Moody's Corporation (MCO) Q2 2015 Earnings Report, Transcript and Summary

Welcome ladies and gentlemen to the Moody's Corporation Second Quarter 2015 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to turn the conference over to Salli Schwartz, Global Head of Investor Relations. Please go ahead.

Thank you. Good morning everyone and thanks for joining us on this teleconference to discuss Moody's second quarter results for 2015 as well as our updated outlook for full-year 2015. I am Salli Schwartz, Global Head of Investor Relations. This morning Moody's released its results for the second quarter of 2015 as well as our updated outlook for full-year 2015. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com. Ray McDaniel, Moody's President and Chief Executive Officer, will lead this morning's conference call. Also making prepared remarks on the call this morning is Linda Huber, Moody's Executive Vice President and Chief Financial Officer. Before we begin I call your attention to the Safe Harbor language which can be found toward the end of our earnings release. Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In accordance with the act I also direct your attention to the management's discussion and analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2014 and in other SEC filings made by the company which are available on our website and on the Securities and Exchange Commission's website. These, together with the Safe Harbor statement, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I would also like to point out that members of the media may be on the call this morning in a listen-only mode. I'll now turn the call over to Ray McDaniel.

Thanks, Salli. Good morning and thank you everyone for joining today's call. I'll begin by summarizing Moody's second quarter 2015 results. Linda will follow with additional financial detail and operating highlights. On the legal front we continue to address the litigation matters and inquiries disclosed in our SEC filings. As we don't otherwise have any legal or regulatory update to provide at this time I will then conclude our prepared remarks with comments on our updated outlook for 2015. After our remarks will be happy to respond to your questions. In the second quarter Moody's delivered revenue of $918 million, the 5% increase from the second quarter of 2014 was driven by strong U.S. performance partially offset by challenging European conditions. U.S. revenue was up 18% from the second quarter of 2015 while non-U.S. revenue was down 10% from the prior-year period. Operating expenses for the second quarter was $499 million, up 8% from the prior-year period. Operating income was $419 million, a 2% increase from the second quarter of 2014. Adjusted operating income defined as operating income less depreciation and amortization was $447 million, up 3% from the same period last year. Operating margin for the second quarter was 45.7% while adjusted operating margin was 48.7%. Diluted earnings per share of $1.28 increased 14% from the prior-year period's non-GAAP EPS of $1.12 which excluded a $0.36 gain resulting from Moody's acquisition of a controlling interest in ICRA Ltd. in the second quarter of 2014. Turning to year-to-date performance Moody's revenue for the first six months of 2015 was $1.8 billion, an increase of 9% from the first six months of 2014. Revenue from Moody's Investors Service was $1.2 billion, up 8% from the prior-year period. Revenue from Moody's Analytics was $542 million, up of 11% from a year ago. Operating expense for the first six months of 2015 was $993 million, up 11% from 2014. Much of this year-to-date growth reflects incremental expense from our 2014 acquisitions. As we approach the end of 2015 the impact of these expenses will moderate. Therefore we are maintaining our full-year guidance for expenses to grow in the mid-single-digit percent range. Operating income of $791 million increased 6% from 2014. Adjusted operating income of $847 million increased 7% from the prior-year period. Operating margin for the first half of 2015 of 44.3% was down from 45.4% in 2014. Adjusted operating margin of 47.5% was down from 48.2%. On a constant currency basis and excluding or 2014 acquisitions, operating margin and adjusted operating margin would each have increased approximately 60 basis points year-over-year. Earnings per share for the first six months of 2015 was $2.39, up 13% from the prior-year period's non-GAAP EPS of $2.11 which excluded the $0.36 ICRA gain. We are reaffirming our 2015 earnings-per-share guidance of $4.55 to $4.65 despite uneven global growth and foreign currency volatility. I'll 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 second quarter increased 5% to $918 million. On a constant currency basis Moody's total revenue increased 10% year-over-year. U.S. revenue of $546 million was up 18% from second quarter of 2014. Non-U.S. revenue of $372 million was down 10% and represented 41% of Moody's total revenue. Recurring revenue of $439 million represented 48% of total revenue. Looking now at each of our businesses starting with Moody's Investors Service, total MIS revenue for the quarter increased 2% from the prior-year period to a record $639 million. Foreign currency translation unfavorably impacted MIS revenue by 5%. U.S. revenue increased 17% to $412 million primarily as a result of strong performance in investment grade, structured finance and public finance. Revenue outside the U.S. of $227 million declined 17% primarily as a result of a slowdown in European issuance