Moody`s Corp (MCO) — Q2 2017 Earnings Call Transcript

Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's second quarter 2017 results as well as our current outlook for full year 2017. I am Salli Schwartz, Global Head of Investor Relations and Communications. This morning, Moody's released its results for the second quarter of 2017 as well as our current outlook for full year 2017. 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, 2016 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 second quarter and first half 2017 financial results. Linda will follow with additional second quarter financial details and operating highlights. I will then conclude with comments on our current outlook for 2017. And after our prepared remarks, we'll be happy to respond to your questions. Before addressing our financial results, I want to begin by saying that we still anticipate completing our proposed acquisition of Bureau Van Dijk in the third quarter. Beginning with our next earnings call, we should be able to discuss our financial results and guidance including the operations of Bureau Van Dijk. For this call however, we will limit our remarks to what we have disclosed in our earnings release this morning. In the second quarter, Moody's achieved a record $1 billion in quarterly revenue, up 8% from the second quarter of 2016. Operating expense in the second quarter was $543 million, up 5%. Operating income was $458 million, up 12%, and adjusted operating income of $497 million was up 13%. We are defining adjusted operating income as operating income before depreciation, amortization and Bureau Van Dijk acquisition related expenses. The operating margin was 45.7%, up from 44.2% in the second quarter of 2016. The adjusted operating margin was 49.7%, up from 47.5%. Moody's diluted EPS for the quarter was $1.61 per share, up 24% from the second quarter of 2016. Adjusted diluted EPS for the quarter was $1.51, up 16%. Second quarter 2017 adjusted diluted EPS excludes the $41 million or $0.13 per share unrealized gain from a euro-denominated purchase price hedge relating to the pending Bureau Van Dijk acquisition as well as $7 million or $0.03 per share of acquisition related expenses. Turning to the first half performance, Moody's revenue for the first half 2017 was almost $2 billion, up 13% from the prior year period. U.S. revenue was $1.1 billion, up 12%, while non-U.S. revenue was $830 million, up 15%. The impact of foreign currency translation was negligible. Moody's Investors Service first half revenue of almost $1.4 billion was up 18% from the prior year period. U.S. revenue was $835 million, up 14%, while non-U.S. revenue was $520 million, up 25%. Moody's Analytics revenue for the first half of 2017 was $621 million, a 4% increase over the prior year. U.S. revenue of $311 million was up 7%, while non-U.S. revenue of $310 million was up 2%. Operating expense for the first half of 2017 was almost $1.1 billion, up 4% from the prior year period. Foreign currency translation favorably impacted expense by 2%. Operating income was $901 million, up 26%. Foreign currency translation favorably impacted operating income by 1%. Adjusted operating income of $973 million was up 25%. Moody's operating margin was 45.6% and its adjusted operating margin was 49.2%. The effective tax rate for the first half of 2017 was 27.8%, down from 32.1% in the prior year period. The decline was primarily due to a non-cash non-taxable gain related to a strategic realignment and expansion involving Moody's Chinese affiliate, CCXI, as well as a benefit from the adoption of the new accounting standard for equity compensation. Given the strength of the first half and a supportive market environment, we are raising our full year 2017 diluted EPS guidance to a range of $5.69 to $5.84. This range includes the $0.31 per share CCXI gain, the $0.13 per share purchase price hedge gain, and $0.10 per share of Bureau Van Dijk acquisition related expenses. Excluding these items, we anticipate full-year adjusted diluted EPS to be in the range of $5.35 to $5.50. 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 second quarter was a record $1 billion, up 8%. U.S. revenue of $568 million was up 4%. Non-U.S. revenue of $433 million was up 13% and represented 43% of Moody's total revenue. The impact of foreign currency translation on Moody's revenue was negligible. Recurring revenue of $489 million was up 6% and represented 49% of total revenue. Looking now to each of our businesses, starting with Moody's Investors Service, total MIS revenue for the quarter was $687 million, up 10%. U.S. revenue increased 3% to $412 million. Non-U.S. revenue of $274 million was up 21% and represented 40% of total MIS revenue. The impact of foreign currency translation on MIS revenue was negligible. Moving now to the lines of business for MIS; first, corporate finance revenue for the second quarter was $356 million, up 17%. This result reflected a favorable mix within each of U.S. leveraged finance and EMEA investment grade issuance as well as strong growth in EMEA bank loan and Asian bond issuance. U.S. and non-U.S. corporate finance revenues were up 6% and 40% respectively. Second, structured finance revenue totaled $119 million, up 7%, primarily driven by the continued strength of U.S. CLO issuance. U.S. structured finance revenue was up 12% while non-U.S. revenue was down 3%. Third, financial institutions revenue of $102 