Moody`s Corp (MCO) — Q2 2022 Earnings Call Transcript

Thank you. Good afternoon, and thank you for joining us to discuss Moody's second quarter '22 results and our revised outlook for full year 2022. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the second quarter of 2022 as well as our revised outlook for full year 2022. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com. During this call, we will also 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 referenced during this call in U.S. GAAP. I call your attention to the safe harbor language, which can be found towards the end of our earnings release. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the act, I also direct your attention to the Management's Discussion and Analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2021, 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 statement, 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 we begin, I'm pleased to announce that in response to feedback from our external stakeholders, we have enhanced our earnings materials and changed the format of our call for this quarter. This morning, on our IR website, we published our supplementary presentation along with our updated earnings release, materials that we believe provide substantial insights into our business. As such, during the call, we will not be going through our usual presentation. Instead, Rob Fauber, Moody's President and Chief Executive Officer, will provide a brief overview of our results and outlook, after which he will be joined by Mark Kaye, Moody's Chief Financial Officer, to answer your questions. I will now turn the call over to Rob Fauber.

Thanks, Shivani. Hello, and thanks to everyone for joining today's call. And as Shivani mentioned, I'm going to keep my opening remarks brief so that we can get straight to your questions. And I appreciate that it's been a very busy morning for many of you on the call. So let me begin with a few key takeaways about our results. And then I want to spend a few minutes on our outlook and the continued strength and relevance of our business. So let me start by reinforcing that as challenging and volatile conditions in global capital markets continue, we're leading the way in providing integrated perspectives on risk for our customers. This quarter was really a tale of two cities as our ratings business was significantly impacted by the slowdown in issuance activity and our MA business continued to grow very nicely. As we've said previously, year-on-year comparisons with our record performance in 2021 would be unfavorable this year. Overall, Moody's revenue declined approximately 11% in the second quarter. Given the operating leverage in the MIS business as well as the negative impact of foreign exchange, adjusted diluted earnings per share declined by 31% from the prior year period to $2.22. MIS, which was significantly impacted by ongoing cyclical disruption in the global debt markets due to several factors including rising interest rates, high inflation, and unsettled geopolitical conditions, generated revenue of $706 million. To put that in perspective, global rated issuance was down 32% for the quarter and transaction revenue was down 40%, reflecting the negative mix driven by the weakness in the leveraged finance markets. When balanced by our recurring revenue, this translated to a 28% decline in total MIS revenue for the quarter. However, customer demand for our MA suite of solutions that help navigate market uncertainty and identify, measure, and manage risk remained robust. This fueled steady growth in our subscription and SaaS-based products, which, along with contributions from prior year acquisitions, delivered revenue growth of 18%. Unfortunately, MA revenue growth was negatively impacted by 5 percentage points due to FX in the quarter. You'll recall earlier this year, we introduced an annualized recurring revenue or ARR metric for MA, and we believe that's a good indicator of future growth. In this quarter, our organic ARR grew by 9%, and we expect this growth to further increase to low double digits by year-end. This is supported by our ongoing product development investments that broaden the ways in which we serve our customers and by the growth in our sales force and strong sales execution. I expect that many of you will have questions about our outlook in a few minutes, so I'd like to make a few comments about our expectations before we get to it in the Q&A. We anticipate that the current market disruption will persist for the remainder of the year, and we've updated our guidance to reflect that. If actual conditions differ from the assumptions underlying our guidance, our results for the year may differ from our revised outlook. For MIS, we expect issuance to decline approximately 30% for the year and full year 2022 revenue to decrease in the low 20s percent range. The last 2.5 years have been unusual to say the least, so I have to acknowledge that with all the uncertainty in the market, the confidence interval around our outlook is likely wider than it was. Our business outlook for MA remains unchanged. However, due to the impact of the weakening euro and British pound against the U.S. dollar, we're slightly reducing MA's revenue growth outlook to the mid-teens percent range. Taking the reduced MIS revenue guidance and the impact of foreign exchange into account, we now forecast Moody's full year 2022 revenue to decline in the high single-digit percent range, with adjusted earnings per share projected to be in the range of $9.20 to $9.70. Incorporated into our outlook is a new restructuring program, part of our broader approach to expense management. This Geolocation Restructuring Program helps us adapt to the new global workplace and talent realities and accelerates ongoing cost efficiency initiatives. This includes real estate optimization and increased utilization of lower-cost operational hubs. We expect this program to generate $40 million to $60 million in annualized savings, with up to $75 million in aggregate charges through 2023. We plan to partially redeploy these savings back into the business to support ongoing organic investments, including sales deployment and employee retention. Before I open it up to questions, let me try to put all this into perspective. Debt issuance markets are clearly in a period of cyclical turbulence. However, we believe that the fundamental drivers of issuance remain firmly intact. Taking a medium-term view, we expect issuance to resume as capital markets adjust to a higher interest rate environment. The volume of outstanding corporate debt in the U.S. has grown each year for the last 30 years, and we believe that the fundamental role of debt in fueling economic activity and financing business growth remains unchanged. Global GDP growth is expected to continue, albeit at a lower rate. Corporate refinancing needs remain strong, and on a historical basis, rates and spreads are relatively in line with their averages despite some recent increases. During this market turbulence, we're going to continue to focus on what we can control in MIS, ensuring that Moody's remains the rating agency of choice, providing a world-class experience for issuers and ensuring the quality, relevance, and timeliness of our ratings, research, and insights that all reinforce investor demand. MA remains a strong and resilient business with almost 60 quarters of consecutive growth. Our investments in product development and sales are accelerating our organic ARR growth, and we're realizing the benefits of our recent acquisitions. In fact, we're ahead of or have met targets we set for our acquisitions of BvD and RDC, and though it's early days, we are on track to meet our targets for RMS. Stepping back and looking at the big picture again, we see strong demand for our integrated risk assessment offerings. The value that Moody's provides to our customers, especially in these uncertain times, remains unmatched. Across the business, we're innovating and investing to provide our customers and market participants with the products and insights that they need to decode risks and unlock opportunities. Finally, all of this would not be possible without the tremendous efforts of our people, and I want to thank them for their continued hard work and dedication. That concludes my prepared remarks. Mark and I would be pleased to take your questions.