as well as the unfavorable impact of foreign currency translation. Non-U.S. revenue represented 36% of total MIS revenue. Moving now to the lines of business for MIS, first global Corporate Finance revenue of $320 million in the second quarter was essentially flat to the prior-year period. This result reflected strong U.S. investment grade issuance primarily from increased M&A activity, largely offset by lower levels of non-U.S. speculative grade issuance as well as a challenging prior year comparable in Europe. U.S. Corporate Finance revenue increased 18% while non-U.S. revenue decreased 25%. Second, global Structured Finance revenue for the second quarter was $121 million, 10% above the prior-year period, primarily the result of strength in U.S. structured credit, RMBS and commercial real estate finance. U.S. Structured Finance revenue was up 20% while non-U.S. revenue was down 10%. Third, global Financial Institutions revenue was $90 million, decreased 2% compared to the prior-year period, primarily given unfavorable foreign currency translation on a weaker euro, partially offset by stronger U.S. bank rating revenue. Excluding the impact of foreign currency translation, global Financial Institutions revenue was up 6% from the prior-year period. U.S. Financial Institutions revenue was up 10% while non-U.S. revenue was down 9%. Fourth, global Public, Project & Infrastructure Finance revenue increased 2% year-over-year to $100 million. Increased U.S. public finance issuance partially offset by a decline in global project and infrastructure revenue against a strong prior-period comparable. U.S. Public, Project & Infrastructure Finance revenue was up 10% while non-U.S. revenue was down 11%. MIS Other which consists of non-rating revenue from ICRA and Korea Investor Service or KIS contributed $8 million to MIS revenue for the second quarter compared to $3 million in the prior-year period. Turning now to Moody's Analytics, global revenue for MA of $279 million was up 12% from the second quarter of 2014. Foreign currency translation unfavorably impacted MA revenue by 6%. U.S. revenue grew by 23% year-over-year to $134 million. Non-U.S. revenue increased by 4% to $145 million and represented 52% of total MA revenue. Excluding revenue from our 2014 acquisitions of WebEquity Solutions and Lewtan Technologies, MA revenue grew 7%. Now moving to the lines of business for MA, first global Research, Data & Analytics or RD&A, revenue of $158 million increased 11% from the prior-year period and represented 56% of total MA revenue. Growth was mainly due to the October 2014 acquisition of Lewtan Technologies as well as strong performance in the credit research and content licensing business. U.S. RD&A revenue was up 19% and non-U.S. revenue was up 2%. Second, global Enterprise Risk Solutions or ERS revenue of $83 million grew 24% from last year resulting from strong project delivery across all product offerings as well as the July 2014 acquisition of WebEquity Solutions. ERS revenue is up 44% in the U.S. and 14% outside the U.S. Trailing 12-months revenue in sales for ERS increased 41, excuse me, 31% and 11% respectively. As we've noted in the past due to the variable nature of project timing and completion, ERS revenue remains subject to quarterly volatility. Third, global Professional Services revenue declined 4% to $38 million primarily due to the year-over-year decline of the Canadian dollar as well as the effect of exiting certain Copal Amba product lines in late 2014. U.S. Professional Services revenue increased 10% while non-U.S. revenue decreased 10%. Turning now to expenses Moody's second quarter expenses increased 8% to $499 million, primarily due to expenses from our 2014 acquisitions as well as compensation costs associated with new hires and merit increases. Foreign currency translation favorably impacted expenses by 5%. As Ray noted reported operating margin and adjusted operating margin were 45.7% and 48.7% respectively for the second quarter. On a constant currency basis and excluding our 2014 acquisition, operating margin and adjusted operating margin would have been approximately flat. Moody's effective tax rate for the quarter was 30.4%, down from 33.1% in the second quarter of 2014. The year-over-year reduction was due to a favorable tax ruling from New York State and a change in the New York City tax law regarding income apportionment. Now I'll provide an update on capital allocation. During the second quarter of 2015 Moody's repurchased 2.2 million shares at a total cost of $235 million or an average cost of $107.35 per share and issued 374,000 shares as part of its employee stock-based compensation plan. Over the first half of 2015 Moody's repurchased 6 million shares at a total cost of $601 million or an average cost of $99.61 per share. Outstanding shares as of June 30, 2015 totaled 200.3 million shares, down 5% from the prior year. As of June 30, 2015 Moody's had $1 billion of share repurchase authority remaining. At quarter end Moody's had $3.1 billion of outstanding debt and $1 billion of additional debt capacity available under its revolving credit facility. Total cash, cash equivalents and short-term investments at quarter end were $2 billion, up $88 million. Free cash flow in the first six months of 2015 was $554 million, up 32% from the first six months of 2014 primarily due to changes in working capital. As of June 30, 2015 approximately 67% of Moody's cash holdings were maintained outside the U.S. and with that I'll turn the call back over to Ray.

