Moody`s Corp (MCO) — Q3 2017 Earnings Call Transcript

Thank you. Good morning, everyone, and thanks for joining us this teleconference to discuss Moody’s third quarter 2017 results, as well as our current outlook for full year 2017. I am Steve Maire, Global Head of Investor Relations and Communications. This morning, Moody’s released its results for the third 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, Steve. Good morning and thank you to everyone for joining today’s call. I’ll begin by summarizing Moody’s third quarter and year-to-date 2017 financial results. Linda will follow with additional third quarter financial details and operating highlights. I will then conclude with comments on our current outlook for 2017. 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’re pleased to have closed the Bureau van Dijk acquisition and are excited to welcome our new Bureau van Dijk colleagues to Moody’s. While we’ve owned the company for only 12 weeks, our experience thus far is very positive, and the operations of Bureau van Dijk are proving to be in line with our expectations. Our integration efforts are on track and we remain confident about achieving the synergy targets that we communicated when we announced the acquisition. Starting from this earnings release, results and guidance will include Bureau van Dijk from the August 10th acquisition close date. Also, as we previously communicated, we’re now excluding the amortization of all acquisition-related intangibles from our diluted EPS metric. This includes amortization of intangibles from Bureau van Dijk as well as earlier acquisitions. In the third quarter, Moody’s achieved a record $1.1 billion in quarterly revenue, up 16% from the third quarter of 2016. Operating expenses for the third quarter totaled $618 million, up 19%, of which Bureau van Dijk operating expenses and acquisition-related expenses constituted 8 percentage points. Operating income was $445 million, up 12%, and adjusted operating income of $499 million was up 14%. We are defining adjusted operating income as operating income before depreciation and amortization as well as Bureau van Dijk acquisition-related expenses. The operating margin was 41.9%, down from 43.3% in the third quarter of 2016. The adjusted operating margin was 46.9%, down from 47.8%. Moody’s diluted EPS for the quarter was $1.63 per share, up 24% from the third quarter of 2016. Adjusted diluted EPS for the quarter was $1.52, up 10%. Third quarter 2017 adjusted diluted EPS excludes a $44 million or $0.23 per share gain from a foreign currency hedge associated with the Bureau van Dijk acquisition, $14 million or $0.08 related to the amortization of all acquisition-related intangibles, and $9 million or $0.04 per share of acquisition-related expenses. Third quarter 2016 adjusted diluted EPS excludes $6 million or $0.04 per share related to the amortization of all acquisition-related intangibles and $6 million or $0.03 per share from a restructuring charge. Turning to year-to-date performance. Moody’s revenue for the first nine months of 2017 was $3 billion, up 14% from the prior year period. U.S. revenue was $1.7 billion, up 10%, while non-U.S. revenue was $1.3 billion, up 20%. The impact of foreign currency translation was negligible. Revenue at Moody’s Investors Service of almost $2.1 billion was up 16% from the prior year period. U.S. revenue was $1.3 billion, up 12%, while non-U.S. revenue was $787 million, up 24%. Revenue at Moody’s Analytics was $990 million, a 10% increase over the prior year period. U.S. revenue of $471 million was up 6%, while non-U.S. revenue of $518 million was up 14%. Excluding Bureau van Dijk, organic MA revenue was $959 million, up 7% from the prior year period. Operating expenses for the first nine months of 2017 totaled almost $1.7 billion, up 9% from the prior year period of which Bureau van Dijk operating expenses and acquisition-related expenses constituted 3 percentage points. Foreign currency translation favorably impacted expense by 1%. Operating income was $1.3 billion, up 21%. Foreign currency translation favorably impacted operating income by 1%. Adjusted operating income of $1.5 billion was also up 21%. Moody’s operating margin was 44.3% and adjusted operating margin was 48.4%. The effective tax rate for the first nine months of 2017 was 29%, down from the 31.5% 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. Primarily due to the strength of the underlying business performance for the first nine months of the year, we are raising our full year 2017 diluted EPS guidance to a range of $6.18 to $6.33. This range includes the $0.36 per share purchase price hedge gain, $0.31 per share CCXI gain, a $0.23 per share related to amortization of all acquisition-related intangibles, and $0.11 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 $5.85 to $6. Both ranges are up approximately $0.50 from prior guidance. 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 third quarter was a record $1.1 billion, up 16%. U.S. revenue of $588 million was up 8%, non-U.S. revenue of $475 million was up 28% and represented 45% of Moody’s total revenue. Foreign currency translation favorably impacted Moody’s revenue by 1%. Recurring revenue of $535 million was up 16% and represented 50% of total revenue. Looking now at each of our businesses starting with Moody’s Investors Service. Total MIS revenue for the quarter was $694 million, up 13%. U.S. revenue increased 9% to $428 million, non-U.S. revenue of $267 million was up 21% and represented 38% of total MIS revenue. Foreign currency translation favorably impacted MIS revenue by 1%. And moving now to the lines of business for MIS. First, corporate finance revenue for the third quarter was $350 million, up 17%. This result reflected strong U.S. investment grade and Asian speculative grade bond issuance as well as a strong contribution from the U.S. rated bank loans. U.S. and non-U.S. corporate finance revenues were each up 17%. Second, structured finance revenue totaled $128 million, up 23% primarily driven by strong CLO issuance and an increase in U.S. CMBS rated transactions. U.S. and non-U.S. structured finance revenues were up 25% and 19%, respectively. Third, financial institutions revenue of $102 million was up 7%; this result was largely driven by an increase in banking issuance from infrequent issuers in EMEA. U.S. financial institutions revenue was down 2%, while non-U.S. revenue was up 13%. Fourth, public, project and infrastructure finance revenue of $109.2 million was up 4%. This result was primarily driven by increased infrastructure finance activity in EMEA and Asia, offset by a decrease in U.S. public finance issuance. U.S. public, project and infrastructure finance revenue was down 16%, while non-U.S. revenue was up 53%. Finally, MIS other, which consists of non-ratings revenue from ICRA in India and Korea Investors Service, contributed $4 million to MIS revenue for the third quarter, down 41%. 