Q2 2019 Earnings Call
Good day, and welcome ladies and gentlemen, she didn't Moody's Corporation second quarter 29, <unk> 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 would now like to turn the conference over to Salli Schwartz Global head of Investor Relations and strategic capital management. Please go ahead.
Thank you.
Good morning, everyone and thanks for joining us on this teleconference to discuss the second quarter 2019 result, as well as our current outlook for full year 2019.
I am Salli Schwartz global head of Investor Relations and strategic capital management.
This morning, Moody's released its results for the second quarter of 2019, as well as an update to our current outlook for full year 2019.
The earnings press release, and a presentation to accompany this teleconference.
They are both available on our website at IR Dot Moodys Dot com.
Ray Mcdaniel, Moody's President and Chief Executive Officer will lead this morning's conference call.
Also making prepared remarks on the call. This morning, It's Mark Hey, Rudy Senior Vice President and Chief Financial Officer.
During this call, we also will 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 mentioned during this call and gap.
Before we begin I call your attention to the Safe Harbor language, which can be found toward 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 factors discussed in our annual report on Form 10-K for the year ended December 31st 2018.
And another SCC filings made by the company, which are available on our website and on the Fccs website.
These together with the Safe Harbor statements set forth important factors that could cause actual results to differ materially from those contained in any such forward looking statements.
I would also like to point out that members of the media maybe on the call. This morning in listen only mode I'll now turn the call over to Ray Mcdaniel.
Thanks, Salli good morning, and thank you everyone for joining todays call.
I'll begin by summarizing Moody's second quarter, 2019 financial results and providing an update on the execution of our strategy.
Mark Hey will then follow with further details on our second quarter results and comment on our revised outlook for 2019.
After our prepared remarks, we'll be happy to respond to your questions.
I'd like to start by providing select highlights for the quarter.
First Moody's second quarter performance reflected continued double digit growth in moodys analytics with strong contributions from all lines of business.
Recurring revenue in EMEA represented 84% of total revenue for the trailing 12 months ended June 32019.
Second.
Excluding the impact of foreign currency translation, Moody's Investor service revenue in the second quarter was in line with the record prior year period, and the issuance environment is constructed as we move into the back half of the year.
Next the charges related to our restructuring program are largely complete and we are increasing our anticipated annual run rate savings by more than $10 million to approximately $60 million.
And finally since our last earnings call. We have continued to execute on our long term strategy in a disciplined manner through targeted acquisitions of businesses that extend our assessment and analytical solution capabilities as well as the planned divestiture of Moody's analytics knowledge services or Max.
In addition, I'm pleased that Moody's has further strengthened its leadership in U.S.G. engagement and disclosure.
Moving onto second quarter, 2019 results double digit and May revenue growth and am I asked was resilient. Despite subdued issuance activity resulted in a 3% revenue increase from Moody's Corporation.
Moody's adjusted operating income of $599 million was up 2% from the prior year period.
Adjusted diluted EPS grew by 1% aided by a 2% reduction in diluted share count from the prior year period as a result of our share repurchase programs.
In the second quarter issuance activity was mixed falling benchmark rates tighter spreads and economic fundamentals supported strong issuance conditions.
However, declining global growth forecasts continued geopolitical uncertainty and lower M&A and investment activity kept some issuers on the sidelines.
The resurgence in corporate fixed rate issuance helped partially offset weakness in floating rate bank loans.
Well, well, however, global issuance activity fell for the fourth consecutive quarter.
The banks have indicated that you with investment grade and leverage finance issuance pipelines are moderate.
But CLL activity remains weak.
Nonetheless, the relatively easier year over year comparable gives us confidence that that might ask will deliver growth in the back half of the year.
Since the first quarter earnings call Weve announced several transactions and enable us to further align our portfolio of offerings with our strategic priorities.
Moody's delivers trusted insights and standards, but allow market participants to make informed decisions contributing to market transparency and fairness.
Our resolve to bring clarity and efficiency to markets has led us to execute these transactions as we increase our focus on providing risk assessments and analytical solutions.
Before I turn the call over to Mark I'll take a minute to review our recent strategic transactions with you.
First with our majority acquisition of 427, a provider of data and analytics on physical quantity risks, we will significantly bolster our capabilities to integrate environmental and climate risk factors into economic modeling and credit ratings.
Second our acquisition of risk first extend Moody's region to the buy side with market, leading solutions for portfolio management and risk analytics delivered on a software as a service or SaaS platform.
Third our newly established joint venture with teammate combines Moody's experience in developing methodologies and global standards with teammates expertise in cyber security technology.
And finally, our planned divestiture of Max reflects amaze recruit increasing strategic focus on providing scalable data financial intelligence and analytical tools, rather than bespoke service oriented engagements.
These transactions are included in our updated full year 2019 guidance.
We expect they will have a dilutive impact of approximately five cents to adjusted diluted EPS.
I will now turn the call over to Mark Hey to provide further details on our second quarter performance and review our updated outlook for 2019.
Thank you Ray.
For EMEA second quarter issuance activity was down 14% from the prior year period.
However in mice revenue was down 2% demonstrating the continued resilience of the business model.
As Ray mentioned earlier issuance was skewed towards fixed rate activity, given low benchmark interest rate and additionally, the mix of jumbo M&A related issuance, an infrequent issue is coming to market was favorable.