Thanks, Linda. I'll conclude this morning's prepared comments by discussing changes to our updated full-year guidance for 2015. A full list of Moody's guidance is included in our second quarter 2015 earnings press release which can be found in the Moody's investor relations website at ir.moodys.com. Moody's outlook for 2015 is based on assumptions about many macroeconomic and capital market factors including interest rates, currency exchange rates, corporate profitability and business investment spending, mergers and acquisitions, consumer borrowing and securitization and the amount of debt issued. These assumptions are subject to some degree of uncertainty and results for the year could differ materially from current outlook. Our guidance assumes foreign currency translation at end-of-quarter exchange rates. Specifically our forecast reflects exchange rates for the British pound and the euro of $1.57 to £1 and $1.11 to €1 respectively. Certain components in Moody's 2015 guidance have been modified to reflect the company's current view of business conditions as follows. Global MIS revenue for full-year 2015 is still expected to increase in the mid-single-digit percent range. However, U.S. revenue is now expected to increase in the low-double-digit percent range while non-U.S. revenue is now expected to be approximately flat. Within MIS Structured Finance revenue is now expected to grow in the mid-single-digit percent range and Public, Project & Infrastructure Finance revenue is now expected to increase in the low-double-digit percent range. Global MA revenue for the full-year 2015 is still expected to increase in the mid-single-digit percent range. Within MA Professional Services revenue is now expected to decrease in the high-single-digit percent range. The effective tax rate is now expected to be approximately 31% to 32%. And capital expenditures are now expected to be approximately $100 million to $110 million. Before we move to the question-and-answer session I would like to highlight that Moody's Investors Service was recently voted the best credit rating agency in a 2015 poll of U.S. fixed income investors conducted by publisher Institutional Investor. This is the fourth year in a row MIS has won this award. I appreciate the market's recognition of our efforts and I applaud the accomplishments of those in the MIS business. This concludes our prepared remarks. And joining us for the question-and-answer session is Michel Madelain, President and Chief Operating Officer of Moody's Investors Service and Mark Almeida, President of Moody's Analytics. We'd be pleased to take any questions you may have.

[Operator Instructions]. We will go first to Manav Patnaik at Barclays.

There were obviously a lot of moving parts with issuance this quarter. There are two that sort of stuck out to me which I wanted to ask you about. So the first one was I guess you guys mentioned RMBS deliberately in the press release, so maybe just some color there in terms of how broad-based that is for you guys to call that out. And then the other aspect was just in CLOs, the total issuance seemed to have been down but it looks like you guys are doing okay in there. So are there certain market share dynamics that you can highlight there?

Well really, so regarding the Structured Finance I think we've seen a good level of activity essentially in some segments of the RMBS market. And we've seen whether it's in the single-family rental space or some of the [indiscernible] as well as some increase in Jumbo activity. So that's really what we had. Can you go back to -b can you maybe restate your other question?

Yes, your performance in the CLO market, like it seems to be minus b.

CLO, it's a combination, I think it's essentially driven by our level of engagement in that segment of the market basically. That's really what drove that performance.

And I would just add that the CLO issuance pipeline it remains strong. And some of the recovery in the leverage loan sector in the second quarter compared to the first quarter, probably is going to give the CLO market some legs going into the second half of the year, although we do expect that to eventually slow.

