Good day, and welcome, ladies and gentlemen, to the Moody's Corporation Second Quarter 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 up for questions and answers following the presentation. I will now turn the conference over to Sallie Schwartz, Global Head of Investor Relations. Please go ahead, ma'am.
Thank you. Good morning everyone and thanks for joining us on this teleconference to discuss Moody's Q2 results for 2014 and our outlook for full year 2014. I am Sally Schwartz, Global Head of Investor Relations. Moody's released its results for the Q2 of 2014 this morning. Earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com.
Ray McDaniel, President and Chief Executive Officer of Moody's Corporation will lead this morning's conference call. Also making prepared remarks on the call this morning is Linda Huber, Chief Financial Officer of Moody's Corporation. Before we begin, I call your attention to the Safe Harbor language, which can be found toward the end of our earnings press release. 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 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 and 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 everyone for joining today's call. I'll begin by summarizing Moody's 2nd quarter 2014 results. Linda will follow with additional financial detail and operating highlights. We have no legal or regulatory updates to report.
Therefore, I will conclude our comments with our outlook for 2014. After our prepared remarks, we'll be happy to respond to
your questions.
2nd quarter revenue of $874,000,000 increased 16% over the Q2 of 20 team. Both Moody's Investor Service and Moody's Analytics delivered mid teens percent revenue growth. Operating expenses for the 2nd quarter were 4 $2,000,000 a 14% increase from the Q2 of 2013. Operating income for the Q2 was $412,000,000 A 17% increase from the prior year period. Adjusted operating income defined as operating income less depreciation and amortization $434,000,000 up 16% from the same period last year.
Diluted earnings per share of $1.48 for the 2nd quarter increased 48% from $1 in the Q2 of 2013 and included a $103,000,000 non cash pretax gain resulting from Moody's acquisition of a controlling interest in ICRA Limited, a leading Indian credit rating agency. On June 26, 2014, Moody's increased its stake in ICRA from 28.5 percent to more than 50%. Moody's recorded a gain of $0.36 per share in the Q2 of 2014. Non GAAP EPS of $1.12 which excludes the ICRA gain increased 12% from $1 in the prior year period. Turning to year to date performance.
Revenue for the 1st 6 months of 2014 was 1.6 $1,000,000,000 a 10% increase from the 1st 6 months of 2013. Revenue at Moody's Investor Service was $1,100,000,000 for the 1st 6 months 2014, an increase of 8% from a year ago. Moody's Analytics revenue for the first half of twenty fourteen Of $493,000,000 was 15% higher than the prior year period. Operating expenses for the 1st 6 months of 2014 were $896,000,000 up 5% from 2013. Operating income of $745,000,000 increased 18% from $631,000,000 in 2013.
Adjusted operating income was $790,000,000 17% increase from the prior year period. First half twenty thirteen operating expenses, operating margin and adjusted operating margin all include a 1st quarter litigation settlement charge. Diluted earnings per share of $2.47 For the 1st 6 months of 2014, which included $0.36 related to the ICRA gain increased 35% from the prior year period, which included a litigation settlement charge of $0.14 Excluding the 2014 ICRA gain and the 2013 litigation settlement charge, diluted earnings per share of $2.11 for the 1st 6 months of $2,016.11 For 6 months of 2013 grew 7% year over year. 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 quarter increased 15% to $874,000,000 Foreign currency translation favorably impacted revenue by 2%. 2nd quarter U. S.
Revenue increased 13 percent to $461,000,000 while revenue outside the U. S. Grew 19% to $412,000,000 and represented 47 percent of Moody's total revenue for the quarter. Global recurring revenue grew 12% to $412,000,000 and represented 47 Total MIS revenue for the quarter was $622,000,000 up 16% from the prior year period. U.
S. MIS revenue of $353,000,000 increased 13% from the prior year period. MIS revenue generated outside the U. S. Of $269,000,000 increased 20% and represented 43% of total ratings revenue.
Foreign currency translation favorably impacted MIS revenue by 1%. Moving now to the lines of business for MIS. 1st, global corporate finance revenue in the 2nd quarter increased 22% from the year ago period to $321,000,000 primarily reflecting strong rated bank loans and speculative grade bond issuance in both the U. S. And Europe.
U. S. And non U. S. Corporate finance revenue was up 20% 24%, respectively.
2nd global structured finance revenue for the 2nd quarter was $111,000,000 an increase of 14% from the prior year period, 2013. Despite an increase in issuance activity from U. S. Banks, U. S.
Revenue declined 4% year over year due to a shift in issuance mix. Non U. S. Revenue increased 19% against the prior year period as a result of increased issuance from banks across all regions. 4th Global Public Project and Infrastructure Finance revenue increased 6% year over year to $98,000,000 U.
S. Revenue was down 2%, non U. S. Revenue decreased 21% from the prior year period reflecting increased infrastructure revenue across all regions as well as higher sovereign and sub sovereign revenue in EMEA. And turning now to Moody's Analytics.
Global revenue from Moody's Analytics of $252,000,000 was up 15% Q2 of 2013. Foreign currency translation favorably impacted MA revenue by 3%. U. S. Revenue grew by 14% year over year to $109,000,000 Non U.
S. Revenue of $143,000,000 increased by 16% from the prior year period and represented 57% of total Moody's Analytics revenue. More than 65% of revenue growth in the quarter was organic with the remainder coming from acquisitions. Moving to the lines of business for MA. 1st, Global Research Data and Analytics or RD and A.
