Good day, and welcome, ladies and gentlemen, to the Moody's Corporation's Second Quarter 2015 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participant lines are currently in a listen only mode. At the request of the company, we will open the conference for question and answers following today's presentation. It is now my pleasure to turn the conference over to Sallie Schwartz, Global Head of Investor Relations. Please go ahead.
Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's Q2 results for 2015 as well as our updated outlook for full year 2015. I am Sallie Schwartz, Global Head of Investor Relations. This morning, Moody's released its results for the Q2 of 2015 as well as our updated outlook for full year 2015. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moody.com.
Ray McDaniel, Moody's President and Chief Executive Officer will lead this morning's conference call. Also making prepared remarks on the call this morning is Linda Huber, Moody's Executive Vice President and Chief Financial Officer. Before we begin, I call your attention to the Safe Harbor language, which can be found 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 ks for the year ended December 31, 2014 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 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. I'll now turn the call over to Ray McDaniel.
Thanks, Sally. Good morning and thank you everyone for joining today's call. I'll begin by summarizing Moody's Q2 2015 results. Linda will follow with additional financial detail and operating highlights. On the legal front, we continue to address the litigation matters and inquiries disclosed in our SEC filings, As we don't otherwise have any legal or regulatory update to provide at this time, I will then conclude with our prepared remarks with comments on our updated outlook for 2015.
After our remarks, we'll be happy to respond to your questions. In the Q2, Moody's delivered revenue of $918,000,000 The 5% increase from the Q2 of 2014 was driven by strong U. S. Performance, partially offset by challenging European conditions. U.
S. Revenue was up 18% from the Q2 of 2014, while non U. S. Revenue was down 10% from the prior year period. Operating expenses for the Q2 was $499,000,000 up 8% from the prior year period.
Operating income was $419,000,000 a 2% increase from the Q2 of 2014. Adjusted operating income defined as operating income less depreciation and amortization was $447,000,000 up 3% from the same period last year. Operating margin for the 2nd quarter was 45.7%, while adjusted operating margin was 48.7 percent. Diluted earnings per share of $1.28 increased 14% from the prior year period's non GAAP EPS of 1 point excluded a $0.36 gain resulting from Moody's acquisition of a controlling interest in ICRA Limited in the Q2 of 2014. Turning to year to date performance.
Moody's revenue for the 1st 6 months of 2015 was $1,800,000,000 an increase of 9% from the 1st 6 months of 2014. Revenue from Moody's Investor Service was $1,200,000,000 up 8% from the prior year period. Revenue from Moody's Analytics was $542,000,000 up 11% from a year ago. Operating expense for the 1st 6 months of 2015 was $993,000,000 up 11% from 2014. Much of this year to date growth reflects incremental expense from our 2014 acquisitions.
As we approach the end of 2015, the impact of these expenses will moderate. Therefore, we are maintaining our full year guidance for expenses to grow in the mid single digit percent range. Operating income of $791,000,000 increased 6 percent from 2014. Adjusted operating income of $847,000,000 increased 7% from the prior year period. Operating margin for the first half of twenty fifteen of 44.3 percent was down from 45.4% in 2014.
Adjusted operating margin of 47.5 percent was down from 48.2%. On a constant currency basis and excluding our 2014 acquisitions, operating margin and adjusted operating margin, which each have increased approximately 60 basis points year over year. Earnings per share for the 1st 6 months of 2015 was $2.39 up 13% from the prior year period's non GAAP EPS of $2.11 which excluded the $0.36 ICRA gain. We are reaffirming our 2015 earnings per share guidance of $4.55 to $4.65 despite uneven global growth and foreign currency volatility. I'll now turn the call over to Linda to provide further commentary on our financial results and other updates.
Thanks, Ray. I'll begin with revenue at the company level. As Ray mentioned, Moody's total revenue for the Q2 increased 5% to $918,000,000 On a constant currency basis, Moody's total revenue increased 10% year over year. U. S.
Revenue of $546,000,000 was up 18% from the Q2 of 2014. Non U. S. Revenue of $372,000,000 was down 10% and represented 41% of Moody's total revenue. Recurring revenue of $439,000,000 represented 48% of total revenue.
Looking now at each of our businesses starting with Moody's Investor Service. Total MIS revenue for the quarter increased 2% from the prior year period to a record $639,000,000 Foreign currency translation unfavorably impacted MIS revenue by 5%. U. S. Revenue increased 17% to $412,000,000 primarily as a result of strong performance in investment grade, structured finance and public finance.
