Q2 2021 Moody's Corp Earnings Call

Hello.

[music].

Please standby.

Good day, everyone and welcome to the Moody's Corporation second quarter 2021 earnings Conference call.

At this time I would like to inform you that this conference is being recorded and that all par.

We 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.

I will now turn the call 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 second quarter 2020.

Participants on our revised outlook for full year 2021 and <unk>.

<unk> head of Investor Relations. This morning, Moody's released its results for the second 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.

<unk> Dot Moody's don't call, Rob Fauber, Moody's President and Chief Executive Officer will lead this morning's conference call.

Also making prepared remarks on the call. This morning is Mark Kaye, Moody's Chief Financial Officer.

During this call we will also be presenting non-GAAP or adjusted figures. Please.

Please refer to the tables at the end of our <unk>.

Earnings Press release filed this morning for a reconciliation between all adjusted measures referenced during this call on a GAAP.

I call your attention to the Safe Harbor language, which can be found towards the end of our earnings release. Today's remarks may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 19.

995.

In accordance with the act I will direct your attention to the management's discussion and analysis section on the risk factors discussed on 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 Safe Harbor statements 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 Fauber.

Thanks.

Thanks, Giovanni and good morning, and thanks to everyone for joining today's call.

I'm going to begin by providing a general update on the business, including Moody's second quarter 2021 financial results and following my commentary Mark Kaye will provide further details on our second quarter 2021 performance.

As well as our revised 2020.

Outlook and after our prepared remarks.

Always we'll be happy to take your questions.

Moody's delivered strong financial results on the second quarter of 2021 revenue growth of 8% net increase in adjusted diluted EPS of 15% highlighted the robust demand for our best in class integrated risk assessment.

Wondering if favorable market conditions and heightened M&A activity provided the backdrop for sustained leveraged finance issuance in the second quarter and it supported growth in our ratings business.

The ongoing expansion of our risk assessment solutions combined with strong retention rates drove in a significant recurring revenue growth.

Top line performance.

As well as expense discipline contributed to adjusted operating margin expansion and our cost efficiency initiatives continue to fund key investments in product innovation that should support ongoing growth.

<unk> digit percentage range.

Additionally, we have raised our adjusted diluted EPS guidance to be.

On the range of $11.55 to $11.85.

Now turning to second quarter results missed revenue grew 4% despite the tough prior year comparable while MAA achieved its highest ever.

With revenue up 50.

<unk>, 15% from last year on an organic constant currency basis, EMEA revenue increased 8%.

Moody's adjusted operating income rose, 12% to $861 million on the adjusted operating margin expanded 200 basis points to 55, 4%.

Adjusted diluted.

<unk> was $3.22.

Up 15%.

On our last earnings call I highlighted the issuance volumes reached their highest level on over a decade this quarter as anticipated investment grade activity decline as many issuers have already substantially fulfilled their funding needs in recent quarters on.

Although overall.

<unk> declined by 16% as you can see on the chart second quarter issuance was still well above the historical 10 year average is shown on the Blue line.

While the growth in leverage loans outpaced high yield bonds. The demand that we saw earlier this year from both asset classes persistent, albeit a bit slower sequentially.

We'll issue. We also saw increased momentum in the CLO market driven by opportunistic refinancing as spreads remain tight.

We frequently comment on our revenue relative to issuance levels, which relates to issuance mix and in the second quarter transactional revenue grew 3%, while mis rated issuance declined.

And 16%. This chart provides an illustration of our second quarter issuance and revenue mix by asset class. So for example, the dark green bubble on the bottom left corner represents investment grade issuance and you can see that issuance was down.

68% in the second quarter versus the prior year.

However, leveraged loans.

Greater proportion of issuers on per issuance of a pay as you go commercial programs represented by the dark blue bubble on the far right saw issuance up over 200% net.

Significantly contributed to this quarter's favorable issuance mix.

Similar to last quarter favorable market conditions lead issuers to access the debt.

Markets for a variety of reasons credit spreads tightened as default rates trended lower keeping the overall cost of debt low and allowing issuers to opportunistically refinance existing debt.

And as the economy started to recover and equity markets continue their strong run we saw on acceleration of M&A as companies use the combination of cash balances and debt financing.

Answering to acquire growth and position businesses for the post pandemic economy.

We expect this constructive environment to persist providing issuers further opportunities to tap the markets.

That said, we forecast activity for the remainder of 2021 to moderate from the historical highs that we saw in the first half of this year.

And Mark is going to go into further detail on our issuance guidance by asset class later on the call.

Now, let's let's turn to M&A.

MAA is growing recurring revenue based on strong retention rates demonstrate the market demand for our products. Our emphasis on renewable sales has increased the proportion of recurring revenue by 4 percentage points.

Points in the trailing 12 month period to 92%, we continue to see significant opportunities and know your customer and financial crime compliance solutions as.

As well as areas like insurance and asset management, both of which contributed to recurring revenue growth along with research and data feeds.

We briefly discuss some of these.

So on the first quarter 2021 earnings call.

And I want to further spotlight. These 2 high growth areas I'll start by highlighting a few key trends in the <unk> market.

First as I've mentioned before the pandemic has accelerated digital transformation and know your customer and customer on boarding.

Regulators.

Business acquiring organizations to know more about their customers and suppliers than ever before and finally financial crime continues to become more sophisticated which requires advanced detection and monitoring capabilities.

Our industry, leading product offerings and solutions leverage information on hundreds of millions of entities and ownership structures.

As I recall is detailed profiles on over 13 million politically exposed individuals using artificial intelligence, we combine our world class datasets to map and analyze adverse media together generating insights and identifying risks at a scale speed and precision that is difficult for others to match and.

As long a compelling solution that is unique to Moody's and enables our customers to make better and faster decisions to combat financial crime.

Similar to our know your customer and financial crime compliance products are expanding offerings for insurers and asset managers are contributing to revenue growth for MA and our core.

Creator of our integrated risk assessment strategy. We initially entered the insurance customer segment by providing market, leading regulatory compliance software. We then moved into actuarial models to support global life insurers enabled by our acquisition of <unk>.

We further expanded our capabilities to include asset and liability.

<unk> management and balance sheet solutions portfolio analytics, and other tools to help address new accounting standards, such as <unk> 17 and seasonal <unk>.

Now the data analytics and domain expertise from across our business enables us to provide insurers and asset managers with more comprehensive solutions.

<unk> to manage a wider set of risks.

As the industry continues to evolve our holistic approach allows us to build on our existing position on the insurance space. While at the same time provide a broader range of increasingly important analytics and insights such as climate risk scenarios. Together. This has contributed to our ability.

80 to deliver 20% organic revenue growth over the trailing 12 months in this segment and we're excited about the opportunity ahead to serve new and growing risk assessment use cases for insurers and asset managers, leveraging our vast datasets and analytics capabilities.

I've also talked a number of times about the importance of innovation.

Being in integrating our data and analytics across our product suite for.

For example, this quarter, we launched an industry first.

<unk> predictor.

This offering combines Moody's ESG, scoring methodology with company specific data and predictive analytics to produce ESG scores for over.

<unk> hundred 40 million small and medium size enterprises.

These stores allow our customers to screen ESG risks on public and private companies to monitor portfolio and supply chain risk and are a great example of integrating our SME and ESG capabilities to address a key market need which is ESG.

<unk> to support sustainable supply chains now staying on ESG for a moment there has been a proliferation of climate related financial disclosures over the past few years and we recently partnered with the Tcf day to provide insight on the quality of climate disclosures, leveraging our natural language processing and machine learning tools.

As we expanded our proprietary ESG credit impacts for coverage to companies in a broader range of industries as well as to U S States and cities and we believe this is a unique offering that will allow investors to understand more clearly the impact of E S and G on any issuer's credit worthiness.