I really welcome the new format for the earnings call. You're assuming issuance volumes declined 30%, it looks like, in 2022, based on your supplemental materials. How much conservatism is baked into that guidance? What does that assume for issuance volume performance over the remainder of the year compared to performance over the first several months? How should we think about seasonality in 3Q issuance?

Yes, George, thanks for the feedback. I suspect there'll be a few questions on issuance and outlook on this call. So I'm going to start by trying to take a big picture view, and then I will get to your question about kind of year-to-date performance. But let me try to put this year's issuance into some sort of historical perspective. First of all, there are two, not one but two, big shocks that are impacting the markets at the same time right now. The first is what I think we all understand is the inevitable monetary tightening after a period of historically low interest rates. Now we've got the Fed aggressively addressing inflation. This has caused a lot of uncertainty in regards to both the trajectory and the pace of rate increases versus what I think the market had both assumed and hoped for—a kind of slow and steady and well-understood trajectory of rate increases during this period of tightening. The second shock we're dealing with is the uncertainty around the duration and the severity of the Russian-Ukraine crisis, which has obviously led to a spike in energy prices that has further contributed to inflation and eroded global confidence in general. Not to mention, we are still dealing with COVID-19 and the knock-on impacts of supply chain disruptions. This complexity is causing tremendous volatility in the markets as investors are trying to navigate all of these interdependent shocks and their implications. With all of that going on, our outlook for issuance this year is almost exactly on top of the average annual issuance of something like $4.4 trillion over the last decade, excluding the pandemic years of 2020 and 2021. Yes, issuance is going to be down significantly. But when you think about comparing it to 2019, that was quite a normal functioning year.

Great. And as a follow-up, you've previously given medium-term targets for MIS margins in the low 60s. What are your latest views on medium-term MIS margins and how much flexibility do you have in managing MIS expenses?

George, MIS's medium- to long-term business fundamentals remain intact. Our view is based on several data points and observations. For example, the stock of data has stably grown over the past several decades. The price to value is compelling for our customers, and there are strong refinancing needs that will buttress the transactional revenue base. I'd also note that credit spreads themselves are close to historical averages, and the interest burden remains low for corporates. Therefore, as issuance growth normalizes in the future, we expect the MIS adjusted operating margin to stabilize in that low 60% range. Furthermore, we are continuing to carefully evaluate our expense base while reinvesting through the cycle to support strategic growth initiatives in MIS, including ESG and climate, technology enablement, strengthening analytical capabilities, and expanding into new markets and evolving risk areas. We still feel confident about that low 60s medium-term target range.

