Moody's Q2 2022 Earnings Call Transcript

Key Takeaways

  • Q2 results: Moody’s revenue declined 11% and adjusted EPS fell 31% to $2.22, reflecting challenging global capital markets and foreign exchange headwinds.
  • MIS segment pressure: MIS revenue dropped 28% to $706 million as global rated issuance plunged 32% and transaction revenue fell 40%, driven by higher rates, inflation and geopolitical uncertainty.
  • MA segment resilience: MA revenue grew 18% (organic ARR up 9%), fueled by robust subscription/SaaS demand and recent acquisitions, with ARR growth expected to reach low double-digit rates by year-end.
  • Revised 2022 outlook: Full-year guidance now assumes MIS revenue down low-20s%, MA growth in the mid-teens (USD basis), Moody’s total revenue declining high-single-digits and adjusted EPS of $9.20–$9.70.
  • Cost management actions: A new geolocation restructuring program will target $40–$60 million in annualized savings (up to $75 million in charges through 2023), partly reinvested in growth initiatives like sales deployment and employee retention.
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Earnings Conference Call
Moody's Q2 2022
00:00 / 00:00

There are 17 speakers on the call.

Operator

Good day, everyone, and welcome to the Moody's Corporation Second Quarter 2022 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen only mode. At the request of the company, we will open the conference up for a question and answer session following the presentation. I will now turn the call over to Shivani Caulk, head of Investor Relations. Please go ahead.

Speaker 1

Thank you. Good afternoon and thank you for joining us to discuss Moody's Q2 2022 results and our revised outlook for full year 2022. I'm Shivani Karp, Head of Investor Relations. This morning, Moody's released its results for the Q2 of 2020 2 as well as our revised outlook for full year 2022. The earnings press release and the presentation to accompany this teleconference are both available on our website at ir.muliz.com.

Speaker 1

During this call, we will also be presenting non GAAP call or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for a reconciliation call between all adjusted measures referenced during this call and U. S. GAAP. I call your attention to the Safe harbor language, which can be found towards the end of our earnings release.

Speaker 1

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 ks for the year ended December 31, 2021, and in other SEC filings made by the company, which are available on our website and on the SEC'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 call this morning in a listen only mode. Before we begin, I'm pleased to announce that in response to feedback from our external stakeholders, We have enhanced our earnings materials and changed the format of our call for this quarter.

Speaker 1

This morning on our IR website, we published our supplementary presentation call, along with our updated earnings release, materials that we believe provide substantial insights into our business. As such, call. During the call, we will not be going through our usual presentation. Instead, Rob Fauser, Moody's President and Chief Executive Officer, will provide a brief overview of our results and outlook, after which he will be joined by Mark Kaye, Moody's Chief Financial Officer to answer your questions. I will now turn the call over to Rob Falber.

Speaker 2

Thanks, Shivani. Hello, and thanks to everyone for joining today's call. And as Shivani mentioned, I'm going to keep my opening remarks brief so that we can get straight to your questions. And I appreciate that it's been a very busy morning for many of you call. So let me begin with a few key takeaways about our results, and then I want to spend a few minutes on our outlook and the continued strength and relevance of our business.

Speaker 2

So let me start by reinforcing that as challenging and volatile conditions in global capital markets continue, We're leading the way in providing integrated perspectives on risk for our customers. And this quarter was really a tale of 2 cities as our ratings business was

Speaker 3

significantly impacted by the slowdown in issuance activity and

Speaker 2

our MA business was negatively impacted by the slowdown in issuance activity and our MA business continued to grow very nicely. And as we've Previously, year on year comparisons with our record performance in 2021 would be unfavorable this year. And overall, Moody's revenue declined approximately 11% in the 2nd quarter and given the operating leverage in the MIS business as well as the negative impact of foreign exchange, Adjusted diluted earnings per share declined by 31% from the prior period prior year period to $2.22 MIS, which was significantly impacted by ongoing cyclical disruption in the global debt markets due to a few things, rising interest rates, High inflation, unsettled geopolitical conditions. MIS generated revenue of $706,000,000 And Really to put that in perspective, global rated issuance was down 32% for the quarter and transaction revenue was down 40% And that reflects the negative mix driven by the weakness in the leveraged finance markets. And when balanced by our recurring revenue, This translated to a 28% decline in total MIS revenue for the quarter.

Speaker 2

Now on the other hand, Customer demand for our MA suite of solutions that help navigate market uncertainty and identify, measure and manage risk, That demand remained robust and that fueled steady growth in our subscription and SaaS based products, which along with the contributions from prior year acquisitions, delivered revenue growth of 18%. And MA revenue growth was negatively impacted by 5 percentage points due to FX in the quarter. Now, you'll recall earlier this year, we introduced an annualized revenue or ARR metric for MA and we believe that's a good indicator of future growth. In this quarter, Our organic ARR grew by 9% and we expect this growth to further increase to low double digits by year end. And that's supported by both our ongoing product development investments that broaden the ways in which we serve our customers and by the growth in our sales force and strong sales execution.

Speaker 2

Now I expect that many of you will have questions about our outlook in a few minutes. And I'd like to make a few comments about our expectations before we get to it in the Q and A. And we anticipate that the current market disruption will persist for the remainder of the year, and we've updated our guidance to reflect that. Now obviously, if Actual conditions differ from the assumptions underlying our guidance, our results for the year may differ from our revised outlook. Now for MIS, we expect issuance to decline approximately 30% for the year and full year 2022 revenue to decrease in the Low 20s percent range.

Speaker 2

Now the last two and a half years have been unusual to say the least. So I have to acknowledge that with all the uncertainty in the market, The confidence interval around our outlook is probably wider than it was pre pandemic. Our business outlook for MA remains unchanged. Call. However, due to the impact of the weakening euro and British pound against the U.

Speaker 2

S. Dollar, we're slightly reducing MA's revenue growth outlook to the mid teens percent range. Now taking the reduced MIS revenue guidance and the impact of foreign exchange into account, We now forecast Moody's full year 2022 revenue to decline in the high single digit percent range and adjusted earnings per share are now projected to be in the range of $9.20 to $9.70 Incorporated into our outlook is a new restructuring program and that's part of our broader approach to expense management. This geolocation restructuring program helps us further adapt to the new global workplace and talent realities And it accelerates a number of ongoing cost efficiency initiatives, and that includes real estate optimization and the increased utilization of lower cost operational hubs. We expect this program to generate $40,000,000 to $60,000,000 in annualized savings with up to $75,000,000 in aggregate charges through 2023, and we plan to partially redeploy these savings back into the business to support ongoing organic investments, Including things like sales deployment and employee retention.

Speaker 2

Now before I open it up to questions, Let me try to put all this into perspective for a few minutes. Now debt issuance markets are clearly in a period of cyclical turbulence. However, we believe that the fundamental drivers of issuance remain firmly intact. And taking a medium term view, We expect issuance to resume as capital markets adjust to a higher interest rate environment. And as you saw in the slides that we shared this morning, The volume of outstanding corporate debt in the U.

Speaker 2

S. Has grown each year for the last 30 years, and we believe that the fundamental role of debt in Fueling economic activity and financing business growth remains unchanged. Global GDP growth is expected to continue, albeit at a lower rate. Corporate refinancing needs remain strong and on a historical basis, rates and spreads are relatively in line with their averages despite some recent increases. During this market of this period of market turbulence, We're going to continue to focus on what we can control in MIS, and that is to ensure that Moody's remains the rating agency of choice, providing a world class experience for issuers and ensuring the quality, relevance and timeliness of our ratings, research and insights that all reinforce investor demand pull.