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 $369 million was up 21%. U.S. revenue of $161 million was up 4%. Non-U.S. revenue of $208 million was up 38% and represented 56% of total MA revenue. Foreign currency translation favorably impacted MA revenue by 1%. Excluding Bureau van Dijk, total organic MA revenue for the third quarter of 2017 was $339 million, up 11% from the third quarter of 2016. Moving now to the lines of business for MA. First, research, data and analytics, or RD&A, revenue of $218 million was up 30% and represented 59% of total MA revenue. Growth was mainly driven by the addition of Bureau van Dijk as well as the strength of the credit research and data feeds business. U.S. and non-U.S. RD&A revenues were up 7% and 65% respectively. Excluding Bureau van Dijk, global organic RD&A revenue was $188 million, up 12% from the third quarter of 2016. Bureau van Dijk’s revenue contribution for the third quarter was reduced by $14 million as a result of a deferred revenue adjustment required as part of acquisition accounting. Second, enterprise risk solutions or ERS revenue of $113 million was up 11% from the prior-year period. U.S. ERS revenue was down 4%, while non-U.S. revenue was up 21%. Trailing 12 months revenue and sales for ERS increased 6% and 7%, respectively. We continue to make progress on shifting the mix of the ERS business to emphasize higher margin products with trailing 12-month product sales of 17% and services sales down 18%. Third, professional services revenue of $38 million was up 6%. U.S. and non-U.S. professional services revenue were up 5% and 6%, respectively. And turning now to operating expenses. Moody’s third quarter operating expenses totaled $618 million, up 19% of which Bureau van Dijk operating expenses and acquisition-related expenses constituted 8 percentage points. The overall increase was primarily attributable to higher accruals for incentive compensation, Bureau van Dijk operating expenses, amortization of intangibles from the acquisition of Bureau van Dijk, and acquisition-related expenses. The impact of foreign currency translation was negligible. As Ray mentioned, Moody’s operating margin was 41.9%, down 140 basis points from 43.3% in the third quarter of 2016. Adjusted operating margin was 46.9%, down 90 basis points from 47.8%. Moody’s effective tax rate for the quarter was 31.4%, up from 30.5% in the prior year period. This increase is primarily due to an increase in the rate of non-U.S. taxes and the tax on the purchase price hedge gain, partially offset by a tax benefit from the adoption of the new accounting standard for equity compensation. And now, I’ll provide an update on capital allocation. During the third quarter of 2017, Moody’s repurchased approximately 200,000 shares at a total cost of $29 million for an average cost of $130.75 per share. Moody’s also issued approximately 300,000 shares as part of its employee stock-based compensation plan. Moody’s returned $73 million to its shareholders via dividend payments in the third quarter of 2017; and on October 23rd, 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 December 12, 2017 to stockholders of record at the close of business on November 21, 2017. Over the first nine months of 2017, Moody’s repurchased 1.4 million shares at a total cost of $164 million or an average cost of $116.70 per share, and issued approximately 2.2 million shares as part of its employee stock-based compensation plan. Moody’s also returned $218 million to its shareholders via dividend payments during the first nine months of 2017. Outstanding shares as of September 30, 2017 totaled 191.1 million, approximately flat to a year-ago. As of September 30, 2017, Moody’s had approximately $600 million of share repurchase authority remaining. I’ll now walk you through the financing of the Bureau van Dijk acquisition which closed on August 10, 2017 at a purchase price of approximately €3 billion or US$3.5 billion. Moody’s issued approximately $1.8 billion of debt including $1 billion of notes, a $500 million term loan and $300 million of commercial paper at a combined blended interest rate of approximately 2.6% pretax. The incremental financing expense associated with these items amounted to $0.03 per share in the third quarter. The balance of the purchase price was funded by $1.4 billion of offshore cash, approximately $300 million of U.S. cash on hand, and an approximate $100 million purchase price hedge gain due to the appreciation of the euro from the acquisition announcement date to the close date. At quarter-end, Moody’s had $5.7 billion of outstanding debt and approximately $700 million of additional borrowing capacity available under our revolving credit facility. Total cash, cash equivalents and short-term investments at quarter-end were $1.1 billion, with approximately 74% held outside the U.S. Cash flow from operations for the first nine months of 2017 was $343 million, a decline of $889 million from the first nine months of 2016. Free cash flow for the first nine months of 2017 was $273 million, a decline of $804 million from the prior year period. These declines in cash flow were due to payments the Company made in the first quarter of 2017 pursuant to its 2016 settlement with the Department of Justice and various state attorneys general.