Revenue outside the U. S. Of $227,000,000 declined 17%, primarily as a result of a slowdown in European issuance as well as the unfavorable impact of foreign currency translation. Non U. S.
Revenue represented 36% of total MIS revenue. And moving now to the lines of business for MIS. First, global corporate finance revenue of $320,000,000 in the 2nd quarter was essentially flat to the prior year period. This result reflected strong U. S.
Investment grade issuance, primarily from increased M and A activity, largely offset by lower levels of non U. S. Speculative grade issuance well as a challenging prior year comparable in Europe. U. S.
Corporate finance revenue increased 18%, while non U. S. Revenue decreased 25%. 2nd, global structured finance revenue for the Q2 was $121,000,000 10% above the prior year period, primarily the result of strength in U. S.
Structured credit, RMBS and commercial real estate finance. U. S. Structured finance revenue was up 20%, while non U. S.
Revenue was down 10%. 3rd, Global Financial Institutions revenue of $90,000,000 decreased 2% compared to the prior year period, primarily given unfavorable foreign currency translation on a weaker euro, partially offset by stronger U. S. Bank rating revenue. Excluding the impact of foreign currency translation, Global Financial Institutions revenue was up 6% from the prior year period.
U. S. Financial institutions revenue was up 10%, while non U. S. Revenue was down 9%.
4th, global public project and infrastructure finance revenue increased 2% year over year to $100,000,000 Increased U. S. Public finance issuance was partially offset by a decline in global project and infrastructure revenue against a strong prior period comparable. U. S.
Public project and infrastructure finance revenue was up 10% while non U. S. Revenue was down 11%. MIS other which consists of non rating revenue from ICRA and Korea Investor Service or KISS contributed $8,000,000 to MIS revenue for the Q2 compared to $3,000,000 in the prior year period. Turning now to Moody's Analytics.
Global revenue for MA of $279,000,000 was up 12% from the Q2 of 2014. Foreign currency translation unfavorably impacted MA revenue by 6%. U. S. Revenue grew by 23% year over year to $134,000,000 Non U.
S. Revenue increased by 4% to $145,000,000 and represented 52% of total MA revenue. Excluding revenue from our 2014 acquisitions of Web Equity Solutions and Lutan Technologies, MA revenue grew 7%. Now moving to the lines of business for MA. First, Global Research Data and Analytics or RD and A.
Revenue of $158,000,000 increased 11% from the prior year period and represented 56% of total MA revenue. Growth was mainly due to the October 14 acquisition of Lutan Technologies as well as strong performance in the credit research and content licensing business. U. S. RD and A revenue was up 19% and non U.
S. Revenue was up 2%. 2nd, Global Enterprise Risk Solutions or ERS revenue of $83,000,000 grew 24% from last year, resulting from strong project delivery across all product offerings as well as the July 2014 acquisition of WebEquity Solutions. ERS revenue was up 44% in the U. S.
And 14% outside the U. S. Trailing 12 month revenue and sales for ERS increased 41 excuse me, 31% and 11% respectively. As we've noted in the past, due to the variable nature of project timing and completion, ERS revenue remains subject to quarterly volatility. 3rd, global professional services revenue declined 4% to $38,000,000 primarily due to the year over year decline of the Canadian dollar as well as the effect of exiting certain Copal Amba product lines in late 2014.
U. S. Professional services revenue increased 10%, while non U. S. Revenue decreased 10%.
Turning now to expenses. Moody's 2nd quarter expenses increased 8% to $499,000,000 primarily due to expenses from our 2014 acquisitions as well as compensation costs associated with new hires and merit increases. Foreign currency translation favorably impacted expenses by 5%. As Ray noted, reported operating margin and adjusted operating margin were 45.7% and 48.7% respectively for the 2nd quarter. On a constant currency basis and excluding our 2014 acquisition, operating margin and adjusted operating margin would have been approximately flat.
Moody's effective tax rate for the quarter was 30.4%, down from 33.1% in the Q2 of 2014. Year over year reduction was due to a favorable tax ruling from New York State and a change in the New York City tax law regarding income apportionment. Now I'll provide an update on capital allocation. During the Q2 of 2015, Moody's repurchased 2,200,000 shares at a total cost of $235,000,000 or an average cost of $107.35 per share and issued 374,000 shares as part of its employee stock based compensation plans. Over the first half of twenty fifteen, Moody's repurchased 6,000,000 shares at a total cost of $601,000,000 or an average cost of $99.61 per share.