Thanks so much. Again, I'll echo my sentiment on the new disclosure is very helpful. Following up on the issuance, could you frame out—because to your point, the $4.4 trillion seems like the 10-year average. As you think about kind of beyond '22, does it hover around that? And maybe just talk about supply versus demand dynamics within the context of issuance and what gets investors reengaged. Is it the Fed funds increase at the end of the month or more visibility on the Ukraine? I know that's a hard question, but just any way to frame where you think that gets reengaged and whether or not it's just the refinances that ultimately trigger some incremental issuance?

Yes, Kevin, so let me talk about the upsides and downsides to our outlook and see if this addresses your question. In developing the outlook, we feel like it's largely weighted towards the downside. We've essentially taken the activity and market conditions observed in the first half of the year and rolled that forward for the rest of the year. You're asking what could get the market started. One key is whether we continue with economic growth or tip into recession. One key to that is inflation. If the Fed can get that under control, there's a possibility they could pull back from more aggressive rate hikes towards the end of this year and into 2023. You mentioned Russia and Ukraine; a resolution there would address some supply chain issues and ease some inflation on commodity prices, reinforcing market confidence. That point about confidence is very important, as it's difficult for issuers to enter volatile markets. The volatility we see in equity markets translates into volatility in debt issuance. A period of stability would be quite helpful. Regarding headwinds, in a recession scenario, we would likely see defaults tick up and spreads widen, creating a headwind. We're keeping a close eye on that.

That's super helpful. And just to follow up real quick. It seems like you're keeping the expense investments intact against the adjustments in revenue. Is that just a function of confidence in the business? Or is there an opportunity to take advantage of some of the dislocation the market currently offers?

Kevin, we view again, as Rob mentioned, the market conditions as cyclical in nature. That means we plan to invest through the cycle as we execute our strategy of providing global integrated perspectives on risk. The opportunity set itself is substantial in expanding markets, KYC, compliance, banking, and insurance. While continuing to evaluate and support investment opportunities underpinning future revenue growth, we're balancing that against activities needed to generate short-term cost efficiencies to support margins and achieve medium-term margin objectives. For example, we remain committed to organically invest $150 million in 2022 in areas like product development and sales distribution, alongside an additional $50 million towards our employees, balanced against new cost efficiencies from the 2022-2023 Geolocation Restructuring Program announced this morning. We've also learned from the pandemic that many business activities succeed remotely. While T&E costs may rise compared to the previous two years, we're prioritizing necessary customer-facing travel, along with naturally occurring expense levers like incentive compensation accruals adjusting based on performance against targets set at the year’s beginning.

Let's throw one in on MA. So it looked like you lowered the guide, but only because of FX. Essentially kept it in line there, but the ARR is expected to accelerate into the end of the year. That was a positive data point. Could you give some color on what's driving that? Is the environment somewhat positive on that side? Would you expect that to become more challenged, or would you expect that to continue doing well because of clients wanting risk solutions?

Toni, it's Rob. Thanks for peeling back the onion. I think you got the right message; the right takeaway on MA. The results align with our prior expectations on a constant dollar basis. As we mentioned, FX significantly impacted this quarter, reducing growth by 5 percentage points. On an organic constant dollar basis, revenue grew at 8%. Our full-year guide incorporated some seasonality visible in the quarter-to-quarter results in MA, largely relating to our banking and insurance businesses within Decision Solutions. Importantly, we remain confident about achieving our full-year revenue guidance, having adjusted solely for FX impacts. One reason we introduced ARR was to focus on the base of recurring revenue growth. We remain confident about our ability to hit the low double-digit ARR growth. The drivers of that acceleration through the end of the year include the realignment of our global sales organization to better serve our customers, and our continued investment in building out our capabilities across all parts of our sales to deepen the penetration of existing customers while broadening our product suite as well as bringing in new logos. Those investments are showing early results; our sales leads are up significantly, and our gross business per sales rep remains consistent with expectations. Through early 2022, we've also had solid price capture compared to historical levels. This is due to enhancements made to our products, which improve our pricing ability. An example of this is CreditView; we are redesigning our flagship web credit research platform, increasing functionality and content, providing us a great opportunity to price for added value. Lastly, our strong sales pipeline gives us confidence in hitting the ARR target for the year.