million was up 14%. This result was largely driven by an increase in issuance from infrequent issuers in EMEA. U.S. and non-U.S. financial institutions revenue were up 8% and 20% respectively. Fourth, public, project and infrastructure finance revenue of $105 million was down 7%. This result was primarily driven by a decline in U.S. issuance and a change in mix of European infrastructure issuance. The revenue decline was partially offset by strong growth in infrastructure issuance in Asia. U.S. public, project and infrastructure finance revenue was down 12% while non-U.S. revenue was up 4%. Finally, MIS Other, which consists of non-rating revenue from ICRA in India and Korea Investor Service, contributed $5 million to MIS revenue for the second quarter, down 37%. The decline is attributable to the divestiture of a non-core subsidiary of ICRA in late 2016. Turning now to Moody's Analytics, total revenue for MA of $314 million was up 3.5%. U.S. revenue of $155 million was up 6%. Non-U.S. revenue of $158 million was up 1% and represented 50% of total MA revenue. The impact of foreign currency translation on MA revenue was negligible. And now moving to the lines of business for MA; first, research, data and analytics, or RD&A, revenue of $181 million was up 7% and represented 58% of total MA revenue. Growth was mainly driven by strength in sales of credit research and ratings data feeds. U.S. and non-U.S. RD&A revenues were up 6% and 10% respectively. Second, enterprise risk solutions, or ERS, revenue of $97 million was flat to the prior year period. This result was primarily due to the timing of revenue recognition for customer projects, many of which are expected to complete in the second half of the year. U.S. ERS revenue was up 7% while non-U.S. revenue was down 5%. Trailing 12-month revenue and sales for ERS increased 6% and 14% respectively, primarily due to the 2016 acquisition of GGY. We continue to make progress on shifting the mix of the ERS business to emphasize higher-margin product with trailing 12-month product sales of 21% and services sales declining by 4%. Third, professional services revenue of $36 million was down 5%. U.S. professional services revenue was up 6% while non-U.S. revenue was down 10%. And turning now to operating expenses, Moody's second quarter operating expense was $543 million, up 5%. The increase was primarily attributable to annual salary increases, higher accruals for incentive compensation, and expenses related to the pending acquisition of Bureau Van Dijk. This increase was partially offset by a decline in non-compensation expense and a favorable foreign currency translation impact of 2%. As Ray mentioned, Moody's operating margin was 45.7%, up 150 basis points from 44.2% in the second quarter of 2016. Adjusted operating margin was 49.7%, up 220 basis points from 47.5% a year ago. Moody's effective tax rate for the quarter was 32.1%, up from 31.9% in the prior year period. Now I'll provide an update on capital allocation. During the second quarter of 2017, Moody's repurchased approximately 700,000 shares at a total cost of $79.5 million or an average cost of $115.35 per share. Moody's also issued approximately 400,000 shares as part of its employee stock-based compensation plan. Moody's returned $73 million to its shareholders via dividend payments during the second quarter of 2017, and on July 11 the Board of Directors declared a regular quarterly dividend of $0.38 per share of Moody's common stock. This dividend will be payable on September 12, 2017 to stockholders of record at the close of business on August 22, 2017. Over the first half of 2017, Moody's repurchased 1.2 million shares at a total cost of $134.5 million or an average cost of $114.06 per share, and issued approximately 1.9 million shares as part of its employee stock-based compensation plan. Moody's also returned $145 million to its shareholders via dividend payments during the first half. Outstanding shares as of June 30, 2017 totaled 191 million, down 1% from a year ago. As of June 30, 2017, Moody's had approximately $600 million of share repurchase authority remaining. As part of Moody's financing of the pending acquisition of Bureau van Dijk, on June 12, 2017, Moody's closed its issuance of $1 billion of senior unsecured notes consisting of $500 million of 2.625% notes due 2023 and $500 million of 3.25% notes due 2028. Prior to issuing these notes, Moody's had an undrawn bridge loan facility. The incremental financing expenses associated with these items amounted to $0.03 per share in the second quarter. At quarter end, Moody's had $4.9 billion of outstanding debt and $1.5 billion of additional debt capacity available under its revolving credit facility and undrawn term loan. Total cash, cash equivalents and short-term investments at quarter end were almost $3.4 billion, with approximately 58% held outside the U.S. Cash flow from operations for the first half of 2017 was negative $48 million, a decline from a positive $546 million in the first half of 2016. Free cash flow for the first half of 2017 was negative $91 million, a decline from positive $492 million in the prior year period. The declines in cash flow from operations and free cash flow were due to payments the Company made in the first quarter 2017 pursuant to its 2016 settlement with the Department of Justice and various states attorneys general. And with that, I'll turn the call back over to Ray.

