Q3 2023 Moody's Corp Earnings Call
Good day, everyone and welcome to the Moody's Corporation third quarter 2023 earnings Conference call. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen only mode. At the request of the company. We will open the conference up for question and answers following the presentation.
I will now turn the call over to Siobhan and Cox head of Investor Relations. Please go ahead.
Thank you.
Good morning, and thank you for joining us today, and Siobhan <unk> head of Investor Relations. This morning, Moody's released its results for the third quarter of 2023 as well as our revised outlook for select metrics for full year 2023.
The earnings press release, and a presentation to accompany this teleconference are both available on our website at IR dumped moodys dot com.
During this call we will also be presenting non-GAAP or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for reconciliation between all adjusted measures referenced during this call and U S. GAAP.
Okay.
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 1995 in accordance with the Act I also direct your attention to the management's discussion and analysis section and the risk.
As discussed in our annual report on Form 10-K for the year ended December 31st 2022.
I'll bet SEC filings made by the company, which are available on our website and on the Sec's website.
These together with the Safe Harbor statement set forth important factors that could cause actual results to differ materially from days.
Such forward looking statements.
I'd also like to point out that members of the media may be on the call. This morning, and understand you made Rob.
Saba, Moody's President and Chief Executive Officer will provide an overview of our results key business highlights and outlook after which we'll be joined by Caroline Sullivan <unk> interim Chief Financial Officer to answer your questions I will now turn the call over to Rob.
Thanks, Giovanni good morning, and thanks to everybody for joining today's call.
I'm excited to share our strong financial results as well as some key business highlights and that's going to include some notable innovations and investments.
Progress on our Gen AI strategy and a spotlight on our fastest growing business in EMEA.
That is our know your customer business or Ky C.
As we commonly refer to it and before I get started I just wanted to say how proud I am that Moody's has again finished number one in the charters risk tuck 100.
That is the most comprehensive global ranking of risk and compliance technology providers and it is a great recognition of the breadth and depth of our solutions based on both market research and customer feedback.
I also want to take a moment to recognize the incredible resilience.
And dedication of our people and I've really appreciated how our people have come together recently to support each other and to continue to deliver for our customers. So as you all will have seen from this morning's earnings release, we reported a 15% overall revenue growth with strong topline performance and <unk>.
Proved adjusted operating margins from each of our businesses and that contributed to a 31% increase in adjusted diluted EPS in the third quarter at MA revenue grew 13%, while achieving its fourth consecutive quarter of 10% growth in EM as growth continues to be led by <unk>.
Our cable IC business, we now have over $300 million of.
Annualized recurring revenue or <unk> and <unk>.
It is growing at 18%. It may also produced an adjusted operating margin of 33, 6%.
I asked grew 18% in the quarter as the leveraged finance issuance markets continued to improve from last years.
Subdued levels I would call. It an mis revenue is now expected to grow in the mid to high single digit percentage range for the full year and that acknowledges the current uncertainties in the capital markets.
Last week, we published our annual refinancing wall study and that showed a 21% increase in the total U S. Non financial corporate debt coming due over the next five years and as I've mentioned on prior calls these refi walls and a very important component of our long term growth algorithm in that room.
<unk> is firmly intact.
And as those of you who attended our innovation open house last month's would've heard we're.
We're moving quickly to integrate our broad data and analytic capabilities across our product suite and to leverage the power of Gen AI to develop new and cutting edge solutions to empower both our customers and our employees and the pace of innovation is clearly accelerating across our businesses. We're investing we're launching new products entering into strategic partnerships.
All of that will enable us to continue delivering market leading growth and if you look just at the third quarter, we announced some really interesting things and I want to take you through a few of those I'm going to start with ratings.
We've talked about on prior calls about how deepening our participation in developing capital markets and in particular domestic issuance markets is important to that long term growth algorithm that I just mentioned.
And that includes Latin America, where Moody's local has grown its customer count by more than 20% this year.
The Asia Pacific Region also has some exciting opportunities which is why in September we further extended our domestic ratings business with the opening of <unk> rating in Vietnam and that is a small but fast growing domestic bond market.
And also talk about how the relevance and importance of our voice in the market is a really critical part of what makes M. I ask the agency of choice for both.
Issuers and investors in the last months.
We published really a groundbreaking cross industry report on cyber risks and practices and it leveraged our relationship with that site and.
And we had nearly 2000 companies that provided data and inputs and we were able to highlight the more than 20 trillion dollars of a rated debt that is at high risk from cyber threats and that is a.
I think a really great example of the importance of a multi dimensional view of risk in this case understanding how cyber risks are impacting credit risks.
Now moving to M. A.
We're launching our first Gen AI enabled product we call it research assistant and we've already previewed it with over 150 customers. Our strategy is to commercialize the launch as we head into the year end renewal cycle and initially our thinking is that the research assistant will be sold as an add on to our flagship product, which is credit view and.
Leveraging the power of an L O M with Moody's trusted proprietary content.
Allows customers to generate rich credit insights in just seconds and with capabilities in multiple languages.
We also expanded our coverage in credit view to now include 12000, new unrated names and that allows us to better serve the private credit market and customers who purchase.
That module are going to have a seamless integrated experience that includes financials ownership structures credit scores.
Sector research interactive scorecards and peer analysis and I think that is a great example of content integration to serve new customers and new use cases.
We're also constantly investing in our data estate that includes Orbis, which is one of the world's largest databases on companies and we've expanded again, our partnership with bid site by integrating their cyber data and scores for about 250000 entities into orbis and that enables our customers to better understand <unk>.
<unk> risk.
We also have several exciting product launches across decision solutions.
In banking, we launched a new module and credit lens that will integrate our bank's own loan level data with Moody's content and this portfolio module.
It provides a dynamic view of a bank loan portfolio by monitoring and measuring performance and providing early warning signals.
We're also integrating RMS as physical and transition risk models with our proprietary ESG and climate data into a range of banking solutions.
