Q1 2021 Moody's Corp Earnings Call
Good day, everyone and welcome to the Moody's Corporation first quarter 2021 earnings Conference call.
At this time I would like to inform you that this conference is being recorded and that all participants are in a listen only mode.
The request of the company, we will open up the conference for question and answers following the presentation.
I will now turn the conference over to Giovanni <unk> head of Investor Relations. Please go ahead.
Thank you good morning, and thank you for joining us to discuss Moody's first quarter 2021 results and our revised outlook for full year 2021.
Bonnie Corp, head of Investor Relations. This morning, Moody's released its results for the first quarter of 2021 as well as our outlook for full year 2021, the earnings press release and a presentation to accompany this teleconference are both available on our website at IR drop Moody's don't come.
Rob Fauber, Moody's President and Chief Executive Officer will lead this morning's conference call.
Also making prepared remarks from the cold. This morning is Mark Kaye, Moody's Chief Financial Officer John.
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, a reconciliation between all adjusted measures referenced during this call and 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 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 31, 2020 and in other SEC filings made by the company, which are available on our website and on the SEC's website. These together with the C Corp.
Statement set forth important factors that could cause actual results to differ materially from those contained in any such forward looking statements.
I would also like to point out that members of the media may be on the call. This morning in a listen only mode I will now turn the call over to Rob Saba.
Thanks, Giovanni good morning, everybody and thanks.
Thanks for joining today's call.
Begin by providing a general update on the business, including Moody's first quarter 2021 financial results and.
Following my commentary Mark Kaye will provide some further details on our first quarter 2021 performance as well as our revised 2021 outlook.
And after our prepared remarks, we'll be happy to take any.
Any questions.
Moody's delivered strong financial results in the first quarter of 2021 revenue growth of 24% and an increase in adjusted diluted EPS of 49% supported by strong performance from both Moody's investors service and Moody's analytics.
Proving economic fundamentals and increased M&A activity drove robust issuance in the first quarter, particularly in the leveraged loan and high yield bond markets.
Am I ask generated over $1 billion in revenue that was up 30% over the prior year period.
MAA is best in class subscription based products and solutions drove revenue growth of 14% in the quarter.
Just this growth.
We're reinvesting back into our business by introducing new offerings and integrating our recent acquisitions.
As a result of our strong performance in the quarter, we've updated our full year 2021 guidance and we now project Moody's revenue to increase.
The high single digit percent range.
Additionally, we have raised and narrowed our adjusted diluted EPS guidance to be in a range of $11 to $11 30.
Now turning to first quarter results. This is the first time that <unk> revenue has exceeded $1 billion in a single quarter.
EMEA has delivered its 50 <unk> consecutive quarter of growth Moody's.
Moody's adjusted operating income rose, 41% to $914 million and the adjusted operating margin.
Expanding 680 basis points to 57, 1%.
Adjusted diluted EPS was $4 six.
Again up 49%.
Now we could not have accomplished these great results without the hard work and dedication of our employees across the world. So on behalf of the entire management team I'd like to express our appreciation.
Say.
Thank you.
I'd also like to acknowledge the continued challenges faced by many of our employees across the globe.
Due to ongoing pandemic conditions, and especially our colleagues in India.
Now turning back to the first quarter issuance volumes reached their highest level in over a decade.
While all sectors were active leveraged finance was really the busiest of all asset classes with leverage loans and high yield bond issuance, increasing by 94%, 85%, respectively. Now typically it's unusual for both leverage loans and high yield bonds to experience this amount of growth in the same quarter.
Issuers tend to favor one type of that type over the other depending on their outlook.
But attractive refinancing opportunities as well as improving M&A activity supported both fixed and floating rate issuance this quarter.
Additionally, CLO market rebounded from a quiet 2020 as issuers refinance their existing securitizations to take advantage of tighter spreads.
The strength in the leveraged finance issuance in the first quarter stemmed primarily from an improving outlook for corporate defaults.
In January the global speculative grade default rate was expected to end the year at just under 5% and by early April this outlook it improved to approximately $3 to 4% and that was due to a more positive economic backdrop.
And these lower default expectations led to tighter credit spreads from keeping the overall cost of borrowing low despite an increase in benchmark rates and this created an attractive environment for opportunistic refinancing and M&A driven issuance.
We're often asked about what informs our longer term views of insurance and we've shown a version of this graph on the slide before in fact, I think I showed at our 2018 Investor day and as you can see the data shows that historically GDP is one of the best predictive indicators of issuance.
Over the longer term.
This relationship may not hold in any one year. There is a clear correlation that issuance tracks GDP growth over time, and we expect this to remain true going forward.
That makes intuitive sense as healthy economies promote business growth in capital investment and also provides a positive backdrop for our business over the medium term.
Focusing on 2021, we still expect overall issuance to decline, albeit modestly from 2000 Twenty's pandemic related surge in it will still be above the prior five year average.
Investment grade issuance, which grew the most in 2020 is expected to face the toughest comparable.
However, with GDP expanding segments of the debt market most sensitive to improvements in the economy like leveraged loans and structured finance are expected to show a corresponding strength and Mark will provide some further details on our issuance forecast by asset class later in the call.
Now moving to <unk>, we're driving robust organic growth across multiple products and solutions.
Credit research and data feeds delivered low double digit growth driven by continued demand for ratings data feeds coupled with strong retention rates.
And compliance is growing in line with our mid 20% expectations and Thats led by our compliance catalyst and supply chain solutions.
And we're continuing to grow in insurance and asset management. In addition to our <unk> 17 offerings, we're expanding our footprint with the buy side.
Benefiting from the enhanced solution suite that we obtained as part of our risk first acquisition in 2019.
In keeping with the theme of collaborating and modernizing and innovating that I discussed on our fourth quarter earnings call well I'll highlight a few recent examples that speak to how we are meeting our customers' evolving needs.
Starting with ESG and climate, we're integrating ESG across all aspects of the business in the first quarter, we launched a tool that provides climate adjusted credit scores for approximately 37000 public companies in.
In addition building on our partnership with Euronext, our data powered the launch of their CAC 40 ESG index.
And Ms. Our analysts are enhancing our ESG analysis with the launch of ESG scores and tools and that includes our proprietary ESG credit impacts score that identifies the impact of ESG factors on a credit rating and.
And our first batch of scores now cover the entire rated sovereign universe.
On prior earnings calls we have.
<unk> discussed how we're integrating artificial intelligence and machine learning and natural language processing into our products to make them better and faster.
One example is quit spread it's our automated financial spreading tool, but is now used by scores of banks around the globe.
This tool has helped customers substantially reduce both the time and cost spent spreading financial statements and it's won multiple awards, including best AI technology initiatives at the 2020 American Financial Technology Awards.
Another area, where we're using innovative technology is sentiment analysis and scoring capabilities.
Our customers tell us they need our help with early warning indicators that filter the signal from the noise.
We are delivering monitoring tools that analyze new stories to understand sentiment across thousands of media outlets and we're seeing increased interest in this use case across our customer base.
