Moody's Corp (NYSE:MCO) Q3 2021 Earnings Conference Call October 28, 2021 11:30 AM ET Company Participants Shivani Kak - Head, IR Robert Fauber - President, CEO & Director Mark Kaye - SVP & CFO Conference Call Participants Manav Patnaik - Barclays Bank Alexander Kramm - UBS Ashish Sabadra - RBC Capital Markets Toni Kaplan - Morgan Stanley Kevin McVeigh - Crédit Suisse George Tong - Goldman Sachs Group Trevor Romeo - William Blair & Company Craig Huber - Huber Research Partners Jeffrey Silber - BMO Capital M ...

PART I. FINANCIAL INFORMATION [Financial Statements](index=13&type=section&id=Item%201.%20Financial%20Statements) This section presents Moody's unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2021, and 2020, including statements of operations, balance sheets, cash flows, and detailed notes [Consolidated Financial Statements](index=13&type=section&id=Consolidated%20Financial%20Statements) The consolidated financial statements show significant revenue and net income growth for the nine months ended September 30, 2021, with total assets increasing to $14.4 billion, largely due to acquisitions Consolidated Statements of Operations Highlights (in millions, except EPS) | Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | **Revenue** | $1,526 | $1,356 | $4,679 | $4,081 | | **Operating Income** | $676 | $642 | $2,330 | $1,944 | | **Net Income** | $474 | $467 | $1,787 | $1,463 | | **Diluted EPS** | $2.53 | $2.47 | $9.51 | $7.73 | Consolidated Balance Sheet Highlights (in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | **Total Current Assets** | $4,255 | $4,509 | | **Goodwill** | $5,898 | $4,556 | | **Total Assets** | $14,414 | $12,409 | | **Total Liabilities** | $11,795 | $10,646 | | **Total Shareholders' Equity** | $2,619 | $1,763 | Consolidated Statements of Cash Flows Highlights (in millions) | Metric | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | | **Net cash provided by operating activities** | $1,706 | $1,488 | | **Net cash used in investing activities** | $(2,161) | $(853) | | **Net cash provided by financing activities** | $135 | $3 | [Notes to Condensed Consolidated Financial Statements](index=21&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes detail key accounting policies and financial data, highlighting significant revenue increases, the $1.9 billion RMS acquisition, and the company's debt structure and segment performance - The company realigned its MA reporting units for goodwill impairment testing in Q2 2021 from five units to two, following a strategic reorganization, with a quantitative assessment as of July 31, 2021, not resulting in any impairment[81](index=81&type=chunk)[82](index=82&type=chunk) - On September 15, 2021, the company acquired RMS, a global provider of climate and natural disaster risk modeling, for a total consideration of **$1.936 billion**, expanding its insurance data and analytics business[117](index=117&type=chunk)[118](index=118&type=chunk) - On October 26, 2021, the Board approved a quarterly dividend of **$0.62 per share**, and on October 13, 2021, Moody's completed a **$250 million minority investment** in BitSight[213](index=213&type=chunk) Revenue by Segment (in millions) | Segment | Q3 2021 Revenue | Q3 2020 Revenue | YTD 2021 Revenue | YTD 2020 Revenue | | :--- | :--- | :--- | :--- | :--- | | **MIS** | $925 | $825 | $2,941 | $2,557 | | **MA** | $601 | $531 | $1,738 | $1,524 | | **Total** | $1,526 | $1,356 | $4,679 | $4,081 | [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=56&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q3 and YTD 2021 financial results, highlighting 13% Q3 and 15% YTD revenue growth driven by MIS and MA segments, increased operating expenses due to acquisitions, and strong liquidity Q3 2021 vs Q3 2020 Performance Summary | Metric | Q3 2021 | Q3 2020 | % Change | | :--- | :--- | :--- | :--- | | **Total Revenue** | $1,526M | $1,356M | 13% | | **Operating Margin** | 44.3% | 47.3% | (300 bps) | | **Adjusted Operating Margin** | 48.3% | 53.2% | (490 bps) | | **Diluted EPS** | $2.53 | $2.47 | 2% | | **Adjusted Diluted EPS** | $2.69 | $2.69 | 0% | YTD 2021 vs YTD 2020 Performance Summary | Metric | YTD 2021 | YTD 2020 | % Change | | :--- | :--- | :--- | :--- | | **Total Revenue** | $4,679M | $4,081M | 15% | | **Operating Margin** | 49.8% | 47.6% | 220 bps | | **Adjusted Operating Margin** | 53.7% | 52.3% | 140 bps | | **Diluted EPS** | $9.51 | $7.73 | 23% | | **Adjusted Diluted EPS** | $9.96 | $8.24 | 21% | - The COVID-19 pandemic has not had a material adverse impact on reported results to date and is not expected to in the near-term, but longer-term impacts remain uncertain[217](index=217&type=chunk) [Results of Operations](index=59&type=section&id=Results%20of%20Operations) Q3 2021 revenue increased 13% to $1.5 billion, driven by MIS and MA growth, while operating and SG&A expenses rose 24% due to acquisitions and compensation, impacting Q3 margins - MIS Q3 revenue grew **12% to $925 million**, driven by a **63% surge in Structured Finance (SFG)** and a **6% rise