Moody's Corp's CEO Hosts Analyst Day (Transcript)

Moody's Corp. (MCO)

Analyst Day Call

September 12, 2012, 08:00 am ET


Salli Schwartz - Global Head, Investor Relations

Ray McDaniel - President & CEO

Mark Zandi - Chief Economist, Moody‘s

Michel Madelain - President and COO, Moody's Investors Service

Mike Rowan - Managing Director Global Commercial Group

John Goggins - EVP and General Counsel

Mark Almeida - President, Moody's Analytics

Geoff Fite - Executive Director and COO, Enterprise Risk Management

Rishi Khosla - Chairman & CEO of Copal Partners

Dan Russell - Executive Director, Research

Linda Huber - EVP and CFO, Moody‘s Corporation

Rob Fauber - SVP, Corporate Development

Lisa Westlake - SVP and Chief HR Officer




Salli Schwartz

Good morning everyone. If everyone could take their seats, we're going to get started. Thank you very much for joining us at our Moody’s 2012 Investor Day today. I am Salli Schwartz, Global Head of Investor Relations for Moody’s Corporation. Before we start this morning’s program, I would like to spend just a minute thanking my team, the volunteers and event staff and of course Moody’s management team who have all helped plan and orchestrate today’s event.

Here we've listed our agenda for the day. I won’t go through the various presentations. I am sure you are all familiar with what we are going to do. But I'd like to note that in addition to what is listed here we've two scheduled breaks. The first after Mark Zandi's macroeconomic overview and a second after John Goggins' legal update.

Moody Analytics product demos will be available during the second break and again at the conclusion of the event and after Ray’s closing remarks we will serve a light lunch. We'll be in this room through Mark Zandi's presentation and then move next door just over here to room C and D. All refreshment breaks and product demos will take place right where we are now in rooms A and B. And we're going to ask that you hold questions until Q&A at the end of each session.

If you need help with anything, there are event staff that have on their name badges little red tags, so please ask them for what you need. There is also an information that is just outside this door into the left there. After today's event we'll be following up via email to ask you to complete a brief survey and we very much appreciate your feedback, so that we can fine tune future investor day events.

Now I've got some detail here, you’ll have a copy of the presentation when we move into the next room. Something more fun here. We've listed our recent financial performance and as you know we did very well last year. We had over 12% revenue growth, 39% operating margin, almost 16% earnings per share growth and an 18% total return which is dividends and share repurchases as a percentage of market cap from 2008 through last year.

Goldman Sachs was kind enough to conduct a screening analysis for us looking at companies in the S&P 500 and measuring how many performed at least as well as we did last year. As you can see here at the top in the green, we start with the S&P 500. We screen for our revenue growth of over 12%. Operating margin over 39%, EPS growth over 16% and total return over 18% and you could see how the numbers diminish. When we get down to the bottom, leaves us only with three companies including Moody’s. So the question is who are the other two, curious, if anyone has any guesses?

Unidentified Speaker


Salli Schwartz

No, not last year. Any others?

Unidentified Speaker


Salli Schwartz

Apple, good guess. Maybe next year depending on how they do with their new iPhone today, but no. Any last guesses? Well we are actually not going to tell you today, alright not yet tell you now. We will tell you later on today, we will get back to you with the answer and you can think on it over the next couple of hours.

At a higher level, I don’t think I have to tell you that Moody’s is a truly exceptional company, we endeavor to share with you today some of the many opportunities we see in the business and help you understand the ways in which we are pursuing our strategy.

To that end I would like to introduce Ray McDaniel Moody’s CEO who will provide opening remarks for the day. Thank you.

Ray McDaniel

Okay, thank you very much Salli and welcome everyone who has been able to join in person and those who are participating remotely as well. Salli has got me on a fairly strict timeline here, so I going to have to move at some speed in order to get Mark Zandi up here for you, but I do want to prepare -- do want to offer some opening remarks for you.

I also have just returned from China, so a little bit of jet lag into the extent that my words come out randomly, just rearrange them in the right order. Okay, the session overview guidance and our ongoing growth opportunities first, then talking about some capital market considerations that influence our business. I do want to touch for a moment on our long-term strategy and then provide a bit of a spotlight on some key emerging markets which where it expands across both the Moody’s investor service and Moody's analytics businesses before offering some concluding thoughts.