That sounds great. And for the follow-up, Mark, I know you lowered the free cash flow guide about 20% at the midpoint versus the prior midpoint. I know MIS likely accounts for the bulk of that. Is there anything else you want to call out in terms of lower free cash flow guidance? Furthermore, regarding capital use outlook on buybacks, you've lowered that as well.

Toni, let me address the free cash flow guide first. We aimed to reflect the year-to-date global free cash flow of $628 million, which is down around 49%, mainly due to lower net income from curtailing MIS revenue due to significantly reduced issuance. Additionally, we faced a tax-related working capital headwind this quarter, expected to partially reverse later in the year, reflected in our revised full-year outlook. The midpoint of our revised free cash flow guidance for 2022 stands at $1.4 billion to $1.6 billion, indicating a free cash flow to U.S. GAAP net income conversion ratio of approximately 100%, aligning with historical levels. This suggests both adjusted diluted EPS and free cash flow will decrease in the low 20% range. Concerning buybacks, our forecast for full-year 2022 share repurchases has now been lowered to approximately $1 billion due to the global economic conditions, reflecting our approach to capital management.

I wanted to drill down further on the issuance side. Could you discuss the pipeline for new issuers? What percentage of the issuance now is coming from new versus refinancing existing debt? How might that trend for the rest of the year?

Ashish, let me share some insights regarding our first-time mandates, which are essentially new issuers entering the market. We've revised our first-time mandates range from $850 million to $950 million down to $700 million to $800 million for the year due to another slower quarter. U.S. first-time mandate activity remains muted, highly correlated to leveraged finance issuance, which is where most first-time issuers emerge. We're expecting activity levels seen in the first half to remain steady in the second half. September will be key; post earnings blackout and summer, we may see issuers choosing to enter the market. This year, we've signed over 400 first-time mandates, although not all are coming to market. Around 40% of the new mandates signed this year have not printed, contrasting with 10% in the same period last year. Historically, it takes roughly two months from executing an engagement for the issuer to issue a bond, but this timeframe has more than doubled. Regarding the current market, it remains challenging, yet we're observing positive tone recently; investment-grade issuance had its best week in 12 weeks and is primarily driven by financial institutions, but high yield and leveraged loans remain light.

Ashish, we expect transaction revenue in MIS to decrease slightly in the second half compared to the first due to historical issuance patterns. Over the past five years, the second half typically contributes around 47% to full-year transaction-based revenue. We expect total MIS revenue to return to a 2-type pattern consistent with historical data, which could lead to some margin headwinds in the third quarter.

That’s very helpful. Regarding the expense bridge on Slide 23, I noticed incentive comp wasn't broken out as before. Could you provide insight into how we should regard incentive comp decline in '22 versus '21?

Absolutely. On the full year 2022 operating expense guidance, we're reaffirming high single-digit percent growth, including $31 million in accrued expenses from the 2022-2023 Geolocation Restructuring Program announced this morning. Excluding that restructuring charge, our full-year operating expenses would have been in the mid-single-digit percent growth range. Specifically for the full year 2022, you can anticipate approximately 8 percentage points from recent acquisitions, notably RMS, 1 percentage point from the restructuring program, operating growth and investments net of ongoing cost efficiencies represent about 6 percentage points, and lower incentive comp will account for a 6 percent decline, effectively keeping operating growth and investments flat. There’s partial offsetting from favorable FX rate movements which adds another 2 percentage points. While we don’t typically provide segment growth forecasts, we expect a high single-digit percent decline in year-to-go expected operating expense growth for MIS, with a mid-single-digit percent growth for MA.

Just coming back to MIS for a second here. You've mentioned multiple times a normalization is expected. If you look further than the next couple of quarters, what confidence should we have? In prior declines, we saw quite a snapback, and many think that will happen again next year. How much should we expect any delay, given refinancing walls will likely not start increasing for a couple of years? With higher rates affecting opportunistic financing, how should we view your 2023 outlook?

Yes, Alex. I'll provide some data points and perspectives to triangulate this. We've looked at issuance over the last 10 years relative to our current 2022 outlook. The last time corporate finance issuance fell below our current outlook was 10 years ago, in 2012. Excluding pandemic years, average issuance over that 10-year span, our current outlook for investment-grade issuance is about 10% to 15% below that average. Leveraged finance issuance outlook suggests it is about 5-6% above that average. High-yield market levels are low, comparable to 2009 levels. An important component affecting our outlook is leveraged loans, which have seen considerable activity over the last decade due to private equity firms deploying raised capital through buyout activity. In the medium term, if growth is modest—let's say low single digits—issuance growth in the same range seems reasonable. Ongoing disintermediation is a potential benefit, although mix may be neutral to a slight headwind. During a recession scenario, we expect to operate at the lower end of that growth range, but in periods of recovery, we would expect to operate at the higher end.