Our acquisition of acquire media has further enhanced our efforts in this space and we'll touch on that more in a moment.
In addition to innovating for our customers, we're modernizing our own technology infrastructure to deliver greater operational efficiency and agility. Just last week, we were proud to be recognized with an honorable mention in the Red had innovation awards for open source platform and agile process that we implemented within the rating agency.
Now.
Turning to our recent acquisitions, we are making some good progress integrating and leveraging the capabilities that we acquired to enhance our offerings for example.
Integrated information and screening capabilities into our <unk> solutions, specifically within our flagship private company database known as Orbis.
We're giving customers curated information on individuals and companies in one place and dramatically improving their ability to make better decisions and saving countless hours in the process.
And as I mentioned, a few moments ago. The acquire media acquisition has accelerated our ability to generate scores that interpret the sentiment implied a new stories, we've already integrated the content from acquire media into multiple products, that's improving our customers' ability to put facts into context to focus their monitoring efforts and consider risks.
More holistic way.
In commercial real estate, we've combined recent catalysts to create Moody's commercial real estate solutions.
We're developing new tools that bring together curated data and world class analytics to support commercial real estate professionals with more integrated lending and investing solutions, which are on track to launch this summer.
And finally.
We're pairing <unk> financials asset and liability management solutions in loan pricing tools with <unk> existing seasonal capital planning and balance sheet software to help customers understand risks and opportunities across their treasury accounting and financial planning departments and with that I'll now turn the call over to Mark to provide further.
Sales on Moody's first quarter results as well as an update on our outlook for 2021.
Thank you Rob in the first quarter Mia's achieved noteworthy results strong execution robust credit activity and favorable issuance mix contributed to revenue growth of 30% compared to a 23% increase in global Mis rated issuance.
Corporate finance was the largest contributor growing 34% while issuance grew 37%.
This was primarily driven by leveraged finance issuance, both opportunistically refinancing debt and funding M&A transactions in contrast, and in line with our expectations investment grade activity moderated as compared to the prior year period.
The financial institutions, and public project and infrastructure finance lines of business also benefited from strong opportunistic refinancing led by infrequent issuers.
Revenues in these sectors grew by approximately 30% year over year, despite issuance growth in the single digit percent range.
Structured finance revenue grew 21% is tightest spreads drove elevated CLO refinancing and you see MBS activity.
<unk> adjusted operating margin expanded 720 basis points to 67, 7%. This was enabled by strong revenue growth coupled with ongoing cost efficiency initiatives and lower bad debt reserves, partially offset by higher incentive compensation accruals.
Moving to EMEA first quarter revenue grew 14% or 10% on an organic basis.
<unk> revenue rose, 17% or 12% organically as Ky C and compliant solutions delivered mid twenty's percent organic growth and customer retention rates remained high.
<unk> revenue growth of 5% or 4% on an organic basis led by a 15% increase in recurring revenue.
Driven by insurance products as well as credit assessment and loan origination solutions.
Recurring revenue growth offset the expected decline in one time revenue as we continue our strategic shift towards more subscription based products.
<unk> adjusted operating margin expanded 360 basis points to 32, 9%.
<unk> topline growth and execution of our in flight restructuring program enabled additional operating leverage in the quarter.
As Rob mentioned earlier in the call Moody's adjusted diluted EPS grew by almost 50% to $4 in <unk> expense, primarily driven by our extraordinary performance in the quarter growth in operating income contributed approximately 94 cents to adjusted diluted EPS.
With 85.
Attributed to mis.
Additionally, non operating activities, including the resolution of uncertain tax positions as well as the release of associated accrued interest provided at 28 benefit.
Turning to Moody's full year 2021 guidance.
Moody's outlook for 2021 is based on assumptions regarding many geopolitical conditions macroeconomic and capital market factors.
These include but are not limited to the impact of the COVID-19 pandemic responses by governments regulators businesses and individuals as well as the effect on interest rates foreign currency exchange rates capital markets liquidity and.
And activity in different sectors of the debt market.
The outlook also reflects assumptions regarding general economic conditions, the company's own operations and personnel and additional items as detailed in the earnings release.
Our full year 2021 guidance is underpinned by the following <unk> assumptions.
2021, U S and Euro area GDP will rise to a range of 6% to 7%.
And three five to four 5% respectively.
U S unemployment rate will decline to between five and 6% by year end and benchmark interest rates will remain low with U S high yield spreads remaining below approximately 450 basis points.
Finally, the global high yield default rate is predicted to decline to a range of 3% to 4% by year end.
Our guidance assumes foreign currency translation at end of quarter exchange rates, specifically, our forecast for the remainder of 2021 reflects U S exchange rates from the British pound of $1 38.
And $1 18 for the Euro these.
These assumptions are subject to uncertainty and results for the year could differ materially from our current outlook.
Following our first quarter performance, we are raising our full year 2021 guidance for most metrics as compared to the guidance provided on February 12.
We now anticipate that Moody's revenue will increase in the high single digit percent range.
As we strategically manage our expense base, we are maintaining our expectations for cost growth in the mid single digit percent range.
Given our improved revenue outlook and expense stability, we project Moody's adjusted operating margin to be approximately 50%.
Our updated net interest expense guidance is in the range of $160 million to $180 million and we reaffirm the effective tax rate projection of 20% to 22%.
We raised and narrowed our diluted and adjusted diluted EPS guidance ranges to $10 40 to $10 70.
And $11 to $11 30, respectively.
Free cash flow forecast is now expected to be between two one and $2 2 billion.
And we continue to anticipate full year share repurchases of approximately $1 5 billion.
Subject to available cash market conditions, and other ongoing capital allocation decisions.
For a complete list of our guidance. Please refer to table 12 of our earnings release.
Within Mis we project full year global rated issuance to decline in the low single digit percent range up from our previous guidance of a high single digit percent decline.
Our guidance for high yield bonds and leveraged loans has been raised to approximately flat.
And up 55%, respectively, as we expect robust issuance in leveraged finance to persist into the second quarter supported by low borrowing costs and sustained M&A activity.
However, we anticipate supply to return to more normalized levels in the second half of 2021 as we believe many issuers would fulfill the majority of the funding needs earlier in the year.
Full year investment grade supply is still expected to decrease by approximately 30% following a very active price calendar year.
We forecast issuance from financial institutions to be approximately flat.
We have not factored the proposed U S infrastructure bolt into our assumptions regarding public project and in structured finance issuance.
Which we anticipate will decline approximately 15%.
Depending on the contents of the final legislation if it were to pass it could improve our expectations for the balance of the year.
The expected increase in leverage low net supply positively impacts new CLO creation as.
As a result, we predict structured finance issuance will increase of 40%.
In line with the surge in leverage finance activity in the first quarter, we're increasing our guidance for new mandates in 2021 to be in the range of 800 to 850.
We have updated mis's revenue outlook to reflect stronger than anticipated first quarter performance.
We now estimate that <unk> revenue will increase in the mid single digit percent range up from our prior guidance of approximately flat.
