Good day, and welcome, ladies and gentlemen, to the Moody's Corporation 4th Quarter and Fiscal Year End 2014 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 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 join To discuss Moody's 4th quarter and full year results for 2014 as well as our outlook for full year 2015. I am Sally Schwartz, Global Head of Investor Relations. This morning, Moody's released its results for the Q4 and full year 2014 as well as our outlook for full year 2015. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com.
Ray McDaniel, Moody's President and Chief Executive Officer, will lead this morning's conference call. Also making prepared remarks on the call this morning is Linda Huber, Moody's Executive Vice President and Chief Financial Officer. 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, 2013, 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 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 Q4 and full year 2014 results. Linda will follow with additional financial detail and operating highlights. I will then conclude with a few general updates and comments on our outlook for 2015. After our prepared remarks, we'll be happy to respond to your questions.
In the Q4, Moody's delivered revenue of $878,000,000 An increase of 13% over the Q4 of 2013. We again achieved growth in almost all lines of business. Operating expense for the Q4 was $533,000,000 up 14% from the Q4 of 2013. Operating income was $345,000,000 an 11% increase from the prior year period. Adjusted operating income defined as operating income less depreciation and amortization was $372,000,000 Also up 11% from the same period last year.
Operating margin of 39.3% was down from 40% in the Q4 of 2013. Adjusted operating margin of 42.4 percent was down from 43% for the same period last year. Diluted earnings per share of $1.12 increased 19% from the prior year period's GAAP EPS And 32% from the prior year period's non GAAP EPS. For full year 2014, Moody's revenue was $3,300,000,000 an increase of 12% from 2013. Revenue of Moody's Investor Service was $2,300,000,000 an increase of 9% from 2013.
Moody's Analytics revenue of $1,100,000,000 was 19% higher than the prior year period. Operating expense full year 2014 was $1,900,000,000 up 9% from 2013. Operating income of $1,400,000,000 increased 17 Adjusted operating income of $1,500,000,000 increased 16%. Operating margin for 2014 of 43.2 percent was up 170 basis points from 41.5% in 2013. Adjusted operating margin of 46 percent was up 130 basis points from 44.7%.
Reported diluted earnings per share of $4.61 was up 28% from $3.60 in 2013. Non GAAP EPS of $4.21 was up 15% from $3.65 in 2013. Full year 2014 non GAAP EPS excluded a $103,000,000 non cash pretax gain or $0.37 per share Resulting from Moody's acquisition of a controlling interest in ICRA. In the 2nd quarter as well as a $0.03 benefit From the resolution of a legacy tax matter in the Q3. Full year 2013 non GAAP EPS excluded a litigation settlement charge $0.15 in the Q1 and a legacy tax benefit of $0.09 in the 4th quarter.
I'll now turn the call over to Linda
Thanks, Ray. I'll begin with revenue at the company level. As Ray mentioned, Moody's total revenue for the Q4 increased 13% to $878,000,000 Foreign currency Translation unfavorably impacted MCO revenue by 3%. U. S.
Revenue of $479,000,000 up 15% From the Q4 of 2013, non U. S. Revenue of $399,000,000 was up 10% and represented 45% of Moody's total revenue. Recurring revenue of $444,000,000 represented 51 percent of total revenue. Looking now at each of our businesses, starting with Moody's Investor Service.
Total MIS revenue for the quarter, which included results for MICRA, was $565,000,000 up 7% In the prior year period, foreign currency translation unfavorably impacted MIS revenue by 3%. U. S. Revenue increased 14 percent to $344,000,000 Revenue outside the U. S.
Of $221,000,000 declined 2 And represented 39 percent of total Ratings revenue. Moving to the lines of business for MIS. First, global corporate finance revenue in the 4th quarter Was up 9% to $263,000,000 reflecting increased U. S. Investment grade bond issuance and growth in the number of credits monitored.
Partially offsetting these gains was the contraction of global high yield bond and bank loan issuance. U. S. Corporate finance revenue increased 15%, While non U. S.
Corporate finance revenue decreased 2%. 2nd, global structured finance revenue for the Q4 was $119,000,000 9% the prior year period, reflecting continued strength in global CLO issuance as well as increased RMBS issuance in Europe and the U. S. These gains were partially offset by reduced ABS issuance in the U. S.
And Europe as well as fewer covered bonds issued in Europe. U. S. And non U. S.
Structured finance revenue increased 11% and 5%, respectively, year over year. 3rd, Global Financial Institutions revenue of $85,000,000 decreased 4% from the same quarter of 2013, Primarily due to lower bank issuance in Europe and the U. S. Partially offsetting this was increased issuance from Chinese and South Asian Financial Institutions. U.
S. And Non U. S. Financial Institutions revenue decreased 7% and 2%, respectively, year over year. 4th, global public project and infrastructure finance revenue increased 9% year over year to $90,000,000 Gains in the U.
S. Were partially offset by decreased infrastructure issuance in Europe and Asia. U. S. Public project and infrastructure finance revenue increased 26 percent, while non U.
S. Revenue decreased 14%. MIS Other, a new line of business, which consists of non rating revenue from ICRA and to $3,200,000 in the prior year period. Turning now to Moody's Analytics. Global revenue for MA of $312,000,000 It's up 23% from the Q4 of 2013.
Foreign currency translation unfavorably impacted MA revenue by 3%. Excluding revenue from 2014 acquisitions, MA revenue grew 18%. U. S. Revenue grew by 15% year over year To $135,000,000 Non U.
S. Revenue increased by 30% to $177,000,000 and represented 57% Total MA revenue. Moving now to the lines of business for MA. 1st, Global Research Data and Analytics or RD and A. Revenue of $150,000,000 increased 11% from the prior year period and represented 48% of total MA revenue.
Growth was primarily driven by strength in sales of credit research, ratings data licenses and economic analysis and data, As well as the October 2014 acquisition of Lutan Technologies. RD and A's customer retention rate remained strong At 96% for the Q4, U. S. Revenue was up 13% and non U. S.
