Good day, everyone, and welcome to the Moody's Corporation First Quarter 2021 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 questions and answers following the presentation. I will now turn the conference over to Shivani Kak, Head of Investor Relations. Please go ahead.

Thank you. Good morning, and thank you for joining us to discuss Moody's first quarter 2021 results and our revised outlook for full year 2021. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the first quarter of 2021 as well as our outlook for full year 2021. The earnings press release and a presentation to accompany this teleconference are both available on our website at ir.moodys.com. Rob Fauber, Moody’s President and Chief Executive Officer, will lead this morning's conference call. Also making prepared remarks on the call this morning is Mark Kaye, Moody's Chief Financial Officer. During this call, we will also be presenting non-GAAP or adjusted figures. Please refer to the tables at the end of our earnings press release filed this morning for a reconciliation between all adjusted measures referenced during this call and GAAP. I call your attention to the Safe Harbor language, which can be found towards 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, 2020, 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 the call this morning in a listen-only mode. I will now turn the call over to Rob Fauber.

Thanks, Shivani. Good morning, everybody, and thanks for joining today's call. I'm going to begin by providing a general update on the business, including Moody's first quarter 2021 financial results. And following my commentary, Mark Kaye will provide some further details on our first quarter 2021 performance as well as our revised 2021 outlook. And after our prepared remarks, we'll be happy to take any questions. Moody's delivered strong financial results in the first quarter of 2021, revenue growth of 24% and an increase in adjusted diluted EPS of 49%, supported by strong performance from both Moody's Investor Service and Moody's Analytics. Improving economic fundamentals and increased M&A activity drove robust issuance in the first quarter, particularly in the leveraged loan and high-yield bond markets. MIS generated over $1 billion in revenue, and that was up 30% over the prior year period. MA's best-in-class subscription-based products and solutions drove revenue growth of 14% in the quarter. And amidst this growth, we're reinvesting back into our business by introducing new offerings, and integrating our recent acquisitions. As a result of our strong performance in the quarter, we've updated our full year 2021 guidance, and we now project Moody's revenue to increase in the high single-digit percent range. Additionally, we've raised and narrowed our adjusted diluted EPS guidance to be in the range of $11 to $11.30. Now turning to first quarter results. This is the first time that MIS' revenue has exceeded $1 billion in a single quarter, while MA has delivered its 53rd consecutive quarter of growth. Moody's adjusted operating income rose 41% to $914 million, and the adjusted operating margin expanded 680 basis points to 57.1%. Adjusted diluted EPS was $4.06, again, up 49%. Now we could not have accomplished these great results without the hard work and dedication of our employees across the world. So on behalf of the entire management team, I'd like to express our appreciation and say thank you. I would also like to acknowledge the continued challenges faced by many of our employees across the globe due to ongoing pandemic conditions and especially our colleagues in India. Now turning back to the first quarter. Issuance volumes reached their highest level in over a decade. While all sectors were active, leveraged finance was really the busiest of all asset classes with leveraged loans and high-yield bond issuance increasing by 94% and 85%, respectively. Now typically, it's unusual for both leveraged loans and high-yield bonds to experience this amount of growth in the same quarter. Issuers tend to favor one type of debt type over the other, depending on their outlook. But attractive refinancing opportunities as well as improving M&A activity supported both fixed and floating rate issuance this quarter. And additionally, CLO market rebounded from a quiet 2020 as issuers refinanced their existing securitizations to take advantage of tighter spreads. Now the strength in the leveraged finance issuance in the first quarter stemmed primarily from an improving outlook for corporate defaults. In January, the global speculative-grade default rate was expected to end the year at just under 5%. And by early April, this outlook had improved to approximately 3% to 4%. That was due to a more positive economic backdrop. And these lower default expectations led to tighter credit spreads and keeping the overall cost of borrowing low despite an increase in benchmark rates, and this created an attractive environment for opportunistic refinancing and M&A-driven issuance. We're often asked about what informs our longer-term views of issuance. And we've shown a version of this graph on the slide before. In fact, I think I showed it in our 2018 Investor Day. And as you can see, the data shows that historically, GDP is one of the best predictive indicators of issuance over the longer term. While this relationship may not hold in any one year, there is a clear correlation that issuance tracks GDP growth over time, and we expect this to remain true going forward. Now that makes intuitive sense as healthy economies promote business growth and capital investment and also provides a positive backdrop for our business over the medium term. Focusing on 2021, we still expect overall issuance to decline, albeit modestly from 2020's pandemic-related surge, and it will still be above the prior 5-year average. Investment-grade issuance, which grew the most in 2020 is expected to face the toughest comparable. However, with GDP expanding segments of the debt market most sensitive to improvements in the economy, like leveraged loans and structured finance are expected to show corresponding strength. And Mark will provide some further details on our issuance forecast by asset class later in the call. Now moving to MA. We're driving robust organic growth across multiple products and solutions. Credit research and data feeds delivered low double-digit growth, driven by continued demand for ratings data feeds, coupled with strong retention rates. KYC and compliance is growing in line with our mid-20% expectations, and that's led by our compliance catalyst and supply chain solutions. And we're continuing to grow in insurance and asset management. In addition to our IFRS 17 offerings, we're expanding our footprint with the buy side, benefiting from the enhanced solutions suite that we obtained as part of our RiskFirst acquisition in 2019. In keeping with the theme of collaborating and modernizing and innovating that I discussed on the fourth quarter earnings call, I want to highlight a few recent examples that speak to how we're meeting our customers' evolving needs. Starting with ESG and climate. We're integrating ESG across all aspects of the business. In the first quarter, we launched a tool that provides climate-adjusted credit scores for approximately 37,000 public companies. In addition, building on our partnership with Euronext, our data powered the launch of their CAC 40 ESG index. In MIS, our analysts are enhancing our ESG analysis with the launch of ESG scores and tools, and that includes our proprietary ESG credit impact score that identifies the impact of ESG factors on a credit rating. And our first batch of scores now cover the entire rated sovereign universe. On prior earnings calls, we've discussed how we're integrating artificial intelligence and machine learning and natural language processing into our products to make them better and faster. One example is QUIQspread. It's our automated financial spreading tool that's now used by scores of banks around the globe. This tool has helped customers substantially reduce both the time and cost spent spreading financial statements. And it's won multiple awards, including best AI Technology Initiative at the 2020 American Financial Technology Awards. Another area where we're using innovative technology is sentiment analysis and scoring capabilities. Our customers tell us they need our help with early warning indicators that filter the signal from the noise. We're delivering monitoring tools to analyze new stories to understand sentiment across thousands of media outlets, and we're seeing increased interest in this use case across our customer base. Our acquisition of Acquire Media has further enhanced our efforts in this space, and we'll touch on that more in a moment. In addition to innovating for our customers, we're modernizing our own technology infrastructure to deliver greater operational efficiency and agility. Just last week, we were proud to be recognized with an honorable mention in the Red Hat Innovation Awards for the open source platform and agile process that we implemented within the rating agency. Now turning to our recent acquisitions. We're making some good progress integrating and leveraging the capabilities that we acquired to enhance our offerings. For example, we integrated information and screening capabilities into our KYC solutions, specifically within our flagship private company database known as Orbis. We're giving customers curated information on individuals and companies in one place and dramatically improving their ability to make better KYC decisions and saving countless hours in the process. And as I mentioned a few moments ago, the Acquire Media acquisition has accelerated our ability to generate scores that interpret the sentiment implied in news stories. We've already integrated the content from Acquire Media into multiple products. That's improving our customers' ability to put facts into context to focus their monitoring efforts and consider risks in a more holistic way. In commercial real estate, we've combined recent catalysts to create Moody's commercial real estate solutions. We're developing new tools that bring together curated data and world-class analytics to support commercial real estate professionals with more integrated lending and investing solutions, which are on track to launch this summer. And finally, we're pairing Zion Financial's asset and liability management solutions and loan pricing tools with MA's existing CECL capital planning and balance sheet software to help customers understand risks and opportunities across their treasury accounting and financial planning departments. And with that, I'll now turn the call over to Mark to provide further details on Moody's first quarter results as well as an update on our outlook for 2021.