Revenue of $145,000,000 increased 11% from the prior year period, driven by strong performance in credit research and content licensing. RD and A represented 57% of total MA revenue and our customer retention rate remains strong in the mid-90s percent range. Rd and a U. S. Revenue was up 9% and non U.
S. Revenue was up 13% as compared to the Q2 of 2013. 2nd Global Enterprise Risk Solutions or ERS. Revenue of $67,000,000 grew 12% against the prior year period Due to growth in subscription revenue and services revenue, ERS U. S.
And non U. S. Revenue was up 13% 11% respectively against the same period last year. As we've noted in the past, due to the variable nature of project timing and completion, ERS revenue remains subject to quarterly volatility. Trailing 12 month revenue and sales for ERS have increased 8% and 15% respectively.
Finally, Global Professional Services grew 41 percent to $40,000,000 primarily reflecting the December 2013 acquisition of Amba Investment Services. U. S. And non U. S.
Revenue increased 67% and 33% respectively year over year. Turning now to expenses. Moody's 2nd quarter expenses increased 14 percent to $462,000,000 compared to the Q2 of 2013. The increase was primarily due to higher compensation and real estate expense attributable to increased headcount, increased incentive compensation and acquisition related costs. Foreign currency translation unfavorably impacted operating expenses by 1% for the quarter.
Moody's reported operating margin for the quarter was 47.1%, up 70 basis points from 46.4 percent in the Q2 of 2013. Adjusted operating margin was 49.7% for the quarter, Up 20 basis points from the 49.5 percent for the same period last year. Moody's effective tax rate for the quarter was 33.1% 3,200,000 shares at a total cost of $258,000,000 or an average of $80.39 per share And issued 700,000 shares under employee stock based compensation plan. Outstanding shares as of June 30, 2014 $211,200,000 reflecting a 4% decline from a year earlier. As of June 30, 2014, Moody's had $1,300,000,000 of share repurchase authority remaining under its current program.
At quarter end Moody's had $2,100,000,000 of outstanding debt and $1,000,000,000 of additional debt capacity available under its revolving credit facility. Total cash, cash equivalents, restricted cash and short term investments at quarter end were $2,000,000,000 an increase $308,000,000 from a year earlier. As of June 30, 2014 approximately 69% of our cash holdings were maintained outside the U. S. Free cash flow for the first half of twenty fourteen of $419,000,000 increased $68,000,000 or 19% from the same period a year ago.
And finally on July 7, 2014, Moody's issued a total of $750,000,000 of debt including $450,000,000 of 5 year notes with a coupon of 2.75 percent and $300,000,000 of 30 year notes with a coupon of 5.25 percent. We intend to use the proceeds to redeem our senior unsecured notes due in 2015, totaling $300,000,000 as well as for general corporate purposes. And with that, I'll turn the call back over to Ray.
Thanks, Linda. I'll conclude this morning's prepared comments by discussing the changes to our full year guidance for 2014. Additional details on Moody's guidance are included in our Q2 2014 earnings press release, which can be found on Moody's Investor Relations website atir.moodys.com. Moody's outlook for 2014 is based on assumptions about many macroeconomic and capital market factors, Including interest rates, corporate profitability, business investment spending, merger and acquisition activity, consumer borrowing and securitization and the amount of debt issued. There's an important degree of uncertainty surrounding these assumptions and if actual conditions differ Moody's results for the year may differ materially from the current outlook.
Our guidance assumes foreign currency translation at end of quarter exchange rates. The company now expects full year 2014 revenue grow in the low double digit percent range. Full year 2014 operating expenses are now projected to increase in the high single digit percent range. These expenses now include costs related to our acquisitions of a majority stake in ICRA and of WebEquity as well as additional incentive compensation. We now expect operating expenses to ramp between $80,000,000 $90,000,000 From the Q1 to the Q4 of 2014.
Full year 2014 non GAAP EPS guidance in the range of $3.90 to $4 Our non GAAP EPS guidance now includes costs related to our acquisitions of the majority stake in ICRA end of WebEquity and additional incentive compensation and financing costs associated with our July 2014 bond offering. Global MIS revenue for the full year 2014 is now expected to increase in the high single digit percent range. Within the U. S, MIS revenue is now expected to increase in the mid single digit percent range, while non U. S.
Revenue is expected to increase in the low teens percent range. Corporate finance revenue is now projected to grow in the low double digit percent range. Revenue from structured finance is now expected to grow approximately 10%. Financial Institutions revenue is now expected to grow in the low single digit percent range. With regard to Moody's controlling stake in ICRA, company will report ICRA's operating results within Moody's Investor Service on a 3 month lag beginning in the Q4 of 2014.
ICRA is expected to contribute approximately $12,000,000 of revenue to MIS in the Q4. For Moody's Analytics, full year 2014 revenue is now expected to increase in the mid teens percent range. Including the acquisition of WebEquity, revenue for Enterprise Risk Solutions is now to the Moody's. Professional Services revenue including AMBA Investment Services is now projected to grow approximately 40%. This concludes our prepared remarks and joining us for the question and answer session are Michelle Madeline, the President and Chief Operating Officer of Moody's Investor Service Mark Almeida, President of Moody's Analytics.
We'll be pleased to take any questions that you have.
