Moody`s Corp (MCO) — Q4 2017 Earnings Call Transcript

Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's Fourth Quarter and Full Year 2017 results, as well as our outlook for full-year 2018. I am Steve Maire, Global Head of Investor Relations and Communications. This morning, Moody's released its results for the fourth quarter and full year 2017, as well as our current outlook for the full year 2018. 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. During this call, we will be presenting non-GAAP or adjusted figures. To view the nearest equivalent GAAP figures and GAAP reconciliations, please refer to our earnings release that was filed this morning. Before we begin, I call your attention to the Safe Harbor language, which can be found toward the end of our earnings release. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the Act, I also direct your attention to the Management's Discussion and Analysis section and the Risk Factors discussed in our Annual Report on Form 10-K for the year ended December 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. Before I turn it over to Ray, I'd like to remind everyone that Moody's will be hosting an Investor Day at the end of this month on February 28 in New York City. Please contact the Investor Relations team if you'd like additional information about this event. I'll now turn the call over to Ray McDaniel.

Thank you, Steve. Good morning and thank you everyone for joining today's call. I'll begin by summarizing Moody's Fourth Quarter and Full Year 2017 Financial Results. Linda will follow with additional fourth quarter financial details and operating highlights, and I'll then conclude with comments on our outlook for 2018. After our prepared remarks, we'll be happy to respond to your questions. In the fourth quarter, Moody's record revenue of $1.2 billion increased 24% from the fourth quarter of 2016, primarily as a result of an increase in rated issuance, the acquisition of Bureau van Dijk, and strong organic performance from Moody's Analytics. Operating expenses for the fourth quarter of 2017 totaled $703 million, down from $1.4 billion in the fourth quarter of 2016. Operating expenses in the fourth quarter of 2016 included an $864 million charge related to a settlement with the U.S. Department of Justice and the attorneys general of 21 U.S. States and the District of Columbia. Excluding this Settlement Charge, operating expenses were up 27% from the prior year period, including 12 percentage points attributable to Bureau van Dijk operating expenses, amortization of acquired intangible assets, and non-recurring Acquisition-Related Expenses. Operating income was $463 million, up from the fourth quarter 2016 operating loss of $473 million. Adjusted operating income of $519 million was up 22%. Foreign currency translation favorably impacted adjusted operating income by 3%. The operating margin was 39.7% and the adjusted operating margin was 44.5%. Moody's diluted EPS for the quarter was $0.13 per share, up from a loss per share of $2.25 in the fourth quarter of 2016. Adjusted diluted EPS for the quarter was $1.51, up 20% and excluded a $1.26 one-time charge related to the net impact of changes in tax laws in the U.S. and Europe. Additional adjustments included amortization of acquired intangible assets and Acquisition-Related Expenses. Turning to full-year performance, Moody's record revenue for the full year of 2017 of $4.2 billion was up 17% from 2016. U.S. revenue was $2.3 billion, up 12%, while non-U.S. revenue was $1.9 billion, up 24%. Foreign currency translation favorably impacted Moody's revenue by 1%. Revenue at Moody's Investors Service of $2.8 billion was up 17% from the prior year. U.S. revenue was $1.7 billion, up 13%, while non-U.S. revenue was $1.1 billion, up 23%. Revenue at Moody's Analytics was $1.4 billion, a 16% increase over the prior year. U.S. revenue of $646 million was up 7%, while non-U.S. revenue of $785 million was up 25%. Organic MA revenue was $1.3 billion, up 8% from the prior year. Operating expenses for full-year 2017 totaled $2.4 billion, down 19% from $3 billion in the prior year, which included the fourth quarter 2016 Settlement Charge. Excluding the Settlement Charge and a restructuring charge in 2016, operating expenses were up 15%, which includes 5 percentage points attributable to Bureau van Dijk operating expenses, amortization of acquired intangible assets, and non-recurring Acquisition-Related Expenses. There was no material impact on expenses from foreign currency translation. Operating income was $1.8 billion, up $639 million from 2016, which included the fourth quarter 2016 Settlement Charge. Adjusted operating income of $2 billion was up 21%. Foreign currency translation favorably impacted adjusted operating income by 2%. Moody's operating margin was 43%, up from 17.7%, and adjusted operating margin was 47.3%, up from 45.5% in the prior year. The effective tax rate for full year 2017 was 43.6%, which included a net charge in the fourth quarter related to the impacts of tax reform in the U.S. and Europe. The effective tax rate was down from 50.6% full-year 2016, which included the non-deductible portion of the Settlement Charge. Excluding the net charge in 2017, the effective tax rate was 29.9%. Excluding the Settlement Charge in 2016, the effective tax rate was 31.3%. We're expecting another solid year of growth in 2018 and our outlook is for low double-digit percent revenue growth, diluted EPS of $7.20 to $7.40, and adjusted diluted EPS of $7.65 to $7.85. Both ranges include an approximate $0.65 benefit from U.S. tax reform. I will 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 fourth quarter was a record $1.2 billion, up 24%. U.S. revenue of $614 million was up 15%; non-U.S. revenue of $551 million was up 35% and represented 47% of Moody's total revenue. Recurring revenue of $581 million was up 23% and represented 50% of total revenue. Foreign currency translation favorably impacted Moody's revenue by 3%. And looking now at each of our businesses starting with Moody's Investors Service, this was the fourth consecutive quarter