Day, and welcome, ladies and gentlemen, to the Moody's Corporation First Quarter 2015 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen only mode. At the request of the company, we will open the conference up for question and answers following the presentation. I will now 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 Q1 2015 results 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 Q1 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.
Thank you, Sally. Good morning and thank you to everyone for joining today's call. I'll begin by summarizing Moody's Q1 2015 results. Linda will follow with additional financial detail and operating highlights. As we have no legal or regulatory updates, I will conclude with comments on our outlook for 2015.
After our prepared remarks, we will respond to your questions. In the Q1, Moody's delivered revenue of $866,000,000 an increase of 13% over the Q1 of 2014. On a constant currency basis, Moody's revenue was up 18% year over year. Excluding the 2014 consolidation of ICRA and our 2014 acquisitions of Lutan Technologies and Web Equity Solutions as well as the impact of foreign currency translation, Moody's revenue grew 16% year over year. Operating expense for the Q1 was $494,000,000 up 14% from the Q1 of 2014.
Operating income was $371,000,000 a 12% increase from the prior year period. Adjusted operating income defined as operating income less depreciation and amortization was $400,000,000 also up 12% from the same period last year. Foreign currency translation unfavorably impacted operating income by 7%. Operating margin for the quarter was 42.9%, while adjusted operating margin was 46.2%. Diluted earnings per share of $1.11 increased 11% from the prior year period.
We are reaffirming our full year 2015 earnings per share guidance of $4.55 to $4.65 despite our expectations for uneven global growth as well as the strength of the U. S. Dollar at current exchange rates. I will now turn the call over to Linda to provide further commentary on our financial results and other updates.
Thanks, Ray. I'll begin with revenue at the company level. As Ray mentioned, Moody's total revenue for the Q1 increased 13% to $866,000,000 Foreign currency translation unfavorably Moody's revenue by 5%. U. S.
Revenue of $500,000,000 was up 17% from the Q1 of 2014. Non U. S. Revenue of $366,000,000 was up 7% from the Q1 of 2014. Non U.
S. Revenue of $366,000,000 was up 7% from the Q1 of 2019. Non U. S. Revenue of $366,000,000 was up 7% and represented 42% of Moody's total revenue.
Recurring revenue of $424,000,000 represented 49% of total revenue. Looking now at each of our businesses, starting with Moody's Investor Service. Total MIS revenue for the quarter was $602,000,000 up 14% from the prior year period. Foreign currency translation unfavorably impacted MIS revenue by 5%. U.
S. Revenue increased 18% to $372,000,000 Revenue outside of the U. S. Of $231,000,000 increased 8% and represented 38% total ratings revenue. Excluding the 2014 consolidation of ICRA, MIS revenue increased 12%.
Moving now to the lines of business for MIS. First, global corporate finance revenue in the Q1 was up 13% to $299,000,000 reflecting increased investment grade issuance from heightened M and A activity as well as strong investor demand for high yield bonds. Partially offsetting these gains was a contraction in bank loan issuance. U. S.
Corporate finance revenue increased 13%, while non U. S. Corporate finance revenue increased 14%. 2nd, global structured finance revenue for the Q1 was $101,000,000 6% above the prior year period. This increase was primarily the result of strong U.
S. Commercial real estate issuance. U. S. Structured finance revenue increased 13%, while non U.
S. Structured finance revenue decreased 6%. 3rd, Global Financial Institutions revenue of $94,000,000 increased 10% from the same quarter of 2014, primarily due to increased revenue from U. S. Finance companies and insurers.
This benefit was offset by a decline in revenue from global managed investment issuers, who experienced elevated activity in the prior year period. U. S. And non U. S.
Financial institution revenue increased 19% and 4% respectively year over year. 4th, global public project and infrastructure finance revenue increased 25% year over year to $101,000,000 resulting from increases in U. S. Municipal financing activity and global municipal infrastructure issuance.
U. S. Public project
and infrastructure revenue increased 37%, while non U. S. Revenue increased 7%. As a reminder, MIS other consists of non rating revenue from ICRA and Korea Investor Service or KISS. MIS other contributed $8,000,000 to MIS revenue in the first quarter compared to $3,000,000 from the prior year period.
Turning now to Moody's Analytics. Global revenue for MA of 2 $63,000,000 was up 11% from the Q1 of 2014. Foreign currency translation unfavorably impacted MA revenue by 5%. U. S.
Revenue grew by 17% year over year to $128,000,000 Non U. S. Revenue increased 5% to $135,000,000 and represented 51% of total MA revenue. Excluding the 2014 acquisitions of Lutan Technologies and Web Equity Solutions, MA revenue grew 7% year over year. Moving now to the lines of business for MA.
First, Global Research Data and Analytics or RD and A. Revenue of $150,000,000 increased 9% from the prior year period. Growth reflected strong sales of credit research and licensing of ratings data a 96% customer retention rate and the acquisition of Lutan Technologies in October 2014. Year over year, U. S.
Revenue was up 13 13% and non U. S. Revenue was up 3%. 2nd, Enterprise Risk Solutions or ERS revenue of $77,000,000 excuse me grew 29% from last year. This increase resulted from strong project delivery across all product offerings as well as the acquisition of Web Equity Solutions in July 2014.
Revenue was up 41% in the U. S. And 22% outside the U. S. Trailing 12 month revenue and sales for ERS increased 28% 24% respectively.