And that is empowering our customers to make better more informed decisions around lending portfolio management stress testing and regulatory reporting and.
And these are some of the original synergies that we envisioned with the RMS acquisition. So it's great to see see this in practice and speaking of RMS.
I was in Europe last month at a major insurance industry gathering with a bunch of Ceos and chief risk officers night again came away very excited about what we're doing with the industry.
Together with bid site, we recently launched a Moody's RMS cyber industry steering group with two major market players.
Munich re and Gallagher and we're also partnering with Lloyd's of London to develop a carbon emissions accounting platform for their ecosystem.
Now in addition to these.
These recent product launches and initiatives, we're continuing to leverage <unk> across our organization and as you heard at our innovation Open House last month, our colleagues are taking a really active and hands on approach and innovating and driving change in fact over 70% of our people have used our in house co pilot tool and that include.
For things like coding preparing a report or improving an internal process and this adoption is also an <unk> reinforcing our early mover advantage as we're now benefiting from an internal feedback loop and that's allowing us to share learnings from our own Gen AI journey with our customers and speaking of <unk>.
Customers, we've been engaging extensively with customers around our gen AI strategy, including the relevance of our curated and proprietary data and research and our approach to data integrity and security and in particular since July we have demo to our research assistant as I said with a number of our customers in nearly every one of them.
Customers believe.
Is that this product will have meaningful benefits for both their productivity and their insight.
We're also wrapping up the work that we've been doing as part of our partnership with Microsoft and leveraging their secure Azure open AI service.
We're building new functionality and content sets and entitlement capabilities into research assistant. We're also continuing to expand the ways that we leverage Microsoft teams to collaborate internally and I think importantly, we're seeking to expand our joint go to market opportunities broadening the appeal of this partnership to new customers and market segments.
And that includes creating teams plug ins that would be available to Microsoft $300 million.
Monthly users and infusing Moody's content into their dynamics and power platforms to enable.
CRM and workflow integrations were also continuing to explore migrating our content sets to Microsoft fabric to enable entitlement and delivery of content and insights to our shared customers. So.
Taken together I'd say, we're very energized by the progress we've made and we're excited about the opportunities that lie ahead. In addition to Microsoft we're working closely with other leading cloud and software players leveraging our respective strengths to deliver new and innovative.
In AI solutions and partnerships can take many forms. It can include a joint product development joint go to market activities or direct commercial opportunities and to help maximize this opportunity. We have developed a strategy and a framework and a team for third party partnerships.
I think a good example of this is the work we announced earlier this week with Google and through this partnership.
Moody's in Google cloud are going to explore creating <unk> and AI application, specifically to help financial professionals perform faster and deeper analysis of our financial reports and disclosures and other materials. So we're certainly excited to be at the cutting edge of Gen AI innovation with some leading partners.
In recent quarters.
We've been spotlighting one of the three cloud based SaaS businesses within decision solutions, and so I want to cap off that series, if you will with <unk>.
And unlike banking and insurance, which are obviously industry specific <unk> is relevant to all of our customer base and as I've said before are really important objective for many of our customers is is to have a better understanding of who they are doing business with whether it's making alone underwriting an insurance policy onboarding of <unk>.
Customer or monitoring of supplier.
And over the years.
We have tried to be very thoughtful about how we have added to our capabilities to build a business that as I said earlier is generating over 300 million, an IRR and growing at 18%.
And two significant acquisitions that some of you ask about from time to time and that's been the NRDC.
But really foundational elements of our cable IC solutions and they have both outperformed their original acquisition targets and there are several somatic drivers behind the growth of the <unk> business, specifically I would call out.
The Digitization and automation.
What are very manual and expensive in house compliance processes.
The growth in online transactions and payments and also the need for greater breadth and precision.
<unk>, a new and increasing regulations and all of this combines with the need for better analytics and insights again, not just about customers, but more broadly who companies are doing business with.
So by combining our proprietary data on companies and people with analytics and and through a modern cloud based SaaS platform, we're delivering solutions for our customers and some pretty compelling ways and.
And these solutions used traditional AI, you've heard us talk about that on this call before that includes machine learning natural language processing.
And integrating data on over 470 million public and private companies with more than one 7 billion ownership lengths profiles on over 20 million politically exposed people.
And sanctions and adverse media and recently based on customer feedback. We have also added an ESG scores and credit scores. So we offer access to our <unk> tools and content in several different ways and that includes.
Via data feeds or Apis into customers and how systems. It also includes full end to end workflow with proprietary and third party data that supports customer acquisition and Onboarding screening monitoring and third party risk management processes and and the front end work.
Software is what we acquired when we bought passport pack in 2020 once that moved us from being just a data provider to being a full service provider in this space and that combination is increasingly being recognized across the industry, including the recent Chartis awards as the only vendor that's.
<unk> is a market leader for both data and workflow.
We're also seeing significant growth outside of the financial sector.
And we are investing to enhance the relevance of our offerings in the corporate and government space.
That includes our recent launch of something called sanctioned 360 that enables customers to efficiently and effectively comply with regulatory requirements regarding their customers counterparties and suppliers by better understanding the implications of both sanctions and sanctions by extension.
And our ability to build solutions that reach.
Broad set of customers is really a key element of our land and expand strategy in fact, approximately 25% of MA overall, new customer growth in the last year came from <unk>.
And generating these new relationships then provides additional opportunities for us to cross sell from other parts of M&A like.
Likewise, our existing customer base also provides some very significant runway for future growth currently.
Only about 20% or about 3000 of MH customers.
One of our cable IC solutions and that represents an important cross sell opportunity for our remaining 13000 or so customers.
Now turning to M I S.
In the third quarter issuance was consistent with normal seasonal patterns I would say that activity was relatively subdued subdued in July and August and we certainly saw some stronger volumes in September <unk>.