of record revenue for MIS. Total MIS revenue for the quarter was $725 million, up 19%. U.S. revenue increased 17% to $440 million. Non-U.S. revenue of $285 million was up 23% and represented 39% of total MIS revenue. Foreign currency translation favorably impacted MIS revenue by 3%. And looking now at the lines of business for MIS; first, corporate finance revenue for the fourth quarter was $334 million, up 20%. This result reflected strong issuance activity in the U.S. investment grade and speculative grade bonds, EMEA speculative grade bonds, bank loans, and Asian investment grade bonds. U.S. and non-U.S. corporate finance revenues were up 16% and 28% respectively. Second, structured finance revenue totaled $148 million, up 13%, primarily driven by strong contributions from CLOs in both the U.S. and Europe, as well as an increase in rated U.S. REIT transactions. U.S. and non-U.S. structured finance revenues were up 17% and 5% respectively. Third, financial institutions revenue of $119 million was up 34%. This result was largely driven by an increase in banking issuance from infrequent issuers. U.S. and non-U.S. financial institutions revenue were up 36% and 33% respectively. Fourth, public project and infrastructure finance revenue of $119 million was up 16%. This result reflected increased U.S. public finance issuance as municipal borrowers accelerated financings ahead of anticipated changes in U.S. tax legislation as well as strength from infrastructure finance. U.S. and non-U.S. public project and infrastructure finance revenues were up 14% and 18% respectively. And turning now to Moody's Analytics, total revenue for MA of $441 million was up 32%. U.S. revenue of $174 million was up 10%. Non-U.S. revenue of $267 million was up 51% and represented 60% of total MA revenue. Organic MA revenue for the fourth quarter of 2017 was $379 million, up 13% from the fourth quarter of 2016. Foreign currency translation favorably impacted MA revenue by 3%. And moving now to the lines of business for MA. First, research, data, and analytics or RD&A revenue of $258 million was up 55%. U.S. RD&A revenue was up 18% and non-U.S. RD&A revenue more than doubled. Bureau van Dijk's revenue contribution of $62 million for the fourth quarter included a $22 million reduction as a result of a deferred revenue adjustment required under acquisition accounting rules. Organic RD&A revenue was $196 million, up 17% from the fourth quarter of 2016, driven by broad strength in all product lines. Second, enterprise risk solutions or ERS revenue of $143 million was up 10% from the prior year period, driven primarily by demand for products that enable adoption of the International Financial Reporting Standard or IFRS 9 accounting requirement, as well as strong performance in the insurance product line. U.S. ERS revenue was down 5%, while non-U.S. revenue was up 18%. Trailing 12-month sales for ERS increased 7%. We continue to make progress on shifting the mix of the ERS business to emphasize higher margin products, with trailing 12-month product sales up 14% and services sales down 13%. Recurring revenue represented 69% of total ERS revenue in 2017, up from 66% in the prior year. And third, professional services revenue of $40 million was up 7%. U.S. and non-U.S. professional services revenues were up 6% and 8% respectively. And turning now to operating expenses, Moody's fourth quarter operating expenses totaled $703 million, down from $1.4 billion in the fourth quarter of 2016. Operating expenses in the fourth quarter of 2016 included the $864 million Settlement Charge. Excluding the Settlement Charge, operating expenses were up 27% from the prior-year period, which includes 12 percentage points attributable to Bureau van Dijk operating expenses, amortization of acquired intangible assets, and non-recurring Acquisition-Related Expenses. Other drivers of expense growth included additional compensation expense for merit increases and hiring, as well as increased performance-based incentive compensation. Foreign currency translation unfavorably impacted operating expenses by 1%. As Ray mentioned, Moody's operating margin was 39.7% and adjusted operating margin was 44.5%. And now, I'll provide an update on capital allocation. During the fourth quarter of 2017, Moody's repurchased approximately 200,000 shares at a total cost of $36 million or an average cost of $146.85 per share. Moody's also issued 100,000 shares as part of its employee stock-based compensation plans. Moody's returned $73 million to its shareholders via dividend payments during the fourth quarter of 2017. On January 24, the board of directors declared a regular quarterly dividend of $0.44 per share of Moody's common stock, which is a 16% increase from the prior quarterly dividend of $0.38 per share. This dividend will be payable on March 12, 2018, to stockholders of record at the close of business on February 20, 2018. For the full year 2017, Moody's repurchased 1.6 million shares at a total cost of $200 million or an average cost of $121.21 per share and issued a net 1.9 million shares as part of its employee stock-based compensation plans. The net amount includes shares withheld for employee payroll taxes. Moody's also returned $290 million to its shareholders via dividend payments during 2017. Outstanding shares as of December 31, 2017, totaled $191 million, approximately flat to a year ago. As of December 31, 2017, Moody's had approximately $500 million of share repurchase authority remaining. At year-end, Moody's had $5.5 billion of outstanding debt and $870 million of additional borrowing capacity available under its revolving credit facility. Total cash, cash equivalents, and short-term investments at quarter end were $1.2 billion, down $1 billion from December 31, 2016, primarily due to the acquisition of Bureau van Dijk. Cash flow from operations in 2017 was $748 million, down from the $1.3 billion in 2016. Free cash flow in 2017 was $657 million, down $1.1 billion from 2016. These declines in cash flow were due to the Settlement Charge payment in 2017. And with that, I'll turn the call back over to Ray.

