Q3 2020 Moody's Corp Earnings Call
Please standby we're about to begin.
Good day, everyone and welcome to the Moody's Corporation third quarter 2020 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 you may signal by pressing star one during that time.
I would now like to turn the conference over Trisha Rodney Cox.
Investors Relations. Please go ahead.
Thank you good morning, everyone and thanks for joining us on this teleconference to discuss Moody's part of course I Twentytwenty was all that's one of the outlook will be a 2020 on Shibani calc head of Investor Relations. This morning, Moody's released its results for the third quarter of 2020, that's one of the opposite the school year Twentytwenty The earnings press.
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Presentation to accompany this teleconference, all boats available on the web.
Like I also would be still.
Right got you know Moody's President and Chief Executive Officer would beat this morning's conference call also making progress on maxing. The call. This morning, small cage maidens Chief Financial Officer.
During this call we will also be presenting non-GAAP or adjusted figures. Please refer to the cables. The B M. <unk> earnings press release called this morning for a reconciliation between GAAP and adjusted measures referenced during this call them GAAP.
I call your attention to the Safe Harbor language, which can be found towards the end audience reach toward today's remarks may contain forward looking statements within the meaning of the private Securities Litigation Reform Act Nike much GAAP in accordance with the Act I also direct your attention to the management's discussion and analysis section and the risk factors.
Scott Smith I know reports on form 10-K for the year ended December 31st 29 <unk>.
Q for the quarter ended March 31st Twentytwenty, I mean, all the actually seen Connie made by the company, which are available on our website and on the Fccs website <unk>.
These together with the Safe Harbor statement get caught important factors that could cause actual results to differ maturity 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, and in listen only mode, but.
Before we begin we would like to comment on the succession plan that was announced last week Ray Mcdaniel retired as president and CEO Moody's I'm sympathetic fast auction any such that we get to the company exceeding of the 15 year this year yeah.
Yeah, very pleased that the board has appointed <unk> Saba, Moody's Chief operating officer. Its way success off label remain on the board on his retirement and we seem to have all the chairman effective January fashion.
Now I'll turn the call EBITDA right.
Thank you Bobby and good morning, everyone I'm going to discuss the company's performance I want to take just another minute or two locked on the leadership succession plan.
Sure Bonnie mentioned all be retiring from movies at the end of the year and unanimous approval. The board of directors Raw caliber will succeed me as president and CEO.
I used to run the Moody's bore well our roll to roll chairman.
No joint work more closely together, that's what was that figure leadership in are probably directors to ensure a smooth the successful transition.
We get a job well done P.C., we're sorry, not easy, especially such a great company.
I'd like to thank all employees for their own yielding commitment to quality and rig work truck pulled me [laughter].
Bring clarity knowledge in fairness to an interconnected world.
It's been a pretty personally working with you all well.
Well, it's difficult to we've been talking about this the right time in the company's evolution this transition to take place.
Even stronger now than ever before and the company is well positioned for the future.
Walk you cross it wasn't a big shoes are doing it took two years hopefully commodity <unk> deep knowledge, all disease and the needs of our customers make him the ideal leader to take Moody's into its next chapter.
I think you all know Rob well she's joining we begin 2000, blockier surely silk <unk> innovative strategic and results oriented leader, he probably cares deeply about our people as.
As long as a company in sort of the number of leadership roles. Most recently as Chief operating officer, where he is overseeing both my Ass and then Matt that's why the strategy and marketing for the Corporation.
I'm, calling people continue to maximize our strengths and trust in collaboration innovation and efficiency across the company.
<unk> future is in excellent hands and with that let me turn the call over to Rob to say a few words.
Yeah, Thats right, it's been a privilege to work alongside ride that benefited from his mentor shipped over the past 15 years I'm also proud to be able to call them a friend.
Under <unk> leadership breezes experienced the strongest growth in its history.
During his tenure re implemented some very important enhancements to the company's business, including growing and strengthening the ratings the research business expanding the company's international presence and building the company data analytics businesses.
Positioned the company for journeys global growth and success and as we look forward I believe we have an enormous opportunity.
In this rapidly changing world understanding and managing risk is more important than ever.
And we're focused on offering our customer solutions that leverage integrated data and technology, it's grounded in our history of insights and analytical excellence.
I think ray first Mentorship and support and I look forward to working with him the board and the entire Moody's team to continue providing trusted insights and standards helped decision makers Act with concepts. We've got an exciting journey ahead and with that I'll turn it back over there right.
[noise] Oh, well, thanks for the racist words and congratulations to you again.
Well now move on to provide a general update on the business, including <unk> third quarter 2020 financial results. Mark will then provide further details on our third quarter performance and also comment on our revised outlook for 2020 after prepared remarks, we'll be happy to respond to your questions.
I want to commend our employees on their hard work during each trolling toss your dedication and focus on delivering best in class customer service Hope Moodys achieved strong third quarter revenue growth of 9% and adjusted diluted earnings per share growth of 25%.
Moody's Investor service, the Moody's analytics performed well despite the difficult environment exhibiting resiliency of our organization and the relevance of our products insights and solutions.
Underlying this performance were hardly active credit markets, which continued to benefit from fiscal and monetary stimulus coupled with issuers looking to opportunistically refinance debt important part of the cash positions.
And you can choose to either and we continue to innovate and integrate our award winning suite of products in response to increasing customer demands for easy to use unified solutions.
Finally, given our performance year to date, we've significantly raised and narrowed our full year 2020, adjusted diluted EPS guidance range to $9 or 95 cents to $10.15.
Looking at third quarter 2020 results <unk> total revenue increased 20%.
Well, let me first go to my Wyeth, and 70% growth from M&A.
Moody's adjusted operating income of $721 million was up 17% from the prior year period.
Solid revenue growth from our two businesses outpaced the relatively small increase in operating expenses dropped 370 basis points of adjusted operating margin expansion.
Third quarter, adjusted diluted EPS, $2 or 69 cents was up 25%.
Turning to the credit markets and as I talked about on prior calls this year, we've experienced a dichotomy between the real economy and credit markets.
I don't want to be remain in flux, that's for certain Covidien 18 cases within certain parts of the U.S. in Europe. All of these areas to begin rolling back reopening measures.
Well friction between China, and the U.S. continued to escalate in the third quarter. The geopolitical environment remained largely the same but with increased focus on the upcoming outcome. The U.S. election in November.
Meanwhile, incremental macroeconomic responses were mixed with the implementation of new stimulus measures in certain jurisdictions and uncertainty or lockup actions and others.
With a stark contrast to the credit markets were fixed rate bond issuance reached new records that dish was bolstered their balance sheets and opportunistically refinanced debt.
The M&A pipeline showed positive indicators of recovery among investment grade issues. However activity was illegally in comparison to prior year.
Leverage loans also true also showed signs of improvement, but remained relatively weak in comparison to boss as demand for floating rate debt was limited.
I'd now like to go into more detail on corporate finance, which was a key contributor to <unk> strong performance.
The chart that shows the percentage of their Myos is total weighted issuance by line of business over the last seven quarters with corporate finance, you should see 2020, increasing to approximately 50%.
As shown on the right hand side of the flight activity for this sector grew 10% year over year.
Favorably favorable mix with more frequent issuers coming to market resulted in a 23% increase in nonfinancial corporate or C.G. trend transaction revenue.
Over the years, we have purposefully oriented ourselves towards more transaction based pricing agreements for data shows that this strategy creates greater value over time and you can see that positive dynamic in this quarter.