Revenue was up 7%. 2nd, Enterprise Risk Solutions or ERS revenue of $120,000,000 grew 42% from last year, Resulting from strong growth across nearly all product offerings, in particular the asset liability and capital solutions, Credit origination, insurance and stress testing verticals. BRS also benefited from the acquisition of Web Equity Solutions in July 2014 And saw early completion of some customer projects, leading to better than expected results for the quarter. Revenue was up 10% in the U. S.
And 65% outside the U. S. Trailing 12 month revenue and sales for ERS increased 25% 16%, 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 grew 28% to $43,000,000 primarily reflecting the acquisition of Amba Investment Services in December 2013 As well as mid single digit growth in our training and certification business.
U. S. Revenue increased 56% and non U. S. Revenue increased 18%.
Turning now to expenses. Moody's 4th quarter expense increased 14%, $533,000,000 primarily due to hiring and added operating expenses from Foreign currency translation favorably impacted expense by 2%. As Ray noted, Moody's Moody's effective tax rate for the quarter was 28.1% compared to 30.6% for the prior year period, Primarily due to a higher portion of income in lower tax jurisdictions. Beginning with the Q4 of 2014, Moody's consolidated ICRA's In the Q4, ICRA contributed approximately $12,000,000 of revenue to MIS. Details on changes to line of business revenue reporting made subsequent to our acquisition of a majority stake of ICRA Can be found on page 13 of our Q4 and full year 2014 earnings press release.
I'll now provide an update on capital allocation. On December 17, Moody's increased its quarterly dividend 21 percent to $0.34 per share of Moody's common stock. During 2014, Moody's returned $236,000,000 to its shareholders via dividend payments. During the Q4 of 2014, Moody's repurchased 4,600,000 shares at a total cost of $440,300,000 And issued 301,000 shares under employee stock based compensation plans. For full year 2013, Moody's repurchased 13,800,000 shares $1,200,000,000 or $88.41 per share and issued 4,900,000 shares under employee stock based compensation plans.
Outstanding shares as of December 31, 2014 totaled 204,400,000 shares, down 4% from the prior year. The Q4 of 2014, the Board of Directors authorized a $1,000,000,000 share repurchase program, which will commence following the completion of the existing program. Included in this incremental program as of December 31, 2014, Moody's had $1,600,000,000 of share repurchase authority remaining. Also at year end, Moody's had $2,500,000,000 of outstanding debt and $1,000,000,000 of additional debt capacity available Under our revolving credit facility, total cash, cash equivalents and short term investments at year end were $1,700,000,000 Down $428,700,000 from the year earlier due to shareholder returns via dividends and share repurchases. This was partially offset by Moody's 2014 bond offering of $750,000,000 of senior unsecured notes.
As of year end, approximately 75% of our cash holdings were maintained outside the U. S. Full year 2014 free cash flow was 9 $44,000,000 up $595,000,000 excuse me, up $59,500,000 or 7% from 2013. And with that, I'll turn the call back over to Ray.
Thanks, Linda. We've received a number of questions about recent media reports The Department of Justice is in the early stages of looking into Moody's. As we've been disclosing in our 10 Q and 10 ks filings, Moody's Like other financial services firms, it's had heightened scrutiny since the financial crisis from a wide range of governmental organizations. Where we believe specific matters are material, we communicate them in our filings and other disclosures to the market. And in this regard, currently we have nothing new to report that would alter our existing disclosures.
With that, I will conclude this morning's prepared comments by Our full year guidance for 2015. 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 year exchange rates with the exception of the British pound and the euro, Which assumes foreign currency translation of $1.51 to £1.00 and $1.15 to €1, respectively. Moody's expects full year 2015 total revenue to grow in the mid single digit percent range.
Operating expense is also expected to grow in the mid single Digit percent range. On a constant borrower basis, Moody's 2015 revenue and operating expense growth rates would each be approximately 300 basis points higher. Moody's projects an operating margin of approximately 43% and an adjusted operating margin of approximately 46%. The effective tax rate is expected to be approximately 32% to 33%. The company expects diluted earnings per share of $4.55 $4.65 Moody's expects 2015 share repurchases to be approximately $1,000,000,000 Subject to available cash, market conditions and other capital allocation decisions.
2015 capital expenditures are expected to $110,000,000 to $115,000,000 driven primarily by technology investments in MIS, our corporate systems and the integration of our recent acquisitions. These investments are expected to continue over the next several years. Depreciation and amortization expense is expected to be approximately $120,000,000 Moody's incremental compliance and regulatory expense is expected to be approximately $5,000,000 primarily due to the continuing maintenance costs to comply with global regulation. Free cash flow is expected to be approximately $1,000,000,000 For MIS, Moody's expects 2015 revenue to grow in the mid single digit percent range. MIS U.
S. And non U. S. Revenue are both expected to increase in the mid single digit percent range. Corporate Finance revenue, Structured Finance revenue and Financial Institutions revenue are all expected to grow in the mid single digit percent range.
Public project and infrastructure finance revenue is projected to grow in the high single digit percent range. Our issuance expectations underlying our 20 MIS revenue outlook are largely in line with the consensus view of various global banks acknowledging that there is a wide range of views in the market. For MA, 2015 revenue is expected to increase in the mid single digit percent range. U. S.
Revenue is expected to grow approximately 10% And non U. S. Revenue to increase in the mid single digit percent range. RD and A is projected to grow in the high single digit percent range. Enterprise Risk Solutions is expected to grow in the mid single digit percent range in 2015, following its 25% growth rate in 2014, Which benefited from the early completion of some customer projects.
With regard to professional services, as part of our integration of Copel and Amba in 2014, We discontinued certain non core product offerings. As a result, 2015 professional services revenue is expected to be approximately flat. 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
And we'll go first to Andre Benjamin from Goldman Sachs.
Hi, good morning.
Good morning.