Speaker 2

MA remains a strong and resilient business with almost 60 quarters of consecutive growth and our investments in product development and sales are accelerating our organic ARR growth And we're realizing the benefits of our recent acquisitions. In fact, we're ahead of or have met the targets that we set for our acquisitions of BDD and RDC. And though it's early days, we are on track to meet our targets for RMS. Now stepping back and looking at the big picture again for just a moment, We see strong demand for our integrated risk assessment offerings and the value that Moody's provides to our customers, especially in these uncertain times, remains unmatched. So across the business, we're innovating and investing to provide our customers and market participants with the products and the insights that they need to decode risks and unlock opportunities.

Speaker 2

And lastly, all of this would not be possible without the tremendous efforts of our people and I want to thank them for all of their continued hard work and dedication. So that concludes my prepared remarks. So Mark and I would be pleased to take your questions. Operator?

Operator

And our first question today will come from George Tong with Goldman

Speaker 4

Fax. Hi, thanks. Good morning. I really welcome the new format for the earnings call. You're assuming issuance volumes declined 30% it looks like in 2022 based on your supplemental materials.

Speaker 4

How much conservatism is baked into that guidance? And what does that Assumed for issuance volume performance over the remainder of the year compared to performance over the 1st several months. How should we think about seasonality in 3Q issuance?

Speaker 2

Yes, George. Thanks for the feedback. So I suspect there'll be a few call. Questions on issuance and outlook on this call. So I'm going to start, George, by trying to take kind of a big picture view and then I will get to your question about kind of year to date, year to go.

Speaker 2

But let me try to put this year's issuance into some sort of historical perspective. First of all, there are 2, not 1, but 2 big shocks that are impacting the markets At the same time right now. And the first is what I think we all understand is the inevitable monetary tightening after a period of historically low interest rates. And now we've got the Fed aggressively addressing inflation. And that has caused a lot of uncertainty In regards to both the trajectory and the pace of rate increases versus what I think the market had Both assumed and was hoping for would be a kind of slow and steady and well understood trajectory of rate increases During a period of tightening.

Speaker 2

But the second shock that we've got is the uncertainty around the duration and the severity of the Russia Ukraine crisis. And that's obviously led to a spike in energy prices that's further contributed to inflation and it's also just eroded, I think, global confidence in general. So And not to mention, we are still dealing with COVID-nineteen and the knock on impacts of supply chain disruption. So That's a lot of complexity. And that complexity is causing tremendous volatility in the markets that we're all living through As investors are trying to navigate all these interdependent shocks and their implications.

Speaker 2

Now let me put this in perspective. With all of that going on, our outlook for issuance this year is almost exactly on top of the average annual issuance Of something like $4,400,000,000,000 over the last decade, excluding the pandemic years of 2020 2021. So Yes. Issuance is going to be down significantly. But when you think about comparing it to 2019, That was quite a normal functioning year.

Speaker 4

Great. And as a follow-up, you previously given medium term targets call. For MIS margins in the low 60s, what are your latest views on medium term MIS margins and how much flexibility do you have in managing MIS expenses?

Speaker 5

Good morning, George. MIS' medium to long term business fundamentals remain intact. And that's again based on our view that the current market disruption in issuance is cyclical rather than structural in nature. And our view is informed by several data points and observations. For example, the stock of data has steadily grown over the past several decades.

Speaker 5

The price to value is compelling for our customers and that there are strong refinancing needs that will buttress the transactional revenue base. I'd also note that credit spreads themselves are close to historical averages, and the interest burden, you know, effectively remains low for corporates. Therefore, as issuance growth normalizes in the future, we expect the MIS adjusted operating margin to stabilize In that low 60% range. Furthermore, we are continuing to carefully evaluate our expense base while reinvesting through the cycle to support strategic expense growth initiatives in MIS. And that's going to include ESG and climate, technology enablement, Strengthening of our analytical capabilities as well as expansion into new markets, regions and evolving risk areas.

Speaker 5

And with that, I'd say we still feel confident about that low-60s medium term target range.

Speaker 4

Got it. Thank you.

Operator

Thank you. Our next question comes from Kevin McVeigh with Credit Suisse.

Speaker 6

Great. Thanks so much. And again, I'll echo my sentiment on the new disclosure is very helpful. I guess, Just following up on the issuance, could you frame out, because to your point, the $4,400,000,000,000 seems like 10 year average. And I know we're not going up to 2023,

Speaker 7

but as

Speaker 6

you think about kind of beyond 'twenty two, Does it hover around that and maybe just talk to supply versus demand dynamics within the context of issuance more What gets investors reengaged? Is it the Fed funds increase at the end of the month or More visibility on the Ukraine. I know that's a hard question, but just any way to frame where you think that gets reengaged and whether or not it's just a refund? It's walls that openly trigger some incremental issuance?

Speaker 2

Yes, Kevin. So Let me maybe talk a little bit about kind of upsides and downsides to kind of our outlook and see if this addresses your question, but let me know. Look, I think in developing the outlook, we feel like it's largely kind of weighted towards the downside. We've effectively taken the activity and the market conditions that we've seen in the first half of the year. We've effectively rolled that forward For the balance of this year and assume that that's effectively what we're going to have for the rest of the year.

Speaker 2

So you're asking kind of what could get maybe the market started. I think one of the keys that we're going to look at is Whether we continue with economic growth or whether we tip into recession, I think one of the keys to that is inflation. If the Fed can get that under control, I think there's the possibility that they pull back from more aggressive rate hikes towards the end Of this year and into 2023. I mean, you mentioned Russia, Ukraine. Certainly, some sort of The resolution there, which would address some of the supply chain issues and ease some of the inflation on commodity prices, but also Just reinforce market confidence, I think would be a positive.

Speaker 2

And that point around confidence is very important Because it's very difficult for issuers to issue into volatile markets. So the volatility that we see in equity markets translates into Volatility in issuing in the debt markets. And so some period of stability. So that's why the kind of certainty in resolving some of these things, I think would be quite helpful. In terms of headwinds, it's a little bit of a converse, right?

Speaker 2

But it's worth mentioning, in a recession scenario, That's when we'd see defaults likely start to tick up and spreads widen. That would be a headwind. So we're keeping really kind of keeping an eye on that.

Speaker 6

That's super helpful. And then just to follow-up real quick, it seems like you're keeping the expense investments intact against And some of the adjustments in revenue, is that just a function of the confidence in the business or is there opportunity to maybe take advantage of some of the dislocation that the market he currently

Speaker 5

offers. Kevin, we view very much, As Rob mentioned a moment ago, the market conditions has been cyclical in nature. That really means we're going to plan to invest through the cycle As we execute on our strategy of providing global integrated perspectives on risk, the opportunity set itself is very substantial In markets that are large and expanding, KYC and compliance, banking and insurance. And therefore, even though we're continuing to evaluate and Investment Opportunities Underpinning, our future revenue growth and expansion, we're going to balance that against, those activities that are needed to generate short term cost efficiencies to support our margins and ultimately help us achieve our medium term margin objectives. So for example, we remain committed to organically invest $150,000,000 in areas this year Like product development, sales distribution capacity as well as an additional $50,000,000 into our and back to our employees.