As I noted earlier refinancing liquidity issuance with the main drivers this quarter. So when he tried to get observed in the second quarter as.
It's spread tightening and overall yield decline recently I think took on more opportunistic child, well activity related shareholder payment and M&A continue to lag.
Well, we hope he was a key issuance driver this quarter the responding needs over the next four years for North American and European issuers increased 10% year to date to approximately 3.8 trillion dollars.
Total approximately 20% is forecast to mature in 2021.
Furthermore of the 2021 maturities only about a third or in the U.S., where we've seen the greatest amount of issuance this year.
Our view is that a portion of 2020 activity represents what we think our best contribute pull forward what companies issue debt fortify their cap cash position until they become more confident and future operating environment.
<unk> said, which did that impact the refinancing of some 2021 maturities through cash on hand remains to be seen it depends heavily on how the economic outlook develops.
The refinancing need shown on this slide represent.
He wants to be a future issuance, even though the average maturity has lengthened for investment grade.
Specifically due to lower benchmark rates have stayed spread tightening U.S. investment grade issuers have been incentivized to lengthen the maturity of their bombs to take advantage of lower overall effective yields.
This is evidenced by the higher year to date average investment grade maturity of 14.5 years compared to 12.4 years in 2019.
Partially the outcome of the nearly 60% increase year to date in 11 to 30 year issuance as shown in the light Green bar on the left hand chart.
This was especially pronounced in the third quarter were 50% investment grade issuance was longer than 10 years.
Now he's asked us whether longer average bond maturities would have a dampening effect on refinancing needs in the medium term.
While this is an important trying to follow the impact to date has been relatively you for two primary reasons.
First year to date being pretty thin charities was limited to investment grade and speculative grade bond issuance saw a decrease in average maturity to 7.5 years due to due to the substantial rise in the use of medium term maturity boss.
Second and perhaps more importantly, why there's been an uptick in longer dated investment grade supply the absolute rise in issuance volume has resulted in a significant increase in wanting to 10 year bond matures.
Specifically investment grade issuance volumes with one to 10 year maturities rose by more than $160 billion year to date as compared to full year 2019 or more than 42% supporting healthy future funding needs.
Moving to Moody's analytics business continued to show resilience delivering strong sales growth despite the challenging cope with 19 environment.
Demand for our insights and analytics supported solid customer retention across both lines of business and an overall retention rate of 94% reflect relevant the importance of our solutions during uncertain times.
Stable retention rates together with growth in subscription sales, but better than expected performance in the third quarter.
And he continues to successfully convert the existing sales pipeline as our sales force and customers have adapted to the virtual working environment.
The pipeline for 2021 is encouraging, especially for high margin recurring revenue subscription products, partially offset by softness in one time project sales yes.
We had a busy season in the winter months and will provide our 2021 outlook early next year. After we examine the sales mix and performance in the fourth quarter.
Maintaining healthy sales pipeline is strong customer retention rates requires ongoing innovation to ensure that we continue delivering solutions that meet emerging customer needs.
By combining modules with our established products, we brought our customers with the tools they need to make better decisions. This.
This quarter, we launched two new integrated solution or your capabilities together and offer more powerful solutions.
I was wondering natural language processing and machine learning our profit assessment score provides customers with early credit relevant warning indicators, we are paring that tools, our corporate credit scoring products created edge and risk.
Together these capabilities will go to solution that helps customers monitor their portfolios for potential credit deterioration.
Similarly, Weve incorporated DSG inclined to assets within our flagship product credit.
Also known as Moodys Dot com.
Using data from video Iris and 427 customers are now able to see the sustainability. This metrics of their portfolio companies along with their credit ratings, providing them with the tools and data needed to take a more holistic approach to evaluating credit decisions.
In addition to enhancing our current portfolio organically you are also investing in the business by acquisitions and partnerships.
In the past, we've spoken about our strategic growth priorities regional expansion and business adjacent cities.
We recently made a number of exciting investments in both areas starting with business Jason.
Our acquisition of acquiring media and AI powered curated real time lead aggregator expands our growing capabilities capabilities. The acquisition bolsters, our ability to provide customers with the counterparty screening surveillance as well as early warning signals to help them make better decisions.
We've also made significant progress on our SG initiatives. The formation of the S.G. solutions group in September combines our internal capabilities with our strategic investments in Brazil Iris at 427.
The team will facilitate coordinated efforts across movies as well as unify innovation and product creation.
Turning to regional expansion, we recently acquired a minority stake in Mark a Malaysian rating agency, which strengthened our presence in southeast Asia and positions us as the leader in Islamic Finance.
In China, we created the commercial strategies to help identify to capture growth opportunities for M&A.
The team will ensure that our new product development and innovation plans aligned with market opportunities as well as help support the advancement of Chinas domestic markets and global economy to data analytics and insights.
Over in Latin America, we continue to build on our leading local platform with the recent acquisition with the recent expansion into Argentina and Uruguay.
Which combines the strength and expertise of our brand with understanding the domestic credit markets.
As we continue to invest in our capabilities to fill customer needs. We are also looking internally at our workplace of the future.
We're excited about the level of engagement from our employees and helping to define our the working environment as their input is key to maintaining our strong culture.
By leveraging our existing technological capabilities. We are confident we will not only be able to execute on expense saving opportunities, but also uphold the exceptional level service to our customers have come to expect.
I'll now turn the call over to Marc Kate right further details in these third quarter results and our revised outlook for 20 Twond.
Thank you Ray.
As we mentioned earlier.
Continued to demonstrate strong operating leverage you talk through disciplined expense management.
This quarter's 11% revenue growth outpaced the 4% increase issue, it's due to favorable revenue mix in corporate and financial institutions lines of business.
The largest contributor to corporate issuance it could go to 18% revenue growth as compared to a 10% increase in activity.
Based on grade and speculative grade issue, it's supposed to be liquidity positions and opportunistically refinance debt.
Potentially volatile.
Got it.
<unk> financial institutions, maybe benefited from favorable mix at the top line grew 12% despite the 12% global issuance declined.
What you do is 77% increase in activity in frequent with bank issue is what allowed you must be quick wits banks were able to do you have an issue had been in prior quarters.
In public project and infrastructure finance revenue.
1%, mostly due to a 25% increase in U.S. public finance activity. We issue. It took a bunch of <unk> credit market conditions and it starts.
Coupon rates.
Meanwhile, structured finance revenue declined 16% compared to a 22% decrease in global issuance stemming from weakness in scale those at the back of new than supply widen spreads hidden Egypt needs yellow creation.
We were pleased to see an uptick in first time mandates in the third quarter through a combination of increased high yield bond issue. Some early signs of redemption in M&A activity overall.
Overall, the Bucks, making 500 mandates to be signed year to date, which is they get about prior expectations.
Yeah, Hi, it's a significant rate growth ongoing expense discipline, they turn expansion of adjusted operating margin by 410 basis points.
Moving over to M- third quarter revenue grew 7% or 8% and.
Organic constant currency basis.
By collaborating with customers to cover their decision ecosystems, we hope they measure manage and understand risk.
Even more important in times of uncertainty and underpinned.
The ninetys retention rates.
Favorable in these recurring Reagan base represents 90% of the total.
6% year over year.
Dallas Cbds mix.
Focusing first and argue Nate the growing importance of knowing your customers suppliers and supply chain and.