And then on enhances our credit ratings relevance and thought leadership.

And M&A as a leading provider of now your customer data and analytics, our customers are increasingly meeting to comply with regulations relating to modern slavery and human trafficking within their supply chain.

Working with various stakeholders, we added new AI enabled.

<unk> to help our customers screen and track previously undetected instances of human trafficking and modern slavery risks across their supplier base.

Providing an opportunity to further broaden our <unk> customer base beyond financial institutions.

On frequently asked how.

<unk> differentiating ourselves in the ESG space. So I thought I would take a minute to provide a few customer case studies that illustrate how we're combining our capabilities to meet the risk assessment needs on.

Different customer types.

In the Americas, we worked with a leading global commercial real estate firm to embed physical climate risk analysis into.

We are global funds in client portfolios.

The detail on the rigor of our climate scores and data on individual properties.

Low them to analyze thousands of properties and a more sophisticated and a more efficient way.

In Europe, a large government agency requested our expertise on their green bonds.

<unk> testing framework through our second party opinion, we assessed that the proposed framework not only aligned with their climate and environmental agenda, but also with the 2021 Green bond principles and since 2012, we provided hundreds of second party opinion on.

Across 30 countries with over 62nd party opinion provided just.

Bond for the first half of this year.

On to Asia, a large regional bank also an existing MAA customer reach.

Recently selected Moody's to create a robust framework to quantify the ESG and climate risk of customers portfolios, leveraging our ESG assessments ESG.

And the volume of insights and data and our ESG score predictor that I just talked about they also requested in house training on how to integrate ESG and sustainability into there.

<unk> risk management practices service.

A really great example of commercializing ESG and climate across our risk assessment.

And cloud offerings and our customer base.

Before I turn it over to Mark <unk>.

I also want to highlight a few examples of industry recognition that Moody's has received through the first half of this year.

And these matter because they are independent third party validation about the strength of our offerings across the firm.

MFS was named best credit rating agency in multiple areas in the global capital Bond Awards, and the best Global credit rating agency by institutional Investor again.

<unk> was also ranked the number 1 securitization rating agency of the year on a global capital European Awards.

As I noted within M&A.

Assessment are investing in our products to help our customers make better decisions on a wider range of risks.

Industry participants recognize the pace of our innovation awarding MH credit sentiment score the best AI based solution in the 2021 AI breakthrough Awards I.

I am pleased that we ranked number 2.

2 on charges storm top 50, demonstrating our position at the forefront of digital transformation in our sector.

Moody's ESG solutions also won the climate risk solution of the year environmental finances sustainable investment awards.

I am also enormously proud that Moody's was named a top.

Top 50 company for diversity by diversity, Inc. And together these recognitions underscore our commitment to customer delivery innovation sustainability and diversity equity and inclusion on.

All of which are critical to our sustained success.

And finally I'm thrilled.

Has joined the Fortune 500 earlier this quarter.

This milestone is a testament to the dedication our employees have shown both to our customers and to 1 another and on behalf of the executive team I would like to thank all of our employees for their ongoing efforts, which contribute to these great recognitions and with.

That Moody's I will now turn the call over to Mark to provide further details on Moody's second quarter results as well as an update to our outlook for 2021.

Thank you Rob in the second quarter <unk> revenue increased 4% supported by a 3% rise in transaction revenue while.

Global.

With valence rated issuance declined 16%.

As a result of favorable mix corporate finance revenue declined 4% versus 26% decrease in issuance. This was attributable to search and leveraged finance activity as the U S and EMEA issue is opportunistically refinanced existing debt and funded M&A transactions.

<unk> faced in great supply contracted compared to the prior year period, which had seen significant liquidity driven financing caused by uncertainty over the unfolding pandemic.

Financial institutions revenue rose, 6% above the 1% increase in issuance. This is G to infrequent in the bank issuance the soil can take.

<unk> each of the ongoing attractive rate environment.

Revenue from public project and infrastructure finance declined 2% compared to a 45% decrease in issuance is increased non U S project in infrastructure activity was offset by a reduction in U S infrastructure supply.

Structured finance.

<unk> revenue increased 73% supported by an over 200% growth in issuance. This is due to approximately 200 CLO deals this quarter, our highest on record predominantly attributable to refinancing activity.

In addition, CMV exclamation further bolstered overall results.

<unk> adjusted operating margin expanded 230 basis points to 66, 3%. This was enabled by strong revenue growth, coupled with operating efficiency initiatives and lower legal accruals, partially offset by higher reserves for 2021 incentive compensation.

Moving to EMEA.

Second quarter revenue rose, 15% or 13% on an organic basis and on.

<unk> revenue increased 19% or 16% on an organic basis. This is due to robust demand for <unk> and compliance solutions as well as strong customer retention rates and double digit trailing 12 month sales.

In research and data feeds.

For IRS recurring revenue rose, 16%, driving overall <unk> growth of 5% or 3% organically.

This reflected the demand for our insurance and asset management offerings tool supporting upcoming accounting standard implementation such as.

Growth in 17, as well as our SaaS based credit assessment and origination solutions.

Additionally, <unk> recurring revenue comprised 88% of second quarter revenue up 8 percentage points from the prior year period.

<unk> adjusted operating margin expanded 310 basis points to.

<unk>, 8% this reflected the benefits of our recently completed restructuring program, which relates to the realization of incremental operating leverage in the quarter.

Turning to Moody's full year 2021 guidance.

Moody's outlook for 2021 is based on assumptions regarding many geopolitical condition.

To 30 with 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 activity in different sectors of the debt market.

The outlook also reflects assumptions.

Regarding general economic conditions, the company owned operations and personnel as well as additional items detailed in the earnings release.

Our full year 2021 guidance is underpinned by the following <unk> assumptions.

Horizon, 2021, U S and euro area GDP to a range of 67% and 45%.

<unk> respectively.

Mark interest rates will remain low with U S high yield spreads remaining below approximately 500 basis points.

The U S unemployment rate will decline to under 5% by year end and a global high yield default rate will fall below 2% by year end.

Our guidance also assumes foreign.

Re translation at end of quarter exchange rates, specifically, our forecast for the balance of 2021 reflects U S exchange rates for the British pound of $1.38.

And $1.19 for the Euro.

These assumptions are subject to uncertainty and results for the year could differ materially from our current outlook.

Following a better than anticipated second quarter results, we are raising our full year 2021 guidance across several metrics. We now forecast for each revenue to grow in the low double digit percent range.

We maintain our expectation for expenses to increase in the mid single digit percent range as we balance reinvesting.

Currency benefits from our cost efficiency programs against the opportunity for future growth oriented investments.

Given our improved revenue outlook on expense stability, we now project Moody's adjusted operating margin to be approximately 51%.

We raised the diluted and adjusted diluted EPS guidance ranges to $10.

Based on 95 to $11.25.

And $11.55 to $11.85, respectively.

We increased our free cash flow forecast between 2.2 and $2.3 billion.

And we anticipate full year share repurchases to remain at approximately 1.5 billion.

To available cash.

Net market conditions and other ongoing capital allocation.

On prior earnings calls, Rob as detailed on integrated risk assessment strategy of wishing basements and acquisitions will play an important role.

<unk> net and we are focused on M&A opportunities in our addressable markets that will advance.

Cash <unk>.

As always we don't comment on any specific potential acquisitions or divestitures and we wont comment on any deals that we are pursuing.

We have not included the impact of any future acquisition and our current outlook, but obviously a transaction could affect our guidance depending on the terms of any deals that we are able to rich.

Australia, and our long haul long held capital allocation policy.

Prioritize organic and inorganic investments into the business before returning any excess cash via share repurchases.

For a complete list of our guidance. Please refer to table 12 of our earnings release.

Within mis.

