Moody`s Corp (MCO) — Q1 2016 Earnings Call Transcript

Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's first quarter results for 2016 as well as our updated outlook for full year 2016. I am Salli Schwartz, Global Head of Investor Relations and Communications. This morning, Moody's released its results for the first quarter of 2016 as well as our updated outlook for full year 2016. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.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 is Linda Huber, Moody's Executive Vice President and Chief Financial Officer. Before we begin, 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 factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2015 and in other SEC filings made by the company, which are available on our website and on the Securities and Exchange Commission's website. These, together with the Safe Harbor statements, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on the call this morning in a listen-only mode. I'll now turn the call over to Ray McDaniel.

Thank you, Salli. Good morning and thank you to everyone for joining today's call. I'll begin by summarizing Moody's first quarter results. Linda will follow with additional financial detail and operating highlights. I will then conclude with comments about our updated outlook for 2016. After our prepared remarks, we'll be happy to respond to your questions. In the first quarter of 2016, reduced global bond issuance weighed on Moody's financial performance despite Moody's Investor Services' consistent market coverage and additional ratings mandate as well as strong results of Moody's Analytics which is not sensitive to debt issuance activity while revenue for Moody's Corporation of $816 million declined 6%. Operating expense for the first quarter was $512 million, up 4% from the first quarter of 2015. Operating income was $304 million, an 18% decline in the prior year period. The impact of foreign currency translation on operating income was negligible. Adjusted operating income defined as operating income before depreciation and amortization was $334 million, down 16% from the same period last year. Operating margin for the first quarter of 2016 was 37.3%. The adjusted operating margin was 40.9%. Diluted earnings per share of $0.93 was down 16% from the prior year period. Given market conditions, we have scaled back our revenue and earnings expectations for full year 2016 and are managing our cost base accordingly. Our 2016 EPS guidance is now $4.55 to $4.65. Before I turn the call over to Linda, I'd like to highlight two investments we made in the first quarter. In March, Moody's Analytics announced the acquisition of GGY, a leading provider of actuarial software for the life insurance industry. The addition of GGY's products and specialized expertise accelerates MA's extension into financial risk management for life insurers, complementing our already strong position with global banks. As part of the Enterprise Risk Solutions line of business, GGY will contribute to MA's regulatory solvency and capital management solutions. We also announced the minority investment in Finagraph, a provider of cloud-enabled automated financial data collection and business intelligence solutions for private companies. This investment underscores Moody's commitment to innovative financial technologies to better address the needs of our customers. Finagraph's information and analytical solutions represent important advantages in banks' risk assessments of small and medium-sized businesses, thus improving access to credit for this underserved segment of the market. I'll now turn the call over to Linda to provide further commentary on our financial results and other updates.