Thank you, Rob. In the first quarter, MIS achieved noteworthy results. Strong execution, robust credit activity and favorable issuance mix contributed to revenue growth of 30% compared to a 23% increase in global MIS rated issuance. Corporate Finance was the largest contributor, growing 34%, while issuance grew 37%. This is primarily driven by leveraged finance issuers, both opportunistically refinancing debt and funding M&A transactions. In contrast and in line with our expectations, investment-grade activity moderated as compared to the prior year period. The financial institutions and public project and infrastructure finance lines of business also benefited from strong opportunistic refinancing led by infrequent issuers. Revenues in these sectors grew by approximately 30% year-over-year despite issuance growth in the single-digit percent range. In structed finance, revenue grew 21% as tighter spreads drove elevated CLO refinancing and new CMBS activity. MIS' adjusted operating margin expanded 720 basis points to 67.7%. This is enabled by strong revenue growth, coupled with ongoing cost efficiency initiatives and lower bad debt reserves, partially offset by higher incentive compensation accruals. Moving to MA. First quarter revenue grew 14% or 10% on an organic basis. RD&A revenue rose 17% or 12% organically as KYC and compliance solutions delivered mid-20% organic growth. And customer retention rates remain high. ERS revenue growth of 5% or 4% on an organic basis led by a 15% increase in recurring revenue, driven by insurance products as well as credit assessment and loan origination solutions. Recurring revenue growth offset the expected decline in onetime revenue as we continue our strategic shift towards more subscription-based products. MA's adjusted operating margin expanded 360 basis points to 32.9%. Strong top line growth and execution of our in-flight restructuring program enabled additional operating leverage in the quarter. As Rob mentioned earlier in the call, Moody's adjusted diluted EPS grew by almost 50% to $4.06 primarily driven by our extraordinary performance in the quarter. Growth in operating income contributed approximately $0.94 to adjusted diluted EPS with $0.85 attributed to MIS. Additionally, nonoperating activities, including the resolution of uncertain tax positions as well as the release of associated accrued interest, provided a $0.28 benefit. Turning to Moody's full year 2021 guidance. Moody’s outlook for 2021 is based on assumptions regarding many geopolitical conditions, macroeconomic and capital market factors. These include, but are not limited to the impact of the COVID-19 pandemic, responses by governments, regulators, businesses and individuals, as well as the effects on interest rates or in the currency exchange rates, capital markets liquidity and activity in different sectors of the debt market. The outlook also reflects assumptions regarding general economic conditions, the company's own operations and personnel and additional items as detailed in the earnings release. Our full year 2021 guidance is underpinned by the following macro assumptions. 2021 US and Euro area GDP will rise to a range of 6% to 7% and 3.5% to 4.5%, respectively. The US unemployment rate will decline to between 5% and 6% by year-end, and benchmark interest rates will remain low with US high-yield spreads remaining below approximately 450 basis points. Finally, the global high-yield default rate is predicted to decline to a range of 3% to 4% by year-end. Our guidance systems foreign currency translation at end of quarter exchange rates, specifically our forecast for the remainder of 2021 reflects US exchange rates for the British pound of $1.38 and $1.18 for the euro. These assumptions are subject to uncertainty, and results for the year could differ materially from our current outlook. Following our first quarter performance, we are raising our full year 2021 guidance for most metrics as compared to the guidance provided on February 12. We now anticipate that Moody's revenue will increase in the high single-digit percent range. As we strategically manage our expense base, we are maintaining our expectations for cost growth in the mid-single-digit percent range. Given our improved revenue outlook and expense ability, we project Moody's adjusted operating margin to be approximately 50%. Our updated net interest expense guidance is in the range of $160 million to $180 million, and we reaffirm the effective tax rate projection of 20% to 22%. We raised and narrowed our dilutive and adjusted diluted EPS guidance ranges to $10.40 to $10.70 and $11 to $11.30 respectively. Our free cash flow forecast is now expected to be between $2.1 billion and $2.2 billion, and we continue to anticipate full year share repurchases of approximately $1.5 billion, subject to available cash, market conditions and other ongoing capital allocation decisions. For a complete list of our guidance, please refer to Table 12 of our earnings release. Within MIS, we project full year global rated issuance to decline in the low single-digit percent range, up from our previous guidance of a high single-digit percent decline. Our guidance for high-yield bonds and leveraged loans has been raised to approximately flat and up 55%, respectively, as we expect robust issuance and leverage finance to persist into the second quarter, supported by low borrowing costs and sustained M&A activity. However, we anticipate supply to return to more normalized levels in the second half of 2021 as we believe many issuers will fulfill the majority of the fund needs earlier in the year. Full year investment-grade supply is still expected to decrease by approximately 30%, following a very active prior calendar year. We forecast issuance from financial institutions to be approximately flat. We have not factored the proposed U.S. infrastructure goal into our assumptions regarding public project and infrastructure finance issuance, which we anticipate will decline approximately 15%. Depending on the contents of the final legislation, if it were to pass, it could improve our expectations for the balance of the year. The expected increase in leverage loan supply positively impacts new CLO creation. As a result, we predict structured finance issuance will increase 40%. In line with the surge of leverage finance activity in the first quarter, we're increasing our guidance for new mandates in 2021 to be in the range of 800 to 850. We have updated MIS' revenue outlook to reflect stronger-than-anticipated first quarter performance. We now estimate that MIS' revenue will increase in the mid-single-digit percent range, up from our prior guidance of approximately flat. We're also raising MIS' adjusted operating margin guidance to approximately 61%. For MA revenue, we are maintaining our forecast of an increase in the low double-digit percent range. This is due to strong demand for our subscription-based products, stable customer retention rates, favorable foreign exchange rates and a 2% to 3% percentage point tailwind from recent acquisitions. MA's adjusted operating margin guidance remains at approximately 30% as we expect underlying margin expansion to be partly tempered by an acceleration in strategic investments in 2021. Since we are maintaining our full year 2021 expense guidance in the mid-single-digit percent range, I would like to provide additional clarity and insight regarding our approach to expense management. In the first quarter, operating expenses rose 7% over the prior year period. Of this reported growth, approximately 4 percentage points were attributed to recent acquisitions and the unfavorable impact of movements in foreign currency exchange rates. Ongoing expense discipline continues to reinforce our operating leverage. As noted on last quarter's earnings call, by generating upwards of $80 million in cost efficiencies this year, we are able to self-fund our strategic priorities and reinvest back into the business. The majority of these strategic investments will occur in the second half of 2021. Before turning the call back over to Rob, I'd like to highlight a few key takeaways. First, we successfully executed our strategic and business objectives against the backdrop of robust issuance, delivering meaningful results this quarter, across both operating segments. Second, we are acutely focused on innovation and integration of new features into our products and solutions to meet our customers' evolving needs. Third, we are maintaining expense discipline through ongoing cost efficiency initiatives, which enable us to both reinvest in our key strategic priorities and expand our operating margins. And finally, we are pleased to revise upward our full year 2021 outlook as we drive operating leverage and create further opportunities for growth. And with that, let me turn the call back over to Rob.

