Q2 2022 Moody's Corp Earnings Call
Please standby.
Good day, everyone and welcome to the Moody's Corporation second quarter 2022 earnings Conference call. At this time I'd like to inform you that this conference is being recorded and that all participants are in a listen only mode.
At the request of the company, we will open the conference up for question and answer session. Following the presentation I will now turn the call over to Siobhan and Coke head of Investor Relations. Please go ahead.
Thank you good afternoon, and thank you for joining us to discuss Moody's second quarter 'twenty two results and our revised outlook for full year 2022, I'm sure Bonnie Coke head of Investor Relations. This morning, Moody's released its results for the second quarter of 2022 as well as our revised outlook for full year 2022.
Earnings press release, and a presentation presentation to accompany this teleconference are both available on our website at IR don't really don't come.
During this call we will also be presenting non-GAAP or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for a reconciliation between all adjusted measures referenced during this call and U S. GAAP.
I call your attention to the Safe Harbor language, which can be found towards the end of our earnings release. Today's remarks may contain forward looking statements within the meaning of the private Securities Litigation Reform Act 1995 in accordance with the Act I also direct your attention to the management's discussion and analysis.
And the risk factors discussed in our annual report on Form 10-K for the year ended December 31st 2021, and in other SEC filings made by the company, which are available on our website and on the SEC's website. They.
These together with the Safe Harbor statement set forth important factors that could cause actual results to differ materially from those contained in any such forward looking statements.
I would also like to point out that members of the media may be on the call. This morning in a listen only mode.
Before we begin I'm pleased to announce that in response to feedback from our external stakeholders, we have enhanced our earnings materials and changed the format of our call for this quarter. This morning on our IR website, we published a supplementary presentation along with our updated earnings release materials that we believe provide substantial insights into our business.
As such during the call we will be not we will not be going through like use the usual presentation. Instead, Rob Fauber, Moody's President and Chief Executive Officer will provide a brief overview of our results and outlook after which he will be joined by Mark Kaye Moody's Chief Financial Officer to answer your questions I will now turn the call.
Over to Rob Saba.
Thanks, Giovanni Hello, and thanks to everyone for joining today's call.
As Giovanni mentioned I'm going to keep my opening remarks brief so that we can get straight to your questions and I appreciate that it's been a very busy morning for many of you on the call. So let me begin with a few key takeaways about our results and then I want to spend a few minutes on our outlook and the continued strength and relevance of our business.
So let me start by reinforcing that as challenging and volatile conditions in global capital markets continue we're leading the way in providing integrated perspectives on risk for our customers and this quarter was really a tale of two cities as our ratings business were significantly impacted by the slowdown in issuance activity.
In our EMEA business continued to grow very nicely and.
And as we've said previously year on year comparisons with our record performance in 2021 would be unfavorable this year.
And overall Moody's revenue declined approximately 11% in the second quarter and.
And given the operating leverage in the MS business as well as the negative impact of foreign exchange adjusted diluted earnings per share declined by 31% from the prior period prior year period.
$2.22.
M I S, which was significantly impacted by ongoing cyclical disruption in the global debt markets due to a few things rising interest rates are high.
High inflation unsettled geopolitical conditions.
<unk> generated revenue of $706 million and.
We don't put that in perspective.
Global rated issuance was down 32% for the quarter and transaction revenue was down 40% and that reflects the negative mix driven by the weakness in the leveraged finance markets.
And when balanced by our recurring revenue this translated to a 28% decline in total mis revenue for the quarter.
On the other hand customer demand for our suite of solutions that help navigate market uncertainty and identify measure and manage risk.
Does that demand remained robust.
And that fueled steady growth in our subscription and SaaS based products, which along with the contributions from prior year acquisitions delivered revenue growth of 18% and.
In EMEA revenue growth was negatively impacted by five percentage points due to FX in the quarter.
Now you'll recall earlier this year, we introduced an annualized recurring revenue or <unk> metric for MAA and we believe that's a good indicator of future growth.
In this quarter, our organic <unk> grew by 9% and we expect this growth to further increased to low double digits by year end.
And that's supported by both our ongoing product development investments that broaden the ways in which we serve our customers.
And by the growth in our Salesforce and strong sales execution.
No I expect that many of you will have questions about our outlook in a few minutes and I would like to make a few comments about our expectations before we get to it in the Q&A.
And we anticipate that the current market disruption will persist for the remainder of the year and we've updated our guidance to reflect that now obviously, if actual conditions differ from the assumptions underlying our guidance our results for the year may differ from our revised outlook.
Now for <unk>, we expect issuance to decline approximately 30% for the year and full year 2022 revenue to decrease in the low 20% range now.
Now the last two and a half years have been unusual to say the least so I have to acknowledge that with all the uncertainty in the market the confidence interval around our outlook is probably wider than it was pre pandemic.
Our business outlook for M&A remains unchanged. However.
Due to the impact of the weakening euro and British pound against the U S. Dollar were slightly reducing MH revenue growth outlook to the mid teens percent range.
Now taking the reduced.
Revenue guidance and the impact of foreign exchange into account, we now forecast Moody's full year 2022 revenue to decline in the high single digit percent range and adjusted earnings per share are now projected to be in the range of $9 20 to $9 70 sites.
Incorporated into our outlook is a new restructuring program and Thats part of our broader approach to expense management.
This geolocation restructuring program helps us further adapt to the new global workplace and talent realities and it accelerated a number of ongoing cost efficiency initiatives and that includes real estate optimization and the increased utilization of lower cost operational hubs and we expect this program to generate 40 to 60.
Million in annualized savings with up to $75 million in aggregate charges through 2023, and we plan to partially redeployed.
These savings back into the business to support ongoing organic investments.
<unk> things like sales deployment and employee retention.
Now before I open it up to questions.
Try to put all this into perspective for a few minutes.
Debt issuance markets are clearly in a period of cyclical turbulence. However, we believe that the fundamental drivers of issuance remain firmly intact and taking a medium term view, we expect issuance to resume as capital markets adjust to a higher interest rate environment and as you saw on the slides that we shared this.
Morning, the volume of outstanding corporate debt in the U S has grown each year for the last 30 years, and we believe that the fundamental role of debt and fueling economic activity and financing business growth remains unchanged.
Global GDP growth is expected to continue, albeit at a lower rate.
Corporate refinancing needs remains strong on a historical basis rates and spreads.
A relatively in line with their averages despite some recent increases.
During this market or this period of market turbulence.
We're going to continue to focus on what we can control in Ms.
And that is to ensure that Moody's remains the rating agency of choice.
Providing a world class experience for issuers and ensuring the quality relevance and timeliness of our ratings research and insights that all reinforce investor demand poll.
EMEA remains a strong and resilient business with almost 60 quarters of consecutive growth.
And our investments in product development and sales are accelerating our organic growth and we're realizing the benefits of our recent acquisitions fact were ahead of or have met the targets that we set for our acquisitions of bvd and RTC and though it's early days, we are on track to meet our targets for Rms.
Now stepping back and looking at the Big picture again for just a moment.
Strong demand for our integrated risk assessment offerings and the value that moodys provides to our customers, especially in these uncertain times remains unmatched.