Thanks, Ray. I'll begin with revenue at the company level. As Ray mentioned, Moody's total revenue for the first quarter declined 6% to $816 million. Foreign currency translation unfavorably impacted revenue by 2%. U.S. revenue was $480 million, down 4% from the first quarter of 2015. Non-U.S. revenue of $336 million was down 8% and represented 41% of Moody's total revenue. Recurring revenue of $452 million increased by 7% and represented 55% of total revenue. Looking now at each of our businesses, starting with Moody's Investors Service, total MIS revenue for the quarter was $525 million, down 13% from the prior-year period. Foreign currency translation unfavorably impacted MIS revenue by 1%. U.S. revenue declined 10% to $336 million, while non-U.S. revenue of $189 million declined 18% and represented 36% of total ratings revenue. Recurring revenue of $231 million increased 4% and represented 44% of ratings revenue. Moving now to the lines of business for MIS, first, global corporate finance of $240 million for the quarter was down 20% from the prior year period. This result reflected lower levels of global speculative-grade issuance, as well declines in the number of U.S. investment-grade bond offerings, and in the volume of European investment-grade issuance. U.S. corporate finance revenue decreased 10%, while non-U.S. revenue decreased 36%. Second, global structured finance revenue for the first quarter was $91 million, down 11% from the prior year period. This represented the lowest revenue quarter for structured finance that we have seen in 10 quarters. U.S. securitization activities slowed primarily within the CMBS and CLO markets due to widening spreads, regulatory requirements, and reduced availability of bank loan collaterals. U.S. structured finance revenue was down 15%. Non-U.S. revenue was flat with a modest increase in Europe. Third, global financial institutions revenue of $95 million was up 1% from the prior year period. U.S. financial institutions revenue was down 3%, while non-U.S. revenue was up 4%. Fourth, global public, project, and infrastructure finance revenue of $92 million was down 9% versus the prior year period as U.S. project finance activity and European infrastructure-related issuance fell amid choppy market conditions. U.S. public, project, and infrastructure finance revenue was down 6%, while non-U.S. revenue was down 14%. MIS Other, which consists of non-rating revenues from Moody's majority on joint venture interest in ICRA and Korea Investors Service, contributed $8 million to MIS revenue for the first quarter led to the prior year period. And turning now to Moody's Analytics. Global revenue for MA of $291 million was up 11% from the first quarter of 2015 excluding revenue from our March 2016 acquisition of GGY, MA revenue grew by 10%. Foreign currency translation unfavorably impacted MA revenue by 2%. U.S. revenue of $144 million is up 12% year-over-year and non-U.S. revenue of $147 million was up 9% and represented 51% of total MA revenue. Recurring revenue of $222 million increased 9% and represented 76% of MA's revenue. Moving now to the lines of business for MA. First, global research, data, and analytics or RD&A, revenue of $165 million was up 10% from the prior year period and represented 57% of total MA revenues. Growth was mainly due to strong new sales of research and data, as well as record customer retention. U.S. RD&A revenue was up 14%, while non-U.S. revenue was up 5%. Second, global enterprise risk solutions or ERS revenue of $90 million was up 16% from last year primarily from accelerated project delivery. U.S. ERS revenue was up 14%, while non-U.S. revenue was up 17%. Excluding revenue from GGY, ERS revenue grew 13%. And as we've noticed in the past, due to the variable nature of project timing and completion, ERS revenue remains subject to quarterly volatility. Trailing 12-month sales for ERS increased 1% reflecting a very difficult comparison with the first quarter of 2015. Third, global professional services revenue of $37 million was flat to the prior year period. U.S. Professional Services revenue was down 6% while non-U.S. revenue was up 3%. Turning now to expense, Moody's first quarter expense was $512 million, up 4% from 2015. The increase was primarily due to higher compensation costs in MA, reflecting additional headcount required to support business growth, as well as Moody's ongoing technology investments. Expenses in MIS were down slightly compared to the prior year period. Foreign currency translation favorably impacted expense by 2%. As Ray noted, Moody's reported operating margin and adjusted operating margin were 37.3% and 40.9%, respectively, for the first quarter. Moody's effective tax rate for the quarter was 32.3% versus 32.9% for the same period last year. The year-over-year decline was primarily due to a change in New York City tax laws relating to income taxation. Now, I'll provide an update on capital allocation. During the first quarter of 2016, Moody's returned $334 million to shareholders via share repurchases and dividends. The company repurchased 2.9 million shares at a total cost of $262 million or an average cost of $89.83 per share, and issued 1.6 million shares under its annual employees' stock-based compensation plan. Moody's also paid $72.1 million in dividends during the quarter, and on April 11, announced a quarterly dividend of $0.37 per share of Moody's common stock payable June 10 to stockholders of record at the close of business on May 20. Outstanding shares as of March 31, 2016 totaled 194.3 million, down 4% from the prior year period. As of March 31, 2016, Moody's had $1.2 billion of share repurchase authority remaining. At quarter end, Moody's had $3.4 billion of outstanding debt and $1 billion of additional debt capacity available under its revolving credit facility. Total cash, cash equivalents, and short-term investments at quarter-end were $2.1 billion with approximately 73% held outside the U.S. Free cash flow for the first three months of 2016 was $211 million, down 13% from the first three months of 2015, primarily due to the year-over-year decline in net income and changes in working capital. And with that, I'll turn the call back to Ray.