My first question, I know the outlook Issue is your official view of the guidance particularly on the issuance side. But I was wondering where as we think about 2015 you think there is the most Upside versus downside risk to the guidance?
Well, just because it's The largest area of our business, I would look to the corporate bond rating area. We are as we said in our prepared remarks, our outlook is largely in line with the outlooks The large global banks for bond issuance both in the U. S. And in Europe. But we did note there is a wide Variance in those outlooks.
So some of the more optimistic outlooks could certainly generate some material upside for us, Particularly in high yield and in the bank loan area.
Andre, it's Linda. And I'll speak Speak a little bit about what we're seeing on investment grade, high yield and leverage loans. And for each of these, I'll talk about what we've seen in terms of issuance in the U. S. Year to date and then what's expected for the full year.
Then I'll talk about fund flows and the state of the current pipeline in each of those areas. So for U. S. Investment grade bond issuance, year to date 2015, we've seen about $100,000,000,000 of issuance For January, which is a strong month. And for the year, we're expecting $1,000,000,000,000 of Fund flows have been good year to date $12,000,000,000 into the investment grade marketplace.
And the current pipeline is described by the banks we've spoken to as above average. High yield bonds, year to date, we've seen about $20,000,000,000 of issuance. For the year, U. S. Is expecting $275,000,000,000 of issuance, Which is down about 10% from 2014.
Funds flows are positive year to date total inflows of $2,500,000,000 And the current pipeline is said to be above average, but that is a recent development and the pipeline appears to be building at this point. For leveraged loans, year to date issuance has been about $30,000,000,000 And for the year, expecting about $350,000,000,000 Leveraged loan issuance, which would be down about 20% from 2014. Fund flows have been slightly negative, down $2,000,000,000 thus far. The market hasn't seen any daily inflows yet on the leveraged loan sector. Current pipeline though is average to above average And the deal calendar is noted to continue to build at a steady pace.
The really interesting point here is what's going on with European issuance. The European investment grade market is in very good shape. Reverse Yankee issuance is expected to be more active As U. S. Companies are looking to issue in Europe, given the largest interest rate differentials in 10 years between the euro and the U.
S. Dollar, The European high yield bond market is off to a strong start. And 2014 also was a very strong year in the European leveraged loan market And there's optimistic view on that going forward. The M and A issuers should help with that on the loan market front. So we've got some interesting conditions, investment grade looking pretty good, high yield and leverage loans off to a slower start but building.
And really the very interesting bright spot here is the number of U. S. Companies looking to issue in Europe. So bit of a lengthy explanation, but I think that sets the tone for what we're looking at.
No, that's very helpful. I guess my second question would Mark, I was wondering if you can maybe provide some update on the enterprise risk area of Moody's Analytics. Maybe provide some color On why the guidance assumes a normalization in the mid single digits next year after such a strong year in 2014. Is that based more on What's been contracted in your view on the pipeline? Or is it simply being conservative after a tough comp?
Andre, I think you nailed it in your note this morning. We had some projects that Got completed sooner than expected in the Q4, so we booked the revenue in 2014 pulling it out of 2015. So I think We've got a tougher comparable as we move into 2015. The pipeline is very healthy. And I would say really you got to think of 2 pipelines.
The pipeline of projects are already contracted that we're working on and delivering as well as the pipeline of prospective new deals coming in. So, I think the story for 2015 is that from an underlying perspective business is Just as strong if not stronger than what we've been talking about over the last couple of years. And really what we're seeing both at the end of 14% and into 15% is the impact of the volatile timing of when revenue gets recognized in this business. This is Ray. One thing I would just add to Mark's comments is, as we have developed this business, We have been getting some larger sales, more complex projects that have Longer implementation installation phases and that is a characteristic that we are dealing with now.
We certainly like Those larger sales, but that also puts some of the revenue out into 2016 that we might otherwise see in 2015.
Thank you.
Thank you. And I'll go next to Doug Arthur with Evercore ISI.
Yes, good morning. I was struck by your comments in the structured business about the strength in residential mortgage Securities particularly in Europe. Ray or Linda, can you sort of summarize the residential versus Mortgage Back Market. I mean the numbers that I've been looking at look sort of weak in terms of total issuance, but it looks like you're seeing something different.
Yes. Let me first turn it to Michel to comment on the European side, if you would Michel.
Yes. Well, I think, Arun, first, you have to put these numbers in perspective. And the base, whether we have High growth in percentage terms, the dollar number are not that large. But what is happening in Europe is we had Hi, everyone. We have a lot of issues in RMBS coming out of the U.
K. And Russia. And that is what drove the For the euro, back to the improvement we've seen in RMBS. We also had similar to what we've seen in the A strong volume of CLOs basically, which also contributed to the growth we've seen in structured finance.
And is that true in the U. S. As well?
Yes. And maybe Ray won't comment on that, but that's we have the same situation In the U. S. Where for CLOs we've seen strong activities and RMBS what we really had is we had What I would describe as a number of non traditional transactions where we've seen growth typically things such as single family rental and Agency will be sharing transactions where we've seen growth basically from prior volumes.
Yes. And Doug, Certainly in the U. S, while we are seeing growth, it is just keep in mind, it is off of a very low base. So The significance of that line in 2014 and going into 2015 is small compared to, for example, CLO or CMBS areas of structured finance.
Okay. Thanks.
Thank you. We'll go next to Manav Patnaik with Barclays.
Hey, guys. I just wanted Clarify, so the mid single digit total revenue guidance includes a 300 basis point FX headwind. Is that correct?
Yes, Manav. That's right.
Okay. And then is that the same for all the other line items like the separate categories that includes an FX headwind?
Generally, yes. If there's anything else to be said about this, I'll encourage Mark And Michelle to speak about it. But we would have been pretty close to our double digit growth target were it not for Yes. Ex headwinds. And you can see in our earnings release the rates at which we're using to make our to prepare our guidance.
Yes. And to the extent you're asking is it in our EPS guidance as well as our revenue guidance? The answer is yes.