That's helpful. On the Moody's Analytics side, there's a lot of mission-critical products, with demand increasing due to high-growth areas. Are there any areas of risk to consider or clients that might cut back in tougher environments?

Alex, not really. We continue to have strong retention rates, and there’s nothing specific indicating risk. Employees express continued value for data and insights that help them navigate uncertainty, regardless of market conditions. Overall, retention rates remain high due to ongoing mission-critical workflows.

I wanted to ask about Decision Solutions. Rob, you mentioned some seasonality with a specific product in that area. Decision Solutions organic revenue growth year-over-year decelerated to 8%. What drove that deceleration, and will that seasonality benefit third quarter organic revenue growth?

Yes, Andrew. Just to remind you of the core components in Decision Solutions, the largest business by revenue is insurance, followed by banking and KYC. Both the insurance and banking businesses have a mix of on-prem and SaaS solutions, which introduced elements of lumpiness in the revenue recognition. While we've had strong growth particularly in KYC, there’s been revenue lumpiness in the first half; noted, that’s what I meant by seasonality. ARR for Decision Solutions was 11%, consistent with last quarter, indicating good sales momentum across our offerings. We continue to grow in our banking business. Key segments we serve include lending, risk management, and finance planning. We’re focused on migrating more products to SaaS to provide enhanced usability for bank clients. One area to highlight is commercial real estate, a focus area for banking customers where we signed a strategic partnership with a major lender to co-develop a commercial real estate lending solution. It’s exciting as we streamline their processes while integrating our data and analytics.

Will the seasonality benefit the third quarter for Decision Solutions organic revenues?

I think the third quarter is likely to be similar to the second quarter, with acceleration expected in the fourth quarter.

On your M&A appetite, the current economic conditions seem choppy. Do these conditions affect your plans for deals? You lowered share repurchase expectations due to free cash flow decline, but how does that impact your M&A outlook?

On share repurchases, we are still planning to return approximately $1.5 billion to stockholders—about 100% of projected 2022 free cash flow. Global economic conditions have weakened significantly relative to our earlier outlook, driven mainly by uncertainty related to Ukraine and inflation. Though we view these market conditions as cyclical, we’re thoughtfully managing leverage and liquidity levels to maintain a strong balance sheet. As a result, we’ve lowered full-year 2022 share repurchase guidance to about $1 billion. Overall, we've adopted a more conservative short-term capital management strategy to maintain financial flexibility to pursue opportunities when they arise.

We've made several bolt-on acquisitions in the past 18 months and continue to focus on integrating those and realizing their business value. We track performance against our acquisitions and feel confident about progress. In periods of market dislocation, sellers may hold rigid to expectations. However, we have significant financial flexibility and a clear view of customer needs, impacting our approach to M&A. We're always vigilant but disciplined in this environment while extracting value from recent investments.

I want to follow up on your recent acquisition successes. You noted mid-30s growth for your screening capabilities, indicating you're ahead of revenue plan. What’s driving this success? How have execution or product offerings resonated with customers?

Our KYC capabilities are central; they drive customers to assess, screen, and monitor entities they interact with, generally addressing risk profiles. The fourth quarter saw active acquisitions in this space allowing us to create a comprehensive offering. This includes data coverage on entity ownership in companies, workflow orchestration for KYC management, all combined with Moody’s expertise. We’re not only addressing traditional KYC needs but also expanding into knows-you-counterparty and knows-you-supplier areas, providing multifaceted solutions that enhance value to our customers.

I want to clarify your medium-term outlook for MIS, which I believe was based on 2021 issuance levels. Should we consider the new base now to be more reflective of 2019 levels? Is that the right perspective?

Yes, generally that is right for reasons discussed on this call.

When we set our medium-term outlook for MIS revenue, we did factor in a period of economic stress, particularly following strong years of issuance in 2020 and 2021.

On the MA business, I understand you haven't seen slowing in that area. How resilient do you think that business is to the macro environment? Are you confident in your targets moving forward?