Thanks, Linda. I'll conclude this morning's prepared comments by discussing the changes for our full year guidance for 2016. A full list of Moody's guidance is included in our first quarter 2016 earnings press release which can be found on the Moody's Investor Relations website at ir.moodys.com. Moody's updated outlook for 2016 is based on assumptions about many macroeconomic and capital market factors, including interest rates, foreign currency exchange rates, corporate profitability, and business investment spending, mergers and acquisitions, consumer borrowing, and securitization and the amount of debt issued. 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 rates. Specifically, our forecast reflects exchange rates for the British pound and the euro at $1.44 to £1 and $1.14 to €1, respectively. As I noted earlier, the company now expects 2016 EPS of $4.55 to $4.65 inclusive of $0.02 dilution from the acquisition of GGY. Moody's full year 2016 revenues are now expected to increase in the low-single-digit percent range. In response to this revised revenue outlook, we have lowered our projected base business spending for the year by approximately $50 million through expense management actions and reduced incentive compensation. These savings allow Moody's to maintain guidance for operating expenses to increase in the mid-single-digit percent range despite the addition of GGY's operating expenses and the negative impact of foreign currency translation. Moody's now projects an operating margin of approximately 41% while adjusted operating margin is still expected to be approximately 45%. Free cash flow is now expected to be approximately $1 billion. Capital expenditures are now expected to be approximately $125 million. For MIS, 2016 revenue is now expected to be approximately flat. U.S. revenue is now expected to decrease in the low-single-digit percent range while non-U.S. revenue is now expected to increase in the low-single-digit percent range. Corporate Finance revenue is now expected to decrease in the low-single-digit percent range, reflecting weak issuance in the first quarter, as well as expectations of variable issuance activity for the remainder of the year. Structured Finance revenue is now expected to decrease in the mid-single-digit percent range as a result of continued challenges to U.S. securitization activity. Public, Project, and Infrastructure Finance revenue is now expected to increase in the mid-single-digit percent range, which assumes weakness in the first quarter is not offset in the remainder of the year. For Moody's Analytics, 2016 revenue is now expected to increase in the high-single-digit percent range. U.S. revenue is now expected to increase in the low-double-digit percent range, while non-U.S. revenue is now expected to increase in the mid-single-digit percent range. Research, Data, and Analytics revenue is now expected to increase in the high-single-digit percent range as a result of new business and an increased customer retention rate. Enterprise Risk Solutions revenue is now expected to increase in the high-single-digit percent range, including revenue associated with the March 2016 acquisition of GGY. Before we move to the Q&A, I'd like to highlight an MIS management change that we announced on April 4. Effective June 1, 2016, Michel Madelain will retire as President and Chief Operating Officer of MIS and will assume the role of Vice Chairman for MIS. He will also remain on the MIS Board of Directors and MIS European boards. Rob Fauber, who has been with Moody's for 11 years, will succeed Michel Madelain as President of MIS. I'd like to extend my thanks to Michel and congratulate Rob on his new role. This concludes our prepared remarks. Joining us for the question-and-answer session is Michel Madelain, President and Chief Operating Officer of MIS; and Mark Almeida, President of Moody's Analytics. We'd be pleased to take any questions you may have.

Yeah. Hey. Good morning. I guess, afternoon already almost. Wanted to come and talk about the guidance for a second here. I guess, from a bigger-picture perspective, what was really the thinking in the EPS reduction? And I'm talking primarily from a seasonal perspective. Is this, hey, the first quarter was really awful, but our outlook, because of refinancing and everything else that we talked about three months ago, has not really changed? Or is this also a reflection of, you know what, the second quarter is all right, but there's still a lot of uncertainty here with Brexit in June and things like that? But we're still hoping a lot for the second half. So, hopefully, you're getting the drift on my question. But where is the near-term and the remainder of the year kind of fit into this?

Yeah. At a high level, Alex, I would point to two things. One is, as you point out, we feel there is still quite a bit of uncertainty for the remainder of this year at a macro level, between Brexit and the potential for interest rate increases, and the fact that we still have some tough comps in the second quarter in particular. We do expect more momentum in the second half of the year than we've had in the first half, and we've already seen improvements in late March and April compared to the very weak beginning to the year in January/February. The other thing I'd point you to, though, is Structured Finance and the conditions for the structured finance market have been very challenged so far this year, and we think that they are going to continue to be challenged especially in the U.S. There are a number of reasons for this. Not only is it credit spreads, which can affect the economics of the transaction, but also regulatory requirements that are being implemented and interpreted, and a lot of the market participants are sorting out the appropriate interpretation for new regulatory requirements around risk retention and disclosure of underlying assets information. And that, in combination with a challenging interest-rate environment or spread environment and issues around the appropriate availability of collateral and areas such as CLOs, has really impacted our outlook for structured finance in the United States for, not only in the first quarter results, but our outlook for the remaining nine months.

Alex, just to give you some sense of the calendarization of that, we've taken down the MIS revenue outlook by a little bit more than $100 million. You should consider 40% of that is what we've already seen as weakness in the first quarter. 60% of it comes from the rest of the year forecast. And in terms of that remaining 60%, about 60% of that is a reduction in structured finance and the balance, about 40%, is corporate. So, that should give you something to work with in terms of what we're seeing. So, we've taken it down for the first quarter but also we've moderated our expectations for the balance that being structured and the remainder being corporate for the rest of the year.

Well, that's very great color. Thank you. And then secondly, Linda, while I'll have you, I guess, can you talk about the cost side of the equation in more detail? I think in the past, you've done a great job kind of talking on an absolute dollar basis and how the trajectory looks like. And it seems like you've really now cut all the flex that you have. So, you should probably have a pretty good visibility for the second, third and fourth quarter. And then, if there's any variability to what you hopefully going to give me now, is it basically - if revenues actually end up being a little bit better, some of the negative flex comes back and maybe some of the bonuses come back? And so, basically, what I'm saying is in a weaker revenue environment, there's not much that's going to change on the cost side on an absolute basis. But if we actually end up doing better, you probably see costs up a little bit again. Is that fair?