Following a strong second quarter, we now project aggregate global rated issuance to grow in the low single digit percent range up from our previous guidance of a low single digit percentage decline we.

We would like to reiterate that our guidance similar to last quarter does not factor in any potential impacts from the U S infrastructure build proposals.

We are raising our issuance forecast for leverage loans to be up approximately 75% and for high yield bonds to be up approximately 25%. These on meaningful increases compared to our prior outlook of up 55% and approximately flat respectively and is the result of better than expected second quarter issuance.

As well as ongoing favorable refinancing conditions and heightened M&A activity.

We expect that the increase in leveraged loans supply will continue to drive CLO accretion and therefore also improving the structured issuance outlook to be up approximately 75%.

Following a very active 2020.

Full year investment grade supply is now forecast to decrease by approximately 40% net is slightly lower than our previous guidance, which anticipated volumes to decline 30%.

Also after a surge in activity in the second quarter, we are increasing our guidance for new mandates to be in the range of 950 to 1000.

<unk> thousand 50 <unk>.

While we believe favorable market conditions will persist we forecast issuance to moderate in the second half of the year to more of a historic Sawtooth pattern as we believe many issuers will fulfill the majority of their funding needs early in the year and net liquidity driven issuance will return to pre pandemic levels.

With our improved issuance outlook, we now estimate that <unk> revenue will increasingly high single digit percent range.

<unk> adjusted operating margin guidance remains at approximately 61% as on improved topline outlook is partially offset by higher incentive compensation accruals and an acceleration in ESG.

Technology and automation investments in the second half of the year.

For MA we are maintaining a low double digit revenue growth guidance supported by a high single digit constant dollar organic growth given robust demand for our renewable products and stable customer retention rates favorable movements in foreign exchange rates.

And tailwind from our recent acquisition.

We are raising ma's adjusted operating margin guidance to be in the range of 30% to 31% as we continue to effectively manage our expense base, while accelerating strategic investment back into the business.

As I mentioned previously we are.

We are firming, our full year 2021 expense guidance to increase in the mid single digit percentage range.

Although we expect higher incentive compensation accruals associated with our improved revenue outlook, many of our cost efficiency initiatives and organic and based on assumptions remain in line with our prior update this enables us to both.

To our strategic priorities.

And reinvest back into the business.

Finally, we want to reiterate that our spending on spending for key organic investments will be heavily weighted towards the second half of the year.

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.

<unk> strong results again this quarter.

Second several areas of EMEA, specifically, <unk> compliance research and data feeds as well as insurance and asset management provided momentum for recurring.

<unk> revenue growth.

Third we continue to integrate and embed a holistic E.

S and G offerings within our products and solutions, enabling our stakeholders to manage involving set of risks.

Fourth our.

Our culture of continuous expense discipline enabled us to repurpose fleet.

Adjusted purposely reinvest back into the business and finally, following a robust first half performance and the ongoing global economic recovery. We are pleased to be able to upwardly revised on 2021 financial outlook.

And with that let me turn the call back over to Rob.

Mark This concludes our prepared remarks and mark.

And I would be pleased to take your questions operator.

Thank you. Thank you I'd like to ask a question. Please dial star 1 on your telephone keypad.

On a speakerphone, please pick up your handset and make sure. Your mute function is turned off without your signal breaches that are equipment.

We will ask that you please limit yourself to 1.

1 question with a brief follow up.

Then are welcome to rejoin the queue for any additional questions you may have.

John that is star 1 to ask a question. We'll go ahead and take our first question from Manav Patnaik with Barclays. Please go ahead.

Thank you.

Good morning, I guess I was just curious in terms of sitting on all the moving pieces are on issuance. If you could help us with.

What the cadence looks like I know you said second half will moderate that.

Are you assuming that <unk> continues kind of the run we've seen in <unk> and then <unk> is kind of a big.

I guess.

What happens is it was hoping any any color there based on what you're seeing would be helpful.

Sure Manav.

Good day have you on the call.

We're now looking at low single digit growth in global rated issuance and obviously thats an improvement from our outlook for low single digit decline.

We've seen earlier this year.

And that really is driven primarily by our improved outlook for leveraged finance and <unk>.

And we have an expectation for those sectors to remain active in the second half.

Year to date global issuance has grown at something like 2%.

Versus the prior year period.

And while issuance conditions, we expect to remain favorable on our outlook.

For the second half of the year assumes moderating issuance in leveraged finance in the second half and we just had a torrid pace of issuance in the first half so.

We're looking for issuance to be roughly flattish to slightly down for the second half of the year vs.

Just just modestly for the first half of the year and then.

Siri provide specific forecast by quarter, but the general idea is really for mis revenue to be slightly down in Q3, and slightly up in Q4 and that would be consistent with the historical issuance the assorted patents that we've.

Yeah.

That's very helpful. Mark Thank you and maybe if I could just follow up Mark I think last quarter, you gave us some numbers that I don't recollect, but I was just hoping you know obviously, there's a lot of ESG activity going on you guys have released a lot of new products and initiatives can you just remind us of what the run rate.

C.

ESG revenues on.

How we should think about what you are targeting.

Absolutely.

Second quarter ESG revenues were just shy of 30% compared to the same period last year and that reflects growth both on a standalone basis and also.

Our integrating our ESG risk metrics and analytics and channel Mis and MA products for the full year, we're looking for roughly 2.

$21 million on a standalone basis, and then another $5 million to $10 million from integration.

2 of our business segments.

So thought I'd just spend a minute on some of the commercial and product.

Achievements this quarter on ESG, because I think they are definitely worth highlighting first on the commercial side, we saw very strong quarterly growth and climate.

Primarily bank stress testing and physical climate risk assessments for commercial real estate corporate facility on infrastructure clients. We also saw very strong market demand for acos.

And then specifically for our <unk> product, which has allowed us to drive success in our sustainable finance area.

And then lastly, we've introduced on the commercial side number of EU techs on any offerings, which are going to really enable us to gain traction in it.

Brady supported some of the key wins, we had in Q2 on.

On the product side, a couple of really interesting.

The new products to the market. The first is we launched the regulatory data solution, which has the FBR.

FTR.

Principal adverse indicators and that's really important because it's going to help investors with reporting obligations under the new <unk> sustainable.

Sustainable Finance disclosure regulation, we've also introduced a climate adjusted EPS.

Allows us to integrate directly climate scenarios, which.

Which are based on the network for the greening of the financial system into our banking and other EDF models, and then 33, the 1 that Rob spoke about earlier on the SME predictive score and this is something we're particularly proud of.

<unk>.

And thats to the first of its kind it gives us a competitive edge and most importantly, it really allows customers to access more than a $140 million.

<unk> scores, which have been integrated into our existing Moody's product like August like compliance catalyst that manav. So.

It's still relatively early days for us in ESG.

But as you get a sense from Mark's comments Theres a lot of investment on a lot of product development going on.

Makes sense. Thank you.

All right. We'll go ahead and take our next question from Kevin Mcveigh with Credit Suisse. Please go ahead.

Great. Thanks, so much and let me add my.

It was as well.

There's obviously a fair amount of cash that's been accumulating on the balance sheet.

High class problem, but any thoughts mark carrabba's to kind of capital allocation, just given where the current cash balance it.

Okay.

Absolutely so first and foremost.

Our priority in managing the balance sheet is really to ensure the business has the capital necessary to grow.

And the flexibility to operate effectively.

Beyond that we're going to seek to deploy the cash on our balance sheet consistent with our long held capital allocation policy.

First reinvesting.

<unk> business organically, and then seeking appropriate M&A targets after that.

And then ultimately returning capital to shareholders by way of dividend and share repurchases.

We do have a very strong corporate development team and we look at a lot of the M&A opportunities though.

Historically, we've executed very selectively and we'll continue to do that next.