in Corporate Finance (CFG)**, primarily from strong U.S. bank loan and CLO activity[230](index=230&type=chunk)[246](index=246&type=chunk)[254](index=254&type=chunk) - MA Q3 revenue increased **13% to $601 million** (**8% organic growth**), led by a **15% rise in RD&A** from strong demand for KYC solutions and data feeds, while ERS organic revenue declined 2% due to a strategic shift[230](index=230&type=chunk)[271](index=271&type=chunk)[278](index=278&type=chunk) - Q3 operating and SG&A expenses rose **24% to $789 million**, driven by inorganic growth from acquisitions, including **$22 million in RMS transaction costs**, higher incentive compensation, and strategic technology investments[231](index=231&type=chunk) - For the nine months ended Sep 30, 2021, MIS revenue grew **15% to $2.9 billion**, and MA revenue grew **14% to $1.7 billion**, with the total operating margin expanding by **220 basis points to 49.8%**[280](index=280&type=chunk)[281](index=281&type=chunk) [Liquidity and Capital Resources](index=89&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity, with operating cash flow of $1.7 billion for the first nine months of 2021, while cash used in investing activities significantly increased to $2.2 billion due to acquisitions Cash Flow Summary (Nine Months Ended Sep 30, in millions) | Flow | 2021 | 2020 | | :--- | :--- | :--- | | **Operating Activities** | $1,706 | $1,488 | | **Investing Activities** | $(2,161) | $(853) | | **Financing Activities** | $135 | $3 | - The increase in cash used for investing activities was primarily due to **$1.3 billion more in cash paid for acquisitions** in 2021 compared to 2020[330](index=330&type=chunk) - As of September 30, 2021, approximately **$1.2 billion remained under the share repurchase authorizations**[337](index=337&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=98&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company reports no material changes to its market risk during the first nine months of 2021, referring to its 2020 Form 10-K for further discussion - There have been no material changes to the Company's market risk during the first nine months of 2021[367](index=367&type=chunk) [Controls and Procedures](index=98&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective as of September 30, 2021, noting a new ERP system implementation automated certain controls without materially affecting overall internal control - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[368](index=368&type=chunk) - In Q3 2021, the company completed the second phase of a new ERP system implementation, automating certain controls without materially changing the overall internal control environment[369](index=369&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=99&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to Note 18, 'Contingencies,' in the financial statements for information regarding various legal and regulatory proceedings incidental to the business - Information regarding legal proceedings is provided in Note 18, 'Contingencies,' of the financial statements[372](index=372&type=chunk) [Risk Factors](index=99&type=section&id=Item%201A.%20Risk%20Factors) The company reports no material changes from the significant risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020 - There have been no material changes from the risk factors disclosed in the company's 2020 Form 10-K[373](index=373&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=99&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q3 2021, Moody's repurchased 340,807 shares at an average price of $374.70, with approximately $1.203 billion remaining under the share repurchase program as of September 30, 2021 Share Repurchases for Q3 2021 | Month | Total Shares Purchased | Average Price Paid | Shares Purchased Under Program | | :--- | :--- | :--- | :--- | | **July** | 283,386 | $374.04 | 277,547 | | **August** | 56,345 | $377.98 | 55,636 | | **September** | 1,076 | — | — | | **Total** | **340,807** | **$374.70** | **333,183** | - As of September 30, 2021, approximately **$1.203 billion of share repurchase authority remained available**[375](index=375&type=chunk) [Exhibits](index=100&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including agreements for the RMS acquisition, supplemental indentures for new debt, and CEO/CFO certifications - Exhibits filed include the Purchase Agreement for the RMS acquisition, supplemental indentures for new senior notes due 2031 and 2041, and CEO/CFO certifications[377](index=377&type=chunk)

Moody's Corp (NYSE:MCO) Q2 2021 Earnings Conference Call July 28, 2021 11:30 AM ET Company Participants Shivani Kak - Head, IR Robert Fauber - President, CEO & Director Mark Kaye - SVP & CFO Conference Call Participants Manav Patnaik - Barclays Bank Kevin McVeigh - Crédit Suisse George Tong - Goldman Sachs Group Toni Kaplan - Morgan Stanley Alexander Kramm - UBS Owen Lau - Oppenheimer Jeffrey Silber - BMO Capital Markets Craig Huber - Huber Research Partners Andrew Nicholas - William Blair & Company Ashish ...