Growth was driven by leverage finance on the back of what were the strongest leverage loan volume since the first quarter of 2022.
And that excuse me, coupled with elevated activity from infrequent banking issuers.
And an improvement in project and public finance issuance versus the prior year all of that contributed to a favorable mix.
As a result.
While global issuance was up about 12%.
Transactional revenue was up 31% versus last year, and together with 5% recurring revenue growth in Mis revenue grew.
Grew 18% for the quarter.
And as we head into the fourth quarter.
I'd say that general market sentiment remains a bit fragile.
We've updated our guidance to reflect an expectation of modestly lower issuance volumes in the fourth quarter, particularly in investment grade structured finance than we had been anticipating back in July.
And the heightened geopolitical turmoil combined with macroeconomic concerns around day.
Higher for longer interest rate environment, there continue to drive some volatility and uncertainty around yields and spreads.
And these conditions are likely to be particularly impactful on the opportunistic investment grade issuers.
That's a reason that we're lowering the outlook for investment grade issuance to approximately 25% growth for the full year 2023.
We also continue to see the knock on impacts of lower asset generation on the structured finance sector and so we are updating our outlook to decline by around 25% compared to the prior year. So these two forecast updates, resulting in overall revision to our expectation for issuance and for the year and we now expect issuance.
Growth to be in the low to mid single digit range in 2023, and I asked to grow in the mid to high single digit range.
So while there are some headwinds to accelerating issuance growth in the near term refunding walls continue to grow and they are a key factor supporting medium term issuance growth and our annual study on refinancing, which we as I mentioned just recently published.
<unk> captures nonfinancial corporate maturities in both the U S and EMEA and we look at the next four years as an aggregate figure.
With approximately $4 four trillion dollars coming due in the next four years, that's up by about 10% versus last year's study and you can see that.
I believe in the appendix in our supplemental materials.
I also want to spotlight the U S. In particular, obviously this is the largest of all the global bond markets and looking out over five years and Thats the length of the U S study the.
The aggregate forward maturity wall.
<unk> grew by about 21% compared to the study last year study and the main contributor to this is leveraged finance, which grew approximately 27%. So that's certainly going to be helpful to future mix over the coming years. So.
Forward maturities continue to provide support for future issuance and continue to be an important part of the mis long term growth algorithm.
I would also say that.
Overall corporate debt velocity.
Total corporate issuance as a percent of total corporate debt outstanding remains pretty far below historical averages so that implies the potential for pent up issuance demand in the future.
So on that note I'm going to pause here and I'm happy to open the call for questions operator.
Thank you if you would like to ask a question. Please dial one star one on your telephone keypad. If you are on 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 again that is star one to ask a question.
Our first question comes from Heather <unk> with Bank of America.
Oh, Thank you very much for the question I appreciate it.
I was hoping you could talk about.
The refinancing walls that you just did drafting and how is it.
Our customers manage through the higher for longer rate environment are they delaying refinancing right now is more getting pushed into 2024.
And when you look at.
Rental customers, who may refi or any concerns about some of that debt.
Not getting refi that maybe those companies can see.
Under some stress.
Hey, Heather.
Yeah, I'd say that first of all just in terms of.
You know how our customers are thinking about.
In our financing and tapping the market and you've probably heard me say this.
In the past volatility is really the biggest challenge I think for the CFO or treasurer.
At the end of September we saw a little bit of that with the jobs Pratt and questions about rates and how much.
How much higher for how much longer certainly geopolitical events can also erode confidence.
I don't think we are in a risk off mode at the moment I would say there is some caution but I don't think we are in a risk off mode and in fact.
Where we see.
The most.
Leveraged issuers, which is bank lines is where we're actually seeing some.
Some issuance at the moment. So that's I think that's good when I think about the maturity walls Heather it's interesting.
Overall, they're up about 10% between the U S and Europe.
Zero in on investment grade maturities.
We're up about 12% and that one interesting thing here Heather.
And by the way the U S study is five years and the Europe is four so I don't mean to confuse everybody, but when.
When I look at the U S study and we will share. These reports with folks if they're interested after the call the share of U S investment grade maturities within the first three years of that five year study.
Has increased so it's up.
The low 60% from the kind of high fifties. This time last year and I think what that means and the reason for that is that companies have in some cases opted for shorter financing tenors and also I think higher rates of dissuaded some.
Refinancing.
So.
And it's interesting to look at what's going on with the average tenors as far as the last part of your question do.
Do I think that you know.
Some issuers may opt not to refinance I think for many folks that'll be difficult to do.
So there.
There may be there may be select companies that have the cash to be able to do that but I don't think that will be a widespread trend.
Thank you I appreciate it and we've done that before.
Yeah.
We'll take our next question from Faiza <unk> with Deutsche Bank.
Yes, hi, good morning, Thank you.
Rob I wanted to stick with our issuance and ask you you said.
Good.
Current trends are well below normal levels and I'm curious if you've evolved your view.
In terms of what normal issuance might look like in the current higher for longer.
Ireland.
Yes, hi, there.
You know as I said, there are a couple of things that lead us to believe that there is some.
I would say pent up demand I mentioned this concept of corporate debt velocity. That's just the amount of issuance over the amount of corporate issuance over the amount of corporate debt outstanding and that's.
You know really at a decade plus.
Low and continues to be this year, so that that leads us to believe that there is further opportunity for issuance I talked about the refinancing walls and over the medium term they look promising.
Other thing I think that tends to be a catalyst for issuances M&A.
And yes, it's been a pretty spotty year for M&A and yes, its about what we had expected.
But private equity firms have a tremendous amount of dry powder somewhere I think the other day I saw they have two trillion dollars to invest.
I think M&A is probably not a Q4 story at this point I think that's.
That's something that we're gonna look look into to 2024 to see if that can be the catalyst for issuance. So I do think there's some things that.
At some point can change the trajectory of issuance.
Thank you.
We will take our next question from Alex Kramm with UBS.