Speaker 5

And that's going to be balanced against some of the new cost efficiencies, which are derived from the 2022, 2023 geolocation restructuring program that we announced this morning. We've also learned, since the beginning of the pandemic that many business activities can be performed successfully remotely. And while T and E costs may rise As compared to prior 2 years, we're going to prioritize customer facing travel where needed. And of course, we have that naturally we have some naturally occurring expense levers Such as the incentive compensation accruals, which are obviously going to flex based on our actual performance as compared to the targets we set at the beginning of the year.

Speaker 6

Very helpful. Thank you.

Operator

Thank you. Our next question will come from Toni Kaplan with Morgan Stanley.

Speaker 8

Thanks so much. Let's throw 1 in on MA. So it looked like you lowered the guide, but only because of FX. So essentially kept it in line there. But the ARR, you're expecting to accelerate into the end of the year.

Speaker 8

So I thought that that was actually a really positive data point. Maybe just give us some color What's driving that? And is the environment, Bill, somewhat Liv, on that side, would you expect that that becomes more challenged, but you can outperform the environment? Or would you expect that that just continues to do well because of clients wanting risk solutions, etcetera?

Speaker 2

Hey, Tony, it's Rob. And thanks for kind of peeling back the onion there. So I think you got the right message, the right takeaway on MA. The results are really In line with our prior expectations on a constant dollar basis. As we mentioned, FX was a significant headwind this quarter, Reduced growth by 5 percentage points.

Speaker 2

And on an organic constant dollar basis, revenue grew at 8%. And our guide for the full year incorporated a little bit of a seasonality that you're seeing in the quarter to quarter results in MA. That relates mostly to our Banking and Insurance businesses within Decision Solutions. And I think you hit on it. The key here is that We are still confident in achieving our full year revenue guidance and we've adjusted that guide Solely to account for the impact of FX.

Speaker 2

And I think very importantly, one reason we introduced ARR was to kind of look through Revenue and the quarterly impact of revenue and be able to really focus on the growth and the base of recurring revenue. And we continue to feel confident about our ability to hit the low double digit guide for ARR growth. Let me give you a little bit of insight What's driving that acceleration through the end of the year? We've talked about how we have Realigned our entire global sales organization really to better organize around our customers and we're continuing To build out our capabilities across all parts of our sales organization, to be able to both deepen the penetration of existing customers as we have conference call as we have broadened our product suite and also to bring in some new logos. And we believe that those investments are in fact I'm showing some early results.

Speaker 2

Our sales meeting activity levels have gone up pretty meaningfully as a result. And our gross business per sales rep has been pretty consistent with our expectations. And that means that even as we have added salespeople, They have remained as productive on a per head basis as before. So we're getting some good production out of the new sales team. The second thing is through the first half of the year, we've had some good price capture compared to our historical level.

Speaker 2

And that really again is due to the enhancements that we continue to make to our products and Really enhances that value proposition and our ability to capture price. A good example of some of the stuff we're doing and you're going to see In coming quarters is around CreditView, where we're continuing to redesign that web our flagship Web Credit Research platform, we're overhauling the look and feel. We're going to have come out with considerably greater functionality and content, And that will be a good opportunity for us to price for value. And the last thing, Tony, I would say that's giving us confidence, just obviously, we We monitor our sales pipeline very, very closely. And the sales pipeline right now is very strong and gives us Confidence in our ability to hit that ARR number for the year.

Speaker 8

Perfect. That sounds great. And then for the follow-up, Mark, I know you lowered The free cash flow guide about 20% at the midpoint versus prior midpoint. I know MIS probably the biggest piece Of that, but is there anything else that you want to call out in terms of lower free cash flow guide? And then also in terms of use of capital outlook on sort of buyback, you lowered that as well?

Speaker 8

Thanks.

Speaker 5

Tony, let me take the free cash flow question and then separately, I'll address share repurchases and the buyback guidance. That's an equation which comes up a little bit later on. In terms of free cash flow guide for the year, what we wanted to do is to reflect the year to date Global free cash flow of $628,000,000 and that was down around 49%, primarily on, to your point, The lower net income that's been driven by the reduction in MIS revenue due to significantly curtailed issuance. In addition, this quarter, we also had a tax related working capital headwind, the impact of which is expected to partially reverse out later this year, and that's reflected in our updated full year outlook. The midpoint of our revised full year 2022 free cash flow guidance of 1.4 to 1.6 does imply free cash flow to U.

Speaker 5

S. GAAP net income conversion ratio that's approximately 100%. And that's very much in line with our historical conversion levels. And that means that our refreshed 2022 guidance at the midpoint now assumes both adjusted diluted EPS and free cash flow will decrease in the low 20% range.

Speaker 8

Perfect. Thank you.

Operator

And our next question comes from Ashish Sabadra with RBC.

Speaker 9

Hi. Just wanted to drill down further on the issuance side. I was wondering if you could talk about the pipeline for new issuers. And also if you could just talk about like what percentage of the issuance right now is really coming from new issuance versus refinancing of existing debt And any thoughts around how that could trend for the rest of the year and exiting the year? Thanks.

Speaker 2

Hey, Ashish. Maybe let me talk a little bit about what's going on with our first time mandates. And these are New issuers into the market. And then I'll give you a little bit of color on what's going on currently in the market, kind of

Speaker 10

what we're

Speaker 2

seeing. We revised our range for first time mandates down from it was 850 to 950 In the last quarter, we revised that down to $700,000,000 to $800,000,000 for the year. And that's because we had another slower quarter. U. S.

Speaker 2

First time mandate activity remained muted, I would say. But it's Pretty highly correlated to leverage finance issuance. That's where most of your first time issuers into the market come from. We expect The activity levels that we see in the first half, kind of like our broader issuance outlook to remain pretty steady in the second half of the year. I think September will be a key month.

Speaker 2

We'll be post earnings blackout, post summer, and we'll see if there's some Issuers that have been sitting on the sidelines that choose to hit the market at that point. It's interesting, we have something like a little over 400 1st on mandates that we signed through the first half of the year, but not all those are coming to market. And In fact, just to give you a put a little meat on the bones there. So far this year and excluding APAC, About 40% of the new mandates that we've signed have not actually printed and that was that That number was something like 10% in the first half of twenty twenty one. To give you a sense, it typically takes something like 2 months From the time that we executed engagement and the issuer actually issues a bond, that timeframe has more than doubled.

Speaker 2

So in terms of what kind of market do we have right now, Obviously, it is still a very challenging environment. The sentiment changes from week to week and even day to day. I would say at the very moment, there's a positive tone in the markets. This week, Investment Grade Issuance has had It's best week in something like 12 weeks. The issuance is generally dominated by financial institutions, but that may change as we kind of get through blackouts here.

Speaker 2

High yield and leverage loans has still been pretty light. We have seen a few high yield Deals hit the market earlier this week. The secondary market firmed up towards the end of last week. Spreads came in something like 40 basis points or so. But in general, it's still a pretty quiet market for leverage finance.

Speaker 5

Maybe Ashish just to add a little bit on to Rob's remarks. We do anticipate the absolute dollar MIS transaction revenue to be slightly lower in the second half of the year, vis a vis the first half of the year and that would align to the historical issuance patterns we've seen Over the prior 5 years, we are on average the second half of the year, have traditionally contributed about 47% of the full year's transaction based revenue. And furthermore, we expect that total MIS revenue to return to more of that SORT 2 type patent consistent with what we've observed prior to the pandemic And that will cause a little bit of margin headwinds in the Q3.

Speaker 9

That's very helpful color. And then my second question was just going to be on the expense bridge. This is on Slide 23 where you provided the expense bridge. I didn't see incentive comp broken out as it was broken out in the Q1. I was wondering if you could provide any color on how we should think about incentive comps Decline in 2022 versus 2021.