So across the business, we're innovating and investing to provide our customers and market participants with the products and the insights that they need to decode risks and unlock opportunities.
And lastly, all of this would not be possible without the tremendous efforts of our people and I want to thank them for all of their continued hard work and dedication.
That concludes my prepared remarks, so mark and I would be pleased to take your questions operator.
Thank you.
If you would like to ask a question. Please dial star one on your telephone keypad. If you are using a speakerphone. Please pick up your handset and make sure. Your mute function is turned off so that your signal reaches our equipment. We will ask that you. Please limit yourself to one question with a brief.
A follow up.
Again that is star one if you would like to signal with questions Star one.
And our first question today will come from George Tong with Goldman Sachs.
Hi, Thanks, Good morning, I really welcome the new format for the earnings call.
You're assuming issuance volumes declined 30% it looks like in 2022 based on your supplemental materials, how much conservatism is baked into that guidance and what does that assume for issuance volume performance over the remainder of the year compared to performance over the first several months, how how should we think about seasonality in <unk> issuance.
Yes, George Thanks for the feedback.
So I suspect there'll be a few questions on issuance and outlook on this call. So I'm going to start George Bye.
Trying to take kind of a big picture view, and then I will I will get to your question about kind of year to date year to go but let me try to put.
This year's issuance into some sort of historical perspective.
First of all there are two not one but two big shocks that are impacting the markets.
At the same time right now and the first is what I think we all understand is the inevitable monetary tightening after a period of historically low interest rates.
And now we've got the fed aggressively addressing inflation and that has caused a lot of uncertainty in regards to both the trajectory and the pace of rate increases versus what I think the market had both assumed and was hoping for would be a kind of.
Slow and steady and well understood trajectory of rate increases during during a period of tightening, but the second shock that we've got is the uncertainty around the duration and the severity of the Russia, Ukraine crisis, and that's obviously led to a spike in energy prices Thats further contributed to inflation and it's also just eroded.
I think global confidence in general so.
And then not to mention.
We are still dealing with COVID-19.
Over 19, and the knock on impacts of supply chain disruption. So.
That's a lot of complexity and that complexity is causing tremendous volatility in the markets that we're all.
Living through as investors are trying to navigate all of these interdependent.
<unk> and their implications now.
Let me put this in perspective with all of that going on.
Our outlook for issuance. This year is almost exactly on top of the average annual issuance of something like $4 four trillion over the last decade, excluding the pandemic years of 2020 and 2021 so yes.
Issuance is going to be down significantly, but when you think about comparing it to 2019.
That was that was quite a normal functioning year.
Okay.
Great.
And as a follow up you've previously given medium term targets for margins in the low Sixty's. What are your latest views on medium term M. A X.
Margins and how much flexibility do you have in managing <unk> expenses.
Good morning, Ed towards Mrs.
Medium to long term business fundamentals remain intact.
Again based on our view that the current market disruption in issuance is cyclical.
And structural in nature, and our view is informed by several data points and observations for example, the stock of data has steadily grown over the past several decades.
Price to value is compelling for our customers and that they are strong refinancing needs that will buttress the transactional revenue base.
Also note that credit spreads themselves are close to historical averages and the interest burden effectively remains low for corporates, therefore as issuance growth normalizes in the future. We expect the mis adjusted operating margin to stabilize in that low 60% range.
Furthermore, we are continuing to carefully evaluate our expense base.
While reinvesting through the cycle to support strategic expense growth initiatives in mis and that's going to include ESG and climate technology enablement strengthening of our analytical capabilities as well as expansion into new markets regions and evolving risk areas.
With that I'd say, we still feel confident about that low 60% medium term target range.
Okay.
Got it thank you.
Thank you. Our next question will come from Kevin Mcveigh with credit Suisse.
Great. Thanks, so much and again I will echo my sentiments on the new disclosure is very helpful.
I guess.
Just following up on the issuance.
Could you frame up because to your point the $4 four trillion. It seems like the 10 year average and I know, we're not going out to 2023.
But as you think about.
Beyond 'twenty two does it hover around that and maybe just talk to supply versus demand dynamics within the context of issuance more.
What gets investors re engages it.
Fed funds increase at the end of the month or more visibility on the Ukraine I know Thats a hard question, but just any way to frame, where you think that gets re engage and whether or not it's just a refund intervals at ultimately trigger some incremental issuance.
Yes, Kevin.
So let me.
Let me, maybe talk a little bit about kind of upsides and downsides to kind of our outlook and see if this.
Addresses your question, but let me know.
Okay look I think in developing the outlook, we feel like it's largely kind of weighted towards the downside.
We have effectively taken the the activity and the market conditions that we've seen in the first half of the year, we've effectively rolled that forward for the balance of this year and assume that that's effectively.
What we're going to have for the rest of the year. So you are asking kind of what could what could get.
Maybe the market started.
I think one of the keys that we're going to look at is.
No.
Whether we continue with economic growth or whether we tip into recession and I think one of the keys to that is inflation.
<unk> can get that under control.
I think there is the possibility that they pulled back from more aggressive rate hikes towards the end of this year and into 2023, I mean, you mentioned, Russia Ukraine.
Certainly some sort of resolution there.
Would address some of the supply chain issues and ease some of the inflation on commodity prices, but also just reinforce market confidence.
It would be a positive and that point around confidence.
It is very important.
Because it's very difficult for issuers to issue into volatile market. So the volatility that we see in equity markets translates into volatility and issuing in the debt markets and so some period of stability. So thats why that kind of certainty and resolving some of these things I think will be quite helpful. In terms of <unk>.
<unk>, it's a little bit of a converse.
But it's worth mentioning in a recession scenario.
That's when we'd see defaults likely start to tick up and spreads widen that would be a headwind. So we're keeping really kind of keeping an eye on that.
That's super helpful. And then just to follow up real quick it seems like youre, keeping the expense investments intact against kind of some of the adjustments in revenue is that just a function of the confidence in the business or is your opportunity maybe take advantage of some of the dislocation that the market currently offers.
Kevin.
View very much as Rob mentioned, a moment ago, the market conditions as being cyclical in nature and.
That really means we're going to plan to invest through the cycle as we execute on our strategy of providing global integrated perspectives on risks the opportunity set itself is very substantial.
In markets that are large and expanding <unk> compliant banking and insurance and.
And therefore, even though we're continuing to evaluate and support based on opportunities underpinning our future revenue growth and expansion, we're going to balance that against and those in those activities that are needed to generate short term cost efficiencies to support our margins and ultimately help us achieve our medium term margin objectives.
So for example, we remained committed to organically invest $150 million in areas. This year like product development sales distribution capacity as well as an additional $50 million in <unk> and <unk> employees and thats going to be balanced against some of the new cost efficiencies, which are derived from the 2022 2023.
Zero location restructuring program that we announced this morning, we've also learned since the beginning of the pandemic that many business activities can be performed successfully remotely.
And while <unk> costs may rise.
As compared to prior years.