And then Linda, just I think if you can just update us typically on the total OpEx bridge you like to give us through the end of the year. And I'm not sure if you want to, I know you haven't historically, but if I look at the Moody's ratings margins, the MIS margins, clearly it's still healthy but it seems to have some tough comparisons. How, depending on I guess the level of hiring as you mentioned, how should we think about how that margin should progress?

Sure. I'm sorry, you were looking for what regarding operating expenses?

You know how you last quarter last quarter I think you gave the bridge that it should ramp up to like $40 million by the end of the fourth quarter.

The view now given what we're seeing at the end of the second quarter on the expense ramp would indicate that we expect that to be about $30 million increase from the second quarter number to the fourth-quarter number. Now we've cautioned that a number of variables can impact that including general expense timing, FX movement and incentive compensation accruals. I would caution that obviously if we do better than plan generally our incentive compensation accrual would increase. And of course if we do worse than plan the incentive compensation accrual would decrease. So generally, though, we think the midpoint case is about $30 million of ramp. On MIS margins I think we would note that we are providing some reinvestment in the business which we think is the right thing to do at this point because the businesses, both businesses are performing very strongly and we're really pleased with the growth progress of both businesses. 10% growth constant currency is really pretty remarkable in an overall S&P market which is less than 1% growth for this quarter. So we think we're doing pretty well. We don't give future guidance on margin side division so I think we'd rather just leave that one alone if that's okay.

We will go next to Bill Bird at FBR.

I was wondering if you could just give us your general thoughts on the new issue pipeline and maybe any commentary on what you're seeing in Europe post the Greek stand-off? Thank you.

Sure, Bill. I'll take a shot at that. And again these of the views we gathered yesterday from U.S. capital markets desks of various investment banks. This information first is just for the U.S. dollar market. And it doesn't align with how we report. And these numbers include both financial and non-financial issuers. So again I'll go through the U.S. first and then I'll make some comments on Europe. And we would note the sort of remarkable difference in the two market areas which I'm sure Michel can speak about later regarding Europe. First of all, in U.S. investment-grade bonds, July was $100 billion month. The first half of 2015 we've seen $700 billion of U.S. investment-grade issuance which is up 20% year-over-year. For the full year the expectation is now $1.25 trillion which is up 15% year-over-year. You'll recall we started this year with a forecast that was supposed to be down 5% to 10%. So again the variability in forecast must be noted as we move through the year. The state of the U.S. investment-grade market is very strong. February, March, April, May and July have all set monthly record issuance levels and the prevalence of the Jumbo deals have continued to drive U.S. investment-grade activity. The current pipeline is above average and we are seeing rates which have remained reasonably low and that has driven M&A activity and there is a significant backlog of announced M&A activity that needs to be funded. Now turning to high-yield bonds, the second part of this $5 billion of issuance in July 1, the first half of 2015 $180 billion which is fat year-over-year. Full year 2015 is expected to be $300 billion which is about flat as well. The current high-yield market is described as okay. That's a technical term. The LBO pipeline continues to underwhelm, it is what we're noting while corporate M&A further accounts for an increase in share of issuance. And the current pipeline is noted as average. Leverage loans, in July we saw $10 billion of issuance, in the first half of 2015 $190 billion which is down 30% year-over-year and the full year is expected to be $360 billion which is viewed to be down 15% year-over-year. Interestingly the loan market right now is currently feeling stronger than the high-yield bond market and the lack of supply and continued CLO issuance is forming attractive supply-demand technicals. Right now the pipeline is average to above average, so we're seeing some slight moderation in the conditions that were brought about by the SNC, the shared national credit program that we discussed on the previous call. Moving now to Europe, the situation in Europe is as different as a number of us have seen it in many years of working here. The euro investment-grade market has been characterized by lower supply due to European market volatility and instability driven by the Greek situation. However, reverse Yankee issuance remains very active in the European market and I would caution that we book European, I'm sorry, we book reverse Yankee issuance in the U.S. in the domicile of the issuer as opposed to that those bonds are actually being marketed in Europe. Market tone has gotten stronger following the situation with Greece having some resolution and we see some companies opportunistically issuing in Europe. Specifically Apple has a $1.25 billion sterling issue in the UK market today. European high yield saw a slowdown in the second quarter given the Greek situation. And there's been no high-yield issuance in July, although some issues are currently being looked at and we expect that the pace of activity may now pick up. So again I think the headline here is broadly divergent conditions between the U.S. which is quite strong and Europe which is a good deal weaker.