Outstanding shares as of June 30, 2015 totaled 200,300,000 shares, down 5% from the prior year. As of June 30, 2015, Moody's had $1,000,000,000 of share repurchase authority remaining. At quarter end, Moody's had $3,100,000,000 of outstanding debt and $1,000,000,000 of additional debt capacity available under its revolving credit facility. Total cash, cash equivalents and short term investments at quarter end were $2,000,000,000 up $88,000,000 Free cash flow in the 1st 6 months of 2015 was $554,000,000 up 32% from the 1st 6 months of 2014, primarily due to changes in working capital. As of June 30, 2015, approximately 67% of Moody's cash holdings were maintained outside
the U. S. And with that, I'll turn the call back over to Ray. Thanks, Linda. I'll conclude this morning's prepared comments by discussing changes to our updated full year guidance for 2015.
A full list of Moody's guidance is included in our Q2 2015 earnings press release, which can be found on the Moody's Investor Relations website at ir. Moodys.com. Moody's outlook for 2015 is based on assumptions about many macroeconomic and capital market factors, including interest rates, 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 some degree of 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 reflects exchange rates for the British pound and the euro of $1.57 to 1 British pound and $1.11 to 1 euro respectively. Certain components of Moody's 2015 guidance have been modified to
to
to increase in the mid single digit percent range. However, U. S. Revenue is now expected to increase in the low double digit percent range, while non U. S.
Revenue is now expected to be approximately flat. Within MIS, structured finance revenue is now expected to grow in the mid single digit percent range and public project and infrastructure finance revenue is now expected to increase in the low double digit percent range. Global MA revenue for the full year 2015 is still expected to increase in the mid single digit percent range. Within MA, professional services revenue is now expected to decrease in the high single digit percent range. The effective tax rate is now expected to be approximately 31% to 32% and capital expenditures are now expected to be approximately $100,000,000 to $110,000,000 Before we move to the question and answer session, I would like to highlight that Moody's Investor Service was recently voted the best credit rating agency in a 2015 poll of U.
S. Fixed income investors conducted by publisher institutional investor. This is the 4th year in a row MIS has won this award. I appreciate the market's recognition of our efforts and I applaud the accomplishments of those in the MIS business. This concludes our prepared remarks and joining us for the question and answer session is Michel Madeline, President and Chief Operating Officer of Moody's Investor Service and Mark Almeida, President of Moody's Analytics.
We'd be pleased to take any questions you may have.
Thank you. We'll go first to Manav Patanik at Barclays.
Hi, good morning guys. There were obviously a lot of moving parts with issuance this quarter. The 2 that sort of stuck out to me, which I wanted to ask you about. So the first one was, I guess you guys mentioned RMBS deliberately in the press release. So maybe just some color there in terms of how broad based that is for you guys to call that out?
And then the other aspect was just in CLOs. The total issuance seem to have been down, but it looks like you guys are doing okay. And are there certain like market share dynamics that you can highlight there?
Yes. I'll ask Michel Madeline to address those. Michel?
Sure. Thank you. Well, really so regarding the Structural Finance, I think the we've seen a good level of activity essentially in some segments of the AirBNs market. And we've seen whether it's in the single family rental space or some of the GSE deals and as well as some increase in jumbo activity. So that's really what we had.
Can you go back to your other can you maybe reset your other question?
Yes, your performance in the CLO market like it seems to be
nothing in the
total issue.
Yes, CLO is
a combination.
Yes, I think it's essentially driven by our level of engagement in that segment of the market basically. That's really what drove that performance.
Okay.
Yes. And I would just add that the CLO issuance pipeline, it remains strong. And some of the recovery in the leveraged loan sector in the Q2 compared to the Q1 probably is going to give the CLO market some legs going into the second half of the year, although we do expect that to eventually slow.
Okay. That's helpful. And then Linda, just I think if you can just update us typically on the total OpEx bridge you like to give us for the end of the year. And I'm not sure if you want to, I know you haven't historically. But if I look at the Moody's ratings margins, the MIS margins, clearly it's still healthy, but it seems to have some tough comparisons.
How depending on, I guess, the level of hiring, as you mentioned, how should we think about how that margin should progress?
Sure. Manav, could you I'm sorry, you were looking for what regarding operating expenses?
You know how you last quarter I think you gave the bridge that it should ramp up to like $40,000,000 by the end of the 4th quarter.
