Moody's Corporation

Good day, everyone, and welcome to the Moody's Corporation Third 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 a listen-only mode. At the request of the company, we will open the conference up for questions and answers following the presentation. I will now turn the call over to Shivani Kak, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone, and thank you for joining us today. I'm Shivani Kalk, Head of Investor Relations. This afternoon and this morning, Moody's released its results for the third quarter of 2022, as well as our revised outlook for full year 2022. The earnings press release and a 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 in US 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 Form Act of 1995. In accordance with the Act, I also direct your attention to the management's discussion and analysis section and the risk factors discussed in our annual report on Form 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 harbour 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. Rob Fauber, Moody's President and Chief Executive Officer, will provide an overview of our results and outlook, after which he'll be joined by Mark Kaye, Moody's Chief Financial Officer, to answer your questions. I will now turn the call over to Rob Fauber.

Thanks, Shivani. Good afternoon, and thanks to everybody for joining today's call. Like I did Last quarter, I'm going to start with a few takeaways. And as everybody's aware, during the third quarter, macroeconomic and geopolitical conditions continued to deteriorate. And that further suppressed the global debt issuance markets from the already subdued levels that we had seen in the first half of the year. At the same time, these conditions supported increasing customer demand for data and analytics to identify, measure, and manage risk. And against this backdrop, Our MA business continued to perform well, with strong revenue growth of 14%, while MIS revenue declined by 36%. And overall, Moody's generated $1.3 billion in revenue with an adjusted operating margin of 39%. And we expect that low issuance volumes, particularly in the leveraged finance space, will persist through the remainder of the year. And as a result, we're revising several of our 2022 outlook metrics, including our guidance for total Moody's revenue, which is now expected to decline in the low double-digit range. And we're also updating our outlook for full year adjusted diluted EPS to now be between $8.20 and $8.50. Now, in response to the expectation for continued economic headwinds, we're also taking decisive steps to reduce our expense run rate by at least $200 million by year end. And the cost savings will be realized across the company and include a more than doubling in the size of our previously announced restructuring program, as well as various additional cost efficiency initiatives. And collectively, These actions put us in a position of strength as we head into 2023, and I'll provide some additional details later in the call. Now, for the third quarter, MA recorded both strong revenue growth of 14% and a 9% increase in annualized recurring revenue, or ARR. With over half of MA's business outside the U.S., foreign exchange rates had an outsized impact on MA's revenue growth, lowering it by 7 percentage points. For MIS, the 36% decrease in revenue against the record prior year period was driven by a 41% reduction in issuance. And altogether, this resulted in a 16% decline in Moody's revenue. And the negative impact of foreign currency movements on total Moody's revenue was four percentage points. Now, expenses grew just 1% in the third quarter as we continued to execute efficiency initiatives and emphasize cost discipline, and the net impact of lower revenue and controlled expenses translated to adjusted operating income of $497 million for the quarter and adjusted diluted EPS of $1.85. Now, let me provide some additional context on the conditions impacting issuance levels and our revised full-year outlook for MIS. And at the beginning of the year, like others in the market, we anticipated that elevated levels of inflation would be transitory and slowly abate over the course of 2022. And instead, the conflict in Ukraine further impacted market confidence and commodity price shocks pushed inflation higher. And these factors prompted central banks to raise interest rates further and faster than expected. to levels we haven't seen for more than a decade and resulting in ongoing uncertainty and volatility in the capital markets. Meanwhile, corporate balance sheets remained robust following a surge in opportunistic pandemic-era financing, allowing issuers to stay on the sidelines given market conditions. We expect that these macroeconomic and geopolitical conditions will continue to mute issuance levels at least through year-end, And in light of this, we're updating our guidance for 2022 MIS-rated issuance to decline in the mid-30s percent range. Full-year MIS revenue is now projected to decrease by approximately 30%. And while the outlook for next year will depend on the pace and scope of market stabilization and recovery, we're confident that conditions will improve over time and that the key growth drivers for issuance will resume. This year, only a little more than a quarter of the first-time mandates that we've signed have gone to