And then separately I just was wondering if you could talk about the margin lift at MA, some of the drivers and whether you think that kind of lift is durable.

As we've been discussing we've been making a lot of effort across MA but particularly in Enterprise Risk Solutions to expand the margin. And we're seeing some of that start to come through and we're seeing good performance with our margin expansion effort. So we're pleased with what we're doing. And we are very focused on doing everything we can to sustain that. I'm not in a position to declare victory and to promise that we're going to be able to continue to drive this degree of margin expansion quarter after quarter. But we're doing everything we can to drive more profitability in the business. And we're optimistic about being able to sustain this over a long period of time.

And we will go next to Peter Appert at Piper Jaffray.

So Linda you mentioned $30 million cost increase between 2Q and 4Q and I think if I'm doing the arithmetic right this would imply that fourth-quarter cost would be roughly flat on a year-to-year basis. Is that primarily just because of the M&A stuff or is there other factors?

Peter, we don't like to get into quarter-by-quarter activity so I think it's fair to say that your assumptions there are correct. We are keeping a very close eye on expenses for the rest of the year given the market choppiness that we're seeing. And we're looking to actively address that by putting resources where they need to be. But generally you're right, we've had a major ramp-up in expenses this quarter because of the quarter-over-quarter change with the acquisition costs coming on. We do expect that that will moderate somewhat as we move through the rest of the year.

And then Linda, another one of the tax rate the New York City changed. Does that result in a permanent reduction in the rates going forward and how should we think about the tax rate going forward?

Short. I think you heard the guidance, Peter, on the tax rate and we did take it down by 1 full percentage point. That's probably looks a little bit more exciting than it might actually be in practice because we are very cautious about the tax rate these days given the assertive nature of taxing authorities around the world. It's a good change but we're cautious because one-off activity in any quarter can really change the nature of the tax rate. But we do see a little bit of improvement there but probably not anything to get very excited about.

We are also cautious on that side because of the stronger performance coming out of the U.S. as opposed to our European and international business but Europe in particular. So more revenue in a higher tax jurisdiction calls for caution.

And then for Mark, the strength in the ERS business, you highlight some of that as early completion of projects. So I'm wondering is it possible to think about how much of that revenue benefit is pull forward and therefore may be more conservative expectations for the second half of the year?

Yes, there was some pull forward there, Peter. Not an enormous amount, frankly, but there was certainly some and we've had a very, very good first half in ERS. The top line is up 26% in the first half of this year. So you know what our full-year guidance is and we haven't moved that. So clearly we're looking at not such strength in the second half. It's worth noting that we're up against some pretty difficult comps in the second half as well. The second half of 2014 was up 35% over the second half of 2013. So we're going up against a strong comp and also we've got the WebEquity acquisition that we did in the middle of last year. That is now fully in our base or close to being fully in our base so we won't get any bump from acquired revenue in ERS in the second half. So, all of those things are going to have an impact on the growth rate for the rest of this year.

Can you talk, Mark, though about maybe the momentum in billings as opposed to the trend in revenues as a forward indicator of momentum in that business?

Yes, I can tell you that business remains very, very strong. The bookings or the billings have been very good so far year to date. We did have the largest, a very large transaction, our largest transaction ever in fact we booked in the second quarter of 2014. So we didn't have anything of that scale in the second quarter of this year. So you saw a little bit of a downtick in the trailing 12-month sales growth rate but nevertheless the sales production has been very healthy, in line with our expectations, maybe even a little bit ahead and the pipeline is very healthy. So we are feeling very good about where we are with the business.

And just one last thing, this is maybe for Ray or Michel. The guidance suggests I think that the international MIS business get stronger in the second half of the year. Is that just a function of comps or is there something specifically you'd call out that might be a driver?

Yes, if you look at the various segments we have the only really segment where we see a favorable development is expected in Structured Finance and Project Finance effectively. That's where I would expect to see some improvement from what we've seen to date effectively.

We will go next to Doug Arthur at Huber Research.