Thanks, Mark. This concludes our prepared remarks, and Mark and I would be pleased to take your questions. Operator?

[Operator Instructions] Our first question comes from Toni Kaplan with Morgan Stanley.

Thanks so much. First quarter came in a lot higher than what I was expecting, driven by MIS. But when I look at the guide for the full year, I guess the raise is a little bit lower than what I would have expected, just given the quarter. And I know we're going to comp the strongest quarter in 2Q. So are you just waiting for that to be behind you, or are you just -- are your expectations for the rest of the year lower now than they were, or are you just being conservative because I know we have a lot of positives ahead of us with strong GDP, et cetera. Thanks.

Toni, we have increased our outlook for the full year 2021 adjusted EPS to approximately $11.15 at the midpoint of the guidance range, and that's around 6% higher than the guidance we gave on EPS back in February. The primary driver of that increase is really a reflection of the actual and the expected strong operating performance of MIS. And I'd call it around 6 percentage points. We all see small tailwinds of around 1% from some of the non-operating factors like the settlement of the outstanding tax matter, which is a little bit more favorable than expected, and that's offset in part by FX. We're certainly happy to go into the issuance outlook and our views there separately.

Okay. Great. And just as my follow-up, MIS margins were the highest ever, I believe, and not by an insignificant amount. You're guiding to 61% in the segment for the year. So having a hard time getting down to that level and after the 68 in 1Q. So just maybe help us drill down into the drivers of the lower margin for the rest of the year. Thanks.

We are guiding, to your point, to approximately 61% for the MIS margin for the full year. And that really means, if you put the 67.7% in the context of that, that you would expect a year to go on average margin for MIS is somewhere between 57% and 58%. And that's primarily driven by our year-to-go expectation for issuance activity, which would be down in the low double digits, given our full year guide of low single-digits issuance. And then in turn, if I look at the underlying drivers, could be driven by tough comparables compared to the year ago period and pull forward that we saw in the first quarter, a little bit of the sorted pattern. And again, we're very happy to go into some of those drivers in more detail as the call goes on.

We will take our next question from Kevin McVeigh with Credit Suisse.

Great. Thanks so much and congratulations. I wonder if you could give us just a little context on the insurance and commercial real estate opportunities, specifically within M&A. Obviously, there's been some reinvestment back into the business, the balance the reinvestment versus the base margin change and obviously, the opportunity that insurance and commercial [Technical Difficulty] to the entire enterprise.

Yes. Kevin, this is Rob. Yes. Thanks a bunch. So good to have you on the call. Let me talk about each in turn here. So let's start with commercial real estate. It's really a major asset class for our financial institution and investor customers. And what we're hearing from customers is that they're looking for the integration of just a wide range of data and analytics to give them better insights and make better decisions, especially given all the underlying kind of turbulence in the market. So we acquired REIS a few years back to give us some market and property-level data that we could integrate into our offerings for our customers. And given the importance of that data to both lending and investing decision-making, we then bought Catalyst, and that helped us further build out our national property coverage. And we're -- by the way, we're very pleased with how Catalyst is -- and we're building out those data capabilities in new markets even a little bit faster than we had anticipated. So, you put that together along with our in-house products, we've got something called commercial mortgage metrics, and all of that forms what we call our CRE solutions offering. I touched on it in our prepared remarks. And as part of that broader CRE solutions suite, we're building out lending and portfolio construction and management tools that really address some of these customer pain points in lending and portfolio construction and management tools that really address some of these customer pain points in the industry. Like I said, they want -- our customers want more content integration. And they also want a more digitized and automated and really connected approach that reduces the underwriting time and enhances the borrower experience. So, on commercial real estate, I'd say we're making some investments. We're encouraged by our progress around product development and the early receptivity we're getting from our customers. Like I said, it's a big asset class for them. So, let me turn to insurance just for a moment, and we've called this out on few of our prior calls, and we're seeing some very nice growth in our insurance business. The core driver of that is around insurers seeking our solutions to help them with this IFRS 17 compliance. And our acquisition of a company called GGY a few years ago, it really enhanced our capabilities in this area because it gave us an actuarial software solution that's widely used by insurers for everything ranging from pricing, reserving, asset liability management, financial modeling, hedging and so on. So, it's part of the kind of core risk processes at these insurance companies. And over the years, we've been able to build out our suite of offerings to insurance companies. That includes ALM, regulatory reporting, business analytics. And our view is that our risk assessment capabilities in areas like credit, like commercial real estate, ESG, and climate are all offering us further opportunities to deliver really even greater value to our insurance customers and give us runway and give us runway for some future growth. So, we feel good about both of those opportunities.

Super helpful, Rob. And just within the context of that, maybe a little more, maybe talk about just the M&A opportunity. Obviously, there's been a couple of acquisitions across the sector, a ton of capital. How are you thinking about consolidation in the sector, whether it's within across MA, just any thoughts on that in will help as well to some of the activities in the space.