So, let me just set up the explanation for this. So, we saw the markets go weak in the beginning of February. We moved aggressively and we moved hard against that situation. We have taken steps in T&E and most importantly in hiring. For two of the divisions, this excludes Moody's Analytics. We are back to what I would call essential hiring, and we're looking at hiring on a person-by-person status in terms of backfilling. So, really clamped down on that front for two of the divisions. Now, we can't turn the ship that quickly, and that's the issue. So, we often talk about $50 million of expense flex. So, we have that in train already. And about half of that is from reduced incentive compensations because we've just taken the guidance down. The other half is from the expense management actions that I spoke about earlier. Now, if this gets worse, we have another $50 million which again is split about half-and-half between incentive compensation and other expense saving measures that we could take. But as we move into that second $50 million, this does get tougher. And we've already taken down our incentive compensation with this first half by about $20 million. So, we'll see how we go. And we'll see what we want to do, but we have been very clear about this, and we started these actions again in February, but you're going to have to wait for the rest of the year to see this flow through, and I'll ask if Ray has any further comment on this.

Yeah. The only thing I would add is as we've said before, we would take different actions if we saw structural changes in the markets that we're operating in versus cyclical ups and downs. This looks largely, to us, to be a cyclical condition in the markets. We'll see in the structured finance area how that market adjusts to different regulatory requirements. But history says that it does adjust, but in terms of how quickly that's going to recover we will have to see. There's a couple of phases of regulatory requirements. The market is adjusting currently to the first phase; there will be more coming. So, we just have to keep an eye on space.

Just one more clarification. The $50 million we've already committed to that is largely offset by additional expenses from GGY and what we view as potential unfavorable FX situations. So, good effort by taking down expenses by $50 million. However, we do have the offset, we're basically back to where we started. So, the watchword here is to be very, very careful with hiring and to be very careful with all other expense items up and down the P&L. And we are absolutely on that.

Great. And sorry, just to quickly - on the expenses, in absolute dollars like you usually give like, hey, in the next couple of quarters see that $5 million, $5 million, $5 million. Like can you just give us an update? It seems like not much has changed, but just to remind us of the absolute dollar level that's changing, any expectations?

Sure. We're looking at expense ramp from here that we think is going to be $35 million to $45 million over the course of the year. Now, the most variable part of that is incentive compensation. If we are not doing well, incentive compensation gets hit first and hard. And if we somehow manage to do better, incentive compensation might ramp up towards the end of the year. So, just to watch out there, but we expect to ramp from here $35 million to $45 million.

Hey, Andre.

Thanks. Hi. How are you? So, on ERS, I was wondering if you can maybe talk through the increase to guidance on that business line, particularly the high-single-digit increase from low-single-digit just a few months ago. I was wondering how much of that is M&A contributions versus new business wins and other factors because if you are simply pulling business forward, I would think the full year guidance wouldn't change that much.

Sure, we'll ask Mark to take that.

Yeah. I think you've got it right, Andre. It's really driven by the GGY acquisition, taking up the ERS result to high single.

Okay. And then just on...

Yeah, the business is performing very much in line with what we expected coming into the year. The timing in the first quarter has been a little different. I think we've just been executing quite well on project delivery, so we pulled some things forward. But the base outlook for the business organically is consistent with what guided to previously.

And then on the debt outlook, I know you talked a bit about the split between how much came out of structure versus other buckets. In corporate finance where you did take the view down, I was wondering if you could provide some color on how much of that is continued weakness in the high-yield market versus like starting to see some cracks in the pipeline for investment grade as well?