Demonstrated by our track record.

That said, we do have some interesting.

Larger bolt on M&A opportunities, both in our addressable markets and consistent with our prior M&A approach and they would fit well with our industrial logic could meaningfully accelerate.

Integrated risk assessment strat.

Bringing in new capabilities or by enhancing our current offerings and initiatives.

Our outlook doesn't specifically include the impact of any future acquisitions.

To the extent, we commit spending too.

And we're actually able to action and M&A deal, we would assess the need to update on our plans for returning capital through share.

<unk> purchases at that time.

Super Helpful. And then just a quick follow up.

Given what success you've had on the ESG side.

And just the incremental market are you investing enough fast enough just any thoughts around that given the amount of cut on strategic initiatives that.

Share repurchase day.

Kevin This is Rob.

I do think we are.

How are you doing good heavy on the call I do think we're investing enough and fast enough.

Said in remarks.

Comments about the new products that we've been rolling out gives you a sense of the breadth.

Breath of product development going on and we've got integration going on across.

Every part of the business. So we're very focused on investing.

To meet the needs of our entire customer base around ESG and climate.

That simply add to that we should expect to see an acceleration.

And in expenses and current is really in the second half of the year.

Pick up the pace of organic strategic investment, we will see a rather large increase in the third quarter visiting fourth quarter related to expenses to support those activities.

Thanks, so much.

Okay. We'll go ahead and take our next question from George Tong with Goldman Sachs. Deutsche. Please go ahead.

Hi, Thanks. Good morning, you mentioned that you now expect low single digit growth in global issuance versus your prior forecast of low single digit decline. This year How's your outlook, specifically for the second half debt issuance changed over the past.

Quarter in other words was the.

Updated outlook reflect just flow through of <unk> outperformance or has your outlook for the second half also improved.

I'll start George really just from an EPS perspective, and then certainly we can go further into this in more detail.

Really the primary driver of our increase in full.

Full year 2021, adjusted EPS to sort of that $11.70 sales at the midpoint of our latest guidance range is really the reflection of the actual.

And expected strong operating performance of the missed on.

4% in the second quarter against what we thought is a very difficult prior year comparable that.

We have increased our EPS outlook.

Outlook versus the first quarter forecast by 4% to 5 percentage points really to reflect that.

If I look specifically at the year to go 2021, adjusted EPS versus the prior year period.

The guidance that we provided implies that that will be down in the low single digit percent range and that's really due to 3 factors I'd.

Say, the approximately flat implied revenue outlook for the second half of the year and we can talk more about the comps pull forward if you would like.

<unk> is the acceleration.

The strategic investments that we have into the second half of the year and then thirdly, just a small M&A hangover, maybe a percentage there.

Yes the.

I would add is the other thing I would add is just.

Given what we've seen with the leveraged finance markets in the first half of the year I think that's why you've seen our outlook for the second half of the year has.

We've carried some of that strength through and seeing an improvement versus what we had projected earlier in the year.

The other thing on it that's super helpful color and then just a quick follow up focusing maybe on M&A certainly strong strong performance. There can you dive a little bit deeper into whats, enabling success and growth there.

Where are you investing in.

If you believe you're investing enough to sustain the growth that we've been seeing in EMEA.

Yeah sure so.

Yes.

<unk> demonstrated a very strong track record for delivering.

On a high single digit organic revenue growth and on.

These calls we've been talking about some of the areas that are driving that know your customer obviously 1.

On the recurring revenue.

Both that we're seeing in our enterprise risk solutions kind of risk as a service business.

Also in our just our core Ms research and data feeds business as well as our private company.

<unk>.

On a private company data solutions.

So.

Greg touching on each of these a little bit to give you a sense of the nature of the demand on what's driving the growth we've talked about <unk> in compliance with just there as there is demand for greater precision and automation.

Customer vetting and we've got this emerging demand for understanding on our supply.

Fly chain resiliency.

Alongside that so all of that as is.

We talked about on the webcast deck driving kind of mid <unk>.

Growth in that <unk> space.

Credit research and data feeds we have some very high retention rates for that credit research.

Lots of demand for the data feeds and I think that just reinforces the.

The critical nature of that content when we're in times of market stress.

And uncertainty.

The other thing I called out on the.

On my opening remarks.

Inside of <unk>, you got areas.

Areas like insurance and asset management, and we thought it was worth calling out.

This quarter.

Not only we got the ongoing demand for the <unk> 17 solutions, but.

Increasing penetration of the buy side. This is defined benefit pension plans in the kind of risk technology and portfolio design space and.

Is really enabled by our acquisition of risk first on all of this is kind of coming together and helping to.

To drive some very good growth rates in that space. So we've got a very active product development pipeline across all of MAA and.

And we expect we're going to continue to have opportunities to fill in product gaps.

And that will then extend our capabilities.

To support ongoing growth.

Very helpful. Thank you.

All right, we'll take our next question from Toni Kaplan with Morgan Stanley. Please go ahead.

Thank you.

Wanted to ask about the IRS business.

Had about 3 stream.

Some mark Harris.

Low single digit growth and I know a lot of it is related to lower onetime sales, but I guess when does that fully get worked through and like when you look at sort of on next year and beyond.

What sort of a normal baseline growth rate for this business.

Yes.

<unk>.

Good day of being on the call.

The key figure this quarter for <unk> as recurring revenue growth.

<unk> revenue growth rate and that represented.

About 88% of total IRS revenue on a quarter. That's why we're so focused on that number and recurring revenue.

<unk>.

<unk> was up about 15% on an as reported basis.

And something like 9% on an organic constant dollar basis.

And looking at the drivers of that recurring revenue growth, we had double digit recurring revenue growth in both insurance and our risk and finance solutions.

I.

I talked a bit just a minute ago about what's driving.

Our growth in the insurance space and risk and finance solutions.

We've seen customers continuing to.

Leverage on a range of different offerings.

Got products risk calc risk frontier all the support.

Credit loss report.

Permits.

And.

Asset and liability and balance sheet management, and our recent acquisition of <unk> financial.

Enhanced that Tony Youre, right, so 15% recurring revenue but.

But overall.

Revenue growth was 5% in the quarter.

<unk> requires 15% revenue recurring revenue growth was was dampened by an almost 40% contraction and onetime business at <unk> and to the to the last part of your question in regards to onetime.

Revenue I mean, we've got increasing customer preference for SaaS solutions. So that's.

And that's naturally going to lead to a continued to decline and a 1 time revenue for the foreseeable future that said I would expect that the rate of decline for onetime revenue will do will decelerate.

In 2022, and eventually level off at some relatively de Minimis.

Level for our Srs business overall, we will still have some customers who want on Prem solutions that we may decide to service debt, but I think youre going to see that growth rate that decline decelerate and then level off sometime next year.

And maybe Tony just to add that a couple of numbers around that and think about.

Sales of 1 time revenue at least for 2021 and for both.

On our DNA and <unk> lines of business as being around $20 million a quarter.

Very helpful and then I'll ask John to my favorite topic, and I ask Mark again.

Slide 22 is really helpful with the branch for any.

The overall versus the prior guidance from last year's expenses.

When I look at it first half Mris adjusted operating margins were 67% Youre guiding to I think 61% for the year, so that implies like 53% margin on the back half.

No.

This is obviously label.

Below last year's Mark Anderson last year included Tim.

Non recurring items like severance and some extra incentive comp and I know you're developing in chicken more incentive comp in the second half, but just how should we think about pacing of investment spend how much of this is conservatism.

Like.

Just wondering is that the pieces there.

Sure.

Good morning.

Updated guidance for the full year 2021 mis adjusted.

<unk> operating margin to your point is approximately 61% and that is a 130 basis points higher than the actual 2020.

<unk> adjusted operating margin on 59, 7%.