Sure. I'm sure you can appreciate, we can't comment on potential acquisitions or divestitures, but I can give you some insight into generally how we're thinking about M&A. And we're really looking for assets that I think of as on strategy and are going to advance our risk assessment capabilities that we talk a lot about. So, think about our customers' needs are changing, right, around a wider range of risk. So, we're really focused on high-value data and analytics that are critical to customer workflows and helping them again with a wider range of risk. Historically, we've been very focused on credit, and our customers are asking us for help with more. So, we've been pretty clear about the areas where we're investing in building, and we're trying to get scaled businesses. That includes KYC, and I'm going to say even more broadly, financial crime, private company data, a lot of demand for private company data. Commercial real estate data analytics, I just talked about and of course, ESG and climate. And so that's really kind of how I think about content and maybe just for a moment and how I think about distribution because I think it all ties into how we think about acquisitions. You may have heard us talk in the past about thinking about our ERS business as what we call kind of a chassis, right, a distribution platform for our risk content to financial institutions. And if you think about it, we've got a huge customer base of banks and increasingly, insurance companies that are using our SaaS solutions. And it's just – it's a great platform for up-tiering our relationships and as I said, helping our customers with a wider range of needs. So there's some further opportunities to continue to build out really our comprehensive offering for banks and increasingly, insurance companies. And that's both organically and inorganically and all just building on that installed customer base and growth in the space. So that – hopefully, that gives you a sense.

We will take our next question from Judah Sokel with JPMorgan.

Hi. Thank for you taking my questions. For my first question, I was hoping to take another stab at Toni's question. As you just look at the rest of the year following the first quarter, how did your outlook for quarters two to four compare to how you were thinking about quarters two to four when you gave guidance in February?

Yes, Judah, it's Rob. Maybe I'll kind of start with issuance but that’s an important foundational piece here. Obviously, we've raised our issuance outlook given the strength of the first quarter with global issuance up 23%. But let me peel the onion back a little bit in terms of the rest of the year. So I think Toni acknowledged in her question that Q2 2020 was when we saw that huge surge of investment-grade infrastructure, sub-sovereign issuance. And those three asset classes were up almost 90% in 2Q 2020, that's sequentially, not year-over-year, but – and investment grade was by far the biggest contributor. So with Q1 issuance up 23%, we think that Q2 is going to be inevitably down off this very tough comp, somewhere in the same ZIP code that Q1 was up is kind of generally our thinking. Mark mentioned this sawtooth pattern. We do think we're going to experience a slightly slower summer. We've – in the past, we used to talk about this sawtooth pattern where we see a little bit slower third quarter. So we do expect a modest decline in the third quarter off of what remember was also a record quarter for issuance in Q3 last quarter and then growth in the fourth quarter. And that implies that the issuance for the second half of this year is going to be down modestly off of the second half of last year.

And then if I were to translate the issuance outlook that Rob spoke to – at a high level on an MIS revenue perspective, you could think about Q2 and Q3 being down in the mid-single-digit decline range and then Q4 being approximately flat year-over-year for revenue.

That was really helpful. Thank you for that cadence visibility. Maybe, I guess, as a follow-up, any ability to do something similar or just give us a little bit of perspective in terms of pace through the year as far as margins go and also as far as MA goes? That would be appreciated. Thank you.

Judah, thank you. I'll start a little bit with MCO and then I'll work my way through to MA. As – sorry, MCO's adjusted operating margin for the quarter was 57.1%. On a trailing 12-month basis, that would equate to 51.6%. And so if I think about attributing that to the approximately 50% guidance that we've given for the year, you could think about really 4 primary buckets. The first being operating leverage, which is positive creation of margin in the range of around 100 basis points and things like scalable revenue growth, the benefit of the incentive comp accrual resets, slightly lower new bad debt expense this time around, offset by the expectation of higher travel and entertainment expenses as we invest in further interactions with our customers of around offset in addition by acquisitions of around 50 bps as well. And then finally and most importantly, sort of those strategic investments we want to make back into the business are in the second half of the year into ESG, KYC, CRE, etcetera. And that's probably an offset of around 160 at the MCO level. If I just back for a second and I look at MA, the Q1 margin expansion was really led by very strong 14% reported revenue growth. I'd also say that expenses for MA were lower, primarily related to our announced restructuring at the end of 2020. And that's part of our overall expense management that creates those opportunities to reinvest back into the future of our business. MA is certainly taking the opportunity in 2021 to accelerate the investments in several of our key strategic priorities in the CRE and KYC space. And as we ramp up those investments, we expect that our margin will remain in line with that 30% full year guidance. I've put just a few numbers around that. You could think about it on a full year basis for MA, underlying margin expansion of around 390 bps, offset maybe by 2 large categories, both strategic investments of around 240 bps in MA and then acquisitions of around 130 bps.

We will take our next question from Simon Clinch with Atlantic Equities.

Hi, appreciate, you taking my question. I was wondering if we could just dig a little bit into the breakdown of MA's organic growth this quarter. I was wondering if you could break down what we saw from the acquisitions you had from – the acquisition Bureau van Dijk and that's sort of KYC complex, as well as the other sort of key drivers of that growth.

Yes, Simon, happy to do that. Obviously, we've got some very steady and good growth in MA, and there's a few different drivers of that. First, credit research and data feeds. There's just continued demand for those ratings data feeds and some very high retention rates for the research and data. And that, I think, reflects the importance of the content when you've got these kinds of real market stress and uncertainty. You touched on KYC and compliance. There's demand for both greater precision as well as automation of all this customer vetting. And we're also seeing some heightened customer focus on now using those kinds of tools for understanding things like supply chain resiliency and the risk profile across not only customer base, but supply chains. We actually had a major US corporate recently who subscribed to our Orbis data to help them really better assess the regulatory and reputational risk, like I said, both their customers, but also their suppliers. And then you've got our ERS SaaS products, and Mark touched on it in the prepared remarks. Strong recurring revenue growth, 15% across all three areas of ERS, and that includes credit assessment and origination, insurance and risk and finance. So we've got -- and we've also got an active product development pipeline, and I think we're going to continue to have opportunities in these areas.

Okay. Thanks. And so did I hear that the KYC portion of your business is growing in that mid-20s kind of pace at this point? Is that right?

That's exactly right, in line with our expectations that we talked about on the prior call.

Okay. All right. Thanks. And just wondering to follow up. Would you be able to just give us an update on your Chinese strategy in China and particularly in terms of the current status of that market and what you're seeing right now and what CCXI is actually allowed to do at this point?