Sure. Andre, maybe this is a good time for us to talk about what we are hearing from the banks. And again, this is issuance views for both financial and non-financial U.S. dollar issuance and then we'll go over to Europe. So, I think you should be able to see a slide that we've put up. Now, investment grade balance, curious situation. For the first quarter of 2016, $340 billion in issuance, about flat year-over-year, that's good. What was less good is that the deal count, the number of transactions was down by about 20%. So, dollar volume, dollar value about the same but deal count is down which is not helpful to us. Moving across the columns, months-to-date for April about $65 billion; and for the full year, we're looking at $1.2 trillion which is about flat. So, right now, from investment grade, the pipeline is robust. It's good. And we expect the market to remain active and the backdrop is stable and companies are coming out of blackout. So, it looks like there's quite a bit to do right now. So, investment grade is positive, the issue here has been the deal count. Going down the high yield, looking at the $40 billion of issuance so far, that's down 60% year-over-year. Months-to-date April $25 billion. Year-to-date, we're looking at $230 billion down 15%. The market tone is better. There are some deals in the market - there have been deals in the market this week. There's one in the market today, a Friday. That's unusual. The market tone has improved but the market is still bifurcated as you see in the second point between have and have not. The stronger credits are doing better. Brand tightening has already happened. We're in about 160 basis points. The question is, is that enough? And if spreads continue to tighten, we may see some progress. Conversely, if they widen now again we may see further back up, so we're going to have to watch that closely. Leveraged loans, we see $40 billion in the first quarter which is down 25% year-over-year, $15 billion month-to-date, and $260 billion for the year, which is down 10% year-over-year. So stability in the macro backdrop as you see in the first point is also aiding the leverage loan market. It's weaker than the high-yield bond market, though, because of fund outflows and the slowdown in CLO formation that goes back to the risk retention requirement which we can talk a bit more about if you want, and some increased default activity serves as a bit of a headwind. Now, if we move over to Europe, looking at the next slide, again, these are the views of the bank. Investment grade in Europe, pipeline is robust and can pick up further because of the ECB's corporate bond-purchasing program. Brexit, though, in the second point, is an uncertainty. And that could sideline the issuers and be harmful for the summer season which is traditionally weaker depending on what happens with that vote. And U.S. corporates continue to see that there's good value in accessing the euro market, what we would call the first Yankees, and we expect that to be a heavy component of supply as it has been and will be, we think going forward. Spec-grade in Europe, the market was muted, supply was down 70% and very volatile first quarter. Again, the ECB's move had sparked the renewed risk appetite and is leading to a pickup in high-yield activity in Europe. And tighter spreads, again may encourage further issuance. So overall in Europe, the ECB's move makes us more optimistic, but it has been a very slow first quarter in Europe. I think the overall view on the more speculative asset classes across the world would be to keep an eye on spreads; if they continue to tighten, we may see the outlook improve, and conversely, if they widen particularly as we go into the Brexit vote, that will be detrimental. So hope that helps to you, Andre.

Yes. Thank you.

Yeah. Thank you. Good afternoon. So, a lot of the big picture, I guess, constraints on the issuance market don't sound much different than what it was when you gave guidance in February, and I was just so - I guess I said I guess some more color on what the degree of changes? I think, Linda, in the $100 million you helped break out the way you're assuming what and I think you just walk through the corporate side of things and maybe structured finance where maybe you can help us understand the different issuance categories and what change was with February?

Yeah, I'll start, Manav, and then invite Linda or Michel to weigh in. It's really centered on - our changes in outlook for structured finance really centered on the U.S. and within the U.S., it's focused on primarily the CMBS market and the CLO market. As you know from our prior comment in the commercial mortgage-backed securities area, there is a lot of refinancing that needs to occur. Some of that refinancing is occurring outside of securitization and we are also expecting to see the volume and activity pick up in the third and fourth quarters of this year because there was very little conduit lending early in this year, and the conduits have increased their financing but it will take some months for that to feed into CMBS. In the CLO area, it's the market dealing with both the risk retention requirements and the interpretations or other regulatory requirements that have to do with transparency around underlying assets and the suitability of the collateral itself. So, assuming that we see the market sort out how it is going to meet the new regulatory requirements and the suitability of collateral, again, we could see a pickup in CLOs later in the year. Pipelines are not bad. As a matter of fact, in Europe, pipeline is up quite substantially. And so, some of the issues that we're seeing in the U.S. are being partially offset by the international business. But it's still not enough to allow us to come anywhere close to holding our original guidance.

Manav, just a little bit of color, and then I'll ask Michel if he wants to comment further. I think your thesis was, what's changed, and shouldn't we have been able to see this when we gave our initial guidance? As I've said previously, high-yield bond issuance down 60% in the first quarter is a pretty heavy hit. Leveraged loans down 25% also is a pretty heavy hit. We have the risk-off mode happening. You had oil prices collapsing. Concerns about China and growth concerns. So, we went through a pretty heavy risk-off phase there which is now starting to fade itself. So, generally, around here, we're okay if we have one segment off, but having corporate hit hard, as well as having structured having had the worst quarter it's had in 10 quarters, we frankly didn't see that. Now, as Ray said, that is what we would view as a cyclical issue in structure, but until the participants in that market figure how to deal with some of these different conditions and move. We do think that that situation will ease as we go into the end of the year. But I don't think we expected the total effect that we have seen in the first quarter. We were thoughtful but it was worse than we thought. And as we've said, there are a number of factors that make the rest of the year a little bit tricky to predict. With that, I'll turn it over to Michel to have him perhaps give some more thoughts about how we're viewing the balance of the year.