Okay for those of you, who saw our press release this morning. We have updated our full-year 2012 guidance. Revenue and operating expenses are now both expected to grow at approximately 12% to 13%. This is from low double digit previously, just providing some more clarity on our growth expectations. Our operating margin is still expected to be about 39% and we will have forecast an adjusted operating margin which is a new metric that Linda Huber will talk about at approximately 43%.

Our earnings per share guidance is now $2.76 to $2.86 on a GAAP basis and $2.70 to $2.80 on a pro forma basis which eliminates $0.06 in a favorable legacy tax outcome that we have in the third quarter. Share repurchase we now expect to have about 300 million in share repurchase, up from 200 previously and the remaining metrics on this slide are unchanged from our previous guidance.

Looking beyond 2012 to the longer term. I would characterize these as the deep current drivers of Moody’s business. First of all debt issuance driven by global GDP growth and this is looking outside of cyclical leveraging and deleveraging and just taking the assumption that global debt and ratable debt will grow essentially in line with global GDP.

Secondly disintermediation of credit markets and we will talk a little bit more about this throughout the morning, particularly with the stress in the banking sector, disintermediation is alive and well. We have growth in our Moody’s Analytics for instance and that’s driven by further penetration of Moody’s Analytics client base. There are good opportunities there. It is a reasonably fragmented market and also driven by additional regulation that we’re able to provide products and services around.

And finally, pricing initiatives aligned with value and it leads as you can see two expectations that over time and on average, we would be able to achieve double-digit growth for the company as a whole. Looking at some considerations affecting the capital markets and that affect our customer base and necessarily so us.

Europe certainly is a top of mind issue and it is probably going to be for sometime. The uncertainty in Europe has an impact on business confidence on the negative side, but it also has some silver linings for the particular businesses that we operate in including low interest rates. So we have low interest rate environment both in the US and in Europe and the stress in the banking sector again is causing deleveraging and is causing corporations to move in to the [barn] markets that formally would have been exclusively in the banking markets.

And finally, risk models and regulation, there are changes in regulation going on globally and those are acting as a catalyst for ongoing needs for better risk models analytics and advisory services.

Now, all that obviously, the macro influences on our business are important, but we are also not simply a cork bobbing in the ocean. We can navigate these macro conditions, both challenges and opportunities for the benefit of the firm. Our proactive marketing and pricing to maximize the benefit from disintermediation, we also have products and strategies that are unrelated to issuance cycle and ongoing monitoring of our outstanding ratings for example generates fees.

As do our frequent issuer pricing agreements and the subscription base that we have for our research and data products. We also have continuing product development and upgrades and the ability to manage costs. We have flex in our incentive compensation programs, we have controlled over our largest expense line which is personnel and we have offshoring opportunities which again we'll talk a bit more about coming up.

Now, I've talked about that guidance, I've talked about growth and some of the macro conditions that we are dealing with and I want to step back and touch just briefly on Moody’s role in the financial markets and at a high level, the strategic priorities that we've identified to succeed in that role.

Most fundamentally Moody’s helps institutions manage financial risk, especially but not exclusively credit risk. In order do this, accomplish this we have to first measure the risk. We have to evaluate that and then we have to make sure that there is a strong nuanced understanding of what has been measured and evaluated.

The measurements include our core ratings product, EDFs through Moody’s Analytics, our market implied rating service. The valuation includes research from Moody’s investor service Moody’s analytics including our recently purchased Copal Partners acquisition and the software advisory services that go with that and then understanding customer understanding comes from for example our published methodologies, training and certification and analyst outreach.

The point here is that this is not Moody’s investor service on one side, Moody’s analytics on the other. Both operating companies do all of these things. It so happens that Moody’s ratings are hardwired into the global financial system and so that is considered appropriate for regulation, but otherwise what we do is complimentary and consistent across the organization.