As 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 decreased 10% to $37,000,000 primarily due to the year over year effect of exiting certain Copal Amba product lines in late 2014. U. S. Revenue decreased 4% and non U.
S. Revenue decreased 13%. Turning now to expense. Moody's 1st quarter expense increased 14% to $494,000,000 primarily due to hiring in 2014 and the Q1 of 2015 as well as added operating expense from our 2014 acquisitions. Foreign currency translation favorably impacted expense by 4%.
Excluding the 2014 consolidation of ICRA and our 2014 acquisitions of Luton Technologies and Web Equity Solutions, Moody's expense grew 9% year over year. Moody's reported operating margin and adjusted operating margin were both down slightly in the quarter to 42.9% and 46.2% respectively. Excluding the 2014 consolidation of ICRA and our 2014 acquisitions of Lutan Technologies and Web Equity Solutions, Moody's added more than 100 basis points of operating leverage year over year. Moody's effective tax rate for the Q1 was 32.9% compared to 28.9 percent for the prior year period, primarily due to a benefit from the resolution of a foreign tax audit in the prior year period. Now I'll provide an update on capital allocation.
During the Q1 of 2015, Moody's repurchased 3,800,000 shares at a total cost of $366,000,000 and issued 2,300,000 shares under its annual employee stock based compensation plan. Outstanding shares as of March 31, 2015 totaled 202,200,000 shares, down 5% from the prior year. As of March 31, Moody's had $1,200,000,000 of share repurchase authority remaining. On March 9, 2015, Moody's issued €500,000,000 of 12 year senior unsecured notes at 1.75%. This transaction provides both cost effective financing and a partial hedge for the company's euro exposures.
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 down $50,000,000 from a year earlier. Free cash flow in the Q1 of 2015 was $242,800,000 up 54% from the Q1 of 2014 due to the increase in net income and changes in working capital. As of March 31, 2015 approximately 63% of Moody's cash holdings were maintained outside the U. S.
On April 17, 2015, Moody's announced a quarterly dividend of $0.34 per share of Moody's common stock payable on June 10 to the stockholders of record at the close of business on May 20. And with that, I'll turn the call back over to Ray.
Thanks, Linda. I'll conclude this morning's prepared remarks by discussing our 2015 full year guidance. Moody's outlook for 2015 is based on assumptions about many macroeconomic and capital market factors, including interest rates, foreign currency exchange rates, corporate profitability and business investment spending, mergers and acquisitions, consumer borrowing and securitization and the amount of debt issued. These assumptions are subject to some degree of uncertainty and results for the year could differ materially from our current outlook. Moody's guidance assumes foreign currency translation at end of quarter exchange rates, including $1.48 to the pound and $1.07 to the euro.
Moody's still expects full year 2015 revenue to grow in the mid single digit percent range. However, on a constant dollar basis, Moody's full year 2015 revenue and operating expense growth rates would now both be 4% to 5% higher, up from the approximately 3% higher that we communicated in February. The company still expects diluted earnings per share in the range of $4.55 to $4.65 For global MIS, Moody's still expects 2015 revenue to grow in the mid single digit percent range. However, MIS' U. S.
Revenue is now expected to grow in the high single digit percent range, while non U. S. Revenue is now expected to increase in the low single digit percent range. Within MIS, both structured finance revenue and financial institutions revenue are now expected to grow in the low single digit percent range. For global MA, 2015 revenue is still expected to increase in the mid single digit percent range.
However, MA U. S. Revenue is now expected to grow in the low double digit percent range, while non U. S. Revenue is now expected to increase in the low single digit percent range.
Within MA, professional services revenue is now expected to decrease in the low single digit percent range. 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 Analyst. We'd be pleased to take any questions you might have.
We'll take our first question from Manav Patnaik with Barclays.
The first question I had was just around the constant currency. So generally, maybe you can tie that. Was that increase more driven by the Moody's Analytics side? Or is that just more of the issue being better than it came in and your outlook for securities and some color there?
Manav, I apologize. I didn't hear the beginning of your question. If you could repeat that, I'd appreciate it.
Yes. It was just around the increased guidance on a constant currency basis. So just what the main drivers there were?
The underlying operating business is performing very well. And if not for the decline of the euro against the dollar, we obviously, as we communicated, we would have had even stronger performance in the Q1. Our current outlook as we said assumes the 1 point 0 $7 dollars to the euro. And so that's absorbing some of the strength of the underlying operating performance. So I think that's really the story.
Okay. And then Linda on the expense side, I mean you cited a favorable benefit of the FX and the expenses and still it looked like it was up double digit. So A, is that mainly just because of the contribution of acquisitions? And then can you help us bridge what you've given us before in terms of how we expect the expense to move quarterly to the end of the year?
Yes, Manav. Your point is correct that the FX impact actually benefits us on expenses and it's a 4% to 5% benefit for the rest of the year, we think on the expense line. In terms of the ramp the rest of the year, this is one of the trickiest calls that we make and there are many things that can cause this number to move around. The expense number for the Q1 has been $494,000,000 and from there now we're looking at a ramp of about $30,000,000 But again, I would emphasize that could be $25,000,000 it could be $35,000,000 And it's impacted by a number of things, including our IT projects. And of course, that is absent any changes to incentive compensation, if we end up doing better.