Okay. And how much of the growth is coming from M and A just to get a sense of like The contribution from the deals there?
Well, the as you saw, the 4th quarter inclusion of ICRA was about $13,000,000 And I'll turn to Mark to Ask him if he would comment on the acquisitions that are on the Moody's Analytics side. Yes. In MA for 2014, our growth was Substantially organic. For the year, we're talking about in excess of 90% of our revenue growth was organic.
I'm referring just to 2015 like with the inclusion of I guess WebEquity in Luton, how much does that contribute?
Yes. Again, we'll the majority of our growth in 2015 will be organic, But we are getting some benefit from acquisitions.
Okay. And then I guess Mark just on the margin expansion guidance that you had given Active or was this just truly one of those lumpy things you experienced in your business?
No. I think it was more than just Lumpiness in the business, although that certainly helped. But it's also I think the improvement in the margin is the result of all the work that we're doing to get us there. Now, so I think we're seeing the results of the operational adjustments we're making across the company, particularly in ERS to drive more Margin expansion. But we did get a bit of a bump in the 4th quarter.
So I would be cautious about extrapolating the 4th quarter results out on a linear basis over the next couple of years. We are going to see the margin move around a bit from quarter to quarter. But I think nevertheless, the trend is definitely going in the right direction. And I would The operational adjustments we've made will continue to keep us on track to expand margin in MA.
Okay. And just last one for me Linda, in terms of you did a couple of debt raises last year. Just from where we are today, just your thoughts So on leverage and what do you anticipate there?
Sure. We're comfortable with our leverage. We do Have some room. We like our rating and we want to stay comfortably within that rating. We probably have $600,000,000 $700,000,000 of room in terms of what we could do within this current rating and we'll see how the year progresses.
Okay. Thanks guys.
Thank you. And we'll go next to Craig Huber with Huber Research Partners.
Thank you. I've got a few questions. Linda, can you just help us what was the incentive comp in the quarter? I think it was $47,000,000 4th quarter a year ago.
Hang on just a second, Craig. Yes, for the Q4 incentive comp was just about $53,000,000 for the Q4 of 2014 as compared to $46,800,000 the previous year. And stock based compensation was about flat at $20,000,000 This year, we did a little bit Better. We had profit sharing in the 4th quarter. We had to put up $7,000,000 profit sharing Because we finished the year stronger than we had expected.
And for the full year incentive compensation was $173,000,000 Craig. Stock based comp was about $80,000,000 and total profit sharing was $9,300,000 Okay.
And then also Linda in your EPS guidance for the year, I'm curious, FX gain that you guys posted in the Q4 roughly $8,000,000 to $18,000,000 how much are you budgeting that line to be For 2015 in your EPS guidance.
Sure. Craig, if you take a look at the earnings release, if you look at page 20 3, I think it is. We've got that outlined. So what we're doing is we're assuming foreign currency translation at the end of year rates With the exception of the specific example of the British pound sterling and the euro, and we're looking at those at 1.51 To £1.15 to €1. So we've budgeted flat at those levels and we're not taking a dynamic view from there.
You said page 23. I thought this press release is only like 12 pages. Am I missing something?
You should have a full 24 pages of our at strength press release here, Craig.
I'll be helpful to look that up. Ray, the CalPERS case that your Competitor S and P just settled for $125,000,000 Does that make it any more likely that you guys will be settling CalPERS anytime soon or no change on that front?
No, I think there's really no change on that front. We're in discovery in the CalPERS case. And once the discovery is completed, the next step is to move for summary judgment. So we're not at a point in this case where the merits have been addressed. Okay.
And lastly, Linda, if
you like I always ask you, if you could just break out within your 4 segments within ratings Dollars high yield versus bank loans, etcetera, percentages
or how we want to do it?
Sure. Craig, do you want the 4th quarter, is over as compared to the 3rd quarter, do you want
to The 4th quarter would be helpful.
Okay. Let's look at Q4 2014 versus Q3 2014 and we'll look at corporate first. So for investment grade, we had $80,000,000 of revenue in the Q4 of 2014, Which is up dramatically from $39,000,000 of revenue in the Q3 of 2014. Set grade moved in a different direction. We had $34,000,000 of revenue versus 3rd quarter's $54,500,000 On bank loans, we had $37,000,000 of revenue versus Interestingly, the percentages and the total in corporate segment as we said for the Q4 was $263,000,000 The percentages in the Q4 for investment grade was 30% of the revenue, that grade was 13%, bank loans were 14% And other was 43%.
Interestingly, in the Q3, things were different. Investment grade was only 15%. So as a percentage, investment grade doubled in the 4th quarter. That grade was 21% in the 3rd quarter and bank loans were 23%. So the majority of the revenues for the Q4 were in fact in Investment grade.
You can see how these things move around and how we can have pretty strong offsets. That's not to say that will happen every quarter. Going to structure, Craig's Q4 of 2014, asset backed $22,000,000 which was 18% of structured revenue RMBS, which includes covered bonds, dollars 20,000,000 or 17 percent commercial real estate, almost $36,000,000 or 30 percent And structured credit was $40,300,000 or 34 percent, totaled 118.5 And as compared to the Q3, there ABS is down a little bit. RMBS It's about flat. Commercial real estate is up in terms of percentage terms.
It was only 26% in the 3rd quarter. And structured credit was about flat At 34% in the Q4. Looking at FIG, Q4 of 2014 about $60,000,000 in banking revenue, 70% of the revenue line. Insurance at 19.2% was 23% Managed Investment 4.3% I'm sorry, dollars 4,300,000 which was 5 percent of the revenue line and the other was $2,100,000 total of 85.3 For financial institutions, banking a little bit stronger in the 4th quarter with 70% of the revenues, Insurance a little bit lighter than in the 3rd quarter where insurance was 30% versus 4th quarter's 23%. And going to PPIF, 4th quarter, we saw almost $48,000,000 of PFGM Sovereign.