Hi, This is recurring revenue base supported by pricing initiative as well as monitored credit growth also contributed to substantially offset this decline in issuance.
For the second quarter, the slight revenue contraction alongside relatively flat expense growth.
Lead to a decline in my guesses adjusted operating margin, which was 60.2%.
For M- each business contributed to the achievement of an aggregate 12% revenue growth rate.
Concurrently, enabling 350 basis points of improvement in adjusted operating margin.
This is the second consecutive quarter of year over year, adjusted operating margin improvement of 350 basis points.
Well getting any revenue was up 10% from the prior year period.
Our DNA revenue grew 14% due to strong sales of credit research and ratings data feeds vectrus by sales growth that Bourbon dike and contribution from the recent acquisition.
On an organic basis, our DNA delivered double digit revenue growth of 11%.
You are in strong demand for subscription product.
Particularly from insurance companies drove a 7% revenue increase.
We also benefited from the ongoing transition to a SaaS based operating model.
Trailing 12 month Ers revenue was up 1%, but sales were up 8%, which provides a positive signal for future revenue growth.
Professional services revenue of the revenue growth of 13% was driven by strong global demand for training solutions.
Organic professional services revenue was up 10%.
I'll now discuss Moodys updated full year 2019 guidance.
Moody's outlook for 2019 based on assumptions about many geopolitical conditions and macroeconomic and capital market factors, including but not limited to interest in foreign currency exchange rates corporate profitability and business investment spending mergers and acquisitions and the level of debt capital markets activity.
These assumptions are subject to uncertainty and results for the year could differ materially from our current outlook.
Our guidance assumes foreign currency translation at end of quarter exchange rate.
Specifically, our full cost for the remainder of 2019 reflects exchange rates for the British pound.
$1.27 cents and for the Euro of one dollar and 14 cents.
We continue to forecast that revenue will increase in the mid single digit percent range, while anticipating total operating expenses to increase in the high single digit percent range.
Operating expense guidance includes depreciation and amortization restructuring charges and impairment charge related to the planned divestiture of Max.
And acquisition related expenses.
Excluding the incremental restructuring and Max impairment charges total operating expense guidance would have still been an increase in the mid single digit percent range.
Of note, we are not expecting a material ramp in expenses from the first to the fourth quarter of 2019, as we start to realize savings from the restructuring program.
The full year 2019 operating margin full cost is approximately 42% with the adjusted operating margin anticipated to remain at approximately 48%. We now expect interest expense to be approximately $195 million.
The full year effective tax rate is anticipated to be in the range of 21% to 22% notwithstanding the low effective rate in the first half of the year.
Diluted EPS and adjusted diluted EPS, a full cost to be $7.15 to $7.35.
And $7.95 to $8.15 respectively.
Share repurchases are anticipated to be in the range of $1 billion to $1.3 billion.
For a full list of all guidance. Please refer to table 13 of our earnings release.
So am I.
We expect.
Total full year revenue to increase in the low single digit percent range with growth rate weighted towards the second half of the year as the year over year comparable becomes easier.
We are anticipating you waste revenue to increase in the mid single digit percent range with strong contributions from fixed rate corporate bonds.
Non us revenues full costs to remain approximately flat.
Oh issuance estimate remains flat to down 5% in comparison to 2018 with continued support from big funded M&A, but with lower contributions from floating rate bank loans and the low.
We are on track to achieve approximately 901st time mandate in 2019.
The Myos adjusted operating margin remains at approximately 58% in 2019.
Or in Asia, We anticipate total revenue to increase in the low double digit percent range as we recognize strong sales growth across all business lines as well as the benefit from the stability of recurring revenue derived from the core ardine business and the ongoing transition to a SaaS based model.
The EMEA adjusted operating margin.
His full cost to expand 150 to 250 basis points to 28% to 29% range in 2019, reflecting the aggregate impact of the announced transactions.
The charges related to our restructuring program are essentially complete.
The total restructuring charge of $108 million that we took in the fourth quarter 2018, and the first half of 2019 exceeded our previously announced range of $70 million to $80 million.
We are currently revising our anticipated annualized pre tax savings to approximately $60 million a $50 million increase from the mid point of the previously announced range of $40 million to $50 million.
This will enable us to realize approximately $30 million of savings as you move through the second half of 2019.
Allowing us to reinvest in our business and provide annual margin stability.
Going forward these savings will create financial flexibility and the various capital market condition and provide additional options to reinvest in our business and bolster margins.
Before turning the call back over to Ray I would like to note a few key takeaways.
We remain confident in Moody's ability to both deliver revenue growth and sustain margins in 2019.
Moody's will continue to execute on the strategic vision to provide trusted insights and standards, while delivering transparency to adjacent markets and emerging risk areas.
Finally, we are confident in our disciplined and thoughtful approach to capital management and the return of free cash flow to our shareholders.
I will now turn the call back over to rate with final remarks.
Thanks, Mark before turning to the question answer session.
I'd like to review a few.
Of our recent activities demonstrating our commitment to a sustainable future.
Each year Moody's is further honed it CSR program to strategically focus on societal issues that we are in a unique position to help address and those that our employees are most passionate about.
Additionally, Moody's work on ESG, specifically comment related risks and opportunities is directed toward promoting global measurement standards for use by market participants.
Moody's continues to support disclosing and adhering to the standards set by the task force on climate related financial disclosures for Tcf.