So a good central scenario would be about $30,000,000 but there is some flexibility around that. And please keep in mind, it's one of the tougher numbers to predict that we have to give you.
Okay, fair enough. And just last one for me. It seems like you guys have had a pretty steady stream of these small sort of tuck in type deals. Can you is that pipeline still pretty active? Like should we be expecting more of these going forward?
Yes. As we said before Manav, we certainly are looking for opportunities to add attractive assets to the portfolio that we have. There is so yes, we are actively looking. But the opportunity to make good acquisitions at what we think are fair prices is lumpy. And we had a series of those last year more than we would normally have in or have normally had in an individual year.
So I would not draw from 2014 and try to extrapolate that into 2015.
Okay. Fair enough. Thank you, guys.
We'll take our next question from Andre Benjamin with Goldman Sachs.
Thank you. Good morning. The question is on ERS. I know it's up 29% in the Q1. So I was just wondering if you could remind us why you're assuming such a sharp deceleration to hit mid single digit growth for the year and how we should think about the puts and takes that would drive upside or downside to that guidance?
Sure. I'll ask Mark Almeida if you wouldn't mind commenting on that. Sure. Andre, I think it's just a matter of our looking at the projects that we've got underway in the ERS business and having pretty good visibility into what work is going to get done and when it's going to be completed and what kind of revenue recognition we're going to have. So the Q1 was very strong.
It was largely in line with our expectations. So it's again, it's really pretty straightforward and it's a function of the schedule of work that's being done and when we expect it to complete. I'd just add to that that it's also as much of a story about 2014 as it is 2015 and that we had a very strong Q4 in 2014 in ERS, which is making for more difficult comparables in the back half of the year. Right. The other thing to add to that Andre is that we did have the WebEquity acquisition mid year last year.
So we're getting some benefit from that in the first half of this year. We won't get as much benefit from it in the second half.
And then same business, the Global Professional Services, I know you said part of the reason it was down was because of exiting certain products. I was wondering maybe a little color on what that would have looked like if you had kept those products and I don't know how much FX is weighing on that business in particular given it's more international exposed?
Andrey, it's Linda. And Mark and I are going to tag team on this because I'm managing Copelamba and he'll comment on some other factors. As you saw in the earnings release and then also on the script, we had exited part of the business for Copalamba and that leaves us a revenue deficit of about $8,000,000 $9,000,000 that we're looking to catch up from, which makes it a little harder to have growth on that line. Maybe Mark wants to talk a little bit more about the other components of professional services.
Yes. The other big piece in professional services is our certification business in Canada. And the Canadian dollar has fallen pretty sharply. So we took a very big FX hit in Canada. So between what Linda described and the FX impact on the training and certification business, it created a lot of headwind for professional services overall.
Thank you.
We'll take our next question from Alex Grom with UBS.
Hey, good morning. Yes, Linda, I think every quarter you kind of remind us what the pipeline is looking like. So I mean pretty straightforward question. Any update you want to highlight in particular?
Sure, Alex. We can have it be pipeline time. So what I'll do is I'll note that these are the comments we gotten from a collection of U. S. Capital Markets desks.
And what we're going to talk about here first is just U. S. Dollar markets and it doesn't align with how Moody's thinks about revenue and expenses. So I want to talk about 3 different areas investment grade bonds, high yield bonds and then leveraged loans. And then I'll provide some comments on Europe.
So let's look at investment grade bonds first. For the Q1 of 2015, we had 3 $50,000,000,000 of U. S. Issuance, which was up 20% year on year. For the full year, the banks are now expecting $1,100,000,000,000 of U.
S. High grade issuance. Note that that's up 10% from the forecast that we received in the beginning of the year that we had said at that time were about flat. You'll note that these forecasts at the beginning of the year are always very speculative and they always move around. So the state of the U.
S. High grade market is very strong. And in the Q1 of 2015, it was a new single quarter record for issuance in the investment grade bond market in the U. S. There were jumbo acquisitions from AT and T at $17,500,000,000 and Oracle at $10,000,000,000 dollars We're anticipating a very busy May as investor demand remains strong.
So that's being driven by M and A financing, financial company and bank issuance and current pipeline is described as robust and we don't see that word too often with many jumbo transactions expected. And the thought is that May could rival March in terms of high volumes. Again, March was at $140,000,000,000 So we've had some pretty heavy quarters here for U. S. Investment grade.
Let's look at high yield bonds. For the Q1 of 2015, dollars 100,000,000,000 of issuance that's up 20% year over year. And for the full year, we're looking at $300,000,000,000 of issuance. Again, the about flat outlook there is an upgrade from the prior down 10% view that we had seen at the beginning of the year. So the state of the market is very strong.
Positive funds flows throughout the year so far. Spreads are performing well and the pipeline is described as average to robust. Now leverage loans, which in some sense are a substitute for high yield bonds are not looking as robust. This is a result of some changes in what we're seeing from the Fed. If you look at the Shared National Credit Program and a press release from November 7, you see that the Fed has some concerns about high leverage levels in syndicated loans.
And again, this program covers loans of $20,000,000 or more with 3 or more banks in the deal. So the Fed talked about its concerns and that has had downward pressure on leverage loans. In any case, dollars 100,000,000,000 for the Q1 of 2015 down 45% year over year, dollars 350,000,000,000 forecast for the year, which is down 20%. The market continues to see a little bit of weakness as I said because of the Fed oversight. And issuers however have strong demand are showing strong demand for the paper.