That is in addition to the mis margin expanding by another 170 basis points in 2020.

In the first quarter, we spoke about the primary drivers.

<unk> margin and what we're seeing in Q2, which were partly flowing.

Going through to our full year outlook is again, an increasing operating leverage.

Above a normalized run rate and thats, driven by better than expected issuance volumes and mix.

Underpinned by the expense discipline that youre observing.

And it's important to keep in mind that we are planning to.

To deploy part of that operating leverage really towards strategic investments in the second half to advance.

ESG capabilities.

Apologies stack and it's really for the benefit of about our customers.

To do that.

We expect those actions really will bring down the third and fourth quarter.

It's margin 2 points below the 61% that we're guiding to for the full year. It's.

It's also worth just finally, noting that <unk> is carrying additional incentive compensation accruals associated with the better than expected issuance that will reset in 2022. So we think about combining some of the onetime costs and incentive.

And my income.

Pointing on making sure that the go forward expense run rate for that.

For 2022 is going to look a lot more like the first half of this year than necessarily what we might see on the second half of this year.

Thank you.

Okay, we'll take our next question.

Incentive plan with UBS. Please go ahead.

Yeah, Hey, Hello, everyone, just coming back to the issuance and Ms outlook.

Kind of want to ask a little bit more holistically and I think if you put the last 12 months into context I think.

Everybody on this call, including you guys and myself.

To be honest of course.

It was obviously grossly wrong by a wide margin in terms of how the environment played out right. So I think things have definitely been a lot better than everybody thought.

So I'm just curious.

From your perspective as a manager.

How are you.

<unk> what would you isolate it is like the biggest factors that have driven that upside and when you think about the next 12 to 24 months.

How do you how do you how do you feel about that like how do you. How do you think that outlook has changed like do you do you feel much less confident now that some of these upsides drivers that you've seen can continue to play out and if so which ones would they be.

Hey, Alex it's Rob.

Maybe let me talk a little bit about how.

How we think about kind of.

The upside and downside to issuance and you're right, it's been quite challenging to forecast for all of us.

And then I might also touch on quest.

Question around pull.

Because I think thats it.

There is a bit of that at play and it gets into how we start to think about.

The outlook on a go forward basis, but.

Obviously, we've seen we've seen very strong activity in leveraged finance and.

I think Thats also.

All forward a key in terms of how we're thinking about the second half of the year in terms of the issuance outlook.

We've anticipated that there is some moderating of leveraged finance issuance in the second half of the year as I said earlier from the very very strong levels that we've seen in the first half but.

If post labor.

Third party sales financing cost and market conditions, where they are now in a continuation of the kind of issuance that we have seen for the last few months, particularly on leverage loans that could present some upside.

Infrastructure and I understand.

There may be some breaking news around the potential agreement.

Agreement bipartisan agreement around an infrastructure bill.

I think it may have some impact in 2021, but more likely to have a positive impact to issuance.

In 2022.

And then as I think kind of think about the downside and I would certainly hoping we were.

We're done with this topic, but.

Any escalation of AV Av impact from another.

Wave of infections or restrictions due to the delta variant.

Sure.

I have to note, we've got a potentially challenging comparable for.

For the second half of the year.

We had a very strong third quarter last year as spreads have tightened.

And not even continued into the fourth quarter, and we had a pretty strong into the year.

Any increase in equity market volatility that.

On leveraged finance activity is often.

Correlated to equity market conditions.

<unk> and equity market volatility so that's something we're going to watch and of course.

Any market disruptions due to unanticipated trajectory of inflation or interest rates.

Okay, Okay, Great and then maybe just shifting gears here quickly.

Curious about some of.

Proactive M&A commentary you've made in particular the comment around larger bolt on so would love you to define some of that a little bit more I mean with bvd I think he did the largest largest deal in history, but when you talk about larger bolt ons can you dimensionalize like how how.

Big something like this could be and.

What capacity you have and then maybe related to that would be great. If you can just remind us what you're looking for in terms of.

Growth, our gross and net of some of these companies you've done a good great job. During some of these smaller deals and really accelerated them, but if you're talking about larger bolt on.

That's something that also needs to accelerate the topline growth or is a lot of accretion something that you care about like maybe just remind us I mean your <unk>.

M&A history yourself right like what do you look for.

Financially, yes, so Alex maybe I'll first kind of clarify.

What I think of an eye.

I mean, and Mark means when we say larger bolt on I think of our acquisitions of <unk>.

D C Bureau van Dijk.

A range of larger bolt on.

<unk> and <unk>.

I know we've provided we've got a number of questions about M&A over the last.

A couple of quarters on these calls.

I think certainly I refer everybody back to that.

But I'm going to come back to.

We're very focused on M&A opportunities in our addressable markets that are what I call on strategy and that are going to advance our risk assessment capabilities to better serve our customers evolve.

Evolving needs and.

You've seen us make acquisitions of high value data and analytics that are critical to customer workflows and risk.

Processes, that's why they end up having such high retention rates.

We've been pretty clear about the areas, where we're investing in building scale.

Businesses that is <unk> in financial crime, where I think we've already made some very significant investments and as a result have a very strong position in that market.

Private company data.

CRE data and analytics commercial real estate is an area that we've talked about on and off over these calls and.

And we see a large end market and demand from our customers and then of course.

ESG and climate and climate in particular climate is an area, where there's a lot of near term demand to understand the physical risk related to climate change.

From from our customers.

Within our ERC.

IRS business.

There are some further opportunities to continue to build out on a more comprehensive offering for banks and expanding our offerings for insurance companies you saw us do that with a with a very small acquisition of GM financial we're doing that both organically and inorganically.

Building on both our existing customer base.

And growth in this space.

Space. So hopefully that gives you some some color.

Just to the second part of your question from a capacity perspective.

Continuing to anchor our capital allocation and cash positioning policies really around that triple B plus rating.

And to give you a feel.

These calculations.

<unk> puts on May 8.

As of the end of the quarter roughly.

3.

$43.5 billion against the trailing 12 month adjusted operating income of around $3 billion. So we're looking at roughly at 1.1 times at this point.

Alright, very good thanks, guys.

And we'll take our next question from Owen Lau with Oppenheimer. Please go ahead.

Thank you for taking my question could.

Could you please give us enough day on the strategy and outlook of your business in China.

Some news recently coming out from China could you. Please talk about if there's any like potential impact that.

That could change Moody's feel on on China, if there's any thank you.

Oh, Hey, it's Rob did have me on the call.

But I think Mark and I will talk about a few of the developments that are going on in China..1 on 1 of them I think you may be referring to is that the data security law.

<unk>.

I guess I would first day, just as an integrated risk assessment business senior policy developments.

Including those like on data security are very important factors that we consider for for China and elsewhere for that matters and the impact both for Moody's and our customers.

John.

And.

For just a little background for everybody on the call.

China passenger data security law in early June that's going to become effective I believe in September.

And that will have some certain certain requirements around the localization of of.

Data and data transfer beyond China.

I don't think that it.

It is going to impact our ratings business, but.

It has a broad scope in the language of the law means it could impact other parts of our business as well as our customers and suppliers over time, but I guess I would say on.

That impact is going to depend on how we see these regulations being interpreted by the market and also how.

They are implemented by authorities and that's going to take some time to play out. So we'll have to see so as it relates to our long term China strategy in China, I don't think it changes it at this point, but mark anything to add to that maybe maybe very briefly just to us.

The regulators in both the exchange on the interbank market and it didn't mean policy.

6 to remove the mandatory bond rating requirements on non financial bonds.

Over the last couple of months as.

As well as the mandatory requirement for disclosure of credit rating reports on public issuance.

Those regulatory changes may have a negative short term impact on.

On domestic Crs revenue.

