Moody`s Corp (MCO) — Q2 2019 Earnings Call Transcript

Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's second quarter 2019 results as well as our current outlook for full-year 2019. I am Salli Schwartz, Global Head of Investor Relations and Strategic Capital Management. This morning, Moody's released its results for the second quarter 2019 as well as an update to our current outlook for full-year 2019. The earnings press release and a presentation to accompany this teleconference 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 Mark Kaye, Moody's Senior Vice President and Chief Financial Officer. During this call, we also will be presenting non-GAAP or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for a reconciliation between all adjusted measures mentioned during this call and GAAP. 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, 2018, and in other SEC filings made by the Company, which are available on our website and on the SEC'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.

Thanks, Salli. Good morning, and thank you everyone for joining today's call. I'll begin by summarizing Moody's second quarter 2019 financial results and providing an update on the execution of our strategy. Mark Kaye will then follow with further details on our second quarter results and comments on our revised outlook for 2019. After our prepared remarks, we'll be happy to respond to your questions. I'd like to start by providing select highlights for the quarter. First, Moody's second quarter performance reflected continued double-digit growth in Moody's Analytics with strong contributions from all lines of business. Recurring revenue in MA represented 84% of total MA revenue for the trailing 12 months ended June 30, 2019. Second, excluding the impact of foreign currency translation, Moody's Investor Service revenue in the second quarter was in line with the record prior year period, and the issuance environment is constructed as we move into the back half of the year. Next, the charges related to our restructuring program are largely complete, and we are increasing our anticipated annual run rate savings by more than $10 million to approximately $60 million. And finally, since our last earnings call, we've continued to execute on our long-term strategy in a disciplined manner through targeted acquisitions of businesses that extend our assessment and analytical solution capabilities as well as the planned divestiture of Moody’s Analytics Knowledge Services or MAKS. In addition, I'm pleased that Moody’s has further strengthened its leadership in ESG engagement and disclosure. Moving on to second quarter 2019 results, double-digit MA revenue growth and MIS’s resilience despite subdued issuance activity resulted in a 3% revenue increase for Moody's Corporation. Moody's adjusted operating income of $599 million was up 2% from the prior year period. Adjusted diluted EPS grew by 1% aided by a 2% reduction in diluted share count from the prior year period as a result of our share repurchase programs. In the second quarter, issuance activity was mixed. Falling benchmark rates, tighter spreads, and economic fundamentals supported strong issuance conditions. However, declining global growth forecasts, continued geopolitical uncertainty, and lower M&A and investment activity kept some issuers on the sidelines. The resurgent corporate fixed rate issuance helped partially offset weakness in floating rate bank loans. Overall, however, global issuance activity fell for the fourth consecutive quarter. The banks have indicated that U.S. investment grade and leveraged finance issuance pipelines are moderate, but CLO activity remains weak. Nonetheless, the relatively easier year-over-year comparable gives us confidence that MIS will deliver growth in the back half of the year. Since the first quarter earnings call, we have announced several transactions that enable us to further align our portfolio of offerings with our strategic priorities. Moody's delivered trusted insights and standards that allow market participants to make informed decisions contributing to market transparency and fairness. Our resolve to bring clarity and efficiency to markets has led us to execute these transactions as we increase our focus on providing risk assessments and analytical solutions. Before I turn the call over to Mark, I'll take a minute to review our recent strategic transactions with you. First, with our majority acquisition of Four Twenty Seven, a provider of data and analytics on physical climate risks, we will significantly bolster our capabilities to integrate environmental and climate risk factors into economic modeling and credit ratings. Second, our acquisition of RiskFirst extends Moody's reach into the buy side with market-leading solutions for portfolio management and risk analytics delivered on a software as a service or SaaS platform. Third, our newly established joint venture with Team8 combines Moody's experience in developing methodologies and global standards with Team8's expertise in cybersecurity technology. And finally, our planned divestiture of Max reflects MA's increasing strategic focus on providing scalable data, financial intelligence, and analytical tools rather than the spoke service-oriented engagements. These transactions are included in our updated full-year 2019 guidance. We expect they will have a diluted impact of approximately $0.05 to adjusted diluted EPS. I will now turn the call over to Mark Kaye to provide further details on our second quarter performance and review our updated outlook for 2019.