Yes, Hey, good morning, everyone just staying on.
On the ratings side for a minute can you talk about how your commercial interactions have changed at all with issuers and this again everybody is using higher for longer environment. Here I guess, what are what are you doing to drive I guess, new issuers and I'm asking from the perspective also and this is very anecdotal but.
I've heard in Europe. For example, there is some some companies that are actually given the higher interest rate environment that they haven't seen in many decades, all considering ratings for the first time, so again, maybe anecdotal, but just wondering what you're seeing too I guess.
Continue to feed the business outside of that I guess macro environment.
Yeah, Alex I would say two.
Two things that we have.
Really active engagement with issuers.
On both sides of the ratings.
Business, one as you would expect.
Very active engagement with the analysts.
Especially around excuse me my voice I'm, sorry, especially in periods like this where there is some economic uncertainty and lots of questions from investors.
Lots of engagement with our analysts and that's why having very experienced analysts is so important so that we can communicate effectively with our issuers understand their credit stories and be able to communicate those to two.
To the investors and that's a that's a big part of the value proposition, but second Alex I might also point to.
We've tried to broaden out the product suite over the years and so that we can engage.
With not.
Not just issuers in the public markets, but folks who may be thinking about coming to market. So a number of years ago. In fact back when I was in M. I S. We develop something called a private monitored rating and that was a great tool to be able to develop an analytical relationship.
On a private basis with a company who wanted to <unk>.
Develop that relationship and understand what their credit profile looks like and also give them. The opportunity then to flip that into a public rating if they decide they want to tap the markets when there's a window.
So.
Thats.
We have a we have a commercial team that's probably between 150 and 200 people around the world very engaged with not only our existing issuers, but also with.
Companies, who may be thinking about getting a rating either public or private.
So.
Active pretty active engagement.
But not seeing a change there given the higher rate environment that was really my question.
No.
In fairness I think the first time mandates you know when you look at that that's obviously come down from.
The highs of 2020 in 'twenty, one and that's I'd say.
We're still looking at something in the range of 500 Ftm's for the year and as I said lots of engagement in fact that number started to tick up this this last quarter.
All right very good thank you guys.
Yes.
We will take our next question from Andrew Nicholas with William Blair.
Hi, Good morning, Thanks for taking my question I wanted to ask a little bit more on the monetization plans for the research assistant I think you mentioned it would be an add on cost is there any additional color you can give there in terms of maybe the magnitude or the potential opportunity and then.
Relatedly of the 150, plus customers, who previewed the tool is the expectation that the vast majority of them would opt in or what kind of <unk>.
Success rate do you have within the customer base that did I have access to the tool already thank you.
Yeah. These are all great questions and.
I want to give you answers to all of them, but I'm, probably going to be able to give you better answers in the next quarter.
So I guess the way we are thinking about it is again, we're trying to preview.
Previewed this with our customers. So that we can get feedback so that we can iterate the product. So we can think about how we want our price and package that.
I expect that.
Many of our users will get some basic level of functionality.
And as I said, we envision that as being an add on we're.
We're getting ready to go into our annual renewal cycle. So we have a very good sense on the next quarter call.
Be able to give you some update on what that take up looks like and then youre going to see that then.
And how we talk about our digital insights business for prospects for that business for full year 2024.
Over I'd say part of the vision here is.
We also want to be able to expose those customers to different content sets than they might have access to today, so imagine that.
The initial customer is one of our credit view customers, they're already a customer and they decided that they want to opt in to the full research assistant functionality, but they may not be a customer of other content sets. So let's say you know some of our climate and physical risk content, we will be.
Working over the course of the next year and we're already working on this and we'll be working on this to be able to provide access to customers for content sets that they find valuable to effectively kind of co mingle right. So when I asked a question about credit and I want to understand.
The impact of of extreme weather events on the credit profile of the company.
We will be able to return that answer.
So that's why you heard me also mentioned the importance of entitlements, that's can be very important for us to get that sorted out across the platform. So that we can entitle customers to new content sets and ultimately monetize all that so again.
Hi.
I know on the next earnings call will be able to give you a little bit more insight into the into the track we've gotten with our customers.
Thank you.
We will take our next question from Toni Kaplan with Morgan Stanley.
Thank you so much.
Given that we're in late October now and this is usually the call where you give some color on how youre thinking about 'twenty for issuance, Rob maybe just give us.
Your initial thoughts on sort of what you're seeing and how you're thinking about 'twenty four shaping up thanks.
Hey, Tony Yes, happy to do that in.
I'll give you some I'll talk a little bit about what's on our minds and obviously on the next call.
We will take you through the guidance for.
For 2024, but.
First I guess I would say, we expect some further economic deceleration in the U S Europe and China.
But I think probably a reasonable probability that we achieve kind of that mythical soft landing and avoid a recession.
Inflation has moderated there is still some uncertainty over rates.
Think generally the market is concluding that we are about at peak rates.
Obviously, theres some headline risk, though around inflation prints and job reports again, you kind of see what happened at the end of September.
And that's important in terms of the market getting comfortable that that we are in fact at the kind of the end of the tightening cycle.
I would say that we.
We expect default rates to pick up in 2024, but really only modestly above.
Long term averages and if that's the case.
Spreads should be relatively well behaved because they're pretty tightly correlated to default rates. I mean, you heard what I said about M&A I think that's really more of a 2024 story well have a better sense for that as we round into the beginning of the year.
And we've got some pretty sound.
Structural support from the things that I talked about so.
We'll get into more of that on the on the next earnings call, but hopefully that gives you a sense of some of the things that are.
Yes.
Factoring into how we're thinking about 2024.
Super very helpful. Thanks.
We will take our next question from Scott <unk> with Wolfe Research.
Good morning, and thanks for taking my questions, maybe moving back to the MA segment.