Thank We'll take our first question from Tim McHugh with William Blair and Company.
Yes, thanks. I guess just wanted to ask a little bit more about I guess the higher expenses you expect for this year. How much of that can you help us break that down a little bit in terms of added incentive comp versus I guess any drag from upfront expenses related to ICRA and I guess how much dilution from web equity. I guess I'm trying to understand what how much that's offsetting what was better than expected performance this quarter and the impact on the full year guidance?
Sure Tim. It's Linda. Let's first look at 2nd quarter expense increase versus last year. And for the Q2, our expenses were $57,000,000 higher than last year, up 14%. And I'll give you the reasons for why that is.
The largest component of that is compensation increases and that was about $42,000,000 Compensation for new hires over the course of the year was about $15,000,000 Merit and stock based compensation for the staff we have was about $12,000,000 and the expenses related to the Amba acquisition we did last year were about $8,000,000 Non comp was about $15,000,000 and that included acquisition some other expenses of about $6,500,000 And some occupancy changes of $4,100,000 You may remember, we have leased additional 2 additional floors and a third coming online in this building here. So that would be the reason for the higher expenses second quarter over 2nd quarter. And as we move to the end of the year, we had said expenses were going to ramp about $55,000,000 We're adding another $30 ish To that we said $80,000,000 to $90,000,000 expense ramp between the Q1 and the Q4. The additions would be the cost of the acquisitions at about $20,000,000 We're thinking incentive comp will add about another $4,000,000 And expenses that we're spending in the second half rather than what we thought were going to come in the first half or about 6 ish. So that adds about $30,000,000 to the expense ramp in the second half.
Now just to be really clear, under GAAP, deal costs are expensed as they're incurred regardless of when or whether deals close. So as we look at deals And when we incur dealer expenses, we expense those and we've included those. And revenues come a little bit more slowly, but that's U. S. GAAP.
So we're looking at a 3 month lag on revenues for ICRA, which as we disclosed in our table in the press release will give us about $12,000,000 in the Q4 of this year for ICRA, but also purchase accounting adds haircuts to revenue. So We are in the position of recognizing the expenses right away and the revenue is a little bit later. Now in ICRA, we're taking a 3 month lag because ICRA reports on Indian GAAP and we've always reported ICRA's results on a 3 month lag. We have to convert those To U. S.
GAAP and it takes a quarter to do that transition. And so we will see the AECO revenues coming on in the Q4. But again, we closed the deal on June 26. So you see the expenses. And the WebEquity deal closed on July 17th.
So you can kind of think through what the acquisition costs mean there. Generally, we're thinking it's about $0.05 ish for the deal activity and about $0.04 for the financing that we did. Your call as to whether you want to think about that Those are GAAP expenses as to whether you want to think about those in the run rate or not. So hope that thoroughly answers everything that you were interested in.
That's great. That's very helpful. I guess just one follow-up to make sure I understand it correctly. The on ICRA, You're talking about you right away have to recognize any of the transaction or kind of upfront expenses. But do you have to recognize the operating expense from ICRA right away or is that Tied to when you start recognizing the revenue that's delayed by 3 months as well.
That's delayed by 3 months as well,
What we're recognizing immediately were the transaction related costs.
Okay. And then Ken, just on ERS, I think trailing 12 months sales activity was up 9% last quarter and so Up 15% this quarter is a pretty healthy step up. I don't know if the comp got easier or I guess as you rolled forward a quarter Or did you see a particular pickup in sales activity that I should read into that?
I'll let Mark Almeida address that. Yes. We had a very strong quarter on sales this past quarter. And we had A number of very good sized transactions and we had one very, very large transaction as well. So it wasn't a question of an easy comp so much as just Very strong results in the quarter.
And just as we normally comment, we expect to see quarterly volatility and that's why as you have done we encourage looking at the 12 month period.
Okay. And can you give any color on is this stress testing related type of work that you're winning with? And I guess in particular you said there's one very large deal. I guess what would can you give us any more color on what type of project that is?
Stress testing continues to be good for us. We're doing a lot of business there and we have a healthy pipeline. But Just in the normal course business, we're having a lot of continued success. And the large transaction that we did really has nothing to do with stress testing. It's just a very big project that a particular customers undertaking and they selected us to take the lead on that project.
Okay. Thank you.
We'll go next to Joseph Foresi with Janney Montgomery Scott.
Hi. With the change in the issuance business, has your expectations for the overall environment particularly on the interest rate side changed at all? I know that they've dip down recently. Do you expect them to be lower to exit this year? Or how should we think about the relationship there?
Yes. I know Linda has some detail on this, but just as an introductory comment, yes, rates have been lower than we were anticipating earlier in the year. We think they are probably going to remain lower than we had expected through the second half. But there are a number of factors relating to that including the flight quality in respect of some of the geopolitical tensions that we're seeing. So We're going to be paying close attention to what's happening not just with benchmark rates, but also spreads.
And the good news is We continue to see low default rates and that's keeping spreads reasonably tight. Linda, I don't know you wanted to add some commentary.
Sure, Joe. If you want to look at the U. S. Issuance trends, I'll talk about investment grade bonds and then high yield bonds and leveraged loans just very quickly. The Q2 obviously was very strong for an investment grade bond issuance.