Thank you, Linda. I think now what I was going to say is that really, in terms of the numbers we're seeing, this is really the result of market volumes and that I think as Ray alluded earlier, our coverage has remained very consistent with what we've seen in the past. So, as the market improves, we should see a pickup in our own volumes, obviously. That's what I was going to add.

Got it. And then, just thinking a little beyond the second half of the year in that your comments on structures were cyclical. I mean, it sounds like a lot of this, at least in your comments, are a little bit more cyclical. But how do you guys think about opportunity it takes? I know you talked about the, I guess, the majority backlog, so maybe if you could just give us a few comments on that and then maybe some comments on, I guess, M&A is going down a bit. That's been a big driver of your issuance in your backlog and it sounds like waiting the valuations says this might be a little slow because of that. So, any puts and takes that you need to call out?

Yeah. You're correct. We have seen slower activity in our rating assessment service coincident with reduced activity and issuance. As far as the cyclicality of the conditions. Clearly in the corporate sector, this is cyclical. There are significant refinancing walls that begin to build in 2017, and really built for several years after that. So, we're going to see a large amount of activity associated with refinancing. M&A, there had been some bumps in the road with M&A, but it has been strong for a while, and to the extent that we're in a low-growth environment that has and probably will continue to encourage M&A. Where we see the erosion in M&A-driven debt is at least at the margins around some of the tax-driven deals and things of that sort. So, really I view the corporate story as being very much a cyclical story with a significant refinancing wall coming upon us beginning next year. On the structured finance side, again I think it's largely cyclical. But we have to watch and see how the market deals with new requirements, and what economically the market determines to make sense. So, that's an area to keep our collective eye on in terms of how much of it is cyclical and whether there's some structural changes to that market.

Yeah, that's why - Yes. Go ahead.

I'm sorry. I just wanted to note that investment-grade issuance conditions are really good right now. The U.S. 10 years at 1.85%. If you want to look at Reverse Yankee Issuance, Unilever did a particularly attractive bond issuance recently, and they paid very, very little for that issuance, which is really quite remarkable. We've seen M&A kind of stop as we dealt with the changes in the inversion rules. And then, this week, healthcare M&A came back strong - three deals this week. I think we saw three deals in the G&P space this week. So, there still is appetite, and there's still transactions that need to be funded. So, we'll see how that goes. So, this is really a week-by-week situation with the backdrop of the Brexit both coming up on June 23. So, it provides an unusual degree of uncertainty particularly in Europe. Absent the break that's concerned, I think we would feel pretty good about companies' financing opportunities particularly for Reverse Yankee. But we're going to have to watch this closely.

All right. Thanks so much for that color, and I just like to congratulate Michelle and Rob on their new roles.

Thank you.

Thanks.

Great. Thank you. So, I realized it was a pretty tough quarter for transaction fees. But it kind of looks like at least in shorter products and corporate finance relationship fees jumped pretty nicely from the fourth quarter. And maybe some of that is pricing, but anything to call out there in terms of good growth?

Yeah. I mean, some of it is pricing, but it's also the monitoring and annual fees associated with the new rating mandates that have come in over the trailing 12 months are significant contributor to that. So, as the stock of outstanding ratings grows, the monitoring fees, annual fees grow along with that.

Okay. Okay. And then, a while back, I think you guys provided some nice color around those monitoring fees across some different regions. I recall that fees in the U.S. were pretty high relative to Europe and Asia. And that's kind of on the monitoring fee side or relationship fee side. So I guess, my question is does that relationship kind of also holds for the most part on the transaction fee side as well?

Unfortunately, it's not as simple as an answer as would probably be convenient because we have a different mix of frequent issuer-pricing agreements versus transaction-based pricing agreements by geography. So, the U.S. market, for example, which is heavily represented by speculative-grade issuers has more transaction pricing. Those are less frequent issuers. And the European market, which is more investment-grade driven has more frequent issuer-pricing agreements. So, the pricing is a bit difficult to match up. But broadly speaking, our pricing is consistent around the world for global ratings. It's not exactly the same everywhere, but it's broadly consistent.

Okay. Great. Thank you.

Hi. I wanted to ask about some of your assumptions because it sounded like you were touching on some of your earlier points. But is it fair to think you're building in a steady environment in Europe in your non-U.S. assumptions? And then I've got a couple other ones.

We do think that Europe is going to be relatively stronger in the second half of the year once we get through the Brexit vote and with the corporate sector purchase program through the ECB. So, assuming that Brexit is resolved in a reasonable way in terms of how the market interprets it, and with that, June purchase program kicking off. We think that's going to be a very attractive spread environment for corporates and that's supporting what should be good year-on-year growth for our European corporates.