Okay. The ramp. Yes, excellent question Manav. The view now given what we're seeing at the end of the second quarter on the expense ramp would indicate that we expect that to be about $30,000,000 increase from the 2nd quarter number to the 4th quarter number. Now we've cautioned that a number of variables can impact that, including general expense timing, FX movements and incentive compensation accruals.
I would caution that obviously if we do better than planned generally our incentive compensation accrual would increase. And of course, if we do worse than planned, the incentive compensation accrual would decrease. So generally though, we think the midpoint case is about $30,000,000 of ramp. On MIS margins, I think we would note that we are providing some reinvestment in the business, which we think is the right thing to do at this point because the businesses both businesses are performing very strongly and we're really pleased with the growth progress of both businesses. 10% growth constant currency is really pretty remarkable in an overall S and P market, which is less than 1% growth for this quarter.
So we think we're doing pretty well. We don't give future guidance on margin side division. So I think we'd rather just leave that one alone if that's okay.
Yeah. That's fine. Thanks a lot guys.
We'll go next to Bill Byrd at FBR.
Yeah. Good morning. I was wondering if you could just give us just your general thoughts on the new issue pipeline and maybe any commentary on what you're seeing in Europe post the Greek standoff? Thank you.
Sure, Bill. I'll take a shot at that. And again, these are the views we gathered yesterday from U. S. Capital Markets Debts of various investment banks.
This information first is just for the U. S. Dollar market and it doesn't align with how we report. And these numbers include both financial and non financial issuers. So again, I'll go through the U.
S. First and then I'll make some comments on Europe. And we would note, the sort of remarkable difference in the two market areas, which I'm sure Michel can speak about later regarding Europe. First of all, in U. S.
Investment grade bonds, July was $100,000,000,000 month. The first half of twenty fifteen, we've seen $700,000,000,000 of U. S. Investment grade issuance, which is up 20% year over year. For the full year, the expectation is now $1,250,000,000,000 which is up 15% year over year.
You'll recall we started this year with a forecast that was supposed to be down 5% to 10%. So again, the variability in forecast must be noted as we move through the year. State of the U. S. Investment grade market is very strong.
February, March, April, May July have all set monthly record issuance levels. And the prevalence of the jumbo deals have continued to drive U. S. Investment grade activity. The current pipeline is above average and we are seeing rates which have remained reasonably low and that has driven M and A activity and there is a significant backlog of announced M and A activity that needs to be funded.
Now turning to high yield bonds, the second part of this, dollars 5,000,000,000 of issuance in July, first half of twenty fifteen, dollars 180,000,000,000 which is flat year over year. Full year 2015 is expected to be $300,000,000,000 which is about flat as well. The current high yield market is described as okay. A technical term. The LBO pipeline continues to underwhelm is what we're noting, while corporate M and A further accounts for an increasing share of issuance.
And the current pipeline is noted as average. Leveraged loans. In July, we saw $10,000,000,000 of issuance. The first half of twenty fifteen, dollars 190,000,000,000 which is down 30% year over year. And the full year is expected to be $360,000,000,000 which is viewed to be down 15% year over year.
Interestingly, the loan market right now is currently feeling stronger than the high yield bond market and the lack of supply and continued CLO issuance is forming attractive supply demand technical. Right now the pipeline is average to above average. So we're seeing some slight moderation in the conditions that were brought about by the SNC, the Shared National Credit Program that we discussed on the previous call. So moving now to Europe. The situation in Europe is as different as a number of us have seen it in many years of working here.
The euro investment grade market has been characterized by lower supply due to European market volatility and instability driven by the Greek situation. However, reverse Yankee issuance remains very active in the European market. And I would caution that we book European I'm sorry, we book reverse Yankee issuance in the U. S. In the domicile of the issuer as opposed to that those bonds are actually being marketed in Europe.
Market tone has gotten stronger following situation with Greece having some resolution and we see some companies opportunistically issuing in Europe. Specifically, Apple has a $1,250,000,000 issue in the U. K. Market today. European high yield saw a slowdown in the Q2 given the Greek situation and there's been no high yield issuance in July, although some issues are currently being looked at and we expect that the pace of activity may now pick up.
So again, I think the headline here is broadly divergent conditions between the U. S, which is quite strong and Europe, which is a good deal weaker.
Great. Thank you. And then separately, I just was wondering if you could talk about the margin lift at MA, some of the drivers and whether you think that kind of lift is durable?