<unk>, we're going to prioritize customer facing travel we need it and of course, we have that naturally we have some naturally occurring expense levers such as the incentive compensation accruals, which are obviously going to flex based on our actual performance as compared to the targets. We set at the beginning of the year.
Very helpful. Thank you.
Thank you. Our next question will come from Toni Kaplan with Morgan Stanley .
Thanks, so much.
Cluster O&M.
So it looks like you.
Lowered the guide, but only because of FX, so essentially kept it.
Line, there, but the.
Or you're expecting to accelerate into the end of the year. So I thought that that was actually a really positive data point.
Maybe just give us some color on.
Hi.
What's driving that.
And you.
Is the environment.
Still somewhat positive.
On that side.
Do you expect that that becomes more challenge, but you can outperform the environment or would you expect that that just continues to do well because of clients wanting risk solutions et cetera.
Hey, Tony it's Rob and thanks for kind of peeling back the onion there.
I think you got the right message the right takeaway.
MA.
The results are really in line with our prior expectations on a constant dollar basis.
As we mentioned FX was a significant headwind this quarter.
Reduced growth by five percentage points.
And on an organic constant dollar basis revenue grew at 8%.
And our guide for the full year incorporated a little bit of seasonality that youre seeing in the quarter to quarter results in EMEA and that relates mostly to our banking and insurance businesses within decision solutions.
And I think you hit on the key here is that we are still confident in achieving our full year revenue.
Our revenue guidance.
And we've adjusted that guidance solely to account for the impact of FX and I think very importantly, when one reason we introduced IRR was to kind of look through revenue and the quarterly impacts revenue and be able to really focus on.
The growth in the base of recurring revenue.
We continue to feel confident about our ability to hit the low double digit guide for our growth. Let me give you a little bit of insight into what's driving that acceleration through the end of the year.
We've talked about how we have realigned our entire global sales organization really to better organize around.
Our customers and we're continuing to invest to build out our capabilities across all parts of our sales organization.
To be able to both.
Deepen the penetration of existing customers as we have broadened our product suite and.
And also to bring in some new logos and.
We believe that those investments are in fact, showing some early results are <unk>.
Sales meeting activity levels.
<unk> have gone up pretty meaningfully as a result.
And our gross business per sales rep has been pretty consistent with our expectations and that means that even as we have added salespeople. They have remained as productive.
On a per head basis as before so we're getting some good production out of the new the new sales team. The second thing is.
Through the first half of the year, we've we've had some good price capture.
Compared to our historical level.
That really again is due to the enhancements.
That we continue to make to our products and really enhances that value proposition and our ability to capture price.
A good example of some of the stuff, we're doing and you're going to see.
In coming quarters is around credit view, where we're continuing to redesign that.
That web our flagship.
<unk>.
Web credit research platform.
Overhauling the look and feel we are we're going to have come out with considerably greater functionality and content and that will be a good opportunity for us to price for value and the last name Tony I would say.
That's giving us confidence just obviously, we monitor our sales pipeline very very closely and the sales pipeline right. Now is very strong and gives us confidence in our ability to hit that number for the year.
Perfect that sounds great and then for the follow up Mark I know you lowered the free cash flow guide about 20% at the midpoint versus the prior midpoint.
Probably the biggest piece of that.
Of that but is there anything else that you want to call.
All out in terms of.
Lower free cash flow guide.
Also in terms of use of <unk>.
Capital.
Outlook on and sort of buyback.
And the Lord that as well thanks.
Toni let me take the free cash flow question, and then separately <unk> share repurchases and the buyback guidance that absolute question, which comes up a little bit later on in terms of free cash flow guide for the year. What we wanted to do is to reflect the year to date global free cash flow of $628 million in that.
Down around 49% primarily on to your point the lower net income that's being driven by the reduction in <unk> revenue due to significantly curtailed issuance.
In addition, this quarter, we also had a tax related working capital headwind.
The impact of which is expected to be partially reversed out later this year and thats reflected in our updated full year outlook. The mid point of our revised full year 2022 free cash flow guidance of $1 $41. Six does imply a free cash flow to U S. GAAP net income conversion ratio that's approximately $100.
Scent and Thats very much in line with historical conversion levels and that means that our refreshed 2022 guidance at the midpoint now assumes both adjusted diluted EPS and free cash flow will decrease in the low 20% range.
Perfect. Thank you.
And our next question will come from Ashish <unk> with RBC.
Hi.
Just wanted to drill down further on the issuance side I was wondering if you could talk about the pipeline for new issuers and also if you could just talk about like what percentage of patients right. Now is clearly coming from new issuance versus refinancing of existing debt and any.
It's around how that could trend for the rest of the year and exiting the year. Thanks.
Ashish, maybe let me talk a little bit about what's going on with our first time mandates and these are.
And our new issuers into the market and then I'll give you a little bit of color on what's going on.
Currently in the market kind of what we're seeing.
But we've revised our range for first time mandates down from it.
It was 850 to 950.
In the last quarter, we've revised that down to 700 to 800 for the year and.
That's because we had another slower quarter.
U S first time mandate activity.
<unk> remained muted I would say.
But it's pretty highly correlated to leveraged finance issuance, that's where most of your first time issuers into the market come from.
We expect the activity levels that we've seen in the first half kind of like our broader issuance outlook to remain pretty steady.
In the second half of the year I think September will be.
A key a key month.
It will be post earnings blackout post summer and we'll see if there are some issuers that have been sitting on the sidelines that debt.
Choose to hit the market at that point.
It's interesting we have something like a little over 401st time mandates that we signed through the first half of the year, but not all of those are coming to market and.
In fact, just to give you put a little meat on the bones. There. So far this year and excluding APAC about 40% of the new mandates that we've signed have not actually printed.
And that was that number was something like 10% in the first half of 2021.
To give you a sense it typically takes something like two months.
From the time that we execute and engagement in the issuer actually issued a bond.
That timeframe has more than doubled so.
In terms of what kind of market do we have right now.
Obviously, it is still a very challenging environment, the sentiment changes from week to week and even.
Day to day.
I'd say at the very moment.
Positive tone in the markets.
This weak investment grade issuance has had.
It's best we can.
Like 12 weeks.
The issuances generally dominated by financial institutions, but that may change as we kind of get through blackouts here.
High yield and leverage leveraged loans has still been.
Pretty light.
<unk> seen a few high yield deals hit the market earlier this week the secondary market firmed up towards the end of last week spreads came in.
Something like 40 basis points or so.
<unk>.
But.
In general.
It's still a pretty quiet market for leveraged finance.
Ashish just to add a little bit on <unk> remarks, we do anticipate the absolute dollar mis transaction revenue to be slightly lower in the second half of the year.
Vis vis the first half of the year and that would align to the historical issuance patterns we've seen.
Over the over the prior five years, where on average the second half of the year is traditionally contributed about 47% of the full year's transaction based revenue.
Furthermore, we expect that total mis revenue to return to more debt saw two type pattern consistent with what we've observed prior to the panic pandemic and that will cause a little bit of margin headwinds in.
In the third quarter.
That's very helpful color and then my second question was just going to be on the expense bridge. This is on slide 23 that you've provided the expense page I didn't see incentive comp broken out as it was broken out in the first quarter. I was wondering if you could provide any color on how we should think about incentive comps.