Yes, we've previously discussed MA being a resilient business, as our clients require expertise, data, and analytics during periods of uncertainty. As we broaden our offerings, essential services remain in demand even in challenging times. The strong retention rates reinforce this sentiment, as our services are crucially embedded in our clients' workflows, making them very sticky.

I want to further inquire about issuance. You mentioned the $4.4 trillion near the average outside pandemic periods. Could you clarify if this is a new base for growth in 2023 or if some rebound is anticipated, informed by refinancing walls?

Brendan, it's good to have you on the call. The last two years were unusual, and while we reference long-term issuance patterns, we must also be cognizant of those atypical years as we generate our scenarios moving forward.

Regarding RMS and ESG, how are those areas performing? Have there been notable changes in trends in recent months? Any updates on M&A opportunities?

It's been almost a year since the RMS acquisition announcement. We’re having encouraging discussions with major insurers about automation and integration across product suites. We’re co-creating new solutions. Last quarter, we mentioned that we're mapping properties in CMBS securities to RMS data, which serves various use cases for banks around assessing physical risk in their portfolios. We've also seen interest in integrating our ESG data and scores into RMS's underwriting solutions—very positive progress there. We’re building strong pipelines and enhancing our product offerings in that space. Overall, our confidence continues in RMS, climate, and ESG growth.

We expect RMS's sales growth in the mid-single-digit percent range and our direct ESG-related revenue to increase by approximately 20% to $34 million. This slight reduction reflects challenges in the sustainable finance market recently.

Do you see opportunities for M&A in the ESG space, or is it still too pricey?

It’s a fragmented market with limited scale opportunities that could make a significant impact. This is why we felt good about acquiring RMS, aiming for a comprehensive climate analytics platform to serve our customers well. We remain focused on organic growth in ESG and climate. We're always attentive to potential opportunities in the market.

Can you discuss the details of the Geolocation Restructuring Program and the timing behind this initiative?

The $75 million maximum Geolocation Restructuring Program is aimed at optimizing our existing real estate footprint, utilizing our lower-cost locations where requisite expertise exists, and ensuring our resources align with prioritized opportunities. Now is a pivotal time as our workplace programs are advancing well, and opportunities to use stockholder capital more efficiently arise. For Q2, we've recorded a $31 million pre-tax restructuring charge mainly related to personnel costs. We'll initiate utilization of our leased office space, expected in Q4 through the first half of 2023. We anticipate reflecting between $25 million to $35 million in additional pre-tax restructuring charges. The annualized savings expected from these actions, $40 million to $60 million, will largely be reinvested into strategic initiatives benefiting employee retention and workplace enhancements.

I wanted to focus on the Decision Solutions segment. Despite a strong organic growth of 12% in the first half, Q2 growth slowed to 8%. What may have caused this deceleration, especially since banking was a concern in Q1? What has changed in the past three months driving slower growth?

Yes, Craig. Just to note, banking and insurance segments do have some degree of on-prem and SaaS solutions, contributing to revenue recognition lumpiness over quarters. While we've seen solid growth, we continue to assess our ARR, which for Decision Solutions was 11%, indicating robust sales momentum. Noting operational growth, our banking business is still very much on track, especially with ongoing migration to SaaS for enhanced usability.

And could you comment on the credit research business? It has been performing quite well, despite market volatility. How has pricing been affected?

Absolutely. Demand for our credit research business remains robust. We saw spikes in usage during both COVID and the Ukraine crisis as clients seek essential insights into credit markets. This ongoing trend supports our value proposition, enhancing pricing opportunities. We're also expanding usage across existing customers, which continues to drive growth. We're committed to improvements in our CreditView platform to further strengthen growth.

I only have a quick two-part question. First, could you discuss the FX impact on your overall results in the second quarter? Secondly, with the interest expense guidance raised slightly, any thoughts on sensitivity to rising rates, and how should we model this in the future?