Mark, do you want to comment on that? Sure. As we've been discussing, we've been making a lot of effort across MA, but particularly in Enterprise Risk Solutions to expand the margin. And we're seeing some of that start to come through and we're seeing good performance in our with our margin expansion efforts. So we're pleased with what we're doing there.
And we're very focused on doing everything we can to sustain that. I'm not in a position to declare victory and the promise that we're going to be able to continue to drive this degree of margin expansion quarter after quarter. But we're doing everything we can to drive more profitability in the business. And we're optimistic about being able to sustain this over a long period of time.
Great. Thank you.
And we'll go next to Peter Appert at Piper Jaffray.
Thanks. So Linda, you mentioned $30,000,000 cost increase between 2Q and 4Q. And I think if I'm doing the arithmetic right, this would imply that 4th quarter costs would be roughly flat on a year to year basis. Is that primarily just because of the M and A stuff? Or is there other factors?
Peter, we don't like to get into quarter by quarter activity. So I think it's fair to say that your assumptions there are correct. We are keeping a very close eye on expenses for the rest of the year given the market choppiness that we're seeing. And we're looking to actively address that by putting resources where they need to be. But generally, you're right.
We've had a major ramp up in expenses this quarter because of the quarter over quarter change with the acquisition costs coming on. We do expect that that will moderate somewhat as we move through the rest of the year.
Got it. And then Linda another one on the tax rate. The New York City change, does that result in a permanent reduction in the rates going forward? And how should we think about the tax rate going forward?
Sure. I think you heard the guidance Peter on the tax rate and we did take it down by 1 full percentage point. That probably looks a little bit more exciting than it might actually be in practice because we are very cautious about the tax rates these days given the assertive nature of taxing authorities around the world. So it's a good change, but we're cautious because one off activity in any quarter can really change the nature of the tax rate. But we do see a little bit of improvement there, but probably not anything to get very excited about.
We are also cautious on that side because of the stronger performance coming out of the U. S. As opposed to our European and international business, but Europe in particular. So more revenue in a higher tax jurisdiction calls for caution.
Got it. And then for Mark, the strength in the ERS business, you highlight some of that is early completion of projects. I'm wondering is it possible to think about how much of that revenue benefit is pull forward and therefore maybe more conservative expectations for the second half of the year?
Yes. There was some pull forward there, Peter, not an enormous amount, frankly, but there was certainly some. And we've had a very, very good first half in ERS. The top line is up 26% in the first half of this year. So you know what our full year guidance is and we haven't moved that.
So clearly, we're looking at not such strength in the second half. It's worth noting that the second we're up against some pretty difficult comps in the second half as well. The second half of twenty fourteen was up 35% over the second half of twenty thirteen. So we're going up against a strong comp. And also we've got the WebEquity acquisition bump
from
acquired revenue in ERS in the second So we won't get any bump from acquired revenue in ERS in the second half. So that all of those things are going to have an impact on the growth rate in for the rest of this year.
Can you talk Mark though about maybe the momentum in billings as opposed to the trend in revenues as a forward indicator of momentum in that business?
Yes. I can tell you that business remains very, very strong. The bookings or the billings have been very good so far year to date. We did have the largest a very large transaction, our largest transaction ever in fact. We booked in the Q2 of 2014.
So we didn't have anything of that scale in the Q2 of this year. So you saw a little bit of a downtick in the trailing 12 month sales growth rate. But nevertheless, the sales production has been very healthy in line with our expectations maybe even a little bit ahead. And the pipeline is very healthy. So we're feeling very good about where we are with the business.
Excellent. Thank you. And just one last thing. This is maybe for Ray or Michelle. The guidance suggests, I think, that the international MIS business gets stronger in the second half of the year.
Is that just a function of comps? Or is there something specifically you'd call out that might be a driver?
Yes. Michel, would you like to comment on the international side?
Yes. I think if you look at the various segments we have, the only really segments where we see favorable development are expected in Infrastructure Finance and Project Finance effectively. That's where I would expect to see some improvement from what we've seen today effectively.
Okay. Thank you.
We'll go next to Doug Arthur at Huber Research.
Yes. Thank you. Linda, if I'm doing my math correctly, which I'm probably not, if the impact on MIS from FX was 5% total, if I apply that to the down 17 percent international, does that suggest that underlying FX adjusted was down about 6% internationally? Is that fair? If you scrub out FX, the FX impact of international ratings.
Doug, let me request that you go on to a second question if you have one while the team takes a look at how that lays out.
No, that's good. That's my only question. Thanks.