Moody's released its most recent Tcf de report earlier this month, which is linked to this presentation and otherwise available on Moodys Dot com Slash CSR.
We are also working towards incorporating disclosure metric set out by the sustainability accounting standards board or SP.
We continue to engage with multiple with a multitude of other partners that develop CSR and he has to standards and frameworks or evaluate and assess performance. Please see the press release, we published yesterday, highlighting our ongoing SG initiatives available at our IR Dot Moodys dot com for more details.
This concludes our prepared remarks, and joining mark Kay in May for the question and answer session or Mark Almeida President of Moody's analytics, and Rob Fauber President of Moody's Investor Service will be pleased to take your questions.
Thank you and ladies and gentlemen, if youd like to ask a question. Please dial star one on your telephone keypad, if you're on a speakerphone. Please pick up your handset and make sure. Your mute function is turned off to that your signal reaches our equipment.
We will ask that you. Please limit yourself to one question with a brief follow up you are then welcome to rejoin the queue for any additional questions. You may have again that is star one to ask a question.
And we will go first to Manav patnaik of Barclays.
Thank you good morning.
Just on that last point around.
Yes gene.
Initiatives it sounds like you know the PR.
Lot of companies have seen SAP, you guys and maybe some tuck in acquisitions as well can you just help us.
Hi, maybe what it is today and how much can be read the opportunities that would be helpful.
Sure a lot of.
In terms of the opportunity in the SG.
Sector for for commercial purposes.
We are looking at.
What you might characterize as non geographic emerging markets.
And so the degree and pace at which these markets will monetize.
Is more speculative than you might see in more established markets that are.
Using various kinds of risk assessments and risk standards. So we would acknowledge that.
However.
We are confident that there is strong demand for the creation of of good measurement tools and standards in these areas.
And so we are committed to two providing that.
This is true for certainly for climate.
In cyber security is another example.
So we feel that this is going to be a good opportunity even though these are market sectors that that are not yet heavily monetized.
I would also add that really regardless of what the direct financial opportunity ends up being in these areas and how quickly it gets realized.
That this is going to contribute to what we're doing in both moodys analytics and Moody's Investor service.
As far as providing.
Risk assessments feeding into our economic models and tools and our credit ratings.
And so it will it will enhance the relevance of the products that we are already providing and the relevance of our credit ratings in particular, so thats how were thinking about this.
Okay got it and then just as a quick follow up I mean can you just help me size will fuel.
India readings explosion is.
I guess you had seen you step down.
And it's all over the news out you can guess I just wanted to see like how big will.
This might be there.
Yes, when when you say our Indian.
Opportunity or exposure.
Are you are you referring to the cross border or what we're doing in the domestic market.
Well, it's more the domestic market around the fact that.
I guess, a couple of the rating agencies unit had to step down down data, including your guidance I was just trying to understand what the risk around the issues there today.
Yes sure.
With respect to.
Our.
Affiliate in India growth.
They've reported a couple of things one that they are.
Addressing a matter relating to a credit ratings that were assigned to one of its customers and this is the subject of a preceding thats been initiated by the Securities Commission called SEBI in India.
And secondly, they reported that they were investigating and anonymous allegation that was forwarded.
To grow by 70 and they've gotten.
Outside experts to look into that anonymous allegation.
We don't anticipate that.
An unfavorable outcome would be material to Moody's in any way and.
We'll just we'll just continue to watch and let the incremental moment team and the board handle the proceeding and the investigation that they're dealing with.
Well thank you.
We will now go to Toni Kaplan of Morgan Stanley .
Thank you.
Could you help us understand how you are able to outpace issuance growth am I asked as well as you did just looking at your transactional business down four and the global issuance environment of down 14.
I, usually think of price and mix is maybe two drivers that can explain some of the delta, but I just wanted to understand if theres a piece that I'm not thinking of.
Sure Rob.
Turning heads it's Rob So first of all this is actually a nice question to be answering.
This quarter. So so thanks for asking.
You're right those are the two primary drivers and it really didn't this quarter.
Joe the mix of who is issuing and when we look at.
Prior.
Accuse me in prior quarters, so kind of comparing back to the first quarter. The issuance mix. In Q2 was was more favorable because it was driven by a larger proportion of M&A driven financings.
And frequent issuers supplies and this comes to frequent versus infrequent issuers and what kind of.
Commercial construct we have around them.
Meanwhile, the frequent issuers through tend to be on these relationship based pricing constructs contributed to the issuance declined to a greater degree in the second quarter.
So again it was mix and I also think we had I mean, you touched on price I think we had some very nice commercial execution in the quarter as well.
Got it and then the price maybe could continue to see the other on less clarity would you expect that that that mix between a frequent and infrequent to continue as it did.
It did certainly may I mean, given that the infrequent issuers. Sometimes this is this gets too.
Two things the M&A environment and.
Opportunistic financing and so when we see it.
The decline in benchmark rates and the tightening of spreads spreads that tends to draw draw the infrequent issuers out to tap the market.
Extremely helpful. Thank you and then.
And for my second question and the margin was very very strong this quarter again similar to last quarter can you help quantify how much was from BBB synergies first is the shift to the SaaS model and ers or.
Just general efficiency or you know if there is any other pieces.
Missing that'd be great. Thanks.
Hi, Mark.
Sure well, we had 350 basis points of margin expansion in the quarter as Mark said.