Speaker 5

Hi, absolutely. So maybe let me spend a minute on expense bridge and then I'll get to the direct question around incentive compensation. So for the full year 2022 operating expense guidance, we are reaffirming high single digit percent growth. And that includes $31,000,000 in accrued expenses as part of the 2022, 2023 geolocation restructuring program that we announced this morning. If we excluded that restructuring charge, our outlook for full year operating expenses would have been in the mid single digit percent growth range.

Speaker 5

And so specifically for full year 2022, you could see anticipated expense growth of approximately 8 percentage points related to acquisitions completed in the last 12 months, primarily RMS, approximately 1 percentage point related to the restructuring program I just mentioned And then operating growth in investments, net of ongoing cost efficiencies, 6 percentage points And then lower incentive comp, minus 6 percentage points. So effectively operating growth and investments being Flat and then, of course, a partial offset from favorable movement in foreign exchange rates. So two more points. The outlook also Then implies year to go operating expense growth of a decline in the low single digit percent range. And while we don't normally provide expense growth forecast by segment, given that we still expect the majority of our 2022 strategic investments To support future MA revenue opportunities, the year to go segment implied guidance would be a high single digit percent decline and a mid single digit percent increase for MIS and MA, respectively.

Speaker 5

And then on to your specific question, The 2nd quarter and year to date incentive compensation accrual was approximately $50,000,000 and approximately $114,000,000 respectively. And for full year 2022, we expect incentive compensation to be around $240,000,000 including RMS. Call.

Speaker 9

Mark, that was very helpful color. Thank you.

Operator

And our next question will come from Alex Kramm with UBS.

Speaker 3

Yes. Hello, everyone. Just, of course, coming back to MIS for a second here. You multiple times have talked about The normalization that you expect to occur. So just wondering if you look out a little bit more than just the next couple of quarters, How much confidence we should be having?

Speaker 3

I guess what I'm asking specifically is, in prior periods Issuance declined and that's obviously what we're looking for 30% down. We've seen a pretty big snapback and I think a lot of people expect that to happen again next year. So I'm just wondering how much confidence we should be having in that like the refinancing walls actually don't really start increasing for a couple of years. Obviously, M and A has been down year to date. And then lastly, with higher rates and higher spreads, the kind of opportunistic financing is still pretty anemic.

Speaker 3

So just wondering how much confidence you have that we get that snapback next year or if it could actually take a couple of years for that normalization to play out?

Speaker 2

Yes. Alex, maybe a couple of things. Again, I'm just going to give you a few kind of data points and perspectives Just to try to triangulate around us. And we kind of looked at issuance over the last 10 years and then Compare that to our current outlook for 2022. And just to give you a sense of kind of what we're dealing with, the last time that overall corporate finance issuance Was below this current outlook was 10 years ago, it was back in 2012.

Speaker 2

And When you look at our average issuance over that 10 year period and you exclude the 2020 2021 periods, Our outlook for investment grade is about 10% to 15% below that 10 year average. Looking at leverage finance, Our outlook implies issuance probably 5%, 6% above that 10 year average. So The high yield market is very quiet. In fact, we're seeing levels of issuance that are even below 2,009. So an important component to our overall kind of outlook is leverage loans.

Speaker 2

I think as you know, I'm going to tie that on then to thinking about how to triangulate that then Yes, our medium term outlook, because we continue to feel good about that medium term outlook. So You've heard me talk about issuance over this kind of 10 year period. And whether you look at overall issuance or just fundamental issuance, So either overall including structure or just fundamental. It's grown roughly in line with GDP growth. Obviously, plus or minus 1% or 2% and GDP growth grew at something like 3% over that period.

Speaker 2

Obviously, there have Puts and takes to that on any given year. The asset class and the fastest issuance growth has been leveraged loans over that period of time and that contributed to a It's a favorable mix over the time period. You hear us talk about it on these calls all the time. So now let me go to medium term. And if you think about the building blocks that we always talk about, GDP growth, pricing, recurring revenue Growth from first time mandates and mix.

Speaker 2

If we've got modest economic growth, which is the outlook, I think kind of in the near to medium term, let's call it low single digits, then translate that to issuance growth Conference? And low single digits is probably a reasonable assumption based on history like I was just talking about. You got a modest benefit from ongoing disintermediation. And rather than mix as a tailwind, I'd probably assume that's either neutral to a slight headwind. So if we're in a recessionary scenario, We're probably at the low end of that low to mid single digit range.

Speaker 2

And if we're experiencing recovery and expansion, we'd expect to be at the higher end of conference call? So Alex, hopefully that gives you a little bit of a sense of why we continue to be comfortable with that kind of medium term guidance. And I know we got a lot of About it when we first put it out into the market, but I think you can kind of see where we're coming from here.

Speaker 3

No, no. This is helpful and I Appreciate very uncertain times these days. Just maybe quick one then and apologies if that has come up already on the Moody's Analytics side. Seems like clearly a lot of mission critical products, a lot of demand because you're expanding into high growth areas. But just Any areas that I should be aware of as it comes to potential pockets of risks, things that maybe clients can do without In a tougher selling environment or any areas where maybe sales cycles are lengthening at all?

Speaker 3

Or is it really strong across the board?

Speaker 2

Alex, not really. We continue to have some very strong retention rates and there's nothing I could point to there.

Speaker 3

Easy enough. Thank you.

Operator

And our next question comes from Andrew Steinerman with JPMorgan.

Speaker 11

Hi. I wanted to ask about Decision Solutions. Rob, you mentioned some seasonality of a specific product in that area. And I guess you were talking about it here in the Q2 because Decision Solutions organic revenue growth Year over year substantially decelerated to 8%. So if you could just tell us about the banking product that drove that growth deceleration in the Q2.

Speaker 11

And of course, you can imagine the other side of that question is, will that seasonality of that banking product benefit 3rd quarter Organic revenue growth for Decision

Speaker 2

Solutions. Yes, Andrew. Let me first Start by just reminding everybody about the really kind of the core components of what's in Decision Solutions and The largest business collectively by revenue is insurance, when we look at kind of our legacy insurance business in RMS. 2nd is Banking and 3rd is KYC. We've got a few other smaller businesses like structured finance and so on.

Speaker 2

So We had very good growth across the entire sub segment of Decision Solutions, particularly KYC. And I think the best thing to do is to look at ARR here because there's been a little bit of revenue lumpiness in In the first half of the year, when I referred to seasonality, that's really what I was referring to. So let me just kind of take some of the key numbers. As you said, Andrew, organic constant dollar revenue, 8% in the quarter, 16% last quarter. However, The key number here is organic ARR grew at 11% for Decision Solutions and that's the same as last quarter.

Speaker 2

So there is the same altitude of kind of sales and building the book of recurring revenue. There's no change there. KYC continues to be kind of a high flyer growing in the kind of mid-20s percent on an organic constant dollar Basis. So where does the lumpiness come from? Both our insurance and banking businesses have a mix Still of on prem and SaaS solutions.

Speaker 2

And you've heard us talk about we're working to migrate more of the portfolio to SaaS, that's true. But we still have a suite of on prem products that introduce an element of lumpiness given some aspects of revenue recognition. And That was the case for the first half of this year. But we accounted for that as we thought about our full year guide. So insurance, RMS, you heard me say, on track.