The pipeline is judged to be average at this point and we still see strong year to date CLO issuance. Dollars 30,000,000,000 for the Q1 of 2015 versus $23,000,000,000 in the Q1 of 2014. And the last 2 weeks have seen positive fund flows into leverage levels. Now let's look at Europe and what we're seeing in Europe. Investment grade in Europe, 1st quarter saw very heavy supply driven particularly by a surge in issuance from U.
S. Based issuers wishing to lock in historically low rates. As you probably saw, Moody's was part of that. The pipeline looks to be above average in May. Now some of that attractive spread level and the attractive issuance conditions in Europe has weakened a little bit.
The best conditions were probably in the Q1, but we continue to see above average pipeline. Now high yield, a bit different. Market is very strong in Europe, up 30% over the same time last year. A record Q1, strong April, good inflows into European high yield and that market looks to be quite attractive right now. So overall U.
S. Investment grade, very robust high yield bonds, robust leverage loans, not so much. Europe investment grade pretty good, but maybe we saw peak opportunity in the Q1 and high yield continues to look pretty good in Europe. So is that efficient, Alex?
As detailed as anyone can hope for. But maybe just a couple of things just to add there. Obviously, you highlighted the leverage loans and the Fed. When and you also I forgot the word that you used, you said that high yield and leverage loans sometimes work countercyclical, if that's the right word to use. So if leverage loans come into increased pressure, do you think the high yield market can absorb that?
And is that from a margin profitability perspective, in particular, if you add the CLO side, are you comfortable that those two businesses that the high yield market will be enough from your perspective? And then secondly sorry for the long question secondly, on the European side, am I reading it right that you're actually feeling better about how Europe is going so far, but that it's really the FX that's the impact there?
To deal with your first question, Alex, I would say that high yield bonds and leverage loans are substitutes for each other. They're not countercyclical. That's a little bit of a different thing. So substitution effect. So we are pretty indifferent as to whether we rate bonds or loans.
Any kind of speculative rate security, we're able to price a little higher for, so we're happy with either. We released a piece of research yesterday on this situation with the Fed and leveraged loans. And it might be interesting for people on the call to get that. But what we see is that more capital has to be allocated to those leveraged loans and there's stricter lending guidance on the bulk of those leverage loans. And it applies even if a loan is sold to the CLO a CLO vehicle.
So we would expect that that would continue and we're fine with the bonds being stronger. Now in Europe, issuance conditions are pretty good. And we would also note that we think that that market continues to look good from an issuance point of view. I'll let Michel talk a little bit about what we're seeing potentially in terms of new mandates and some other things.
Thank you, Linda. Yes, in terms of new mandate, I think we've seen a bit of a slowdown in the Q1. We see that as really something that is cyclical essentially. There's overall the level of growth in Europe is still very much subdued. There continues to be some covered deleveraging.
So again to that, obviously, we have very low rate environment and we have a banking system that continues to struggle somehow. So overall, we were very satisfied with the volume we've seen in the Q1. Bank loan, we see a similar contraction to the one we've seen in the U. S. But overall, I think we continue to see the structural trends in our favor in Europe basically unchanged.
All right. I'll leave it at that. Thank you very much.
Thanks, Alex.
We'll move on to Denny Galindo with Morgan Stanley.
Good morning, guys.
Good morning, Denny.
Can you talk a little bit about the share but can you talk about the kind of metrics that would cause buybacks to go up and down in the quarter? And does the fact that you bought more shares this quarter have any bearing on how much you might buy in Q2?
We do use a grid, Denny, as you point out. But the details around that and exactly the pace at which we're going to be buying under that grid as well as opportunistically outside that grid is not something we would want to telegraph.
Yes, Jenny, our guidance has been around $1,000,000,000 for this year and the pace was a little heavier in the Q1. We are pleased with the price that we achieved in the Q1, dollars 95.20 per share. Stock crossed $110 briefly this morning. So we're pretty happy with that. And we'll have to see.
As we always say, the total amount of buybacks is subject to a lot of different factors. And the pacing is something, as Ray said, that and the actual grid prices are not something that we disclose.
Okay. And then moving on to the PPIF group within MIS, that was it sounded like that was pretty strong. And it's sometimes hard to get good information on that space. Do you expect public financing to kind of remain fairly strong over the next few quarters? And what types of issuers are really driving that strength there?
Yes. The real strength in the Q1 was coming from the U. S. Municipal sector of PPIF. And that's municipalities taking advantage of a couple of things.
Obviously, low rates and attractive borrowing conditions, but also the fact that a lot of the volume from the mid-2000s is coming off of lockup and is able to be refinanced as a driver as well. We do think we're going to see a good year for PPIF for the full year. But realistically the pace that we saw in the Q1, I don't think that's the central scenario.
Okay. And then just one more longer term question. Longer term in structured, we're starting to see some innovation the stacker deals from the GSE or securitizing single family rentals, which are both kind of ways to bring private money into financing single family homes. Could you talk about these deals or any other areas of structures which could kind of boost the growth rate in structured products or in that kind of RMBS bucket specifically?