Okay. Thanks, Linda. Before discussing our full-year guidance for 2018, I'd like to provide some highlights on our progress with the Bureau van Dijk integration and synergy activities. Our integration efforts are on track and we remain confident about achieving the synergy targets that we communicated when we announced the acquisition. Since closing the acquisition in August, we have enhanced Bureau van Dijk's products with content sourced from Moody's, launched programs to cross-sell Bureau van Dijk products, and initiated measures to enhance sales productivity and efficiency. In New York, San Francisco, and Hong Kong, Bureau van Dijk's staff are now co-located at Moody's offices, with six additional offices in Europe, Asia, and South America set to be combined in 2018. Bureau van Dijk's business continues to perform well, and we are very pleased with the progress we're making as we pursue our various collaboration and integration efforts. So, I'll conclude this morning's prepared comments by discussing our full-year guidance for 2018. A complete list of Moody's guidance is included in Table 14 of our fourth quarter and full-year 2017 earnings press release, which can be found on the Moody's Investor Relations website at ir.moodys.com. Moody's outlook for 2018 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 results for the year could differ materially from our current outlook. Our guidance assumes foreign currency translation at exchange rates as of January 31, 2018. Specifically, our forecast reflects exchange rates for the British pound of $1.42 to the pound and for the euro of $1.25 to the euro. As I noted earlier, Moody's expects full-year 2018 revenue to increase in the low double-digit percent range. Operating expenses are also expected to increase in the low double-digit percent range. The company is projecting an operating margin of 43% to 44%. Adjusted operating margin is expected to be approximately 48%. The effective tax rate is expected to be 22% to 23%. Full-year 2018 diluted EPS is expected to be $7.20 to $7.40. Adjusted diluted EPS is expected to be $7.65 to $7.85. Both ranges include an approximate $0.65 benefit, resulting from U.S. tax reform. Free cash flow is expected to be approximately $1.6 billion. Moody's expects share repurchases to be approximately $200 million, subject to available cash, market conditions, and other capital allocation decisions. Capital expenditures are expected to be approximately $120 million. Depreciation and amortization expense is expected to be approximately $200 million. For MIS, 2018 revenue is expected to increase in the mid-single-digit percent range. U.S. revenue is expected to increase in the low-single-digit percent range and non-U.S. revenue is expected to increase in the high-single-digit percent range. Corporate finance revenue is expected to increase in the high-single-digit percent range. Structured finance and financial institutions revenues are each expected to increase in the mid-single-digit percent range. Public project and infrastructure finance revenue is expected to decrease in the low-single-digit percent range. For Moody's Analytics, the 2018 revenue is expected to increase in the mid-20s percent range. U.S. revenue is expected to increase in the low double-digit percent range and non-U.S. revenue is expected to increase in the mid-30s percent range. Organic MA revenue is expected to increase in the low double-digit percent range. RD&A revenue is expected to increase approximately 40%. The full-year 2018 revenue contribution from Bureau van Dijk will be reduced by an estimated $16 million as a result of a deferred revenue adjustment required as part of acquisition accounting. Organic RD&A revenue is expected to increase in the mid-teens percent range. ERS revenue is expected to increase in the low-single-digit percent range, and professional service revenue is expected to increase in the high-single-digit percent range. Before turning the call over to Q&A, I would like to talk for just a minute about Linda. As you all know, last month, we announced that Linda will be leaving Moody's after more than 12 years of outstanding service as our Executive Vice President and Chief Financial Officer. We're grateful for Linda's service and wish her every success in the next phase of her career. We're also grateful that Linda has agreed to remain at the company for a transition period, and I'm confident that with the strong team she has built, her successor will be able to hit the ground running. We're now focused on finding the right person to take on the role, and I have begun a comprehensive search. We'll be looking at both internal and external candidates and have engaged a search firm to assist us in this process. Of course, Linda's departure has no effect on our corporate strategy or financial priorities, which have delivered an unprecedented period of growth for Moody's during Linda's tenure. 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. Your guidance calls for mid-single-digit growth in MIS after a year where the segment grew 17%, and it looks like non-U.S. is really the strong part. So could you just give us some color on which geographies and products are really driving this high-single-digit growth in non-U.S. in 2018 and just also just what you're seeing so far in 1Q, just given that it's the toughest comp for the year? Thanks.