And for the first half of the year in the U. S. Again we're running about $100,000,000,000 of issuance, which was up about 10% year over year. For the full year, expecting $950,000,000 or $1,000,000,000 of investment grade issuance in the U. S.
Which will be about flat. So June was very busy. July slows down because of earnings blackouts. And we think the technical backdrop remains positive. M and A activity is picking up and it's running at a pace that we haven't seen since 2007.
And for corporates refinancing high coupon bonds remains very popular. So we expect that the pipeline will come back strength in August September. For high yield bonds, we're running about $200,000,000,000 in the U. S, which is about flat year over year and expecting a little bit less than that in the back half of the year maybe $150,000,000,000 full year to be about $330,000,000,000 which is flat year over year. Little bit of volatility in June because of the headlines.
And we do see that as Ray said rates remain attractive. The pipeline is about average at this point for high yield bonds. And in leveraged loans about $270,000,000,000 for the first half of the year down 5%. For the full year expecting about $425,000,000,000 which is also down 5% year over year. Calendar is very active there and The majority of that activity is related to M and A issuance.
And we have seen for the first time some outflows from loan funds, But that's offset by very heavy issuance of collateralized loan obligations. And issuance for the first half there has been $67,000,000,000 compared to 40 $1,000,000,000 for the same time last year. And the pipeline continues to be as I said above average Due to that LBO and M and A activity in leveraged loans. So a bit of a mixed bag and the traditional sort of July earnings blackout lag here, but rates remain pretty attractive and its rates at default levels are low.
Got it. Very helpful. And then just you went through a very thorough and also helpful discussion of costs and expenses and how they're looking for the Going forward, but should are ICRA and Web Equity dilutive to margins in the short term? And do you expect to have them step up the corporate average if that is so? I mean, I understand that the expenses versus the revenues are a little bit mixed in those businesses, but I'm trying to get a feel of what exactly the dilution is from them if any and then how long it would take to
get them back to company average.
Sure. The EPS impact for this year, yes, ICRA is a little bit dilutive. You might want to call that about $0.03 and web equity about $0.02 And again you might want to think about how you want to factor that in.
Okay. And just so am I making the assumption that we're going 1st of all, Web Equity is a small business. It's a business we think is a nice fit, but it is small And it will not be margin dilutive to Moody's Analytics. ICRA while it is an attractive business does not have same margin that Moody's Investor Service does. So there will be a modest drag from ICRA.
But again it is a nicely profitable business. Okay. Last question for me. Obviously some news out regarding the regulatory environment for one of your competitors. Any updates you can give
on that or any thoughts that you think are appropriate. Thank you.
Not much to say. All we know is what has been discussed in the public market. So really nothing to add to what you would have already read. Thanks.
We'll go next to Andre Benjamin with Goldman Sachs.
Thank you. Good morning. Two quick questions. First, how much of the second quarter reported revenue growth in Corporate Finance was driven by more of the volume growth in high yield in Investment grades, which we can observe versus other things that are a little bit harder for us to see publicly like pricing or new customers or additional revenue from other Flight Monitoring.
Yes. I mean obviously volumes were strong in the second quarter, but we also did have pickup in other non issuance related components of revenue. That includes price. It includes monitoring fees, which relate to relationships that we have grown new rating relationships that we've grown in The prior year and earlier in this year. And the pipeline of new rating relationships has remained strong both in the U.
S. And in Europe this year. So it's a multifaceted growth story for the corporate sector.
Andre, it's Linda. The specifics in the corporate finance area, investment grade revenue was $63,000,000 which is 20% of the whole line and that was up 5% from last year. Fed grade bonds $77,000,000 was 24% of the total corporate line. That was up 36% From last year's $57,000,000 bank loans about $76,000,000 from last year's $53,000,000 represents about 24% of the total line and that's 43% from last year. And other accounts about $105,000,000 up from $93,000,000 last year.
That's 33,000,000 I'm sorry 33 percent of the total line and up 13% from last year. What we see here is a pretty white hot speculative grade market. And as we go into the second half, we've toned that down a touch because this is really remarkable speculative grade issuance. And we expect that favorable conditions will continue, about that a little bit for the back half of the year. And I don't know if Ray or Michelle would like to comment further on that.
No. The only comment I would add is just Reinforcing Linda's remarks. We don't see anything on the horizon that looks like it's going to have a chilling effect on the market, But the likelihood that it's going to remain at the pace we saw in the Q2 in spec grade, we don't think that's the central case. Michel, if you have anything to add, please do.
No, nothing to add, Ryan.
Okay. Thank you.
Thanks. And a quick follow-up, A little bit longer term. We've run some numbers on a set of representative U. S. Companies and see that leverage ratios As measured by net debt to EBITDA at the lowest level in about 15 years.
I guess as you talk to your CEO customers. Do you feel like we're likely to remain in more of a structurally lower band for leverage going forward? Or could we potentially be at something like a cyclical trough where all the risk aversion and political issues can go away and The economy improves we can actually see people meaningfully adding leverage again.
Yes. I mean certainly, I think what we're seeing in from a geopolitical standpoint breeds caution. But beyond that looking longer term and assuming that that is resolved in some non catastrophic way, Look, we look primarily I think to economic momentum around the world and the business confidence As opposed to the refinancing that we've been seeing. So that's if there's a re leveraging, I think it's going to come off of Greater Global Business Confidence.