Sure. I'll make a couple of comments and Michelle or Linda may wish to make remarks as well. Certainly, innovation has always been a feature of the securitization market. As you said, some of the new product that we're seeing is bringing private money into portions of that market. Also changes in regulation are going to have an impact on that market going forward and it will undoubtedly drive further innovation.
Whether it's the rules for 2016 that are impacting the CLO market and how the market adjusts to that, the leverage limits that are being put on banks, the activity in the banking sector that's being tailed that they move capital raising and liquidity raising into the structured sector should all be characteristics of this market going forward. Really though for the shorter term looking out over the next couple of quarters, I think we'd be looking for upside coming from existing product and from a resumption of securitization activity at more robust levels coming out of Europe. Michelle, I don't know if you want to add anything to that.
Just one quick correction
point. Maybe if I may just one comment on single family rental. It's a sector where we have been active and but just in terms of number of transaction, I think that remains a fairly small sector. Although, again, we've seen innovation with now new structures with multiple originated deals. And so that's a sector where we are present, yes.
Jenny, I think you may we'll double check this, but I think you may have confused one concept. Stacker deals are deals that come out of the existing portfolios. There's a similar type between Fannie and Freddie. So that is to move from the government balance sheet into the capital market. That's not really a new product and it has nothing 0 to do with private capital.
That's moving balance sheet exposure for the U. S. Government into the private market. It's not new private market origination. So you might want to just think about that a little bit.
We're not super excited about the innovation in the RMBS market at this point. There are some of those products including single family rental, but these things are few and far between. And what we're really looking for is a resumption of the jumbo mortgage markets, the private label jumbo markets. But the U. S.
Government is still backing the vast majority of mortgages in the U. S. So still rather limited private capital participation at this moment.
Thanks for taking my questions. Sure.
And we'll move on to Joseph Foresi with Janney. Please go ahead.
Hi. I wonder if we could talk first about just the trajectory of the margins in the analytics business. I know it's been an area where you're trying to scale up on the software side in this quarter might have been affected by some one time changes. But can we just maybe could you give us a little color on sort of what you think that might look like through the back half of this year?
Mark, would you like to comment on that? Yes. I'll comment on what we're doing with the margin generally. But as you observed and as Linda explained earlier, we had some changes that we made in the Coppola Ambev business and some integration costs that we were dealing with there. If you exclude Copel Ambev from Moody's Analytics, the margin for the rest of the Moody's Analytics business actually went up in the quarter.
And that's even taking into account the drag we had from the 2 acquisitions that we made. So we did have margin expansion on that basis in the quarter. That's the 3rd quarter 3rd consecutive quarter of margin expansion in MA. So I think it's consistent with what we've been talking about and the efforts we've been making to drive margin in MA. That continues to be a focus.
We think it's achievable. But as we've described before, we expect this to be a very long term effort and something that is going to occur in a meaningful way over a number of years and not something that you're going to see a dramatic change in over the next couple of quarters.
Okay. So I mean should we think of that as a small creep? I think what that implies unfortunately what you see in our model sometimes, we extrapolate some of the historical and just kind of run it through going forward. So is that a small creep year over year? Or do you think that momentum each quarter obviously excluding the one times carries through the back half of the year?
Well, again, I mean, what I'm describing was a modest increase in the MA margin ignoring the Copelamba business in light of the changes that we were making over there. So I think given that we don't really guide to margin for the business, I think that's pretty much all we could say there.
Okay.
And there will continue to be some noise on a quarterly basis just based on the mix of activity that we're seeing there.
Got it. Okay. And then just a larger question on the sort of the issuance side. For a number of years people have been talking about the amount of corporate debt out there. And I think starting next year and heading into the back half of that year and going forward that's all going to come due.
Do you have any sense of sort of how that plays out from an interest rate perspective and then mixes it to the issuance market?
Well, yes, talked before about the refinancing walls that we can see on the horizon. This is particularly pronounced in the U. S. And particularly in the spec grade area. So beginning in 2016, but then really, really more of a 2017 2018 story, we are going to see substantial refinancing needs in the corporate sector.
That's true also in Europe and in Asia, albeit to a lesser degree than what we see in the U. S. And I'm not anticipating a dramatic increase in interest rates over this period certainly at the longer end. So I think even though I keep saying this and I keep being wrong even though I would expect rates to increase on a going forward basis, I don't expect that to be the kind of increase that would make absolute financing terms unattractive.
Got it. Okay. And then last one for me. Any comments you have? I know you said you really didn't have anything on the regulatory changes.
Any comments or updates there? Thanks.
No, nothing really new to report on the legal regulatory side. We'll be filing our Q very shortly. But again nothing notable that I would point you to as of right now.
Thank you.
From FBR, we have Bill Byrd. Please go ahead, sir.
Yes. Good morning. Ray, I
was wondering if you could talk about what you're seeing right now in the reverse Yankee bond market? Are you seeing that pipeline build? Do you anticipate more companies following your lead and tapping this market? Thank you.
Sure, Bill. I'm actually going to hand this over to Michel and let him offer his thoughts on this.
Yes. No, thank you, Ray. Well, I think this is really a matter of 2 factors. 1, the currency play and 2, the rate differential that exists between and the spread differential between the U. S.
And European markets. And I think on both of these fronts, I think we continue to expect to see favorable factors for such a trend. So we don't have a number to offer here, but I think the conditions that have been favorable to date are expected to remain in place at least for the possible future for the short term, medium term.