We're also raising ma's adjusted operating margin guidance to approximately 61%.
For MA revenue, we are maintaining our forecast of an increase in the low double digit percent range there.
This is due to strong demand for subscription based products stable customer retention rates.
Favorable foreign exchange rates, and a 2% to 3% percentage point tailwind from recent acquisitions.
<unk> adjusted operating margin guidance remains at approximately 30% as we expect underlying margin expansion to be partly tempered by an acceleration in strategic investments in 2021.
Since we are maintaining our full year 2021 expense guidance in the mid single digit percent range I would like to provide additional clarity and insight regarding our approach to expense management.
In the first quarter operating expenses rose, 7% over the prior year period.
Of this reported growth approximately four percentage points were attributed to recent acquisitions and the unfavorable impact of movements in foreign currency exchange rates.
Ongoing expense discipline continues to reinforce our operating leverage.
As noted on last quarter's earnings call by generating upwards of $80 million and cost efficiencies. This year, we are able to self fund our strategic priorities and reinvest back into the business. The majority of these strategic investments will occur in the second half of 2021.
Before turning the call back over to Rob I'd like to highlight a few key takeaways.
First we successfully executed our strategic and business objectives against the backdrop of robust issuance delivering meaningful results this quarter across both operating segments.
Second we are acutely focused on innovation and integration of new features into our products and solutions to meet our customers' evolving needs.
Third.
We are maintaining expense discipline to ongoing cost efficiency initiatives, which enable us to both reinvest in our key strategic priorities and expand our operating margins.
And finally, we are pleased to revise upward our full year 2021 outlook as we drive operating leverage and create further opportunities for growth in.
And with that let me turn the call back over to Robyn.
Thanks, Mark This concludes our prepared remarks, and Mark and I would be pleased to take your questions operator.
Yes.
Thank you if you would like to ask a question. Please dial star one on your telephone keypad.
We are using a speakerphone please pick up your handset and make sure your mute function is turned off.
Your signal feature sorry equipment.
We will ask that you. Please limit yourself to one question with a brief follow up.
You are welcome to rejoin the queue for any additional questions you may have.
Again that is star one to ask a question.
Your first question comes from Toni Kaplan with Morgan Stanley.
Thanks, so much.
First quarter came in a lot higher than what I was expecting driven by M. I S.
I look at the guide for the full year I guess, the raise is a little bit lower than what I would've expected just given the strength in the quarter and I know, we're going to comp their strongest quarter in two Qs. So are you just waiting for that to be behind you.
Or are you just are your expectations for the rest of your lower now than they were and.
Or are you just being conservative.
Because I know we have a lot of positives ahead of us with strong J D P et cetera.
Toni good morning.
We have increased our outlook for the full year of 2021, adjusted EPS to approximately $11.15 at the midpoint of the guidance range and thats around 6% higher than the guidance. We gave on EPS back in February.
The primary driver of that increase is really a reflection of the actual and the expected strong operating performance of mis and I'd call it around six percentage points.
We also have small <unk> of around 1% from some of the non operating factors like the settlement of the outstanding tax matter, which is a little bit more favorable than expected. So that's offset in part by by FX. We're certainly happy to go in TV issuance outlook and our views there is separately.
Okay, Great and just as my follow up.
I ask margins were the highest ever I believe in and not by an insignificant amount.
You're guiding to 61% in the segment for the year, so having a hard time getting down to that level. After the 68 and one Q. So just maybe help us drill down into the drivers of the lower margin for the rest of the year.
We are guiding to your point to approximately 61% for the margin for the full year.
And that really means if you put the 67, 7% in the context of that that you would expect a year to go.
On average margin for MAA, so somewhere between 57 and 58%.
And that's primarily driven by our year to go expectations for issuance activity, which would be down in the low double digits, given our full year guide of low single digits for issuance and that in turn if I look at the underlying drivers could be driven by tough comparables compared to the year ago period.
Pull forward that we saw in the first quarter a little bit of the assorted patents then yes, I mean again, we're very happy to go into some of those drivers in more detail as the call goes on.
We will take our next question from Kenneth Mcveigh with credit Suisse.
Great. Thanks, so much and congratulations.
Hey.
I Wonder if you could give us just a little context.
The insurance and commercial real estate opportunities specifically within M&A, obviously your system.
Excellent.
Yes.
Alice Reinvestment force.
Mortgage.
Obviously, the opportunity that insurance commercial growth.
Okay.
The entire enterprise.
Yes, John this.
This is rob.
Thanks, a bunch.
Sure.
Good to have you on the call. Let me, let me talk about each in turn here, so let's start with the commercial real estate.
It's really a major asset class for our financial institution.
And investor customers.
What we're hearing from customers is that they're looking for the integration of just a wide range of data and analytics to give them better insights and make better decisions, especially given all the the underlying kind of turbulence in the market.
So you know we acquired <unk>, a few years back to give us some market and property level data that we could integrate into our offerings for our customers and they're given the importance of that data to both.
Lending and investing investing decision, making we then bought catalyst.
And that helped us further build out our national property coverage.
By the way, we're very pleased with how our catalyst and <unk>.
We're building out those data capabilities in new markets, even a little bit faster than than we had anticipated. So.
You put that together along with our in house products, we've got something called commercial mortgage metrics and all of that forms what we call our CRE solutions offering I touched on it in our prepared remarks.
And as part of that broader CRE solutions suite were building out lending and portfolio construction and management tools that they're really address some of these customer pain points in the industry.
Like I said, they want our customers want more content integration. They also want to.
A more digitized and automated and really connected approach that reduces the underwriting time and enhances the borrower experience. So on commercial real estate I'd say.
We're making some investments we're encouraged by our progress around product development and the early receptivity, we're getting from our customers. So like I said, it's a big asset class for them. So let me turn to.
Insurance just for a moment and we've called this out on a few of our prior calls and we're seeing some.
Very nice growth in our insurance business. The core driver of that is around insurers seeking our solutions to help them with this <unk> 17 compliance.
Our acquisition of a company called <unk> why a few years ago, it really enhanced our capabilities in this area because it gave us the <unk>.
And actuarial software solution that is widely used by insurers for everything.
Everything ranging from pricing reserving.
Asset liability management financial modeling hedging and so on so.
It's part of the kind of core risk processes at these insurance companies and over the years, we've been able to build out our suite of offerings to insurance companies that includes.
AUM regulatory reporting.
Business analytics.
<unk>.
Our view is that our risk assessment capabilities in areas like credit like commercial real estate.
ESG and climate are all offering us further opportunities to deliver really even greater value to our insurance customers and give us runway for some future growth.
We feel good about about both of those opportunities.
Okay Super helpful. Robyn just within the context of that.
Hello, Mark.
Talk about.
The M&A opportunity, obviously, there's been a couple of acquisitions across the sector.
From a capital how are you thinking about consolidation in the sector, whether it's within my assets across EMEA.
And any thoughts on that I think will help as.
Some of the activities.
Sure.
I'm sure you can appreciate we can't comment on potential acquisitions or divestitures, but I can give you some insight into that.