Yes. Andre, it's Linda. We saw a pretty strong durable goods number this morning, which is encouraging. The CapEx picture has been mixed though. It has strengthened a bit, but it's very sector specific.
So We probably peaked in terms of CapEx additions for the natural resources industries as commodity prices But for other industries, they're sort of looking to increase their CapEx spending. So overall, it's moved a bit, but perhaps not as robustly as it could and we'll see if this durable goods order number leads that up which would be helpful to us.
Thank you.
We'll go next to William Byrd with FBR.
Good morning. I was wondering if you could talk a little bit about Europe. What kind of trends are you seeing? How is the pace of disintermediation going? And then secondly, could you talk about just your plans for deploying the excess $450,000,000 that you raised in July.
Thank you. All right. Michel, would you like to comment on what you're seeing in Europe?
Yes. Well, I think we continue to see the trends we described in prior quarters. The intermediation continue We see new issues coming to market. We see a high level of activity across the board Okay, Sergey. And especially around structure high yield basically and also bank loans, which is really the speculative segment of the marketplace.
So nothing It's putting that in question. As you know the ECB is launching a program of targeted LTRO program which will provide liquidity to banks that are lending to the marketplace. So that will provide some more lending capacity on the part of the banks, but we don't expect That really derailed that momentum.
Thanks, Michelle.
And Bill, it's Linda, you're right. We did a $750,000,000 bond deal a while back and $300,000,000 of that we are looking to redeem a private placement 10 year piece of paper that comes due in 2015 with a 4.98 coupon on that. So once we do that the rest the remaining 450 will be used for general corporate purposes. The usual stuff working capital CapEx acquisitions repayment of other debt and share repo. Interestingly on the deal that we did, we had a 5 year piece and a 30 year piece.
We were trying to Scribe and we were able to tighten the pricing. We were very, very pleased about that and pleased that we're able to access the debt markets at rates which have been very attractive for us. So we're just doing some management here in terms of how we're handling our various pieces of debt. And we would note that our bonds are trading very tightly. And in fact as compared to one of our competitors maybe even 100 basis points tighter.
So we're pleased with how all that's going.
And Linda, could you give us the actual number on the incentive comp accrual in the quarter?
Yes. Hang on just one second Bill while we find that. So incentive compensation for the Q2 was $44,000,000 up from $34,000,000 last year, so about $10,000,000 increase. Stock based compensation moved up as well $20,000,000 versus $16,000,000 last year or $4,000,000 Heavier. And salaries and benefits were $238,000,000 versus $210,000,000 last year, Which is $28,000,000 heavier or 13% higher.
So that's incentive compensation view. Now we've been asked a lot about that incentive compensation. The main driver of incentive compensation is really operating income. Keep in mind operating income was up 17%. So if we are able to put up good operating income, we do increase our incentive compensation pool.
Note that we do not get paid incentive compensation on that ICRA gain. That is not included. So we have to have real results in order for us to have the incentive compensation pool move up. So for the rest of the year because we'll probably get that question, We had asked people to look at maybe $35,000,000 a quarter for incentive compensation and it's probably better if you bump that up to more like $40,000,000 per quarter for the rest of the year. Medi Hub.
Great. Thank you. Thanks a lot.
We'll go next to Manav Patnaik with Barclays.
Yes. Hi. Good. Just one clarification on all the cost detail that you gave out. So the $0.05 impact from the deal cost and then the $0.04 from the financing that was just for the Q2 and then the for the remaining of remainder of the year call it another $0.06 from the acquisition costs.
Did I get that right?
Now the $0.05 and the $0.04 are built into our full year outlook of $3.90 to $4
Okay, fine. That's great. And then Linda, like you talked about the different components in Corporate Finance. Just in structured finance, can you just talk about the CLO market, I guess, seems like what's driving most of the growth and how that breaks out and just some commentary there?
Yes, sure. I'll go ahead and do the other 2 sectors after that as well because we usually get asked. But let's start with structure. So structure for the quarter is $110,000,000 Asset backed security is about $24,000,000 That was actually down a little bit from last year's Q2 about $25,500,000 and FX are about 22% of Structured Lines. RMBS about $20,000,000 up from last year's about $19,000,000 and it's about 18% of the line.
Commercial real estate is at $30,000,000 about flat to last year's $30,000,000 as well and that's 27% of the structured line. And structured credit. You're right about this Manav is $37,000,000 that's 34% of the structured line. Up from $22,000,000 last year or about a 70% increase. So structured credit CLOs have been very helpful to us on the Structured Finance line.
Would you like me to just go ahead and go through FIG and CIF, Bernard? Okay. So FIG was $92,000,000 for the quarter and that was up from $84,000,000 last year. So banking is about $64,000,000 up from $57,000,000 last year, it's about 11% increase and banking close to 70% of the FIG line. Insurance $24,000,000 up from $23,000,000 last year, pretty flat.
It's about 26% of the whole FIG line. And management investments about $4,000,000 pretty flattish from last year and that's only 5% of the FIG line. PPIF. We did $98,000,000 in the 2nd quarter and Public Finance and Sovereigns about $40,000,000 especially down from last year's $43,500,000 and PFG and sovereigns represents 41% of the PPIF line. Structured munis $4,300,000 exactly flat to last year and that's 4% of the line.