Decline in 'twenty two versus 21.
Absolutely. So maybe let me spend a minute on expense bridge and then I'll get to the direct question around incentive compensation. So for the full year 2022 operating expense guidance, we are reaffirming high single digit percent growth.
And that includes $31 million and accrued expenses as part of the 2022 2023 Geo location restructuring program that we announced this morning, if we excluded that restructuring charge our outlook for full year operating expenses would have been in the mid single digit percent growth range and so specifically for <unk>.
Full year 2022, you can see anticipated expense growth.
<unk> eight percentage points.
Related to acquisitions completed in the last 12 months primarily Rms.
Proximately, one percentage point related to the restructuring program I, just mentioned and then operating growth in basements nature of ongoing cost efficiencies.
Six percentage points, and then lower incentive comp minus 6% touch points, so effectively operating growth in investments being approximately flat and then of course, a partial offset from favorable movements in foreign exchange rates of two points.
The outlook also then implies year to go.
Operating expense growth.
The decline in the low single digit percent range and while we don't normally provide expense growth forecast by segment given that we still expect the majority of our 2022 strategic investments to support future MA revenue opportunities the year to go statement implied guidance would be a high single digit per se.
<unk> decline and a mid single digit percent increase for Mis and MA respectively, and then answer your Pacific question, the second quarter and year to date incentive compensation accrual was approximately $50 million and approximately $114 million, respectively and for full year 2022.
We expect incentive compensation to be around $240 million.
<unk> and Rms.
Mark that was very helpful color. Thank you.
And our next question will come from Alex Kramm with UBS.
Yes, Hello, everyone just of course coming back to him I ask for a second here.
<unk> multiple times have talked about the normalization that you expect to occur. So just wondering if you will look out a little bit more than just the next couple of quarters.
How much how much confidence we should be having I guess, what I'm asking specifically is.
Yeah.
And in prior periods of issuance declines and that's obviously, what we're looking for 30% down we've seen a pretty big snapback.
And I think a lot of people expect that to happen again next year. So I'm just wondering how much confidence we should be having in that like the refinancing walls actually don't really start increasing for a couple of years. Obviously M&A has been down year to date, and then lastly, with higher rates and higher spreads the kind of opportunistic financing is still pretty anemic.
So just wondering how much confidence you have that that we get that snap back next year or if it could actually take a couple of years for that normalization to play out.
Yes.
Alex maybe a couple of things again, I'm just going to give you a few kind of the data points in perspective, just to try to triangulate around us.
We kind of looked at.
Issuance over the last 10 years, and then compare that to our current outlook for 2022, and just to give you a sense of kind of what we're dealing with the last time that overall corporate finance issuance was was below. This current outlook was was 10 years ago back in 2012.
And when you when you look at our average issuance over that 10 year period, and you exclude the 2020 in 2021 periods our outlook for investment grade is about 10% to 15% below that tenure average looking at leverage finance.
Our outlook implies issuance, probably 5% to six percentage percent above that 10 year average so.
Yes.
High yield the high yield market is very quiet in fact.
We're seeing levels of issuance that are even below 2009.
An important component to our overall kind of outlook is.
As leverage leveraged loans.
And I think as.
I'm going to tie that on then to thinking about how to triangulate that then to our medium term outlook because we continue to feel good about that medium term outlook.
So.
You've heard me talk about issuance over this 10 year period, and whether you look at overall issuance or just fundamental issuance so either overall, including structure of just fundamental.
It's grown roughly in line with GDP growth.
Obviously, plus or minus a percent or two and GDP growth grew at something like 3% over that period, obviously there have been.
And takes to that on any given year.
The asset class and the fastest issuance growth.
It has been leveraged loans over that period of time and that contributed to a favorable mix over the time period, you hear us talk about it on these calls all the time.
So now let me go to medium term.
And if you think about.
The building blocks that we always talk about GDP growth pricing recurring revenue.
Growth from first time mandates in mix.
If we've got modest economic growth, which is the outlook I think kind of in the in the near to medium term, let's call it low single digits.
Then translate that to issuance growth.
Low single digits is probably a reasonable assumption based on history like I was just talking about you got a modest benefit from ongoing disintermediation and rather than mix as a tailwind I'd probably assume it's either neutral to a slight headwind. So if we're in a recessionary scenario, we're probably at the low end of that.
That.
Low to mid single digit range and if we're experiencing recovery and expansion, we would expect to be at the higher end of that range. So.
Alex hopefully that gives you a little bit of a sense of that.
Why are we continue to be comfortable with that kind of medium term guidance and I know, we've got a lot of questions about it when we first put it out into the market, but I think you can you can kind of see where we're coming from here.
No no. This is helpful and I appreciate the very uncertain times. These days just maybe quick one then and apologies if that has come up already on the on the Moody's analytics side.
Seems like clearly a lot of mission critical products, a lot of demand because you're expanding into high.
High growth areas, but just any areas today, we should be aware of as it comes to potential pockets of risks things that maybe clients can do without in a in a tougher selling environment or any areas, where maybe sales cycles are lengthening at all or is it really.
Strong across the board.
Not really we continue to have some very strong retention rates and there is nothing I could point to there.
Easy enough. Thank you.
And our next question comes from Andrew Steinman with J P. Morgan.
Hi, I wanted to ask about decision solutions, Rob you mentioned, some seasonality or a specific product in that area and I guess you were talking about it here in the second quarter because decision solutions organic revenue growth year over year substantially decelerated to 8%. So if you could just tell us about the banking.
Product that kind of drove that growth deceleration in the second quarter and of course, you can imagine the other side of that question is will that seasonality of the banking product benefit third quarter organic revenue growth for <unk>.
<unk> solutions.
Yes, Andrew.
Let me first start by just reminding everybody about the really kind of the core components of whats and decision solutions and.
The largest business collectively by revenue.
As insurance when we look at kind of our legacy insurance business in RMS second is banking.
And third is <unk> then we've got a few other smaller businesses like.
Structured finance and so on so we had very good growth across the entire.
Subsegment decision solutions, particularly <unk>.
And.
I think.
The best thing to do is to look at IRR here, because theres been a little bit of revenue revenue lumpiness in the first half of the year when I referred to seasonality that's really what I was referring to so let me just kind of take some of the key numbers.
As you said, Andrew organic constant dollar revenue, 8% in the quarter, 16% last quarter. However, the key number here is organic.
<unk> grew at 11% for decision solutions and Thats the same as last quarter. So there is the same altitude.
<unk>.
<unk> kind of sales and building a book of recurring revenue there is no change there.
<unk> continues to be kind of a high flyer growing in the mid 20% on an organic constant dollar basis, So where does the lumpiness come from.
Both our insurance and banking businesses have a mix still of on Prem and SaaS solutions and you've heard US talk about we're working to migrate more of the portfolio to SaaS that's true.
But we still have a suite of on Prem products.
That introduce an element of lumpiness given some aspects of revenue recognition and that was the case for the first half of this year.
But we accounted for that as we thought about our full year guide.
So insurance.
RMS you heard me say on track or.