Okay. Thanks, Linda. I’ll conclude this morning’s prepared comments by discussing the changes to our full-year guidance for 2017. Complete list of Moody’s guidance is included in Table 12 of our third 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 $1.34 to £1 and for the euro of $1.18 to €1. Moody’s full year 2017 guidance incorporates Bureau van Dijk’s results starting from the acquisition close date of August 10, 2017. Bureau van Dijk’s revenue contribution for full year 2017 will be reduced by an estimated $39 million, $14 million in the third quarter and an estimated $25 million in the fourth quarter, as a result of a deferred revenue adjustment required as part of the acquisition accounting. Moody’s now expects full year 2017 diluted EPS to be $6.18 to $6.33, including the purchase price hedge gain, CCXI Gain, amortization of all acquisition-related intangibles and acquisition-related expenses. Excluding these items, full-year 2017 adjusted diluted EPS is now expected to be $5.85 to $6.00. Both ranges include an estimated $0.20 per share tax benefit related to the adoption of the new accounting standard for equity compensation. Moody’s now expects revenue to increase in the low-teens percent range. Operating expenses are now expected to decrease in the 20% to 25% range. Excluding the 2016 settlement and restructuring charges and acquisition-related expenses, adjusted operating expenses are now expected to increase in the low double-digit percent range. Depreciation and amortization expense is now expected to be approximately $160 million. Free cash flow is now expected to be approximately $600 million. For MIS, Moody’s now expects 2017 revenue to increase in the low-teens percent range. U.S. revenue is now expected to increase in the low double-digit percent range and non-U.S. revenue is now expected to increase in the high-teens percent range. Corporate finance revenue is now expected to increase in the low-20s percent range. Structured finance revenue is now expected to increase approximately 10%. Financial institutions revenue is now expected to increase in the low double-digit percent range. Public, project and infrastructure finance revenue is now expected to be approximately flat. For MA, Moody’s now expects 2017 revenue to increase in the low-teens percent range. Non-U.S. revenue is now expected to increase in the low-20s percent range. Excluding Bureau van Dijk, MA revenue is still expected to increase in the high single-digit percent range. RD&A revenue is now expected to increase in the low-20s percent range. Excluding Bureau van Dijk, our RD&A revenue is still expected to increase in the low double-digit percent range. This concludes our prepared remarks. And 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’ll be pleased to take any questions you may have.

Hi. Good morning. With regard to the latest tax reform proposal, how are you thinking about the change in issuance if interest deductibility is capped at 30% of EBITDA?

I’ll offer some initial comments and my colleagues may wish to add their thoughts as well. I don’t anticipate this is going to make a big difference in issuance levels. Certainly, with the 30% interest deductibility cap, there will be some impact on more speculative grade companies that may reach that cap. But, I don’t believe it’s going to fundamentally change the capital structure or thinking about debt issuance and leverage at these firms. I would also point out that the benefit we would get from moving to a 20% tax rate would be much more substantial than what I would anticipate being any decrease in revenue from reduced debt issuance. So, I think it’s positive. And we will see whether the current form of this bill goes through and obviously take close attention to any changes that happen along the way. I’d also note that I look favorably at the five-year carry-forward that’s been proposed as part of this, in terms of mitigating any changes in the attractiveness of debt issuance.

Toni, it’s Linda and I just want to reiterate that after me, I think we do want to make sure that everyone continues to understand that the 20% proposed corporate tax rate would be dramatically beneficial for Moody’s if in fact that rate did come to pass. To think about the math, everyone should look at a 1% decrease in our estimated tax rate, which would be $0.07 to $0.08 in EPS. So, please use whatever rate you would like to, but in any case that would be quite a wind at our back because we’re a pretty full taxpayer.

And just wanted to ask, you had a great quarter in ratings, but it looked like the incremental margins on MIS were a little bit lower than prior quarters. And I think in the release, you mentioned an increase in incentive comp accruals as one of the drivers. Are there other drivers to call out, and could you give the incentive comp expense for the quarter? Thanks.

As you see, we’ve increased guidance pretty significantly at this point in the year. That requires that we have a catch-up in terms of our percentage completion of our performance on that new target. For the corporation as a whole, we’ve adjusted incentive compensation. We had to add $35.6 million to that amount. That includes incentive compensation. And then, in salaries and benefits, we’ve also had to add approximately $22 million; this will include about $5 million we’re thinking of global profit sharing for the firm. And I’ll let Rob talk to the question on the MIS margin.