Let me expand its keep watching compliance business this quarter.
Together with her back sales of research and data be products, so the 22% increasing revenue.
Gross proceeds of 110 basis.
But do you ever its revenue grew <unk> percent.
10% on an organic basis strong performance in credit just six months in origination solutions, such as credit things drug product.
She will support from my seat of insurance products.
In the third quarter.
Adjusted operating margin increased 220 basis points in conjunction with the growth in writing.
It seemed to compensation accruals increased but were partially offset to expense discipline and lower travel and entertainment costs.
Teaching Moody's full year 2020 guidance.
Outlook for 2020 is based on assumptions regarding geopolitical conditions and macroeconomic and capital market factors include but are not limited to get back to because the banking.
Responsive by governments regulated businesses individuals as well be fixed interest rates foreign currency exchange rates capital markets liquidity and activity picks up.
Big markets.
Reports or it makes assumptions regarding general economic conditions, and GDP growth in the U.S. endure area, the company's operations and personnel and additional items detailed in the earnings release. These assumptions are subject to uncertainties and results for the year could differ materially from our current outlook.
Our guidance assumes foreign currency translation in the quarter exchange rates, specifically upfront costs for the remainder of 2020 or fixed rates exchange rates to the British pound $1.29 since it's a euro at $1.17 cents.
Also seemed to previously announced restructuring programs around the rationalization that district Thats Big leases is to make it to result in total pre tax charges of $25 million to $35 million.
Total $25 million to $30 million is expected to be recorded in the second half of the year, creating between $3 million charge incurred in third quarter.
Its programs expected to adults.
And your life savings of $5 million to $6 million.
First about guidance. Please refer to table 12 about Britain's release.
Yeah great.
Your twin twin guidance, the most key metrics as compared to the prior cost and now anticipate that Moody's revenue increase in the high single digit percent range.
The revision.
Pieces that operating expenses, which we now expect to increase in the low single digit percent range there.
The resulting improvement in operating leverage to pull itself.
Bites adjusted operating margin guidance.
Range of 40% to 49%.
Proximity.
Person.
We are reaffirming both interest expense and full year effective tax rate guidance range of $180 million to $200 million and 19.5% to 21.5% respectively.
Diluted EPS full costs could be significantly right and never sure range at $9 and.
Since $9.50 and adjusted diluted EPS to range at $9 and bye bye.
The $10 to 15 cents.
Cash flow is now expected to be approximately $1.8 billion.
Hi, Frank quarterly earnings calls, we noted uncertainty surrounding the impact of the pandemic answer result, you clarity pools share repurchases as we want it to be executed at night.
Oh business.
Okay.
They should be hoping to announce that we expect to resume share repurchases in the <unk>.
Quarter end.
Providing guidance of approximately $500 million buybacks for the year.
Okay. So your 2020 guidance underpinned by the following back or assumptions.
2020 units and Euro area GDP to decline approximately 6% to 9% respectively.
Our employment rate to end the year at approximately 8%.
Each month interest rates stay low with you its high yield spreads of approximately 500 basis points.
And the global high yield <unk>, she likes to approximately 8% by year end.
We continue to closely monitor both the macro economic backdrop and credit market activity as we head into the fourth quarter.
Turning to the operating segments.
Yes, with the surgeon issuance year to date, we now anticipate full year revenue to increase in the low double digit percent range with rates of issuance growth in high teens.
Hey, my guidance it seems to be some great activity for the full year increase of 60%.
My prior assumption of 50%.
Hi yield issuance increases 25%.
Some site person thanks.
Bank loan issuance declined 10% or 20.
20% decline.
Dr. issuance declined 5% slightly higher than our prior expectation of a 40% decline.
Additionally, with the increasing first time mandates in the third quarter, we have raised up so your expectation of approximately 550 to a range of 600 to 700.
As a reminder for its turned mandates are an integral part of its future growth.
Not to generate incremental libbey, two issuance, but altitude future annual monitoring fees.
Given the likely contingent.
Yeah, we have discussed we believe that the majority of issue. It was looking to refinance a waste liquidity through 2020 had already done so.
Furthermore, we anticipate that emanate the one positive train control <unk> activity earlier in the year what were they relatively limited in the fourth quarter.
Turning to guidance adjusted operating margin. We also raised guidance by two percentage points to approximately 60%.
It's driven by both year to date revenue growth continuing to outperform and disciplined expense management inclusive about incentive compensation accruals.
With over 60 courses of consecutive growth in Asia, we are.
Police to return for your 2020 written guidance in the mid single digit percent range.
Guidance reflects a net unfavorable impact of approximately two percentage points from the divestiture of mix.
Partially offset by great some tuck in acquisitions, including arguing see risk first Cts suite and acquire media.
We expect our you name it and the growth in the fourth quarter to gain driven by two I see and compliance solutions as well as research and data speeds.
Some of the continued strength of your rates from living in Soc with leading suffering analytics, such as President I, sorry, 17 solutions support steady growth in 2020.
It means reaffirms adjusted operating margin guidance of approximately 30% driven by operating leverage created by the ongoing transition scalable subscription based products and focused.
Focused expense management initiatives.
Before turning the call back over to rate I would like to highlight a few key takeaways.
First the opportunities to raise guidance metrics for the full year due to better than expected performance in the quarter driven by the high demand for <unk> suite of products insights and solutions.
Second we continue to innovate and reinvest in our business to further enhance our relevance and meet our customers needs additional needs for sustainable long term success.
Third <unk> it's.
It's increasingly complex environment, we remain committed to all of our stakeholders.
<unk> approach to expense management.
Future workplace environment, and prudent capital allocation is to die to ensure ongoing operational and financial flexibility.
I'd also personally excited.
Energized I love towers appointment, the incoming president and CEO.
I think the impressive record of achievements <unk> deep knowledge about businesses, so they need to all customers.
So why did you feel great leadership guidance and friendship over the past several years I've really enjoyed working with and learning from him.
With that let me turn the call back over to rate.
Thank you Mark on this concludes our prepared remarks, so rough fibermark k. and I would.
I would be happy to answer any questions you might have so please operator, we can open it up for questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please tell star one on your telephone keypad.
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Any additional questions you may have again star one to ask a question will cause for a brief moment.
And we'll first hear from Kevin Mcveigh of credit Suisse.
Great. Thank you Hey, congratulations to you Ray Rob as well and really just Oh hadn't really really good results itself.
Got to go out on top brain, you set a tough bar for us but.
A lot of hard work, there Hey, I wanted to start with just the margins in Moodys analytics, you know really nice improvement <unk>.
I Wonder if you could help us frame that out a little bit in terms of you know what drove it and you know how sustainable it is gulfport.
Thank you for the question and that's before I address the question directly on.
Kicks, it's worth noting that we've had over 500 basis points of margin expansion and indeed analytics over the past three years, a very impressive results I'm on a continued trend.
For the third quarter, specifically he reported in a margin expanded by 220 basis points to 31.4% this quarter and.
And that was primarily driven by over 300 basis points of core expansion and its I think about our DNA being 200 basis points of that maybe you're already seeing around a 100 basis points of that and.
And that was offset in part by seem to compensation true ups during the quarter.
We have maintained our 2020 in a segment margin guidance of approximately 30% that represents.
Over 200 basis points of margin expansion on a trailing 12 month basis basis from 2019.
We do expect continued margin expansion over the long term.
We may see some pressure in the next 12 to 18 months it spending them depending on the ultimate duration in severe a cheap I'm.