That was up pretty nicely from $40,000,000 in the 3rd quarter. Project and Infrastructure of $42,000,000 down a little bit from the $44,800,000 in the 3rd quarter And other is negligible. So the total was $90,000,000 in PPIF. And do you want Moody's Analytics as well Craig or will that do it for you?
I'm good on that. But I do have one last quick question.
Sure.
Your overseas operations, Linda, what percent of the revenues are booked overseas in U. S. Dollars?
Craig, we're not going into that level of detail on FX. I think the statement that we made is that revenue was About 55, 45 U. S, non U. S, but we're not going into the currencies in which we're billing.
Can I ask you, is it a significant number? Is it like north of 10% of your stuff overseas in U. S. Dollars? Can you help us at all on that?
We don't disclose that, Craig.
Okay. Thank you.
And we'll go next to Alex Kramm with UBS.
Hey, hello everyone. Just want to come back to a lot of Details you've given on the guidance. Maybe not to pick 1 in particular, but if you look at the U. S. Where Linda you talked about the Issuance environment in particular, mid single digit growth is the guidance.
Obviously, there's no FX impact. And basically you said IG flat and high yields and leverage loan down pretty substantially. So help us What gets you there? Like obviously, you have pricing power. You have recurring revenue growth.
So Just help us a little bit here to get to the delta.
Yes. I mean, we do have price opportunities, but I Caution you on that side that those some of what we can do with price relates to volume of issuance. So if there's a change in a bond rating fee and bonds are not issued, we wouldn't see that pricing opportunity. I think the probably the biggest thing that may not be top of mind is the increase in monitoring fees. We've had almost 2,000 new rating relationships developed since the beginning of 2013.
Over the last 2 years, almost 2,000 new names are being followed and we do take annual monitoring fees. And a lot of that, the majority of that does come out of the corporate sector.
Okay. Anything to outside of the U. S. To point out or do you think in other regions the issuance and the revenue growth are more in line with each other? Yes.
I think they are. And in particular,
I think we see some upside opportunity coming out of Asia. There's been good growth in New rating relationships and bond issuance in Asia, not just in corporates, but in financial institutions, the banking sector as well.
Okay, great. And then just maybe switching topics because I think in general folks are pretty down on the outlook For issuance, but let's say, if you get into this environment where maybe it is even worse than what you're seeing here, What are the levers you can pull? I think Linda, you mentioned the incentive comp and things like that. Can you Share a little bit what the goals are there or the ranges in terms of where that could come out and perhaps any other levers you can pull on the margin side?
Sure, Alex. We generally view that we have about $50,000,000 of expense flexibility that we can Execute without causing a lot of difficulty. I would caution that forecasts on issuance, Those forecasts are notoriously wrong. Last year, we started off with investment grade issuance for 2014 said to be down 10% and we finished up 10%. So you have to be careful about that.
And the first thing that we can do is we would probably look to Slow our rate of hiring if we see difficulty. We can slow up on certain technology projects for example. But We think we've taken a good middle of the fairway view here in terms of our guidance and I'll let Ray comment a little bit further if he'd like
No. As Linda says, we do have tools available to manage Spence in more extreme environments. But frankly, if what we're looking at is Just some uneven cyclical conditions. We're probably going to continue to invest Through those because we see some very good long term opportunities and we want to be ready to seize them. All
right. Very helpful. Thanks.
Thank you. We'll go next to Peter Appert with Piper Jaffray.
Thanks. So Ray, appreciate your comments on the legal front and of
So you guys don't see
any need apparently in the context of the aggressive buyback To reserve cash for potential legal settlements, I'm wondering if you could talk about just where things stand on other cases. Are there any you'd Call out that you think we should be paying particular attention to? And then any commentary on the direction of legal costs for you guys? We as I have said on the previous calls, the number of active cases It's down dramatically from what we had in the peak following the financial crisis. It's down to about a dozen cases here in the States.
And in We have not had any new litigation since 2013. And the litigation that we have is Uniformly in early stages. Nothing is going to summary judgment. Nothing is there are no imminent trials. So we're there's not a lot of new news on the litigation front from our previous communications to you.
Peter, it's Linda. We talked about the financial strength and flexibility of the corporation in the prepared comments. We have very significant cash And undrawn credit line of $1,000,000,000 And we're going to run our capital allocation plans in accordance with guidance that we've given. And beyond that, we're just not going to speculate on hypothetical.
Okay. Fair enough. Linda, how about Any color on how the costs will build in 2015?
Yes, Peter. We've been taking a look at that. And I think what we wanted folks To do was take a look at the expenses. 1st quarter number, you might want to focus on. We're never sure if we have this quite right, but we ended the 4th quarter At an expense run rate of about $532,000,000 we think folks should probably back that off to a little bit over 500 $1,000,000 in the Q1 of 2015.
And then we see our ramp this year as being a bit more gradual, because in 2014 we had a lot of Acquisitions to take into account and those are pretty expensive to bring online. And then we had strong incentive compensation build in the Q4 as we did better than we expected. So we would expect the ramp to go from sort of $500,000,000 in expenses to maybe $530,000,000 or $540,000,000 And that will largely see a pickup in the Q4. So you want to take the ramp up $30,000,000 to $40,000,000 But it will be relatively smoother over the 1st 3 quarters would be sort of how we're looking at it. But we often don't get this right Because of the incentive comp piece.
Right. Got it. Okay. Thanks. And then Linda, the ICWA's margin is Quite a bit lower than what MIS does, correct?
I will pass that one over to Ray or Michel.
Yes. It is a lower margin business and they do have public financials. So those are available to you.
Right, Right. That's what
I thought. Okay. But you guys now do you guys now run the business actively? We have majority control, but as I said, it is a public company. So we're involved through the Board of Directors And we have a majority of the Board of Directors, but there are also independent directors.
We have someone that we've known for a long time as Group CEO. And so we are managing the business, But in the context of it being a public company with minority shareholder rights and procedures that have to be followed in an Indian context.
We'll go next to Bill Byrd from FBR.