And Bill, let me just add something. We show in terms of our revenue performance, the revenues based on the location of the issuer rather than the market into which it is issued. So think about that in the context of our U. S. Versus European corporate revenues.
Thanks for that clarification. Linda, could you also give us the incentive comp accrual
for the quarter year over year?
Sure, Bill. Just a second while we look that up. For the Q1 of 2015, the incentive comp accrual was about $38,000,000 and that's up from last year's 29.5 percent. And we're running about on target with where we expect it to be at this point in the year. That number is one that obviously bounces around.
If we're doing worse, that number is smaller. If we find ourselves doing better, of course, that number would become a bit heavier, but $38,000,000 for the Q1.
Just one final question. Your more moderate growth outlook for
As a matter of fact, most of the outlook story, the changes relate to currency.
Thank you.
Next we have Bill Warmington with Wells Fargo.
Good afternoon everyone.
Hi Bill.
So I wanted to start out by asking about the very strong muni issuance up 37%. Just wanted to see if you could talk a little bit about the conditions that have produced that and your thoughts on the pipeline there going forward for the rest of 2015?
Yes. It's the 37% growth is really driven again by the U. S. Municipal market, which had a very strong quarter. We expect that the U.
S. Market is going to continue to be strong through the year, although not at 1st quarter levels as I think I mentioned earlier. And again, it's a combination of refinancing with the opportunity to do so in an attractive rate environment and the expiration of lockup periods for some of the municipal bonds.
Got it. And then on the I noticed the MIS relationship revenue growth at about 3.7% just seemed particularly low. And I wanted to ask how much of that's being distorted by FX and if there's anything else going on there that would explain that?
No. It is again an FX story. I know this starts to sound like a broken record, but it's we have reasonably large recurring revenues coming out of Europe. A lot of frequent issuer pricing arrangements and the monitoring fees and that go along with that. It's we're seeing growth, but it's that growth is really being impacted by the decline of the euro.
Got it. And then one last question for you on the research data and analytics there. Just wanted to ask about how price increases were trending so far in 2015, what your expectations were going to be there for the year?
Yes. They're running pretty much in line with the way they were through 2014. So we continue to get a nice kick from price and we anticipate that continuing.
Excellent. Thank you very much.
Next we have Peter Appert with Piper Jaffray.
So Ray, your market share performance relative to peers has been really strong certainly in the Q1, I think even for the last several years. Can you call out anything in terms of what you see driving that performance or any particular categories where you think you're picking up share?
Yes. Our coverage has been strong. And obviously, we are we would attribute that to a combination of the work we're doing on our analytics and the demand that that is creating from the institutional investor community for issuers to get Moody's ratings. Beyond that, I think it's really a matter of operational execution and we're paying a lot of attention to executing well. Nothing fancy about that.
No particular asset class where you think so I was thinking about, for example, in CMBS that one of your competitors had some issues maybe that's helping you?
Ironically, not really in that area. Where And you're correct that the structured finance area in particular shows some coverage volatility. It always has. Rating shopping is more prevalent there. But the area where we are strong in the commercial mortgage backed securities area in terms of multifamily or multi property deals, we've been strong in even before there were where there was a moratorium on the ratings from one of our competitors.
And so the strength continues, but it hasn't really changed in terms of the mix we're picking up because of external events.
Okay, great. Thank you. And then just one other thing. The feels like maybe the banks in Europe are getting a little bit healthier at least they seem to be scraping by on their version of the stress test. Wondering if you think that has any implications in terms of this whole disintermediation thesis in terms of just the competitive pressure from banks being able to better serve lending requirements?
I guess the short answer Peter is no, I don't think so. The demands on financial institutions globally in terms of meeting stress tests, capital requirements, liquidity requirements, the businesses that they have been curtailed from are all continuing to put pressure on profitability, willingness to make loans. And I think also we're increasing the awareness from corporations municipal entities that they need access to multiple forms of liquidity and capital. And so the bond market is it's not a substitution for bank relationships, an alternative and an addition to the banking relationships.
Sure. So 2% to 3% still the right number in terms of incremental revenue from disintermediation or you think maybe even better than
that? I think that's probably a fair number. It's going to vary quarter to quarter cyclically. But structurally, I think that's very much intact. Great.
Thanks, Ray. Thank you.
And we'll take Craig Huber with Huber Research Partners.
Yes. I got a few questions. Linda, if I could ask you just to break down the revenues by your 4 segments high yield versus bank loans, best grade for the 3 sectors to start off please?
Yes. Sure, Craig. We're looking at the Q1 of 2015 over 2014. So investment grade at $87,000,000 is running at 29% of the almost $300,000,000 we saw in CFG for the Q1. That 29% is up from last year's 18%.
So as we said, investment grade has been running hot and strong and the jumbo deals are really terrific. Spec grade at about $63,000,000 is up from last year's $53,000,000 Percentages are about the same 21% versus 20%. Bank loans are down both absolutely and in percentage terms about $45,000,000 versus last year's $67,000,000 15% of the total versus last year's 25 percent. And other is about $104,000,000 which is up from last year's $97,000,000 but on percentage terms down to 35 percent versus last year's 37%. So the big change there is the increase in percentage from investment grade.