Sure. Maybe we can kick it off by letting Linda talk about the consensus views that we've collected, and I know Rob will have some comments on this.

Yeah. Toni, thanks for the question. I'll start with the views from the various banks that we survey, and again, these views are the consensus views of those banks and may not line up exactly with Moody's revenue categorizations. For investment grade bond issuance for 2018, the call is for $1.25 trillion of issuance, which is flat to down 10% from 2017. Notes include that the market remains robust with tight spreads offsetting rising rates. January 2018 was the second-largest January on record after January of 2017. You probably noticed the growing M&A pipeline among investment-grade borrowers, and we note the 87% probability of a Fed rate hike in March, with an average expectation of three rate hikes in total in 2018. For high yield, the call is for $285 billion of issuance, flat to up 10% from 2017. Notes include high yield fundamentals remaining strong with demand for new issues, an improving macroeconomic environment, and relatively narrow spreads. Issuance remains primarily driven by refinancings. Year-to-date 2018 issuance is already up 10% year-over-year and the forward pipeline is characterized as robust. A potential headwind though is the tax reform impact on companies with very high amounts of debt and low EBIT and EBITDA, and I'm sure we'll talk about that later. On the leveraged loan front, the third category in the U.S., $500 billion is expected for 2018, flat to down 10% from 2017. Notes include that the leveraged loan market remains strong and spreads are narrow. Full-year 2018 is expected to be down slightly from a record 2017, with upside should M&A activity accelerate or if rising rates create further demand for floating-rate paper. And switching over to Europe, investment grade in Europe has had a bit of a slower start for issuance for the year, but it is expected to pick up post-earnings season. Spreads are near historical lows, some concern about the ECB QE tapering, but those are muted, and the euro area continues to see strong growth in GDP and corporate profit. Speculative grade in Europe, notes include high yield and leveraged loan markets are in good shape with strong forward pipeline, though issuance levels faced tough comps as compared to strong 2017. Spreads narrowed due to strong demand, and those are fueling opportunistic issuance. So again, that's the view from the bank. And then I'll ask Rob to comment a little bit more about the various sectors.