Results in RNA in DNI stood out to us and were pretty encouraging. So I was wondering if you can maybe go over any of the specific products verticals are solutions that we're driving some of the strength that we saw there. Thanks.
Hey, Scott good to have you on the call.
So yes.
Yes, we continue to see some pretty strong both demand and also.
Utilization that's important we've talked about the utilization of our products is very important to the overall kind of value capture.
But around our economic data in our research in our models.
Sure.
I mentioned that we have just recently expanded our coverage within credit view.
And that is integrating the content from Orbis that company database and also.
Our credit scores so we.
A while back we started to provide credit scores and effectively every company that isn't that giant database.
And we have been.
We have been integrating that into a variety of our different solutions and we've gotten some very nice.
Take up from that I would also say that.
Again in times, where you've got economic uncertainty there continues to be a good bit of demand for.
Economic data and content.
And and the ability to kind of forecast and plan and we have continued to you know continue to see that we've also seen some interest coming in from.
From some of the government sector. So the growth there has been maybe even a little bit higher than from some of our other segments. So all in all a number of things that are contributing to.
Allowing us to keep powering along in terms of growth in that segment in.
Going forward, we've got the.
The coverage expansion and research assistant that I think will provide future runway for growth.
Great I appreciate the color.
Yes.
We will take our next question from Craig Huber with Huber Research partners.
Great. Thank you Rob Whats your updated thoughts on the private credit market out there and how significant do you think it could be for your ratings business here.
Louis.
And the area here, where this could potentially be a headwind to ratings growth with its not picked up the stuff there is not rated.
Housekeeping question, if I can throw that in there what's your incentive comp for the first three quarters. Please thank you.
Yeah, So I'm going to let Caroline get to that in just a second but let me take the private credit.
Question first.
Greg we've talked about this a bit on the calls before and.
There are places where you could see this as a headwind where.
Companies decide that they're going to tap the private credit market rather than the public markets.
We have seen more and more cases, where companies have done that and they've actually come into the private into the public markets.
That makes sense because in general the public markets tend to be.
<unk> cheaper than the private markets.
So I actually you know when this kind of first came up and I would say maybe it might've been a year ago. When we first started talking about this on these calls.
I've gotten I'd say more and more positive on the opportunity for Moody's.
And while acknowledging you know what I just mentioned, there's just a lot of opportunity for us to serve this market. There's a lot of capacity in this market.
When you're in times of increasing credit stress the investors in those markets will have a better understanding of what the credit risk is of the investments that they are holding and so we've had some really good discussions both.
With alternative asset providers, so the private credit lenders.
As well as investors in their funds and so we're seeing demand for some form of credit assessment coming from both of those.
Constituents and I've spent a good bit of time actually engaging with the private equity firms and alternative asset managers.
There are just a number of ways that we already work with these firms pretty extensive relationships across the firm.
But there are more and more ways that we're continuing to support them. So in general Craig I actually see this as a.
As a net positive for us. It has meant that we've had to think about our product offerings I mentioned the coverage expansion credit views and importantly, you know.
One important reason, we did that was to make it more relevant to that market and we've thought about some of our rating products and assessment tools. So it has led us to think about the product suite and make sure that.
We're evolving the product suite to meet the needs of what is obviously a growing market.
So Greg with regards to incentive comp and our accruals align with our actual and projected financial and operating performance and we inspect expect incentive comp to be between $3 70, and $3 90 for the year.
With approximately $19 million for the fourth quarter.
For Q1, it was 89 million Q2, it was approximately $100 million and for Q3. It was approximately 100 million.
Great. Thank you both.
We will take our next question from Owen Lau with Oppenheimer.
Thank you for taking my question, so going back to M&A I.
I think the margin was pretty strong at 33, 6% and I know you maintained the margin guidance for <unk>, but going forward given that you have been investing into journey II, how should we think about the sustainability of that margin. Thank you.
Hey, Owen Great question and.
Just on the margin.
Maybe just one thing I'll say is.
Not sure I get to wound up about.
Margin in any given quarter and you've heard us talk about some seasonality in both expenses and in the way that revenues can come in and obviously it was a good quarter for us.
I think.
I would say that.
We have really tried to be disciplined across the business and to think about how we are re prioritizing across the business to make sure that we are putting resources against the highest and best opportunities.
And obviously, we have made some investments to date in Gen. I in fact, I was just with.
Our team that is providing our <unk> as a service across the companies probably 25 people.
Some of those are from different parts of Moody's and some of those or are new to Moody's.
Guess, what I would say Oh is looking forward I mean, you've heard me talk about we want to lean into growth and and invest in growth and one reason that's.
That's so important is in some of these markets you have literally new customers coming into the market adopting solutions. So we talk about <unk> and how that's broadening beyond just meeting regulatory requirements as to wanting to understand what youre doing business with.
So what youre supplier risk looks like that means you have new customers coming into the market and you've seen our retention rates pretty similar you know many other players in the market who.
It provides services like this have very robust retention rates that means those customers are sticky.
So once you get that customer it's hard to dislodge that customer so while we have a lot of <unk>.
Market growth, we want to make sure we invest in the products.
Sales distribution to make sure that we get those customer relationships and then over time as we continue to build more and more scale, we will have the opportunity to grow the margin.
Next year, I guess I would say the other thing I'd say with just Gen. AI investment. It's early days right I mean, yes, I've got a team here I mentioned.
But we havent started putting customers on the products, yet and so that means that we're going to have growth and you know our expenses around compute capacity and other things I imagine we will continue to be building out kind of our capabilities.
Across the firm in next year, but we're also going to balance that with <unk>.
Making some hard calls and being very disciplined in where we invest across the entire business. So hopefully that gives you a little feel Owen.
Got it thank you very much Rob.
We will take our next question from Seth Weber with Wells Fargo.
Hi, good morning, I wanted to add.
Actually a follow up on that question.
I was intrigued by the <unk> discussion.