And though it could get nights and economic impacts and but we do feel very positive about this business.
That's great and then maybe just within the context I may as well you know almost a 95% retention rate you know in this environment seems really really impressive maybe some puts and takes around that you know in terms of what's driving that and then the ultimately you know even within the context of <unk>.
You know were bankruptcy is a little bit better client losses anything like that because really just had a really really nice outcome.
Yeah.
Rob do you want to address that.
Yeah sure yeah. The overall retention rate across a imagine as you say has remained very strong in fact probably picked.
Picked up slightly that's led by our.
Our research products, 96% retention, they're very very strong I think what you're saying is you know in a in an environment of of uncertainty or our customers really really value the insights and expertise that we're able to offer them. So I think that's supporting a retention, but you also see the retention rate.
In our fashion and beauty businesses, we have out in the webcast and I think that goes to the fact that these are you know embedded into customer workflows and viewed as kind of must have solution. So when you think about the yara suite of solutions. Yeah. These are being used for you know loan origination regular.
Foreign capital reporting you know.
Accounting all sorts of things so.
You know that supports those retention rates and just like would be if you do a lot of that data is being used to support.
That compliance solutions, which which you know, but that really supports those retention rates.
[noise]. Thank you [noise].
Thank you Kevin and thank you for your comments at the beginning also.
Next we'll hear from another type of.
Barclays.
Thank you and my congratulations to the.
They involved as well.
First question I had was just trying to think about some of the moving pieces.
Particularly on the issue in the fourth quarter, you Mckamy, there's going to be from the election volatility and that depends on how the markets react, but you know what I wonder the hospitals and at that stage in investment grade and high yield issuance that'd be so that's.
Got surprised a lot of us are out through the first set of locked down in any more sense do you think a lot of the I.G. company I've read a lot.
Cash in terms of you know maybe what they anticipate they needed or do think that there's not a lot done you could see some kinda because it's either that coming.
Bob This is Marc and good afternoon, I think given the nature of your question well teachers, maybe a little bit different than what we've done in the past and I'll start really by talking about what we're hearing from the banks and then we'll open it up and further.
Following patients for that.
Starting with that you had seen basement grade and the banks have seen record issuance, which was increasingly driven by opportunistic issue is looking to take advantage of historically low rates.
And tight spreads in the third quarter.
Fiscal and monetary sponsors have facilitated market stability that companies continue to build liquidity reserves and taste of uncertainty.
As a result, the cash balances have surged over the last two quarters. The banks you would like to get one portion of this cash will be deployed in 2021 <unk> business fundamentals mobilize the majority may be used to fund the near term debt maturities contingent upon this each operating environment.
And specifically the bank supports it seems strong interest in lung there 40, your bond durations and a notable increase that you see in sustainable its bond issuance further.
For the remainder of the year, the banks, but the connectivity it snowed.
And many companies have completed couldn't necessarily funding for the year.
However, some they've continued to take advantage of favorable low rates and tight spreads I mean to date M&A activity.
In a related issue and.
Ted significantly we turned the pipeline looks relatively however.
However, they are indications that M&A volumes, maybe walk me and I further uncertainty around the occurrence and timing of fiscal stimulus.
Writing fiction texting trials election results Don.
And then at rates of course, we're going to continue to weigh on the market based on the banks input the.
Dave given they are used for investment grade issuance to be 50% to 60% for the full year.
Moving onto the spec grade that so much investment grade market active high yield bond issuance had been driven by record low rates and tightening spreads the volume of high yield bond issuance year to date has lost full year 2019, as well as the Jordan totals a loss in years.
Conversely, leveraged loan issuance it lags and they didn't technical backdrop.
Slowing seal it makes you can load them up so.
For the remainder of the year, our yield bond and liquid leveraged loan issuance is expected to slow in the fourth quarter and given that most refinancing Sunday. They stayed up the uncertainty from next week's election, and I would see a second wave of potential close it might some cases.
Turning to European investment grade. Despite the recent spike oppose that 19 cases at central banks supporting strong EBITDA Dimont have continued spread.
Sprague's Marin with investment grade sprague's recovering to about 80% of the levels.
And didn't make that she issuance continues to increase with around 20% of corporate bond issuance in 2020 labeled as gifts you've been.
Reverse Yankee issuance made music and the falling down more than 20% year to date and that's due to the favorable late in the U.S.
For the full year, the banks full cost European it's great issuance.
5% and then finally, the European spec grade instruments had been similarity supported by aggressive monetary and fiscal policies.
What is returning back to the month of higher with investments that has allowed the leveraged finance markets remained relatively flat.
But the forward pipeline looking forward that in previous months.
And so far there has been a big enough and obviously ultimates dissipation of volatility and that may be close by this election.
And with that let me pause here to see if there and I said the questions.
<unk>.
[noise]. Thanks for that I guess, you called out that.
I've just got more but maybe just a follow up would be just on the key light fee business could you just help us saying, what the competitive landscape, there looks like and perhaps allstate buttons, there could be many more tuck ins kinda give yes.
Yeah, Rob I think this is for you.
I'd be happy to take that in a minute what I might also do is maybe provide you a little bit of color on kind of what we're seeing in the K white fish space. So you know as you know we've got a a leading position in that market. We're competing against players like repetitive Lexisnexis, Dun, <unk>, bradstreet and and and.
Number of others, but there are some interesting trends going on in the K likes to say so.
First Ur Cobots really accelerated.
A digital transformation NK, why she and customer onboarding.
You know I think locked down have made the old fashioned way of doing all this stuff or you know quite challenging company.
Companies are looking for more precise filters and ways to focus what and when they look at individuals and entities and we actually had a very large bank tellers recently that for the first time their legal and compliance teams.
Are are pushing for their K why she seems to to use external vendors and solutions.
I'd better leverage data and technology, then what they're doing in house.
So automation not only brings efficiency, but but also improves reliability and quality control and you see what happens in the market. So many headlines when these banks get this stuff wrong. The defines can be on the billions, but.
The second regulation continues to develop and evolve in this space.
And it's requiring companies to know more about their customers.
Than ever before so you've got new regulations that expand the you know the number in nature of of offenses that must be screened for so things like a reputation all risk a social risk patch crime cyber crime.
Minimal issues and end to be able to screen monitor for risk like that the customers need more sophisticated platforms around no adverse media.
Like what we've got with with already she in which we further enhanced with our acquisition of acquire media. So we're very excited about that I.
I think the third thing is the financial crime is getting more and more sophisticated and that requires more intelligent solutions. So you've got institutions increasingly trying to understand their exposure not just to their customers bunch of their customers customers and again, that's where we're merging you know bank shown in turn.
All data with our external MPG in the hierarchy and rich data from BBB and already see and we can give a deeper understanding of risk when these institutions can get on their own so.
We're really focused on.
Offering smarter content to existing solutions.
Yeah, providing new insights in some of these new areas and providing the market with what's really trusted sources have insights and analytics. There that we think is best in class and really positions us well in that competitive landscape.
Well I mean, I would think that.
Yeah, I'd, just add real quickly that or firms wanting to be able to demonstrate to them their risk committees or their boards of directors or the regulators that they are taking a robust approach too.
Knowing their customers and others.
Using a standard is very valuable and demonstrating that robustness and ER. We are very much a standard in this area so up.
Just to add that it is a positive networking effect to our position.
Next we'll hear from Toni Kaplan of Morgan Stanley.