Our insurance, our legacy insurance business growing very nicely.
And banking.
There, we're seeing some very nice growth as well im going to touch on that.
And just a second in terms of what is driving that.
We've got three primary areas that we serve for banks lending risk management finance and planning.
We're continuing to to really build out our SaaS offerings that has the highest growth part of our banking business.
It allows us to really deliver a lot more functionality and usability to our customers.
That then drives a lot more usage from our customers and that supports the overall kind of value proposition and pricing opportunity for us one area I would maybe call out.
Andrew is commercial real estate, you've heard us talk a lot about the investments that we've been making there obviously commercial real estate is very important to our banking customers and we recently signed.
Our strategic partnership with one of the largest commercial real estate lenders in the country.
To kind of co develop a commercial real estate lending solution. We're very excited about about doing that in bringing together all of our commercial real estate data and analytics with our cloud based loan origination tools to really help this bank and other banks with a more holistic gear to streamline their processes. That's one example.
<unk>.
But I'm going to come back to the key takeaway here for decision solutions, because we've had some volatility in the revenue from quarter to quarter is look at <unk> and IRR for decision solutions was 11% in the quarter same as last quarter. So no change to the very good growth, we're seeing across the entire decision solutions portfolio.
Yeah.
Right, Rob there was a piece that yet and do you expect the seasonality to benefit third quarter for decision solutions organic revenues.
I think Ken what we'd likely to see in the third quarter is pretty similar to what we've seen in the second quarter and then an acceleration.
At the end of the year in the fourth quarter.
Thanks Mark.
And our next question come from Andrew Nicholas with William Blair.
Hi, Thanks for taking my questions first one just kind of on your own M&A appetite obviously.
A challenging environment or at least a choppy one.
The current economic conditions or perhaps some conservatism.
From a growth perspective heading into the end of the year impact how youre thinking about doing deals I know you already kind of lowered share repurchase expectations due to the free cash flow, presumably the free cash flow.
Decline, but I'm wondering how that impacts your outlook for M&A as well.
Good afternoon, I'm going to spend just a minute talking about share repurchases and I'm going to turn it over to Rob to touch on the M&A component of your question. So perhaps most importantly, how capital planning and allocation strategy remains unchanged.
This year, we are still planning to return approximately 1 billion and a half dollars to our stockholders or approximately a 100% of our projected 2022 free cash flow at.
At the midpoint of our guidance range and.
As you can appreciate global economy economic conditions have significantly weakened relative to our first quarter outlook and we spoke about several of those factors, but primarily the uncertainty around the duration and severity of the conflict in Ukraine as well as heightened inflationary risks and although we ultimately view these market conditions.
<unk> and the disruption to be cyclical.
Are being very thoughtful about our leverage and liquidity levels.
We're going to do that in order to ensure that we maintain a strong balance sheet and then equally important financial flexibility and as a result, we have lowered our guidance for full year 2022 share repos to approximately $1 billion.
And that means we've adopted a slightly more conservative short term approach to capital management with the philosophy of preserving financial firepower to be able to take advantage of market conditions.
And when they arise.
Yes.
Let me add to that so.
We had done a number of bolt on acquisitions over the last let's call. It 18 months, we've been really focused.
On executing on that portfolio of acquisitions, and integrating and getting the real business value.
Out of those acquisitions in fact, we.
We track our performance against our acquisition cases, and we review them.
Every quarter and we included in the.
The slides and our kind of our performance on some of our larger acquisitions to date and we feel very good about that.
It's interesting.
I ran the corporate development team for years and.
In these periods of market dislocation.
Initial.
Instinct is to think Oh, well this has got to be a buyer's market valuations are down so sharply.
But like we're talking about whats the whats the duration of this kind of correction. The same thing that sellers are thinking about this as a six 912 months.
Correction I.
I remember when we were talking about multiples at one level 12 months ago, and so im not a seller. So you tend to see often times, some disconnects between valuation expectations between buyers and sellers in these markets.
If you've got companies that have a very leveraged capital structure is eventually that May force them to do something that is often not the case in our sector and so I guess the last thing I would say is you know like Mark said, we've got we've got plenty of financial firepower.
We have very clear view of the kinds of things that our customers want and need from us and what would be additive to our.
<unk> offerings for our customers and so we're always on the lookout, but I'd say, we're going to continue to be disciplined.
In this market and continue to extract the value out of the things that we have invested in over the last 12 months to 18 months.
Great. Thank you that's helpful. And then maybe a follow up Rob to a point that you made on kind of the success of some of your acquisitions of late obviously on slide 22, you know mid <unk> type growth for your screening capabilities and being ahead of plan there.
Terms of $300 million of revenue in that business I was wondering if you could spend a little bit more time on what exactly within that business is outperforming your initial expectations. Obviously the market is a strong one but if there is anything from an execution standpoint, or a product offering stampede standpoint.
That's really resonating with customers would love to hear it. Thank you.
Yeah. So I think this is really about.
Our <unk> and again I'm I'm warning you we may move on from that term because I think in some ways, it's a little too limiting for what it is but.
Very simply we help customers assess screen and monitor the individuals and companies that they do business with or that they want to do business with.
And we do that by helping them know the entities and individuals.
By understanding the risks associated with those third parties and also to execute at scale with some workflow tools and you've heard us talk about the goal here is to be both more efficient and more effective.
And so.
I talked about mentioned on Investor day, virtually every company around the world is working to better understand the risk profile of their customers, but also their suppliers and other counterparties. So theres, a big opportunity here and back to acquisitions and investments in the fourth quarter of last year, we were pretty active in this space and we may.
Several acquisitions and that has allowed us to begin assembling.
More comprehensive offering to support customers in their K.
Ky C workflow.
That includes data and intelligence with really unmatched coverage on entities' ownership and companies. It includes an element of workflow orchestration.
With highly Configurable integrated and automated <unk> management and also the thought leadership and expertise that our customers expect of Moody's. So we're pulling all of this together.
In a way leveraging these world class datasets, leveraging now this kind of highly configurable workflow platform and all the expertise we have to not only help with as I said the traditional know your customer use cases, but now going even more broadly to know your counterparty know your supplier.
So on so there is a lot to it but.
All of that.
Back to your original question about RTC and what we had said.
We knew that RTC was going to be a very important component of basically unlocking our opportunity here and in fact it has been.
Thank you.
Thank you our next question will come from Ali.
With Deutsche Bank.
Yes, hi, thank you.
Wanted to just.
Let's just put a finer point on your medium term outlook for mras.
I think at the time when you put out that outlook. It was based off of 2021 issuance levels.
Just wanted to clarify I think what Im hearing you say is that we should think about the base now.
More 2019.
Is that the right way to think about sort of normalized growth from here or am I am I misunderstanding, what youre, saying with respect to your medium term outlook.
Yes, I think generally I think that is right for some of the reasons that we've talked about on the call. So far.
And maybe just to add one.
Maybe just add one quick comment to <unk> Mark is when we set our medium term outlook.
Mis revenue in particular, we did build in a period.
Straights and economic strength into the model as the state of our medium term target really followed the point that you're making to historically strong years of issuance in 2020 in 2021.