Linda, if I'm doing my math correctly which I'm probably not, if the impact on MIS from FX was 5% total if I apply that to the down 17% international, does that suggest that underlying FX adjusted was down about 6% internationally? Is that fair if you scrub out FX, the FX impact on international ratings?

Doug, let me request that you go on to a second question if you have one while the team takes a look at how that lays out.

No, that's good, that's my only question. Thanks.

Okay.

If we can come up with the answer while we're on the call here we will do that.

And we will go next to Denny Galindo of Morgan Stanley. Please go ahead, sir.

I want to delve a little bit more into the RMBS strength that you called out. We had looked at issuance from a couple of sources that showed covered bonds down 15% to 20% and also private label RMBS down 15% to 20% and you didn't get the exact number but it sounds like it was up. So I was just kind of curious, are there any one-time fees that you're receiving there or a change in pricing or maybe if you could give us just a little bit more color on the RMBS number?

Yes, as far as the covered bonds are concerned we had a year-on-year decline in the European covered bond component of Structured Finance. The strength was in the U.S. RMBS sector and that related to improved market activity and increased coverage. And as I think Linda had mentioned earlier it covered a collection of different aspects of the mortgage market, the prime component, single-family rentals, some of the agency risk sharing deals. So it was a good strength in U.S. RMBS. It's still well, well below any kind of levels that we had pre-financial crisis. So it's got a long way to go to get back to where it was.

Okay and then moving on to PPIF, I don't think we've talked about that yet. There's been some anecdotal stories about cities not using your service because you've changed the way that asses pensions but yet it sounds like you're increasing your guidance for that line item. So I was just kind of curious if you could give us a little color on where that strength is coming from? Is this moving away from Moody's talk kind of more talk than action or any thoughts that you have on that topic?

Well, I guess I'm tempted to say you can't believe everything you read. But I think the misunderstanding if there is one would be what we see as strength in our coverage and strong growth as we reported versus what's happening in the broader market. And that embeds a cyclical shift in the mix from larger issues and issuers that would typically use more ratings to a shift in the issuers who have traditionally used two ratings rather than three or one rating rather than two. That's a cyclical condition and is a market story rather than a Moody's story.

And if I may, we have a response to Doug's earlier question. Doug you can correct me if I am stating your question incorrectly. I think your math led you to believe that the constant dollar reduction in MIS international revenues was down about 6% and we have taken a look at that and that is about correct. So yes your math is correct. Mr. Galindo, did you have anything further, sir?

Yes, I did actually have one more question. Just on the European issuance, we talked a little bit over the last couple of quarters about new mandates there. I know that the strength in issuance is down but are you still getting the same pace of new firms looking to establish new issuer ratings in Europe or has that slowed down this year?

Yes, I think we did actually see a slowdown and the slowdown is really related to what we've described happening in bank loan and high-yield where we've seen less activity and that's obviously a significant contributor in overall volume of new mandates. So we've seen in it such a slowdown in first time mandates. I think what is important, I mean the important question for all of us obviously is that a structural or is that sort of a cyclical situation? And we do believe it's cyclical and really reflect the condition that that market is facing at the moment basically.

The only other thing I would add is that while it's down year-on-year it is up sequentially from the first quarter new mandates.

And we will go next to Craig Huber at Huber Research.

A few questions if I could please. Linda, I'm just curious first is housekeeping question here on foreign currency given the dozens of currencies you guys are in, what are you budgeting the currency impact, both the cost and revenues for the third quarter and the full-year?

Sure. Let me just talk a little bit about what this does for us. And I believe where we were we had said I think we're looking at $1.11 on the euro. Let me just double check that, and if I have it right looking at the team $1.57 on the pound, yes, correct. So we do have sensitivity to the currencies and our sensitivity is disproportionately heavier on the revenue line for euros, Craig and heavier on the expense line in pounds. So for a while in the second quarter we sort of had everything going the wrong way. We have many employees in London as you know and we do have billings in euros, so there you see some of the issues that we had to deal with. So the estimated impact of FX for 2015 is we are thinking a 3% to 4% decline in revenue and a 3% to 4% benefit in operating expense. Again as I said $1.57 is what we're looking at for the pound, $1.11 for the euro and the way it lays out is a $0.05 if you will, a $0.05 decline in the euro will give us about $20 million of decline in revenue. Now that's offset to the positive by a $4 million benefit on the expense line, so overall the EPS impact would be a $0.05 decline. So this is one of the things that makes us concerned regarding the guidance view and we're going to just have to see how this plays out through the rest of the year. But we had had the euro relatively steady at $1.11. As the Greek situation flared up we dropped back to $1.08 and I think we're back up through $1.09 today but we're very sensitive to this number.