And.
You could deconstruct that into a couple of categories about 150 basis points of the expansion came from the core business about half of that came from the work we've been doing and enterprise risk solutions to increase the profitability of that business.
We've got about 100 basis points from the.
Removal of the.
Deferred revenue haircut in the pure van Dyke business that we had in the second quarter last year.
And then another 100 basis points from the Bureau van Dyke business in the aggregate so I can't really.
Give you any further detail to tell you how much is attributable to Bureau van Dyke synergies per se.
But those are the three principal categories of margin expansion.
That's really helpful. Thank you.
Our next question will come from Mike Cho of Jpmorgan.
Hi, Good morning, just my first question is around the the change in the last few less guidance, just hoping you could give a little bit more color behind.
The increase in the revenue guide.
I guess behind some of the commentary you just gave.
Yes sure Rob.
Yes, so obviously we've we've.
As Mark touched on we've got the same overall issuance outlook.
And the components to get to our overall and minus low single digit guide.
As you said, we've increased our our our us guidance and that's really around our outlook for corporate bond issuance and the revenue expectations.
Given the receptive environment that we're seeing.
Some small upward.
Revisions in our outlook for Us project and infrastructure finance activity.
And thats been.
Partially offset by the downward revisions that we've got and US bank lines and CLL sorry.
I don't want to overstate the magnitude of these forecast revisions it was enough to to push the push the us into mid single digits, but.
Obviously not enough to impact the broader.
Mine's revenue guide.
Okay, Great. Thanks, and then just my follow up is around the restructuring program.
Mark you mentioned that you expect to see about $30 million.
Benefit this year and $60 million.
Overall run rate synergies I guess just one.
When should we expect to see the full benefit of the 6 million and two.
How much of that are you planning to reinvest.
Correct.
Thanks for the question and certainly the increasing the total restructuring charges of $108 million was really due to the acceleration and an expansion of our staffing and real estate optimization and some of the acquisition integration.
And that as you correctly note that lead to an increase in our annualized presale pre tax savings amount of approximately $60 million part of that benefit that 30 million that you will see 19 is really coming through how we think about the expense ramp for the year. So specifically, we're now expecting an expense ramp of between zero and $10 million from Q1 to Q4.
This is a much larger amount that you would have seen in 2018.
And depending on the opportunities as we evaluate.
Both.
Internal investment opportunities versus margin expansion that will very much depend on the particular environment as it develops in 2020.
Okay, great. Thank you.
I will now take a question from Alex Kramm of VBS.
Hey, good morning, everyone.
Wanted to just talk about the divestiture or the Max divestiture I'm, a little unclear actually whats included in your updated guidance on the one hand theres on this slide you say, it's a five cents impact from all these transactions, but I don't really think you adjust its kind of like the revenue margin outlook I know the dealer supposed to close later this year, but just maybe clarify what's included and what's still come out when this closes and then I guess bigger picture on this whole question.
As we think about 2020 this business can come completely out how does this change kind of like the revenue and the margin profile of that business. Thank you.
Alex Good morning. This is mark I'll start with your first question and I'll answer specific to adjusted diluted EPS guidance update and the increase is primarily due to the lower expected interest expense and we certainly did factor in the Myos at U.S. revenue guidance improvement and but also note that we did narrow our range given the high confidence that we have from a first half operating performance in particular as it relates to and Max itself and while mix is not material to Moody's and we did full cost we had full cost 2019 financial and the absence of a transaction to be around $110 million in revenue.
And around 20%, a standalone EBITDA margin associated with that.
Okay, Great Thats helpful. Thanks for that.
And then maybe just secondly, just quickly on the M.I.S. business. Just obviously you updated your outlook here, a little bit, but curious to what degree this contemplates kind of the.
Potential a likely rate cuts and then we're going to be seeing today. Maybe later this year, how that may still shift kind of the expectations or what you expect to happen in the marketplace. So is this kind of steady eddy guidance or outlook or quick.
Do you think the marketplace could still change materially given what.
The fed is likely to do here.
And given your question, maybe we'll we'll do series I will talk a little bit about puts and takes sort of for issuance activity that we're hearing from.
Externally from some of the banks and I'll turn it over to Rob to follow up specifically with that your internal internal viewpoint.
In the us.
The banks are saying that investment grade issuance is down slightly year to date due to some deleveraging activity as still active but lower year over year M&A and it's like multinationals shifting issue in Europe to take advantage of lower rates there high yield bond issuance from what we're hearing has been moderately year to date supported by refinancing activity and then Conversely leverage loan issuance has been down over 30% with acquisition financing driving for the majority of that activity that banks have relayed that anticipation of a fed rate cuts.
Is now driving yields lower and tightening spreads, which does sit up condition supportive of the strong issuance environment for investment grade and high yield bonds.
In the second half of the year.
And we did hear that expectation persist for lower.
Uhhuh benchmark rates through the medium term due to ongoing growth concerns and then of course those consents are also being reflected in the market with the bifurcation and the demand for high yield credit sort of that preference towards the higher quality names, we turn to you at Europe feedback from the banks is that the investment grade market, you've seen some of the rate dynamics to the us bit more accentuated. The tenure Buncefield, obviously continues to fall through the below zero percent.
And as a result basement grade relative dynamics continue to encourage reverse Yankee issuance.
Which by some measures comprises about a third of the total issuance in Europe year to date.