Generally how we're thinking about.
M&A and we're really looking for assets that I think of is on strategy and are going to advance.
Our risk assessment capabilities that we've that we talk a lot about.
Think about our customers' needs are changing right around <unk>.
A wider range of risks so we're really focused on.
High value data and analytics that are.
Critical to customer workflows.
And helping them again with a wider range of risks historically, we've been very focused on credit and our customers are asking us for help with with more so we've been pretty clear about the areas, where we're investing and building.
And we're trying to get scaled businesses.
That includes <unk> and I'm going to say, even more broadly financial crime.
Private company data a lot of demand for private company data.
Commercial real estate data analytics, I, just talked about and of course ESG and climate.
And.
So that's really kind of how I think about content and maybe just from a moment, how I think about distribution because I think it all ties into how we think about.
Acquisitions, you may have heard us talk in the past about thinking about or our <unk> business is what we call kind of a chassis right.
Distribution platform for our risk content to financial institutions, and then if you think about it.
We've got a huge customer base of banks and increasingly insurance companies that are using our SaaS solutions and it's just it's a great platform for upturn our relationships as I said, helping our customers with a wider range of needs.
There are some further opportunities to continue to build out really.
Our comprehensive offering for banks and increasingly insurance companies and that's both organically and Inorganically and all just building on that installed customer base and growth in this space. So that hopefully that gives you a sense.
We will take our next question from Judah <unk> with J P. Morgan.
Hi, Thank you for taking my question.
From a first question I was hoping to take another stab at Tony's question.
As you just look at the rest of the year. Following the first quarter, how does your outlook for quarters two through four compare to how you were thinking about quarters two through four when you gave guidance in February.
Yeah. Judah this is Rob maybe I'll kind of start with issuance because thats an important.
Important foundational piece here obviously.
We've raised our issuance outlook given the strength of the first quarter with.
With global issuance up 23%.
Let me, let me Peel, the onion back a little bit in terms of the rest of the year. So.
Thank Tony acknowledged in your question.
Q2, 'twenty was when we saw that huge surge of <unk>.
Investment grade infrastructure sub sovereign issuance and <unk>.
Those three asset classes were up almost 90%.
In <unk> 'twenty, that's sequentially not year over year, but an investment grade was by far the biggest contributors so.
With Q1 issuance up 23%, we think that Q2 is going to be inevitably down off this very tough comp.
Somewhere in the same ZIP code that Q1 was office kind of generally our thinking.
Mark mentioned the saw tooth pattern, we do think we're going to experience a slightly slower summer.
We've in the past we used to talk about this saw tooth pattern, where we'd see a little bit slower third quarter. So we do expect a modest decline in the third quarter off of what remember was also a record.
Quarter for issuance in Q3 last year, and then growth in the fourth quarter and that implies that issuance for the second half of this year is going to be down.
Modestly off of the second half of last year.
If I were to translate the issuance outlook that Rob spoke to two at a high level on an mis revenue perspective, you can think about Q2 and Q3 being down in the mid single digit decline range, and then Q4 being approximately flat year over year for revenue.
So that was that was really helpful. Thank you for for that cadence.
<unk> ability maybe.
I guess as a follow up any and the ability to do something similar or just give us a little bit of perspective in terms of pace through the year as far as margins go.
And also as far as M&A goes that would be appreciate it. Thank you.
Judah. Thank you I'll start a little bit with the <unk> and then I'll work my way through to add to EMA.
<unk>, sorry, <unk> adjusted operating margin for the quarter was 57, 1%.
On a trailing 12 month basis that would equate to 51, 6% and so if I think about attributing that to the approximately 50%.
Guidance that we've given for the year you could think about really four primary buckets, the first being operating leverage which is positive.
Creation of margin in the range of around 100 basis points net is from things like scalable revenue growth.
The benefit of the incentive comp.
Cool resets slight.
Slightly low in your bad debts expenses this time round.
<unk>.
Offset by the expectation of higher.
Travel and entertainment expenses as we invest in.
And further interactions with our customers of around 50.
Offset in addition by acquisitions of around 50 bps as well and then finally and most importantly sort of those strategic investments, we want to make back into the business in the second half of the year in ESG.
ESG, <unk>, CRE et cetera, and Thats, probably an offset of around 160 assets net to the <unk> level.
Back for a second and I look at MAA.
Q1 margin expansion was really led by very strong 14% reported.
Revenue growth.
I'd also say that expenses for MA were lower primarily related to our announced restructuring at the end of 2020 and Thats part of our overall expense management that creates those opportunities to reinvest back into the future of our business.
Certainly taking the opportunity in 2021 to accelerate the investments in several of our key strategic priorities in the CRE and <unk> space and as we ramp up those investments.
We expect that our margin will remain in line with that 30% full year guidance I put just a few numbers around that you could think about on a full year basis for Ma.
Underlying margin expansion of around 390, Bips offset maybe by two large categories those strategic investments of around 240 bps in MA and then acquisitions of around 130 bps.
And we'll take our next question from Stephen Quinn with Atlantic Equities.
I appreciate you taking my question I was wondering.
If we could.
Just digging a little bit into the breakdown of MH.
Organic growth this quarter I was wondering.
If you could breakdown what we saw from the acquisitions you had from.
Pre acquisition of Bureau, van Dijk, and Thats, what Okay why C complex.
As well as the other.
Key drivers of that.
That growth.
Simon.
Happy to do that obviously, we've got.
We've got some very steady and good growth in Ma.
There is a few.
Different drivers of that.
First <unk>.
Credit research and data feeds.
There is just continued demand for those ratings data feeds and some very high retention rates.
For the research and data and that I think reflects the importance of the content the content when you've got these times of.
A real market stress and uncertainty you touched on <unk> and compliance.
There is demand for both greater precision as well as automation of all this customer vetting and we're also seeing some heightened.
Customer focus on are now using those kinds of tools for understanding things like supply chain resiliency and the risk profile across.
Not only customer base, but supply chains.
We actually had a major U S corporate recently, who subscribe to our Orbis data.
To help them really better assess the regulatory and Reputational risks like I said of.
Both our customers, but also their suppliers and then you've got our IRS.
SaaS products and Mark touched on it in the prepared remarks.
Strong recurring revenue growth.
<unk> percent across all three areas of Urs and that includes credit assessment and origination.
Insurance and risk and finance so we've got and we've also got <unk>.
Active product development pipeline and I think we're going to continue to have opportunities in these areas.
Okay. Thanks, and so did I hear that the <unk>.
A portion of your business is growing in that mid twenty's kind of pace at this point.
That's exactly right.
In line with our expectations that we talked about on the prior call.
Okay Alright.
And I was wondering if you follow up would you be able to just give us an update on.
Your Chinese strategy strategy in China.
I am, particularly in terms of the current status of that market and what you're seeing right now.
I.
Ccs science actually allowed to do at this point.
So the license suspension at Ccs Psi is over.
And.
As I think you know <unk>.
Continues to be the leading domestic rating agency in.
In China.