Secondly, Linda, what was your incentive comp in the second quarter? What was that in the first quarter please?

Sure. Just one second. So the incentive compensation amount that we booked in the first quarter of this year, Craig, is what you want?

That and the second, yes.

It was $38 million in the first quarter and almost $43 million in the second quarter.

Okay and then as I typically like to ask you Linda can you just give us the breakdown of revenues for the four main categories, high-yield versus investment-grade, etc. and also the other three categories?

Yes, sure. We'll start with investment-grade and I'll do the comparisons first with the second quarter of 2014. So in investment-grade that's the main story here, Craig. For the second quarter of 2015 we had about $84 million versus last year's $63 million. And investment-grade comprises 26% of the total revenue in corporate. So we're seeing very good activity in investment-grade as we had mentioned. Speculative grade last year was $77 million. This year it's $60 million and the percentage declined from 24% to 19%. Bank loans was $67 million for the second quarter of 2015 versus last year's $75 million. The percentage was down from 24% last year to 21% this year. And other was up a bit from last year, $108 million versus $105 million last year. Percentage of 34% was about the same. So again largely an investment-grade story for this year second quarter of 2015. Turning to structured, same comparison second quarter of 2015 versus 2014, ABS was up a bit, last year $24 million, this year $26 million. The percentage, though, was 21% of the total structured for the second quarter this year. RMBS was up at $19 million to $21.5 million and consistent at 18% of total structured. Commercial real estate from $30 million to $32.2 million, consistent at 27% of revenues. Structured credit went from $37.3 million last year to $41.1 million, consistent at 34% of the revenue. So again there you see some movement on the ABS line and the commercial real estate and structured credit line as we mentioned. FIG, last year we had $92 million total this quarter, this year we had $90.4 million. FIG is always pretty consistent. Banking was $63.7 million last year, $62 million this year, 69% of total FIG revenues. Insurance is down a bit, $24 million last your, $21 million this year. 23% of total revenue versus last year's 26%. Managed investments about flat at a little over $4 million and 5% of the total and other was about $2.3 million for us and a small piece of the $90 million total. So a little bit weaker in the insurance sector for FIG. Finally PPIF as compared to last year, $54 million in PFG and sovereign which is up nicely from last year's $44 million. The percentage of the total 54%, Project & Infra conversely is down from last year's $54 million to $45.5 million and that's 46% of the total revenue. So those segments sort of switched places in PPIF for this year and I think that's about it, Craig, if that does it for you.

So I missed that small municipal structured product line you have in there?

I'm not sure -- that's rolled up into another segment now and I think you're going to have to chat with Salli about that.

Rolling it, okay. My other question is for organic revenue if you could just help us with this. Within your research business and also ERS what was the underlying organic revenue growth in each of those excluding those small acquisitions please?

As it happens the benefit we got from acquired revenue almost exactly offset the FX hit. So the constant dollar organic revenue growth rate for MA overall was a little over 12%. And a similar story in RD&A. Overall RD&A growth rate on a GAAP basis was 11% and constant dollar organic was also 11%.

We will take our next question today from Tim McHugh at William Blair.

First I want to ask just on ERS, the increased pace I guess of customer deployments is that just timing of where you're at in the cycle or is there something different you've been doing the last couple of quarters that's I guess accelerating how quickly you can get to that revenue recognition point and customer deployment point?

There is a lot that we're doing to try to speed up the implementation of our projects and thus the recognition of our revenues. And that is an ongoing project, so it's not as though we've done it and we've got a structural change in the business that we're going to be able to sustain from here on out. But it's something we're very focused on and we're pleased with the traction we're getting there. It is very much a strategic focus for us and it's something we're trying to do. It's a function of the work that we're doing with the product to make the product more, have more standard features built into the product and focus on selling those standard features and standard versions of the product. So that accelerates or facilitates the implementation of projects. So the short answer to your question is yes and we're making good progress there, but like I said that is an ongoing focus for the management of the business.