Good afternoon.
I was wondering if you could Speak to what's happening on the investment grade line. I was really struck by the spike in investment grade revenues in Q4. If I look back over the last 3 years, investment grade typically throttles at $40,000,000 to $60,000,000 a quarter. So I was just curious if there's kind of anything different going on in terms of how you're pricing the product? Or does it tie into Ray's comments on monitoring fees?
Thank you.
The Q4 was a strong issuance quarter for investment grade, but it was also supported by mix. There were some large transactions and some issuers that even though their investment grade might not fall into our Frequent issuer pricing, so that they were on a per issue pricing basis. And so it was both Good volume and good mix. And the monitoring as you mentioned that continues to ramp.
So this is how you can see the strength of the The strength of the M and A financing pipeline coming through. And I think we had commented when I read through the various market sectors earlier, We do see a backlog of M and A financing from deals that have been announced and that's helpful to us.
And then separately, as you look at the year and based on the pipeline that you see right now, how do you see growth sequencing this year? Are we going to Likely start stronger than we finished or what do you see as the shape of growth this year?
This is also something that we notoriously don't perhaps do as well as we'd like to In terms of the timing, because we're really subject to how the market looks from quarter to quarter. Recently, We've seen the Q2 and the Q4 be the stronger revenue quarters, Bill. And I think we would probably continue to see that. MIS has that pattern. And I think for Mark's business, the Moody's Analytics business, The Q4 is always the strongest.
It's quite strong and you saw that in 2014 as well. Beyond that, I'll invite Raydus to give any further comments. But that sawtooth pattern would be something that I think we'd expect Yes.
On the MIS side, that's what really has been driving the Sawtooth Marks business. Moody's Analytics tends to grow Sequentially, whereas Moody's Investor Service follows the sawtooth and being larger tends to drive a sawtooth Pattern for Moody's Corporation. Yes, there is as we've said, there is there are a lot of different opinions about Issuance expectations for 2015, they are subject to, in my view, A more than customary number of uncertainties, which create both risks and opportunities. Certainly, looking at The strong job creation in the U. S.
And how that might influence the Fed's thinking on interest rates balanced against The weakness in global growth in most places that are not the United States and trying to manage That from a policy monetary policy perspective, we will be watching that just as everyone else is. And I would imagine that that is going to lead to periods of very active growth and periods of relative softness throughout the year.
And just one final question related to structured finance. I was wondering if you could just speak to the new CLO risk retention rules and how you see them impacting the market?
Yes. The market is going to take Some time to adjust to that. We don't see, for example, That there's going to be an elimination of CLOs. There may be more of a concentration in some of the large CLO Arrangers, but it seems unlikely to me at least that the banking sector is going to Be able to step in and provide the capital absent some sort of securitization process. And so I would imagine the market is going to be looking for ways to continue to do that process in a way That is regulatory compliant and economically attractive.
It's happened historically and I would expect to see that again this year going into 2016 where it becomes effective.
Bill, one other thing I just want to caution you and all the other analysts And people who take a look at Moody's. As I said, the issuance pipeline in Europe looks very, very strong. In fact, we're told by the banks It's difficult to get a roadshow slot to show your bonds in Europe right now. There's that much traffic We're issuing into Europe. So sometimes some folks take an overly U.
S.-centric view of things. And Moody's is completely agnostic as to where companies issue. We're just pleased that they're issuing. So you should take a look at what's going on over in Europe as the Particularly the Q1 unfolds and Asian issuance is looking pretty good for us as well. So Just keep an eye on the global pattern this year, which might be a little bit different.
Thank you.
Thank you. We'll go next to Joseph Foresi with Janney. Hi.
I wonder if we could drill down on what drove margins In the Q4 in the analytics business, I just want to get a sense of sort of what took place there and Maybe a better understanding of the trajectory. I know you expect them to increase in 2015. Mark, do you want to Sure. Well, again, it was really 2 things going on. 1, where what I would characterize The structural changes that we're making in the business and some of the operational disciplines we're bringing in To drive more margin, particularly in Enterprise Risk Solutions.
So I think we're just doing a better job. We're being much more disciplined about Pricing projects to ensure that we can deliver the kinds of profitability that we expect and require for the business. So That's a piece of it. And then the other piece of it is the fact that we just as we discussed, we had a number of projects that completed sooner than expected That for which we wound up reporting revenue in the Q4. So we had an inflow of Revenue on the top line and our expenses were our expense base was our expense base.
So that was driving a bit of a spike in the 4th quarter. So you've got 2 things going on. You've got structural and then the cyclical, if you will. Is that helpful? It is helpful.
I wonder is there any way to think about the trajectory of long term margin expansions or even the trajectory of 2015? Will they step back down and then gradually go up or? Yes. Again, I guess, we I'm going to Hold to my commitment that we're going to grow margin in this business In ERS over the next several years, and we're going to get a number of points of margin expansion over several years. So I think that's the way to think about it.
I wouldn't guide you to think about A meaningful shift in margin, one way or the other going into 2015. Maybe that's the best way to set your expectations for this year.
Okay.
Thanks. And then obviously, we're kind of excited about the European issuance market there. How do we think about either the profitability or the revenues coming in from European market in light of The currency and the move in currency. I know you've given overall guidance for the total piece. I'm just wondering as you look at those two factors together, how should we be thinking about those?
Together, how should we be thinking about those?
Sure. Joe, let me talk a little bit about what we're seeing with FX. So we spoke about That for 2015, we would be pretty close to double digit revenue growth for if not for the FX piece. And of course, it hurts us on revenues and it helps us on expenses. So about 3% loss on revenue from FX And about the same help on the expense line.