Great. Thank you Rob congrats on the new role and Ray Congrats on your retirement.
And thank you for that.
On the 2020 issuance and all the color earlier in the call I know you don't like to give forward here at this point, but and there's a lot of moving pieces in the next few weeks potentially lets stimulus and the election, but just help us out preliminary on your preliminary thoughts on 2020 line issuance scenarios.
Okay closest competitors forecasting issuance had about three so just hoping to understand if they'll take the over under on that line.
[noise] shown Johnny I, I'll take that and and.
Appreciate the well wishes.
You know 2021, I think remains uncertain just like the the the balance of 2020. So we're going to give you as you noted we're going to give our guidance on the fourth quarter earnings call like we normally do.
I think in particular, you know this year, it's going to be very important to see how 2020 evidence in terms of issuance because that's going to be a material factor I'm pulling together, our 2021 outlook you know when you see a real drop off in issuance after the elections.
And then when they have some pent up demand starting off in 2021.
I guess I would say in general from where we said right now I think the headwinds probably outweigh the tailwinds and very importantly, because we had to do and I'm, including this year or two very strong issuance years.
And that obviously creates some very tough comps for issuance and in particular for corporate issuance and investment grade issuance.
In terms of kind of thinking about the supporting factors going into next year I, maybe you know highlight a few things one you know obviously the potential for improving economic growth.
And an increase in M&A activity, we certainly soon enough and uptick in M&A activity this past quarter.
And you know I think we could see more sponsored driven and distressed activity.
Next year, but sustain central bank support along with you know potentially another round of stimulus.
And obviously I think a continued low rate environment.
It's going to be supportive of refinancing those maturity walls that we showed in the webcast at <unk>.
And that means that we may see growth in some areas like our rating assessment service that that works with companies around M&A activity.
I think we could see an improvement in bank loans off of a very low base. This year various parts are structured finance.
You know, we could see ongoing U.S. public financing infrastructure issuance, you know taking advantage of a very low rate.
Then we weigh that against the potential headwinds and starting with you know like I said that very elevated issuance that we've seen this year, particularly in investment grade, which as as we said we expect to be up.
Around 60% versus two thought 2019, that's a hard act to follow.
And we've talked about the elevated liquidity at that a lot of issuers you heard that from Mark in terms of what the banks are thinking that raises the potential for cash rich companies to defer yeah, either due to deferred issuance or pay down debt depending on how next year unfolds and you know that I think in addition, the virus is obviously a wildcard.
That's likely going to impact the trajectory of any economic recovery in both consumer sentiment and corporate investment and balance sheet management. So.
Hopefully that gives you some insight into our thinking today, but I can assure you we'll provide a forum for your next quarter.
Very helpful and then on and I ask margins, there's an incredibly strong quarter over quarter acceleration and I would have expected cost returning following the two Q.
Yes blocks down et cetera, and so just maybe a continued increase in incentive comp given issuance has been so strong. So just maybe talk a little bit more about the strengths and then last margin can you maybe parse out some of the more permanent versus temporary savings.
Cuts that Muskogee coal that related reductions eventually return thanks a lot.
Tony could take it off to need and you're absolutely correct that nice margins. This quarter were at very strong. The 64.2% result was up around 410 basis points compared to the same period last year and there were two very strong underlying drivers to that to the first with very strong <unk> performance.
I'm, obviously in the quarter and the second was very strong cost discipline at that we showed at throughout the quarter.
As I think through what the potential temporary and permanent related items could be in the quarter. We looked at a variety of factors and that include activities. The management to taking around restructuring and increased automation I lived in M&A and the utilization of lower cost locations have procurement officials.
And obviously at real estate optimization.
A good portion of that that we believe will carry through into future quarters and on the other half they do want to make sure that we are sufficient adequately stopped like expertise and so they'll get the elements of the leverage that we created this quarter, we're going to use to reinvest back into the business.
Puts us up or stable.
In 2010 to 21.
Thank you.
Next we'll hear from Alex.
Yes, Hello, everyone. I appreciate that you when I look at 2021, yet or provide a little color. One thing I would ask fell about 2021, Rob you just mentioned a the loan business, having some very easy comps next year and I guess that makes it a little bit more bullish on that.
Isn't this next next year, but what other factors should we be thinking about the loan business. In particular is it is it just about the rate picture near term rates or are there other reasons, where that isn't that why that business could actually make a nice come back next year.
Yeah with respect to.
With respect to lonely.
Slowly in particular.
No I I think we have to acknowledge that are generally the borrowers are at the lower end of the credit continue and as such are more susceptible to the pace and and strength of the recovery or whether we have a a second wave that force.
It is.
Closing parts the economy that had been able to open.
So.
Again, just this whole there's really there's really a set of injured inter dependencies between what's happening politically what's happening with the disease and what's happening in the economy more broadly and they play off of each other and I would say the London market is particularly.
Sensitive to both positive or negative developments around that set of inter dependencies. So hopefully that's helpful to getting to your question.
Yeah, I know that but that's fair and then just a quick one here also again, sorry that I'm thinking about 21, but to me 2020 is already over I think but.
But.
And what I think well I think everybody hopes it to be over right. So if.
And if you think about the the recurring side of the M.I.S. business I think year to date, you've grown that 5% and you cited the strong issuance over the last couple of years. You know is it fair to assume that you know given the strong issues that we had this year. That's that's a recurring revenues the monitoring fees and continue to.
Two or three she had at that at that pace.
Yeah, Rob Gayle.
Oh, sorry, yeah.
Yeah, Hey, Alex I think so I mean, obviously, we've had a little bit of slow down from the rate of recurring revenue growth that we saw in the second quarter I think it was something like 5% and that's typically what's contributed to that as you know ongoing in our pricing initiatives I think that remains intact.
As you know we had a little bit lower first time mandates.
While we were in the height of kind of the the pandemic that has obviously picked back up.
So you know I think that improvement in mandates will continue to support our growth rate that looks like.
Something like what we're seeing now.
Okay very good thanks.
And also could talk to us.
No Alex just real quick I, just wanted to add do keep in mind that the growth in.
In this year related to first time mandates, where the first time mandates. We brought onboard last year those will be somewhat higher than the number of first time mandates. We get this year. So there's a bit of a headwind even though we will continue to add growth I just I just want to make sure you're able to model that correctly.
Absolutely. Thanks for the reminder, and then again also congrats to all the new roles and I enjoy I guess semi retirement when you take care.
Thank you.
Okay, let's say from Morgan.
Hi, Thank you I'll also just echo those congratulatory messages.
But you say and that looking forward to I appreciate the great great work with you guys.
Just wanted to ask a couple of questions about free cash flow.
Touched on cost met expense matching that'll help free cash so it seems like while they have been strong and obviously guidance is taken up generally seems like that maybe there's a little bit of a slip as a little bit of a disconnect in <unk>.
Conversion for EPS and free cash out of the pit picking up a little bit more so maybe you could just touch on what's going on there and then also just touch on the rationale for restarting the share repurchase program. How you guys thought about the timing and the amount.
You know for for getting back into that thank you.
Thanks for the question, let me start with yes first question on that free cash flow. So.
This morning, we grade boats out full year, adjusted EPS and free cash flow guidance by approximately 12%.
And that eight of those Midpoints, we are expecting our full year adjusted EPS to grow approximately 21% and our free cash flow to grow approximately 12% for the year net that's where he the numerical disconnect that you're highlighting and deep.