Okay understood and then just as a follow up on the <unk> business I heard you say that you haven't seen anything.
Any type of slowing in any component of that business.
Moment in time.
I'm curious again on your medium term outlook, which was in the teens.
How resilient do you think that business is.
<unk> two to the macro environment in general.
Are you confident in those targets going forward.
Yes, we've talked about this a bit before.
It's a very resilient business and.
The reason for that is if you think about what we're helping our customers do.
<unk>.
We talked about again, it's not.
It may sound, a little bit trite, but in these periods of uncertainty you've got customers, who are trying to navigate all of this uncertainty and they need expertise they need data they need analytics, they need expertise and.
So they really really values in those periods.
As we've continued to broaden out our offerings you think of I talked about what are we doing in banking it's.
Loan origination risk and finance at risk management and financing planning those are not things that banks are turning off in periods of stress think about.
Whats going on across our insurance portfolio. We've got models that are literally at.
At the very heart of pricing.
Property and casualty risk for insurers.
In our <unk> business.
You've got to make sure that youre not doing business with sanctioned entities are bad people.
Whether we're in good periods or bad periods.
And so.
We just we have some very mission critical workflows that we're serving for customers and you can see from our retention rates. This stuff is very sticky.
Once we are embedded into these workflows.
The retention rates are very high so.
That's why I tend to feel quite confident about the business, even when we're in periods of market stress.
Great. Thank you so much.
And our next question will come from Manav Patnaik with Barclays.
Hi, Good afternoon. This is Brendan on for Manav, just wanted to ask and I apologize for going back to this.
The issuance.
That you talked about the $4 four trillion near the average excluding the pandemic.
To be clear it sounds like you are saying.
Is this more so a new base to grow off of.
Just in your current guidance, when we think about 2023 or or is there still.
Or are you still thinking theres, a theres a bit of a rebound.
That could happen or is that more so when the refinancing loss pickup beyond that.
Hey, Brendan good to have you on the call.
I think we have to acknowledge that the last two years were unusual years.
I think a lot of a lot of analysts and investors are looking back at long time series of issuance just like we are in.
And those last two years are in fact unusual.
And so.
We're kind of running our scenarios.
We are kind of looking at historical patterns and what we think is reasonable growth on a go forward basis.
Okay.
And then just wanted to ask on the.
RMS and ESG businesses.
How that's how that's doing in any current trends any any any change in trends there in the last couple of months and then and then after that just.
Anything on M&A applications in that space.
For the year.
Pretty pricey.
Yes, let me start with RMS.
So.
It's been almost a year in fact since we.
<unk> announced the acquisition and we're having some I've talked about a little bit in the past some very encouraging discussions with major insurers and reinsurers.
Really want to automate and digitize and integrate.
And.
We're integrating across our products, we are co creating new products.
Last quarter, I think I mentioned that.
We are mapping all of the.
The property is in.
See MBS securities to Rms.
Data there are a few other areas, where we're making some nice kind of early progress. There are a number of use cases for banks that we have identified and are starting to get some traction helping banks, particularly around looking at physical risk in their portfolios were working on starting to do the same around transition risk you mentioned ESG Brendan.
A lot of interest from insurers and integrating our ESG data and scores into RMS is underwriting.
Solutions, so that they can better understand the ESG profile of companies.
As their underwriting and looking at our broader portfolio, we've already got several.
Very nice customer wins, there and we are building a nice pipeline.
And we're also we also have some very nice product enhancements. So as you may remember before we bought RMS we had a small climate business.
And now we're able to take those RMS models and data and to be able to kind of power some of those climate.
Solutions some of our climate on demand solutions.
We're also starting to pick up the pace around cross selling conversations with insurers to help them around a broader range of risk assessment needs. So in general feeling pretty good about.
What's going on across the company in terms of.
Not just RMS, but also in terms of climate and ESG, maybe just two quick quantification points. There tells to help with the modeling we still expect rms's sales growth to be in the mid single digit percent range.
And Thats, obviously up from the historical growth rate of the low single digits and then for 2022.
<unk> to further increase our direct and attributable ESG related revenue.
About 20%.
At $34 million, that's just a little bit lower than what we previously forecast simply reflecting some weakness in the sustainable finance market.
Thank you and just anything on the M&A in ESG.
No.
It's a it's a pretty fragmented.
Market, there arent a lot of kind of scale opportunities to move the needle out there.
That was one reason that we.
We really felt good about the acquisition of RMS because.
When you look around and you think.
If climate analytics are important to your customers how do you get that at scale and how do you get that.
And a platform that you feel very very confident in the analytics and.
As a discussion we have with our board at the time of the acquisition.
They've been sort of RMS and serving the global insurance industry for over 30 years. So you know that those models are robust. So I guess I would say ESG is probably primarily an organic opportunity with an investing organically, we keep our ear to the ground, but like I said not a lot of scale opportunities out there.
Thank you.
And our next question will come from Jeff Silber with BMO capital markets.
Thanks, I know, it's late I will just ask one I was wondering if we can just get a little bit more color about what youre, calling in I guess, the geolocation restructuring program not only in terms of details, but I'm. Just curious why now why not last quarter went out next quarter et cetera.
Yes.
$75 million.
275 million Geo location restructuring program that we announced this morning was really focused on optimizing our existing real estate footprint.
Further utilizing.
Lower cost locations, where the requisite skills and talents exists and really ensuring our focus and resources remain firmly allocated to prioritize areas opportunity why now I think the workforce of the future workplace of the future are programs at Moody's are progressing well.
And that has presented opportunities for us to be more efficient with you saw that stockholder capital and that means for the second quarter that we recorded that $31 million pretax restructuring charge, which is mostly related to personnel.
Expenses, and then as we exit and cease use of our lease office space, which is expected to really begin in the fourth quarter of this year and continue through the first half of 2023.
You can expect us to reflect between another 25 and $35 million in pre tax restructuring charges.
In our financials for the $46 $60 million in annualized savings that we anticipate generating and through these actions. The majority is going to be redeployed towards our strategic investments.
And that's going to include further workplace enhancements further employee retention initiatives and the idea here is really to be able to create that financial flexibility to balance between profitability in the short term and then supporting business margin expansion over the long term and then finally, just as an aside if the.
Issuance downturn is more severe and protracted than what we've modeled is our central case, you could expect us to take more aggressive actions around expenses.
In the future.
Okay, that's really helpful. Mark Thanks, so much.
And our next question will come from Craig Huber with Huber Research partners.
Great. Thank you I wanted to get back to this decision solutions subsegment, if I could obviously was up 12% organically excluding.
Currency for six months, but only up 8% here in the second quarter year over year.
You talked with the banking piece of that.
You're right being the major reason for the slowdown I guess, but wasn't that also an issue in the first quarter and I guess I'm trying to figure out what's changed in the latest three months versus the first quarter to account for the slower growth there.
Yes.
Craig I guess, maybe.
Couple of things I would.
I would just flag.
Flag and back to the.
Both banking and insurance.
Have some as I said, both a mix of on Prem and SaaS solutions and so.
<unk>.