And the last thing sort of what we're hearing from the banks and specifically related to high yield issuance in the second quarter in Europe , and that's primarily driven by refinancing activity and then similarly as in the us and their significant preference for high end spit great rate that name.
I will turn it over to Rob to update you sort of on the Myos is 2019 issue and.
Expectations, Yes, Alex I'll touch on that in the second let me just.
Let me just follow up with kind of how we're thinking about issuance for the remainder of the year Mark.
In his remarks.
I mentioned, our issuance forecast is essentially unchanged at flat to down 5% and we have.
Shifted our expectations as we've touched on two more fixed rate bond issuance and less floating rate instruments and includes loans and sell those.
We've upped the investment grade outlook modestly given all the opportunistic refine jumbo M&A activity we've seen.
But the biggest changes are really around corporate high yield bond issuance outlook for us.
From the first quarter given all the activity in the pipeline that we're seeing and we're expecting to see some significant growth now and in high yield issuance for the full year and engine virtually we've trimmed our outlook for bank loan issuance on.
Really last opportunistic refined.
The fact that new issue loan spreads and yields are are higher than a year ago. So we expect to see there are some significant declines in issuance and maybe it just in terms of upside and downside.
I would say the supply were seeing is benefiting from what I would call very issuer friendly market conditions, probably the most.
Constructive conditions, we've seen in quite some time.
As a as I mentioned earlier that could.
That could lead to some elements of opportunistic supply.
More than we've anticipated.
M&A is really going to be a key factor here our expectation is for ongoing levels of activities, we continue and as I've mentioned.
We've seen some jumbo financing activity.
To get M&A deals done on the downside I guess, a few things I mean potential surprises.
In how the central banks respond to the threat of.
Of lower economic forecasts.
Yes, there are obviously expectations that the market has dialed in.
And then things like disorderly Brexit.
And Chinese us trade discussion so those would be some of the things were looking at is that good.
That could be a wildcard on to our outlook for the year.
Yes, just to just to close this off its ray.
I think what you're hearing from us is that.
We're in a bit of a goldilocks.
Scenario right now where.
Growth is slowing but there is still growth.
That slowing growth is encouraging.
Central Bank action.
Which is beneficial to rates and spreads remain tight.
Yes, if we if we tip either way away from from that scenario, we would have more challenges in the second half, but right now that's what we're seeing.
Excellent color. Thank you.
We will now go to Craig Huber of Huber Research partners.
Yes. Thank you a couple of questions, maybe if we could start with China. If we could raise just wanted to get an update where you are out there in terms of maybe trying to start up an operation there similar with S&P has done it's my sense.
Correct me, if my wrong, but is your 30% equity stake over there and see.
Excise sort of coming up this whole process for your perspective, we'll I guess would you be able to top it off and actually buying more of that operation actually consolidated here I'm, just curious where you're at right now just given that your main competition at least globally got their licenses you know back in January .
I have a follow up thank you.
Yes.
We talked about this a little bit before.
And.
We have.
A 30% stake as you know.
In.
The largest rating agency domestic rating agency in China, It's also quite profitable.
So we're very satisfied with our position NCCN outside.
Certainly if we like.
CCX I and we do.
We would be interested in participating further.
In that business.
That is going to be.
Determined in part by probably.
Policy decisions that are made in China, and potentially in discussions between China and the United States.
So.
At this point.
We are very satisfied with the position we are in.
And if circumstances change.
We would be prepared to pivot whether it's it's.
Selling down our position or increasing our position or or requesting a separate license other than the license is currently held by Cxi. So we're just going to have to be patient and see how that plays out but in the meantime.
We are.
30% holder in a in a very successful business.
Just to give you a little bit more color on sort of the size of the opportunity because I think theres been.
Hey, a fair amount of confusion.
Around this and so.
Let me give you just a few numbers.
First of all we've talked before about China being the third largest.
Onshore bond market.
And it's causing very quickly on becoming the second largest.
We rate both in the cross border market large Chinese companies going to the U.S. or euro bond markets.
And we have the CCX high in the domestic market. So.
The ratings that we have in the cross border market.
Our about.
37% of the revenue share so high Thirtys.
Revenue share we have about 70% coverage.
But it's a multiple rating market so that turns into about high thirtys.
Revenue share and that's approximately a $260 million cross border market. So that gives you a sense of what what the cross border revenue opportunity is.
And then.
Coincidentally.
CCX all I has a high thirtys percent.
Revenue share of the domestic Chinese market, which coincidentally is also about $260 million.
So we've got we've got high 30% revenue share in both cross border and domestic and both markets are about $260 million.
In total ratings revenue.
So that gives us about $150 million currently.
In China related revenue.
Excluding the income contribution that comes from Cxi, which would be you can do the math would be about another $15 million.
Thank you for that Ray and then if I could also ask you touched touched on this a little bit, but if you could just talk a little bit further about the market conditions for debt issuance with back half of this year and we think about the economy spreads.
The M&A M&A environment any pull forward potential here.
The base rate the absolute rates Hello, just a sense of maybe about Europe as well. Thank you.
Yes sure.
No not a whole lot to add to what we were talking about before.
In terms of our expectations for the second half of the year.
But.
You know as we look at whether the second half of the year may.
Include more significant pull forward.
I think I think we probably will be seeing pull forward.