Yes. So the license suspension at CCXI is over. And as I think you know, CCXI continues to be the leading domestic rating agency in China. And we're also continuing to have a very strong position in the cross-border rating markets. As we think about China, so we continue to address the domestic market through our position in CCXI, the cross-border market opportunity through MIS, like I said, we feel like we're very well positioned in both. And then there are some emerging opportunities in China that we've talked about a little bit in the past. We've made some investments there to help us with our positioning. One area that we see, a real opportunity in China is around ESG, but more specifically, I'd say, green finance and sustainable finance. And we made an investment several years ago in a small company called Shentel. Think of that as in kind of the same strategy that we employed with our investment in CCXI years ago, and we're working with Shentel to help the market and its evolution around sustainable finance. We also made an investment in a company called MioTech, which uses some very sophisticated technology to capture unstructured data around both ESG as well as KYC. So that -- again, two focus areas for us. So we're looking at how we can start to address the market beyond just the -- what I'd say, the core ratings business as well as our core business in MA.

Your next question comes from Alex Kramm with UBS.

Yes. Hello, everyone. Apologies in advance for coming back to the same topics that was asked a couple of times on MIS outlook, but I don't think you directly answered a couple of those questions. So thinking about the outlook change again on the MIS top line, and I know you don't give a quarterly forecast, but it does appear if you're thinking about a typical seasonality for the year, right? Obviously, the comments you just gave a couple of questions ago with a down in 3Q, and 2Q and 3Q, obviously make a lot of sense. But in terms of how the outlook for the remainder of the year has changed from what you said at the beginning of the year, maybe you can just explicitly say, if you changed anything or if it's unchanged. Because it does look like from a seasonal perspective, you got a little bit more conservative. And if so, the question would be, obviously why, given the economic backdrop and everything else improving. So sorry to beat a dead horse, but I don't think you've explicitly addressed it. Thanks.

All right. Alex, you're keeping us honest here. No problem. Look, I do think it's true that we -- in thinking about our issuance outlook, we have factored in the consideration around the potential for some pull-forward out of the second half of the year into the first quarter and first part of the year. And that was, as you saw, benchmark rates tick up and a surge of issuance. And Alex, maybe let me anticipate a question also and get to what might be the upside and downside to this, because I think that also gets at where you're headed here. A lot of times, we talk about -- I guess I used the phrase puts and takes. But, I guess, I would say that probably more puts than there are takes just given what we're seeing right at this moment. So that, I think, means there are some factors that could contribute to some upside to the outlook. So I think this quarter, second quarter, is really a key one to watch because we talked about second quarter 2020 being a really tough comparable with the surge in issuance, especially from investment grade. But if the strength of the leveraged finance markets continues through the quarter and makes up some of that liquidity driven issuance from the second quarter of last year and then on top of it contributes to the positive mix from a revenue standpoint, yeah, that could provide some upside. Like I said, we've been trying to think about pull-forward. You could see pull-forward even from -- depending on what happens with rates and spreads. You could see pull-forward from next year. Faster recovery and economic growth really outside of the U.S. could provide some upside. And then Mark touched on it, but potentially around infrastructure, depending on what kind of -- ultimately, what kind of bill we see, that might provide a boost to infrastructure issuance and municipal issuance in the back half of the year. On the downside, we've got to watch mix and any, kind of, escalation of a third wave of infections that ends up impacting the global markets. So that's really what's on our minds.

Very fair. Thank you for that. And then just maybe for Mark and just as a quick one. On the expense side, I think you mentioned incentives higher, but I think there was a very easy comp last year, so not a surprise. So maybe just if you haven't mentioned it yet, what was the incentive comp for the year? But then most importantly, how do you think about incentive comp for the remainder of the year? Because again, it does look like you had such a strong first quarter, but by my thinking, you probably under-accrued a little bit on incentive comp if the year continues to play out as we all expect.

Alex, thanks for the question, and good morning. The incentive comp accrual process very simplistically that we follow is roughly 25% of the full year expected incentive comp payout, primarily because we're in the first quarter. So we're really looking at roughly one-quarter of the full year expected amount. In the first quarter itself, we accrued for a $61 million in incentive comp. And looking forward to the next three quarters, you would expect – or we expect to see around $60 million per quarter due to the improved full year revenue and margin outlook. That's slightly higher than what we had provided in February, which is a range for between $50 million and $60 million. So, certainly, we are incurring appropriately in the first quarter.

All right. Now, that clears it up. Thank you.

And we will take our next question from George Tong with Goldman Sachs.

Hi thanks. Good morning. I wanted to follow up on the earlier question on pull-forward activity debt issuance. Can you discuss how much of the upside surprise versus the guide was, in fact, reflective of refinancing pull forward, compared to, say, an improvement in macro or balance sheet prefunding and what the implications could be for issuance across the various categories over the remainder of the year?

George, maybe let me start here just by sharing a little bit about what we're hearing from the banks in terms of their issuance outlook because I think that will help provide additional context to the comments that Rob made a little bit earlier. If I start with the US investment-grade, although the year-to-date activity was below the prior year period, we heard from the banks that they noted that issuance in the first quarter was still very robust. I mean that was driven by factors we've already discussed, M&A activity near historically tight spread, et cetera. The banks did also highlight that they thought that borrowers likely opportunistically pulled forward some of their 2021 funding plans to take advantage of the favorable rates that they saw this quarter, especially so that interim or mid-quarter uptick in rates themselves. The bank's overall expected US investment-grade issuance to decline around 30% over the course of the year and that's very much in line with our forecast for that line of business. On the US spec-grade side, tight spreads, low default rates certainly drove the impressive start to the year for high-yield bond and leverage loan issuance. The volume year-to-date for both of those categories has significantly surpassed the prior year period. And so the outlook that we're hearing from the banks here is that they expect the speculative-grade market to slow, as many issuers in east and their early perception of the year, have completed their refinancing needs in the first quarter. And we've taken that view into consideration in our outlook in for US spec-grade. On euro investment-grade, there was the relatively light supply in the quarter as issuers did enter 2021, to your point, with strong cash balances right. We saw a lot of reverse ante issue in as a focus throughout the first quarter. Again, the thing factors, favorable M&A backdrop, low rates, et cetera could also support activity later in the year. And then the banks here forecast European investment-grade issuance to be down in the year, mid-teens percent range. And then finally, on the spec European spec rate side, similar to the US, issuance volume year-to-date did surpass the prior year period, but that was driven more by a pickup in some of the private equity and buyout activity as issuers are looking to take advantage of the low rate end and again, the bank here expect refinancing consideration to remain positive. I hope that provides sort of additional market color that you're looking for.