And project and infrastructure at about $54,000,000 up from last year's 45%. It's a 20% increase and that represents 55% of the PPIF line. So You can see we've had good growth particularly as we mentioned in the script in the Project and Infrastructure line. The structured credit CLO line, banks a little bit weaker than perhaps because of the nature of the issuance the big banks issuing. And then we've talked about the very strong results in the spec grade lines in corporate.
Okay. Thanks a lot. And then just one more on the cash balance The percentage held offshore ticked up nicely at least from what I had for the full year of 20 Clearly you guys are raising some debt in the U. S. And so forth, but just any thoughts around how you kind of manage that international cash
Sure. Your observation is right for the Q2. We had about $600,000,000 of cash in the U. S. At the end of the second quarter, which keep in mind was before we did the bond deal.
And internationally, we had about $1,400,000,000 of international cash that's 70%. So we did the U. S. Bond deal of course to help our U. S.
Cash position. And we run a little bit heavier in terms of cash being generated by the international part of the business. So how will we manage it? We manage it to support international acquisition opportunity And we are happy with the balance that we have given that our business is about 50% outside the U. S.
So we are fine with the balance that we have and we have plenty of U. S. Cash to support our dividends and our share buybacks and liquidity needs that we have in the U. S. As well.
Okay. Thanks a lot guys.
Sure. We'll go next to Peter Appert with Piper Jaffray.
Thanks. So Linda, just staying on structured finance for a sec, I think this is the best quarter you guys have done from a revenue perspective since The financial crisis. I'm wondering if you guys read anything into this in terms of beyond CLOs or we had an inflection point in terms of life in the structured finance market.
Peter, it's Ray. I'll start. We obviously were very pleased with structure for the quarter. It is really being driven by the CLO market both in the U. S.
And in Europe. It and we've seen growth in some other areas, But that really is the dominant driver of growth in CLO in structured at this point. The commercial real estate sector has been pretty good, but we still are not Seeing a lot of activity in RMBS and covered bonds in Europe, student loans, Some of the areas that we saw pre financial crisis are still not showing much of a pulse. So I think that's going to moderate the rate of growth in structured finance, although I think we are going to continue to see growth in that area. But I would not anticipate any kind of explosive growth coming out of structured at this point.
Peter, as I noted RMBS has actually been down year over year. And I think it was noted in this morning's economic results that The new housing sales were down. So we continue to see perhaps a weaker housing market than might be hoped for. Around the world though, we do have governments starting to talk about the need to get the securitization market for Housing for Residential Mortgage Backed Securities functioning again. And that is something that is Those conversations have also taken place in Europe.
And perhaps Michelle might want to comment a little bit on covered bonds, which we also include in this line and RMBS potential in Europe as well. Michel, did you want to say a few words?
Well, You're right. I think there's a lot of discussion in Europe about restarting the securitization market creating the right conditions To do that the ECB, the Bank of England, a number of governments and policymakers are focusing on that. The reality As Ray said, remains a very anemic market for at the moment. Cover borne also Is facing the challenge of the fact that banks have very ample source of funding and actually the ECB is adding to that. So I think the politically and there's a lot of discussion around that, but The dynamics of the market remains behind what we've seen in the past.
And The CLO is similar to the U. S. Has been really the major driver of the improvement together with better activity in RMBS actually in Europe.
That's helpful.
Thank you. Thanks, Michelle.
And Linda, can you remind me the relative profitability of the different asset classes for you guys. I think the impression in the market is that high yield issuance is It's generally going to be more profitable for you probably structured finance as well. So I'm wondering if some of your conservatism with regard to the Second half guidance might be a function of just this mix issue and an expectation of weaker trends and high yield.
Peter, we priced a little bit higher for speculative grade ratings and that's because that is a tremendous amount of credit work required in bringing those ratings to the market. So whether it's more profitable is a different question. And we try to run profitability pretty similarly across all of our business lines. So I'm not sure it's much more profitable. Structured finance is not more profitable.
That's a bit of an urban myth we've had in place for many years here at Moody's. So I think the issue on the back half of the year and I'll let Ray comment on this. It's just really what we are thinking about regarding speculative grade activity. And as we said, we've taken guidance up. But on the spec grade front, we had a white hot second quarter and we're cautious as we're usually cautious about whether that pace can continue.
And I'll let Ray correct anything I said wrong.
No, the only thing
I would add is which I think you already know Peter, Our structured business and the spec grade business are more transaction Based Businesses as Opposed to Recurring Revenue Businesses. So we are we do enjoy the benefit of high volume periods, but there's a bit more volatility when issuance activity slows. We see much less of that in investment grade in financial institutions, but it is a characteristic of the spec grade and structured
That's helpful. Thanks very much.
We'll go next to Craig Huber with Huber Research Partners.
Yes. Hi there. I got a few questions. I guess, first, your total headcount of your company, what is it today? And then what percent is it up from a year ago?
Sure. The answer excluding the acquisitions Craig is that headcount is up 10% year over year. And if you include the acquisitions, I think we've got in the press release, we're running approximately 9,500 people now. Most of our acquisitions have been in the revenue generating businesses and we're being very careful in the shared services part of the business to ensure that we have our more routine functions in lower cost jurisdictions. So headcount's up to about 9,500 with everything considered without the acquisitions we've had about a 10% increase.
And secondly, you gave a lot of detail on costs and stuff, but I'm just curious back in the second quarter, were there any one time costs that you can quantify for us during the quarter? Any deal related transaction cost. Can you maybe quantify stuff like that?