That is again more of a phenomenon at least it has been more of a phenomenon in the us than it has been internationally.
So it's really us spec grade and we do have.
Optimistic expectations for the U.S. spec grade market year on year.
For the second half.
Europe I don't know that we will be seeing pull forward historically that has not characterize the European market as much.
And so.
Whether the the.
Quantitative easing that is expected in Europe .
Encourages.
More pull forward is a question we will have to just watch and see the answer too.
And see.
How significant that is a reminder, that the spec grade market in Europe is not of the same size as the us market. So it would be less material, even if there is pull forward.
Right, maybe I'll, just add a little bit of color to us as we are.
Now into.
Into the second half year, Craig so.
Second quarter seasonally strong.
Our typical kind of salt to pattern.
Supported by these favorable market conditions that we've talked about the pipeline has.
I'm thinking kind of here from a corporate perspective, but the pipelines continue to replenish on stays pretty solid.
July is usually a bit softer.
We've got earnings blackouts, but.
We're expecting some good issuance ahead of the seasonal slowdowns.
That we'll see later in August in Us investment grade.
Yes, you've got the corporate bond index at its highest level in something like two years and funds flows flows have been positive.
Every month of the year and then.
Yes high yield.
The spreads have recovered.
Substantially all the widening that they had experienced in Q4 and high yield Bond fund flows have been positive every month this year except may.
Also contributing to the to the demand there.
And that's in contrast to a level of outflows that.
We have seen in high yield bond funds, something like five and over the last six years. So positive funds was.
On the flip side.
The leverage loans pipeline looks pretty modest and.
Weve. Despite the fact, we've seen now I believe is 34 consecutive weeks.
Our fund outflows the tone in the leverage loan market.
The secondary market is pretty firm, we've got some jumbo M&A, that's been announced that still has to get funded in the markets in the second half the year.
And as Ray said in Europe .
The investment grade market continues to be pretty active we've got very low benchmark rates, they're strong investor demand.
The leveraged finance activity has improved in Europe from the first quarter. It was very soft in the first quarter.
We've seen some good activity in July again same theme of sustained.
Investor demand for for the supply and good market conditions. So.
That's what we're seeing.
Thank you can I just ask a quick housekeeping question if I could.
The bvt always get asked by investors how did BV to was it was excluding currency was up high single digits. The revenue there. Thank you.
Yes.
Sure.
Well, we don't we don't typically disclose the severe event dike results on a standalone basis as you know, but I can say that the business. There is performing very very well, we're very happy with it.
It is both from a revenue standpoint, and a sales standpoint, it's been growing in the.
The low to mid teens on a on an organic constant dollar basis. So we feel very good about what's happening in beer event.
Great. Thank you guys.
Without getting more into the detailed just to reinforce Mark's point you can look at the our DNA.
<unk> growth rate and see that it's getting good contribution from from Bureau, van Dyke, yes, but to be fair.
It's not just a bigger event like story in our DNA, our DNA is strong pretty much across the board.
Thank you.
And now we'll take a question from Joseph Foresi of Cantor Fitzgerald.
Hi, I wanted to go back to China for a second.
I guess my question there is I understand the opportunity, but how do you protect yourself against.
Fraud.
In China, and do you think that Theres a higher risk.
Around the ratings in that geography versus.
The rest of the world.
And Joe in terms of thinking about fraud risk I mean, certainly.
It's well understood that there is less transparency.
In some of the.
Financial information available on Chinese companies than you might see in for US public companies for example.
The ratings in the cross border market, though are on the very largest entities in China, which are internationally active and they do have have higher quality.
And more consistent financial reporting so thats less of a concern.
In the domestic market.
It is a challenge.
It's.
And the way to address it through ratings.
In particular is looking at how much how complete the financial information is how intuitive it is.
Do the numbers make sense across the financial statements.
And if there is a lack of of comfort with the amount or clarity of the information the choices are simply not to participate in the rating or to make conservative assumptions about.
Where the creditworthiness of the entities should be placed in terms of a rating score.
I think there is going to be continued interest in building transparency theres going to be continued interest in assessing financial statement quality and assessing financial statement quality that in itself provides opportunities for firms like moodys or Moody's analytics.
Got it okay.
And then.
I guess, maybe I'll, just stick with China, I was going ask a different one, but we only get to here. So.
When when movies goes in and rates, China Chinese company.
How do they do they benefit typically the same way that us entity would benefit.
In other words do they get.
More favorable.
Potential interest rate associated with that and I'm. Just wondering how you early stage you can gauge sort of Moody's reputation.
Internationally, because I'm trying to just kind of measure.
What kind of possible demand could come out of that region. Thanks.
Well certainly in the cross border market the.
The dynamics are similar to what we would see.
Among us issuers or western European issuers.
In the domestic market.
At at this point in time.
That benefit is less clear.
Because there are more constraints on the buy side and on the issuer.
On the issuers of debt.
And so that is a market that is still more at a lesson in terms of its.
Channeling of capital according to the best risk reward dynamics, and that's where I think again, we see opportunity because improving the quality of risk assessments.
For these entities.
Should overtime allow capital to be channeled more efficiently.
Which is really.
At the end of the day, one of the policy goals for for the Chinese officials.
Got it.
Thank you.
And our next question will be coming from George Tong of Goldman Sachs.
Hi, Thanks, I want to go back to the EMEA segment.
