Moody's Corporation

Good day, everyone, and welcome to the Moody's Corporation Second Quarter 2022 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in listen-only mode. At the request of the company, we will open the conference up for question and answer sessions following the presentation. I will now turn the call over to Shivani Kalk, Head of Investor Relations. Please go ahead.

Thank you. Good afternoon and thank you for joining us to discuss Moody's second quarter 2022 results and our revised outlook for full year 2022. I'm Shivani Kark, Head of Investor Relations. This morning, Moody's released its results for the second quarter of 2022, as well as our revised outlook for full year 2022. The earnings press release and the presentation to accompany this teleconference are both available on our website at ir.moody's.com. 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 a 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 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, 2021, 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 Harvest 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. Before we begin, I'm pleased to announce that, in response to feedback from our external stakeholders, we have enhanced our earnings materials and changed the format of our call for this quarter. This morning, on our IR website, we published our supplementary presentation along with our updated earnings release, materials that we believe provide substantial insights into our business. As such, during the call, we will not be going through our usual presentation. Instead, Rob Falber, Moody's President and Chief Executive Officer, will provide a brief overview of our results and outlook, after which he will be joined by Mark Kay, Moody's Chief Financial Officer, to answer your questions. I will now turn the call over to Rob Falber.

Thanks, Shivani. Hello, and thanks to everyone for joining today's call. And as Shivani mentioned, I'm going to keep my opening remarks brief so that we can get straight to your questions. And I appreciate that it's been a very busy morning for many of you on the call. So let me begin with a few key takeaways about our results. And then I want to spend a few minutes on our outlook and the continued strength and relevance of our business. So, let me start by reinforcing that as challenging and volatile conditions in global capital markets continue, we're leading the way in providing integrated perspectives on risk for our customers. And this quarter was really a tale of two cities, as our ratings business was significantly impacted by the slowdown in issuance activity, and our MA business continued to grow very nicely. And as we've said previously, year-on-year comparisons with our record performance in 2021 would be unfavorable this year. And overall, Moody's revenue declined approximately 11% in the second quarter. And given the operating leverage in the MIS business, as well as the negative impact of foreign exchange, adjusted diluted earnings per share declined by 31% from the prior period, prior year period, to $2.22. MIS, which was significantly impacted by ongoing cyclical disruption in the global debt markets due to a few things, rising interest rates, high inflation, unsettled geopolitical conditions, MIS generated revenue of $706 million. And really, to put that in perspective, global rated issuance was down 32% for the quarter. and transaction revenue was down 40 percent. And that reflects the negative mix driven by the weakness in the leveraged finance markets. And when balanced by our recurring revenue, this translated to a 28 percent decline in total MIS revenue for the quarter. Now, on the other hand, customer demand for our MH suite of solutions that help navigate market uncertainty and identify, measure, and manage risk, that demand remained robust. And that fueled steady growth in our subscription and SaaS-based products, which, along with the contributions from prior year acquisitions, delivered revenue growth of 18%. And MA revenue growth was negatively impacted by five percentage points due to FX in the quarter. Now, you'll recall earlier this year, we introduced an annualized recurring revenue or ARR metric for MA, and we believe that's a good indicator of future growth. And this quarter, our organic ARR grew by 9%, and we expect this growth to further increase to low double digits by year end. And that's supported by both our ongoing product development investments that broaden the ways in which we serve our customers and by the growth in our sales force and strong sales execution. Now, I expect that many of you will have questions about our outlook in a few minutes, and I'd like to make a few comments about our expectations before we get to it in the Q&A. And we anticipate that the current market disruption will persist for the remainder of the year, and we've updated our guidance to reflect that. Now, obviously, if actual conditions differ from the assumptions underlying our guidance, our results for the year may differ from our revised outlook. Now, for MIS, we expect issuance to decline approximately 30% for the year and full-year 2022 revenue to decrease in the low 20% range. Now, the last two and a half years have been unusual, to say the least, so I have to acknowledge that with all the uncertainty in the market, the confidence interval around our outlook is probably wider than it was pre-pandemic. Our business outlook for MA remains unchanged. due to the impact of the weakening Euro and British pound against the U.S. dollar, we're slightly reducing MA's revenue growth outlook to the mid-teens percent range. Now, taking the reduced MIS revenue guidance and the impact of foreign exchange into account, we now forecast Moody's full year 2022 revenue to decline in the high single-digit percent range. and adjusted earnings per share are now projected to be in the range of $9.20 to $9.70. Incorporated into our outlook is a new restructuring program, and that's part of our broader approach to expense management. This geolocation restructuring program helps us further adapt to the new global workplace and talent realities, and it accelerates a number of ongoing cost-efficiency initiatives, and that includes real estate optimization and the increased utilization of lower-cost operational hubs. We expect this program to generate $40 million to $60 million in annualized savings with up to $75 million in aggregate charges through 2023. And we plan to partially redeploy these savings back into the business to support ongoing organic investments, including things like sales deployment and employee retention. Now, before I open it up to questions, let me try to put all this into perspective for a few minutes. Now, debt issuance markets are clearly in a period of cyclical turbulence. However, We believe that the fundamental drivers of issuance remain firmly intact. And taking a medium-term view, we expect issuance to resume as capital markets adjust to a higher interest rate environment. And as you saw in the slides that we shared this morning, the volume of outstanding corporate debt in the U.S. has grown each year for the last 30 years. And we believe that the fundamental role of debt in fueling economic activity and financing business growth remains unchanged. Global GDP growth is expected to continue, albeit at a lower rate. Corporate refinancing needs remain strong. And on a historical basis, rates and spreads are relatively in line with their averages, despite some recent increases. During this period of market turbulence, we're going to continue to focus on what we can control in MIS. And that is to ensure that Moody's remains the rating agency of choice, providing a world-class experience for issuers and ensuring the quality, relevance, and timeliness of our ratings, research, and insights that all reinforce investor demand pull. MA remains a strong and resilient business with almost 60 quarters of consecutive growth. And our investments in product development and sales are accelerating our organic ARR growth. And we're realizing the benefits of our recent acquisitions. In fact, we're ahead of or have met the targets that we set for our acquisitions of BDD and RDC. And though it's early days, we are on track to meet our targets for RMS. Now, stepping back and looking at the big picture again for just a moment, We see strong demand for our integrated risk assessment offerings. And the value that Moody's provides to our customers, especially in these uncertain times, remains unmatched. So across the business, we're innovating and investing to provide our customers and market participants with the products and the insights that they need to decode risks and unlock opportunities. And lastly, all of this would not be possible without the tremendous efforts of our people, and I want to thank them for all of their continued hard work and dedication. So that concludes my prepared remarks, so Mark and I would be pleased to take your questions. Operator?