The main exposures for us that we're working with are the euro and the pound. And we do we are able to hedge a portion of our exposure using some derivatives that are discussed in our Ks and Qs. It's pretty effective, pretty easy to hedge transaction exposure, which would be Something like acquisitions or debt issuance activities, a little bit trickier to hedge translation exposure. And for us, a good rule of thumb for everyone to think about, if the euro declines from the $1.15 we've budgeted for By another $0.05 that will hit us about $20,000,000 in revenue and that will be offset by about $4,000,000 of benefit In expense, so net $16,000,000 on the operating income line. The EPS impact Of a $0.05 decline in euro would be about $0.05 on the EPS line.
So you can think about that, use that as And that's assuming that the pound is pretty static in this equation because the euro is the currency that's Been moving around.
Yes. That's assuming the pound at $1.51 and just the euro moving.
Yes. Okay.
Got It helps very much. And then just lastly, I know it's often difficult to find sort of the niche acquisitions that you're looking for. How does that pipeline look in general? And is there any specific areas that you're looking to capitalize on in 2015? We are always looking.
We remain disciplined about what we try to pull the trigger on. More of the opportunities are on the Moody's Analytics side. The opportunity that we had with ICRA on the MIS side last year was a little more unusual. But in terms of the specifics on the Moody's Analytics side, I think we'd rather wait until we have something to announce Just so we can look around confidentially.
Joe, also just in case you want to think about the EPS Impact of the acquisitions that we've done in 2014 was a pretty active year for us. The acquisitions were dilutive By about $0.05 in 2014 and we expect that to be about the same in 2015 about $0.05 absorption from the
From our existing acquisitions. From our existing acquisitions.
Existing acquisitions rolling forward, but wanted to just give you that number, which might be helpful.
It is helpful. Thank you.
We'll go next to Bill Warmington with Wells Fargo.
Good afternoon, everyone.
So I
had a question for you on Copol and AMBA. You've mentioned that as a result of discontinued product lines, The revenue expectation there was going to be flat for 2015. But I wanted to ask what you thought the longer term how we should think about The longer term growth rate for that group going forward and also speak perhaps to the demand that you're seeing from U. S. Financial institutions for those types of services.
Sure, Bill. It's Linda. I'm managing the Kolaamba business, So I'll take this one. You're right. We did discontinue a product line.
So it's going to make it a little trickier To have the professional services line grow this year, historically and going forward, we'd expect Copeland to be growing in the Lowish teens. Its margins, which we don't disclose, are quite strong and we're very pleased about that. But Given the need for U. S. Financial Institutions and in fact global financial institutions to watch their expenses, we see very good demand for this High end knowledge process outsourcing that we do.
Legacy Copal supports investment bankers In producing pitch books and valuation models, legacy AMBA is more focused on providing support for equity research Analyst and both of those businesses are doing very nicely. So we wanted to focus on those core areas. And Mark may want to comment A little bit more about what's going on with the rest of professional services, which he is managing.
Yes. We on the training and certification side of professional services, the business It's doing better. We had a couple of years where things were fairly soft in that area. The fundamentals in the business have improved nicely. But we are taking a pretty big whack there on with the strength of the dollar because much of that business is outside the United States.
Thank you. And then a second question for you on CapEx And $110,000,000 to $150,000,000 guidance. I wanted to just ask what was if you look at the CapEx over the past 3, 4 years, it's gone from sort of the mid-40s to $75,000,000 this past year to $110,000,000 to $115,000,000 Maybe talk a little bit about what's driving that? And also if the $110,000,000 to $115,000,000 we should think of that as kind of the new normal for the way the business is being run?
Yes. Sure, Bill. You're right. We have had an increase in CapEx costs. Given the revenue line of the business, We're still running a pretty CapEx light kind of business.
But the main thing that we're doing here is pretty typical of other Financial Services Company as well, which would be what we're doing here is we're making capital investments on the technology front. And over the next few years primarily that involves Moody's Investor Service as the main beneficiary and then our corporate And part of what we're doing here is we're providing for a more scalable and flexible Infrastructure for MIS, we're hoping to make our analysts ever more efficient and have flexibility to deal with any kinds of Regulatory changes that might come in the future. So those are multiyear projects. Our businesses are performing Really well. We're very pleased with how 2014 has come in.
So we think it's appropriate that we continue to invest in those businesses. And yes, 110 to 115 is probably right for the next couple of years. But for the size of our business, it's still not a particularly
A couple of housekeeping items. I just wanted To double check, the contribution from acquisitions on a total company basis, it looks like it was about 200 to 300 basis points. Is that a good number? It looks like about 13% reported, 3% from FX get you about 16% constant currency And then 2 to 3 basis 200 basis points, 300 basis points off of that for acquisitions to get to an organic
The revenue line, the operating I am.
The revenue line. I'm trying I just want to make I
want to just get to an
Organic constant currency numbers. Yes.
I don't have the specific number in front of me, but you're Approximately your range is correct. But we're also That is looking at Amba, which was a 2013 acquisition. So if you're specifically asking about the 2014 Positions, it would be a much smaller number. Got it. And then just also asking the share count exiting the quarter.
Sure. I think the simple share count was about 204,000,000 shares. And we took out about 4% net Of the share count in 2014, that's probably reasonable to model as a net number over $15,000,000 Bill. We can never Be sure exactly how that will work out because as we said we're shooting for $1,000,000,000 Lacking any other Better ideas, you probably ought to just look at that pro rata over the year. We run, as you know, systematic share repurchase programs.
So we try to stay in the market all the time and we set those programs ahead of time so we can stay in the market Despite most things that are going on with the company, so I would run that about $250,000,000 a quarter something like
Excellent. Thank you very much.
Thank you. We'll go next to Tim McHugh with William Blair.
Yes, thanks. Just want to ask about the in the Corporate Finance segment, the other accounts. Can you talk a little remind me, I guess, what's in there and what's Driving the growth that's grown quite a bit as a percentage of revenue for Corporate Finance.
Yes. The MIS, other line is a combination of Korea Investor Service and ICRA non ratings businesses, they both have some non ratings activities. So that's what's captured in that line.
Tim, it's Linda. Are you asking about specifically other within The CFG line is that what you're looking for?
Yes. Yes. That's what I was asking.