Okay.
If we can come up with the answer while we're on the call here, we will do that.
Great. Thank you. Sure.
And we'll go next to Danny Galindo at Morgan Stanley. Please go ahead, sir.
Hi, good morning. I want to delve a little bit more into the RMBS strength that you called out. We had looked at issuance from a couple of sources that showed covered bonds down 15% to 20% and also private label RMBS down 15% to 20%. And you didn't give the exact number, but it sounds like it was up. So I was just kind of curious, are there any like one time fees that you're receiving there or a change in pricing?
Or maybe if you
could give us just a little bit
more color on the RMBS number?
Yes. As far as the covered bonds are concerned, we had a year on year decline in the European covered bond component of structured finance. The strength was in the U. S. RMBS sector and that related to improved market activity and increased coverage.
And as I think Linda had mentioned earlier, it covered a collection of different aspects of the mortgage market, the prime component, single family rentals, some of the agency risk sharing deals. So it was good strength in U. S. RMBS. It's still well, well below any kind of levels that we had pre financial crisis.
So it's got a long way to go to get back to where it was.
Okay. And then moving on to PPIF. I don't think we've talked about that yet. There's been some anecdotal stories about cities not using your service because you've changed the way that you assess pensions. But yes, it sounds like you're increasing your guidance for that line item.
So I was just kind of curious if you could give us a little color on where that strength is coming from? Is this kind of moving away from Moody's talk kind of more talk than action? Or any thoughts that you have on that topic?
Well, I guess I'm tempted to say you can't believe everything you read. But I think the strength in our coverage and strong growth as we strength in our coverage and strong growth as we reported versus what's happening in the broader market. And that embeds a cyclical shift in the mix from larger issues and issuers that would typically use more ratings to a shift in the issuers who have traditionally used 2 ratings rather than 3 or 1 rating rather than 2. That's a cyclical condition and is a market story rather than a Moody's story.
And if I may, we have a response to Doug's earlier question. Doug, you can correct me if I have if I'm stating your question correctly. I think your math led you to believe that the constant dollar reduction in MIS International revenues was down about 6% and we have taken a look at that and that is about correct. So yes, your math is correct.
Okay, great. Thank you. Sure.
And Mr. Galindo, did you have anything further,
sir? I did actually have one more question. Just on the European issuance, we talked
a little bit over the
last couple quarters about new mandates there. I know that the strength in issuance is down, but are you still getting the same pace of new firms looking to establish new issuer ratings in Europe? Or has that slowed down this year?
Yes. Michel, do you want to address Europe?
Yes. I can. Yes. I think we did actually see a slowdown. And the slowdown is really related to what we described happening in bank loan and high yield where we've seen less activities.
And that's obviously a significant contributor in overall volume of new mandates. So we've seen indeed such a slowdown in 1st time mandate. I think what is important to I mean the important question for all of us obviously is that, is that a structural or is that a sort of cyclical situation? And we do believe it's cyclical and really reflect the condition that that market is facing at the moment basically.
Yes. The only other thing I would add is that while it's down year on year, it is up sequentially from the Q1 new mandates.
And Mr. Galindo anything further now?
No, that's it. Thank you.
Thanks. And we'll go next to Craig Huber at Huber Research.
Yes. Hi. A few questions if I could please. Linda, I'm just curious first a housekeeping question here on foreign currency. Given all the dozens of currencies you guys are in, what are you budgeting the currency impact both the cost and revenues for the Q3 and the full year?
Sure. Let me just talk a little bit about what this does for us. And I believe where we were, we had said I think we're looking at $1.11 on the euro. Let me just double check that. And if I have it right, looking at the team 1.5 $7 on the pound.
Yes correct. So we do have sensitivity to the currencies. And our sensitivity is disproportionately heavier on the revenue line for euros Craig and heavier on the expense line in pounds. So for a while in the second quarter, we sort of had everything going the wrong way. We have many employees in London as you know and we do have billings in euros.
So there you see some of the issues that we had to deal with. So the estimated impact of FX for 2015 is we are thinking a 3% to 4% decline in revenue and a 3% to 4% benefit in operating expense. Again, as I said, dollars 1.57 is what we're looking at for the pound, dollars 1.11 for the euro. And the way it lays out is a 0 point 5 dollars if you will, a $0.05 decline in the euro will give us about $20,000,000 of decline in revenue. Now that's offset to the positive by a $4,000,000 benefit on the expense line.