Yes. Well, that’s very helpful. And just a follow-up and you touched on this a little bit earlier. Interest rates are moving higher, but certainly, the macro environment is also getting stronger. Can you just perhaps talk a little bit more about the puts and takes around how these factors will influence and drive issuance activity?

Yes, George, this is Rob. I think our general view on this is that we touched on in the prepared remarks. It's economic growth and that really is what provides the strongest driver for our business over the medium and long-term, right? It's about business investment. It's about M&A activity. As we think about rates, obviously, rates are a factor. They were certainly a factor last year. But it's the – I think it's really the pace of rate increases and whether the rate increases are accompanied by economic growth and whether they're anticipated by the market. So if you think back to the taper tantrum back in, what, 2013, that was where the market was surprised as kind of a rapid increase in rates, and we saw a real pullback in issuance. But to the extent that the Fed is able to be transparent about this, as we see very strong economic growth, we think that this will ultimately be manageable from an issuance perspective.

Very helpful. Thank you.

Our next question comes from Craig Huber with Huber Research Partners.

Great. Thank you. Obviously, a very strong start to the year in MIS. I wanted to talk on your cost outlook. You guys obviously did not raise your expense outlook for the year, mid-single digits, as sort of a nuance there that you were going from the low end of mid single-digit expectation for the year towards the higher end of mid-single-digits, or maybe you could talk about that. And in conjunction with that, I'll be curious to hear your underlying employee base, is that going to be relatively stable this year putting aside acquisitions and stuff? And I have a follow-up.

Craig, good morning. We are very pleased to highlight that our disciplined expense management actions continue to create and maintain operating leverage and investment capacity for our business. Now we are actively managing our underlying expenses down by 3% to 3.5% or a little bit over $80 million to self-fund the key initiatives we want to invest in 2021. And we've spoken about those relating to KYC, CRE, ESG, et cetera, but also to enhance our technology infrastructure to enable automation, innovation and efficiency to support growth. If I were going to complete the picture on the expense side, you see that the strategic investments, 3%, 3.5%, getting reinvested or cost efficiency is getting reinvested in strategic initiatives. You've got M&A expenses of around 2% to 2.5% in the outlook. We've got an FX headwind of somewhere between 1.5 and two percentage points. And what that really then implies is that the operating growth net of incentive and stock compensation is relatively well controlled around that two percentage point. And I think that's the key message we wanted to deliver. On the headcount, certainly, if I look at year-over-year snapshot between March 2020 and March 2021, we've been relatively stable on an organic basis, if I think over the year, at around 11,400 employees. We don't necessarily anticipate that to dramatically move up or down, as really are looking again to make sure that we are more focused on the skill set enhancements and the support that we can provide our employees over this period.

And then also, you've talked about ESG bolting on a little bit today. What is the annualized run rate of your ESG revenues, please?

We are expecting for 2021 to generate around $25 million in stand-alone activities from ESG and an additional $5 million to $10 million in additional revenues through incorporating our ESG risk analysis into the MIS and MA product.

This my first question. The cost ramp you're expecting fourth quarter this year versus the first quarter, how should we think about that, please?

We are – we have raised – we would like to raise the expense ramp for the first to the fourth quarter to be between $60 million and $80 million. And that would be up from the $45 million to $55 million that we mentioned on the February call, and that was a result of additional savings that we've achieved in the first quarter and a little bit of a shift in timing of spending for strategic initiatives, primarily to the second half of the year. The slightly wider range also captures the uncertainty around the expectation for the resumption in travel and entertainment expenses as the euro progresses.

Great. Thank you.

The next question comes from Owen Lau with Oppenheimer.

Good afternoon. And thank you for taking my questions. So I want to go back to incentive comp and investments. I'm just wondering, the flexibility to accrue more incentive comp or maybe accelerate your investment in the first quarter given the strong revenue. I mean, if you accrue less in the first quarter, that would have more pressure on the expense base later this year, because you may have to true up the accrue comp. And then at the same time, office starts to reopen you may lose some of the co-fee sales. I am trying to understand, whether do you have the flexibility to change at 25% target, given that you expect revenue may moderate later this year?

Owen, thank you for the question. So for incentive compensation, we typically followed a time-based percentage accrual process. That really is very much in alignment with the applicable SEC and accounting standards. If our outlook for the year holds, as we've provided this morning, you would not necessarily see a variation in the incentive comp accrual as the year progresses. Obviously, the year may turn out slightly differently from our outlook, and we certainly provided many factors that could drive that. And what that really means is as the year progresses, you're not only adjusting your incentive comp accrual for that particular quarter, but you also have to do a true-up for the prior quarters, and that's what could result in volatility in the amount that's accrued each quarter.

Got it. That's very helpful. And then just a quick one on AI. Rob, I think you touched on a QUIQspread. Can you give us more color on maybe QuantCube and also the overall AI initiatives in Moody's? Thank you.

Sure, Owen. So in general, we've got – as you'd imagine, we've got data scientists and engineers all across the business. We've got innovation going on around AI, machine learning, natural language processing, natural language generation going on in MA and MIS. In fact, we just hired a new head of innovation in MIS to coordinate our efforts there. So you're right, QUIQspread is a great example of something that actually came out of – we have something called an accelerator, and this was actually something that our employees identified as a result of – of understanding our customers needs. And we were able to deploy this AI machine learning technology to help with a huge pain point of many of our banks, who are all manually spreading financial statements. And we've just got an enormous trove of financial statements here at the firm that can train those models. And so that's how we develop QUIQspread, and now we're deploying that actually as a product and selling that to our banking customers. So we've got initiatives like this going on all over the firm. Another good example of leveraging what I'd say is natural language generation is how we are actually writing some of our boilerplate reports for infrequent issuers using natural language generation. So literally writing reports from databases and then being able to augment that with expert insight. And that's turned out to be really valuable for our customers because it provides more transparency on a wider range of credits, as you can imagine. Regards to QuantCube, we're doing some interesting things in collaborating with them, mostly in the rating agency, where they've got all sorts of alternative data and predictive models. And we're able to use that and integrate that into some of our research series. So, for instance, QuantCube knows where every ship on the planet is at any given time. So they can track flows of commerce. And then we're able to have leading indicators of economic activity in addition to, kind of, the traditional indicators, and that -- we've actually published research around that using data from QuantCube. It's actually been quite popular with our research subscribers.

That’s great. Thank you very much.

Your next question comes from Manav Patnaik with Barclays.

Thank you. Rob, I just wanted to follow-up on your comments early in the call around M&A, and you talked about distribution. And I just wanted to clarify, like the -- you referred to EFRs, but is that, that you already have the distribution at scale or you'll be looking for more distribution and scale?

