses serving high-growth risk assessment markets, And in 2021 in particular, to seize the really attractive growth opportunity in front of us, we made some substantial investments, particularly in the fourth quarter. Across the firm, we're introducing a range of new products and solutions to help customers identify, manage, and measure risk and unlock opportunity. And the pace is accelerating. We're balancing these investments with capital returns and seek to return approximately $2 billion to our stockholders this year in the form of dividends and share repurchases. For 2022, we project Moody's revenue to increase in the high single-digit percent range. That's driven by continued strong growth from MA and robust global debt issuance levels for MIS. And I'm also pleased to announce that in response to investor feedback, we're introducing new medium-term guidance, including Moody's Corporation's revenue to grow by at least 10% on an average annualized basis and adjusted operating margin to be in the low 50% range. Recent acquisitions combined with organic investments put us in an excellent position to deliver on our integrated risk assessment strategy and achieve these targets. Finally, I want to remind you that Moody's will be hosting our next Investor Day on March 10th, later this year in New York City. And during the event, we're going to be showcasing key aspects of our business. And I look forward to meeting many of you in person. It's been a while. And for those who are unable to attend, there will also be a virtual option. Now, turning to full year results. both MIS and MA revenue grew by 16%. MIS rated over $6 trillion of issuance and generated over 1,100 new mandates, and that's equivalent to almost five new mandates every working day of the year. And this, combined with MA's 56th consecutive quarter of revenue growth, helped us achieve our second successive year of 20-plus percent adjusted EPS growth. 2021 was really a year where we accelerated our strategy to be the world's leading integrated risk assessment business. That included investing for growth, purposeful innovation, and delivering for our stakeholders. During the year, we made a series of acquisitions to enhance our capabilities and further build out our offerings. The largest of these acquisitions, RMS, gives us a world-class insurance data and analytics franchise, as well as some sophisticated weather and disaster modeling capabilities. And this allows us to serve a wide spectrum of customers, helping them to better understand the physical risks posed by climate change. And that's an important part of our broader ESG offerings. We also made investments to build out our ratings presence in important international markets. And in 2021, we began offering local credit ratings in Brazil as part of the continued expansion of our Moody's local business across Latin America. And just last week, we announced our intent to acquire a majority stake in GCR Ratings, the leading credit rating agency in Africa, giving us an unmatched presence across the continent and really positioning us for the future. In 2021, we expanded our suite of award-winning offerings with more than 15 meaningful product launches. This includes Portfolio Studio, our new cloud-native software as a service credit portfolio management tool. It provides a single and powerful view of risk. As part of our broader ecosystem of risk finance and lending solutions, it enables our customers to identify and measure and manage portfolio risks and returns by combining best-in-class Moody's models, scenarios, and other content with business applications for financial institutions. We also launched the next generation of supply chain catalysts, providing our customers with an enterprise view of their critical supply relationships. Supply Chain Catalyst combines our Orbis database with customers' internal data to deliver an integrated view of risk across multiple tiers of their supply chain and taking into account factors like financial health and sustainability and reputational risk, among others. And finally, we continue to focus on serving our people, our customers, and our communities. Our DE&I initiatives have received some great external recognition, helping to distinguish Moody's as an employer of choice and that has never been more important than right now in addition to the accolades that you see on this slide we were just notified of our inclusion in the bloomberg gender equality index for the second year in a row and for the 11th year running we're very proud to have received a perfect score from the corporate equality index on top of these awards We've achieved recognition from customers for our products and services. And among many other awards, we were named Best Credit Rating Agency by Institutional Investor for the 10th straight year, and we're ranked number two overall in the Chartist Risk Tech 100. Now, switching to our segment results, beginning with MIS. Favorable market conditions contributed to our strongest year yet in terms of both revenue and rated issuance. And Investment grade supply moderated off what was really a record 2020, but volumes were still substantial. Meanwhile, the leveraged loan market rebounded sharply, and it was bolstered by low default rates and an uptick in private equity buyout activity, as well as increased investor appetite for floating rate debt amid higher inflation. Strong leveraged loan volumes also supported some very strong CLO growth. And more broadly, structured finance issuance rebounded. That was due to ongoing favorable market conditions, including tight spreads. And that drove both new CLO as well as refinancing activity and CMBS and RMBS issuance in particular. As we consider the issuance drivers and factors for the year ahead, broadly speaking, the economy has demonstrated resilience to the impact of Omicron. GDP is growing, companies are performing well, and job creation continues, all of which underpin business, investor, and consumer confidence. But there are headwinds. Inflation remains elevated amid supply chain constraints and tight labor markets, although we expect price pressures to abate over the course of the year. But still, uncertainty around the future path of interest rates may invite some occasional bouts of market volatility, and we've certainly seen that in the start of the year. Historically, a rising interest rate environment when associated with robust economic activity has been a positive for MIS. And I think it's worth noting that even with the potential for interest rate increases this year, overall financing rates will remain at very modest levels from a historical perspective. We forecast that tight spreads, M&A transactions, ongoing refinancing needs, and disintermediation will support global debt activity above medium-term historical levels, but with issuance slightly moderating versus record levels in 2021. And Mark's going to