Financial Data and Key Metrics Changes - Moody's reported a revenue growth of 24% in Q1 2021, with adjusted diluted EPS increasing by 49% to $4.06 [8][9] - Adjusted operating income rose 41% to $914 million, and the adjusted operating margin expanded by 680 basis points to 57.1% [9][20] - The company updated its full-year 2021 guidance, projecting revenue to increase in the high single-digit percent range and adjusted diluted EPS to be in the range of $11 to $11.30 [8][24] Business Line Data and Key Metrics Changes - Moody's Investor Service (MIS) generated over $1 billion in revenue, up 30% year-over-year, marking the first time MIS revenue exceeded $1 billion in a single quarter [8][19] - Moody's Analytics (MA) revenue grew by 14%, with subscription-based products driving this growth [8][20] - MIS's adjusted operating margin expanded to 67.7%, while MA's adjusted operating margin increased to 32.9% [20][24] Market Data and Key Metrics Changes - Issuance volumes reached their highest level in over a decade, with leveraged loans and high-yield bond issuance increasing by 94% and 85%, respectively [10][11] - The global speculative-grade default rate is expected to decline to approximately 3% to 4% by year-end, improving the outlook for corporate defaults [11][23] - Investment-grade issuance is expected to decline by approximately 30% for the full year, while high-yield bonds and leveraged loans are projected to be flat and up 55%, respectively [25][26] Company Strategy and Development Direction - The company is focused on innovation and integrating new features into its products to meet evolving customer needs, particularly in areas like ESG and climate [13][15] - Moody's is making strategic investments in KYC, commercial real estate, and ESG, aiming to enhance its risk assessment capabilities [44][45] - The company is also integrating recent acquisitions to improve its offerings and customer solutions [17][18] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the economic backdrop, which supports business growth and capital investment, while acknowledging potential challenges such as a third wave of infections [11][68] - The company anticipates a modest decline in issuance in the second half of 2021, as many issuers are expected to fulfill their funding needs earlier in the year [25][49] - Management highlighted the importance of economic growth as a key driver for the business over the medium and long term [78] Other Important Information - The company is maintaining its expense growth expectations in the mid-single-digit percent range while focusing on cost efficiency initiatives [24][29] - Moody's free cash flow forecast is expected to be between $2.1 billion and $2.2 billion, with share repurchases anticipated at approximately $1.5 billion [25] Q&A Session Summary Question: Insights on the full-year guidance raise - Management noted that the full-year adjusted EPS guidance was increased to approximately $11.15, reflecting strong operating performance from MIS [34] Question: Clarification on MIS margins - Management explained that the guidance for MIS margins is approximately 61%, with expectations for lower margins in the latter part of the year due to tough comparables and issuance activity [36] Question: Opportunities in insurance and commercial real estate - Management discussed the growth in the insurance business driven by IFRS 17 compliance and the integration of data analytics in commercial real estate solutions [40][41] Question: Update on M&A opportunities - Management emphasized a focus on acquiring assets that enhance risk assessment capabilities and meet evolving customer needs [44][45] Question: Clarification on issuance outlook - Management acknowledged that Q2 2020 had a surge in issuance, making it a tough comparable, and expects a modest decline in issuance in Q2 and Q3 [49][50] Question: Discussion on refinancing pull-forward activity - Management indicated that many borrowers pulled forward their 2021 funding plans to take advantage of favorable rates, impacting the issuance outlook [75]