And we're also continuing to have a very strong position in the cross border rating markets.
As we think about China. So we continue to address the domestic market through our position in Ccs side, the cross border market opportunity through <unk>.
As I said, we feel like we're very well positioned in both.
And then there are some emerging opportunities in China.
That we've talked about a little bit in the past we've made some investments there to help us with our positioning one area that we see a real opportunity in China is around ESG, but more specifically I would say green finance and sustainable finance and we made an investment.
Investments several years ago in a small company called Shantou think of that as kind of the same strategy that we employed with our investment in <unk> years ago, and we're working with Shantou too.
To help the market and its evolution around sustainable finance, we also made an investment in a company called <unk>.
Which uses some very sophisticated technology.
To capture unstructured data around both ESG as well as <unk>. So that again two focus areas for us. So we're looking at how we can start to address the market.
Beyond just.
What I'd say is the core ratings business as well as our core business in EMEA.
Your next question comes from Alex Kramm with UBS.
Yes, Hello, everyone.
Apologies in advance will coming back to the same topics that was asked a couple of times on mis outlook, but I don't think you directly answered a couple of those questions. So.
Thinking about the outlook change again on the Mis topline.
And I know you don't give a quarterly forecast, but it does appear if you're thinking about a typical seasonality for the year right. Obviously the comments you just gave a couple of questions ago with a with a down in <unk> and <unk>, obviously makes a lot of sense, but in terms of how the outlook for the remainder of the year is changed from what.
You said at the beginning of the year, maybe you could just explicitly say if you changed anything or if its unchanged because it does look like from a seasonal perspective, you got a little bit more conservative and it is so the question would be obviously why given the economic backdrop and everything else improving so so sorry to beat the dead horse, but I don't think <unk>.
The address it thanks.
Alright, Alex Youre, keeping us on us there no problem.
Look I do think it is true.
And thinking about our issuance outlook, we have factored in the.
The consideration around the potential for some pull forward out of the second half of the year into the first quarter.
First part of the year and that was as.
As you saw benchmark rates kind of tick up.
Serge surge of issuance and.
Alex maybe let me anticipate a question also and kind of get to what might be the upside and downside to this because I think that also.
It kind of gets it where youre headed here.
A lot of times, we talk about.
I guess I'll use the phrase puts and takes but I guess I would say, they're probably more puts than there are takes just given what we're seeing right at this moment so.
That I think means there are some factors that could contribute to some upside to the outlook. So.
I think that the.
This quarter second quarter is really the key one to watch because we talked about second quarter 2020, being a really tough comparable with the surge in issuance, especially from an investment grade.
But if the strength of the leveraged finance markets continues through the quarter and makes up some of that liquidity driven issuance from the second quarter of last year and then on top of it contributes to the positive mix from a revenue standpoint.
That could provide some upside.
Like I said we.
We've been trying to think about pull forward you could see pull forward even from depending on what happens with with rates and spreads you can see pull forward.
From next year faster.
Recovery in economic growth really outside of the U S.
It could provide some upside and then mark touched on it but.
Potentially around infrastructure, depending on what kind of.
<unk>.
Ultimately what kind of bill we see that might provide a boost to infrastructure issuance of municipal issuance in the back half of the year.
On the downside.
We got to watch we've got to watch mix.
And.
Any kind of escalation of.
A third wave of infections that yes.
That ends up impacting the global markets. So that's that.
Really what's on our minds.
Okay.
Very fair thank you for that.
And then just maybe for Mark and this is a quick one on the expense side. I think you mentioned incentives are higher but I think that was a very easy comp last year. So not a surprise so maybe just.
If you haven't mentioned it yet, but what was the incentive comp for the year, but then most importantly, how do you think about incentive comp for the remainder of the year because again. It does look like you had such a strong first quarter, but by my by my thinking you're probably under accrued a little bit on incentive comp.
<unk> continues to play out as we all expect.
Alex Thanks for the question and good morning.
Think of comp accrual process very simplistically that we followed is.
Is roughly 25% of the full year expected incentive comp payout, primarily because we are in the first quarter. So we're really looking at roughly a quarter of the full year expected amount.
In the first quarter itself, we accrued for a $61 million in incentive comp and looking forward to the next three quarters, you would expect to we expect to see around $60 million per quarter due to the improved full year.
Revenue and margin outlook, and that's slightly higher than what we had provided in February which was a range between 50 and $60 million. So certainly we are incurring appropriately in the first quarter.
Alright, no that clears it up thank you.
Okay.
And we will take our next question from.
George Tong with Goldman Sachs.
Hi, Thanks, Good morning, I wanted to follow up on the earlier question on pull forward activity.
Debt issuance can you discuss how much of the upside surprise versus the guide was in fact reflective of refinancing pull forward.
Fair to see an improvement in macro or balance sheet pre funding and what the implications could be for issuance across the various categories over the remainder of the year.
Maybe let me start here just by sharing a little bit about what we are hearing from the banks in terms of their issuance outlook, because I think that will help provide additional context to the comments that Rob made a little bit earlier.
I'll start with that U S investment grade, although the year to date activity was below the prior year period, we heard from the banks that they noted that issuance in the first quarter was still very robust I mean, it was driven by factors, we've already discussed M&A activity.
Starkly tight spread et cetera. The banks did also highlight that they thought that borrower is likely opportunistically pulled forward. Some of their 2021 funding plans to take advantage of the favorable rates that they saw this quarter, especially as you saw that interim or mid quarter uptick in rates themselves.
The bank's overall.
<unk> U S investment grade issuance to decline around 30% over the course of the year and Thats very much in line without a forecast for that line of business.
On the U S spec grade side tight spreads low default rates certainly drove the price start to the year for high yield bond and leverage loan issuance.
The volume year to date for both of those categories has significantly surpassed the prior year period.
So the outlook that we're hearing from the banks series that they expect the speculative grade market to slow.
As many issue is at least in the early perception of the year have completed their refinancing needs in the first quarter and we've taken that view into consideration in our outlook for U S spec grade.
Net euro investment grade there was.
Relatively light supply in the quarter as issue as did.
Did enter 2021 to your point with strong cash balances right. We saw a lot of reverse Yankee issuance as a focus throughout the first quarter again, the same factors favorable M&A backdrop low rates et cetera could also support activity later in the year and then the banks here forecast European investment grade issuance to be down in the mid <unk>.
Teens percent range and then finally on the spec grade European spec grade side.
To the U S issuance volume year to date did some Pos.
Prior year period.
That was driven more by a pickup in some of the private equity and buyout activity.
As issuers looking to take advantage of the low rate environment and again the banks here expect to refinancing considerations to remain positive and hope that provide sort of additional market color.
You were looking for.
Yes.
That's very helpful.
Just a follow up.
You touched on this a little bit earlier interest rates are moving higher but certainly the macro environment is also getting stronger can you just perhaps talk a little bit more about the puts and takes around how these factors will influence and drive issuance activity.
Yes, George this is Rob I think are our general view on this is that we've touched on the prepared remarks.