Okay, thanks Linda. I'll conclude this morning's prepared comments by discussing the changes to our full year guidance for 2017. A complete list of Moody's guidance is included in Table 11 of our second quarter 2017 earnings press release, which can be found on the Moody's Investor Relations website at ir.moodys.com. Moody's outlook for 2017 is based on assumptions about many geopolitical conditions, and 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 the results for the year could differ materially from our current outlook. Our outlook assumes foreign currency translation at end of quarter exchange rates. Specifically, our forecast reflects exchange rates for the British pound of $1.30 to GBP1 and for the euro of $1.14 to EUR1. As I noted previously, this guidance does not include revenue and operating expense estimates related to our pending acquisition of Bureau Van Dijk. Moody's now expects full year 2017 diluted EPS to be $5.69 to $5.84, including the CCXI gain, the purchase price hedge gain, and acquisition-related expenses for Bureau Van Dijk. Excluding these items, full-year 2017 adjusted diluted EPS is now expected to be $5.35 to $5.50. Both ranges include an estimated $0.16 per share tax benefit due to the adoption of the new accounting standard for equity compensation as well as an estimated $0.10 per share impact from financing expenses related to the pending acquisition of Bureau Van Dijk, and an estimated $0.04 per share impact related to reduction in share repurchase activity as a consequence of financing the acquisition. The adjusted operating margin is now expected to be approximately 47%. Moody's now expects full year 2017 revenue to increase in the high single-digit percent range. For MIS, full year 2017 revenue is now expected to increase in the high single-digit percent range also. U.S. revenue is still expected to increase in the mid single-digit percent range while non-U.S. revenue is now expected to increase in the low teens percent range. Corporate finance revenue is now expected to increase in the low teens percent range. Financial institutions revenue is now expected to increase in the high single-digit percent range. For MA, full-year 2017 revenue is now expected to increase in the high single-digit percent range. U.S. revenue is now expected to increase in the mid single-digit percent range and non-U.S. revenue is now expected to increase in the low double-digit percent range. RD&A revenue is now expected to increase in the low double-digit percent range. Before turning to Q&A, a reminder that we continue to expect our previously announced acquisition of Bureau Van Dijk to close in the third quarter of 2017. As a result, we are not able to provide any updates for you regarding the pending acquisition beyond what we have said in the earnings release. This concludes our prepared remarks, and so joining Linda and me for the question-and-answer session are Mark Almeida, President of Moody's Analytics, and Rob Fauber, President of Moody's Investors Service. We'd be pleased to take any questions you may have.

Within corporate finance, you had a very strong first half and you've increased guidance for the year. Could you give some additional color on the drivers? Is it just issuance related or is pricing or share gains also playing a factor there? And also, just which regions have been very strong? It looks like the non-U.S. business is where you're really expecting the benefit?

I'll turn this over to Rob to provide some color, but you are correct, we had very strong performance in the leveraged loan and spec rate portions of the market and the non-U.S. growth was very strong as well. So Rob, I don't know if you wanted to provide any color commentary on that.