I'll address FX impact first to ensure clarity. In Q2, the U.S. dollar strengthened against both the euro and the British pound. Spot rates were $1.05 against the euro and $1.21 against the pound compared to $1.11 and $1.31 in the previous forecast. This significantly affected quarterly MCO, impacting revenues unfavorably by approximately 3% for MCO, 2% for MIS, and 5% for MA. The overall effect reduced adjusted diluted EPS by $0.07 in the quarter. Considering that 45% of our revenue comes from international operations, about 65% of it in EMEA, continued strengthening of the U.S. dollar, especially against the euro, will weigh on our results. About 40% of our operating expense base is in non-U.S. dollar currencies, which may help to partially neutralize FX movements. On an annual basis, every $0.01 FX change between the dollar and the euro impacts EPS by around $0.02 and revenue by $8 million to $10 million. A similar calculation for the pound reveals about a $2 million impact on revenue and expenses combined. We have assumed constant foreign exchange rates in our medium-term targets, so if rates stay at current levels or continue to appreciate, achieving those targets will be more challenging. Regarding interest expense guidance, we have a $500 million 2.625% coupon note maturing in January 2023. Our revised interest expense guidance of $220 million to $240 million includes expectations of refinancing these notes. Given rising benchmark rates, we'd expect a higher coupon on any new issuance. We typically refinance maturities prior to due dates. If we don't refinance, that would lower our interest expense expectations for 2022.

Could you detail how you would handle expense reductions in the second half if markets continue to deteriorate?

Russell, it's Rob. We’d look at this from two angles—cyclical outlook actions into 2023 and structure-based actions for more severe concerning scenarios. Short-term, we can slow hiring; additionally, there are natural expense levers around T&E and incentive compensation accruals. For structural changes, we'd reduce or perhaps stagger organic strategic investments, aiming for a lower burn rate. Given these initiatives underpin medium-term guidance, it remains imperative to maintain a balance.

I would like to confirm if you won't be buying back shares for the remainder of the year and if you plan to focus on any specific investments from a data product perspective?

We have indeed lowered share repurchase guidance to around $1 billion this year, down from $1.5 billion, reflecting the current economic landscape impacting our outlook and net income. This makes it important to adopt a more conservative approach ensuring financial flexibility for potential opportunities. We're focused on maintaining flexibility for further share repurchases or M&A when needed; neither is prioritized over the other at this stage.

If your priority is M&A, where do you want to focus?

We're actively pursuing opportunities in the KYC verification space, an area we've developed considerably with organic investments complemented by recent acquisitions. Our banking and insurance sectors also hold significant potential for bolt-on acquisitions targeting integrated risk assessment services, particularly in ESG and climate capabilities. We haven't executed at scale but remain focused organically creating impactful offerings for our clients.

Could you elaborate on how independent M&A compensation plans are from MIS and overall corporate performance? Noting the consolidated revenue guidance reduction, I expected greater adjustments in operating growth and incentive compensation expenses.

While our compensation pool is corporate, we allocate it considering business and functional performance. As mentioned earlier, it’s been a two-sided story with solid MA performance versus MIS’s decline. This will ultimately reflect in compensation accruals.

When looking at the operating expense growth forecast becoming aligned with management guidance, we suggest lower-end adjustments align with the high single-digit percentage growth. Every component is taken into consideration appropriately to ensure understanding.

I seek clarity on Slide 17 regarding debt growth amid economic fluctuations. Is that the right perspective, particularly considering 2008's context? What factors should we be examining surrounding growth during this period? Is it high yield and loans, or are we overlooking significant influences?

There are various methods to triangulate the predicted growth rate forward. Assessing the stock of global debt is key. Over recent years, new issuers entered continuously, increasing the overall debt stock and influencing visibility into maturity walls which can provide stability for the business. While observing the flow of debt may also provide insight, case trends often fluctuate back to how private equity firms expedite deploying raised funds, affecting leveraged finance markets significantly.

When looking at cyclical shifts like issuance and new debt, we realize it can swing based on key market conditions related to funding and growth. Our perception isn’t that we should expect discrepancies in debt to entirely diminish; ultimately, debt remains crucial for economic progress. While we may not revert to historical low-inflation measures, we will still see significant financing efforts.

Can you update us on retention metrics? Retention appears to be a critical focus, particularly in a people-centric environment. Are we confident that investments would be sufficient to secure employee quality?

You’re correct; our workforce is crucial. So far, our retention metrics have been promising, despite competitive pressures. Our performance aligns with industry standards, possibly slightly better, as reported in employee surveys indicating strong workplace flexibility and purpose-focused mission driving positive sentiments. One additional point to consider is that compensation isn't the sole driver; aspects such as flexibility, sense of purpose, and work-life balance matter significantly too. We’ve made an effort to positively impact all these elements to strengthen our employee value proposition.

Thank you for joining today. We look forward to speaking with you next quarter. Goodbye.