Economic growth in.
That really is what provides the strongest driver for our business over the medium and long term right. It's that it's about business investment it's about M&A activity as we think about rates. Obviously rates are a factor. They were certainly a factor last year, but it's the I think it's really the the.
Pace of rate increases and weather.
Rate increases are accompanied by economic growth and whether they are anticipated by the market. So if you think back to the taper tantrum back in 2013.
That was where the market was surprised and it was kind of a rapid increase in rates and you saw a real pullback in issuance, but to the extent that the.
That is able to be transparent about this as we see very strong economic growth. We think that this will ultimately be manageable from an issuance perspective.
Very helpful. Thank you.
Your next question comes from Craig Huber with Huber Research partners.
Okay.
Great. Thank you.
Obviously, a very strong start to the year.
So I wanted to talk on.
Your cost outlook you guys, obviously did not raise your expense outlook for the year mid single digits. This was sort of a nuance. There that you were going from the low end of mid single digit expectation for the year towards the higher end of mid single digits.
Talk about that.
In conjunction with that.
I'd be curious to hear.
Your underlying employee base is that going to be relatively stable. This year put aside acquisitions and stuff.
A follow up.
Alright good.
Good morning.
We're very pleased to highlight that our disciplined expense management actions continue to create and maintain operating leverage.
And investment capacity for our business net.
We are actively managing our underlying expenses.
Down by 3% to 3.5% or a little bit over $80 million to self fund the key initiatives, we want to invest in in 2021 and that we spoken about those relating to <unk> et cetera, but also to enhance our technology infrastructure to enable automation innovation and efficiency.
Support to support growth.
If I were going to complete the picture on the expense side, you see that to strategic investments, 335% getting reinvested cash.
Efficiency is getting reinvested in strategic initiatives, and then <unk> got M&A expenses of around two to two 5% in the outlook that.
We've got Ed ethics headwinds of somewhere between one and a half and two percentage points.
What it really implies is that the operating growth net of incentive and stock compensation is relatively well controlled around that two percentage points and I think that's the key message we wanted to deliver on.
On head count and certainly if I look at year over year snapshots between March 2020, and March 2021, we'd be relatively stable.
On an organic basis, if I think over the year at around 11400.
Employees, we don't necessarily anticipate that too dramatic from move up or down.
We really are looking again to make sure that we are more focused on the skill set and huntsman and the support that we can provide our employees and over this period.
And then also you've talked about ESG.
A little bit today, but what is the annualized run rate of <unk>.
<unk> revenues please.
We are expecting for 2021 to generate around $25 million in standalone activities from ESG, and an additional $5 million to $10 million.
And additional revenue through incorporating our ESG.
Risk analysis in TV, Mis and Ma product.
Please my first question the cost ramp you're expecting fourth quarter this year versus the first quarter, how should we think about that please.
We are we have raised.
We'd like to raise the expense ramp.
For the first to the fourth quarter to be between 60 and $80 million.
That would be up from the $45 million to $55 million that we mentioned on the February call and that is.
As a result of additional savings that we've achieved in the first quarter and a little bit of a shift in timing of spending for strategic initiatives.
Initiatives, primarily to the second half of the year the slightly wider range also captures the uncertainty around the expectation for the resumption in travel.
In entertainment expenses as the year progresses.
Great. Thank you.
Your next question comes from Owen Lau with Oppenheimer.
Good afternoon, and thank you for taking my questions. So I wanted to go back to incentive comp and we investment.
Just wondering the flexibility to accrue more incentive comp or maybe accelerate your investment in the first quarter given the strong revenue I mean, if you accrued.
Accrual last in the first quarter.
That would add more pressure on the expense space later this year.
Because you may have to true up the accrual com.
And then at the same time office starts to we opened you may lose some of the COVID-19 safe I'm trying to understand where that you have to flexibility to changed at 25% target given that you expect revenue may moderate later this year.
Thank you for the question so for extensive compensation, we typically followed a time base percentage.
Accrual process that really is very much an aligned and alignment with the applicable ACC in accounting standards.
If our outlook for the year holds as we've provided this morning, you would not necessarily see a variation in the incentive comp accrual as the year progresses.
Obviously, the year may turn out slightly differently.
From our outlook and we certainly provided many factors that could drive that and what that really means is as the year progresses youre not only adjusting your incentive comp accrual for that particular quarter, but you also have to do a true up for the prior quarters and Thats what could result in volatility in the amount that's accrued each quarter.
Got it that's very helpful. And then just a quick one on AI, Rob I think you touch on a quick spread can you give us more color on maybe Kwan Cooper and also the overall AI initiatives in Moody's. Thank you.
Sure Owen.
So.
In General we've got as you can imagine we've got.
Data scientists and engineers.
All across the business, we've got innovation going on around AI and machine learning natural language processing natural language generation going on in MA and Mis in fact, we just hired a new head of innovation and Ms to coordinate our efforts there.
So youre right <unk> spread is a great example of something that actually came out of we have something called an accelerator and this was actually something that our employees are identified.
The result of.
Understanding our customers' needs and we were able to deploy this AI and machine learning technology to help with a huge pain point of many of our banks, who are all manually spreading financial statements and we've just got an enormous drove of financial statements here at the firm that can train those models.
And so that's how we developed <unk> and now we're deploying that actually has a product.
And selling that to our banking customers.
So we've got initiatives like this going on all over the firm. Another. Good example of leveraging what it says natural language generation is how we are.
Actually writing some of our boiler plate reports.
For infrequent issuers using natural language.
Generation, so literally writing reports.
From databases, and then being able to augment that with expert insight and that's turned out to be really valuable for our customers. Because it provides more transparency on a wider range of credits as you can imagine regards to quant cube, we're doing some interesting things and collaborating with them mostly in the rating.
See where they've got all sorts of alternative data and predictive models, and we're able to use that and integrate that into.
Some of our research series So for instance in a quite.
Knows where every ship on the planet is at any given time, so they can track.
Flows of Commerce, and then we're able to have leading indicators of economic activity.
In addition to kind of the traditional indicators in that.
We've actually published research around that using data from quantity of it has actually been quite popular with our.
Research subscribers.
That's great. Thank you very much.
Your next question comes from Manav Patnaik with Barclays.
Thank you Rob.
But I just wanted to follow up on your comments early in the call around M&A and you talked about.
Distribution and I just wanted to clarify.
You referred to.
Is that that you already have the distribution at scale or you'd be looking for more distribution.
Gail.
Yeah Manav.
First of all good afternoon, good to have you on the call.
I guess I'd just point out.
I think of and we think of Urs as distribution I don't think Thats always intuitive to folks right that if you think about the content that we are producing which is really to help customers make decisions for the most part around risk not in all cases, but for the most part.
You've got we've got.
Literally thousands of banks and financial institutions customers, who are using our software as a service solutions in critical workflows and so you can imagine the conversation in fact, I do a number of customer calls and as I sit down with these financial institutions and we talked about.
Whats on your mind, what are you what are the unmet needs that you have around risk assessment.