Yes, Manav, first of all, good afternoon. Good to have you on the call. I guess, I'd just point out that I think of and we think of ERS as distribution. I don't think that's always intuitive to folks, right, that if you think about the content that we are producing, which is really to help customers make decisions for the most part around risk, not in all cases, but for the most part. You've got, we've got literally thousands of banks and financial institutions customers who are using our Software-as-a-Service solutions in critical workflows. And so you can imagine the conversation. In fact, I do a number of customer calls. And as I sit down with these financial institutions and we talk about what's on your mind, what are you -- what are the unmet needs that you have around risk assessment, I start to hear, well, it's not only, obviously, you're helping us with credit, but we've got to figure out how we can better and more efficiently onboard customers. We've got to better understand the sustainability profile and ESG profile of who we're doing business with. We've got to understand the physical risks relating to climate change as part of our stress testing requirements as part of our commercial lending activities, right? And so our customers are coming to us, and we're able to then -- this ERS platform, these solutions are very good distribution channels for us to be able to deliver more data and analytics and insights to this financial institution customer base. So that's why -- that how I tend to -- I kind of describe it as, in a way, calling it just distribution is shortchanging it because it's really about the integration of the software, the technology, the data and the analytics. But it's a platform that's being used at thousands of banks. So it's a natural for us in terms of up-tiering those relationships.

Got it. That's helpful. But I guess, is that, I guess, my question was, so what you have at ERS, do you have the scale that you need, or were you referring to the fact that you would like to get more active on the distribution side, if there are assets out there in terms of M&A?

Yeah. What I was -- I think what I was referring to, we obviously have a nice big ERS business. And what I was really referring to was we continue to look at ways to enhance the offerings for our banking and insurance customers around ERS, but -- so that's really where I was going with that, Manav.

Okay. That's fine. And then just one quick one. You guys have always been great at managing expenses and your margin is already good. But things do seem like they're looking better. And I was just curious if you guys have anything like an upturn playbook and everyone talks about a downturn playbook, but there seems like a lot of good things that you guys can invest in. So I'm just curious how you think about when you would do that, or is it just manage the costs and the expenses like you are right now?

Yeah. Manav, so thinking big picture here, and I know there's a lot of focus on margin from quarter-to-quarter, but from where we're sitting, we're looking at the fact that we're serving some very high growth markets. And, obviously, you're seeing that with the growth rates in the various areas across our business. It's ratings, it's research, it's data feeds, it's company data and KYC, it's ERS. And so for us, what we want to be doing is investing in these high-growth end markets. There are some very, we think, very strong, structural drivers that will mean that the growth in these end markets is going to continue for some time. And we want to -- in some cases, we have leading positions. In other cases, we are building scale in our businesses to build leading positions there. And if you think about the retention rates, we've talked about that a lot, right, very high retention rates. These are very sticky products because they're embedded into critical customer risk workflows. And so if you combine that, right, high-growth end markets with very sticky products, you want to make sure that you're investing in the growth of those markets, right, rather than cash cowing these businesses. What we want to be doing is investing to capture the growth. So in any given quarter or even year, I think you're going to -- as we see opportunities, you're going to see us make those investments because we're investing for the medium and long-term. And I think one of the last thing I would say is we've got -- our customers are dealing with a wider range of risks than ever before. And I think we're really better positioned to serve our customers than ever before. So we want to make sure we're making those investments.

And just to put a quick two numbers around that, Manav. In the first quarter, you saw strategic investments of probably around 1.5% of the increase in expenses in the quarter. For the full year, we expect strategic investments to be between 3% and 3.5%. So you will see that acceleration over the next couple of quarters.

Got it. That’s it. That’s helpful. Thank you very much.

We will take our next question from Shlomo Rosenbaum with Stifel.

Hi, thank you for taking my questions. Maybe you could provide just a little bit of detail on the accelerated investments that you're going to be doing this year because of the higher outlook. I understood that there's -- part of the margin impact is going to be accelerating some of those investments. Can you just give us some specifics around that? And is the implications as that goes forward to future years? And frankly, is there an ability for you guys to accelerate investments in a more meaningful way that could drive more meaningful top line growth for either of your business units that would be possible if you had another blowout quarter? How does that work?

Yeah. This is Rob. I'll start and Mark may want to add in. But maybe first, let me give you a bird's eye view of kind of the primary areas of investment. And I don't think this is going to surprise you, just given the areas that we've been focused on. But we're really concentrating that investment on product development across ESG and climate, KYC, commercial real estate, data and analytics, and I talked about those investing and lending products that we're developing and hoping to roll out in the next quarter or so, maybe to a little lesser extent, China and a content platform there. Modernizing our technology, continuing to become more and more efficient. We've got a big focus in particular in MIS around that, that we've talked about in the past. And then in general, we've got some other areas of product development. In fact, we formed a growth board internally, so that we could really have a very disciplined and concentrated approach to how we are investing and looking at the progress of that investment. And to your point, are there ways to accelerate that investment. And I can assure you that, that is something that we're looking at.

And Shlomo, if I could, maybe just a deep dive on one of those investment areas, specifically on ESG. Specifically, we're very focused on integrating ESG into our risk assessment to workflows. And that's going to help us drive growth and impact. Let me give you three examples here. The first example could be in the commercial real estate space, where our customers are looking for on-demand scoring capabilities to screen properties globally. And they really want those sustainability considerations integrated into their screening. So we provided a solution that provides forward-looking risk assessments of property exposure to floods, hurricanes, wildfires and other climate hazards. The second example I could give you in the ESG space with the integration is around banks and insurance companies. They want climate data integrated into their economic scenario modeling, as well as a stress testing, and that's going to help them meet regulatory and other requirements across the globe. And then, finally, just a third example on that deep dive, customers want to be able to integrate data sets. And specifically, they want to co-mingle their data with ours. And to enable that, we've made our data available on our new DataHub platform that allows customers to access our data alongside with their own in-house data and to work with using sort of those advanced data science tools that Rob spoke about earlier.

Yeah. And one last thing, Shlomo. Just touching on that point that Mark made, we're doing that in ESG, but this concept of integration is a place where we're making very deliberate investments, because as we integrate this, it's more useful for our customers, this concept of integrated risk assessment. These risks are, in many cases, related, but it also is going to enable greater cross-selling back to that point around revenue opportunity.

Okay, great. And next, I just wanted to ask a little bit kind of housekeeping stuff and maybe just some number of things. Number one, I didn't see any breakdown of contribution from the Cortera acquisition and your acquisition type stuff. And then there's a $16 million of non-operating income maybe you could break out. Thanks.