Yes. That is right, Linda. The growth in MIS expenses, as Linda said, is primarily due to the higher incentive comp accruals. If you look at our year-to-date adjusted operating margin versus the prior year, you’ll see about 300 basis points of margin expansion. And taking account of the catch-up accrual for incentive comp that Linda talked about and last year’s restructuring charge that you can see, our adjusted operating margins for the third quarter are largely consistent with that year-to-date figure.

Just maybe just to come back on the tax side, again. Thanks for the color. We know this is obviously early days, we’ll see what changes. But like, when you mentioned Ray on the spec rate side, there could be some impact, do you have some more like numbers you can share with us such as when you look at your rated debt today, how many of those companies would be hitting those thresholds? And then secondarily on the taxes, are there other things that you didn’t mention to the earlier question that we should be thinking about? For example, yesterday, private equity companies got pretty hard in the market because there’s some worry. Obviously, those are big users of debt as the companies private, et cetera. Is that something we should be thinking about as well?

Well, just in terms of the overall outlook, as we’re looking at the end of this year and going into next year, we obviously have some movements or anticipated movements in official rates. But the spreads remain tight. In fact, the default rate forecast is for the default rate to be declining over the next 12 months, which should further encourage tight spreads. So, there are some good news items around the debt issuance profile, even as we look at potentially a rising rate environment and as we look at coming off very full years for debt issuance in both the bond and loan sectors. So, I’m not anticipating that either the tax reform or other conditions in the market are going to generate a strong directional change in 2018 issuance. So, I don’t have anything else I can add on the tax reform proposal itself, but that would be a more general outlook.

And Alex, to provide some insight on high yield default rates, the one-year forecast as of the end of September shows that globally, high yield default rates are at 1.9%, with the U.S. at 2.3% and Europe at 1.3%. This indicates a relatively stable outlook for high yield default rates.

Okay, good. Thank you. And then just secondly, on BVD. You put out that 8-K last week, the confusion with some of these numbers and I think some people wondered if there is some seasonality in that business. So, maybe, can you just talk about how that business is tracking, now that you own it? How we should be thinking about, maybe not just the fourth quarter but also how the year next year progresses, is it a steady increasing business or is there seasonality? And then a very quick one, on the amortization add back, what’s the amortization add back in EPS points for the fourth quarter because I can’t really make sense of the 23 for the full year?

Okay. So, the way we’re going to deal with this, Alex, is Mark is going to speak first about the growth outlook for the business and how we’re doing. And I’m going to take care of some housekeeping on the exciting topics of deferred revenue haircut and conversion from such differences to U.S. GAAP. But before that, Mark has a good part. So, Mark, go ahead.

Alex, the BVD business is performing very, very well, very much in line with our expectations, as Ray said. I think probably, the most informative thing you might do is look at the amount of revenue we recognized for that business in the third quarter, carrying in mind, we only had seven weeks of the business, and add back in the deferred revenue adjustment. Then, if you annualize that number, you get a very nice number that I think will compare very favorably to what we showed in that 8-K filing. So, I think if you do that math, you’ll see some very nice acceleration in revenue growth. And that’s what we’re seeing, and we’re already very engaged with the business and working on a number of new sales opportunities, new product development opportunities. So, everything is going very, very well from an operational standpoint, and we remain very enthusiastic about the business.

One specific I would just add is that I don’t think we see a lot of seasonality in the business. There is some, but not a lot of seasonality to answer the specific question you were asking. Sorry, Linda.

Okay. So, accounting class begins now. Deferred revenue haircut. So, the first part of this is, this was fully expected and the adjustment is required by acquisition accounting. It gets amortized as a revenue reduction over the remaining period of customer contracts that were inherited as of the acquisition date. So, this is going to affect us in 2017 and to some extent into 2018. So, what we need to do is fair value all the assets and the liabilities acquired. The fair value of the deferred revenue is the cost to sell those contracts plus a reasonable profit margin. So, the total estimated impact, the total deferred revenue haircut is expected to be about $52 million. And as a result, BVD’s revenue contribution will be reduced by about $39 million for this year and an estimated $13 million, which will continue through August of next year for fiscal year 2018. The quarterly impact is $14 million in Q3 and $25 million in Q4. The percent impact for PP&A is $0.04.

Excellent. Sorry, keep going.

Okay. So, part two, transitioning from Dutch IFRS to U.S. GAAP, we had to do a couple of things. These have no impact on the economic value of the business, nor how it’s doing. We had to capitalize software and income taxes. That requires a higher hurdle under U.S. GAAP; and income taxes, we had to put up a small reserve for uncertain tax positions, and that is not required under IFRS. So, those two things are small accounting changes, but that’s it. Anything else we can do for you?

Linda, to continue on that topic, the margin profile for BVD has been discussed, indicating it's over 50% under IFRS standards. Could you clarify how that will be affected in the first year? I anticipate there might be a natural decline from the 51% due to changes in expenses, as well as another decrease in the first year because of deferred revenue changes. Could you provide some insight on this?

Sure. So, what’s happening is the EBITDA margin under U.S. GAAP is 44%; previously, we’ve spoken about approximately 51%. Those are accounting adjustments; they don’t reflect any change in the underlying operating performance of the business. And Mark may want to speak some more about that.

