Moody's Corporation (MCO) Earnings Call Transcript & Summary

Yes. And maybe in answering that, I'll start with talking about why I think we're uniquely positioned to help with customers answer ESG-related questions and to bring transparency to the market. And that's really because Moody's has collected and considered ESG factors for many years as part of our credit analysis process in MIS. And ESG consideration is obviously becoming more important to credit going forward. The proprietary data and analytics we have in Moody's Analytics has allowed us also to create unique insights and analysis that very few others can replicate. Last, I would say, the investments that we've made in ESG will enable us to create a best-in-class set of assessments, research, data and analytics. So maybe with that backdrop, I'd say, the philosophy that does underpin our ESG strategy is threefold. First, integration in MIS, integration in MA and then the stand-alone ESG commercial opportunities, that's a little bit to your point of what we spoke about in our press release this morning. On the MIS integration side, we have obviously direct relationships with many issuers, which has enabled a better collection of data. And it's also about how we integrate ESG considerations then into our credit ratings and methodologies. For those of you who have access to moodys.com, a good example would be the Ford Motor company, where you can clearly see how we've incorporated ESG considerations from both Vigeo Eiris and Four Twenty Seven into our analysis of credit. On the MA side, we've been integrating Vigeo Eiris and Four Twenty Seven into multiple the MA products, for example, into our REIS platform. And we rolled out recently a new ESG and Climate Risk hub, and you can see that at moodys.com/esg. And of course, there are additional stand-alone opportunities that Vigeo Eiris offers through green evaluations or Four Twenty Seven through a climate modeling and physical risk analysis on their locations across the globe.

Got it. And just in terms of monetizing these ESG products, I think Vigeo Eiris and on the analytics side, I think we understand that incremental subscriptions, data sales. On the rating side, can you just help us understand embedding the ratings into your -- or the ESG evaluations into your ratings business? Is that incrementally priced higher? Or what are the incremental monetization opportunities on the rating side specific to ESG?

Yes. I think there really are 2 primary benefits of incorporating ESG into ratings. The first is it enhances the relevance of the ratings, which is very important in reinforcing the overall system dynamics. And secondly, it provides us an opportunity to offer a value-add or enhancements to both issuers through the second part of the opinion or to investors through the quality of the research that we provide. Now we spoke previously around revenue associated with the ESG business of around $15 million to $20 million this year, but the pace at which we're growing is quite impressive. And that's really the point I wanted to emphasize here.

Got it. And I'm sure that you've done a lot of acquisitions to build up the ESG portfolio. Is there a strong pipeline there? Or do you have kind of the components you envisioned?

I feel, for the most part, we have the building block components across Moody's corporation that we are -- are necessary to continue to enhance and build our ESG business. Whether that's VE and Four Twenty Seven providing those party -- second-party opinions or assessments or the climate risk solution or the analytics and the know-how, the thought process on the MIS side or the solution sets that we have on the MA side. So we feel pretty comfortable with our asset collection at this point to provide -- to be able to provide an attractive product suite to the market.

Got it. And maybe just one last one on ESG. Obviously, there's a lot of external efforts in terms of selling ESG offerings. Internally, we've seen a whole lot of announcements as well from Moody's on trying and being ESG-friendly investment, if that's the right way to phrase it. Just a quick comment there on how -- what top priority there -- it is there?

Yes. So in terms of ESG as a corporate priority for Moody's, this is very high up on our list. We've taken a number of steps, I would say, over the last 18 to 24 months. And at this point, I'd consider us to be a leader in the measurement disclosure and the iterative improvement of ESG metrics. And just some examples, we joined the Financial Stability Board task force and climate-related financial disclosures in 2016. We're a participant of the UN Global Compact. And we're signatory to the principles for responsible investment. And we report on ESG using the recommendations of the Sustainability Accounting Standards Board. We also announced that we're committed to a carbon neutrality. We were carbon neutral as a company in 2019. And we are purchasing offsets to retroactively be carbon neutral all the way back to September 2000 when we became a public company. We are looking to procure 100% renewable energy beginning this year. And our science-based targets were validated by the science-based targets initiative, which is a collaboration between CFP, the UNGC and the World Resources Institute. And so we're feeling very proud as a company for the strides that we're making in ESG as a corporation.

Got it. That's great to hear. Maybe just shifting to one of the other investment areas, which is CRE or commercial real estate. A lot of the investors we talk to are very familiar with the CoStar Group. And REIS, who you acquired is, I guess, in the consensus view, a very distant second competitor, if at all. So just curious on why Moody's decided REIS was an acquisition to make? And maybe just help us understand what this commercial real estate strategy is from Moody's perspective?