Spec grade bonds and percentage terms up a little bit. Bank loans down. Very important for everyone to note, we can do okay with the changed mix and we're doing pretty well despite the fact that the investment grade piece was stronger in the Q1. Looking at structured, Q1 2015 versus 2014. Looking at asset backed securities, absolute number is about $21,000,000 about flat from last year's 23 percentages, it's 21% of the total for structured of $101,000,000 down from last year's 24 percent.
Residential mortgage backed securities, which does include covered bonds, about $18,000,000 flat from last year's $18,000,000 Percentagewise, down to 18% versus last year's 2019. Commercial real estate up $33,000,000 from last year's 29 percentage terms, it's also up to 33% versus last year's 31. Structured credit, which is primarily CLOs, up to about $29,000,000 from last year's $25,000,000 percentagewise up to about 28% versus last year's 26%. And spend Fig, Q1 2015 versus 2014, dollars 94,000,000 in revenue versus last year's $85,000,000 Banking about $63,000,000 up from last year's $57,000,000 that stays flat at about 67% of the percentage total. Insurance at about $25,000,000 versus last year's $21,500,000 is up to 27% from last year's 25 percent.
Managed investments $3,500,000 versus last year's $6,600,000 is down. That's 4% of fixed total versus last year's 7% and others about 2%. And then lastly PPIF, total is $100,000,000 versus last year's $80,000,000 That's a big jump. PFG and Sovereign up absolutely to $56,000,000 from last year's $41,000,000 up in percentage terms 56 percent versus last year's $51,000,000 Project and Infrastructure also up about $55,000,000 from last year's 40 percent, percentage wise down to 44% from last year's 49%. And that's the total for PPIF.
So that's the whole view on the ratings business. We do have the MIS other line, which is something kind of newish Craig and that includes KISS and ICRA. So that's up a little bit from last year because the ICRA consolidation $7,800,000 versus last year's 3.3 percent. And of course, the ECRA percentage at 56% of the total is higher because we didn't have that view as of last year.
And sorry just for clarification, the MIS other is ICRA's non ratings businesses. Correct. The ratings agency has its revenues rolled up into the Lonza business that we have for MIS already.
Thanks for that clarification.
And then
if I could ask a simpler question. On the currency side, Linda, I think last quarter, you had about 100 basis point spread between the impact on revenues versus your costs. I believe you said in the second quarter expecting the impact of 4% to 5% for each. Is it just rounding or you are thinking almost on top of each other this quarter?
It's rounding Craig. This is pretty hard for us to forecast. So what we're looking at is it's a negative 4% to 5% in revenue. It's positive 4% to 5% in the operating expenses. As we've talked about before, our main exposures are the euro and the British pound.
At the end of the Q1, the pound was at 1.48 dollars and the euro was at 1.07 dollars And we had run this year with the euro at $1.15 was what we've had in our forecast. Now a very happy phenomenon for me as a CFO is the euro this morning is at 1.12 dollars So we're kind of coming back in the right direction. And Ray and I talk about the euro every day. So what we what that all boils down to is, if you were to see euro to further weaken, we would a $0.05 decline in the euro would cost us another $20,000,000 in revenue, but help us $4,000,000 on the expense side. So the net would be down $16,000,000 or about $0.05 on EPS.
So this is actually pretty simple. The shorthand we use is if the euro falls another $0.05 versus the dollar, it will hit us $0.05 in EPS, which is a pretty simple metric for you to use.
I guess I'm also asking Linda, the 7% hit as you guys calculated it on your operating profit line in the Q1 from currency, you're expecting a similar type hit here on the profit line from currency?
It could be Craig. It depends what happens going forward. As I said, we're slightly cheered by the fact that the euro is up a little bit. But this is bouncing around far too much for us to put a tight range around this. And as you saw, we held guidance.
And we don't like to move guidance after the Q1. That would be a correct observation. But this currency piece makes it a little bit harder to know where we're going to go. So we're going to have to just watch it. And the euro could continue to strengthen or it could weaken from here.
And those two situations don't look the same. And that's why we're being a little bit thoughtful and we'll see where we get to as the year goes on.
Lastly, Linda, is there anything else besides your incentive compensation that you would call out on the variable cost side to help offset any potential weakness at some point down the road on the revenue side. Anything else of significance?
I think we view Craig, we always have our sort of $50,000,000 in flexibility. If things really got difficult, we can slow down on things and certainly slowing hiring would be the first thing. But I always want to put some perspective on this because Moody's is a growth company and you need to think about it that way. We're looking at 72% of the S and P 500 have reported so far. And sales growth for the S and P 500 all in is minus 4.1%.
And if you take out the energy companies, if you want to make that argument, the growth is up 2%. We just put up 13% growth and 18% on a constant currency basis. So in order to do that, we are spending some money. But as you know, our shareholders have been telling us if we can get growth, we should do that. And I think we've demonstrated pretty effectively, we're able to do that despite some pretty hefty currency headwinds.
We think we've had a pretty good quarter.
Understood. Thanks, Linda.
We'll continue with Tim McHugh with William Blair and Company.
Yes, thanks. Most of my questions have been asked, but two quick ones. I guess, Copal, you said the $8,000,000 to $9,000,000 hit from shutting down products. I guess, since there's different pieces in there with the certification business, I just want to circle back to your earlier question. What's the underlying trend?
Are they seeing still good growth, good demand? If you adjusted for that, Is it possible to strip that out and look at how it's performing without that change?