The first point there in regards to kind of the drivers of revenue growth, there were a few things that played into it for this quarter. First, we had a very favorable mix of issuance. And by this, I mean that we saw very strong issuance from issuers who are typically infrequent issuers rather than issuers on relationship based arrangements with us. As Ray mentioned, U.S. bank loans, we saw a very healthy activity there. And we benefitted from issuance that was a bit more broad-based than last year where we had several kind of super-jumbo transactions included in the volume. So, this broader issuance generally leads to better revenue yield. We had very strong growth in first time mandates also contributing to that favorable mix. And as Ray mentioned, some pockets of very strong issuance growth, particularly outside the United States, EMEA bank loans, Asian corporate finance, Canada, to spotlight three.

Okay, great. And then you raised the MA guidance to high singles from mid and basically because of the RD&A line, and so could you just give us some color on why your confidence has increased in that business segment, and so what's really driving your higher confidence for that for the rest of the year? Thanks.

Sure. This is Mark. We're getting some benefit from the stronger pound and euro, but on a constant dollar basis, growth is pushing up from high single digits to double digits and we're seeing good underlying performance in the business with better-than-expected yield from price, new sales production and net upgrades, somewhat offset by higher attrition. So overall, the business is firm across all of the different product areas, and it's just pushing us up slightly from high single to the lower end of double digits.

Just maybe stepping back and asking more broadly about the guidance here, obviously a great first half of the year. If I look at typical seasonality, I think the guidance suggests a slowdown that's usually a little bit bigger than what we would expect typically. So maybe just some commentary around what is conservatism or are there actually any particular areas that make you think that some of the current run rates are not sustainable and some of this was more one-time than usual?

We certainly think that there has been pull-forward into the first half, including the second quarter. How much opportunistic financing is still going to occur in the second half pulling forward from 2018, we'll just have to see, but borrowing conditions do remain good, rates are low, spreads are narrow. So, that's all positive. Also, I would say in terms of the second half, we're cognizant of the fact that we are going to be compared against a strong second half in 2016. And so while we think there's going to be healthy activity, the comparables are more challenging in the second half.

All right, makes sense. And then maybe just shifting gears away from earnings for a second here, I wanted to ask you about BVD. When you had the call and you were pointing out the strong growth that these guys had, I think like 9% CAGR or so plus, I think there was a sense that a lot of that was true growth and very little pricing, and I think there's an expectation that you can do more there down the line. When we do our own channel checks, it actually sounds like pricing has been a fairly healthy component. In some cases, maybe there was even a goal to like, you renew or do you want to have now maybe close to like 10% increases from time to time again. These might be one-off conversations, but the point is, can you just compare and contrast what we may have heard and kind of like the sense that you'll have post the call now that you maybe have spent a little bit more time?

Yes, I mean to answer generally, I think the answer is the same as how we think about pricing for the rest of Moody's Corporation. We are going to be very focused on what kind of additional value can be provided, the synergies that we talked about, and that any pricing that we would seek to increase would be associated with the growth in value of the product and data that we're making available.

The first question is just around guidance. I was wondering if you could maybe flesh out the benefit you had from FX both on the top line and EPS.

Sure, Manav. Hang on just one second.

It was not material in the second quarter. It was negligible on revenue and I think it was 1% on expense.

And Manav, to anticipate, if you're wondering about the full 2017 outlook, we're expecting a 2% favorable impact on revenue growth, and as Ray had said, a minimal slightly unfavorable impact on expense growth. Does that help you out?

That's for the full year.

Yes, that's exactly what I was looking for. Broadly speaking, in relation to the typical expense ramp that you usually provide us, it seems like you're generally a bit cautious in the second half, keeping in mind various factors. What does the cost control focus look like at the Company now?

Sure, Manav. In answering the ramp question, looking at the first quarter expense run rate to the fourth quarter, now we're looking at a ramp of $40 million to $50 million, and previously we had said $30 million to $40 million. Some of that is because our projects are stretching out a little bit further into the year and we do expect some hiring in some of the businesses. However, we're keeping very close, very tight handle on hiring around here and we do continue very much to focus on expense controls, focus on T&E, but particularly using caution in hiring particularly in the higher cost areas and looking to substitute where possible in other locations. So, we continue that focus throughout the year.

Maybe just to ask on Europe, I think in the past you've had somewhat of a mixed view of the opportunity there given GDP growth versus the secular trend. Obviously trends are very strong lately I guess, found out from one of the earlier questions. Has your view of the importance there or the pace of growth that we could expect to see during the next few years internationally changed at all or improved at all?