Yeah. Thanks, Linda. So Linda provided the Street estimates for issuance overall for U.S. corporate, generally flattish to slightly down. Our forecast is broadly in line with those estimates as you'd expect. And as you noted, Toni, we're coming off a very strong issuance from the corporate sector in 2017 in really all regions. Just kind of tying this together, several factors influencing our overall issuance outlook this year. Linda touched on a few of these, but expanding global economy, this concept of synchronous growth across the G20, the first time we've seen all G20 economies growing at the same time since 2010, modest geopolitical risks, firming commodity prices, declining default rates that are supporting the tight spreads that Linda talked about, and we expect to see some robust M&A activity, which we think will help to offset some of the expected decline in the refinancing activity that we saw, particularly in the bank loan market last year. There are obviously some risks, namely the recent increase in market volatility and concerns about inflation and rate increases. Currently, our outlook hasn't really accounted for any kind of market disruption to issuance activity in 2018. We didn't have that in 2017. And then maybe as we take the issuance outlook and then build to the revenue guidance, obviously, there are several factors that go into how that then translates into revenue. First, the issuance forecast that I talked about, we also have some assumptions around mix, which you've heard us talk about on many of these calls, then new mandate activity, I'm happy to talk about the new mandate activity for the year at some point on the call. Recurring revenue growth from an increase in monitored ratings, and I think this is important – this is about a third of our total revenue, the recurring revenue. You've seen some pickup in the recurring revenue growth rate over the last couple of quarters, and that is due in large part to the growth in first-time issuers that we are now rating. Finally, kind of our standard pricing contribution and a bit of favorability from FX; that gets us there.

That's great. And just for my follow-up, Linda, I think this is the question everyone wants to know, but what are your plans and what drove your decision to move on?

Thanks, Toni. This is my 51st first earnings call for Moody's, and I think it's just time to take a look at some other things that are out in the world and very orderly transition and nothing really too exciting to say; don't have finalized plans as of this point.

Thank you. And Linda, I would just like to say thanks for all your great work here over the last couple of years. I am missing you already, big shoes to fill for sure. In terms of the RD&A business, the organic growth looked particularly strong and the outlook for 15% growth next year. Just want to be clear, this is ex-BvD, right? That's one. Two is, what's driving the, what seems like better than recent performance in the RD&A business? And then let me ask my follow-up in advance. The margins in the legacy MA business, can you speak to the trend you're seeing there? Thank you.

Excuse me, Peter, it's Mark. So in RD&A, first, just to be clear about what's in and what's out, in 2017, there is no Bureau van Dijk in the – when we talk about organic RD&A for 2017. That includes no Bureau van Dijk. In the 2018 guidance, we do have, in the fourth quarter, Bureau van Dijk becomes organic, so we will have Bureau van Dijk in the 2018 numbers and reflected in our 2018 guidance for RD&A. So that's the – definitionally, that's what we're working with. Just to provide some color around the good – the very good results we're seeing in RD&A. I'd just call out that we had very solid low-double-digit underlying growth in the credit research and data businesses, which was a result of our work to improve upon and expand the content delivered to our CreditView platform and our data feed. New business production has been solid. Customer attrition has remained very low, and our yield from existing customers generated strong growth as customer institutions are upgrading their usage rights and extending access to our content across more users in their organizations. In addition, we gained 2 or 3 points of growth in RD&A in the fourth quarter from one-time projects, which was mostly modeling work for customer stress testing and IFRS 9 requirements. Our results were further helped in the fourth quarter by about 300 basis points of favorable FX. So in short, we are seeing very good execution of our product strategy, with strong take-up of the range of our capabilities, plus some FX benefits. That's what we saw in the fourth quarter of 2017 that drove the very good numbers we had. And as we look into 2018, frankly, it's more of the same. We have good momentum going into 2018. We see continued good performance in all of the businesses, especially as we bring our new content delivery platform, CreditView 2.0, to the market in midyear. CreditView 2.0 will provide a more modern interface with expanded content and greater flexibility that accommodates access to a broader range of data, which will enable us to better cross-sell the Bureau van Dijk content. We will also get a strong year-on-year contribution from Bureau van Dijk as the business moves into the organic category in the fourth quarter. In addition, we also expect continued favorable FX impact, which takes up our already strong full-year outlook by another couple of points.

Got it. And then how about the legacy MA margins and the trend you're seeing there?

Yeah, well, you saw in the fourth quarter, we had 300 basis points of expansion in the adjusted operating margin. Most of that is from the legacy Moody's Analytics business, with some additional contribution from Bureau van Dijk. We're seeing good success as we continue to rigorously pursue our strategy to drive margin expansion in MA. You may note that we had no head count growth in Moody's Analytics next year. Ignoring the addition of the Bureau van Dijk staff, we literally had two more people working in Moody's Analytics at the end of 2017 compared with the end of 2016. So the strategy is to deploy the resources that we have against our very best opportunities, which we've identified and are pursuing them, and we expect to continue to pursue that strategy and feel good about where we're headed.