I’d only say that what Linda said is correct. There are some accounting phenomena that we’re reporting here, but the economics of the business are very much in line with what we expected and what we talked about when we announced the acquisition.

The interest deductibility cap, first of all, should have essentially no impact on the investment-grade sector, and should not have a significant impact for the higher-rated portion of the speculative grade sector. So, it’s real when you get more deeply into speculative grade that those caps may make a difference. And that’s a part of the market that tends to be quite cyclical anyway. I would also say that a strong economic environment, where firms are investing back in their business are identifying opportunities for growth, is a positive environment, not only for those firms but for the rating side of the business as well. So, if we have an environment in which firms are on their front foot in terms of thinking about growth and investment, mergers and acquisitions, et cetera, I think that’s going to be a benign to positive environment for the ratings part of our business.

Manav, it’s Linda. I wanted to just go back to your earlier part of the question on BVD and its performance. Furthermore, I wanted to add, we have talked about $45 million in synergies projected by 2019, $80 million in synergies by 2021. We view that we are on track with those synergies. And Mark may want to speak a little bit more about some of the things that we’re working on that front.

Yes. We’re making very good progress on both expense and revenue synergies. We’re already very engaged from a sales perspective. We’ve won business together with customers in multiple parts of the world. We’ve displaced a competitor recently with a joint selling effort in the Middle East. BVD closed its largest-ever sale in the United States last month. And we’ve got new product development activities going on jointly. So, we feel good about what’s happening from a revenue and sales perspective. On the expense side, we’re making good progress on realizing expense synergies. We’re consolidating office locations. We’re already co-located in New York, San Francisco, and Hong Kong, and we’re moving forward with other offices as well. So, I think both, on the revenue and the expense side, we are very much on track to deliver on the synergies that we talked about.

Yes. And I would add, I’m very pleased with Mark and his team. We’re coming in a little bit lighter on the acquisition and integration costs than we had expected. And in order that everyone can model this appropriately, I want to make very clear, in terms of the entirety of the Bureau van Dijk acquisition. Purchase price amortization associated with the entire deal will be $1.3 billion; annual amortization expense is $70 million per year and total annual amortization expense is $95 million from all of our legacy acquisitions. And in a minute, if someone is interested, I’ll walk through the guidance change and the different components of that. I expect we’ll get to another question on that. So with that Manav, anything further or we’ll move on to another question.

Hi. Thanks for taking my questions. Could you give us a sense of what pieces of your guidance are benefitting or taking it from FX moves versus last quarter? Just trying to see how the expectations for the underlying strength may have changed on a constant currency basis.

Certainly. We have a special bonus slide to discuss our guidance, which should be visible if you're on the webcast. Initially, we provided full year 2017 adjusted diluted earnings per share guidance in the range of $5.35 to $5.50. We have now included legacy amortization of acquisition-related intangibles, which accounts for a $0.12 change in guidance this year, representing about 25% of the $0.50 increase. The legacy MCO business is primarily tied to the MIS business, contributing approximately $0.28 to the guidance increase, or about 55% of this amount. This part of the business has significantly influenced the increase in guidance. Additionally, Bureau van Dijk's performance contributes around $0.10 to the guidance adjustment this year, accounting for about 20% of the rise. Altogether, these factors bring us to a total increase of about $0.50. The new guidance range is set at $5.85 to $6. We've also noted about $0.04 impact from foreign exchange, which the accounting team confirms is minimal. Less than 10% of the $0.50 increase can be attributed to foreign exchange effects.

And then for a second question on RD&A, looking at your guidance, seems to imply some continued acceleration on an organic basis for Q4. And I know last quarter, you folks have been a bit measured on the characterization of the improvement that was happening in that business last quarter. So, any updated thoughts on the go forward outlook and any color you can share there?

I would just say that you’re right. We’ve had acceleration in RD&A in the third quarter. And if you look at where our guidance was for RD&A before the Bureau van Dijk acquisition, that would imply that we’d have continued acceleration into the fourth quarter. So, that remains our view. The business is performing well, we’re pleased by what’s happening there, and we expect to carry on and deliver good results there.

Just want to ask about the international part of the credit rating business. It’s been very strong, I guess, all year, but you’ve been asked this throughout the year, but just revisiting. How much do you put on secular trends in that piece versus I guess just favorable conditions or as well as I guess currency helping you there?

I’ll just talk a little bit also about kind of the components of this very strong non-U.S. growth story because I think it’s a mix of some of the factors that you cited. Specifically, this quarter, we had much stronger revenue growth outside the U.S. We had real strength in Asian corporate and infrastructure. Obviously, the Asian corporate story importantly, part of that is China. We think that is a long-term trend; that surge we’re seeing in infrastructure issuance is also something that I think would be a longer-term secular trend. Europe, we saw real strength across the board, across all of our fundamental franchises, and we’re seeing reduced geopolitical risk there, and steady economic recovery. So, again, I think that will contribute to I think very constructive market conditions overall.