However, it's positive sort of on that medium to long term perspective, and transforming the current regulatory demand for ratings into a more sustainable market based on that.

Driven demand.

Okay.

Okay. That's very helpful. I want to quickly go back to the some of the investments in <unk>.

Hey.

Particular on <unk> E, Rob and Mark you just mentioned do you expect these investments to drive top line growth maybe issue on next year or those investment.

We'll increase the stickiness of your project, so I'm trying to understand better how how investors.

You can think about you all all of.

These expenses thank you.

Yeah.

Look.

Both I think is the answer we're certainly making enhancements to our existing products, but we're also rolling out.

We're also rolling out.

On a new.

New products and.

Maybe since you mentioned it maybe let me just touch on commercial real estate and just to give you a sense.

What we're doing because it's the major asset class for our financial institution investor customers.

And Thats why we really decided that we wanted to build out our capabilities here.

And what we're hearing from customers is all about the integration of a range of data and insights and analytics to give them better insights and make better decisions, especially if that asset classes is rapidly evolving and the.

The thing about commercial real estate.

Investing in lending workflows that have historically been pretty fragmented.

Net and manual and that became particularly challenging amidst the COVID-19 stress.

You know that a few years ago, we made an acquisition of a company to give us market and property data, but now we are making.

Investments in lending and investing.

To help with lending and investing decision making.

<unk>.

So there's a good bit of internal product build as.

As well as we've supplemented that we made an acquisition earlier in the year to give us more listings data. So I think you are going to see an expansion of the product array in these areas.

As well as enhancements of existing products.

Okay.

Got it thank you very much.

And we'll take our next question from Jeff Silber with BMO capital markets. Please go ahead.

Thank you so much.

We hear and read a lot about the tight labor market in the United States and I know on some other countries youre seeing that as well is that impacting you at all on it.

Specifically, maybe for some of the customer service reps or some of the lower level positions I'm just curious.

Yes.

Like every company, we've seen a bit of an uptick.

Employee turnover as the pandemic drags on an and.

And job opportunities have increased.

To address that.

We're doing a number of things and that includes updating our market benchmarking to make sure that we're compensating our employees competitively and fairly.

And.

And it also very importantly includes giving our employees the flexibility they want and need in this environment.

Our employees as well as prospective employees. So these are our recruits have made it very clear to us that workplace flexibility is a very important part of their overall calculus when they are thinking about.

Either staying at or joining a firm.

So we see our flexible approach as a competitive advantage.

Advantage for talent relative to some financial institutions that are mandated 5 days a week back in the office.

I would also say that our employees greatly value diversity equity and inclusion so that they can.

Theater authentic selves and be at their best in and we've really prioritized initiatives to support day Eni.

And I think the last thing is that employees.

So really want to work somewhere where they connect with the mission and.

<unk>.

Our employees come to work every day in support of our purpose.

<unk> as a company, we talked about that being to provide clarity knowledge and fairness to an interconnected world and those aren't just words. They are at the heart of everything that we do our people are enormous we committed to that purpose.

And so that I think is also something that.

That has a strong retentive effect.

Effect for us.

Okay. That's really helpful. And then Mark 1 for you you were very helpful. Providing quarterly guidance on the expense side can you give any color on the revenue side, what the cadence should be in <unk> and <unk>.

Good morning, and them sticking very happy.

To give you a general idea.

Look forward really <unk> revenue to be slightly down in the third quarter, and then slightly up in.

In the fourth quarter, and Thats really driven by the historical issuances Sawtooth pattern, you could think about similarity issuance as being sort of down mid single digits in Q3 based on now.

It may be up.

Mid single digits based on guidance on the fourth quarter.

Terms of expenses different youll see an acceleration in the third quarter relative to the prior year comparable.

And then expenses should be approximately flat in Q4, net which takes into account our accelerated strategic organic investments.

We spoke about.

About earlier.

Okay, Great that's really helpful. Thanks, so much.

Okay.

And we'll take our next question from Craig Huber with Huber Research partners.

Go ahead.

Great. Thank you likewise.

Questions on cost first if I could.

Mark I think you said earlier on that.

We should expect cost next year to be more like your second half of 'twenty, 1 cost as opposed to the lower first half of the year costs did I hear that right.

And along the same ones on what to ask incentive comp I think it was $61 million in the first quarter what was the second quarter, what's your outlook and I've a follow up if I could.

Sure.

Just to clarify my earlier question on costs was specifically related to Miss you should expect next year to look more like the first half. This year net just emphasizing that in the second half on at 2021, we will be investing a lot in the business in terms of their incentive compensation.

We accrued for the second quarter.

21, approximately $81 million in incentive comp and you should expect to see between 65 and $7 million per quarter of accrual for Q3 and Q4 this year.

Purely driven by improved full year revenue and margin outlook and just as a point of reference that will be lower than.

A total incentive comp accruals, we took in the third and fourth quarter 2020.

Thank you for that my other question wanted to ask.

What's your outlook for <unk> in cielo to sort of think out here over the next year given the strength you've seen here and the added stock of bank loans out there. Please.

Actually Craig so.

Maybe let me just start by John.

Talking about structured finance on the quarter and then give you some sense of whats contributing to our outlook.

In our second quarter structured finance revenue.

Mis was up almost 75%.

And securitization activity.

It kind of across the board was just very elevated.

As Mark talked about earlier, a very active market and Ceos in part because you've got obviously, an enormous amount of leverage loans.

Supply.

But also a lot of refinancing activity.

<unk> and Thats refinancing even of the 2000 vintage given the tightening of spreads in the CLO.

<unk> market.

Something like 70% of Clo's in this past quarter were refi.

CMV asked which obviously kind of ground to a halt last year for a little while but we've also.

And that rebound.

That's primarily due to.

Commercial real estate CLO transactions.

And we saw spreads there continue to tighten and just the overall improvement in market conditions on that brought back some some a number of issuers who are on the sidelines.

On the U S.

So CBS, sorry, U S ABS and <unk> activity.

There is probably the highest levels that we've seen in something like 8 quarters, and overall issuance and our MBS remains quite strong across the board spreads are still tight.

There's been a little bit of widening recently due to all the supply.

But nothing I think particularly material.

And.

In terms of talking to.

Bankers in this space Greg.

We're hearing they don't see.

Many signs of this but softening or slowing down obviously, we're going to want to wait and see as we get through.

Kind of on what will probably be on a little bit slower on August, but overall avs fundamentals are expected to continue to improve.

Just got a lot of pent up demand.

Sure.

In that space and a general improvement.

And economic activity.

Thank.

Last thing I would say Craig that's contributing to our.

Updated.

Outlook on structured finance issuance for the year.

Perfect. Thanks Robyn.

Okay.

Right.

And we'll take our next question from Andrew Nicholas with William Blair.

Go ahead.

Just wanted to ask a follow up on 1 of your answers earlier in terms of the ESG product lineup.

You rolled out climate solutions of that suite margin and ESG score predict there.

This quarter I guess I'm, hoping you could spend some time talking about which client types are most interest.

And those products today, and then whether or not you have an opinion on how kind of the consumers of those products might evolve over time and to the extent that that that would expand the addressable market for that business.

Sure.

So maybe let me start.

With kind of where does this market.

<unk> net.

As we think about the customer base I think it really started with investors who are focused on essentially responsible investing and then that has obviously mainstreamed too.

Equity and fixed income investors globally, who wanted ESG content alright.

4 ports.

Portfolio construction and portfolio Mark.

Monitoring the.

The customer base is now broadening out to essentially all of our customer types. So that includes not only investors, but financial institutions corporates and at corporate.

It also includes issuers.

As well as governments and I think the key theme here Andrew is that Youre seeing the demand for integration of ESG and climate considerations into <unk>.

Very wide range of customer processes and.