Speaker 2

Our insurance, our legacy insurance business growing very nicely. In banking, there we're seeing some very nice growth as well. I'm going to touch on that In just a second in terms of what is driving that. We've got 3 primary areas that we serve for banks, lending, risk management, finance and planning. We're continuing to really build out our SaaS offerings.

Speaker 2

That is the highest growth Part of our banking business, it allows us to really deliver a lot more functionality and usability to our customers. That then drives a lot more usage from our customers and that supports the overall kind of value proposition and pricing opportunity for us. One area I would maybe call out, Andrew, is commercial real estate. You've heard us talk a lot about the investments that we've been making there. Obviously, Commercial Real Estate is very important to our banking customers and we recently signed a strategic partnership with 1 of the largest Commercial real estate lenders in the country to kind of co develop a commercial real estate lending solution.

Speaker 2

We're very excited About doing that and bringing together all of our commercial real estate data and analytics with our cloud based loan origination tools To really help this bank and other banks with a more holistic view to streamline their processes. That's one example, But I'm going to come back to the key takeaway here for Decision Solutions because we've had some volatility in the revenue from quarter to quarter Is look at ARR and ARR for Decision Solutions is 11% in the quarter, same as last quarter. So no change to the very good Growth we're seeing across the entire Decision Solutions portfolio.

Speaker 11

Right. And Rob, there was a piece at the end. Do you expect the seasonality to benefit 3rd quarter for Decision Solutions organic revenues?

Speaker 5

I think what we're likely to see in the 3rd quarter is Pretty similar to what we've seen in the Q2 and then an acceleration at the end of the year in Q4.

Speaker 11

Okay. Thanks, Mark.

Operator

And our next question will come from Andrew Nicholas with William Blair.

Speaker 7

Hi, thanks for taking my questions. First one is just kind of on your own

Operator

M and A,

Speaker 7

appetite, obviously a challenging environment or at least a choppy one. The current economic conditions or perhaps some conservatism from a growth perspective heading into the end of the year impact how you're thinking about doing deals? I know you already kind of lowered share repurchase expectations due to the free cash flow, presumably the free cash flow decline, but wondering how that impacts your outlook for M and A as well.

Speaker 5

Good afternoon. I'm going to spend just a minute talking about share repurchases, and then I'm going to turn it over to Rob to touch on the M and A component of your question. So That's most importantly, capital planning and allocation strategy remains unchanged. And this year, we are still planning to return Approximately $1,500,000,000 to our stockholders or approximately 100% of our projected 2022 free cash flow That's the midpoint of our guidance range. As you can appreciate, global economic conditions have significantly weakened call?

Speaker 5

Relative to our Q1 outlook. And we spoke about several of those factors, but primarily the uncertainty around the duration and severity of the conflict in Ukraine as well as heightened inflationary risks. And although we ultimately view these market conditions And the disruption to be cyclical, we are being very thoughtful about our leverage and liquidity levels. And we're going to do that in order To ensure that we maintain a strong balance sheet and an equally important financial flexibility. And as a result, we have lowered our guidance for full year 2022 share reposed to approximately $1,000,000,000 And that means we've adopted a slightly more conservative short term approach to capital management with the philosophy of preserving financial firepower to be able to take advantage of market conditions if and when they arise.

Speaker 2

Yes. And let me add to that. So we had done a number of bolt on acquisitions over the last, Let's call it 18 months. We've been really focused on executing on that portfolio of acquisitions and integrating and getting the real business value Out of those acquisitions, in fact, we track our performance against our acquisition cases and we review them Every quarter and we included in the slides kind of our performance on some of our larger acquisitions to date and we feel Very good about that. It's interesting because I ran the corporate development team for years and in these Periods of market dislocation, the initial instinct is to think, oh, well, this has got to be a buyer's market, valuations are down so sharply.

Speaker 2

But like we're talking about what's the duration of this kind of correction, the same thing the sellers are thinking about. This is a 6, 9, 12 month Correction, I remember when we were talking about multiples at one level 12 months ago and so I'm not a seller. So you tend to see oftentimes some disconnects between valuation expectations between buyers and sellers in these markets. If you've got companies that have very leveraged capital structures, eventually that may force them to do something. That's often not the case in our sector.

Speaker 2

And so I guess the last thing I would say is, like Mark said, we've got plenty of financial firepower. We have a very clear view of the kinds of things that our customers want and need from us and what would be additive to our offerings for our customers. And so we're always in the lookout, but I'd say No, we're going to continue to be disciplined in this market and continue to extract the value Out of the things that we have invested in over the last 12 to 18 months.

Speaker 7

Great. Thank you. That's helpful. And then maybe A follow-up, Rob, to a point that you made on kind of the success of some of your acquisitions of late. Obviously, on Slide 22, You note mid-30s type growth for your screening capabilities and being ahead of plan there in terms of $300,000,000 of revenue in that business.

Speaker 7

I was wondering if you could spend a little bit more time on what exactly within that business Is outperforming your initial expectations. Obviously, the market is a strong one, but if there's anything from an execution standpoint or a product offering standpoint that's really resonating with customers, I would love to hear it. Thank you.

Speaker 2

Yes. So I think this is really about Our KYC and again, I'm warning you, we may move on from that term because I think in some ways it's a little too limiting for what it is. But Very simply, we help customers assess, screen and monitor the individuals and companies that they do business with or that they want to do business with. And we do that by helping them know the entities and individuals, by understanding the risks associated with those third parties And also to execute at scale with some workflow tools. And you've heard us talk about the goal here is to be both more efficient and more effective.

Speaker 2

Call. And so I talked about I mentioned at Investor Day, virtually every company around the world is working to better understand the risk profile of their customers, but also their suppliers and other counterparties. So there's a big opportunity here and back to acquisitions and investments. In the Q4 of last year, we were pretty active in this space and we made several acquisitions and that has allowed us to begin assembling A much more comprehensive offering to support customers in their KYC workflow. That includes data and intelligence with really unmatched coverage on entities ownership and companies.

Speaker 2

It includes an element of workflow orchestration with highly configurable integrated and automated KYC management And also the thought leadership and expertise that our customers expect of Moody's. So we're pulling all of this together In a way, leveraging these world class data sets, leveraging now this highly configurable Workflow platform and all the expertise we have to not only help with, as I said, the traditional know your customer use cases, But now going even more broadly to know your counterparty, know your supplier and so on. So there's a lot to it, but that All of that, back to your original question about RDC and what we had said, we knew that RDC was going to be a very important component Basically, unlocking our opportunity here and in fact it has been.

Speaker 7

Thank you.

Operator

Thank you. Our next question comes from Faiza Ali with Deutsche Bank.

Speaker 12

Yes. Hi. Thank you. So I wanted to just sort of first, just put a finer point on your medium term outlook for MIS. I think at the time when you put out that outlook, it was based off of 2021 issuance levels.

Speaker 12

And I just want to clarify, I think what I'm hearing you say is that we should think about the base now as more 2019. Like is that the right way to think about sort of normalized growth from here? Or am I misunderstanding What you're saying with respect to your medium term outlook?

Speaker 2

Yes, I think generally, I think That is right for some of the reasons that we've talked about on the call so far.

Speaker 5

And maybe if you just add one Maybe just add one quick comment to Rob's remark. When we set our medium term outlook for MIS revenue in particular, We did build in a period of stress and economic stress into the model as the setting of our medium term target really followed That's a point that you're making, 2 historically strong years of issuance in 2020 2021.

Speaker 12

Okay, understood. And then just as a follow-up on the MA business, I heard you say that you haven't seen anything Any type of slowing in any component of that business at this moment in time? I'm curious again on your medium term outlook, Which was in the teens. Like how resilient do you think that business is to the macro Grow environment in general, are you confident in those targets going forward?