No, I think for both Europe and the U.S., we expect growth to be modest, GDP growth, and then debt growth to be modest. But the mix of debt that is in the banking system versus the capital markets, we certainly expect to continue to see this intermediation trend continue. And that is the European story, actually a global story, but it's definitely a European story as well. And given the caution in Europe about the pace at which they might engage in any tapering, I think we're going to continue to see a good market environment, good market tone going forward. And that is a little more optimistic than I had been at certain points in the past.

Tim, it's Linda. Let me just interject here. The issuers we're hearing from, a number of the investment banks that we talk to, and then Rob Fauber may have some more granular color for you, but looking at the European markets, and again this is not a Moody's view but rather what we're hearing from the banks, they are saying they are expecting the second half of 2017 volumes to be in line with first half activity as issuance volumes pick back up after the post-summer slowdown. As Ray had noted, the spreads in rates remained very attractive and we'll see what happens with the tapering. In spec rate in Europe, the leveraged loan market remains robust, but some softness crept into high-yield given where we are in the calendar year, as is typical with the summer issuance weakening a bit. Most of the refinancing expected in 2017 may have already occurred, but fundamentals are improving, economic growth looks reasonable, and there's the overhang of uncertainty from Brexit. Maybe Rob might want to speak a little bit more specifically about what he's seeing in MIS.

The only other thing I would add to that and echo Ray and Linda's comments, we've seen very strong issuance growth there. That continued through the French and U.K. elections. Lots of investor interest, lots of cash to invest there. And we've also seen a pickup in first time mandate activity in EMEA, recent activity about 2x what we have been seeing over the last year or two. So a very good indicator about first-time issuers coming into the market, and as Ray said, that this in the year should trend.

Okay, great. And can I follow-up on RD&A? Mark, I understand kind of the metrics you gave in terms of new sales and pricing, but I guess one part is, can you comment on where you've seen higher attrition? And secondarily, the improved sales that's leading to the higher revenue growth, given there's a bunch of different solutions you provide within RD&A, can you elaborate on what parts I guess of that segment are seeing a stronger demand or stronger growth?

On the attrition point, I would characterize the higher attrition as very idiosyncratic, a couple of selective cases of attrition but not anything systematic, either by product or customer type or geography. On the positive side, this strength in the business, as I said earlier, is really across the board. We're seeing good sales production and pricing power and customer upgrades and new sales production in really all of our product areas. So I really can't pinpoint it to any one thing, but it's just better-than-expected performance along a number of dimensions and across a number of businesses. And just to be clear, we're seeing good solid performance and I wouldn't characterize what we're seeing as a dramatic improvement in the business. We expected the business to do well. It's doing a bit better than we expected, and if I say, that's pushing us into double-digit growth, and again it's no one geography or product area that I can really point to.

Now that it looks like down in D.C. we're moving away from healthcare reform back to tax reform, I'm just wondering if you're hearing any updates about the potential change in the deductibility of corporate interest expense and what the impact might be on your business?

I have not heard anything that is in the public discourse about the tax reform expectations, and really there are just a large number of variables and until we see how the different trade-offs are made and interact with each other, it's going to be difficult to predict.

It's Linda. I just wanted to reiterate that if corporate tax rates move downward, a 1% change in our estimated tax rate is equal to $0.07 to $0.08 of EPS. So, if you want to explore potential scenarios, you can use that guideline.

Okay, that's helpful. And then actually a couple of numbers questions for you, Linda. What share count is embedded in your guidance for the year and can you give us an update on what your expected interest expense is for the year as well? Thanks so much.

So I'm not going to give you a share count for the year. You can take a look at the share count that we have. We have said that given that we are committed to delevering given the acquisition expense of Bureau Van Dijk, we are reducing the guidance on our share repurchases to approximately $200 million for both 2017 and 2018, and job one for Moody's right now is to delever from the financing cost for Bureau Van Dijk. So you can do some math there, Jeff, and I think you probably could come up with something that looks reasonable. I'm sorry, your second question was?

Was on interest expense.