Your remarks, I think you said, 20% of EMEA customers buy <unk> today I was just wondering can you just talk to what that trend line has looked like and where do you think that could go from like a wallet share perspective.
I think you may have touched on this a little bit but are these customers that are not using you or are these new customers.
New wins are they customers that aren't using anything today or are they conquest or just how we should think about that opportunity.
Yes, it's a great question and this is probably something we're going to be talking with you more about.
Next quarter would be my guess, but.
You know again, if you think about what has gone on historically that customer base. It really started.
Really in financial institutions and mostly in banks.
And then it started to evolve.
As you know all corporates had to start complying with different sanctions regimes around the world.
But also as corporate said, Hey, we we want to start.
This trend I talked about around better understanding who you're doing business with has driven a need from our customers to really get foundational master data and then build a set of.
Leverage analytics on top of that to help them think about things like.
Sales and marketing optimization, extending trade credit onboarding and monitoring customers and thinking about supplier risk those are.
That's a set of activities that almost every one of our companies our customers is doing and so we're having conversations with more and more and more of our customers around.
Well, how do you think about the master data and linking then the data and the analytics that you have at your firm and that we can layer on top of that to help you get a.
Better more holistic view of who you're doing business with and to power those.
Different use cases, and so that gives us some confidence that we're really going to be able to grow in the corporate and government sector, even faster than what we've done. It's a small you can see the customer split, but we think we have an opportunity to really get some growth there and I think you'll hear us talk more about that.
In the in the next quarter when we start to talk about.
Our product pipeline looks like for 2024.
That's helpful. Thank you.
Yes.
Our next question comes from George Tong with Goldman Sachs.
Hi, Thanks, good morning.
On slide 10, you trimmed your issuance guidance from mid single digit growth to low to mid single digit growth in the cuts are centered around investment grade leveraged loans and structured finance how much of your updated issuance outlook is locked because of refinancing needs versus discretionary in nature and more influenced by macro considerations and then.
Related to that does the refinancing pipeline, particularly in high yield what does that tell you how quickly that issuance can expand for next year.
George I'd tell you one.
I'm going to I mean.
And I tried to give you some insight.
Youre asking about fourth quarter right the assumptions going into the fourth quarter, and you talked a little bit about refinancing and how much does that give us confidence how much is kind of in the bag.
But let me <unk>.
Let me.
Give you some insight I think it'd be helpful for everybody in the call into how we are thinking about the fourth quarter from our boats on issuance and revenue standpoint.
And I'm going to talk a little bit.
Talk more focused more on really sequential growth in issuance and revenues than maybe perhaps I normally do because I think in some ways. It's at the moment, it's a little easier to triangulate back.
Back to the environment that we are that we just experienced in the third quarter versus what is a very different environment.
A year ago so.
Overall.
Yeah.
We're assuming.
Low to mid single digit.
Decline in total sequential issuance growth.
For the fourth quarter versus the third quarter of 'twenty three.
And that translates.
Into.
High teens growth on a year over year basis now.
For Q4 looking back to Q4, 'twenty, two and then that gets us to our low to mid single digit issuance guide for the year and let me drill down George because you were you were touching on on corporates.
We're assuming that corporate issuance grows.
Let's call it mid single digits.
For the fourth quarter versus the third quarter of 2003.
That translates to something like mid single digit revenue growth for corporates in the fourth quarter versus the third quarter. Okay. So mid single digit issuance and revenue growth sequentially.
In the fourth quarter.
For all other ratings lines, we expect pretty flattish revenue growth versus the third quarter of 'twenty three and then if you.
If I come back up to overall mis revenue.
That translates to something like low single digit revenue growth for the fourth quarter versus the third quarter of 2003 and now when I go back to.
Looking at <unk> 22.
Something like mid 20% growth.
Obviously, given it was a much lower comp.
I would acknowledge I've got a wider range at this point than we normally do but there's just there's a little more uncertainty.
In the market.
So I want to be very clear with everybody about what we've assumed and then again im compare it in some ways I'm anchoring too to the third quarter here.
So that you can get.
A sense of you see a variance one way or the other versus the third quarter you got a good sense of what that's going to do to revenues to <unk> revenues and in turn earnings and again just to George just to put a finer point on a key assumption really then is around corporate issuance for fourth quarter and that's mid single digit growth versus the third quarter that we just finished.
And I would say at the moment.
It's probably a little more downside than upside.
To this but we're not even a full month ended the quarter. So.
We will see.
I hope that I hope that's helpful. In helping you think about.
What's going on in the fourth quarter.
Sure Yes, that's helpful. Thank you.
We'll take our next question from Ashish <unk> with RBC capital markets.
Thanks for taking my question I wanted to focus on keeping gunflint and then on the insurance you.
We saw a material improvement from 6% last quarter to 8% in the third quarter. I was just wondering if you could provide some color that youre seeing that improvement.
Obviously, you saw the explosion of IQ product at the innovation day. So is it more driven by the climate solution thought in this acquisition.
Core business.
Historically stable so color on veterans would be helpful. Thanks.
Yeah she's thanks.
It's a good good question last quarter I think we.
We talked about hitting.
That high single digit Mark for <unk> growth within insurance and.
You see 8%.
And as you said improved.
And I would say, there's a few things there.
Going into that and as you know we've got.
What I'll call kind of a a P&C franchise, which is really historically the RMS franchise and then we have the the.
The life franchise with historically.
The Moody's franchise and now all of that is our insurance business and in P&C.
We have started to see an improvement in our growth from our core.
RMS customers and in.
Some of that is just good old fashioned blocking and tackling.
And and great sales execution.
And we have a very robust intelligent risk platform, that's the SaaS platforms.
Having some nice success in migrating people from on Prem solutions to the SaaS platform and we're also as you mentioned starting to rollout new solutions. It is giving us an opportunity to continue to not only bringing new customers, but also to too.
To be able to do more for our existing customers. So that's one.
I would also say that.