And Peter, it's Ray. I would just add, as we look forward in 2018, Moody's Analytics will be getting a larger allocation of our shared service expense because of the increased size of the business with the acquisition of Bureau van Dijk primarily, so just in terms of what to expect.

Peter, also – it's Linda. Just so everyone is aware, we're not helping Mark from the accounting perspective here. As we brought on the business, we had to do, with the BvD business, we had to move through a deferred revenue adjustment. We handled some of that in 2017, and some of that will remain in 2018, just so there's a bit more guidance for modeling purposes. We expect that there is about $16 million left of deferred revenue adjustment for Bureau van Dijk in 2018. Just so you have the detail quarter-by-quarter that lays out about $10 million in Q1, $5 million in Q2, and the rest in Q3. I think we're done with that once we lap the close of the acquisition in August 2018. So Mark is nodding; just a quick addition there in terms of its deferred revenue haircut in case it's not as well understood as it should be.

Hi, thanks for taking my questions. I was wondering if you could speak on capital allocation a bit, what you plan to do with the proceeds from the tax savings. It seems like you'd probably just delever quicker and faster. But wondering if any tweaks or changes to your normal capital allocation priorities as we look to 2018. Thanks.

Sure. It's Linda, and I'll let Ray help me with this one. I think we announced when we took on the Bureau van Dijk business that with the $2 billion of debt we had added for that acquisition, our plans for 2017 and 2018 really centered on deleveraging after that deal. In 2018, we're planning to reduce our debt by about $500 million, and we're ahead of schedule in that process because we are strong operating cash flow. We think our capital allocation priorities are going to remain about the same. We have some very good opportunities to invest in our business which will always be job one. In terms of our international cash, we probably have less cash offshore than many corporations do at that point because we spent $1.3 billion of it for the Bureau van Dijk acquisition. So for Moody's, we may end up with a couple hundred million dollars of offshore cash to repatriate, but not a huge amount. So I think we're going to stick to our plans and continue to focus on deleveraging. And as I think Ray had mentioned, about $200 million of share repurchase on the docket for 2018. Ray may have something else you might want to add.

No. I just – I agree with how Linda has characterized our priorities. It is deleveraging. First, we are going to be able to be ahead of schedule as compared to our acquisition analysis on the deleveraging. And at the same time, we are going to be able to make necessary investments in the growth of the business.

Okay. Okay. Got it. That's helpful. And then for a follow-up, could you just speak to MIS margins, down year-over-year in the quarter. I realize it's up strongly on a full-year basis, but this comes despite the strength in revenue growth. How much is driven by mix versus investments or just incentive comp and help us understand how these shape your outlook for that segment as it relates to your 48% margin guide for 2018? Thank you.

Sure. I'll start on this one. It's Linda. In fact, the MIS operating margin did decline by 110 basis points despite 19% growth in revenue in the quarter. On the full-year basis, it's important to note that the MIS operating margin is up 190 basis points. We had some unusual activity in the fourth quarter. We would really point you towards the full year as being more indicative. But in the fourth quarter, we kind of saddled Rob with some additional expenses here. As you know, we had very strong performance in the fourth quarter, so we had to increase our performance-based incentive compensation, our stock compensation, and we had profit sharing in 2017. I think the total amount was a little over $10 million, so all of that hit MIS. The second thing that was important is we had a little bit of a severance charge in one of the non-U.S. businesses. All that comes to a little bit less than $20 million or so. So, really just the result of very strong performance and one little item that we right-sized. But I think you should see the margins back to as Rob had described previously, but I'll let him follow up on this.

Yeah. Maybe just to give a little color about what we're going to do to continue to drive on the margin. You've seen our results over the last several years; we're continuing to look for further efficiency in managing expenses in a disciplined fashion. So a couple of things I might just point to I think will support that. First, we just this year completed a reorganization of our junior staff into a dedicated support organization. That's going to help us manage our staffing more effectively through the inevitable ebbs and flows of issuance and drive up our resource utilization. Second, we're leveraging technology in a variety of ways across MIS. We just launched our first bots in October as part of our Robotic Process Automation initiative and these bots are automating manual repeatable tasks that are currently being done by people. We're also developing workflow and analytical tools that are going to help the analysts be more efficient and spend their time focused on higher value-added activities. The last thing I'd say is we're hiring more staff in low-cost locations like India, and we're looking to open an office in Costa Rica this year through MIS so that we can make sure we have the right jobs in the right places. In this past year, to give you a sense, about half of our head count growth was at our support center in India.