So overall, the EPS impact would be a $0.05 decline. So this is one of the things that makes us concerned regarding the guidance view. And we're going to just have to see how this plays out through the rest of the year. But we had had the euro relatively steady at $1.11 As the Greece situation flared up, we dropped back to $108,000,000 percent. And I think we're back up through 109% today, but we're very sensitive to this number.
And secondly, Linda, what was your incentive comp in the Q2? What was that in the Q1 please?
Sure. Just one second. So the incentive compensation amount that we booked in the Q1 of this year Craig is what you want?
That and the second, yes.
Yes. It was $38,000,000 in the Q1 and almost $43,000,000 in the second quarter.
Okay. Then as I typically like to ask you Linda, can you just give us the breakdown of revenues for the 4 main categories high yield versus investment grade etcetera and also the 3 categories?
Yes, sure. We'll start with investment grade and I'll do the comparisons versus the Q2 of 2014. So in investment grade, that's the main story here Craig. For the Q2 of 20 15, we had about $84,000,000 versus last year's $63,000,000 And investment grade comprises 26% of the total revenue in corporate. So we're seeing very good activity in investment grade as we had mentioned.
Secular grade last year was $77,000,000 This year it's $60,000,000 and the percentage declined from 24 to 19. Bank loans was $67,000,000 for the Q2 of 2015 versus last year's $75,000,000 The percentage was down from 24% last year to 21% this year. And other was up a bit from last year $108,000,000 versus $105,000,000 last year. Percentage of 34% was about the same. So again largely an investment grade story for this year Q2 of 2015.
Turning to structured, same comparison Q2 of 2015 versus 2014. ABS was up a bit, last year $24,000,000 this year on $26,000,000 The percentage though was 21% of the total structured for the Q2 of this year. RMBS was up from $19,000,000 to 21.5 dollars and consistent at 18% of total structured. Commercial real estate from $30,000,000 to 32.2 percent consistent at 27% of revenues. Structured credit went from 37.3 percent last year to 41.1 percent consistent at 34% of the revenue.
So again, there you see some movement on the ABS line and the commercial real estate and structured credit lines as we mentioned. FIG, last year we had $92,000,000 total this quarter. This year we have $90,400,000 FIG is always pretty consistent. Banking was $63,700,000 last year, dollars 62,000,000 this year, 69% of total FIG revenues. Insurance is down a bit $24,000,000 last year, dollars 21,000,000 this year, 23% of total revenues versus last year's 26 percent.
Managed investments about flat at a little over $4,000,000 5% of the total and other was about $2,300,000 for us and a small piece with a $90,000,000 total. So a little bit weaker in the insurance sector for FIG. And finally PPIF as compared to last year, dollars 54,000,000 in PFG and Sovereign, which is up nicely from last year's 44 The percentage of the total, 54%. Project and infra, conversely is down from last year's $54,000,000 to 45.5 dollars and that's 46% of the total revenues. So those segments sort of switched places in PPIF for this year.
And
I think that's
about it Craig if that does it for you.
Did I miss that small municipal structured product line you have
in there?
I'm not sure that's rolled up into another segment now and I think you're going to have to chat with Sally about that.
Rolling in. Okay. My other question is for organic revenue, if you could just help us with this. Within your research business and also ERS, what was the underlying organic revenue growth in each of those excluding those small acquisitions please?
As it happens, the benefit we got from acquired revenue almost exactly offset the FX hit. So the constant dollar organic revenue growth rate for MA overall was a little over 12%. And similar story in RD and A. Overall RD and A growth rate on a GAAP basis was 11% and constant dollar organic was also 11%.
Okay. Thank you.
Sure.
We'll take our next question today from Tim McHugh at William Blair.
Yes, thanks. First one to ask just on ERS. The increased pace, I guess, of customer deployments, is that just timing of where you're at in this cycle? Or is there something different you've been doing in the last couple of quarters that's, I guess accelerating? How quickly you can get to that revenue recognition point and customer deployment point?
Yes. There's a lot that we're doing to try to speed up the implementation of our projects and thus the recognition of our revenues. And that is an ongoing project. So it's not as though we've done it and we've got a structural change in the business that we're going to be able to sustain from here on out. But it's something we're very focused on and we're pleased with the traction we're getting there.
It is very much a strategic focus for us and it's something we're trying to do. It's a function of the work that we're doing with the product to make the product more have more standard features built into the product and focus on selling those standard features and standard versions of the product. So that accelerates or facilitates the product implement the implementation projects. So, the short answer to your question is yes, and we're making good progress there. But like I said that is an ongoing focus for the management of the business.