Tim, it’s Linda. I’ll outline the market insights we’ve received from the investment banks for everyone's consideration. These insights may not align with Moody’s revenue characterizations. So far this year, we’ve seen $1.1 trillion in issuance for investment-grade bonds, year-to-date. The outlook for the year is flat to up 5%. Last year, we started with an estimate for this year that suggested a flat to down 10% outcome. Therefore, I strongly encourage everyone to keep in mind that early estimates for upcoming years can often be substantially off from actual results. Currently, investment-grade bond issuance is on pace, with October’s issuance of $120 billion marking the largest October on record. We expect November to exceed $75 billion. Spreads are tight, remaining at three-year lows, and the market is robust. We anticipate $250 billion in high-yield bond issuance this year, which is an increase of 10% to 15% for the full year. High-yield bond issuance is significantly above last year's figures, and similar to the investment-grade market, high-yield spreads are near three-year lows. Despite the geopolitical environment, volatility has remained subdued, contributing to a friendly atmosphere for issuers. We discussed a relatively mild default outlook for high-yield bonds in the upcoming year. Leveraged loans are prominent, with $550 billion in issuance so far this year, representing a 40% increase expected for the full year 2017. The conditions in the leveraged loan market are very strong, with expectations for rising rates, significant refinancing and repricing activity driven by strong investor demand, and CLO issuance at $90 billion, increasing 80% year-to-date. In Europe, we see a similar outlook from the banks. There has been a busy period for investment-grade bond issuance, and they expect spreads and rates to stay near historic lows for the rest of the year. Positive investor fund flows continue, supported by the European Central Bank's indication of a prolonged period for quantitative easing. Eurozone GDP growth is at its highest in seven years, which will help sustain the market, even with low inflation. The Bank of England raised rates yesterday for the first time in a decade but noted that another increase isn’t on the immediate horizon due to Brexit concerns. Overall, market sentiment remains very positive in Europe, with a strong pipeline for both high-yield bonds and leveraged loans, while credit spreads are compressing, providing issuers with record low rates. Additionally, U.S. rates remain significantly higher than European rates, which may keep a ceiling on U.S. rates. We are also aware of a new nominee for the Fed chair. The current forward covers indicate an 88% probability of a rate hike in December 2017. We'll monitor how that develops. In summary, the views on spreads are very attractive. I'm not sure if Rob wants to add anything further, but I believe that summarizes the banks' insights on issuance.

Yes. The only other thing I would add, Linda, is obviously, the recent announcement by the ECB with the planned reduction of their asset purchases. I think our view is that it’s a pretty gradual step towards eventually normalized monetary conditions. We expect that the impact on market financing conditions will be moderate at most. And as Linda said, they have also signaled they intend to kind of hold on rates beyond the monetary stimulus program. So that will continue to support some attractive issuance conditions combined with economic growth in many parts of Europe.

And just one follow-up on BVD. Linda, you gave some helpful kind of bridge in terms of the profit margin versus what we might have thought before for that business. What about versus that 8-K but it was like $70 million per quarter or kind of $140 million of revenue? And then, Mark’s approach, he encouraged us to use one in five, more than $80 million on a run rate. Is there something different versus that statement I guess or that 8-K that we looked at versus what you will now see can bridge that at all for us?

Sure, I’ll let Mark talk about that.

Tim, it’s Mark. I think the difference is, we’re seeing acceleration in the sales performance of the business, which is slowing through the revenue over time. So, I think that’s basically what’s going on. The second half of last year was a little light from a sales perspective and that flowed into first half revenue in 2017. But as I said, we’re seeing acceleration, significant acceleration. That’s what I think explains the difference between what you saw in the 8-K and what we’re talking about today.

Hi. Another BVD question for you. You talked about the business performing well and maybe even a couple of takeaways. Can you just maybe dive in a little bit deeper into those takeaways? What’s causing them, why would someone switch away from their other vendor and do you expect more of those to come?

What I was referring to was we’ve had a couple of situations already where we’ve gone to customers with a joint product offering. So, BVD product together with the Moody’s Analytics product just offering a more complete or more comprehensive solution to customers’ information needs. I mean, frankly, that was part of the one of the important premises of the acquisition was that we thought there were opportunities for us to do that, and so we’re seeing that. So, by joining our product offerings together, we’re finding that we’re able to meet a broader set of needs or broader set of customers. As a result, we’re able to displace some competitors. So, we’ve had a couple of examples of that already. And it’s still early days. We think there is a lot more opportunities there for us.

And Joe, let me clarify one point. The 8-K that has been referenced is formatted unusually for numbers. It is required by regulation to include BVD management’s projections based on their audited 2016 financial statements, which are in Dutch IFRS, while we adhere to U.S. GAAP. As you may remember, we have growth expectations that include revenue synergies we are considering. When you factor in those synergies, you can bridge the gap between the two. As we've mentioned previously, we still anticipate those synergies to materialize, as Mark has indicated. I want to ensure that this is clearly understood.

Got it. My second question is just on 2018. It sounds like you’re fairly comfortable with the impact of what the tax reform will be and issuance. It sounds like you got a ticker in the Analytics business with BVD. So, I guess I’m wondering what areas or what do you think are the great unknowns as you head into next year, particularly on the margin side but a little bit on the demand front as well, what are you concerned about? Thanks.