Okay. And then, the assumption, I guess, global corporate finance. It sounded like you've seen some people comeback to a market on the M&A side, are you expecting a rebound in the next, I guess, two to three quarters in M&A. Again, I'm just trying to get the assumptions behind some of the guidances out there.

No. I wouldn't say - I would not anticipate M&A to be running for the remainder of the year at the pace it ran last year, but there's still going to be a reasonable amount of activity. So, I don't have a number for you on that but that would be my narrative around it.

So, keep in mind, there's also the announced M&A pipeline that still needs to be funded. We had cited at $200 billion at the beginning of the year and only some of that financing has moved through the pipeline. So, we've got some very, very big deals. We're thinking about the Teva deal and also the Dell deal alone. That's $60 billion that we could see that has to move for example. So, we would still see that there is some opportunity there but we think that the companies are going to choose their slots pretty carefully again given the macro environment.

Okay. That's very helpful. And then, just on the cost-cutting side, have you seen any change in attrition rates among employees? And then, it sounded like the compensation was perhaps flexible in the sense that if we had a better second half of the year, we could see that compensation number go up, how do we think about that kind of given the current environment?

Sure. I think we're seeing a little bit of reduced voluntary turnover, but it's only moved a few tenths of a percentage point off of our high-single-digit view of things. If one is looking for a job in the financial sector right now, particularly if one is looking for a job in the banking sector, that's a pretty challenging place to look at this point in time. So, that would probably be the reason why we're seeing a slight reduction in voluntary turnover. Now for incentive compensation, let's talk about that. We have started the year with 100% of our bonus target being set at the $4.80 we have previously seen for guidance. We've pulled that down to $4.60. And as a result of that, we have taken down our incentive compensation. For example, for the first quarter of last year, incentive compensation was $38 million. And this year on the first quarter, it's come down to $32 million. So, we've pulled down incentive compensation pretty hard to deal with this new lower forecast. And if we're not going to hit our numbers, the employees are not paid as well. That's just the way it goes. In terms of the $32 million number, we would see that it will ramp a bit as we go into the fourth quarter, if things go right. But if we do considerably better than the $4.60 we're predicting now, Joe, you would expect that we would take incentive compensation back up. So, $4.80 was 100% and $4.60 is below that. So, we've cut incentive comp accordingly.

And this does react formulaically. So, improved performance will cause higher accruals and reduced performance will reduce the incentive comp line formulaically.

Got it. Thank you.

Hi. How is it going?

Good afternoon.

On the frequent issue of programs, are you happy with the proportion of MIS by its frequent issuer or longer-term would you prefer that to be higher?

There is some volatility that we are accepting in order to have more transactional pricing as opposed to frequent issuer pricing. But that really, outside of cyclical conditions, it really is driven by our view of whether global debt is likely to continue to grow and we would like to capture the upside of that through higher transactional pricing, which we might think of as retail pricing as opposed to wholesale pricing. That being said, if we see a change in the growth opportunity in global debt markets, we will consider whether a different pricing model makes more sense and we would adjust.

Okay. And just a last one for me. So, can you talk a bit about the management change in MIS? Is it going to be business as usual or should we expect a maybe a different approach? Well, we're very pleased with all the work that Michel Madelain has done since he has been the President of MIS. So, in that respect, you should think of it as business as usual. That being said, Rob and Michel are not the same person. So, we're looking for good ideas. We're looking for good ideas from Michel going forward in his new role and from Rob in his new role. So, anticipate business as usual, but maybe not all exactly the same business. Great. Thank you.

Hi there. Thanks for taking my questions. First one on the expenses. The incremental margins were very high in MIS, and I was wondering how much of that was due to kind of losing some of these things like rush fees and new issuer fees that might be kind of a higher-margin profile than some of the pure kind of transaction-based fees that you, guys, charge.

No. I really think that the focus should be on transaction volumes in terms of the change. Those other businesses, rating assessment service, and that sort of thing is really not a very large part of the revenue profile for MIS. And so, even though we appreciate when that area is more active, it's not a big contributor to changes in revenue or margin. It's really based off of volumes.