You've slightly increase your revenue guidance for the full year, but you're holding your overall global issuance forecast unchanged at flat to down 5% the flat to down 5% as a relatively wide range. So at the increment would you say your view of the global issuance environment is stronger because of fixed rate issuance or would you say, it's really just mix at Moody's that's changing your view on EMEA.
Hi, I think where we're well its two things. We are we are anticipating that the favorable mix that we've seen in the first half will probably continue in the second half.
And also.
I would say, we're we're modestly more positive on issuance, but certainly not to the point, where we would move outside of that zero to down five range.
Got it Thats helpful.
In the in the EMEA segment your operating margins expanded a strong 350 bips year over year in the quarter, you've lowered your operating margin guidance by a point for the full year can you talk about what's changing in the business to cause the diminished view on margins in the segment.
Sure and the change is primarily driven by M&A activity and that we've announced which obviously includes M&A related transaction costs for both the next divestiture and risk first and acquisition.
The M- adjusted margin guidance would have been unchanged and were it not for risk first and Max.
Got it that's helpful. Thank you.
And now we will go to Jeff Silber BMO capital markets.
Hey, guys. Good morning, it's Henry Chien, calling for Jeff.
I just wanted to talk about.
Some of the acquisitions that you've been making.
At a high level could you kind of just talk through.
I guess, maybe strategically what areas you're looking at.
And how does sort of tie that altogether and sort of dramatically in terms of how you're looking at.
Future acquisitions. Thanks.
Sure.
Ill turn this over to Mark and Rob to comment in each of their.
Units.
But as we said in the prepared remarks, where we're starting from.
The strategic perspective that we want to provide expanded risk assessments and extend our analytics solutions data and analytic solutions offerings.
The data analytic solutions are really coming out of the M&A and where the Moody's analytics unit.
Is looking at acquisition opportunities and the non credit risk assessments or risk assessments that can contribute to our credit analysis, but also may provide.
Independent.
Measures are coming from Moody's Investor service for the most part.
Mark I don't know if you want to say anything on risk first yes, I would just note that the risk first acquisition, we view that as kind of a classic Moody's analytics business I'd say highly specialized set of analytical capabilities that are targeted at.
Important problems that are shared by many customers in this case in the investment management segment.
Those capabilities are built around.
Our unique highly specialized data set to get in this case that data relates to.
Pension plan assets.
The historical returns of the liability structures et cetera.
The solutions that risk first offers benefit from network effects as they serve the buyside ecosystem, including the investment managers themselves. The ultimate asset owners that is the pension plan sponsors ensures foundations and endowments as well as the investment consultants.
And those network effects are.
Stimulated by the fact that this product is sold on a SaaS platform, which is very readily implemented customers can have it up and running.
Very quickly after making a purchase decision so the.
The ease of use speeds the adoption of the platform.
And so that again that enhances the the network effects, we get from this thing and there are some very important synergies in the risk first product with the work that we've been doing in the insurance space, you'll recall about three years ago, we acquired Gigi why which substantially.
Ramped up our analytical relevance to the management of insurance liabilities risk first now gives us some very important capabilities on the asset side.
Of the.
Insurance companies. So you can start to see that we are.
Building out a very substantial position to be able to solve a very wide range of problems for insurance companies.
Got it Rob you want to comment on for 27, yeah. So.
Dovetailing with what Ray said I mean, we're we're investing in areas, where the market is looking for analytics and insights.
To be able to assess risks that are increasingly relevant.
To both the credit markets and even more broadly capital markets and financial institutions and for 27 is.
Is is a great example, so you've got investors banks insurance companies issuers.
All increasingly focusing on the physical risks associated with climate and Thats things like sea level rise or water scarcity wildfire so on and.
For 27 brings us some very robust climate analytics modeling data and very importantly expertise.
That's going to allow us to be able to leverage this content across Moody's and that's both the rating agency as well as M&A and.
We've we've acquired some unique content sets and capabilities and we think thats really going to differentiate us in our ability to integrate climate.
Analytics into our offerings and again, that's that's all part of the broader focus that we've got.
On an investment in the SG.
Space and I would also say that.
That deal while small has gotten some.
Has some very good industrial logic, and we've gotten some very good progress and market feedback.
From around the world on our move into that space.
Okay great.
Okay. That's super helpful. Thanks, Thanks for the color.
And now we will go to Tim Mchugh of William Blair.
Thanks.
I guess two questions. One just numbers one can you give us the incentive comp.
For the quarter and then secondly, as a follow up on ESG I guess, how quickly are you going to integrate those things.
Moody's branded type offering if thats the ultimate plan I guess and are there any other pieces to the kind of the SG strategy Thats.
That you feel are missing after some of your recent.
Acquisitions.
Demo onto the numbers question the incentive compensation for the second quarter 2019 was $51 million, that's consistent with approximately 50 million.
Per quarter for the expectation for 2019.
So this is rob.
Theres I think theres, some scarcity value to some of the assets in the U.S.G. and climate space. So.
We've obviously acquired.
Majority Stakes in Vizio virus, which is really data and scores.
For investors in SG and then they also have a very nice.
Green Bond assessment platform.
For issuers for 27, I, just talked about focused on climate data and analytics for investors financial institutions. So we think weve.
Got some very good assets were also producing SG content within the rating agency.
Increasingly kind of thinking about and being more explicit about how we factor ESG considerations.