Rob, why don’t you tackle what you’re seeing on the rating side and then Linda can jump in.

Yes. I’ll provide a balanced answer here with both some of the support as well as some of the risk. We plan to provide a view on 2018 on our 4Q earnings call as we always do. That allows us to account for Christmas through the end of the year and other factors like Wall Street estimates and updated macro assumptions. But that said, we certainly see some themes that will shape our outlook. Ray’s touched on a few of these. But, we see support for issuance growth coming from a number of factors that include economic growth, continued M&A volumes, modest geopolitical risks, improving commodity prices, and a low and actually declining, as Ray and Linda pointed to declining default environment. We think that should carry over into next year. The question marks for us as we look into next year include Asia’s ability to grow off of a very robust issuance growth in 2017, further growth in the U.S. investment-grade sector off some very robust recent levels, the potential of deceleration of re-fi activity that we’ve seen in 2017, particularly in the bank loan space, and whether we will see an improvement in U.S. public finance refunding activity, which has been down pretty sharply throughout this year. The last thing I would point to is just the potential increase in volatility poses a risk. If you think about this past year, we really didn’t see any kind of shutdowns, market shutdowns where the market closed for one or two weeks. If we were to see that, that would obviously provide some downside.

Sure. We are not ready to predict an estimated tax rate for next year yet, but we are working with about 30% for this year. If there is a reduction in tax rates, it could benefit us by $0.07 to $0.08 for each percentage point the corporate tax rate decreases. We also maintain our ability to price effectively and prioritize value for our issuers. Our outlook remains at 3% to 4%. Importantly, increases in growth and interest rates are not necessarily unfavorable for Moody’s. Historically, during periods like 2008-2009 and 2012-2013, when interest rates rose by more than 100 basis points, MIS’s revenue actually grew. If the economy shows growth, we might see an increase in issuance for capital expenditures, which has been quite limited recently, as most of our activities have been focused on refinancing, shareholder payments, and mergers and acquisitions. We would like to see a broader range of uses for proceeds. Moreover, if rates rise due to strong economic growth, it would not necessarily be a negative scenario for Moody’s. Ray may have additional insights.

I think that’s pretty comprehensive. So, why don’t we see what other questions we got?

Yes. Hi. A couple of questions. How would you characterize the M&A environment here in the U.S. and Europe today versus a year ago?

It’s been pretty good. We obviously had a period of very heavy M&A volume in the last couple of years. I would anticipate the M&A environment to remain positive as companies are enjoying economic growth and thinking about investment and building out their businesses. So, I think we should be looking at a good environment for M&A on a going-forward basis.

The only other thing I’d add to that Ray, obviously, we’ve got a robust equity market, which I think will be healthy for M&A. M&A has become an increasingly important driver of some of the recent bank loan activity that we’ve been seeing, as we’ve been seeing the modest deceleration in some of that refinancing activity.

And some of that may convert over to bond activity.

I also wanted to ask about the typical trend of refinancing that occurs each year. How would you describe that for your business this year? Specifically, how much do you think has been brought forward for future years, compared to usual?

Well, in terms of pull forward from 2018, I think that has been very strong. So, a lot of maturing debt for 2018 has been part of the 2017 story. What we’re looking at though is, again, a substantial build of the refinancing walls each year. The fact that 2018 now doesn’t have much refinancing in its profile, we look to 2019, 2020, and the walls build every year from 2018 out. It really becomes more of a question of will firms seek opportunistically to pull forward from multi-year refinancing walls. That is what we’ve been seeing to date, I think. We’ll have to keep an eye on whether that’s going to continue to characterize the refinancing profile going forward.

Just a quick housekeeping question, if I may. Linda, what was the incentive compensation for each of the first three quarters this year? I recall you mentioned a $20 million profit share. Is that figure included in the number you're going to provide us, or how does that fit in?

Profit sharing goes in the salary line. So, for the year, if you look at profit sharing, the numbers that we put up, sequentially for the first quarter, we went $52 million; second quarter, $51 million; and then, the number pops up to $78.4 million for the third quarter. We’re thinking for the fourth quarter, if we had to eyeball this, Craig, the team is thinking 60ish, depending on whether we have another very strong quarter in the fourth quarter that would take us beyond the guidance we’ve just given you, could be higher, but 60ish, given what we’re seeing right now. So, hope that’s helpful to you.

I know it’s late. I got a couple of numbers questions. Linda, I know you’re dying to talk about the amortization but I’m not going to go there unless you’d really want to. Just in terms of the calculation of the adjusted diluted EPS. Is it possible to give it what it was historically for Q4 2016 and for 2016, just so we know what the base we’re looking at?

I think we don’t really want to go into historical pro forma here, if that’s okay.

I think you would just be looking at what the legacy purchase price amortization would be as an add-on to the existing adjusted numbers. But, I don’t have that number in front of me.