Denny, a little bit more color, in the first quarter of 2016, in fact, expenses increased 4% over 2015, and you might want to ask why that was? The majority of that growth was to continue the growth, support the growth in Moody's Analytics which as you can see is performing beautifully. So, MA expenses grew 9% which supported revenue growth which was even greater. MIS expenses, though, were slightly down, and of course, we're trying to match the expense support for the revenue growth in the business. And we can't do that instantaneously. Most of the $50 million that we've already equipped and processed on expense management will come from shared services, that's the fourth part of the business which I run for the most part and then also to MIS. Moody's analytics is performing well and we will continue to invest in it. And if compensation view will be slightly different perhaps than the rest of the corporation, if it performs according to its targets which through the first quarter, it has, and even better, its incentive compensation would be at target or perhaps even higher. So, we've been very cautious to match what we're doing here with where we're seeing growth and the further reason for the growth in that incentive compensation for the first quarter year-over-year was because of some of the additions that we made in headcount last year and that some of the things we've already started at the very beginning of 2016. We have a very good handle on that right now and of course, we did see the acquisition of GGY which added some expense and we continue to make prudent technology investment. But this is very carefully planned expense management where we need it to support the growth areas and we're throttling back on those areas particularly the support areas where we can do that. So, very careful, very active management of our expenses.

Okay. That's helpful. I mean, that's a good segue into Moody's Analytics. That was a little strong and most of the guidance increase seems to be from the acquisition. We've also seen some stories coming out of our IFRS 9 and the equivalent GAAP rules which seem like might give you guys a pretty nice runway in ERS over the next, say, two to three years. Have you been able to size that opportunity in a better way since we last spoke on IFRS 9 and these changes to the GAAP provisioning rules?

Denny, well, we've talked about this. IFRS 9, we think, is going to be a very nice growth driver for the business. We actually think that the prospect for IFRS 9 is probably richer for us than what we've gotten from stress testing because it's applicable to many, many more institutions all over the world. So we are very optimistic about IFRS 9. It's still early days, frankly, for that initiative. We've had some success thus far. We have a good pipeline, and we have very good expectations for what we can do there. But you're absolutely right. We had good strength across MA in the first quarter, really very broad-based strength for Moody's Analytics. On a constant-dollar basis, every region was up double digits organically, so we feel that the business is just performing very well. And demand for the things that we're doing continues to be very strong. So, we've taken up guidance in ERS because of the GGY acquisition, but we've also taken up guidance in our RD&A, just reflecting strong underlying growth in the business.

Okay. And then just one last one. On the capital allocation guidance, you had this kind of $1 billion number out there. And typically, the way you formulaically do this, you end up buying more shares whenever - or spending more whenever the stock price is down. So, I was a little surprised that only - roughly 25% of the annual buyback rate occurred in the first quarter. I mean, is there - was there something kind of stopping you from - or did the formula not come out? Was it more aggressive buybacks in that quarter? And is this something that maybe we could increase that number if there is an attractive opportunity with the price in the second quarter or third quarter? Maybe just kind of your thoughts around how that buyback number will progress?

Denny, it's Linda. And then if Larry wants to chime in, I'm sure he will do so. So, we are working with the guidance of approximately $1 billion in buybacks, and we have to set our plan as we finish the previous quarter's earnings call. So, in the absence of better information when we did this close to 90 days ago now, we decided to keep our allocation pro-rata across this year because you could see a couple of points that likely concerning around Brexit, around the U.S. election and so on. So, we started out spreading our money pro-rata across the year. Now, we had some heavy tiering in place, and when the stock price fell to $78, we were able to buy back more shares quite cheaply. And in fact, we were at $89 and change for average repurchase price in the first quarter. Until yesterday the stock was in the high 90s and $100. So, we felt pretty good about that. So, I'll have to see where we want to go with that allocation over the rest of the year. But, again, we have to do this in advance for the coming quarter, and we can't change that allocation until we move into another window period. So, that's the technical explanation of what's going on. I hope that's helpful to you, and maybe Ray has some further thoughts.

No. I think that's it.

Thanks. So, the MIS revenue performance in the first quarter lagged just a little bit against your primary competitor. Anything to read into that in terms of changes in the market share dynamic?

No. Our coverage was very strong, and so I don't think that's part of the story. I think the story probably does revolve around the fact that we have more transactional-based pricing than our competitor. And so in a low-volume quarter, I think that's where you see the difference show up.

Yeah. Makes sense. Ray, on the Brexit issue, let's say, God forbid, they make the wrong decision and decide to go, do you interpret that as a fundamental structural change in the market that might just reduce the issuance opportunity coming out of the EU?

Yeah. It's certainly for, I would think for some period of time that is going to be a disruptive influence in the European market. And not only because of an exit by the UK, but whether that causes any other nations to rethink their position in the EU or in the Eurozone. So, it's quite speculative to try and anticipate what the overall consequence of this would be. That being said, it's also hard for me to imagine that in the short run it wouldn't have a chilling effect on issuance just because of the confusion about what the longer-term consequences would be. Okay. I just want to thank everyone for joining the call today, and we look forward to speaking with you again in July. Thank you.