Thank you, Ray. For MIS, second quarter issuance activity was down 14% from the prior year period. However, MIS revenue is down 2%, demonstrating the continued resilience of the business model. As Ray mentioned earlier, issuance was key towards fixed rate activity given low benchmark interest rates and additionally, the mix of jumbo M&A related issuance and infrequent issuers coming to market with favorable terms. MIS's recurring revenue base supported by pricing initiatives as well as monitored credit growth also contributed to substantially offset this decline in issuance. For the second quarter, the slight revenue contraction alongside relatively flat expense growth led to a decline in MIS's adjusted operating margin, which was 60.2%. For MA, each business contributed to the achievement of an aggregate 12% revenue growth rate, concurrently enabling 350 basis points of improvement in adjusted operating margin. This is the second consecutive quarter of year-over-year adjusted operating margin improvement of 350 basis points. Organic MA revenue was up 10% from the prior year period. RD&A revenue grew 14% due to strong sales credit research and rating data feeds by sales growth at Bureau van Dijk and contribution from the Reis acquisition. On an organic basis, RD&A delivered double-digit revenue growth of 11%. ERS's strong demand for subscription products, particularly from insurance companies drove the 7% revenue increase. We also benefited from the ongoing transition to a SaaS-based operating model. Trailing 12 months ERS revenue is up 1%. Sales were up 8%, which provides a positive signal for future revenue growth. Professional services revenue growth of 13% was driven by strong global demand for training solutions. Organic professional services revenue was up 10%. I'll now discuss Moody's updated full-year 2019 guidance. Moody's outlook for 2019 is based on assumptions about many geopolitical conditions and macroeconomic and capital market factors including, but not limited to, interest and foreign currency exchange rates, corporate profitability, and business investment spending, mergers and acquisitions, and the level of debt capital markets activity. These assumptions are subject to uncertainty, and results for the year could differ materially from our current outlook. Our guidance assumes foreign currency translation at end-of-quarter exchange rates. Specifically, our forecast for the remainder of 2019 reflects exchange rates for the British pound of $1.27 and for the euro of $1.14. We continue to forecast that revenue will increase in the mid-single-digit percent range while anticipating total operating expenses to increase in the high-single-digit percent range. Operating expense guidance includes depreciation and amortization, restructuring charges, and impairment charges related to the planned divestiture of Max and acquisition-related expenses. Excluding the incremental restructuring and Max impairment charges, total operating expense guidance would have still been an increase in the mid-single-digit percent range. Of note, we are not expecting a material ramp in expenses from the first to the fourth quarter of 2019, as we start to realize savings from the restructuring program. The full-year of 2019 operating margin forecast is approximately 42% with the adjusted operating margin anticipated to remain at approximately 48%. We now expect net interest expense to be approximately $195 million. The full-year effective tax rate is anticipated to be in the range of 21% to 22% notwithstanding the low effective rate in the first half of the year. Diluted EPS and adjusted diluted EPS are forecast to be $7.15 to $7.35 and $7.95 to $8.15 respectively. Share repurchases are anticipated to be in the range of $1 billion to $1.3 billion. For a full list of all guidance, please refer to Table 13 of the earnings release. For MIS, we expect total full-year revenue to increase in the low-single-digit percent range, with growth weighted towards the second half of the year as the year-over-year comparable becomes easier. We are anticipating U.S. revenue to increase in the mid-single-digit percent range with stronger contributions from fixed rate corporate bonds. Non-U.S. revenues forecast to remain approximately flat. Our issuance estimate remains flat to down 5% in comparison to 2018, with continued support from debt-funded M&A but lower contributions from floating rate bank loans and CLOs. We are on track to achieve approximately 901 first-time mandates in 2019. The MIS adjusted operating margin remains at approximately 58% in 2019. For MA, we anticipate total revenue to increase in the low-double-digit percent range as we recognize strong sales growth across all business lines as well as the benefit from the stability of recurring revenue derived from the core RD&A business and the ongoing ERS transition to a SaaS-based model. The MA adjusted operating margin is forecast to expand 150 to 250 basis points to the 28% to 29% range in 2019 reflecting the aggregate impact of the announced transactions. The charges related to our restructuring program are essentially complete. The total restructuring charge of $108 million that we took in the fourth quarter of 2018 and the first half of 2019 exceeded our previously announced range of $70 million to $80 million. We are currently revising anticipated annualized pretax savings to approximately $60 million, a $15 million increase from the midpoint to the previously announced range of $40 million to $50 million. This will enable us to realize approximately $30 million of savings as we move through the second half of 2019 allowing us to reinvest in our business and provide annual margin stability. Going forward these savings will create financial flexibility given the various capital market conditions and provide additional options to reinvest in our business and/or bolster margins. Before turning the call back over to Ray, I would like to note a few key takeaways. We remain confident in Moody’s ability to both deliver revenue growth and sustain margins in 2019. Moody's will continue to execute on its strategic vision to provide trusted insights and standards while delivering transparency to adjacent markets and emerging risk areas. Finally, we have confidence in our disciplined and thoughtful approach to capital management and the return of free cash flow to all shareholders. I will now turn the call back over to Ray for his final remarks.