I start to here, while it's not only obviously you are helping us with credit, but we've got to figure out how we can better and more efficiently onboard customers. We've got a better understand the sustainability profile and ESG profile, who we're doing business with we've got to understand the physical risks relating to climate change as.
Part of our stress testing requirements as part of our commercial lending activities right and so our customers are coming to us and we're able to then.
This <unk> platform. These solutions are very good distribution channels for us to be able to deliver more data and analytics and insights to this financial institution customer base.
Why that is.
I tend to kind of describe it as in a way.
Calling it just distribution is short changing it because it's really about the integration of the software the technology the data and the analytics.
But it's a platform that's being used at thousands of banks. So it's.
It's a natural for us in terms of the upturn those relationships.
Got it that's helpful. But I guess is that I guess my question was so what you have at the IRS do you have the scale that you need or what you're referring to the fact that you would like to get more.
Active on the distribution side, if there are assets out there in terms of M&A.
Yes, what I was really I think what I was referring to we obviously have.
A nice big IRS business and what I was really referring to was we continue to look at ways to two.
Enhance the offerings for our banking and insurance customers.
Okay around Drs, but so that's really where I was going with that manav.
Okay. That's fine and then just one quick one you guys have always been created managing expenses.
And as I already gave you did things do seem like they're looking better and I was just curious if you guys have anything like an upturn playbook and everyone talks about a downturn playbook.
Ed.
It seems like a lot of good things that you guys can invest in and just curious how you think about <unk>.
When you would do that or is it just manage the cost and the expenses like you all right now.
Yes, manav so.
Kind of thinking Big picture here and I know, there's a lot of focus on margin from quarter to quarter.
From where we're sitting we're looking at the fact that.
We're serving some very high growth markets, and obviously youre seeing that with the growth rates in the various.
Areas across across our business its ratings. It's research it's data feeds its company data in <unk> <unk>.
Yes.
And so for us what we want to be doing is investing in these high growth end markets. There are some very we think very strong structural drivers that will.
Meaning that the growth in these end markets is going to continue for some time and we don't want to in some cases, we have leading positions in other cases, we are building.
Scale in our businesses to build leading positions there.
And if you think about the retention rates, we've talked about that a lot right.
Every high retention rates. These are very sticky products because they are embedded into.
Critical customer risk workflows, and so if you combine that right high growth end markets with very sticky products, you want to make sure that you're investing in the growth of those markets rather than kind of cash counting these businesses, what we want to be doing is investing to.
Capture the growth.
So in any given quarter or even year, I think youre going to as we see opportunities you're going to see us make those investments because we're investing for the medium and long term and I think one of the last thing I would say is.
We've got our customers are dealing with a wider range of risks than ever before and I think we are really better positioned to serve our customers than ever before so we want to make sure we're making those investments.
To put a quick two numbers around that terminated in the first quarter you saw strategic investments probably around one 5% of the increase in expenses in the quarter.
For the full year, we expect strategic investments to be between three and three 5%. So you will see that acceleration over the next couple of quarters.
Got it that's super helpful. Thank you very much.
We will take our next question from Shlomo Rosenbaum with Stifel.
Hi, Thank you for taking my questions.
Maybe you could provide just a little bit of detail on kind of the accelerated investments that you are going to be doing this year.
Because of the higher outlook.
I stood there as part of the margin.
Impact is going to be accelerating some of those investments.
Can you just give us some specifics around that.
The implications as that goes forward to future years.
Frankly.
Is there an ability for you guys to accelerate investments in a more meaningful way they could drive more meaningful top line growth for either of your business units that.
Would be possible. If you had another blowout quarter, how does that work.
Yes. This is Rob I'll start and Mark may want to add in but maybe first let me give you.
Birds eye view of kind of the primary areas of investment and I don't think this is going to surprise you just given the.
The areas that we've been focused on but.
We're really concentrating that investment on product development.
Cross ESG and climate.
Ky C.
Commercial real estate data and analytics and I talked about those.
The investing and lending products that we're developing and hoping to rollout.
In the next quarter or so.
Maybe to a little lesser extent, China, and our content platform there.
Modernizing our technology continuing to become more and more efficient we've got a big focus in particular in <unk>.
Ms around that that we've talked about in the past.
And then in general we've got some other areas of product development. In fact, we formed a growth board.
Internally, so that we could really.
Have a very disciplined and concentrated approach to how we are investing and looking at the progress of that investment and to your point are there ways to accelerate that investment and I can assure you.
That that is something that we're looking at.
Shlomo if I did maybe just a deep dive in one of those investment areas specifically at ESG.
Pacifically, we're very focused on integrating ESG into our risk assessment to workflows, and that's going to help us drive growth and impact let me give you three examples here.
The first example could be in the commercial real estate space.
Our customers are looking for on demand, scoring capabilities to screen properties globally, and they really want those sustainability considerations integrated in today's screening. So we provided a solution that provides forward looking at risk assessments of property exposure to floods hurricanes wildfires and other climate hazards.
Example, I could give you in the ESG space, where the integration is around banks and insurance companies.
<unk> climate data integrated into their economic scenario modeling.
As well as the strength testing and thats going to help them meet regulatory and other requirements across the globe and then finally, just third example, net deep dive at customers want to be able to integrate datasets and specifically they want to co mingle their data with ALS and to enable that we've made our data available on our new.
Data hub platform that allows customers to access our data.
Alongside with their own in house data and to work with it using sort of those advanced data science tools that Rob spoke about earlier.
And last thing Shlomo.
Touching on that point that Mark made we're doing that in ESG, but this concept of of integration is a place where we're making very deliberate investments.
Because as we as we integrate this the.
It's more useful for our customers and this concept of integrated risk assessment. These risks R. R.
Or in many cases.
Related but it also is going to enable greater cross selling and are back to that point around in a revenue opportunity.
Okay great.
I just wanted to ask a little bit kind of housekeeping stuff and maybe just some numbers things number one I didn't see any breakdown of contribution from the courtyard acquisition in your acquisition type stuff and then they were.
There was a $16 million of non operating income maybe you could break out thanks.
Sure Simon let me start just with the M&A for a second so if I think about the combination of.
Quire media ASEAN financial catalyst and Tara.
Total M&A spend there was around $350 million.
That would have that.
Generate are expected to generate in 2021, which is fully incorporated into our guidance around $44 million ish in revenue collectively.
What sort of the.
At margin impact to EMEA, we spoke about earlier, that's the negative 130 basis points.
And then an adjusted EPS impact from net those four acquisitions collectively it's probably around four ish sales negative net.
And of course, those have been incorporated into our <unk>.
Outlook, if I just did a quick flyby to your second question on net non operating income and expenses and I'm going to refer to maybe table five in the price resets the non operating and expense table and just the material items there.
Uncertain tax positions of UTP.
That's primarily driven by the reversal of the tax related interest accruals, which are associated with the resolution of the outstanding tax matters in the statute of limitations expiration. This quarter I just want to highlight that we don't.
We expect those benefits to reoccur to the same extent in the future periods.