Tim, it's Linda, let me just add one element of clarification. On the finance side and Mark and I and our teams work together very closely on ERS revenue recognition. Software revenue recognition accounting is a very detailed and challenging sort of thing and we're very cautious that we handle revenue recognition appropriately. I think one of the things we've learned to do better is to better match expenses with revenues and to ensure that we stage completion of projects. So I think as a whole the corporation has gotten better at managing this but we're very cognizant of the revenue recognition rules and we're very thoughtful about how we're dealing with those.

And ERS in the U.S. the growth rate picked up I guess 19% versus 13% last quarter, steady growth rate there. So I guess what drove the acceleration this quarter versus what you've been seeing?

Well we have the impact of the WebEquity acquisition. That is a very heavily U.S. focused business, so you've got a very significant contribution from WebEquity. But as I said earlier, business generally is very good in MA across-the-board but in ERS specifically and that would be true in inside and outside the U.S.

Our next question today is from Robert Simmons at Janney.

Hi, I'm asking for Joe Foresi. You've talked about reversing the issuance of it. I was wondering if you could quantify that all, like how big a market is that and how long do you expect that to remain strong for you? Any sort of detail would be helpful.

Sure. Let me just mention that it's very choppy. The strongest month for issuance is probably March, April, and then the market sort of went away as concerns arose about what was happening with Greece. Now that those have somewhat moderated and that doesn't say that those are solved, we are seeing a pickup in potential interest in the reverse Yankee issuance, perhaps spotlighted by as I said the Apple deal in the Sterling market today. It's very hard to predict this because it is very market dependent and we'll have to see how conditions layout. We would also expect that going into August is seasonally a less active month in the European markets as a whole. So, we may see some hiatus here as we go through August and potentially some strengthening as we move back into the September time period. But this is a hard one to call and it moved month by month. Therefore we wouldn't be giving guidance on that and we're happy to talk about this a bit further as we get to Investor Day on Wednesday, September 30.

Can you quantify at all how big it is for you guys, though, at the time?

I don't think we've split that out. I don't know if anyone else has any thoughts on that. No, can't give too much more detail on that.

And we will move next to Bill Warmington at Wells Fargo.

So I was hoping that you might be able to talk about some of the international MIS business lines on a constant currency basis. I know you've talked about the group as a whole but it seems like some of those business lines are doing better than the reported revenue would indicate on the surface. Maybe not but it would seem it.

We can give you some information on the FX impact internationally by line of business. I wouldn't be able to break it down more finely done that. But the FX impact on international corporate finance was $11 million, on Structured Finance was $6 million, Financial Institutions was $7 million, PPIF was $4 million. On the MA side, RD&A international it was $7 million, ERS international was $4 million and Professional Services it was $1 million.

And then one other question just on the stress testing in Europe I wanted to ask about how the Greek turmoil was impacting demand for those services. I figure you can make a case for it either positive or negative but I wanted to check.

The Greek situation really hasn't had an impact on our work in Europe in any way, frankly. There's lots of demand for what we're doing among European banks and I can't say that the situation in Greece has had any impact at all.

And we will go next to Vincent Hung at Autonomous.

Just one question from me, maybe I missed this but did you see any evidence of a reversal in the disintermediation trend in Europe this quarter?

A reverse in the disintermediation trend?

Or re-intermediation?

As we said the number of new mandates that we are seeing year-over-year is down but sequentially first quarter to second quarter is up. We attribute that not to banks becoming particularly aggressive in lending rather than the attractiveness of bond markets but more to a demand question. So I think as we see growth resume in Europe we are going to see an increase in new mandates again.

There are no further questions at this time. Mr. McDaniel. I'll turn the conference back over to you, sir.

Okay, I want to thank you for joining us. And as Linda mentioned we look forward to speaking with you on Investor Day which is September 30 and until then I hope everyone enjoys their summer.

Once again, this does conclude today's Moody's second quarter 2015 earnings conference call. As a reminder a replay of this conference will be available after 3:30 PM Eastern time on the Moody's website. Once again thank you for joining us.