Thanks, Mark. Before turning to the question-and-answer session, I'd like to review a few of our recent activities demonstrating our commitment to a sustainable future. Each year, Moody's has further honed its CSR program to strategically focus on societal issues that we are in a unique position to help address and those that our employees are most passionate about. Additionally, Moody's work on ESG, specifically climate-related risks and opportunities, is directed toward promoting global measurement standards for use by market participants. Moody's continues to support disclosing and adhering to the standards set by the task force on climate-related financial disclosures, or TCFD. Moody's released its most recent TCFD report earlier this month, which is linked to this presentation and otherwise available on moodys.com/CSR. We are also working towards incorporating disclosure metrics set out by the Sustainability Accounting Standards Board, or SASB. We continue to engage with a multitude of other partners that develop CSR and ESG standards and frameworks, or evaluate and assess performance. Please see the press release we published yesterday highlighting our ongoing ESG initiatives, available at ir.moodys.com for more details. This concludes our prepared remarks. Joining Mark Kaye and me for the question-and-answer session are Mark Almeida, President of Moody's Analytics; and Rob Fauber, President of Moody's Investor Service. We'll be pleased to take your questions.

Thank you. Good morning. Ray, just on that last point around your ESG initiatives, it sounds like there's a PR around ESG with a lot of companies have picked up; you guys have made a few tuck-in acquisitions as well. Can you just help us size maybe what it is today and how much can be where the opportunities are? That would be helpful.

Sure, Manav. In terms of the opportunity in the ESG sector for commercial purposes, we are looking at what we might characterize as non-geographic emerging markets. The degree and pace at which these markets will monetize is more speculative than you might see in more established markets that are using various kinds of risk assessments and risk standards. We would acknowledge that; however, we are confident that there is strong demand for the creation of good measurement tools and standards in these areas. This is true certainly for climate and cybersecurity as another example. We feel that this is going to be a good opportunity even though these are market sectors that are not yet heavily monetized. I would also add that regardless of what the direct financial opportunity ends up being in these areas and how quickly it gets realized, this is going to contribute to what we're doing in both Moody's Analytics and Moody's Investor Service as far as providing risk assessments integrating into our economic models and tools and our credit ratings. It will enhance the relevance of the products that we are already providing and the relevance of our credit ratings in particular. That's how we're thinking about this.

Okay. Got it. And then just as a quick follow-up, I mean, can you just help me size what your India ratings exposure is? I guess you had your CEO stepped down out there, and it's all over the news out here in India. So I just wanted to see like how big or what's the risk might be there?

Yes. When you say our Indian opportunity or exposure, are you referring to the cross-border or what we're doing in the domestic market?

Well, it's more of the domestic market around the fact that there is, I guess a couple of the rating agency CEOs had to step down, down there, including your guidance, so I was just trying to understand what the risk around the issues there are today?

Yes, sure. With respect to our affiliate in India, ICRA, they've reported a couple of things. One, they are addressing a matter relating to credit ratings that were assigned to one of its customers, and this is the subject of a proceeding that's been initiated by the securities commission called SEBI in India. Secondly, they've reported that they were investigating an anonymous allegation that was forwarded to ICRA by SEBI, and they've gotten outside experts to look into that anonymous allegation. We don't anticipate that an unfavorable outcome would be material to Moody's in any way. We'll just continue to watch and let the ICRA management team and the ICRA board handle the proceeding and the investigation that they're dealing with.

Okay, thank you.

Thank you. Could you help us understand how you were able to outpace issuance growth in MIS as well as you did? Just looking at your transactional business down four, and the global issuance environment down 14. I usually think of price and mix as maybe two drivers that can explain some of the delta, but I just wanted to understand if there's a piece that I'm not thinking of?

Sure. Rob?

Toni, it's Rob. So first of all, this is actually a nice question to be answering this quarter. So thanks for asking. You're right. Those are the two primary drivers, and it really did this quarter. I've got a mix of who was issuing, and when we look at prior quarters. When I compare back to the first quarter, the issuance mix in Q2 was more favorable because it was driven by a larger proportion of M&A driven financing and infrequent issuer supplies. This comes to frequent versus infrequent issuers and what kind of commercial construct we have around them. Meanwhile, the frequent issuers who tend to be on these relationship-based pricing constructs contributed to the issuance decline to a greater degree in the second quarter. Again, it was mixed, and I also think we had – I mean, you touched on price. I think we had some very nice commercial execution in the quarter as well.

Got it. And the price maybe could continue the other on less clarity. Would you expect that mix between the frequent and infrequent to continue as it did?

It certainly may. I mean, the infrequent issuer sometimes gets to two things: the M&A environment and opportunistic financing. When we see a decline in benchmark rates and a tightening of spreads, that tends to draw the infrequent issuers out to tap the market.