If I look at the FX loss and gain line, that's really small FX loss this quarter across a number of currency pairs deaths compared to a large gain in the first quarter of 2020, which at the time was really driven by material dollar appreciation you recall this time last year and rebalancing that occurred and I would say FX.
Results were very much in line with our expectations from the hedging program.
Net income from from.
From investments and non consolidated affiliates in that table, five and Thats really from Regulus statement of our positions in various non consolidated affiliates on a quarterly basis, we had a small writeup of minority investment as this quarter, we had a small write down a minority investment.
A year ago same quarter and then finally the other line.
Normally a combination of various individually immaterial and in the aggregate immaterial non operating items this quarter because of the strong equity market movement. This line actually captured as small gains that we had on investments that are used to hedge our deferred compensation program that gives to give you a full sense of color across the non operating expense.
Yeah.
Okay.
Okay.
Our next question from Angela Merkel with William Blair.
Hi, Thank you for taking my question.
Sure.
In terms of the balance sheet cash continues to build language is well below what I think you would consider low.
Comfortable limit. So I was hoping you could spend some time talking about the balance sheet capital allocation and maybe more specifically whats keeping you from being more aggressive on share repurchase.
Good morning, and thank you for the question maybe.
And maybe most important is from me to start upfront and just make clear that the capital allocation framework that we're using remains unchanged. We're.
We're going to look first and foremost for opportunities to invest organically and inorganically back into our business.
So we're very disciplined financial metrics and then to the extent that we have additional capital remaining we will return net to shareholders through a combination of share repurchases and dividends.
We know or at least is very aware that in early to mid 2020, we did pause buybacks and we raised cash at that time really to be prudent and to be opportunistically take advantage of low rates and we're very focused on financial flexibility given again at the time, the heightened risk of economic and capital market stresses at the time.
I'm head central banks really not intervene with support.
This still remains a little bit of residual risks and uncertainty today and Thats, obviously much smaller.
So I'd say for now we are certainly very comfortable to project to return $2 billion to stockholders this year.
A combination of dividends and buybacks and we will obviously continue to assess the appropriate balance of capital return as the year progresses.
I would also not read too much into the relatively low share repurchases that occurred in the first quarter of approximately $132 million that was mostly due to the purchasing plan that we put in place.
At the time, we entered into the <unk>.
Plan used to purchase shares into the comment I made a minute ago, we're still continuing to target that 1 billion and a half and share repo by the end of the year and you should expect an acceleration of the pace of that in the second quarter.
Great. Thank you and then just another.
Housekeeping item.
Looking at the free cash flow guidance.
It looks like free cash is expected to grow at a slower pace than our net income. This year. Just wondering if you could kind of speak to what's driving that disconnect.
Relative to your historical pattern. Thank you.
The slight difference between the forecasted 2021 growth in net income.
11% and free cash flow of 4% at the midpoint of the guidance range.
Is really related to the expected working capital.
Headwinds.
The timing of I would say noncash items across quarters in years. So I put this broadly in context free cash flow actually grew faster than net income in both the 2019 and 2020.
Specifically in 2019, we had 8%.
Versus 17% growth in free cash flow in 2020, we had 24% versus 27% growth in free cash flow and so you can see sort of that variation a little bit across years.
Our capital light business.
Investment with hefty ramp up really considerably to change that dynamic between net income and free cash flow over an extended period.
And we don't anticipate that necessarily happening so nothing in particular that I would draw your attention to that I'm concerned about.
In terms of that relationship.
Got it thanks again.
We will take our next question from Jeff Silber with BMO capital Michael.
Thanks, So much I know, it's late I'll, just keep it to one.
Talk a little bit about the potential positive upside from the infrastructure proposals and I know they are just proposals that we've got a long way to go.
Got it.
It does come to some sort of fruition would it only expense impact the public finance aspect of your issuers could it bleed into other issuers and also just generally do you make up from a new issuers are there different margins you could make depending on the issuer. Thanks so much.
Yeah.
Yeah.
Yes, obviously its going to remain to be seen.
The final size and content of whatever ends up.
Getting getting past I would expect that the majority of that would be seen in our.
Our <unk> sector as possible that you could see some of that in our corporate corporate finance sector.
I don't think there is a.
A meaningfully different economic profile across those.
Although typically our international sub sovereign, we're really talking about U S International sub sovereign tends to have a little bit different economic profile, but.
So.
It's probably a little too early to tell at this point.
Alright, I completely understand and again on the profitability by issuer does that make a difference.
I don't think a significant difference in this case.
Okay, great. Thanks, so much.
Okay.
Once again, if you would like to ask a question. Please press star one.
We will take a follow up from Craig Huber with Huber Research partners.
Yes, hi, Thanks, Rob we've talked about this in the past.
We do position of CEO of the company I've seen with other companies from the CEO takes over.
Whether it be internal or external hire.
Within a matter of months quarters, we'll do a large size acquisition given what one when your main competitors here in the states did.
The November timeframe.
Has your thoughts changed at all here in terms of just the normal cadence of some of these tuck in acquisitions going back to your days, you'll be in your corporate development area, which I think youll, that's like eight or nine years and stuff you've never companies ever done a huge acquisition game change acquisition.
Sorry, the bvd for free.
A little bit over $3 billion and stuff.
Itching at all to do a large acquisition is my main question here.
Yeah, So Craig Great question.
I wouldn't say itching to do a large acquisition I think I, just kind of come back to.
We're running our own race here and we feel very good about the outlook across our entire business.
We have got some we are serving some very high growth end markets and we are very well positioned in those end markets and so what I think youre seeing from US is this focus on building scale in those businesses right you've seen US look bvd was a very nice size acquisition.
And we've made some bolt ons to that RTC acquire media.
Core terror and that has really helped us build what we think is a world leader in both the <unk> space, but also the private company data space and you see the growth rates that are coming out of that business. So we feel very good about that and you've heard us talk about now what we're doing around commercial real estate, you've heard us talk about.
<unk>.
<unk>, where we have made over the years tuck in acquisitions and look with those acquisitions have done.
We highlight in insurance, we bought <unk>, we bought Barry inhibitor.
We bought risk first all of that is now supporting that growth that youre seeing.
In insurance and asset management, so Craig I'm going to come back to <unk>.
We're going to do things that are on strategy. We're not focused about is it big or small it's got to make sense for us for our risk assessment strategy and for serving our customers, we're hearing loud and clear from our customers, where they want and need our help and thats where were investing organically.
And Inorganically.
Okay. Thank you.
There are no further questions at this time I would like to turn the conference back over to Juan Pablo with any additional or closing remarks.
Yes, well. Thank you everybody for joining today's call and we look forward to speaking with you again in the summer.
This concludes Moody's first quarter 2021 earnings call.
Minder immediately following this call the company will post the Mris revenue breakdown under the first quarter 2021 earnings section and then Moody's IR homepage. Additionally, a replay of this call will be available after 330 P. M. Eastern time on Moody's IR website. Thank you.
Sure.
Yes.
Yes.
Yeah.