So, let me ask the question another way. If I’m looking at growth in adjusted diluted EPS for the fourth quarter, how do you think that will compare to the year-over-year growth we just saw in the third quarter?

I’m not sure we want to give guidance on the fourth quarter specifically, Jeff. I think we’re viewing that. We will probably be up from last year’s fourth quarter for the rating agencies, but potentially, sequentially down from this year. I think Rob may have some more color he wants to give you on that. Mark may want to give some color on MA. But I’m not sure we want to get all the way into quarterly guidance for the fourth quarter. Rob, is that about directionally correct?

Yes. That’s exactly right, Linda.

Okay, great. I want to ask a fourth quarter question, how about a 2017 question, what should we be modeling for interest expense for the year?

Sure. I can get that for you in just a second. And anticipating the expense ramp question, we would expect that excluding the BVD, the first quarter to the fourth quarter expense ramp would be $55 million to $65 million. We had had a lower number obviously when we talked with you before. If you include BVD, the expense ramp is $120 million to $130 million. Both of those numbers are up from $40 million to $50 million previously. We have the addition of BVD, we have the incentive compensation. So, I just want to make sure everybody can model that correctly. Did you want the full 2017 financing cost or do you want the quarter?

I’ll take whatever you want to give us.

Year-to-date, the financing costs from borrowing are approximately $140 million, and for the quarter, it is about $49 million.

Hi. Good morning. I just want to talk about the longer-term trajectory of margins in Moody’s Analytics. Where do you think that could track over the next couple of years, now that you’ve closed BVD?

Sure Mark want to take that?

Sure. Well, I think you really have to decompose that into two pieces. We have to think about the trajectory of margins for the legacy business and then think about what the impact of BVD is. We’ve talked about work that we’re doing to drive margin expansion in the legacy business, principally by expanding the profitability in the ERS segment. We are continuing to make progress on that, we delivered good results in the quarter. The margin expansion you saw in the quarter, about half of that was due to BVD and the other half was organic. That’s true if you look at the nine-month margin expansion in MA as well. So, we’ve got a plan, we’re executing on the plan, continuing to see good results there that we expected, and we’ll continue to pursue those efforts over the coming quarters and years. Then separately, you’ve got the Bureau van Dijk effect. That’s a high-margin business. It’s going to be accretive to the MA margin. We expect that’s going to be a boost to profitability in Moody’s Analytics. So, we’ve got two things going on, both of them I think are moving us in a very positive direction, and we’ll continue to pursue our efforts on both sides.

Got it, thanks. I appreciate your comments around the 30% cap on interest flexibility will have much of an impact. Can you give us a sense around how sensitive you think the market is, if that cap declined to say 25%?

Obviously, you’re starting to work your way up into higher speculative grade issuers, if you’re at 25% or 20%. So, I can’t quantify that for you. But yes, you are obviously going to be moving up toward the investment grade market as hypothetical caps come down.

Conor, we would point out that Germany, and I believe the UK is working on the 30% EBITDA cap. So, that is somewhat of the view that is looked upon in other countries, maybe where that prospective number has come from.

Good afternoon, everyone. First of all, welcome to Steve Maire. I think Salli got the better side of that job. I have a couple of questions about BVD. The first is regarding the revenue deceleration and growth deceleration in 2016 and 2017, followed by the re-acceleration in 2017. Did you change anything in the sales force structure or organization that contributed to this improvement?

The short answer, Bill, is no. What we’re talking about here, these were things that really predated our involvement in Bureau van Dijk. They had discontinued a product and began to build a new product to replace it, which we are actually working with them on and helping bring a better product to market. The effect of that has been elevated attrition in the legacy product, which having worked through that, we’re now seeing the business begin to accelerate. So, what we’re observing here didn’t really have anything to do with our acquisition of the company. It was a historical thing that we were aware of and prepared for as we got involved with the company.

You mentioned some early revenue synergies that you’re seeing taking place. I want to ask about Orbis Bank Focus, and that’s one that I’ve heard talked about as potentially being a viable or alternative to S&P Global’s SNL?

Yes. That’s right. Again, that’s a product that we are working together with Bureau van Dijk on. We’ve got a lot of experience in that area working with the rating agency in providing very extensive statistical coverage for rated banks. We know from talking to our customers that there is demand for alternative products that would cover a much larger universe of banks. Bureau van Dijk had started to build out a product for that market. We’re now working together with them to build out what we think will be a better product and we will be coming to market with that product shortly. That is an important product development synergy for us.

Hi. Maybe I missed this. Can you talk about the source of the strength in professional services?

Yes. You’re right. We were up in professional services this quarter for the first time in a while frankly. It was attributable to strength in both of our professional services businesses. Both, our financial training and certification business did well and was up in the quarter as was the Moody’s Analytics knowledge service businesses, our India outsourced research and analytics unit. So, both of those businesses had a string of difficult quarters but have made some very good progress. We think we’ve turned things around in both of those areas. We’re hopeful that the third quarter results are something that we’re going to be able to continue over the coming quarters as well.

I’ll just add to that. We’re pleased with the performance in professional services and are targeting a return to positive growth in that area consistent with the marketplace.