Tim, it's Linda. Let me just add one element of clarification. On the finance side and Mark and I and our teams work together very closely on ERS revenue recognition. Software revenue recognition accounting is a very detailed and challenging sort of thing. And we're very cautious that we handle revenue recognition appropriately.
I think one of the things we've learned to do better is to better match expenses with revenues and to ensure that we stage completion of projects. So I think as a whole, the corporation has gotten better at managing this. But we are very cognizant of the revenue recognition rules and we're very thoughtful about how we're dealing with those.
Okay, great. And ERS in the U. S, the growth rate picked up by I guess 19% versus 13% last quarter, steady growth rate there. So I guess what drove the acceleration this quarter versus what you've been seeing?
Well, we had we have the impact of the WebEquity acquisition. That is a very heavily U. S. Focused business. So you've got a very significant contribution from Web Equity.
But as I said earlier, business generally is very good in MA across the board, but in ERS specifically. And that would be true in inside and outside the U. S.
Okay. Thanks.
Our next question today is from Robert Simmons at Janney.
Hi. I'm asking for Joe Friese. You talked about reverse sinking issuance a bit. I was wondering if you could quantify that at all, like how big a market is that? How long do you expect that to remain strong for you?
Any sort of details would be helpful.
Sure. Let me just mention that it's very choppy. The strongest month for issuance was probably March, April. Then the market sort of went away as concerns rose about what was happening with Greece. Now that those have somewhat moderated and that doesn't say that those are solved, We are seeing a pickup in potential interest in the reverse Yankee issuance perhaps spotlighted by as I said the Apple deal in the sterling market today.
Very hard to predict this because it is very market dependent and we'll have to see how conditions lay out. We would also expect that going into August is seasonally a less active month in the European markets as a whole. So we may see some hiatus here as we go through August and potentially some strengthening as we move back into the September time period. But this is a hard one to call and it moves month by month. Therefore, we wouldn't be giving guidance on that and we're happy to talk about this a bit further as we get to Investor Day on Wednesday, I don't think we split that out.
I don't know if anyone else has any thoughts on that. No, can't give too much more detail on that.
All right.
Great. Thanks.
We'll move next to Bill Warmington at Wells Fargo.
Good afternoon, everyone.
Hey, Bill.
Hi, Bill.
So I was hoping that you might be able to get be able to talk about some of the international MIS business lines on a constant currency basis? I know you've talked about the group as a whole, but it seems like some
of those business lines are
doing better than the reported revenue would indicate on the surface? Maybe not, but I would assume it.
Yes. I mean we can give you some information on the FX impact internationally by line of business. Wouldn't be able to break it down more finely than that. But the FX impact on International Corporate Finance was $11,000,000 Unstructured finance was $6,000,000 Financial Institutions was $7,000,000 PPIF was 4,000,000 dollars On the MA side, RD and A International, it was $7,000,000 ERS International was $4,000,000 and professional services, it was $1,000,000
Great. That's very helpful. And then one other question. Just on the stress testing in Europe. I wanted to ask about how the Greek turmoil was impacting demand for those services.
I figured you could make a case for it either positive or negative, but I wanted to check.
Yeah. The Greek situation really hasn't had an impact on our work in Europe in any way frankly. There's lots of demand for what we're doing among European banks. And I can't say that the situation in Greece has had any impact at all.
Excellent. Thank you very much.
And we'll go next to Vincent Hung at Autonomous.
Hi, afternoon. Hi,
Vincent. Just
one question for me. Maybe I missed this, but did you see any evidence of a reversal in the disintermediation trend in Europe this quarter?
A reverse in the disintermediation trend?
Reintermediation. Yes.
As we said, the number of new mandates that we are seeing year over year is down, but sequentially Q1 to Q2 is up. We attribute that not to banks becoming particularly aggressive in lending rather than the attractiveness of bond markets, but more to a demand question. And so I think as we see growth resume in Europe, we are going to see an increase in new mandates again.
Okay. Thank you.
There are no further questions at this time. Mr. McDaniel, I'll turn the conference back over to you sir.
Okay. I want to thank you for joining us. And as Linda mentioned, we look forward to speaking with you on Investor Day, which is September 30. And until then, I hope everyone enjoys their summer.
And once again, this does conclude today's Moody's Q2 2015 earnings conference call. As a reminder, a replay of this conference will be available after