Speaker 2

Yes. We've talked about this a bit before. It's a very resilient business. And I think the reason for that is if you think about what we're helping our customers do. And we talked about again, it may sound a little bit trite, but in these You've got customers who are trying to navigate all this uncertainty and they need expertise, they need data, they need analytics, they need expertise.

Speaker 2

And so they really, really value us in those periods. As we've continued to broaden out our offerings, You think about I talked about what are we doing in banking. It's loan origination, risk and finance at risk management and finance and planning. Those are not things that banks are turning off in periods of stress. Think about what's going on across our insurance portfolio.

Speaker 13

I mean, we've got models that are

Speaker 2

literally at the very heart of Those that are literally at the very heart of pricing property and casualty list for insurers. And in our KYC business, You've got to make sure that you are not doing business with sanctioned entities or bad people, whether we're in good periods or bad periods. And so we just we have some very mission critical workflows that we're serving for customers. And you can see from the retention rates, this stuff is very sticky. Once we're embedded into these workflows, the retention rates are very high.

Speaker 2

So That's why I tend to feel quite confident about the business even when we're in periods of kind of market stress.

Speaker 12

Great. Thank you so much.

Operator

And our next question will come from Manav Patnaik with Barclays.

Speaker 14

Good afternoon. This is Brendan on for Manav. I just wanted to ask and I apologize for going back to this, but about The issuance,

Speaker 2

that you talked about the

Speaker 14

$4,400,000,000,000 near the average if you exclude the pandemic. And I just want to be clear. It sounds like you're saying is this more so a new base to grow off of Based on your current guidance, when we think about 2023 or is there still or are you still thinking there There's a bit of rebound that could happen or is that more so when the refinancing loss pick up beyond that?

Speaker 2

Hey, Brendan. Good to have you on the call. I mean, I think we have to acknowledge that the last two years We're unusual years. And I think a lot of analysts and investors are looking back at long time series of issuance just like we are. And those last 2 years are in fact unusual.

Speaker 2

And so as we're kind of running our scenarios, We are kind of looking at historical patterns and what we think is reasonable growth on a go forward basis.

Speaker 14

Okay. And then just wanted to ask on the RMS and ESG, your businesses. How that's doing? And any current trends? Any change in trends there in the last couple of months?

Speaker 14

And then after that, just Anything on M and A opportunities in that space, if it's still pretty pricey?

Speaker 2

Yes, let me start with RMS. So it's been almost a year in fact since we announced the acquisition and we're having some I've talked about a little bit in the past, some very encouraging discussions with major insurers and reinsurers We really want to automate and digitize and integrate. And we're integrating across our product suite. We're co creating new Products. Last quarter, I think I mentioned that we're mapping all of the properties in CMBS Securities to RMS Dana.

Speaker 2

There are a few other areas where we're making some nice kind of early progress. There are a number of use cases for banks that we have identified and are starting to get some traction helping banks particularly around looking at physical risk In their portfolios, we're working on starting to do the same around transition risk. You mentioned ESG, Brendan. A lot of interest from insurers in integrating Our ESG data and scores into RMS's underwriting solutions so that they can better understand the ESG profile of companies as they're underwriting and looking at their broader portfolio. We've already got several Very nice customer wins there and we are building a nice pipeline.

Speaker 2

And we're also we also have some very nice product enhancements. So as you may remember, Before we bought RMS, we had a small climate business. And now we're able to take those RMS models and data And to be able to kind of power some of those climate solutions, some of our climate on demand solutions. We're also starting to pick up the pace around cross selling conversations with insurers to help them around a broader range of risk assessment needs. So In general, feeling pretty good about what's going on across the company in terms of not just RMS, but also in terms of climate and ESG.

Speaker 5

Maybe just two quick quantification points there to help us modeling. We still expect RMS' sales growth to be in the mid single digit percent range this year, and that's obviously up from the historical growth rate of the low single digits. And then for 2022, we're expecting to further increase our direct And attributable ESG related revenue by about 20 percent to $34,000,000 That's just a little bit lower than what we previously forecast, simply reflecting Some weakness in the sustainable finance

Speaker 13

market.

Speaker 14

Thank you. And just anything on M and A and and

Speaker 2

Year. It's a pretty fragmented market. There aren't a lot of kind of scale opportunities to move the needle out there. That was one reason that we really felt good about the acquisition of RMS because you look around and you think If climate analytics are important to your customers, how do you get that at scale and how do you get that in a platform that you feel very, very confident In the analytics. And as a discussion we had with our Board at the time of the acquisition, they've been call.

Speaker 2

RMS has been serving the global insurance industry for over 30 years. So you know that those models are robust. So I guess I would say ESG is probably Primarily in organic opportunities and investing organically. We keep our ears to the ground, but like I said, not a lot of scale opportunities out there.

Speaker 5

Thank you.

Operator

And our next question will come from Jeff Silber with

Speaker 7

BMO Capital Markets. Thanks. I know it's late. I'll just ask one. I was wondering if

Speaker 10

you can just get a

Speaker 7

little bit more color about what you're calling, I guess, the geolocation restructuring program, not only in terms of details, but I'm just curious why now, why not last quarter, why not next quarter, etcetera?

Speaker 5

The $75,000,000 or up to $75,000,000 geolocation restructuring program that we announced this morning Was really focused on optimizing our existing real estate footprint, further utilizing our Lower cost locations where the requisite skill and talent exists and really ensuring our focus and resources remain Firmly allocated to our prioritized areas of opportunity. Why now? I think the workforce of the future, workplace of the future, Our programs at Moody's are progressing well, and that has presented opportunities for us to be more efficient with use of that stockholder capital. And that means for the Q2 that we recorded that $31,000,000 pretax restructuring charge, which is mostly related to personnel expenses. And then as we exit and cease use of our lease office space, which is expected to really begin in the Q4 of this year and continue through the first half of twenty twenty three, You can expect us to reflect between another $25,000,000 $35,000,000 in pretax restructuring charges In our financials.

Speaker 5

For the $40,000,000 to $60,000,000 in annualized savings that we anticipate generating through these actions, The majority is going to be redeployed towards our strategic investments, and that's going to include further workplace enhancements, further employee retention initiative. And the idea here is really to be able to create that financial flexibility to balance between profitability in the short term and then supporting business margin Expansions over the long term. And then finally, just as an aside, if the issuance downturn is more Severe and protracted than what we've modeled as our central case. You could expect us to take more aggressive actions around expenses In the future.

Speaker 7

Okay. That's really helpful, Mark. Thanks so much.

Operator

And our next question will come from Craig Huber with Huber Research Partners. Call.

Speaker 2

Great. Thank you. I wanted

Speaker 15

to get back to this Decision Solutions sub segment, if I could. Obviously, it was up 12% organically excluding Currency for 6 months, but only up 8% here in the Q2 year over year. You talked about the banking piece of that, if I heard you right, being the major reason for the slowdown, I guess. But wasn't that also an issue in the Q1? And I guess I'm trying to figure out what's changed in the latest 3 months versus the Q1 account for the slower growth there?

Speaker 2

Yes. Craig, I guess maybe a couple of things I would just flag and back to the Both banking and insurance have some, as I said, both a mix of on prem and SaaS solutions. And You had some aspect of, I'll call it, kind of timing and revenue recognition that contributed to What was going on in the Q1 and as well in the Q2. And so that's one reason that we kind of keep going back to ARR Because it gives the ability to kind of look through some of the kind of rev rec issues that you get from Kind of this on prem product suite that we still have. And so back to As I think about the underlying kind of health of that business, I'm looking at ARR And ARR for Decision Solutions 11% same as it was last quarter.