You had some aspect of I'll call it kind of timing and revenue recognition that contributed to what was going on in the first quarter and as well in the second quarter and so.
That's one reason that we kind of keep going back to <unk> because it gives the ability to kind of look through.
Some of the kind of Rev. Rec issues that you've that you get from kind of this this on prem.
Product suites that we still have and so back to as I think about the underlying health of that business.
Looking at <unk>.
And <unk> for decision solutions, 11% same as it was last quarter.
And my follow up please.
On the credit research business you guys had for many years obviously.
Maybe just touch on the growth rates there youre seeing it seems like it's holding up quite well. Despite the very volatile markets, maybe talk about pricing or if you could if that's changed at all.
Thank you.
Yes.
Youre right that continues to be a.
A very nice business for us.
I talked a little bit about the kind of demand in times of uncertainty.
That's certainly true in fact, we've shared.
Some statistics around usage and you saw during COVID-19 usage really spiked we saw during the.
The Ukraine crisis usage spiked because our customers view this as really kind of must have insights into the credit markets. So that all then supports the value proposition and the pricing opportunity for us.
We've also had some success in <unk>.
Actually expanding the usage at some excuse me the.
Kind of the broad usage at some of our customers as well.
So all of that is contributing to supporting what is continuing to be some nice growth and also mentioned Craig we're continuing to make some enhancements in that.
That credit view platform that we think will provide.
Ongoing support for growth.
Great. Thank you.
And moving onto Owen Lau with Oppenheimer.
Thank you for taking my question I only have a quick two part question. So the first part.
Could you be could you. Please talk about the FX impact to your overall business.
Overall results in the second quarter and then the second part.
With regard to the interest expense guidance I think you raise that number a little bit could you. Please talk more about that and how we should think about the sensitivity on rising rates and how we should.
<unk> inches.
Expense going forward. Thank you.
Good afternoon, and thank you I'll start with the FX impact to first and I'll try to be comprehensive here as I realize this is an important element and for consideration during the second quarter. We did see the U S dollar strengthened quite considerably against both the euro and the British pound.
Typically the end of quarter spot rates were $1 five against the euro and $1 21 against the pound.
Meaningfully down from a 111 against the Euro and $1 31 against pound lost last forecast and as a result, the quarterly MTO Miss in EMEA revenues were unfavorably impacted by approximately three two and 5% respectively and the net.
The impact of all of that flowed down to adjusted diluted EPS of about <unk> <unk> negative in the quarter.
If I step back just for a minute so approximately.
<unk>, 45% of our revenue is generated through our international operations and then of that approximately 65% is generated in EMEA.
And so further strengthening of the U S dollar specifically against the Euro is going to weigh on our actual results as the year progresses.
Similarly about 40% of our operating expense base is denominated in non U S. Dollar currency as over 60 ish percent of our employees are located outside of the U S and thats going to help neutralize when he's partially neutralize the FX movements. So if I were to roughly quantify the annualized impact of foreign currency movements and four models.
Purposes.
Every one St FX movements between the dollar and the Euro is going to impact full year EPS by approximately <unk> <unk> and full year revenue by about $8 million to $10 million.
And then every one St FX movements between the dollar and the British pound is going to impact full year revenue by about $2 million in expenses by about $2 million, so more or less neutral on an EPS basis, and then finally, if I think forward.
When we set our medium term targets back in February we had assumed constant foreign currency exchange rates over the medium term. So specifically the euro of $1 14 to the dollar and the pound of $1 35 to the dollar and so if foreign exchange rates remain at current levels or if the U S. Dollar continues to appreciate we're going to see a little.
Bit of headwind to achieving the medium term targets become.
More pronounced.
On your second question around interest expense guidance, we do have a $500 million to 65% coupon notes that is maturing in January 2023, and our revised 2022 interest expense guidance of $220 million to $240 million incorporates the current.
<unk> that we will look to refinance our January 2023 note in the second half of this year.
And given the rise in benchmark rates, you could naturally expect a coupon or a higher coupon on a similar size and duration.
As the note that is due in early 2023, and so for additional context, historically, we've refinanced upcoming maturities before it.
They have become due and thats really part of our commitment to effectively manage our capital structure and maintain our financial flexibility and the Best example of that you could think about November 2021, when we refinanced the 500 million four 5% debt that was maturing in 2022 so.
We lost coming to the topic in the event, we don't proactively refinance the upcoming bond maturity and that was clearly reduce our interest expense expectation for the full year 2022.
Thanks, a lot mark.
And our next question will come from Russell clouds with Redburn.
Yes, thanks for having me on the days.
Later today I will cover the safe.
Expenses I wondered if you could detail what you would be prepared to do with respect to reducing expenses in the second half of the year. If we do see it continue.
Deterioration in markets.
Russell, It's Rob first of all I just want to welcome you to the call.
And just in terms of the additional actions that we would take during the second half of the year I think there are two ways I'd like to look at this there's differently actions would take based on a cyclical outlook going into 2023, and then actions, we take which is not our central case based on sort of a structural outlook going into 2023 in terms of cyclical activities that we could take us certainly spell.
Slowing down hiring would be one theyre also natural expense leaves us in terms of managing our <unk> costs as well as managing our incentive compensation accrual. We also have the ability, though I would preserve this really for more structural based outlook changes of that reducing our organic strategic investments during the year or staggering those to be a slight.
Lower burn rate and I think the reason that's important is those initiatives really do underpin our medium term guidance. When you think about mis and MA revenue.
Okay. That's helpful. Thank you Nicole.
As a follow up I just wanted to confirm.
From what Youre, saying in the guidance that you are not going to be buying back any more shares to the rest of this year and from your comments all the fire power.
Be safe for bolt on M&A.
If that's the case, where do you believe you need to focus investment M&A from a data product perspective.
Through the following.
Maybe a slight challenge given the balance sheet is very healthy as you noted in the schedule.
Close to 24 months low livestock Bob ethanol.
Maybe just to reiterate some of the key points that we spoke about earlier. So we have lowered our guidance for full year 2022 share repurchases to approximately $1 billion and that is lower than our prior guidance of $1 5 billion and you could think about that is reflecting the current economic environment.
Specifically, the fact that our outlook for full year and net income our full year EPS is commensurately lower by that amount and from a CFO perspective, it's important at least at this point in time to adopt a slightly more conservative approach to capital management and the idea here is to again preserve financial firepower.
Able to take advantage of market opportunities those market opportunities could include further share.
Price repurchases or they could include M&A in other words I'm not looking to signal one over the other owners need to create financial flexibility as we approach the end of the year.
Okay. Thank the lead in terms of policy.
M&A driven.
Eli contend with data.
Yes, I think you've seen us be very active in that kind of know your customer verification space, where we have.
Hi.
A compelling set of assets in a high growth market.
We are supplementing our acquisitions that we've done to date with organic investments, but there may be other opportunities there and that would be very attractive for us because of the growth rates we're seeing.
And the traction that we're getting from customers.
I would say also.
Our banking business you've seen us.
Make some bolt on acquisitions there.
Over the last several years is the same with our insurance business.