Extremely helpful. Thank you. And then for my second question, MA margin was very, very strong this quarter again, similar to last quarter. Can you help quantify how much was from BvD synergies versus the shift to the SaaS model and ERS or just general efficiency or if there's any other pieces I'm missing that'd be great. Thanks.

Mark?

Sure. Well, we had 350 basis points of margin expansion in the quarter as Mark said, and you could deconstruct that into a couple of categories. About 150 basis points of the expansion came from the core business. About half of that came from the work we've been doing in Enterprise Risk Solutions to increase the profitability of that business. We got about 100 basis points from the removal of the deferred revenue haircut in the Bureau van Dijk business that we had in the second quarter last year. Then another 100 basis points from the Bureau van Dijk business in the aggregate. I can't really give you any further detail to tell you how much is attributable to Bureau van Dijk synergies per se, but those are the three principal categories of that margin expansion.

That's really helpful. Thank you.

Hi, good morning. Just my first question is around the change in the MIS U.S. guidance. I was just hoping you could give a little bit more color behind the increase in the MIS U.S. revenue guide. I guess behind some of the commentary you just gave.

Yes. Sure, Rob. Obviously, we've – as Mark touched on we've got the same overall issuance outlook and the components to get to our overall MIS low single-digit guide. As you said, we've increased our U.S. guidance, and that's really around our outlook for corporate bond issuance and the revenue expectations given the receptive environment that we're seeing. Some small upward revisions in our outlook for U.S. project infrastructure finance activity has been partially offset by the downward revisions that we've got in U.S. bank loans and CLOs. So I don't want to overstate the magnitude of these forecast revisions. It was enough to push the U.S. into mid single-digits, but obviously not enough to impact the broader MIS revenue guide.

Okay, great. Thanks. And just my follow-up is around the restructuring program. I think Mark, you mentioned that you do expect to see about $30 million or so benefits this year and $60 million overall run rate synergies. I guess one, when should we expect this see the full benefit of the $60 million? And two, how much of that are you planning to reinvest?

Thanks for the question. Certainly the increasing in these total restructuring charges of $108 million was really due to the acceleration and expansion of our staffing and real estate optimization and some of the acquisition integration. As you correctly note, that led to an increase in our annualized pretax savings amount of approximately $60 million. Part of that benefit, that $30 million that you'll see in 2019 is really coming through in how we think about the expense ramp for the year. Specifically, we're now only expecting an expense ramp up between $0 and $10 million from Q1 to Q4 vis-à-vis a much larger amount that you would have seen in 2018. Depending on the opportunities as we evaluate both internal investment opportunities versus margin expansion, that will very much depend on the particular environment as it develops in 2020.

Okay, great. Thank you.

Yes. Hey, good morning, everyone. I wanted to just talk about the divestiture or the Max divestiture. I'm a little unclear actually what's included in your updated guidance. On the one hand, there's this on the slide, you say it's a $0.05 impact from all these transactions, but I don't really think you adjust as kind of like the revenue margin outlook. I know that deal is supposed to close later this year, but just maybe clarify what's included, what's still will come out when this closes. And then I guess bigger picture on this whole question. As we think about 2020, this business completely out. How does this change kind of like the revenue and the margin profile of that MA business? Thank you.

Alex, good morning. This is Mark here. I'll start with your first question and I'll answer it specifically to your adjusted diluted EPS guidance update. The increase was primarily due to the lower effective interest expense, and we certainly did factor in the MIS U.S. revenue guidance improvements. But also note that we didn't narrow our range. Given the higher confidence that we have from a first half operating performance, in particular as related to a Max itself and while Max is not material to Moody's, we did forecast, we had forecast 2019 financial in the absence of a transaction to be around $110 million in revenue and around a 20% standalone EBITDA margin associated with that.

Okay, great. Now that's helpful. Thank you for that. And then maybe just secondly, just quickly on the MIS Business, just obviously you updated your outlook here a little bit, but curious to what degree this contemplates kind of the potential or likely rate cuts that we're going to be seeing today and maybe later this year, how that may still shift kind of the expectations or what you expect to happen in the marketplace. So is this kind of steady eddy guidance or outlook or do you think the marketplace could still change materially given what the Fed is likely to do here?