Like I said, that's everything from portfolio construction on monitoring, but you've got corporate.

Who are engaged in sustainable finance and managing sustainable supply chains, you've got banks wanting to understand the ESG and climate risks.

There are borrowers and up the collateral they are taking a securing our loans you've got governments, who are wanting to inform <unk>.

Risk mitigation.

And investment.

Around the physical risk related to climate change and so that's why you hear us talking so much about integration across our entire product suite.

Perfect.

Helpful. And then maybe somewhat related need for my follow up I was hoping you could give us an update.

Moody's specific.

ESG initiatives underway and in progress there is obviously an important topic for raw investors as you mentioned and he answered the prior question.

Yes, I think about Moody's specific ESG initiatives, we are very well positioned to help answer.

On can we get sheet related questions for the business.

And to be able to bring transparency to the equity to fixed income and the sustainability markets more broadly and you can touch on that in just a couple of areas that I think are of interest. The first thing within on ESG research data and analytics products at 1 of our competitive Differentiators is our focus on.

So materiality.

Versus just financial materiality and Thats, because really both a combination of technology enabled scoring and analytical overlays.

The assessments that we're doing to be able to deliver really reliable high quality insight for our customers. The second area we were.

Very strong is on the physical risk assessments that climate and Thats, both on the operational risk whether it's on looking at asset level data on exposure to floods heat scraped hurricanes et cetera, as well as on the supply chain risk and sort of how that market risk capturing companies sort of resource.

The third 1 I mentioned is.

On doable at ratings, we are very strong very active the first and second quarter for our insights on our product and then finally to the point that Rob made earlier, just integrating that into an MA product suite.

Certainly a differentiator for us and what we are hearing from clients to reclaim any short tech client quota share.

Sustained made solutions with access to ESG analytics and <unk>.

Excellent test subject matter experts.

Thank you.

And we'll take our next question from Ashish <unk> with RBC capital markets.

Please go ahead.

Taylor and thanks for taking my question and congrats on solid results.

I just wanted to focus on your private company data initiatives.

Thanks for including the slide and the details on <unk> compliance, which obviously has been a strong area of growth, but I was just wondering if you can discuss the traction for other use cases for private company data.

And also talk about some of the organic and inorganic initiatives going forward to further expanding our footprint in the private company data. Thanks.

Hey, Ashish good to have you on the call.

Youre right I mean, the biggest and fastest growing use case for our private company data.

There is around.

Know your customer and.

As I mentioned earlier, we're starting to see.

Emerging demand around.

Addressing supply chain risks.

I might call that out.

But.

Private our private company data.

Fuel is a whole range of both.

Data <unk>.

Use cases.

A few examples tax on transfer pricing.

Trade credit Master data management digital marketing.

Corporate development in the list.

Goes on and we're seeing some some very good growth.

Across the.

<unk>.

Portfolio. The other thing I would say is we're integrating that data into a number of our different offerings. So for instance, you think about commercial real estate when our customers are saying, Hey look we want to have.

More holistic understanding around the properties that.

We're either investing in or lending on.

As you can imagine 1 of the key things to understand is the profile of the tenants in those buildings. So we're able to leverage that data we're able now to.

To have with the ESG predictor scores.

Sites on the ESG profile of the tenants and of course the.

The entire profile of the tenants.

We're also integrating that content into our <unk> offerings as you can imagine we've got.

Our commercial banking customers, who like the idea of being able to get that data into their origination platforms.

To enhance their own efficiency. So they're just there are a whole range of different ways that we are monetizing.

This data beyond <unk>, and that's driving some very nice growth for us.

That's very helpful color.

And just on follow up I wanted to ask about share cross.

Send opportunity, particularly on the insurance and asset management site again, thanks for EQT net slight and talking about the holistic offering there.

The question there was how well are you penetrated how much more opportunity there is to upsell cross sell Nikki on existing customer base.

Ashish.

Speaking specifically of insurance do I have that right.

Our insurance and asset management or if you want to talk in generalities also like hung on the offerings that penetrated on how much more room. There is to just upsell cross sell rather than necessarily going after new logos. Thanks.

Yeah, I guess, maybe I'd start by just.

Highlighting that.

So our current insurance franchise is primarily focused on life insurance and there are some so as you can imagine theres some reasonably good synergies between life insurance and.

In asset management, and kind of buy side and so we've been able to expand our product offerings first of all by leveraging kind.

Yes.

Combined capabilities.

And as we've seen insurance customers take 1 product that gives us an opportunity then to cross sell in multiple products I've talked about.

We started with.

<unk> compliance.

Excuse me regulatory reporting.

Thanks.

The solvency too right and then we evolved into actuarial modeling and that that's a very very important function at life insurance companies and then we we developed these.

Products around <unk> 17, and seasonal so what happens is kind of a land and expand.

Our strategy.

There, where we've got insurance companies, who were taking 1 of these products and then increasingly taking multiple products.

That's very helpful. Thanks.

And we'll take our next question from Shlomo Rosenbaum with Stifel.

Please go ahead.

Hi.

Thank you very much for taking.

<unk> hearing on to circle back just low questions were asked before on <unk>.

Specifically Owen's question.

What's going on in China right now.

And the media has reported.

Characterizing it as kind of a crackdown risks it's more than just.

Specific was about some of the data privacy in terms of the.

My question <unk> environment.

Becoming increasingly tight managing commercial real estate.

Finance E Commerce Ray it ride hailing like education, just how do you think about that in the context of your business. Both operationally in terms of operating in China, and then also from a ratings perspective.

Perspective in terms of being able to rate the various businesses that are out there and what these changes on the regulatory environment might mean for you on recommendations.

Yes, certainly it's.

It's an evolving landscape.

And we've all got to navigate these changes we've.

We've done that and we'll continue to do that in China.

I guess I would say that given the atmospheric saucer and use sign our relations.

I'm going to talk now about.

Our approach the domestic rating market because we've got a lot of questions on on these calls and in other investor.

Meetings.

I.

I continue to remain comfortable with our approach to the domestic ratings market and that is to work through leading Chinese players.

I think it is going to be.

Challenging for wholly owned American companies to achieve later.

Leadership positions in nationally important industries in China over the medium and even long term.

And certainly what's going on today, I think reinforces that view.

In regards to the U S government's recent business advisory relating to U S companies operating in Hong Kong.

Obviously, Hong Kong is a very important business hub for us.

As it relates to the substance of that advisory.

I guess I would just say that we've got contingency plans in place for all sorts of potential business issues for our offices all over the world in Hong Kong is no different.

Okay.

And then just going back a little bit over here in terms of like I think Tony was asking about this on.

Yes.

How much of the IRS is still being impacted by the ability.

Of your people to go over to clients.

We meet with them face to face get the.

Implementations done there definitely was kind of a lag in the business because of their ability to do that and I was wondering how much are you still being.

<unk> by that and are you seeing change in momentum recently.

Yes.

<unk> talked about this when the pandemic unfolded in regards to kind of the but the big implementations.

On Prem, which as I've talked about it at a much smaller part of our business now than it was but but.

Intangible part that I think was more impacted by.

Not being able to be on site and is just the complexity of some of these on Prem.

Solutions and installations I think challenged.

Bye bye being virtual but I would say that we've done a great job on.

But that of adapting to virtual engagement with our customers and you see that from not only the recurring revenue growth but.

Our sales of of the SaaS solutions.

In that business. So I think youre going to I think part of what is contributing to that.

Fairly.

<unk> decline in 1 time is what you're touching on.

But like I said in terms of overall engagement with our customers that we have done a great job on adapting virtually.

Can I sneak in 1 more.

Please go ahead, just a real quick 1.

Just on <unk>, it looks like you've generated $3 million of revenue in the quarter is that a good run rate to assume for the whole year or is that like a $12 million revenue business.