Sorry. We're prepared to answer different questions here. So let me take a shot at that. What's in that line and the reason why it's growing, it includes fees for monitoring, which Ray has talked about Are really nicely moving in our favor because of the increased number of credits we're looking at. Then there's some other things medium term note programs, shelf programs, commercial paper, a smallish business on estimated ratings And other indicative and corporate family ratings and as Ray said the ICRA rating revenue as well.
So it's A group of different things, but it is a large and nicely growing line item
for us.
Is the monitoring fees the piece that's driving it to grow so much as a percentage of revenue?
Yes. That is the largest driver.
Okay. And then you're being asked about the ER I'm sorry, the MA margins in general for 2015. Do you have I guess if I missed it, did you say something or give your view on MIS' margins? Do you expect them to improve next year or be flat? I guess what's the outlook?
No. I don't think we would anticipate margin Expansion at MIS, if in fact we are in a mid single digit revenue Growth environment. Certainly, if we get surprised on the upside with issuance volume Or coverage rated coverage, I would anticipate having good incremental bring down from that upside surprise. So we'll have to wait and see.
Okay. Thank you.
We'll go next to Vincent Hung with Autonomous.
Hi, good afternoon. Hi. Just going back to the guidance of investment grade flat, higher down 10% and loans down 20%. That's just U. S, right?
Yes. Vincent, it's Linda. This is not guidance. It's rather the view of a group of Issuing banks that we talked to. So it sort of sets the tone in terms of what the various banks are seeing In terms of trends for this year, but you're right, that's U.
S. Onwards.
Do you have a similar sort of sense for Europe?
What I might do is turn it over to Michel, who might have a better sense of that.
Yes. Well, I think we as Linda said, I think we expect A more positive story on investment grade. We high yield we Should benefit from sort of the environment in Europe and the sort of search for yield we're seeing across the board. And as I think Ray or Linda mentioned, last year was a good year for leveraged loan and we expect that to continue. So that's Directionally what we're seeing at
the moment. Okay.
And just on
the comment that the pipeline for high yield was Above average and developing. Is that just because it's been so weak year to date?
I think you have a good point there, Vincent. High yield is very subject to market conditions. And so as we started January with oil bouncing around, With overall rates coming down, but spreads widening a bit, the pipeline has only recently firmed, but That is a positive development for us. But again, we'll continue to watch it. And With Fund Close being positive, that's good as well.
So we'll have to see, but we're encouraged by the recent
Okay. Just lastly, on the investment grade strength in the 4th quarter, I think you noted the helpfulness of the M and A pipeline. Is that supported by the higher fees associated with having to do the deals quicker?
It can be, but not necessarily Many of these are very large deals and that the frequency of M and A deals and the size of Have generally been helpful to us.
Okay. Thanks a lot.
Thank you. We'll go next to Patrick O'Shaughnessy, sorry, with Raymond James.
Hey, good afternoon, guys.
How are you doing Patrick?
I'm doing well. A couple of quick follow-up questions for you. So on the Within structured finance that derivatives or structured credit bucket obviously had a very strong Q4. Can you refresh my memory kind of what products Kind of fall within that and where was the specific strength during the Q4?
Sure, Patrick. Structured credit is pretty much a CLO story, Steve, and that would speak to much of the strength in the 4th quarter. One of the things I was noticing as I was pulling this data together, CLO volume so far for 20 Issuance volume is $3,000,000,000 2014 issuance volume for CLOs was $124,000,000,000 Which is just a very, very significant number. And we'll see what happens with that number In 2015, but that's what most of structured credit consists of these days.
And For both the Q4 and the full year, CLO strength I mean, there was real strength in the U. S, I would also point to Europe. Although it's a smaller market, a smaller component of the business, there was also strong growth there.
Great. Thanks. And then a follow-up question on the expense ramp over the year. I appreciate how it's kind of tricky to Figure out exactly what that slope is going to look like. But given the numbers that you talked about, I think you said maybe start the Q1 barely over 500 1,000,000 and then kind of finish the year maybe $530,000,000 $540,000 If we take, let's say, the low end of that average, Say the average quarter is $510,000,000 You multiply that by 4, that gets you to $2,040,000,000 If I divide that by what your Last year, dollars 1,855,000,000 I'm getting something like 8% expense growth and your full year guidance is more like mid single digits.
So Am I screwing something up with my math? Or is it just pretty tricky to figure out what that ramp is going to look like?
It's pretty tricky to figure out the ramp. And you're we're not going to go into it quarter by quarter. It is mid single digits. So take a little bit of a look at what you're doing. We return back to target incentive compensation, which would mean 100% incentive compensation and no profit sharing.
And I think as I mentioned, profit sharing was a little over $9,000,000 this year. And incentive compensation because we had a good year end was a little bit higher. So we normalize those things as we go into The view of the expense ramp for 2015. So you're close, but you might want to think about it a little bit more.
Okay, great. Appreciate that insight. Thank you.
Sure.
There are no further questions at this time.
Just a couple of housekeeping matters for everybody who might be trying to run models. We did note that regulatory and compliance costs will be about $5,000,000 Incrementally for 2015, we wanted to make sure that that was noted by everyone who is working on their model. Additionally, we wanted to note the tax rate of 32% to 33%. In 2014, particularly in the Q4, we had Some positive resolution of 1 off international tax matters. And to keep our lives exciting, the U.
S. Approved Reenactment of extender legislation at the very end of for the end of 2014. At this point that has not been extended into 2015, which is why we're looking at a 32% to 33% rate for 2015. And I think with that, we've got most of the housekeeping out of the way unless anybody else has any last final questions.
Just before we end the call then, I would like to announce that we'll be hosting Our annual Investor Day, again this year, we'll be doing it on Wednesday, September 30, here in Manhattan. And more information will be available on the Investor Relations website as we get closer to the event. So thank you all for joining us today.
And this concludes Moody's 4th quarter and full year 2014 earnings call. As a reminder, a replay of this call will be available