Alex, given your question maybe what we'll do here is I'll talk a little bit about puts and takes sort of for issuance activities that we're hearing externally from some of the banks, and I’ll turn it over to Rob to follow up specifically with our internal viewpoint. In the U.S., the banks are saying that investment grade issuance is down slightly year-to-date due to some deleveraging activity still active, but lower year-over-year M&A and it's like multinationals shifting issuance to Europe to take advantage of lower rates there. Now high yield bond issuance from what we're hearing has been up moderately year-to-date, supported by refinancing activity. Conversely, leverage loans issuance has been down over 30% with acquisition financing driving the majority of that activity. The banks have relayed that anticipation of a Fed rate cut is now driving yields lower and tightening spreads, which sets up conditions supportive of the strong issuance environment for investment grade and high yield bonds in the second half of the year. Expectations persist for lower U.S. benchmark rates through the medium term due to ongoing growth concerns. Of course those concerns are also being reflected in the market with the bifurcation in the demand for high-yield credits sort of that preference towards the higher quality names. When we turn to Europe, feedback from the banks is that the investment grade market, you're seeing some of the rate dynamics to the U.S., but more accentuated. The 10-year bond yield obviously continues to fall further below 0%. Investment grade relative dynamics continue to encourage reverse Yankee issuance, which by some measures comprises about a third of the total issuance in Europe year-to-date. The last thing related to high yield issuance in the second quarter in Europe is primarily driven by refinancing activities. Similarly, as in the U.S., there's a significant preference for higher-end spec-rated names. I'll turn it over to Rob to update you sort of on MIS’s 2019 issuance expectations.

Yes. I'll touch on that in a second. Let me just follow up with how we're thinking about issuance for the remainder of the year. Mark in his remarks mentioned our issuance forecast is essentially unchanged at a flat to down 5%. We've shifted our expectations to more fixed rate bond issuance and less floating rate issuance, and that includes loans and CLOs. We've upped the investment grade outlook modestly given all the opportunistic refinancing and jumbo M&A activity we've seen. The biggest changes are really around the corporate high yield bond issuance outlook for us from the first quarter, given all the activity in the pipeline that we're seeing. We're expecting some significant growth now in high yield issuance for the full-year. Conversely, we've trimmed our outlook for bank loan issuance on really less opportunistic refinancing, and the fact that new issue loans spreads and yields are higher than a year ago. We expect to see some significant declines in issuance. In terms of upside and downside, I would say the supply we're seeing is benefiting from what I would call very issuer-friendly market conditions, probably the most constructive conditions we've seen in quite some time. As I mentioned earlier, that could lead to some elements of opportunistic supply more than we've anticipated. M&A is going to be a key factor here. Our expectation is for ongoing levels of activities to continue. We've seen some jumbo financing activity to get M&A deals done. On the downside, I guess a few things; potential surprises in how the central banks respond to the threat of lower economic forecasts. There are obviously expectations that the market has dialed in, and then things like disorderly Brexit and Chinese, U.S. trade discussions. So those would be some of the things we're looking at that could be a wildcard to our outlook for the year.

Yes. Just to close this off – it's Ray. I think what you're hearing from us is that we're in a bit of a Goldilocks scenario right now where growth is slowing, but there is still growth. That slowing growth is encouraging central bank action which has beneficial effects on rates, and spreads remain tight. If we tip either way away from that scenario, we would have more challenges in the second half; however, right now that's what we're seeing.

Excellent color. Thank you.

Yes. Thank you, a couple of questions. Maybe if we could start with China, if we could, Ray. Just want to get an update on where you're at there in terms of maybe trying to start up an operation there similar to what S&P has done. It's my sense; correct me if I'm wrong, but is your 30% equity stake over there in CCXI sort of gumming up this whole process from your perspective? I guess what should be able to top that off and actually buy in more of that operation so you could actually consolidate? I'm just curious where you're at right now? Just given that your main competition, at least globally, got their licenses you know, back in January? I have a follow-up. Thank you.

Yes. We've talked about this a little bit before. We have a 30% stake, as you know, in the largest rating agency, domestic rating agency in China. It's also quite profitable, so we're very satisfied with our position in CCXI. Certainly, if we like CCXI, we would be interested in participating further in that business. That is going to be determined in part by probably policy decisions that are made in China and potentially in discussions between China and the United States. So at this point, we are very satisfied with the position we are in. If circumstances change, we would be prepared to pivot, whether it's selling down our position, increasing our position, or requesting a separate license, other than the licenses currently held by CCXI. We're just going to have to be patient and see how that plays out. In the meantime, we are a 30% holder in a very successful business. Just to give you a little bit more color on the size of the opportunity because I think there's been a fair amount of confusion around this, let me give you just a few numbers. First of all, we've talked before about China being the third largest onshore bond market, and it's closing very quickly on becoming the second largest. We rate both in the cross-border market large Chinese companies going to the U.S. or Euro bond markets. We have CCXI in the domestic market. The ratings that we have in the cross-border market are about 37% of the revenue share, so high 30s percentage revenue share, and we have about 70% coverage. But it's a multiple rating markets, so that turns into about a high 30s revenue share, and that's approximately a $260 million cross-border markets. So that gives you a sense of what the cross-border revenue opportunity is. Coincidentally, CCXI has a high 30s percent revenue share of the domestic Chinese market, which is also about $260 million. We've got high 30% revenue share in both cross-border and domestic, and both markets are about $260 million in total ratings revenue. That gives us about $150 million currently in China-related revenue, excluding the income contribution that comes from CCXI, which would be, you can do the math, about another $15 million.