Okay, got it. Thanks so much.

Yeah, thank you. My first question was just around guidance. I usually think when you give guidance in the beginning of the year, it's a bit conservative. And I guess there's a few areas where I just need a little bit more help here. I think one of the areas was on the corporate finance group, which I think Rob explained with mix and new mandates maybe. But similarly, the PPIF group, it sounds like at least in the U.S., it's going to be down quite a bit. So maybe, there is an international mix here where it helps you down only low single digits, we would have thought more. And sort of the second part, the guidance part was just around FX, Linda. If you could tell us the contributions you've assumed on the revenue and margin side, I presume that's benefit because your spot – your guide is above the spot rate, which is unlike prior years, I believe.

Sure. Why don't we let Rob start off on the outlook around PPIF and corporate?

Yeah. So keep in mind, our PPIF segment has several rating lines in it. We do have a mid-single – low-single-digit revenue decline as our guidance. But we have a significant – we think that the U.S. public finance issuance is going to be significantly adversely impacted from the changes to the U.S. tax law; that's really around the loss of tax-exempt status for advanced refundings in U.S. public finance, which was, depending on the year, somewhere between 20% and 30% of the market.

And the pull-forward that we saw in the fourth quarter.

That's right. We saw some pull-forward activity. I think probably a modest slowdown in infrastructure after a very strong year around the globe and a pretty stable issuance environment in sub-sovereign and all that then kind of builds to, ultimately to our revenue outlook.

Yeah, it's Linda. On the corporate side, before we move away from Rob, I always encourage him to speak a little bit about what he's seeing in new mandates because analysts have expressed interest in this. So why don't you go ahead and cover that, Rob?

Yeah, sure. And that also is going to touch on, I think, one of Toni's questions around the guidance around non-U.S. growth. So a really good story in the fourth quarter, 260 first-time mandates; that's up about 47% on the year-over-year quarter. So that took us above 1,000 new mandates for the year, setting a new record. We expect somewhere slightly below that number, but still another strong year for first-time mandate activity. The strength in first-time mandates, that we had continued into that – we see that into the pipeline. And interestingly, as we look at the mix of first-time mandates and the growth, the European and Asian first-time mandates grew at a rate of growth that was about 2x first-time mandates in the United States. So that then contributes to that higher rate of growth for non-U.S. revenues, at least in part.

And Manav, on the FX point, you're right. FX, the spots have been moving around quite dramatically. We expect FX to have a 3% positive impact on revenue in 2018 and a 3% positive impact on adjusted operating income. As you know, our main exposures are to the euro and the pound, and we put a pin in it with the pound at $1.42 to the dollar, as Ray said, the euro at $1.25. Probably for your planning purposes, the rule of thumb here is that €0.01 decline in the euro takes about $0.01 off our EPS, and the £0.01 decline in the pound basically doesn't move our EPS all that much. So we're a little bit more sensitive to the euro, and hopefully, that will help you out. Yes, we do note that the currencies are moving around a bit.

Okay, got it. And then if I could just have you give us the expense build that you typically give us going into the fourth quarter and maybe just that 3-point revenue growth. I presume MA has more of that, if you could just help us price that out.

Let me give you the expense ramp for next year, which is what I think you're looking for. For 2018, we're looking for an expense ramp of $60 million to $70 million, and I'll get somebody to give me a first-quarter expense number so we know what we're starting from here in just a minute. The expense ramp, as you know, can be very strongly impacted by the timing of expenses, FX movements, and as we saw this year, very strong late-period changes in incentive compensation. So $60 million, $70 million is given what we know now. But we'll look at that as we go through the year. So let's use a starting number for the first quarter of 2018. Maybe sort of $635 million might be a good place to start and then look at $60 million to $70 million increasing ramp as we move through the year.

All right. Thank you.

Thanks so much. I hate to go back to tax reform, but I'm going to. Even in your prepared remarks or I think maybe even bankers remarks, you note about the potential adverse impact of tax reform in a high yield market, I know it's still early. Are you seeing any of that? And then even on the corporate side or the investment-grade side, excuse me, I know there was some noise early on about the limits on corporate expense, interest expense deductibility, and I know that we've watered down a little bit, but again, are you hearing anything from your potential customers on that front as well? Thanks.