Sure. Another very good question, Manav. With the REIS acquisition, what we really liked about that was the proprietary data set of over 18 million U.S. commercial properties that REIS had built over, call it, approximately 40 years. We already provided a solution in ERS for commercial and industrial lending. And obviously, to your point, CRE is the second largest asset type on bank's balance sheets. As a management team, we see real estate as a natural adjacency. And we feel we are uniquely positioned to deliver an integrated offering, featuring property, economic, climate, credit, CMBS data and analytical tools. And since we're already doing a lot of the business with much of the same customer base, including banks, insurance companies and CMBS investors, it made a lot of sense for us to acquire REIS. On the integration side, we did recognize that when we acquired REIS, that it would require some patients, particularly around product strategy and customer relationship management. And we've done a lot of work around this, especially on the product side. For example, we rolled out a new and improved REIS website to access site earlier this year. A good example of product specifically could be the commercial location score, which we launched. And that allows CRE investors, lenders and developers to evaluate the suitability of more than 7 million commercially zoned parcels in the U.S. The commercial locations are actually compute a numerical score for each parcel. For each use case to think about an office or retail or multifamily spots, which can then be used to complement existing site risk and investment assessment analysis. And I would say key to this product development was the creation of this REIS network, which does utilize the power of that proprietary REIS database and how we're transforming it to be a scalable ecosystem around which we're building today.

Got it. And maybe just a little bit more on the REIS network. I mean, it sounds a little bit like the BBD of real estate maybe, if that's the right way to put it. But I guess, how does -- what's going to be the differentiating factor of these partnerships with these third-party players versus the competition out there?

Yes. I think the network that we have created for third-party real estate information service providers is still relatively early, but it has proven to be quite powerful. I'd say that while the proprietary data that I spoke about a minute ago is key, we are very disciplined in our investments and acquisitions. So partnerships allow us to add to the power of the network while not having to acquire everything as well as incorporate some of the nontraditional data sources like traffic, population density, sentiment data and news, et cetera. It's beneficial for our partners because they get -- then get access to a wider platform and Moody's large customer base, which in turn then create network effects, of course, you're familiar with those. And maybe just some specifics around this. So we have signed up a number of partners including CompStak, Rockport VAL, enrich data, retail market point to enhance this real estate network that we're beginning to build.

Got it. Maybe quickly moving on into KYC. You guys call it KYE, I guess. But I think conceptually, KYC completely makes sense. It's something the banks and everyone been trying to do forever. But for some reason, it never has been able to scale or become this big opportunity for the leading companies. You just made an acquisition. So maybe talk about how that positions you and maybe how quickly we can expect that to scale.

Sure. Our biggest and most transformative acquisition of the company to date has been BVD, which closed in August 2017. And BVD's public and private company database, as you can see on the Slide 44, has grown from 220 million entities when we announced the acquisition to over 375 million today. It's incredibly impressive. If I look at Slide 43, you'll see one of the benefits that we talked about when we announced the BVD acquisition is that it would diversify Moody's Analytics customer base significantly beyond financial institutions and further into corporates, professional services and governments, and that's really been the case. The market demand for BVD is also enabled by the myriad of use cases, including credit risk, transfer pricing and KYE. And we have seen significant demand for our compliance products, in particular, and that's really been driving our continued expansion into that KYE space. If you can see back here on Slide 44, with the RDC acquisition that we completed in February of this year, we acquired a world-class -- or world-class, world-leading curated database with over 12 million individual publicly exposed person profiles or PEP profiles as well as a sophisticated AI decisioning platform. And that means that together, BVD and RDC can offer a more efficient one-stop customer solution that otherwise would be at least very time-intensive and costly to build. The other benefit here is that BVD and RDC have a specialized and unique data set that is difficult to replicate. You can think about RDC as being focused on individuals and primarily on selling to U.S. companies, whereas BVD's dataset is more in private companies with a stronger distribution outside of the U.S. And that makes that fit between those 2 firms very complementary. And then I'm going to end this answer with just to remind investors that BVD and RDC, we are targeting a 100 -- BVD and RDC do have a combined 150 million in KYC pro forma-related sales in 2019, and we're looking to target more than doubling that by 2023.

Got it. Maybe we can move on, time seems to be moving fast here. But we can't talk about opportunities without addressing China. And just wanted to get your latest update there. You have a 30% stake in one of the leading rating agencies in China. Your competitors, S&P and Fitch have gotten individual licenses to go in. What's Moody's' plan as of now?

Sure. So China remains a great opportunity, and it's an area that we will continue to invest in. As you can see on Slide 30, China is the second-largest bond market in the world. It's been growing at nearly 20%. We hold a 30% stake in CCXI, and we've had strong success with our partnership. CCXI is one of the largest domestic agencies in China with over 1,700-related credits. In 2019, we received $17 million in attributable income from this JV. So it's clearly profitable. We also have a very strong position in the cross-border market with over 400 rated credits as well as a very active Moody's Analytics business in Mainland China. That, combined with our cross-border business, resulted in $176 million in revenue for 2019. And then just to tie back to our ESG discussion from earlier, we have also invested in Syntao Green Finance, which is data and analytics on a number of Chinese ESG providers.