Thank you for that, Ray. And then if I can also ask, you touched on this a little bit, but could you just talk a little bit further about the market conditions for debt issuance for the back half of this year? I mean when you think about that economy spreads and the M&A environment and the pull-forward potential here, the base rate, the absolute rates, how low they are? Just sort of sense out there and maybe about Europe as well? Thank you.

Yes, sure, not a whole lot to add to what we were talking about before. In terms of our expectations for the second half of the year. But as we look at whether the second half of the year may include more significant pull forward, I think we probably will be seeing pull forward that has, again, more of a phenomenon at least it has been more of a phenomenon in the U.S. than it has been internationally. So it's really U.S. spec-grade, and we do have optimistic expectations for the U.S. spec-grade market year-on-year for the second half. Europe, I don't know that we will be seeing a pull forward; historically that has not characterized the European market as much. Whether the quantitative easing that is expected in Europe encourages more pull forward is a question we will have to just watch and see the answer to. And see how significant that is. A reminder that the spec-grade market in Europe is not of the same size as the U.S. market, so it would be less material even if there is pull forward.

Ray, maybe I’d just add a little bit of color too, as we're now into the second half of the year, Craig. The second quarter was seasonally strong. Our typical consultative pattern supported by these favorable market conditions that we've talked about. The pipeline has, I'm thinking kind to hear from corporate perspective, but the pipeline has continued to replenish. I'd say it's pretty solid. July is usually a bit softer; we've got earnings blackouts, but we're expecting some good issuance added a seasonal slowdown that we'll see later in August. In U.S. investment grade, you've got the corporate bond index that is tight as level, and something like two years in funds flows have been positive every month of the year. In a U.S. high yield, the spreads have recovered substantially all the widening that they had experienced in Q4, and high yield bond fund flows have been positive every month this year except May. I'm also contributing to the demand there. And that's in contrast to the level of outflows that we had seen in high yield bond funds in something like five and over the last six years. So positive fund flows, on the flip side, the leverage loans pipeline looks pretty modest despite the fact we've seen now, I believe it's 34 consecutive weeks of fund outflows, the tone in the leverage loan market, the secondary market is pretty firm. We've got some jumbo M&A that's been announced that still has to get funded in the markets in the second half of the year. As Ray said, in Europe, the investment grade market continues to be pretty active. We've got very low benchmark rates; there's strong investor demand. The leverage finance activity has improved in Europe from the first quarter; it was very soft in the first quarter. We've seen some good activity in July. Again, the same theme of sustained investor demand for the supply and good market conditions. So what we're saying.

Thank you. Can I just ask a quick housekeeping question if I could? The BvD, I always get asked by investors, how did BvD do? Was it was excluding currency was up high single-digits, the revenue there? Thank you.

Sure. We don't typically disclose the Bureau van Dijk results on a standalone basis as you know. But I can say that the business there is performing very, very well. We're very happy with it. It is both from a revenue standpoint and a sales standpoint. It's been growing in the low-to-mid teens on an organic constant dollar basis. So we feel very good about what's happening in Bureau van Dijk.

Great. Thank you, guys.

Yes. Then without getting more into the detail, just to reinforce Mark's point, you can look at the RD&A growth rate and see that it's getting good contribution from Bureau van Dijk.

But to be fair, it's not just a Bureau van Dijk story in RD&A. RD&A is strong pretty much across the board.

Hi. I wanted to go back to China for a second. I guess my question there is, I understand the opportunity, but how do you protect yourself against fraud in China? And do you think that there's a higher risk around the ratings in that geography versus the rest of the world?

Joe, in terms of thinking about fraud risk, I mean certainly it's well understood that there is less transparency in some of the financial information available on Chinese companies than you might see for U.S. public companies, for example. The ratings in the cross-border market though are on the very largest entities in China, which are internationally active, and they do have a higher quality and more consistent financial reporting, so that's less of a concern. In the domestic market, it is a challenge, and the way to address it through ratings in particular is looking at how much – how complete the financial information is, and how intuitive it is. Do the numbers make sense across the financial statements? If there is a lack of comfort with the amount or clarity of the information, the choices are simply not to participate in the rating or to make conservative assumptions about where the creditworthiness of the entity should be placed in terms of a rating score. I think there is going to be continued interest in building transparency. There's going to be continued interest in assessing financial statement quality, and in assessing financial statement quality that provides opportunities for firms like Moody's or Moody's Analytics.