Speaker 15

And my follow-up please. On the credit research business you guys had for many years obviously, maybe just touch on the growth rates there you're seeing. It seems like it's holding up quite well despite the very volatile Markets, maybe talk about pricing there if you could, if that's changed at all? Thank you.

Speaker 2

Yeah. You're right. That continues to be a very nice business for us. I talked a little bit about the Kind of demand in times of uncertainty. That's certainly true.

Speaker 2

In fact, we've shared some statistics around usage. And you saw during COVID usage really spiked. We saw during the Ukraine crisis Usage spikes because our customers view this as really kind of must have insights into the credit markets. So that all then supports the value proposition and the pricing opportunity for us. We've also had some success in actually expanding the usage at some of excuse me, Kind of the broad usage at some of our customers as well.

Speaker 2

So all of that is contributing to supporting what is Continue to be some nice growth. And I also mentioned, Craig, we're continuing to make some enhancements in that CreditView platform that we think will provide ongoing support for growth.

Speaker 15

Great. Thank you.

Operator

And moving on to Owen Lau with Oppenheimer.

Speaker 3

Thank you for taking my question. I only have a Quick two part question. So the first part is, could you please talk about the FX impact To your overall business to your overall results in the Q2? And then the second part is with regard to the interest expense guidance. I think you raised that number a little bit.

Speaker 3

Could you please talk more about that and how we should think about the sensitivity on rising rates and how we should to model our interest expense going forward? Thank you.

Speaker 5

Owen, good afternoon and thank you. I'll start with the FX impact first, and I'll try to be comprehensive here as I realize this is an important element for consideration. So So in the Q2, we did see the U. S. Dollar strengthened quite considerably against both the euro and the British pound.

Speaker 5

Specifically, the end of quarter Spot rates were $1.05 against the euro and $1.21 against the pound. And that's meaningfully down from $1.11 Against the euro and £1.31 against pound last forecast. And as a result, the quarterly MCO, MIS and MA revenues We're unfavorably impacted by approximately 3%, 2% and 5%, respectively. And the net impact of all of that slowed down to adjusted diluted EPS of about $0.07 negative in the quarter. If I sit back just for a minute, so approximately 45% of our revenue is generated through our international operations.

Speaker 5

And then of that, approximately 65% is generated in EMEA. And so further strengthening of the U. S. Dollar specifically against the euro is going to weigh on our actual results as the year progresses. Similarly, about 40% of our operating expense base is denominated in non U.

Speaker 5

S. Dollar currency as over 60 ish percent of our employees are located outside of the U. S, and that's going to help neutralize or at least partially neutralize the FX movements. So if I were to roughly quantify the annualized impacts of foreign currency movement for modeling purposes, every $0.01 FX movement Between the dollar and the euro is going to impact full year EPS by approximately $0.02 and full year revenue by about $8,000,000 to $10,000,000 And then every one thing FX movements between the dollar and the British pound is going to impact full year revenue by about $2,000,000 and expenses by about $2,000,000 So more or less neutral on an EPS basis. And then finally, if I think forward, When we set our medium term targets back in February, we had assumed constant foreign currency exchange rates over the medium term.

Speaker 5

So specifically the euro of the $1.14 to the dollar and the pound of $1.35 to the dollar. And so if foreign exchange rates remain at the current levels Or if the U. S. Dollar continues to appreciate, we're going to see a little bit of headwind to achieving the medium term targets become A bit more pronounced. On your second question around interest expense guidance, we do have a $500,000,000 2 point 6% to 5% coupon note that is maturing in January 2023.

Speaker 5

And our revised 2022 interest expense guidance of $220,000,000 to $240,000,000 incorporates the current expectation that we will look to refinance our January 2023 notes In the second half of this year. And given the rising benchmark rate, you could naturally expect a coupon or a higher coupon On a similar size and duration, as the note that is due in early 2023. And so for additional context, Historically, we've refinanced upcoming maturities before they become due. And that's really part of our commitment to effectively manage our capital structure and maintain Financial flexibility. The best example of that, you can think about November 2021 when we refinanced the $500,000,000 4.5 percent debt that was maturing in 2022.

Speaker 5

So maybe last comment on the topic. In the event we don't proactively refinance the upcoming bond maturity, And that would clearly reduce our interest expense expectation for the full year of 2022.

Speaker 3

Thanks a lot, Mark.

Operator

And our next question will come from Russell Cloughes with Redburn.

Speaker 10

Yes. Thanks for having me on late in the day. So those are the helpful comments so far on the expenses. I wonder if you could detail what you would be call to do with respect to reducing expenses in the second half of the year if we do see a continued deterioration in markets?

Speaker 2

Hey, Russell, it's Ross. First of all, I just want to walk you to the call. And just in

Speaker 5

terms of additional actions that we would take during the second half year, I think there are 2 ways I'd like to look at this. There's definitely actions we'd take based on A quick outlook going into 2023 and then actions we take which is not our central case based on sort of a structural outlook going into 2023. In terms of cyclical activities that we could take, certainly slowing down hiring would be 1. There are also natural expense levers in terms of managing our T and

Speaker 9

E costs, as well as

Speaker 5

managing our incentive compensation accrual. We also have the ability though I would preserve this really for more structural based outlook changes of reducing our organic strategic investments during the year or staggering those to be a slightly lower burn rate. And I think the reason that's important is those initiatives really do underpin our medium term guidance when we think about MIS and MA revenue.

Speaker 10

Okay, good. That's helpful. Thanks for the comments as well, Rob. And as a follow-up, I just wanted to confirm What you're saying in the guidance that you're not going to be buying back any more shares for the rest of this year. And from your comments, all the firepower is going to be saved for bolt on M and A.

Speaker 10

If that's the case, where do you believe you need to focus investment in M and A from a data product perspective? And perhaps as a final note and maybe a polite challenge, given the balance sheet is very healthy, as you noted, and the shares are So you're close to a 24 month low. Why stop the buyback now? Thanks.

Speaker 5

I am maybe just to reiterate some of the key points That we spoke about earlier. So we have lowered our guidance for full year 2022 share repurchases to approximately $1,000,000,000 and that is lower than our acquired guidance of $1,500,000,000 And you could think about that as reflecting the current economic environment, specifically the fact that our outlook for full year Net income of full year EPS is commensurately lower by that amount. And from a CFO's perspective, it's important, At least at this point in time to adopt a slightly more conservative approach to capital management. And the idea here is to again preserve financial firepower to be able to take advantage of market opportunities. Those market opportunities could include further share price repurchases or they could include M and A.

Speaker 5

In other words, I'm not looking to signal 1 over the other, only to create a financial flexibility as we approach the end of the year.

Speaker 10

Okay. And then in terms of priorities, if it is M

Speaker 5

and A driven, right, do

Speaker 10

you think you lack in terms of data or product?

Speaker 2

Yes. I think you've seen us be very active in that kind of know your customer verification space where we have A compelling set of assets in a high growth market. We're supplementing our acquisitions that we've done today with Organic investments, but there may be other opportunities there and that would be very attractive for us because of the growth rates we're seeing And the traction that we're getting from customers. I would say also our banking business, you've seen us Make some bolt on acquisitions there over the last several years, same with our insurance business. We've also over the last few years added what I'll call kind of domain capabilities that are really important to this idea of really Bringing to life integrated risk assessment for our customers and so ESG and Climate and Properties and other things, we believe are Yes, we haven't done those at the same scale, but are important in terms of this concept of delivering integrated risk assessment for our customers.