Into the ratings and I think what you'll see is over time.
All of this will be part of a.
A branded broader Moody's suite of SG offerings.
And they will be that history.
Content I think you will see package.
To meet a wide range of customer needs across Moody's Corporation as I said, both the needs of the of the rating agency needs of Vizio ours, and 427 customers and the needs of.
Of maize very broad customer base.
Thanks.
And now we'll go to Dan Dolev of Nomura.
Hey, guys. Thanks for taking my question appreciate it.
So just so I understand on Moody's analytics the.
Risk first.
We estimate as about a 100 basis points in growth in the second half and.
Why didn't you raise the revenue guidance here or I, just want to make sure there's kind of no implied slowdown.
On this one thank you.
Hi, Dan its Mark I think you're probably overstating risk first a bit the scale of it.
And maybe it's because you're not taking into consideration that we will have the.
Accounting treatment on the deferred revenue haircut.
That may be why you're you're.
Got it.
I mean, you might be overstating it.
16, and a half million pounds, right, which was disclosed but have you disclosed the actual contribution I don't think you have.
We have not.
We have not disclosed that the other thing you need to keep in mind is.
Were assuming that by the time, we get to the fourth quarter, we will not have any revenue from the Macs business. So thats going the other way.
Got it so so there is no implied.
No no implied slowdown it's just the M&A.
Well, absolutely correct absolutely right.
The underlying business is performing extremely well.
I agree.
And just.
Follow up question I mean, you talked about the issuance in you sound very upbeat about the issuance in our space in our business services space Theres a lot of talk right now about being late cycle that or I mean can we get maybe a macro comment from from you guys notwithstanding the issuance.
And where you think we are because there seems to be a lot of confusion.
Thanks.
Well with respect to issuance.
Just to be clear.
It's it's not that we are expecting a lot of growth compared to the first half of this year, but we had.
Relatively easy comparable.
From the second half and particularly the fourth quarter of 2018, so thats really.
Informing our commentary.
As far as the.
Broader in late cycle question.
Yes, I think it's obvious to everybody that we have been in a long growth cycle.
And that that growth has been slowing globally.
On a.
Somewhat steady basis with a number of.
IMF re forecast down for global growth and.
This slowdown in Europe with the.
Renewed discussion about quantitative easing expected interest rate cuts here in the us not to mention the trade discussions so yes.
You can you can look at late cycle, you can look at slowing growth.
On the other hand, they're all policy tools that are going to be deployed to deal with the slowing growth.
And.
A number of things are up in the air right now that could be resolved favorably.
Trade discussions and Brexit being being too.
Which could act as as catalysts to renewed growth so.
No I think I think appropriate to be a bit cautious.
And a bit wary of where we are in this cycle.
But things can still break in a positive way.
Got it thanks, a lot great quarter.
We now we'll take a question from Bill Warmington of Wells Fargo Securities.
Good afternoon, everyone.
So I wanted to ask about the cyber security strategy the view.
Got a strategic investment teammate announced an expanded JV with with the company and I wanted to ask if you are if the ultimate thought was to develop a standalone cyber security rating and if so what the opportunity.
Was there for Moody's.
Yes, I think.
I think we are very open minded about what is going to be the best.
Offering in the cyber security space, whether it's it's a rating some other kind of score probably.
Research and analytics associated with some some standardized measurements.
And we also see this as an area where.
Both.
Providing assessments.
Or scores based on publicly available information may be.
Helpful to market participants.
And providing private assessments.
Whether it's for.
Risk committees or boards of directors.
Et cetera.
Vendor risk management May may play a role here. There are there are a number of directions. We believe this can go and what we're really focused on with teammate is is developing the methodology and then the analytical engine that goes with that methodology to bring some real science to this area.
And then for my follow up question on.
On the Max divestiture.
Any other pruning that you're thinking about doing in the portfolio.
No I think we're pretty comfortable with the portfolio.
Excellent well, thank you very much.
Thank you.
We will now go to Shlomo Rosenbaum of Stifel.
Hi, Thank you very much for squeezing me in as well.
Which one.
Would you be able to disclose what the growth rates were of some of the businesses that you bought like the 24 seven the risk first and then just kind of an annualized basis.
No you put up the risk first in pounds in 18, but is there some kind of if you want to put the three that you're talking about I guess with the JV together is there an annualized revenue assumption that we should make over there amongst those three.
Yes, I think I think it's fair to say that this would not be material for purposes of your modeling in assessing what our outlook is.
These are these are young companies.
Acquisition of capabilities and expertise as much as.
As the.
Media financial return from these companies.
Okay, and how fast as Max growing or was it wasn't really growing at all.
Yes, Max was growing and as we said it had about.
If we had forecast about a 110 million in revenue.
At a 20% EBITDA.
Margin.
If we had not done this transaction that would have been the profile for the year, yes, it had been growing.
But it was growing slower than the M- business overall.
Okay. Thank you.
And this does conclude today's question and answer session I would like to turn things back over to Ray Mcdaniel.
Okay. Thank you all for joining today's call and we look forward to speaking with you again in the fall. Thanks.
This concludes Moody's second quarter 2019 earnings call as a reminder, immediately following this call. The company will post the MNS revenue breakdown under the second quarter 2019 earnings section of the Moody's IR home page. Additionally, a replay of this call will be available after 330 P.M. eastern time on IR web site. Thank you.