Got it. Okay. And then I guess maybe I'll just stick with China. When Moody's goes in and rates a Chinese company, do they benefit typically the same way that a U.S. entity would benefit? In other words, do they get more favorable potential interest rates associated with that? And I'm just wondering how you gauge Moody's reputation internationally because I'm trying to just kind of measure what kind of possible demand could come out of that region. Thanks.

Certainly in the cross-border market, the dynamics are similar to what we would see among U.S. issuers or Western European issuers. In the domestic market, at this point in time, that benefit is less clear because there are more constraints on the buy side and on the issuers of debt. That's a market that is still more adolescent in terms of its channeling of capital according to the best risk-reward dynamics. That's where I think again we see opportunity because improving the quality of risk assessments for these entities should over time allow capital to be channeled more efficiently, which is really at the end of the day one of the policy goals for the Chinese officials.

Thanks. I want to go back to the MIS segment. You've slightly increased your MIS revenue guidance for the full-year, but you're holding your overall global issuance forecast unchanged at flat to down 5%. The flat to down 5% is a relatively wide range. So at the increment, would you say your view of the global issuance environment is stronger because of fixed rate issuance? Would you say it's really just mix at Moody's that's changing your view on MIS?

I think – well it's two things. We are anticipating that the favorable mix that we've seen in the first half will probably continue in the second half. Also, I would say we're modestly more positive on issuance, but certainly not to the point where we would move outside of that 0% to down 5% range.

Got it. That's helpful. In the MA segment, your operating margins expanded a strong 350 bps year-over-year in the quarter. You've lowered your MA operating margin guidance by a point for the full-year. Can you talk about what's changing in the business to cause a diminished view on margins in the segment?

Sure. The change is primarily driven by M&A activity that we've announced, which obviously includes M&A-related transaction costs, both the Max divestiture and RiskFirst acquisition. The MA adjusted margin guidance would have been unchanged where it not for RiskFirst and Max.

Hey, guys. Good morning. It's Henry Chen, calling for Jeff. Just I wanted to talk about some of the acquisitions that you've been making. At a high level, could you kind of just talk through, I guess maybe strategically what areas you're looking at and how to tie that all together in terms of how you are looking at future acquisitions? Thanks.

Sure. I'll turn this over to Mark and Rob to comment on each of their units. But as we said in the prepared remarks, we're starting from the strategic perspective that we want to provide expanded risk assessments and extend our analytics solutions, data and analytics solutions offerings. The data analytics solutions are really coming out of Moody's Analytics and where the Moody's Analytics unit is looking at acquisition opportunities. The non-credit risk assessments or risk assessments that can contribute to our credit analysis but also may provide independent measures are coming from Moody’s Investors Service for the most part. Mark, I don't know if you want to say anything on RiskFirst.

Yes. I would just note that the RiskFirst acquisition, we view that as a classic Moody's Analytics business. It's a highly specialized set of analytical capabilities that are targeted at important problems that are shared by many customers. In this case, in the Investment Management segment, those capabilities are built around a unique highly specialized data sets; in this case, that data relates to pension plan assets, the historical returns of the liability structures, etc. The solutions that RiskFirst offers benefit from network effects as they serve the buy side ecosystem, including the investment managers themselves, the ultimate asset owners, which are the pension plan sponsors, insurers, foundations and endowments, as well as the investment consultants. Those network effects are stimulated by the fact that this product is on a SaaS platform, which is very readily implemented; customers can have it up and running very quickly after making a purchase decision. So the ease of use speeds the adoption of the platform, and that again enhances the network effects we get from this thing. There are also some very important synergies in the RiskFirst product with the work that we've been doing in the insurance space. You'll recall about three years ago, we acquired GGY, which substantially ramped up our analytical relevance to the management of insurers' liabilities. RiskFirst now gives us some very important capabilities on the asset side of the insurance companies. So you can start to see that we're building out a very substantial position to be able to solve a very wide range of problems for insurance companies.

Got it.

Rob, you want to comment on Four Twenty Seven?

Yes. Dovetailing with what Ray said, we're investing in areas where the market is looking for analytics and insights to assess risks that are increasingly relevant to both the credit markets and even more broadly capital markets and financial institutions, and Four Twenty Seven is a great example. You've got investors, banks, insurance companies, issuers all increasingly focusing on the physical risks associated with climate. That's things like sea level rise or water scarcity, wildfires, and so on. Four Twenty Seven brings us some very robust climate analytics, modeling data, and very importantly, expertise. That's going to allow us to leverage this content across Moody's and both the rating agency as well as Moody's Analytics. We've acquired some unique content sets and capabilities and we think that's really going to differentiate us and our ability to integrate climate analytics into our offerings. Again, that's all part of this broader focus that we've got on an investment in the ESG space. I would also say that that deal, while small, has gotten some good industrial logic and we've had some very good press and market feedback from around the world on our move into that space.