Sure. I'll comment a little bit and then Mark may want to comment. I guess we've had the confluence of 2 frustrating events in the professional services line. And I'm managing the Copalamba business. Mark is managing the rest of professional services, which includes CSI.
But the 2 really have nothing to do with each other other than that they're reported up through the same line in Moody's Analytics. We did I did mention the product line that we decided to reduce in scope for Copelamba. But we very much like the trends and the outlook for Copa Lamba. I think I've mentioned before it has generally Moody's like growth rates and close to Moody's like margins. And right now as banks are looking to reduce costs being able to offshore knowledge processes is growing at a pretty terrific rate.
And we're very pleased with what we're seeing at Copalamba. We were just out in India last week, a group of us, and we're very pleased with the opportunity that that business presents. So just a little bit of a lapping problem. And I don't know if Mark has anything more to add about CSI than what he's already said. Mark?
Yes. I would just add that in training and certification, ignoring the currency impact which is quite substantial, I'd say the underlying business is okay. It's not growing as well as the rest of Moody's Analytics. So it's below trend in that respect, but it's all right.
And then Mark, I guess on ERS, I don't know if I missed it, but I think in the past you've given kind of a trailing 12 month sales activity or sales growth rate. Can you give that if I I apologize if I missed it.
Yes. I think Linda did mention it. Trailing 12 month sales is 24% growth of quarter.
Does that include WebEquity or is that an organic?
Yes. That includes WebEquity as well. Which would be a small piece. Yeah. It's a small piece, a couple of points.
Okay. Thank you.
We'll take Vincent Hung with Autonomous.
Hi, good afternoon. I just want to piggyback on the question on market share from before. So I'm really curious as to your strong growth in MIS. So it's up 12% excluding ICRA versus 6% at S and P. And I think one of the sources of dispersion is your non U.
S. Result where you saw a good year on year increase even if you exclude MIS other and S and P saw a year on year decline. And can you give us some color on the non U. S. Trends you saw this quarter?
I can talk about Moody's. I don't really know anything more than you do about how other firms got to their performance levels in the Q1. We have talked about the Moody's story pretty extensively here. So, Vince and I actually don't have a lot to add to that. I apologize.
Okay. Fair enough. And then just last question. You think it would be harsh to say that leverage lending is structurally impaired?
Yes. I think that banks have got to work through an evolving regulatory and profitability environment. That is going to have an impact on lending. It's also I think going disintermediation trend that we've been seeing. And so I think that's structural as well.
Vincent, it's Linda. I'm going to read to you from the Fed's press release on this topic from November 7. It says the annual Shared National Credits Review found that the volume of criticized assets remains elevated at $340,800,000,000 or 10.1 percent of total commitments, which is approximately double pre crisis levels. So, let's assume that the banks are listening to the Fed on that front and perhaps they're tamping down leverage lending in this higher risk category because they've got to hold more capital against these loans as we said even if they put them into CLOs later. So it's pretty important that that situation be understood.
And I'd urge you to take a look at what the Fed is saying and also at the research we've written on this topic.
Okay. Thanks a lot.
We have Doug Arthur with Huber Research. Please go ahead.
Yes. One quick question. Linda, can you just clarify, I think you threw out a figure of 35,000,000 dollars as I believe you were referring to the quarterly trend in cost Q1 to Q4. Can you just clarify that figure? Is that revised given the somewhat heavier Q1 costs?
Or is there's no change? Thanks.
First of all, let me 1st of all, congratulations Doug on your joining Cuba Research. And the number the mid case the base case we're looking at now is $30,000,000 of expense ramp. And our Q1 expenses were $494,000,000 I think on an earlier call we had said maybe $500,000,000 for the Q1. And I think we had had a steeper ramp originally that might have even been $40,000,000 to $50,000,000 dollars So we're kind of backing off on that. Again, I'd caveat this is probably the number I dislike giving the most because it can vary based on a whole bunch of different things.
And this is cutting it pretty finely to give that midpoint of $30,000,000 of expense ramp Q1 to Q4. But that's our best guess as of right now.
Great. Thank you very much.
And we'll move on to Patrick Asanjani with Raymond James.
Hey, good morning or good afternoon, I guess for you guys. The first question is with the reverse Yankees, I appreciate you saying that you book it as U. S. Revenue, but how are you charging for reverse Yankees? Are you actually generating revenues in euros on that and having to translate it back to dollars?
No. If these are U. S. Issuers, U. S.
Domicile companies,
we would
be
dollars.
Okay, great. Thanks. And then a follow-up. S and P or McGraw Hill in their call talked about how the dollar issuance environment was very strong, but the breadth of issuance was not very good. And so that kind of had ramifications on their growth.
And certainly that doesn't seem to be something that you guys talked about or showed up in your results. So can you just maybe talk about do you tend to have a preference for a lot of smaller deals versus a few bigger deals? And what's the recent environment look like in that regard?
Yes. The when we look at volume and we look at count, obviously, we're pleased when both are up. But because of the way the pricing is structured, I would say as a general rule, seeing more smaller issuers, a higher count would make more of a difference than a higher dollar volume.
All right. Thank you.
And at this time, this concludes Moody's Q1 2015 earnings Conference Call. As a reminder, a replay of this call will be available after 3:30 pm Eastern Time on Moody's IR website. Thank you.