The primary driver behind that is really something you get working capital headwinds that you mentioned earlier this year.
Specifically, the Q1 advertising pension plan funding, the higher 2019 and seem to come.
Payments that were paid earlier this year and then Capex, if we adjust for those items outgrowth in free cash flow. This year is very much in line with our adjusted EPS for the year.
And then I'd simply add to play out.
Helpful. Paul free cash flow conversion of net income is expected to be around 100% this year.
And your second question around share repurchases, we have not changed I think it's important for me to stay up front that weve not changed our long term strategic approach to capital allocation. We did take several steps earlier this year to ensure that we were very robust and working capital.
Available to us under any sort of stress environment.
And pools Cherry purchase it just out of an abundance of caution.
I'm very pleased to announce this quarter that we are we can mean single share repurchase program. We are guiding to for your 2020 amounts of approximately 500 million and subject to available cash market conditions, obviously other ongoing capital allocation decisions.
Longer term, our plans remain to optimize our balance sheet.
The other t. buffers use of excess cash to invest for growth.
After which we'll continue to look to return capital to shareholders by growing the dividends and continue to repurchase shares and he chembio question around line now and we feel very comfortable with our very strong financial performance. They do today and that we have very successful opportunistically.
Early refinancing of 2021 gets in that in August and that really means that we've got a clear pathway for 2021.
Okay. That's great. Thank you guys.
Craig Huber of Huber Research partners.
Oh, Thank you Rob congratulations as well.
Ray I, just want to say as well as I think you've done a fabulous job here. The last 15 years like if there was a hall of fame out there for Ceos you'd be at my friend.
Thank you all right I appreciate that.
That's the truth, that's a high bar Youve put in place for Rob and the team there.
I guess, if we think about the election here a lot of people office, you think there's a potential for blue wave here as Democrats sweeping everything here.
What do you Wanna, Rob Thank ray tax implications of potentially higher taxes.
Tumor as well as corporations.
More regulations out there such a what that could mean for debt issuance <unk>.
What you think of the coming years after that maybe put in place.
Yeah, So Craig I'll start maybe Rob.
Might want to add on but you know as a starting point you know.
Recognize that there are not going to be identical policies and priorities, depending on whether there's a blue waves or weather.
The Republicans win pulled aside it when the presidency, the number of combinations, none of which will produce exactly the same set of priorities and policy.
ER element that we will have to to address just as other business as well that means that we've done very well in both Republican and Democratic administrations.
As well as in unified and divided.
Government so.
In a lot of ways, what we think about is accommodating what the policy priorities are in terms of managing our own business and I think we'll be able to do that usefully I think we are viewed particularly during this pandemic period as having been hit very constructive force in them.
Markets with data analytics information and so you know I'm pretty optimistic.
Whichever way. This goes that we will have a successful business now what that means in terms of debt issuance, but that was going to be the details there and I'll I'll pass this over to Rob for a couple of his thoughts on this.
Yeah, Craig you know it's interesting because this is really the converse to the questions that we were getting just a few years ago with the lowering of corporate tax rates and you know I recall.
Uh huh.
We sorry, we lost profit and Oh, so yeah.
Let me, let me just step in because I I.
Crop is going to discuss the fact that when we were looking at a lower race a few years ago. There was a lot of speculation and questioning about what it means for you know what happens with not slower rate, but interest deductibility tax shields.
Pre funding needs of municipal debt a host of details that really ended up in some cases being pretty immaterial compared to what had been anticipated in terms of debt issuance, but in other cases caused debt issuance to either be accelerated.
In the case of parts of the municipal sector or yes. It has some effect.
<unk> and so again, it sounds like cliche, but the devil will be in the details in terms of the drivers on a debt issuance for 2021 and probably beyond that.
One other question Ray.
Your outlook given the importance of M&A out there historically for debt issuance.
It's a very weak this year that M&A.
Why cannot part of debt issuance not picked up significantly here over say the next 12 to 18 months as soon as fives gets under control of calling me just keep picking up in Europe and U.S., what's your thoughts on M&A here, given the interest rate environment et cetera. So that's 12 plus months.
Yeah you.
You know we've seen an uptick in M&A pipelines, just recently and so.
That that once we had back in the second quarter is showing signs of getting up off campus.
So I'm actually reasonably optimistic about M&A driven debt issuance over the next 12 to 18 months and it could take a couple of different flavors. This could be a fairly rapid and strong recovery economic recovery in which case you know you'll have businesses pivoting to thinking about how to grow.
And secure beachheads in attractive adjacent fees et cetera through inorganic activity.
Even if that doesn't happen in the recovery of slow there are going to be firms that are increasingly distressed and stronger firms are going to be looking to a distressed M&A market and I I think are going to be more inclined to pull the trigger so I can see a couple of pathways to a more.
Promising M&A environment in 2021, and we have this year, but I'm not sure which path is going to eventually.
If I could also just ask mark the incentive comp number for the quarter to replace and how it's done year to date.
Sure the incentive compensation for the third quarter winds that $77 million, we are now expecting.
Tend to compensation to be approximately $225 million to $235 million for the full year and that will compare against the initial guidance at the beginning of the year around just around 50 million per quarter, what's your hundred million. So so yes.
Great. Thank you.
Yeah.
Next we'll hear from Jeff similar BMO capital markets.
Thank you so much and Ray let me add my that's what you see you and Rob Congratulations Ray just what I think you're getting for all your help over the years I.
I know you have to be really.
Good question, Jeff I.
I know we had a previous question that they know about the 2020 was over but we do have a couple of months left so I just wanted to ask about your 2020 guidance you know.
If I look at the implied Fourq guidance for EMI, Yes, I think it's implying a low single digit revenue decline, but pretty adverse decremental margin impact I guess, there's some spending going on in the quarter that we should know about or right now.
Nor it to a massive that your math is correct and.
Specifically for the fourth quarter, our guidance would imply sort of a low double digits.
Decline and enhance revenue and on the expense side would imply sort of a a high single digit or.
Low financing low single digits or the low end of mid single digits, increasing expenses and specifically if I think about the expense ramp really from the first quarter and that's really now expected to be around $60 million and that's really related to costs associated with incentive comp and other charitable contributions.
And then specifically on living in basin see technology.
To support our infrastructure to enable data automation innovation efficiency as well as business growth.
So that gives you a little bit of color and one other question.
Yeah, that's actually very helpful. Mark I appreciate it and just shifting gears over to you know what your company is doing or planning on doing any SG, we're getting a lot of questions from investors a lot of companies that have different strategies can you just give us a little bit more color or what your strategy is there.
Sure Rob do you want to kick.
Kicking off.
Yeah, I'd be I'd be happy to take that I think you might want to think about it you know we've got three way that we're thinking about yes. Two one is integrating yes, gi considerations into our ratings and research and that's really really important to the ratings business to ensure the.
Ongoing relevance and thought leadership I think you'll also see that you know eventually be commercialized or with our our research business and and that.
Speaking of them as you know, we've got a broad customer base of financial institutions banks insurance companies corporates.
Who have Ah Ah Ah, increasing demand and need for U.S.G. and climate concept to be integrated.
Into the various risk management offerings that we have today. So if you think about whether its loan originals and now they're climate stress testing you can imagine our commercial real estate platform, where we started to put.
Our fiscal risk scores related to climate. Some for 27, so I think you'll see.
A good bit of integration and commercialization of our U.S.G. and climate content.