While it may not be showing up in the insurance segment.
We're also feel very good about the cross selling.
Synergies that we're seeing where we've got insurers, who maybe buying solutions from other parts of Moody's analytics.
So a good example is around <unk> and master data.
And then on the.
On the life business. So we over the last couple of years. There were there was some growth one of the drivers was around some of the <unk> 17 accounting standards. Some of that is is now in place.
But.
Now we've now we're in a wave of kind of product enhancements.
And other things so we still have actually have some very nice growth in the life business. So all in all pretty encouraged.
By the not only the the growth in the insurance business, but I think the opportunity for us to continue to see some further acceleration there.
That's really helpful color. Thanks, Thanks, a lot.
We will take our next question from Manav Patnaik with Barclays.
Just wanted to ask real quick any first.
First off is there any disclosures you can give us on a revenue growth in your in your ESG climate businesses, there within Moody's analytics is.
At this point still mostly.
RMS and insurance.
It sounds like you were alluding to some cross sell opportunities as well so any color there I appreciate it.
Flip that over to Carolina sure maybe we'll enter the RMS question first so we are on track.
To achieve the $150 million of RMS related to incremental run rate revenue by 2025.
And with regards to climate and ESG for 2023, we expect about 200 million in annual rising revenues, they're growing at a double digit pace and so there is really on growing demand from our customers with regards to add more information around <unk>.
And that's really helping us out with that yes.
I'd say that.
Obviously, the bulk of what Caroline just talked about is from RMS BR.
Beyond that we've got ESG scores, we've got the ESG.
Module, which is an extension of our credit view.
Module and we also have a.
Sustainable finance franchise that produces second party opinions on labeled bond issuance.
Out of the rating agency all of that is what goes into <unk>.
ESG and climate and the other thing I would say is that.
And in Caroline's right we've got.
I think healthy demand ongoing demand, but I gave the example of integrating the RMS transition and physical risk data and models into our banking solution. So.
That was that was always the plan and those kinds of things are going to help us continue to grow that overall pool of revenue from ESG and climate going forward.
And we will take our next question from Andrew Steinman with J P. Morgan.
Hi, Rob I, just wanted to jump into RMS a little bit more.
Firstly could you mention how well RMS is growing.
Third quarter and I.
Surely you gathered caught my ear with the earlier comments about how Moody's is integrating the RMS climate risk data into ESG solutions for banks. So my question is how much of RMS revenues are now coming outside of that core P&C insurer and are the products really different.
When you're delivering RMS data to Bang span insurers.
Yeah, Hey.
So I don't think we we don't disclose Rms growth.
At the you know on a quarterly basis, but I can tell you that.
Our target of.
RMS revenue, including synergies to grow in the high single digit range for 2023.
We're still on track for that.
And as I mentioned, the two components is.
RMS growth is what I'll call core growth has been picking up.
I think we all understand there was a fairly low growth profile when we acquired it that is improving.
And we are starting to get more and more synergy revenue and I guess the other thing I'd say Andrew is.
Yes, something like.
Integrating the content into our banking solutions will capture that as synergy revenue, but you won't necessarily see that in the insurance segment.
Which is why I think it's important for us to be able to give you.
The color on how we're capturing synergies across the broader <unk>.
<unk>.
Andrew can I make sure I just understand that last bit of the question. It was the difference in insurance.
A living in insurance and banking.
So when you look at the type of RMS climate data that banking customers are consuming is it very different than insurers. Let me just remind you like when you look at our Cat model you gotta be expect genius.
Some of that data.
You do.
Okay.
I actually in a way I've said this before in a way I've always.
Sometimes thought of that content is in some ways trapped.
In very sophisticated insurance workflow software right. So there is really really rich detailed.
Whether models climate models and massive amounts of data that has historically been used in the RMS software for the larger global insurers and reinsurers and brokers around the world.
And the reality is and this was a main driver of why we bought this company.
We knew that there was going to be a lot of demand for that content, but delivered in a different way. So for instance, we've come up with something called climate on demand, where we can actually do fairly simple scores and give you an average annual loss estimate. So this is the financial quantification of a weather event on a give.
Property and we can go down to a 10 meter resolution.
Banks are saying, Hey, I'm underwriting our commercial loan unsecured goodbye.
I'm underwriting loans secured by commercial real estate.
And I understand insurance policy has an annual policy, but this is a 15 year loan.
So I want to start to understand so we are doing.
We're doing exactly what you just described is how do we take that content.
And deliver it to customers in different ways that our consumable for them in their workflows in.
In ways that are valuable and.
I think it was very difficult for RMS to do as a Standalone company, that's part of the value that we're bringing here.
Okay. Thank you very much.
Yes.
We will take our next question from Russell Quelch with Redburn Atlantic.
Yes, hi, Thanks for squeezing me in service.
As a small uptick in the expected restructuring charge to 'twenty three vessels, what you said in Q2.
It's very small, but wondered what's driving that and maybe.
Broader question is there room for further restructuring 2000 for the economic environment.
Pan out.
You laid out and you spoke to Tony's question. Thanks.
Yeah, Russell, Hey, there I think I'm going to hand that to Caroline.
Sure.
So we expect our restructuring program to be substantially complete by the end of the year.
We are forecasting up to $205 million.
About 100 to 110 and MAA at 90% to 95 and Mris.
The charges relate to both real estate rationalization and workforce optimization.
Inspect expect to incur restructuring charges between $20 million to $40 million in the fourth quarter.
Our over 65% of that being related to real estate. So with regards to expanding this into 2024, we have no plans for us.
And Russell I would just.
To add to that and it was interesting back when we first announced this I think it was on this call a year ago and I got some questions from people like Hey, why are you all doing that than I do.
Get those questions anymore.
We.
We we really took some hard decisions and took a hard look at the business and figure it out.
You know what.
We wanted to re prioritize.
And as Caroline said, we've continued to do that through the course of the year.