Craig, we don't really want to get into that. I think we had talked about looking forward there's sort of 0 point And deal costs and $0.04 from the financing costs. We don't want to tell the analysts what to think. If you want to think about that as part of the run rate, please do that. But we're very cautious to make sure that we give the GAAP numbers and give those first, so that those are well understood.
So I don't think we want to get into the particular sense associated with various deals.
Was there anything else Linda that you'd want to highlight other than this $0.05 $0.04 that made you keep your full year EPS guidance the same?
I think that's most of it Craig. We'll see where we get to or the next time we'll be speaking to the markets Investor Day September 30 and we'll take another look at that time. But From a GAAP perspective, we do have to include these costs. So again, the analysts can choose a different path if that's what they prefer to do. Ray, Ray, I don't know if you have anything else you want to add.
That's it.
Sorry, a couple more if I could. The WebEquity revenue share. Can you just quantify that for us for modeling purposes? You said it was small.
Right. I'll turn it over to Mark. I'm not sure we had disclosed that.
Yes. We haven't really talked about WebEquity in any detail because that wasn't a second quarter event, just closed last week. And it is a as I said before, we like the company quite a bit. We like its fit in Moody's Analytics and the position it gives us with the smaller U. S.
Banks, which is has not been an area that we have been as involved in historically. So their loan origination solutions for smaller banks is a very nice fit we think Strategically, but again it's a small company. So the materiality of the revenue is not there.
Craig one other thing that we should note on the run rate for the expenses. We've said expenses, the estimated tax rate is 30 3%. And in the first half of the year, we ran a little bit lower. So by math, it's going to potentially run a little bit higher In the back half of the year. So in the first half of the year, we had a resolution of some international tax matters.
And in the second half, we are expecting somewhat higher rate absent any other of these individually resolved matters. So we do expect for the tax rate to average 33% for the year. But again, it ran a little lower in the first half. So that means by the math it would have to run a little higher in the back half. So make sure that you factor that in
Welcome. Also if
I could ask your professional services, what was the revenue growth there excluding the AMBA transaction?
It was almost entirely from the acquisition.
Okay. I guess my last question if I could sneak this in. Your main competitor S and P obviously has been in the news a lot here in the last 48 hours with their wells noticed. I'm just curious Ray or Linda whoever wants to answer this. How often does a company like yours have to make Significant methodology or criteria changes to your ratings methodology.
That's something that the government seems to be focusing on with S and P right now. I'm Curious if you could just talk broadly about that how often you have to make it in a material way.
Well, I don't think there is a I mean we review our methodologies annually, but there's not a schedule for changing methodologies. And Frankly, that is really dependent on the ratings performance, how well our ratings accuracy is being measured and external events. If there are changes in regulation, Some industry structure that dictates a review of the methodology. We obviously will do that. But I don't even know what the pace of change in methodologies has been historically other than we review them regularly.
But I'm just curious, you're suggesting it's pretty rare that you have to change your criteria methodologies?
No, we I mean, we've changed methodologies in some sectors this year and we did so last year as Well, and minor changes are more common than material changes. But As I said, we're really we're not trying to set a pace for change so much as making sure that we are responsive to what's happening in the market and what we think is the ongoing quality of the methodologies that we're using.
Great. Thank you.
We'll go next to Doug Arthur with Evercore.
Yes, great. Just one question, a clarification Ray. On the $12,000,000 that you're expecting to recognize from ICRA in the 4th quarter. Is that In the revised MIS guidance or is that extraneous to that?
That is in the revised MIS guidance.
Okay, great. Thank you.
We'll go next to Patrick O'Shaughnessy with Raymond James.
Hey, good morning. So my first question is, where do you think we are in terms of M and A being a meaningful contributor to bond issuance. And I ask because although we've seen M and A pick up, the commentary from a lot of the advisory shops is We're seeing announcements right now, but a lot of deal closings are late this year. They're going to be 2015 events. And so do you think there's still a lot more room to go in terms Bond issuance related to M and A?
Yes. I think there is potentially. And I take your point that the announcements predate debt financing. And so we're pretty optimistic about what we anticipate on the M and A front. And obviously, we'll keep our eye on that.
Linda, I don't know if you had anything else you wanted to add to that.
Yes. That's one of the factors Patrick that encourages us About the back half of the year and also next year as well. If you look in our investor deck, there's a chart in there that correlates M and A issuance bond issuance which might help you out. And as we said M and A deals have been running at the fastest pace for first half since 2007. It's been quite a strong surge and obviously companies are aware of low interest rates and also record high equity prices.
So that creates a really terrific deal environment. And we've been talking about this Now for quite a while, but we're finally seeing it, which is terrific. But the point that you make that some of this financing will spill over into 2015
Typically fall. I would imagine a lot of the sponsored financing is going to be high yield. But corporate M and A, is that mostly investment grade or is it a mix? Where has that historically fallen?
You're correct that most sponsor deals are generally high yield deals and they can either fall in bank bond deals or loan deals. Private equity firms can even kind of run it up to the day of the financing to decide what the balance is going to be between those And for big corporates, those probably would tend toward investment grade issuance. You're right about that, particularly the strategic as they're acquiring that would generally be investment grade financing. I don't
know if
Ray wants to add anything.
No, I was just going to say the financials would tend towards the spec grade and the strategics would tend towards the investment grade.