Through our existing and new image.
In the products and services and then lastly, we've got you know stand.
Standalone, yes, GE and climate businesses with digital Iras and 427, we recently put all that together into an U.S.G. solutions group and so there are we are you know we've got school.
Scores on thousands and thousands of companies around the world, we're selling those too.
You know investors and financial institutions, and others, but I think you'll also see us start to develop and we are developing a sustainable finance offerings for issuers and there we are.
Got to sustainability ratings through there's your lives, there's an issuer paid rating and we've done a close to 240, if there's a year to date and have a second party opinion on label bond issuance. So this started in the Green bond market. It has moved now there's all sorts of of labeled insurance transition.
Bonds Green bonds Blue bond social bonds and so on.
And so we're providing second party opinions.
On that issuance through Vizio hours I'd also note that our associates are starting to do the same thing. So cxi has a green bonds.
That's an offering and our affiliate in Korea.
Just gotten its first mandate, so I think you'll you'll see us monetize there's a variety of ways and maybe one last point on indexes because we get this question a lot.
How are you going to be able to to monetize yes, you through their indices.
We obviously don't have a scaled.
Index business and so what we're doing is working to partner with other index providers to provide them the data to power their indices and so a good example of that Euronext sole active ARCC part two index providers that we partner with we just recently launched a very interesting index with you on that.
Around energy transition, so I think you'll see US you monetize that index opportunity in a different way.
Okay. That's really helpful. I appreciate the color.
Thanks, William from Wells Fargo Securities.
Hi, Good afternoon, I wanted to pass along higher client relations symbolic Oh, Ray and a lot of it as well.
Hi, My question is related to the already see I was wondering if you could provide an update on how those synergies are.
Trending and maybe Kevin any discussion around absolute margin level and the RBC.
Yeah, I'd be happy to jobs that that.
Jake.
Sorry, Rob Jake just I wanted to welcome you to call I know Oh aren't doing this is your first time on so I just want to say Hello and welcome.
Well I'll I'll turn the substance over to Rob now.
Yeah. Thank you very much.
I appreciate that.
But we feel good about already see in the combination with a BBB. It's a it's a great business Super group of people and really had good said with the NH portfolio and I you know I was talking earlier about those trends that we're seeing in the K rights to market. So I think this was a timely act.
Acquisition so.
So far this year, we've really focused on a joint sales programs [noise] between DVD and already see and that I think has been successful we use.
I mean, I think some tangible sales when that neither BBB more arden she would have closed without this combination.
We've got a an initial phase of our integrated compliance offering that's going to be released.
Next month, yeah. So that's a key milestone in the integrations of our product offerings.
And then we've got the after the acquisition of acquiring media and that further strengthens our capabilities specifically with with RBC. So acquired he is a very important supplier to RTC and the Moody's overall.
And that's going to be an opportunity to leverage their.
They're sophisticated AI driven news aggregation engines to build new.
No early warning signal offerings that are going to further enhance our kids business.
It actually hasn't benefits to our credit yes. She offerings in regards to you know maybe how it's performing slightly better than expectations from a revenue standpoint due to the momentum that we had coming into the year with subscription growth.
Current sales, maybe a little bit behind expectations, but that's really just the same overall challenges weve had caused by social distance and so I think that's very much of a temporary issue.
Got it thank you very much.
Oh Rosenbaum at Stifel.
Hi, Thank you Robin living congratulate you also but I do want to tell the way that he does seem a little young to be put out to pasture.
[laughter].
[laughter] I don't feel young [laughter] synergetic on these calls.
[laughter].
No questions I wanted to ask you just sort of a strengthening in our DNA are you is the strength to go to like 12% organic growth how much of that is in sales forces. The strong you know.
Strong retention are you seeing a pickup in sales over there as well or is it really just less calling on or just a little bit more color there.
Yeah.
So hi, Shlomo it will not raise not being put out to pasture bye.
Perfect. Thanks for the well wishes. So maybe three primary drivers of that or DNA organic constant dollar growth that we're seeing and it's really research data feed them. These compliance solution that would say why she solutions and the BBD RTC business.
In research.
You know I touched on there's really strong retention rates.
That 96% and research is actually slightly up.
Over the last 12 months, that's a remarkably good figure and the yield on this existing base from a upgrades and price.
Related to our enhanced credit you platform and says I think what's driving.
That growth in data feeds it's interesting we did some things around sales deployment.
To get both new logos, but also to sell more products into existing customers to serve a a little bit broader range of use cases that these customers. So we've seen really nice growth in organic growth in data sheets, and then of course you know.
Already see I think I've I've talked about that to get that to give you a sense to be revenue was low teens this quarter and as you've heard from US. We think there's good ongoing demand and Mackay watch this space.
Okay and then maybe this one is from Mark.
We encounter a situation in 2021, where you're dealing with the confluence of of you know.
He dropped much weaker year over year issuance or just because of what we saw the strength in this year together with the fact that a we will you know hopefully have more of an opening up into the economy in general in terms of Oh people traveling and more expenses creeping and what are the main levers that you have to go ahead.
And you know kind of manage the margins and just like philosophically. When you manage the business is that something that you focus on you know into heightened way in the near term or is that something that like you know hey, the margins can just go down year over year and that's just the nature of the business or how should investors be thinking about that.
And shiny lights, and very interesting question and it's certainly one that the management team and I think about it in that same regular basis, maybe the way I'll address it by two.
Looking through some of the extreme actions you've taken.
Taken this year are implementing now and with the idea that you could infer the bezel carries through to 2021 and to create the financial flexibility and that either the firm.
So this quarter itself you can see that the adjusted operating expense growth was 1% at so in Seattle, that's against that 9% revenue growth for the quarter net maybe shipping in early signal demonstrating how strongly we're managing against our expenses.
I carried at fully to the full year and you can see here that our guidance against the low single digit percentage growth and against a high single digits NCR waving your numbers. So that same sort of carries forward to the full year and that's despite absorbing into this year that relate to for example to cope with 19 bad debt reserve.
There's a highly seemed to comp that M&A activity et cetera.
Maybe if I carried at for the little bit further into 2021, we are targeting to manage core expenses down.
With the idea of self funding it.
Between $18 million and $800 million of.
Reinvestment back into the business to support underlying business growth promotion activity. Some strategic basements, let say why see yes, cheap picture and that's going to be achieved through some of the cultural expense discipline around to get managing those core expenses down to self fund and that they're going to.
Cheap those savings from procurement activities I keep efficiency and traveling entertainment real estate et cetera. So that gives you a little bit of color around how were thinking about managing our expense base to create that financial flexibility in 2021.
Okay. Thank you.
[laughter] well hear from George Tong of Goldman Sachs.
Hi, Thanks, Good morning, Ray you will be missed congrats on a great run and Bob Congrats on the new role.
Thank you.
So the notice that you're continuing to increase your mix of transaction based pricing with them and I guess can you talk about where you are in this process and which of your debt categories. You expect to be more focused on with this change.
Yeah.
So I'll just start George but but Rob may have.
Additional thoughts I wouldn't really say its not so much that we have a target ratio or or percentage between the recurring and and transaction, but we.
Or noting that a lot of the growth. We're seeing is coming from speculative grade issuers and those tend to be less frequent issuers and more inclined to to pay on a transaction basis.
If we if we believe and I do that that trend will be continuing that is going to be pushing.
In in a transactional a direction over time in terms of the mix and Rob Mark Please weigh in.