We've also over the last few years added what I'll call kind of domain capabilities that are really important to this idea of really bringing to life integrated risk assessment for our customers and so ESG and climate and properties and other things.
We believe our we haven't done those at the same scale, but are important in terms of this concept of delivering integrated risk assessment for our customers.
Okay, great. Thanks, Kevin.
And our next question will come from Jeff Mueller with Baird.
Thank you.
The question is how independent or the M&A compensation plans from the mis or overall corporate performance in our shared services burden can shift in.
Between the segments or it can impact executive comp and whatnot, but I guess I'll lead in for the question would be given the magnitude of the consolidated.
Our revenue guidance reduction I would've expected more of an adjustment in that operating growth plus incentive compensation expense bucket, but I'm wondering if the answer is largely because there's this big pool of MA expense, that's largely untouched and given the current circumstances.
Yes, so I mean overall, we have kind of one corporate bonus pool, then, we obviously have allocations to our our businesses and our functions.
Guided by performance.
But I think at a high level, you're right I mean, it has been a tale of two cities. So.
Yes.
<unk> performance has been quite strong mill performance.
So and so that we then expect that to be reflected in our.
Compensation accruals.
Okay, and then mark when I add up the factors on slide 23, I get to like 6% year over year growth are you trying to signal something at the lower end of high single digit percentage increase range and just to be clear that includes a point from restructuring charges, which are then excluded on an adjusted.
<unk> basis.
Thank you for.
Allowing you to reconfirm that point, that's exactly right. So I certainly would like to signal the lower end of the high single digit percentage growth for full year operating expenses net of course to your point includes approximately 8% from the restructuring program.
And that restructuring is excluded from adjusted EPS correct.
That is correct okay. Thank you.
And our next question comes from Shlomo Rosenbaum with Stifel.
Hi, good morning, actually good afternoon, and thank you.
Taking my questions I was just trying to think a little bit about slide 17 in terms of.
With the.
<unk> has grown throughout varied economic conditions.
Is that really the right way to look at it I mean, we're looking at 2008, where it looks like debt is nine that wind up but you know the.
The <unk> business had significant declines during that point in time, what should we be looking at in terms of really moving the needle back and forth for for the business isn't really.
When you are looking at high yield and leverage loans.
How should we be thinking about that and then the potential impacts of rising interest rates, particularly in those securities.
In terms of like CFO interest in just rolling that forward at current levels or potentially looking to delever.
Yes, maybe I'll provide a few perspectives and then I'll see if mark wants to build on that.
There are I think a number of ways to kind of triangulate.
Around what you think kind of a growth rate for the business going forward is.
I do think the overall stock of global debt.
<unk> is an important one and what I think this chart in part shows is that you've obviously got.
New issuers coming into the market year after year, and so that stock of debt has continued.
To grow and that's very important because these maturity walls that we talk about provide kind of a we've used the term kind of a balanced for the business and theres just been a lot of debt that has been issued in particular in the last few years, but.
The overall just stock of debt has gotten much larger and then when we look at the flow of that and we've had I think a good bit of conversation about the flow of that on this call and you touched on mix and one of the big.
<unk>.
Themes over the last 10 years was the growth of the leveraged finance markets and that in fact has.
Been favorable.
Two to our mix over the years.
It's hard to say, what I've said in the near term you can see mix being neutral to even negative but keep in mind.
Part of what is driving that is.
Is that you have private equity firms that are a raised an enormous amount of capital.
Over the last few years and so they are deploying that capital and buyout activity.
And that has really fueled the leveraged finance market in the leveraged loan market in particular, I think that's actually been a kind of an important structural trend that has supported.
Issuance over the last decade, and maybe Sean just to add on to Rob's comments I'll take it as a little bit of a different direction here, but I think will be helpful.
As you consider.
At the moment in history network and.
The way I want to purchase is really just taking it through the lens of cyclicality versus structural.
Overtime, and when we think about a cyclical shift in issuance.
And I think about now both refinancing activity as well as new debt issuance for.
For example, existing issue, it's growing the balance sheet or new companies accessing the debt markets.
You could consider the following points. So firstly, a cyclical decline, which is our central case scenario is.
It's really temporary until I suppose one of two conditions happen either funding costs turned from rising to falling or <unk> at growth.
Turned from falling to rising and.
Our belief is that those two conditions really might be made by the second half of next year. If inflation is reined in by the first half of next year or by 2024. If this is a longer downturn E inflation target training.
At materially not our central case, but a structural decline in debt issuance.
You consider aggregate global deleveraging would be a longer lasting phenomenon where companies and governments.
Across various sectors and regions decided to shrink the balance sheet and Thats really a result of demand or supply in Dallas. So you think about on the demand side.
Longer term global growth prospects are lowered so significantly the companies aren't expanding while social needs have fallen so government on expanding services for example.
Larry on the supply side as savings are savings less and there is less money tomorrow or savings are investing in vehicles other than the debt markets and I think the key point here is that the years that are going to follow sort of 'twenty. Three 'twenty four we may not ultimately return to a period of low inflation and low rates, but debt issuance is likely to remain in a very efficient.
Method to finance growth.
And ultimately that becomes very important in how we think about sort of the outlook not just with this year, but over the medium term period.
Sure.
In consideration and maybe the final point here is the global economy has really gone through many cyclical and structural shifts over time and date has remained a key method of <unk>.
Financing that growth and innovation.
Okay. Thank you just one follow up where are you with retention I mean, theres a lot of talk of.
Reinvesting too.
To improve retention and things like that and you guys are really are in a very much a people business for a lot of it where are you with the retention metrics. Now are you comfortable that you have that you will be deploying enough to retain the levels of employees that are in the quality of employees that you are looking for.
Yes, Shlomo you are right.
People are absolutely critical to our business.
And what has gotten us through the pandemic so well.
And we have indeed made some investments in.
Making sure that we retain our people in.
In general I would say that.
Based on the kind of data that we have in kind of our ability to benchmark against financial services. We think were either broadly in line or even slightly better in terms of overall employee retention than financial services more broadly but.
It continues to be a competitive market and we continue to make sure that we're making the right investments to.
Not only retain the people we need but attract the people.
That we need as well.
Thank you.
One other <unk> one other thing to add to that sorry is not all about compensation either compensation is important but we hear from our employees. All the time that so are other aspects of <unk>.
Working at Moody's it's about.
Working at a company that you feel has a real purpose and does something important in the world. It's about having the flexibility that you value. We did a recent employee survey and our employees dose we're doing pretty good job on on workplace flexibility. So we're going to continue to make sure that we're.
Focus not just on compensation, but on the whole basket of things that contribute to.
Kind of a compelling value proposition for our employees.
Thank you and that does conclude the question and answer session. I will now turn the conference back over to Mr. Rob Fauber for any additional or closing remarks.
Okay. So thanks, everybody for joining today and we look forward to speaking with you next quarter.
Goodbye.
Thank you. This concludes Moody's second quarter 2022 earnings call as a reminder, immediately following this call the company will post.
Revenue breakdown under the Investor resources.
His section of the Moody's IR homepage. Additionally, a replay of this call will be available after four P. M. Eastern time on Moody's IR website. Thank you.