Speaker 5

Okay. Thanks, Jeff.

Operator

And our next question will come from Jeff Meuler with Baird.

Speaker 16

Yes, thank you. The question is how independent are the M and A compensation plans from the MIS or overall corporate performance and I know shared services burden can shift and between the segments or it can impact executive comp and whatnot. But I guess the lead in for the question would be Given the magnitude of the consolidated revenue guidance reduction, I would have expected more of an adjustment in that operating growth plus incentive compensation expense bucket. But I'm wondering if the answer is largely because there's this big Pool of MA expense that's largely untouched and given the current circumstances.

Speaker 2

Yes. So I mean overall, we have kind of 1 corporate bonus pool, then we obviously have allocations to our businesses and our functions Guided by performance. But I think at a high level, you're right, I mean, it's been a tale of 2 cities. The MA performance has been quite strong, the MIS performance less so. And so that We then expect that to be reflected in our compensation accruals.

Speaker 16

Okay. And then, Mark, when I add up the factors on Slide 23, I get to like 6% year over year growth. Are you trying to signal something at the lower end of the high single digit percentage increase range? And just to be clear, that includes a point from restructuring charges, which are then excluded on an adjusted EPS basis.

Speaker 5

Thank you for allowing me to reconfirm that point. That's exactly right. So I'd certainly like to signal the lower end of the high single digit percentage growth for full year operating expenses. That, of course, to your point includes approximately 1% from the restructuring program.

Speaker 16

And that restructuring is excluded from adjusted EPS, correct?

Speaker 5

That is correct. Okay. Thank you.

Operator

And our next question comes from Shlomo Rosenbaum with with Stifel. Hi, good

Speaker 13

morning or actually good afternoon. Thank you for taking my questions. I'm just trying to think a little bit about Slide 17 in terms of MIS with the debt has grown throughout varied economic conditions. Is that really the right way to look at it? I mean, we're looking at 2,008 where it looks like debt is 9, debt went up, but The MIS business had significant declines during that point in time.

Speaker 13

What should we be looking at in terms of really moving the needle call back and forth for the business. Is it really should we be looking at high yield and leverage loans? I mean, How should we be thinking about that and then the potential impact from rising interest rates, particularly in those securities In terms of like CFO's interest in just rolling their debt forward at current levels or potentially looking to delever?

Speaker 2

Maybe I'll provide a few perspectives and then I'll see if Mark wants to build on that. I mean, Yes, there are, I think, a number of ways to kind of triangulate around what you think kind of a growth rate for the business going forward is. I do think the overall stock of Global Debt is an important one. And what I think this chart in part shows is that you've obviously got new issuers coming into the market year after year. And so that stock of debt has continued to grow and that's very important because these maturity walls that we talk about provide kind of a We've used the term kind of a ballast for the business.

Speaker 2

And there's just been a lot of debt that has been issued in particular in the last few years. But the overall just Stock of debt has gotten much larger. And then we look at the flow of debt and we've had, I think, a good bit of conversation about the flow of debt on this call. And you touched on mix. I mean, one of the big themes over the last 10 years Was the growth of the leveraged finance markets and that in fact has been favorable to our mix over the years.

Speaker 2

It's hard to say what I said in the near term, you could see mix being neutral to even negative. But keep in mind, Part of what is driving that is that you have private equity firms that have raised an enormous amount of capital over the last Yes, a few years. And so they are deploying that capital with buyout activity, and that has really fueled The leverage finance market and the leverage loan market in particular, I think that's actually been a kind of an important structural trend that has supported Issuance over the last decade.

Speaker 5

And maybe, Sean, just to add on to Rob's comments, I think it is a little bit of a different direction here, but I think it would be helpful As you consider the moment in history that we're in. And the way I want to approach this is really just taking it through the lens of cyclicality versus structural Call, over time. And when we think about a cyclical shift in issuance, Conference. And I think about now both refinancing activity as well as new debt issuance. For example, existing issue is growing the balance sheets or new companies accessing the debt market.

Speaker 5

We really could consider the following point. So firstly, a cyclical decline, which is our central case scenario, it's really temporary until I suppose 1 of 2 conditions happen, Either funding costs turn from rising to falling or and or growth trends turn from falling to rising. And You know, our belief is that those two conditions really might be met by the second half of next year if inflation is reined in by the first half of next year or by 2024 If this is a longer downturn, I. E, inflation is hardly draining or it suffers materially. Not our central case, but a structural decline in debt issuance Or you consider aggregate global deleveraging would be a longer lasting phenomenon where companies and governments Across various sectors and regions decide to shrink their balance sheet, and that's really a result of demand or supply in balance.

Speaker 5

So you think about on the demand side, longer term Global growth prospects are lowered so significantly, the companies aren't expanding or social needs have fallen. So government funds expanding services, for example. Similarity on the supply side, savers are saving less and there is less money to borrow or savers are investing in vehicles other than the debt markets. And I think the key point here in that the years that are going to follow sort of 'twenty three and 'twenty four, we may not ultimately return to a period of low inflation and low rate, The debt issuance is likely to remain in a very efficient method to refinance growth. And ultimately, that becomes very important In how we think about sort of the outlook, not just for this year, but over the medium term period in consideration.

Speaker 5

And maybe a final point here is, the global economy has really gone through many cyclical and structural shifts over time, and debt has remained a key method of financing that growth and innovation.

Speaker 13

Okay. Thank you. Just one follow-up. Where are you with retention? I mean, there's a lot of talk of reinvesting to forward To improve retention and things like that.

Speaker 13

And you guys are really are in a very much a people business for a lot of it. Where are you with your retention metrics now? Are you comfortable that you have that you will be deploying enough to retain the levels of employees that are earning the quality employees that you're looking for?

Speaker 2

Yes. Shlomo, you're right. People are absolutely critical To our business, and it's what has gotten us through the pandemic so well. And we have indeed made some investments in making sure that we retain our people. In general, I would say that based on the kind of data that we have and kind of our ability to benchmark against financial services, We think we're either broadly in line or even slightly better in terms of overall employee retention than Financial Services more broadly.

Speaker 2

But it continues to be a competitive market and we continue to make sure that we're making the right investments Not only retain the people we need, but attract the people that we need as well.

Speaker 6

Thank you.

Speaker 2

And one other Selma, one other thing to add to that, sorry, is not all about compensation either. Compensation is important, but we hear from our employees all the time that So, there are other aspects of working at Moody's. It's about working at a company that you feel has a real purpose and does something important in the world. It's about Having the flexibility that you value, we did a recent employee survey and our employees told us we're doing a pretty good job on workplace flexibility. So we're going to continue to make sure that we're focused not just on compensation, but on the whole kind of basket of Things that contribute to kind of a compelling value proposition for our employees.

Operator

Thank you. And that does conclude the question and answer session. I'll now turn the conference back over to Mr. Rob Faber for any additional or closing remarks.

Speaker 2

Okay. So thanks everybody for joining today and we look forward to speaking with you next quarter. Goodbye.

Operator

Thank you. This concludes Moody's Q2 2022 earnings call. Call, the company will post the MIS revenue breakdown under the Investor Resources section of the Moody's IR home page. Additionally, a replay of this call will be available after 4 pm Eastern Time on Moody's IR website.