Okay, very cool. That's super helpful. Thanks.

Thanks. I guess two questions. One just a numbers one. Can you give us the incentive comp for the quarter? And then secondly, as a follow-up on ESG. I guess, how quickly are you going to integrate things to a Moody's branded type of offering if that's the ultimate plan? I guess are there any other pieces to the kind of ESG strategy that you feel are missing after some of your recent acquisitions?

Tim, I'll answer the numbers question. The incentive compensation for the second quarter of 2019 was $51 million; that's consistent with the approximately $50 million per quarter for the expectation that 2019.

Yes. So this is Rob. I think there's some scarcity value to some of the assets in the ESG and climate space. We've obviously acquired majority stakes in Vigeo Eiris, which is really data and scores for investors in ESG. They also have a very nice green bond assessment platform for issuers. Four Twenty Seven, I just talked about focused on climate data and analytics. We're investors, financial institutions. We think we've gotten some very good assets. We're also producing ESG content within the rating agency. Increasingly, kind of thinking about and being more explicit about how we factor ESG considerations into the ratings. What you'll see is, over time, all of this will be part of a branded broader Moody's Suite of ESG offerings. They will be the ESG content; I think you will see packaged to meet a wide range of customer needs across Moody's Corporation. As I said, both the needs of the rating agency, the needs of Vigeo Eiris, and Four Twenty Seven customers and the needs of MA's very broad customer base.

Thanks.

Hey guys, thanks for taking my question. Appreciate it. So I just understand on Moody's Analytics the RiskFirst, we estimate as about a 100 basis points in growth in the second half. And why didn't you raise the revenue guidance here? I just want to make sure there's kind of no implied slowdown on this one? Thank you.

Dan, it's Mark. I think you're probably overstating RiskFirst a bit in the scale of it. Maybe it's because you're not taking into consideration that we'll have the accounting treatment on the deferred revenue haircut. That may be why you're...

Got it. I mean, looking at 16.5 million pounds, right? Which was disclosed, but have you disclosed the contribution? I don't think you have.

Yes. We have not disclosed that. The other thing you need to keep in mind is we're assuming that by the time we get to the fourth quarter, we will not have any revenue from the Max business. So that's going the other way.

Got it. So there is no implied slowdown, it's just the M&A.

Absolutely correct. Absolutely right.

Got it.

The underlying business is performing extremely well.

Good afternoon, everyone. So I wanted to ask about the cybersecurity strategy. You've got a strategic investment with Team8. You announced an expanded JV with the company. I wanted to ask if the ultimate thought was to develop a standalone cybersecurity rating and if so, what the opportunity was there for Moody's?

Yes. I think we are very open-minded about what is going to be the best offering in the cybersecurity space, whether it's rating, some other kind of score, probably research and analytics associated with some standardized measurements. We also see this as an area where both providing assessments or scores based on publicly available information may be helpful to market participants. Providing private assessments, whether it's for risk committees or boards of directors, et cetera, vendor risk management may play a role here. There are a number of directions we believe this can go. What we're really focused on with Team8 is developing the methodology and then the analytical engine that goes with that methodology to bring some real science to this area.

And then for my follow-up question on the Max divestiture. Any other pruning that you're thinking about doing in the portfolio?

No, I think we're pretty comfortable with the portfolio.

Excellent. Well, thank you very much.

Thank you.

Hi. Thank you very much for squeezing me in as well. Would you be able to disclose what the growth rates were of some of the businesses that you bought, like the Twenty Four Seven the RiskFirst? And then just kind of on an annualized basis. And then you put up the RiskFirst and Pounds in 2018, but is there some kind of, if you wanted to put the three that you're talking about, I guess with the JV together, is there an annualized revenue assumption that we should make over there amongst those three?

Yes. I think it's fair to say that this would not be material for purposes of your modeling and assessing what our outlook is. These are young companies, acquisition of capabilities and expertise as much as the immediate financial return from these companies.

Okay. And how fast is Max growing, or was it wasn't really growing at all?

Yes. Max was growing, and as we said, it had forecast about – we had forecast about $110 million in revenue at a 20% EBITDA margin. If we had not done this transaction, that would have been the profile for the year. It had been growing, but it was growing slower than the MA business overall.

Okay. Thank you.

Okay. Thank you all for joining today's call, and we look forward to speaking with you again in the call. Thanks.