But I think in terms of restructuring program were done there'll still be and you've heard me talk about this we're still going to be thinking about where we move resources and prioritizing things, but I think as far as restructuring I think we're done.
Okay. Thanks.
We will take our next question from Shlomo Rosenbaum with Stifel.
Hi, good afternoon, and thank you for taking my question I had kind of an operational question for you Rob just looking at the operating profit going up.
Pretty substantially from two two to two <unk>.
I was wondering if you could just discuss more kind of detail around.
What actually happened there like I don't usually see that kind of move.
In your business.
Getting out of a lot of leases at one point in time or.
Can you just give us some on the ground.
Thoughts of that because usually I think of your business is very much in that area.
Costs are a lot of them are people and I'm not sure that you had that kind of movements within within your head counts.
Yeah.
Thanks, Shlomo I guess.
Ill reiterate the kind of a health warning of I don't want to get overly fixated on one quarter. Obviously it was a good quarter from a margin perspective, but.
But we do have.
Seasonal spending patterns.
And MAA this.
This year I think is no different and obviously youre looking at our full year guidance and what that implies for the fourth quarter and obviously that means that in our margin will be a little bit lower in the fourth quarter than it was in the third quarter. So.
Kind of why is that and I would just say that.
Go into the end of the year, we've got all sorts of.
Projects that start to.
People are trying to get them done by the end of the year and we also have a good bit of the increase in selling activity is just a huge renewal and sales period.
For us.
And the other thing I might say is that.
Again, you've heard me talking about this this re prioritization.
You saw that we took some additional actions that were reflected in that updated restructuring charge. So there was there were some things that went on.
Over the course of the summer that was part of that re prioritization and some of that went into that restructuring charge. Some of that then flowed through.
We saw that flow through but then in the fourth quarter as I said, we've got a plan for investments. We know we're going to have a lot of selling activity.
If you think back to the call.
Back in February of 'twenty.
Earlier this year I mean.
Jenny I wasn't even a sim.
And so we've had to figure out how are we going to get after <unk>. How are we going to have the right resources with the right skills and really go after that and fund that internally.
And so again that was all part of the.
You know kind of the re prioritizing and repositioning.
Within the business, so hopefully that.
Hopefully that gives you a bit of a sense, but I wouldn't get too caught up.
Just in this quarter.
Okay. Thank you.
Our next.
Comes from Jeff Mueller with Baird.
Yes. Thank you wanted to ask a long term question on corporate debt velocity I hear you that it's the lowest it's been in a while there's a lot that's impacted issuance, we should see cyclical recovery and refi well it should be supportive, but if you look at like the very long term like a multi decade.
<unk>.
Curious what the data shows in terms of correlation.
After a period of a material interest rate increase.
Does corporate debt velocity tend to persist at a low level.
Or is that correlation not really there. Thank you.
Yes. This may be a you.
You may have stumped the professor on this one.
<unk> got the data, but I don't have it handy.
But what I would say is that we have looked at issuance and so I'm not going to necessarily come at this from a debt velocity standpoint, but we have looked at issuance in periods of higher interest rates.
And I think it's during the period of transition is when we typically see more challenge to issuance. So it's not not simply an absolute higher level of rates that is the headwind.
Typically.
Higher rates are also accompanied by economic growth, which ultimately is positive for issuance. So over the longer term, we tend to see that correlation.
As supportive of issuance.
Maybe the other thing is I mean, just thinking out loud here is.
If we go back decades, the size of the market and just vastly different so I just don't know how comparable.
That really would be.
But you know what.
There might be something we can follow up on with NIM dig in on.
Thank you.
Yes.
Our next question comes from Jeff Silber with BMO capital markets.
Hey, Good afternoon. This is Ryan on for Jeff just a quick clarifying question looking at the quarterly changes in rated investment grade issuance volumes and revenues on page five of the release I saw issuance was up 6%, but revenues down 6% can you just explain the disparity there.
The pricing comes into play there. Thank you.
Yes that was.
A mix issue so in investment grade, we have typically two types of issuers.
Those who are on.
Kind of frequent issuer programs and those who are less frequent opportunistic issuers and so in this quarter that mix trended more towards the frequent.
<unk> frequent issuers and less towards opportunistic which in some ways makes sense as you've got kind of a rising rate environment.
<unk> opportunistic investment grade issuers are going to sit on the sidelines. If they can so I think that was primarily what was going on there it really wasn't.
A pricing issue.
Alright, and Lee will take Craig to your first question with Huber Research partners.
Rob I got a follow up question on pricing can you just quantify what.
What pricing is doing this year for each of your two main segments.
It's up about 3% to 4% how should we think about that for 'twenty three.
Yeah.
Pretty steady Eddie.
<unk>.
And I guess Craig.
You know the real Devil is in the details because it does depend to some extent on the.
The issuance mix so as you know we.
We don't just have a blanket price increase across.
The entire issuer community, we were really really thorough and thoughtful about how we do this when we think about regions and asset classes.
The value and the costs.
To support the surveillance in.
And so all of that goes into how we think about <unk>.
Pricing. So you know again, you don't have a blanket price increase it depending on where we have more or less price increases that average out to 3% to 4%. It depends on what effectively kind of our pricing take is in any given year, but I would say the idea of kind of 3% to 4% on average.
Across the portfolio.
It is true this year and we expect it to be true again next year.
Great. Thanks, Rob.
Yes.
And there are no further questions at this time I would like to turn the call back over to Rob Barbara for any additional or closing comments.
Okay, well I think that does it I really appreciate everybody for joining the call and we'll talk to you.
In February.
Bye bye.
And this concludes Moody's third quarter 2023 earnings call as a reminder, immediately following this call. The company will post the mis revenue breakdown under the Investor resources section of the Moody's IR homepage.
Additionally, a replay will be made available immediately after the call on Moody's IR website. Thank you.
Please wait the conference will begin shortly.
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