Now, at a practical level, our strategic operating priorities in order to allow us to help institutions manage risk. Obviously we want to be the most respected authority serving risk-sensitive markets. To do that we have to defend and enhance our core ratings and research business, ratings accuracy and transparency, our timeliness, outreach and distribution to make sure that the ratings are received and understood.

We also have opportunities to invest in strategic growth areas. This is leveraging our brand, our skills and we want to broadly occupy the institutional credit and financial risk management and information vertical.

These are mutually reinforcing activities. Defending and enhancing our core ratings business provides us the opportunity to invest and grow outside of that business and growth in areas where we can lever our brand and where we can lever our skills and expertise fortifies the moat around the ratings business.

Looking at our use of capital, we do have twin commitments to supporting growth and returning cash to shareholders. We have strong free cash flow we enjoy that luxury. If we were able to invest in rating agencies around the world that would certainly be a very high priority for us.

But there are few acquisition targets of scale that are also actionable in that area, so we have organic investment in the rating agency and we have both organic and acquired investment in Moody’s Analytics. We have a methodical approach to acquisitions, we are careful about those and we will talk in more detail later in the morning about how we measure the acquisitions and how we think about both what are attractive targets and whether we are meeting shareholder expectations with the targets that we do pursue.

And then finally where we do not have other profit opportunities that we think are in shareholders best interest, we intend and do return cash to shareholders via a mix of stock buybacks and dividends. Turning to the emerging markets. Just a reminder, first of all of Moody’s global profile. We are present in 28 countries and we are active in all of the world's financial centers and frankly we are active in some places that really aren’t financial centers as well.

But you can see where we have presence and you can see our global staffing summary here on this slide. Now turning to our presence in key emerging markets. We are pursuing markets such as China and India and Latin America on really a portfolio basis. Moody’s investor service has presence in these markets and Moody’s analytics has presence in these markets.

And in China and India we are also represented through joint ventures, CCXI in China and ICRA in India. We participate in the global crossborder markets that is the key aspect of our ratings business, but also these domestic markets, in particular through the joint ventures we participate in the credit rating business in these domestic markets and then Moody’s Analytics is offering a range of products and services which again, Mark Almeida will talk about in more detail across these markets.

So it's really a portfolio approach, partly in response to what we think will succeed, partly in response to what we’re permitted to do in these markets and you can see the range of activities. You also see at the bottom of the slide, the revenue that we currently generate from these markets and I put this up not only because it's an attractive set of numbers but when you look at that compared to our total global revenue, it really is quite small and the opportunity here is quite large. So we're enthusiastic about the long-term opportunities that come from these key emerging markets.

And then finally, just in conclusion to this introductory set of comments, again Moody’s helps institutions manage risk. We're distinctively well suited for rapidly evolving financial world because we provide both finished products and services as well as platforms, software platforms and data that allow institutions to do it themselves if they wish to. So we are well suited for different attitudes and orientations of different institutions around the world to how they think about measuring, evaluating, understanding risk for sound risk management.

The diversification of products and services does allow profitable participation in economies at multiple stages of development. So we don’t have to wait for mature bond markets that demand our global scale ratings. We can participate profitably in markets that are on that long path to getting to well developed deep and liquid bond market, and this allows Moody’s not only to survive but to prosper. You are going to hear more about that in detail from my colleagues and I thank you very much for joining us today and I am going to turn this over to Mark Zandi now. Thank you.

Mark Zandi

Thank you Ray thanks for the introduction. I am going to expound for about an hour, not complicating a bit too much. I'll expound for about 10 minutes and then we'll take any questions or comments that you might have. The global economic recovery is just over three years old. It’s struggling, but I expect it to remain in tact. And while there would be a great deal of variability across the global, I do think it should gain traction by this time next year and by mid-part of the decade I think we should see solid growth throughout must of the global economics.

So let me sort of break that down a bit and take a little deeper look at different parts of the world. First Europe, obviously this is the weakest link in the global economy. The European economy is in recession, likely to remain in recession through the end of the year into next. And it’s going to be [slope] for the foreseeable future.

But I do think and it is my working assumption that the Eurozone will remain in tact, that it will continue to look like it does today for the foreseeable future and the reason for this view is that I believe European policymakers are fully committed to the Eurozone and this is most obvious by the recent actions in European Central Bank ECB.