Sure. So in thinking about interest expense, we have been running at a rate that we had viewed as pretty normal of sort of $35 million a year rate in 2016. Now this year that rate has kicked up because we did do some issuance of $800 million in the first quarter of the year. And then it's pretty important that everyone understands how we've handled the financing of Bureau Van Dijk. So we announced the deal, you'll recall, on May 15th and at that point we had a bridge loan in place. We replaced that bridge loan on June 12 and we returned that bridge loan with public bonds, a long five-year bond and a long 10-year bond. The blended interest rate on those financings is 2.94%. So we are going to pay with sort of a third a third a third in cash those bond proceeds and also we have commercial paper and a term loan facility if we want to use that. So again, you'll see that the financing impact of all of that for the year is about $29 million or $0.10. So, hopefully that will help you out in terms of thinking about what the additional financing cost will be for the year.

I was wondering if you could give us some idea of how conservative you are on the second-half performance of issuance. It sounded like the environment is good, things are picking up. Outside of comps, is there anything else that we should – that you are concerned about and anything kind of holding you back?

Again, as I had mentioned, the pull forward that we saw into the first half of the year creates some uncertainty for the second half. There is still a sizable amount of debt that can be pulled forward and conditions remain good, but whether that will happen or not, I think a lot of the debt that was maturing late in 2017 has already been refinanced, so we'd be looking into the out years to see what might get pulled forward. Rob, did you want to add to that?

The only thing I would add kind of touching on that is just kind of the sustainability of this bank loan refinancing cycle that we're in. That's a question mark. Another question mark, just an unforeseen event, market volatility, and I think some potential upside if we see a pickup in public finance, U.S. public finance refunding activity.

Let me provide an overview of the indications from the issuing banks for the year. Year-to-date, there has been approximately $720 billion in investment grade issuance, and the forecast now suggests a decline of 5% to 10% for the year. While rates have increased slightly, the overall market conditions remain stable and constructive. The first half of 2017 was tracking with record levels from 2016, but we may see a slowdown in the latter half, as Rob mentioned. The M&A pipeline is weaker compared to the previous two years, which adds some caution to our outlook for the rest of the year. In high-yield issuance, we have seen $150 billion so far, with expectations of flat to a 5% increase. The markets remain resilient despite concerns about struggling retailers and some weakness in the energy sector, with sustained strong underlying demand. However, the lighter pipeline is a concern due to fewer M&A activities, and many planned refinancings have already taken place. Finally, for U.S. leveraged loans, there has been $400 billion issued to date, an increase of 30%. As Rob noted, we need to consider if this trend will continue. Spreads are tighter, and there's been significant loan refinancing and repricing activity. Additionally, we’ve observed $55 billion in CLO formation this year, which we will need to monitor. There has been heavy inflow into loan mutual funds and strong investor demand, so it's important to factor this information into your assessments for the latter half of the year.

Right, thanks. And then just on Analytics, can you update us on how much of the growth this quarter was maybe related to timing or some pent-up demand or regulatory change? It sounded like you think that the business is just pushing forward maybe to higher growth rate. But I just want to see if any of that took place just given all the political changes here in the U.S.? Thanks.

No, I don't think we saw that happening in the first half of the year. You're right to observe that some of the regulatory pressure on financial institutions around the world is lightening up, but the demand for what we do is being driven by other interest and other requirements on the part of the banks. But I don't think we saw any pull forward in activity related to regulation in any way.

So Linda or Mark, I was hoping you could give us a little bit of commentary on margin trends in the Analytics business. Not to be greedy but I'm wondering why the margin performance isn't a bit better given the strength you're seeing in your higher profit businesses and also the shift in the ERS, why that isn't theoretically showing up in margin performance yet?

Peter, I think it's because we've always said that in any given quarter, the margin isn't going to be that – isn't going to tell you all that much about the business, and I think this quarter is a very good example of that because we had light revenue in ERS due to the project timing issue. So, we were light on the top line, the expenses were what the expenses were, and we did have some additional expense coming through related to the Bureau Van Dijk transaction. So again, I don't think you can gain an awful lot of information from either the operating margin or the adjusted operating margin in the quarter. I think more generally, we're continuing to make good progress on the work we're doing in ERS to drive higher profitability. We've talked about shifting from a business that has grown a lot through delivering these low margin implementation services. We are deemphasizing that work and putting a lot more emphasis on product sales. That is going well and we'll continue on that path. So, we feel like we're on a good trajectory with that and I think we'll continue to see progress over time. But again, any one quarter might not be consistent with the longer-term trend.