provide some details on MIS 2022 issuance expectations later in the call. Now, moving to Moody's Analytics. In 2021, MA's revenue grew by 16%. We also meaningfully increased the mix of recurring revenue, which now represents 93% of MA's total revenue. And underpinning this performance were 9% organic revenue growth supported by a 95% retention rate, over 2,000 new customer accounts added through a combination of global sales, execution, and acquisitions, and targeted investments in high-priority markets. And this momentum gives us the confidence to capitalize on the strong demand and market opportunities across MA by continuing to invest both organically and inorganically. And we're doing just that. In 2021, with a purposeful acceleration in the fourth quarter, we invested to enhance and fast-track the launch of several product offerings. For instance, in the fourth quarter, we acquired Passport and invested to accelerate our integration with the goal of significantly advancing the development of our customer screening and onboarding capabilities. By digitizing and automating the KYC and AML process for our customers, we're providing a streamlined workflow along with data from our Orbis and Grid databases. And we're building an efficient and effective interconnected suite of tools that deliver a stronger value proposition for customers in what is still a relatively fragmented market. We also continue to build product capabilities in commercial real estate. I've previously talked about a product launch in the third quarter, Credit Lens for commercial real estate. And that's our SaaS workflow platform built on the latest cloud technology and tailored to the specific needs of commercial real estate lenders. In the fourth quarter, we accelerated the roadmap for enhancements to the platform, including the overall user experience. We also expedited the launch of our portfolio monitoring solution for commercial real estate investors, integrating and building on the acquisition of RealX data in September. This solution, Commercial Real Estate Portfolio Manager, was recently made available to customers in North America. And last, we invested in the ongoing SaaS conversion of our banking software products, which supports growth among our existing customers and will help deepen our penetration of the midsize financial institution sector. We expect that this conversion will raise our recurring revenue growth rate to low double digits in 2022 and low teens in 2023. With 24% overall sales growth, including 20% increase in our organic recurring sales, We demonstrated significant traction with customers in these three segments. This strong sales growth, along with our financial capacity, gave us the confidence to invest opportunistically in the fourth quarter in these areas. For the broader MA business, we're also making some foundational investments which will support both revenue growth and operating efficiency. In the fourth quarter, we made investments in integrating RMS, which we'll touch on shortly, as well as fine-tuning our sales capabilities to deepen customer penetration, expand cross-selling, and refine our go-to-market approach. Now, as you can see on this slide, our organic recurring revenue growth rate has steadily improved, and we anticipate it's going to continue to do so and contribute towards our goal of achieving total revenue growth in the low to mid-teens percent range of within five years. And this focus on organic recurring revenue expansion is at the core of our business strategy for MA. There are also some other drivers that underpin this medium-term outlook. We're redoubling our focus on customer satisfaction to support our strong retention rates and help us support recurring revenue growth. Our product enhancements enable us to increase revenue per customer from cross-selling upgrades and pricing opportunities. The continued transition to SaaS in our enterprise risk solution segment provides the opportunity for revenue uplift from existing customers, as well as the opportunity to add new customers. And we're also prioritizing the development of products and solutions for existing and new customers to further tailor our solutions to their unique needs. Now, last year on our fourth quarter earnings call, we talked about the use cases that we're serving across what was at the time a $35 billion addressable market opportunity. Now, we've since expanded that to $40 billion by adding RMS. And given the demand to assess a wider range of risks, many of these markets are growing quickly, which, as you can see on the right, translated into four areas in MA where we generated over $100 million in organic recurring revenue, with double-digit growth rates. And this leads me to our acquisition of RMS. And though it's early in the integration process, in meeting with a number of C-suite executives at insurance and reinsurance companies, I got to tell you, I'm excited about the opportunity to serve the insurance industry with a broader array of risk assessment offerings, as well as leveraging RMS's world-class data and models and expertise to meet our customers' growing needs around disaster and climate risk. We have aligned and cross-trained our sales teams, and the SAS migration is ongoing at RMS. Most importantly, the feedback from RMS and Moody's insurance customers has been overwhelmingly positive. They're excited about us jointly providing more comprehensive offerings for both the asset and the liability side to the balance sheet. And we're identifying opportunities for new products that evaluate weather and climate risks to take to the broader Moody's customer base, particularly in commercial real estate, CMBS, and banking. To bring this to life, I want to highlight a recent example of a large P&C insurer, which has been a customer of both RMS and, to a lesser extent, MA for years. I met with them recently to talk about how we can be even more of a strategic partner for them, and we discussed how they wanted to integrate ESG considerations into a range of processes that included underwriting, investment, regulatory compliance, scenario analysis, portfolio management. And ultimately, the breadth of our offerings and our ability to integrate them in ways that provide a more consistent view of ESG risk across the enterprise, and especially for climate change, really differentiated our offerings. And this cross-sell was enabled by the very deep RMS relationship and combined with the broader Moody's ESG capabilities. And I think it's a great example of the kinds of conversations that we're having with many RMS stakeholders and Moody's insurance customers about how we can enable a consistent view of risk to support profitable growth, lower insured losses, and reduce volatility. I'm now going to turn the call over to Mark to provide further details on Moody's fourth quarter results, as well as our full year 2022 and medium-term outlooks.