You can see how aggressive they have been in this first graphic that shows the size of their balance sheet go back prior to the recession back in 2007 and 2008. There have been a Euro [1.5 trillion] on balance sheet; it’s now up to Euro 4.5 trillion and rising very quickly.

This amounts about a third of European GDP just for context. The Bank of Japan’s balance sheet is about 30% of Japan’s GDP. The Bank of England’s balance sheet is about 25% of UK GDP and the (inaudible) which of course has been very aggressive and remains aggressive. Its balance sheet is about 15% of US GDP.

So the ECB has been very aggressive. Over the past year cutting rates, cutting reserve requirements, providing very cheap funding to European banks through the LTROs and of course most recently last week, the announcement that they will engage in an open ended bond buying program to maintain very low interest rates.

I think this signals very strongly that the ECB will continue to do what’s necessary to keep the Eurozone together. There is a fair amount of criticism that all the Europeans have been doing is in the sense of kicking the can down the road, not addressing more fundamentally the economic issues that face in erecting the kind of institutions they need to have a more durable fiscal amount through a union. But I will disagree with that assessment I do think with each round of financial market, they are making progress and they are posing fiscal discipline on the troubled sovereigns, requiring the troubled sovereigns to engage in structural economic reform.

The ECB by its actions is beginning the process of debt mutualization de facto and the quid pro quo for the open ended bond buying will be that the troubled sovereigns will have to participate in a more rigorous fiscal process and I think that’s a key step towards developing the institutions Europe needs to have a more reverse fiscal process that will ultimately succeed.

Of course there is a lot of risk here, mostly political. I think the European leadership knows where they want to go and they have a rough road map in mind but to get the [electric] to follow along is obviously going to be tricky. The Germans are really not very about happy about having to [any] up all of this, and of course in Spain and in Greece the economies are close to depression like conditions and very close to bailing.

So I don’t want to be calling (inaudible) about this obviously the risks are very high but the politics will overwhelm the process, but I think there is a strong realization that the cause of not keeping Eurozone together are very, very high and at the end of the day we’ll figure out how to do that. And regardless it’s going to be [slot] for Europe but they will keep it together.

In the emerging world, growth has slowed I think the slowdown in the end is and its most pronounced literally right now, you can kind of get a sense of the slowdown here, this shows real GDP growth from 2011, 2012 and 2013 for four key emerging market economies. You can see the slowdown is occurring between 2011 and 2012.

The Brazilian slowdown occurred between 2010 and 2011. You can’t quite see that but if you go back to 2010 Brazilian growth is closer to [4% or 5%] and you can also see the slide that I do expect growth to stabilize soon and we will see a bit of the improvement as we move into 2013 and 2014.

The slowdown is in part related to the fallout from the European economy. China’s economy is much more depended on Europe than it is on the US and so that’s been a significant weight on growth. To some degree the slowdown in the end is by design. If you think back a year and year and a half ago, these economies were overheating, inflationary pressures were developing, food prices were rising very rapidly and so fiscal monitoring policy turning contractionary and that has succeeded in slowing growth.

And the slowdown is also in part due to policy errors. I think in some of these countries, they panicked a bit because of the slowdown it’s been a little bit more pronounced than they wanted and they’ve responded with polices that have been counterproductive. This is most obvious in countries like India and to a lesser degree Brazil.

But I do think the slowdown is at its worst end. We will see these economies start turning and the reason for this view is that these economies are now working really hard to stimulate growth, monetary policy, it's now much more expansionary, central banks across the [EN] are cutting interest rates.

And we're seeing some additional fiscal stimulus, the Chinese announced stimulus last week that it amounts to about 2% of their GDP. The Koreans last week also announced and these economies are very sensitive to monitoring fiscal stimulus.

I think they will succeed in turning these economies around by early next year and certainly by this time next year. One of the quick point about the [EN]. The [EN] is operating pretty close to capacity. So, even when growth accelerates, we're not going back to the kind of heady growth rates, we're getting back a couple of three years ago because this isn’t enough capacity to do that but we will see better growth.

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