market, meaning there's a backlog waiting to tap the markets. And to leverage those opportunities, our teams have been engaging extensively with investors and issuers. We haven't been sitting still. We've been building our domestic rating franchises, including in Africa with the majority acquisition of GCR and across Latin America through Moody's Local. and we've made significant progress in digitizing our content to both improve the customer experience but also to drive increased usage. As we look ahead, our pricing opportunity remains intact, and we know there are over $4 trillion in refunding needs that will likely be refinanced over the coming four years. In short, we're continuing to deliver on our differentiated strategy to be the agency of choice for our customers. While current conditions for MIS are challenging as those ease, Issuance will accelerate, and we will be well positioned to capture growth and operating leverage through our extensive market presence. Now, turning to MA, which, despite the challenging market conditions, delivered another impressive quarter of revenue growth and margin expansion. Fifty-nine consecutive quarters of revenue growth, MA has proven to be acyclical, and the third quarter was no different. ma reported 14 revenue growth or nine percent on an organic constant currency basis and with best-in-class retention rates and growing customer demand ma also achieved nine percent arr growth for the third quarter and that's inclusive of rms we're confirming our top line revenue guidance for 2022 MA full-year revenue is expected to increase in the mid-teens percent range, and that's despite a 5 percentage point headwind from foreign exchange rates. We expect ARR to accelerate to low double-digit percent growth by year end. We're also raising the MA adjusted margin guidance to approximately 30 percent, and that's a 100 basis point increase over our prior guidance, reflecting ongoing expense efficiency. So let me take a moment just to highlight our fastest-growing business, and that's KYC and compliance solutions. And in recent years, we've invested, and that's been both organically and inorganically, in acquiring, developing, and integrating data, analytics, and technology to create a world-class set of solutions. And this combination supports new use cases around counterparty verification. That's enabling us to grow with existing customers and add new customers in areas like the fintech, corporate, and government sectors. We continue to receive industry awards and recognition, including most recently a top-right quadrant positioning from Chartas. We also won the AI Breakthrough Award for our innovative solution for fraud prevention. And that's one of an increasing number of places where we're being recognized for the integration of artificial intelligence into our solutions. Also, as we pass on the one-year anniversary of the RMS acquisition, let me give a quick update on that. We're on track to achieve the financial targets announced last August, and I'm excited about the opportunities that are in front of us. We are laser-focused on maximizing our synergy opportunities by launching new products and pursuing markets that leverage our combined capabilities and strengths. So, for example, this past quarter, we launched our ESG underwriting solution for property and casualty insurers, which integrates Moody's extensive data to help them operationalize ESG risk assessment into their insurance underwriting workflows. And I also want to recognize the great work being done by our colleagues at RMS. And in my meetings with customers over the last few months, I've heard firsthand about how important our solutions are in helping the industry address an increasing array of risks, including recently as we assisted our customers in rapidly quantifying the financial impact of hurricanes Fiona and Ian. Now, moving to the restructuring plan that I mentioned earlier. On our last earnings call, we said that we would take additional actions to manage expenses and improve operating leverage if we observed further deterioration in the external environment. And given our view that the weakness in the issuance market will likely persist through at least the fourth quarter of 2022, our teams have undertaken a careful review of prioritization of ongoing initiatives, and we've identified several avenues for meaningful savings. We are expanding our restructuring program to more than double providing up to $135 million in savings in 2023 from a combination of rationalizing our real estate footprint and reducing our global workforce to reflect the reality of the current market environment. We have also undertaken a careful prioritization of ongoing initiatives in light of our current business priorities. And that has identified up to $100 million in additional savings. So collectively, these are projected to lower our 2023 expense run rate by at least $200 million. And as we take these decisive actions, we will be mindful to invest and allocate resources to maintain the rigor and quality of our ratings and processes. Look, these are challenging and uncertain times, and we are prioritizing financial discipline today and making sure that we're well positioned to capture growth opportunities tomorrow. So that concludes my prepared remarks, and Mark and I would be pleased to take your questions. Operator.