And Peter, I probably should help Mark out here a bit. Mark has been pretty successful, and as we've talked about before, as his business is more successful, it does draw a bit more in terms of corporate allocations. So, that's part of the issue as well.

Got it. And then Linda, for you, I'm wondering what your thought is on this concept of potentially moving to an adjusted EPS metric in conjunction with the Bureau Van Dijk transaction, where are you on that?

Peter, we're contemplating that. We can't get the cart in front of the horse here because we don't own Bureau Van Dijk yet. So we have to wait until that closing occurs, which as Ray said, we expect to be on schedule in the third quarter. All of that appears to be going fine. At that point, we'll think about that and it's something we're discussing right now, but we'll have more to say about all that on the third quarter call.

A couple of questions. Your guidance for structured finance for the rest of the year, I'd be curious as to hear what your underlying thoughts are on some of the categories, RMBS, CMBS, the other asset-backed categories, how you see them maybe playing out here in the second half of the year?

For structured finance, we expect there to be year-over-year growth in the second half. The areas that have been strong, certainly I would point you to the CLO business, and there is still a substantial stock of potential assets to go into CLOs as the loan market has been so robust recently. So that would continue to be a promising area. I'll see if Rob wants to add anything further.

We've noticed a slight slowdown in the ABS market after a very active period from February to May, but I believe that issuance will be bolstered by niche sectors such as solar and handsets. In the CMBS space, there is a strong level of inquiries and the current pipeline is somewhat better than it was at this point last year. However, there is competition from alternative funding sources like banks and life insurance companies, which will impact how many mortgages enter the securitization market. I am optimistic about the CMBS market, anticipating that the second half of 2017 will show improved strength as it seems we've addressed many of the risk retention issues. Regarding CLOs, alongside refinancing activity, we have a healthy pipeline, and we're beginning to see more small and medium enterprise deals entering that space. In terms of RMBS, the market appears to be modestly stronger than last year, with a diverse mix of assets. Europe also shows a healthy pipeline for CLOs, ABS, and RMBS.

I’ll address that. You're correct that we generally have a more relationship-focused approach with the banks, which tends to result in steady revenue growth. This quarter, we observed strong issuances from typically infrequent issuers. There are multiple factors at play contributing to growth in all regions. In the U.S., there was an increase in bank loan financing activity within the managed investment sector, which was somewhat new, along with activity from infrequent issuers in banking and insurance. In Europe, the trend we noted in the first quarter has continued into the second quarter, where banks are building their bail interval capital or debt to meet regulatory requirements. We also saw some opportunistic issuances in regions like Sweden and the Middle East, and I believe we'll continue to see financing activity from those Middle Eastern financial institutions. Lastly, in Asia, despite experiencing lower issuance compared to the same quarter last year, revenue growth persisted, supported by infrequent issuers from both banks and non-banks in China. I anticipate that this issuance activity will continue.

And Craig, it's Linda. For completeness, Rob might want to talk a little bit more about what he's seeing in new mandates as well. So if you want to go ahead with that, Rob?

Sure. A good story with the first time mandates, healthy leveraged finance markets are very conducive to first-time issuers tapping the market. In the second quarter of 2017, we saw over 300 first time mandates. That's up almost 50% from the first quarter and up I think about 70% over 2Q 2016. That growth was in all very strong in all geographies, reflecting again the same comments we had about the leveraged finance markets, positive investor sentiment, tight spreads. In Asia, I would also note a record – reached a record for first time mandates in the second quarter, and I had noted that the EMEA activity was significantly elevated over what we've seen the last couple of years. The only caveat to the Asian first time mandates, a number of those Chinese first time issuers have to get regulatory approval before they can actually issue. So there some of that issuance is still sitting on the sidelines. But overall, we expect to see, I think we could see over 800 first time mandates in 2017, and that's up a bit from the levels we've seen in the last couple of years, which is kind of mid to higher 700s.

I think we’ve covered a lot of ground here, and if that's all the questions, we’ll conclude the call. Thanks for your participation, and we look forward to speaking with you on the next earnings call.