Yeah, I didn't that's exactly right right not nothing really to add to that yeah. Okay.
Okay got it that's helpful. And then looking forward to the remainder of the year. How would you expect the mix of issuance between investment grade and high yield to change, especially given the strong rate of high yield issuance, we saw in the third quarter.
Yes in a row arc.
Yeah, I'd be happy to to kind of take that maybe let me just talk to you about you know kind of what we're seeing right now.
We are yeah, given how strong investment grade has been year to date, we are seeing some I'd call. It headlines in packing investment grade market. Some are the equity markets. Its elections earnings in section stimulus.
I would note that fund flows into investment grade continued to be strong we've had something like a 28 consecutive weeks of inflows on the the fed continues to be a.
A small bar in the secondary market not provide some support.
Meanwhile, the conditions in the leveraged finance markets are very conducive to issuance and that's interesting because.
Usually that doesn't happen when we see those kind of equity market volatility, but you know.
Up until very very recently, we've seen some relatively aggressive deals dividend recaps LDL goes and that that's even corresponded with an up tick in and leverage loan activity. You know so we may see the balance of issuance a little bit weighted to a leveraged finance, but I think some of the strength that we're seeing and.
He activity. It's just an issue was trying to get ahead of the election related volatility and you know as we've talked about and I think we're going to see that activity slowed at the end of the year. The last thing I would say is with the upcoming holidays. There just there are fewer and fewer windows for for issuance for the remainder of the year.
Got it very helpful. Thank you.
Next we'll hear from a one mile of Oppenheimer.
Good afternoon, and thank you for taking my question. So first of all our way congratulations on your successful Korea movies and also Rob Congratulations on the rise and so promotion.
So for my question I want to go back to buybacks, if I'm doing my math correctly incident and share purchases in total gets above 50% of free cash flow. This year instead evolve to be more aggressive given that you had talk about 80% in the past and.
I had to show the street. Thank you.
Okay, Matt. Thank you for the question we.
Targets to really manage our capital and that is with an anchoring maybe that's what they said they prayed anchoring really around the triple B plus rating.
We don't propose we don't say targets based on.
Percentage of free cash flow return EM.
With that said.
Over the past several years and that typically 2016 to 2019 up free cash so.
Version of net income it actually being 116%.
When adjusting for the deal case settlements.
This year, we expect as I mentioned early on the coal at the number to be slightly over a 100% of approximately 100% in terms of the year to date.
The expectation that the dividends around 350 million year to date, and then share repurchases has been around 262.
We hypothetically carry forward.
With that said rates each year and that would put dividends.
On June 20 million and share repurchase guidance at approximately the same I get we spoke about earlier at which would be about 50% about 1.8.
And free cash flow guidance Youre, absolutely correct.
Okay got it and then finally for <unk> S. A I think he also has had a pretty strong quarter and you mentioned the right. It affects men loan origination solutions and I have always said into maybe could you. Please well find more color on disease and all that.
Anything in particular, why it happened in the third quarter and also the sustainability all of these projects going forward. Thank you.
Yeah, Rob.
Yeah, Yeah I'll touch on this.
Overall Europe's growth has been supported by you know obviously risk first and as we said you know strong sales of of credit lands and <unk> and <unk> for Us solutions and insurance solutions. So we've seen as we sunset or one of our origination products, we've seen very good.
Kinda renewal cycle.
Cycle or around that and exact subscription growth for our credit origination credit assessment origination.
Then something like north of 30% year over year, and that's again driven by that there's year to date sales of public credit lands or software.
For US 17 continues to just to contribute to that as well.
Okay got it thank you very much.
[noise] from Trans Atlantic equities.
Hi, Thanks for taking my question.
I wanted to just follow up with just on the the K Y C business opportunity that you have and obviously, it's just I was just wondering in terms of the data sets you have.
And the assets you've acquired although many natural and cemetery kinds of opportunities for us for the use of that data beyond this okay I see a market that youre currently talks.
Yeah. Good question. So I think what you know what we're likely to see the broadening of Kyi see to go beyond.
Simply serving.
Regulatory requirements that financial institutions, and you heard me talk a little bit earlier about in addition to increasing regulation you've got institutions, who also just want to have a better understanding.
Oh, who they're doing business with and going beyond for instance, financial crime into things like reputation or risk.
Data security, you know social issues around modern slavery and things like that so I think what that means is in addition to drivers for for cable I see I think we may start to see.
Customers start to look at this kind of data to understand their supply chain risks.
You know.
We've talked about on calls before you know kind of I know your supplier a use case, so I think that if you're going to see that broaden overtime.
Okay interesting.
And.
And just in terms of other areas within sort of regulatory tech or compliance attack are there any any opportunities there as well.
So going beyond for instance, no art, RK lights and offerings that that stuff within within the space of within the space of regulatory Tech.
Beyond cable I see.
Oh, I see what sports lottery market.
It it it is I think more broadly you know weve shown before that.
You know the broader regulatory and accounting drivers for our M&A business. So you know there's a whole host of.
Different kinds of regulation, not just tell you I see Ah, but things around stress testing a regulatory capital calculations, a basel solvency a whole range of things that I think are driving demand for birds, the existing m- products as well as opportunities for.
Ross to you know to fill product gaps to me you know more and more of these regulatory requirements as they as they evolve.
Okay, that's interesting okay.
Thanks, and maybe I'll just follow up on on that yes. He comments you had before.
Just in terms of across all these different opportunities you have how.
How do you think monetization of those will develop over time and I'm thinking because it yeah.
Over the next decade, I I would imagine that a lot of the E. S. G data that were companies and investors and companies using would ultimately become just part of the existing process that we have today. So let's just kind of curious as to how how do you view.
The opportunity to monetize up beyond what you have today.
Yeah, Great question I think that's right is what you're getting at is eventually the data which right now is it's hard to do that right. So there's real value in good high quality data.
Over time as there are standards around disclosure requirements as there is automation on you know through XBRL. The data itself I think will will become more commoditized and what will really be valuable. The m. sites. So you know I think you're going to see.
You know part of the industry evolves.
You talked about the sustainability ratings and second party opinions I think that is going to grow over the medium to long term, we're already seeing a pickup in demand there and then I think you're going to see like I talked about earlier the integration of this content into risk management offerings right. So.
Every financial institution back insurance company in the World is going to have to be.
Really thinking about these non financial riffs, yes, Gi climates, and they're going to have to be integrating them into their origination platforms that are monitoring of their portfolios that you know I talked about stress testing, we're seeing bank of England with climate stress tested banks are going to have to comply with that.
I think you're going to see you know the monetization of that yes content through the risk management.
Segment, and you know back to my point around indexes, we don't have a big scaled index business, but we do have a big scaled Ah you know risk assessment business serving financial institutions.
And that concludes our question and answer session for today at this time I'd like to turn the call back over to Ray Mcdaniel for additional or closing comments.
Okay. Thank you and by the way aside I forgot to welcome you to the call as well HM.
So.
You know before.
Before handing the call I would like to reiterate my gratitude to our employees.
Resilience dedication support or really amazed me a I'd also like to thank all of you who have.
Joining me on these earnings calls over the years I think this will be my 63rd.
And Ah for those of you had been along for for some or all of the journey I very much appreciate the interactions Weve had so thank you everybody and Oh enjoy the last two months.
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At 330, P.M. Eastern time on Moody's IR website. Thank you you may now disconnect.
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