Yeah. Rob, do you want to talk about what you heard from people?

Yeah. It's a good question. As you can imagine, we're in very regular contact with the issuers on this topic. I think the general view is it's still very early days in terms of seeing any kind of change to corporate behavior. The highly leveraged companies that we're speaking with have not indicated that this is a significant issue, at least not yet. And obviously, that remains to be seen because that's where the impacts could be more noticeable. I would note though that there is an enormous amount of money that's been raised by the private equity firms that needs to be deployed, and we're seeing this in the form of a very active LBO market at this time.

And I'd just add that in terms of the caps on interest rate deductibility, that is really going to only have an impact for firms that are at the bottom of the speculative grade rating scale, so say B3 and below, and then obviously the actual impact will vary by individual company.

That's inclusive of the benefits in the first quarter. I think your point is well taken that that may weigh a little bit more heavily toward the first quarter. So I'd put the majority in the first quarter just because that's when we would expect a heavier exercise of options, and I'd lighten it up a little bit in the second and third quarters, and then we should be pretty much through that. I think we had a number somewhere around in these documents of approximately $40 million for that. So you can kind of spread it as I had said.

Thank you. Linda, I just want to say, you did a heck of a job, and you'll be missed.

Thanks, Craig.

My first question is, Ray, or whoever would like to answer this. On the bank loan outlook for this New Year, given the strength in the last couple of years, can you just talk a little bit further about your outlook for that? I know you said some investment banks you checked in with for this year are down 0 to 10%, or something. Just what the puts and takes are to move that number higher or lower this year? What are we looking for there on bank loans?

Well, I mean certainly to the extent that floating rate debt is relatively more attractive in a more volatile interest rate environment, that could have a positive impact, at least relative to competition from the spec grade bond sector. Beyond that, I think so far, we are seeing good activity in the bank loan sector, reasonable pipeline, but it's very early days.

Yeah, and the only thing I would add to that is that we had an enormous refi wave over the last 18 months. So the question will be, as we see an expected pickup in M&A, will that offset to some extent what we think will be a decline in the refinancing activity?

Sure. We were able to add about $150 million to free cash flow from the reduction in the tax rate, which is helpful. It might be interesting, Shlomo, to take a look at the increase in our 2018 adjusted diluted EPS guidance. We're moving from, if I've got this right, about $6.07 to a midpoint of a little over $7.70. I think what we have there is about $0.65 of that from U.S. tax reform, about $0.40 each from BvD and the business, and maybe $0.15 coming from FX and other things. So $0.80 of our increase there is really coming from our business and the acquisition, $0.55 from tax reform and the rest from FX. In terms of the operating margin expansion, we also got the question about how much of that is from FX. If you look at that 70 basis points, only 10 basis points is from FX. So we're doing most of that the hard way. So, I hope that all of that is helpful to you in thinking about where we're going with 2018.

Okay, great. And thanks, just as a follow-up, just a little on BvD, a prime competitor of theirs in Benelux was DNB and they sold that business to a private investor about a year and a half ago. Was there any change in competitive environment back then? I mean one of the reasons they sold was because they were being challenged by BvD. I want to know if the old DNB business has become more competitive for you guys over there.

Bureau van Dijk has a terrific market position in Europe and has for a very long time. We have not seen any meaningful change to the competitive situation there, which is not to say that there isn't competition, but we feel that we're very, very well positioned. We feel good about where we are.

Good afternoon, everyone. So, Linda, just wanted to say phenomenal run, congratulations, and I look forward to when our paths cross again. I wanted to ask a question on RD&A. You'd talked about the strong organic growth there and some of the drivers. A nice pickup in the core research business. You also highlighted 2 to 3 points coming from one-time projects, and you also mentioned the BvD deferred revenue adjustment. So I'm trying to weigh those pieces, and I want to ask for your help in terms of how I should think about the constant currency organic revenue growth for RD&A, normalized for all these things, kind of going forward.

Yeah, I guess Bill, going forward, I think you can think about the underlying legacy business performing at high single-digit kinds of rates. And then we've got a number of things that boost the overall results. We've got the addition of Bureau van Dijk. We've got the FX impact which takes us up from there.

Thank you.

Okay. Just want to thank everyone for joining the call today, and we look forward to speaking with you at Investor Day on February 28. Thanks again.