Got it. And I guess just in terms of the strategy, though, like are you sticking with the partnership? Or do you have a separate license, a filing in there with the regulators? Just a quick comment there.

Sure. We believe Moody's can ultimately be very helpful to Chinese companies and the economy in creating the conditions necessary for additional foreign investment. And I make this point just because current estimates are only that around 2% of Chinese domestic corporate that is owned by investors outside of China. We think many international investors are interested in investing in China and their credit markets. And credit investors rely on Moody's opinions and analysis. So we absolutely believe there is a role for us to play in helping to foster greater international investment. Obviously, I spoke earlier about our loan across border markets. And I think the way I'd like to sort of focus this answer is really, we want to participate in a way that is constructive and supportive of the People's Bank of China or the PBOC's financial market policy goals.

Okay. That's fair enough. In terms of other emerging markets, you just mentioned you took a stake in Malaysia. I feel like when you guys bought or started taking a stake in ICRA, and S&P took a stake in CRISIL, I think we all thought, okay, India could be the next big thing, but it did not. So how should we think about emerging markets? Just kind of a steady eddy, you bring the value-add as Moody's as a brand? Or are there other areas that could really show some good growth?

Yes. So you can see here on Slide 29, India, Latin America, South Korea, all represent interesting opportunities to us. Our emerging market revenue growth CAGR from 2019 -- from 2009 to 2019 was approximately 14% per annum. We estimate there's around $700 million in the total addressable market from the emerging markets, domestic credit rating revenue. And Moody's has a strong position in most of these markets. In South Korea, we have our affiliate KIS. As I mentioned earlier, we recently invested in MARC in Malaysia. And we have a strong position in South America where Moody's or its affiliated companies now assigned domestic credit ratings in a plethora of countries, including Argentina and Brazil, Chile, Mexico, et cetera. We also participate in the cross-border issuance from larger companies in those emerging markets. And so our presence here is quite noted now.

Got it. All right. That's helpful. Before we leave the ratings business, just a question on margins. You guys have Moody's, MIS margins have been quite impressive, and they only keep getting better. So how do you, as a CFO balance necessary investments with the leverage you get? And it seems like there's no ceiling on margins. I would just appreciate how you approach that.

Yes. That's very -- also very, very common, but a very good question to ask. So maybe I'll answer this with respect specifically to MIS. Assuming we achieve the approximately 58% adjusted operating margin guidance for MIS, which we stated on July 30. That would be around -- that would be at least 400 basis points of margin expansion over the last 5 years. I think from a margin perspective, and we said this previously, don't see necessarily these levels or that level as a cap, but it's reasonable to expect incremental margin growth in MIS to be slower going forward than over the last 5 years. And we apply the same philosophy to MIS margins as we do to margins for the entire business, so that's a more of a broader NCL comment. For example, the important point here is to drive sustainable margin expansion over the long term while also reinvesting for growth. And there are certainly levers that we think about using to achieve that. For example, staffing, automation, for example, financial spreading, natural language processing, for example, in generating the tier sheets for thousands of municipal credits. But it's really about making sure that we're using our resources efficiently and continuing to provide value to our customers.

Got it. I didn't realize we're almost nearing our time here, but maybe on the margin front, if I can have you end with Moody's Analytics, and just talk about that those margins have obviously been increasing, adding BVD and the likes, clearly helps to have those great assets with high margins in there. But how should we think about the trajectory of Moody's Analytics over the medium term?

Yes. I think Moody's Analytics also presents a very good opportunity for us to continue with our ongoing steady, consistent margin improvement and expansion. And there are a couple of key drivers to that. Maybe I'll just spend a minute on one, ERS specifically about the transition to cloud and cloud-based software. And ERS like some of the other businesses, a very unique hard-to-replicate data set, with an analytics solution on top of that. And you can see through some of the analysis and slides that we present in the Investor deck, we had significant recurring revenue growth from improved subscription sales over time. And that has certainly contributed to the ongoing margin improvement, including our ability to generate strong products to support CECL, IFRS 9, IFRS 17, et cetera. Manav, I agree, time seem to go very quickly this morning. There were some great questions, and I very much appreciate yourself and Barclays inviting me to talk this morning.

Yes. Thank you, Mark. Look, it's great to hear. There's a lot of good things going on at Moody's, and there was a lot of other great things I want to talk about, but I'll get to those over the course of the day. So thank you again very much for being here.

Thanks, Manav.

All right. Take care, everybody.