That's helpful. Thank you. And then lastly from me, how's the tone of your interactions with the SEC been recently, if And I ask because the SEC's enforcement directors made some public comments about they might be more active with Their oversight of ratings agencies and just want to know if anything that he said has been reflected in kind of the tone of your interactions with the SEC?
We as you would imagine, we have frequent contact with the SEC staff through their inspection review procedures, the Office of Credit Rating Agencies. I would characterize those interactions as being constructive. There are things that the SEC expects us to do from a process standpoint, from a reporting standpoint and we do everything we can to meet those expectations. But I would not characterize the relationship as hostile in any way. I think it is constructive.
All right, great. Thank you.
We'll go next to Edward O'Tornow with Benchmark.
Could you review the numbers you gave on the bank loan ratings? That's a category that sort of exploded in recent years and it's now a pretty good chunk of business. Can you give me the percent of business something like that, Beauty of Growth, the margins on the business?
Sure, Ed. I'll give you the growth. We're less interested in talking about margins. But last year bank loans were 50 $3,000,000 of revenue for us. And this year, it's close to $76,000,000 so an increase of almost And as Ray said, a lot of that is driven by merger and acquisition activities.
And we also note that because investors like floating rate paper right now given their concerns about potential interest rate increases. Bank loans are really where the action is primarily in the U. S. But also to some degree in Europe. So you're You're
telling now.
Those is a high point.
Yes. That Ed Thanks.
We're big enough to do
Anyway, I would just underscore the comment that we are seeing Strong activity in Europe in the bank loan area. That is a line that in years past I would not Have highlighted because it wasn't large enough to be worth citing, but it has Come on very strongly and is a nice part of the corporate business now.
Is it a totally separate or is it sort of displacing Traditional Issuance, if you know what I mean.
I think it's really part of the disintermediation story. The ratings on the bank loans makes it easier to syndicate and transfer those loans. And so, yes, there is a trade off between rated bank loans and bonds particularly spec grade bonds. And as Linda said, depending on appetites for fixed rate versus floating rate paper and the decisions about whether to enter the bond market or remain in a
You may have given this are they priced About the same as bonds or premium or discount in terms of your rate that you charge?
The speculative grade area is priced a little bit higher at the year.
So they're in the speculative grade area, yes.
Got you. For the most part, yes. Yes.
Thanks very much.
We'll go next to Bill Warmington with Wells Fargo.
Good afternoon everyone. So a question for you now That your operating margins have reached the mid-40s. I think you made some comments in the past about trade offs between investing that incremental profit going forward into revenue growth versus margin expansion. If you could share your thoughts with us on that?
Sure. I'll take a crack. It's Linda and then Ray to take a shot at it as well. We are executing on margin expansion here at Moody's. And as I read in the prepared remarks, the operating margin for the Q1 was 47.1 percent that was up 70 basis points from last year's 46.4%.
So again, this is not a marketing campaign and not promises. We are expanding our margin and 70 basis points I would submit is pretty healthy year over year. We have said that over the mid to longer term we were looking to be in the low to mid-40s And we continue to be happy with that view. We do want to invest back in our businesses. As you can see our businesses are Performing really well.
We're very pleased with the growth rates we're putting up. And our shareholders are 80% growth in GARP holders and they've told us they want top line growth above everything else, but we are able to have margin expansion as well. So I think we feel pretty happy about this balance and our shareholders do as well from what we can see and Ray may have some other thoughts.
No, it's just Obviously, it's going to be influenced by mix, the pace of growth at Moody's Analytics versus Moody's Investor Service and the pace of growth inside the U. S. Versus outside the U. S. Particularly whether it's in developed markets or emerging markets.
But where we see opportunity for top line, we're going to go after that and we're still going to Be prudent in managing the margin, but we want the top line growth.
Yes. And we'll talk a little bit more about this when we get to Investor Day. Quite frankly, we haven't started our process yet to think about what if anything we might say or change at Investor Day, but potentially we can talk about that. But we would note we're running this business very efficiently and we're very pleased with the progress we've been able to make on our margin line. So I think that pretty much covers it.
So a question for you on Copel on the knowledge process outsourcing side. If you could comment on what you're seeing for the pace of outsourcing at the U. S. Banks whether you're seeing that increase, decrease, stay the same?
Copelamba has very nice margins and Moody's like growth rate is What we've said in the past, we feel that we're in the right place at the right time having very high end knowledge process outsourcing capabilities. And I think it'd be fair to say there's very active dialogue going on with all of just about all of the U. S. Banks who are looking to cut costs. You can see those stories every day in the press and also looking to increase their return on equity.
So it is a terrific business for us to have, but particularly at this point in the cycle. And I'll see if Ray or Mark want to say anything else.
I think that does it from my perspective.
Well, thank you very much. Appreciate it.
Sure.
And that will conclude our question and answer session. I'd like to turn the conference back over to Ray McDaniel for any closing our additional remarks.
Okay. Just quickly before we end the call, I want to announce that we will host our Annual Investor Day on Tuesday, September 30, here in New York. Attendance is by invitation only and the event will be webcast. Further details will be provided on our Investor Relations website ir. Moodys.com as we get closer to the event.
So thank you for joining the call today and we look forward to speaking to you again
This concludes Moody's Q2 earnings call. As a reminder, a replay of this call will be available after 4 pm Eastern Time on Moody's website.