Yeah.

Maybe if I think about specifically could carry on some of the other acquisitions that we've done.

We feel pretty comfortable that the pace that were.

We're executing on it makes a lot of sales for our business and the direction in which we're going.

And so I'd be comfortable again some of it you to assume sort of that level. If I just widened the aperture a little bit for the year and we're really looking for the 2021 M&A impact.

On our revenue number inclusive of <unk>, but not including.

RTC to be around $44 million for the full year.

Then I would also say that.

That's a very small bit of our overall data solutions business.

And increasingly what you're going to see is just that that data. They have is going to be integrated in and.

<unk>.

Through a variety.

Alrighty of our different products, so we're not going to be particularly focused on.

Sure.

The individual quarter results were much more focused on what it is doing to support our broader data solutions business.

That's very helpful. Thank you.

And we'll take our next question from Patrick.

Sure Matthew with Raymond James Please go ahead.

Hey, good afternoon, and I appreciate we've been going for a while so I'll stay to 1 question.

The bite and administrations nominee for assistant Treasury Secretary for financial institutions Grand Steel as previously called for the SEC to enact structural reforms on your industry credit rating.

In stream in particular.

What's the current nature of your dialogue with as you've seen in the by the administration and are you incrementally more concerned about potentially disruptive regulations.

Patrick.

For the question and I guess I would first say as you'd expect we are in active dialogue with our regs.

<unk>.

And policymakers both in the U S and around the world and from.

From time to time, our business model has been the subject of discussion by policymakers.

It's been carefully studied in multiple jurisdictions that goes back well over a decade now.

Most recently in 2020.

Regulator <unk> Advisory group that represented a broad cross section of the market.

The conclusions have remained the same.

Which is allowing for a range of business models allows the market to function efficiently and effectively.

And.

I would say that.

Over the past decade.

There isn't that policymakers have substantially strengthened the regulatory framework around our industry and we as a company and I believe as an industry have strengthened processes and internal controls we have in place to manage conflicts of interest and provide the market with very high levels of confidence and transparency.

Brown.

Our business and we operate under a very robust regulatory oversight regime.

We're going to continue to focus on maintaining policies and procedures that meet our regulatory requirements and provide the market with credit ratings that are that our independent and transparent and of the highest quality and I guess I would.

Currency or include Patrick.

Over the last.

18 months as you can imagine I've met with a lot of issuers and investors and policymakers.

And regulators and I think in general, but the feedback is that we have done an excellent job at managing ratings throughout what I think I would characterize as kind of the.

Could a stress test for credit ratings, which is the pandemic.

I believe that the market feels that it's been well served by the credit rating agency industry over there over the last decade.

That's very helpful. Thank you.

And we'll go ahead and take our next question from Judah Sao.

<unk> with J P. Morgan. Please go ahead.

Hi, appreciate you sneaking in here at the end.

Earlier, you touched on <unk>.

Margin, particularly to Delta between revenue is being raised in your outlook, but net margins I was wondering if you could talk about MA margins, where you're kind of on the opposite dynamic.

Ultimate guidance.

Staying the same but margin guidance a blip. It. So I was wondering what was happening over there what youre seeing to change that outlook. Thank you.

Good afternoon.

I'll start a little bit with some context here so <unk>.

He is focused on topline renewable growth.

Revenue organic strategic investments and that's really given the large opportunity set that we have in front of us.

While concurrently looking to ensure margin expansion and profitability and historically, we've done that right you've seen sort of that over or nearly 500 basis points of expansion and since 2017, we have raised our EMEA.

Through reallocated.

Adjusted operating margin guidance to 30% to 31% to net.

60 day 160 basis points higher than the 2020 actual number of that 29, 4%. If I think about the components of that you see core margin expansion going up by approximately 230 basis points.

And that's going to be offset by a combination of M&A.

<unk> done and organic investments that we've done and still plan to do of around 140 basis points net sort of gets us to that mid point of $1.20. So we see very strong leverage coming through in terms of the guide for the full year.

<unk>.

Okay. Thanks.

We'll take our next question from Craig.

Stephen <unk>. Please go ahead.

Thank you Mark I wanted to go back to costs for a second here.

Once we hopefully get past this COVID-19 environment here.

Can you give us some help you how to think about your annualized costs that you think will come back in the system in terms of employees fully back on the office around are we going to do that.

Sure.

<unk> expenses and stuff is it sort of like a $100 million rough number that will come back on the system. Once we get through this pandemic, we're still tracking at right now.

Craig maybe a little bit of context, and then I'll get to the specifics of a question. So most importantly, I think we as the management team are very pleased to highlight that disciplined expense management continues to create and maintain operating leverage and investment capacity and for our business.

If I think about just as an interesting.

In comparison in answering your question, if I talk about sort of the first half of the year.

Versus the second half of the year. So first half of the year, we saw operating expenses.

Particularly up 5% year over year and within that 5% the underlying operating expenses, excluding M&A and FX were effectively.

Flat.

And the reason for that was really because of.

Some of the programs that we've implemented which does include some <unk> savings, but think about the 2020 real estate rationalization program say.

Savings from the 2020, and a restructuring plan, which ended this quarter the offshoring initiatives that.

We've engaged in really holding those operating expenses for the first half of the year effectively <unk> zero percent.

M&A was about 3% on an FX was about 3 percentage and that's how you get to that 5% number for the first half year.

By contrast that to the second half of the year. We are looking for operating expenses, excluding M&A and FX to really try.

To really accelerate and if we think about the mid single digit guide that we provided this morning about half of that is really due to that underlying core operating expense growth.

M&A is probably 2 ish percent of that and maybe FX, maybe 1% and so that gets us to really the expense ramp for the year and we're looking at somewhere between 80% to 19.

$19 million and that would take into account all the additional incentive compensation accruals and any accelerated organic.

Initiatives investments in the second half.

I'm sorry, but then once you look at the cost right now annualized however, you want to do it.

First of all we get through this COVID-19.

How much extra costs, if people will come back when you have employees back in the office.

<unk>, where do you think is a reasonable level I'm, assuming it's not going to get back a 100% where it was pre pandemic, but it's not going to be zero. If you add those 2 nuggets together, it's an extra roughly $100 million, how should we think about that in your mind or roughly 3% of cost.

Okay.

Greg I appreciate the follow up question I was trying not to specifically given we're sort of in July and we've got a little bit of time to go before the end of the year in which we provide on how your outlook for 2020, just to give you as things day.

This year, its probably around a quarter.

What it would have been in 2019, so certainly the run rate.

And what we're expecting for the year is much lower and we do anticipate a portion of that coming back.

But to Rob's comments earlier around the way that we think about and workplace of the future workplace flexibility, we had to learn to operate on a more effective and efficient manner. We've also executed a number of procurement.

And other offshore activity.

<unk> that have generated savings and I realize the $100 million are quoting is really based off of the $80 million to $100 million and cost efficiencies.

We telegraphed previously.

Some of those efficiencies will be redeployed back into interest in the business and some will ultimately flow through to the bottom line and we will give a clear update of that day.

<unk> at when we do the outlook probably in February of next year.

Great. Thank you Mark.

It appears there are no further questions at this time, Mr. Sadler I'd like to turn the conference back to you for any additional or closing remarks.

I just want to thank everybody for joining.

And you can call and enjoy the rest of the summer be well on.

We look forward to speaking with you again on the fall.

This concludes Moody's second quarter timeframe on an earnings call. As a reminder, immediately following this call. The company will perform I ask Bethany breakdown under the Investor resources section of the Moody's.

Today's hard home page. Additionally.

Additionally, a replay of this call will be available after 330 P. M. Eastern time on Moody's IR website.

Very much.

Okay.

[music].

<unk>.

[music].

Okay.

Yeah.

Okay.