Sure. Shlomo, let me start just with the M&A for a second. So, if I think about a combination of Acquire Media, ZM Financial, Catalyst, and Cortera total M&A spend there was around $350 million. That would have generated or we expected to generate in 2021, which is fully incorporated into our guidance around $44 million-ish in revenue collectively. You've got sort of the margin impact to MA we spoke about earlier, that's the negative 130 basis points. And then an adjusted EPS impact from that those four acquisitions collectively is probably around $0.04-ish negative. And of course, those have been incorporated around $0.04-ish cents negative. And of course, those have been incorporated into our outlook. If I just did a quick slide by to your second question on non-operating income and expenses, and I'm going to refer to maybe table five in the press release, that's in non-operating and expense table. Just the material items there, but uncertain tax positions or UTPs, that's primarily driven by the reversal of the tax-related interest accruals, which are associated with the resolution of the outstanding tax matters and the statute of limitations exploration this quarter. I just want to highlight that we don't expect those benefits to reoccur to the same extent in the future periods. I look at the FX loss and gain line, that's really small FX loss this quarter. Across a number of currency peers, that's compared to a large gain in the first quarter of 2020, which at the time was really driven by material dollar appreciation. You recall this time last year and rebalancing that occurred. And I think FX results were very much in line with our expectations from the hedging program. You see the income from investments in non-consolidated affiliates in that table, and that's really from a regular assessment of our positions in various non-consolidated affiliates. On a quarterly basis, we had a small write-up of minority investment. This quarter, we had this more write-down of minority investment a year ago same quarter. And then finally, the other line is normally a combination of various individually immaterial and in the aggregate immaterial non-operating items, This quarter, because of the strong equity market movement, this line actually captured some are gains that we had on investments that are used to hedge our deferred compensation program, so to give you a full sense of color across the non-operating expense line.

We will go to our next question from Andrew Nicholas with William Blair.

Hi thank you for taking my question. First, in terms of the balance sheet, cash continues to build. Leverage is well below what I think you'd consider a comfortable limit. So, I was hoping you could spend some time talking about the balance sheet, capital allocation and maybe more specifically, what's keeping you from being more aggressive on the share repurchase front?

Good morning and thank you for the question. Maybe most important is for me to start upfront to just make clear that the capital allocation framework that we're using remains unchanged. We're going to look, first and foremost, for opportunities to invest organically and inorganically back into our business through very disciplined financial metrics. And then to the extent that we have additional capital remaining, we will return that to shareholders through a combination of share repurchases and dividends. We know -- or at least is very aware that in early to mid-2020, we did pause buybacks. And we raised cash at that time really to be prudent and to be opportunistically take advantage of lower rates and we're very focused on financial flexibility given again at the time, the heightened risk of economic and capital market stresses at the time. Head Central Banks really not intervene with support. The story made a little bit of residual risk and uncertainty today, and that's obviously much smaller. And so I think for now, we are certainly very comfortable to project to return $2 billion to stockholders this year. Between a combination of dividends and buybacks, and we'll obviously continue to assess the appropriate balance of capital return as the year progresses. I would also not read too much into the relatively low share repurchases that occurred in the first quarter of approximately $132 million. That was mostly due to the purchasing plan that we put in place at the time we entered into the 10b5-1 plan used to purchase shares. And to the comment I made a minute ago, we're still continuing to target that $1.5 billion in share repu by the end of the year, and you should see an acceleration of the pace of that in the second quarter.

Great. Thank you. And then just another housekeeping item. Looking at the free cash flow guidance, it looks like free cash is expected to grow at a slower pace than net income this year. Just wondering if you could kind of speak to that disconnect relative to kind of your historical pattern? Thank you.

The slight difference between the forecasted 2021 growth in net income of 11% and free cash flow of 4% at the midpoint of the guidance range is really related to the expected working capital headwinds and the timing of, I would say, non-cash items across quarters and years. So I put this broadly in context, free cash flow actually grew faster than net income in both of 2019 and 2020. Specifically in 2019, we had 8% versus 17% growth in free cash flow. And in 2020, we had 24% versus 27% growth in free cash flow. And so you can see sort of that variation a little bit across years. We are a capital-light business. Investment would have to ramp up really considerably to change that dynamic between net income and free cash flow over an extended period and we don't anticipate that necessarily happening. So nothing in particular that I would draw your attention to that I'm concerned about in terms of that relationship.

Got it. Thanks again.

We will take our next question from Jeff Silber with BMO Capital Markets.

Thanks so much. I know it's late. I'll just keep it to one. I think you talked a little bit about the potential positive upside from the infrastructure proposals. And I know they're just proposals and we've got a long way to go. But if this does come to some sort of fruition, would it only impact the public finance aspect of your issuers? Could it bleed into other issuers? And also just generally, do you make – from the new issuers, are there different margins you could make depending on the issuer? Thanks so much.

Yes. Obviously, it's going to remain to be seeing kind of final size and content of whatever ends up getting passed. I would expect that the majority of that would be seen in our PPI sector possible that you can see some of that in our corporate finance sector. I don't think there's a meaningfully different pro economic profile across those. Although, typically our international subside, we're really talking about US, international sub sovereign tends to have a little bit different economic profile. But so again, it's probably a little too early to tell at this point.

All right. I completely understand. And again, on the profitability by issuer, does that make a difference?

I don't think a significant difference in this case.

Thanks so much.

[Operator Instructions] We will take a follow-up from Craig Huber with Huber Research Partners.

Yes, hi. Thanks. Rob, we've talked about this in the past. With your new position now as CEO of the company, I've seen with other companies when the CEO takes over, whether it be internal or an external hire, within a matter of months or quarters, he'll do a large size acquisition. Given what one of your main competitors here in the States did back in the November timeframe. Has your thoughts changed at all here in terms of just the normal cadence of these tuck-in acquisitions going back to your days as lead in your corporate development area, which I think you led 8 or 9 years and stuff. You've never – the company has never done a huge acquisition, game-changing acquisition outside of BvD for – a little bit over $3 billion and stuff. I mean -- are you guys itching at all to do a large acquisition is my main question here?

Yes. So Craig, great question. I wouldn't say itching to do a large acquisition. I think I just kind of come back to we're running our own race here, and we feel very good about the outlook across our entire business. We have got some -- we are serving some very high-growth end markets, and we are very well positioned in those end markets. And so what I think you're seeing from us is this focus on building scale in those businesses, right? You've seen us, look BvD was a very nice size acquisition and we've made some bolt-ons to that, RDC, Acquire Media or Cortera and that has really helped us build what we think is a world leader in both the KYC space, but also the private company data space. And you see the growth rates that are coming out of that business. So we feel very good about that. And you've heard us talk about now what we're doing around commercial real estate. You've heard us talk about ERS, where we've made, over the years, tuck-in acquisitions, and look what those acquisitions have done. We highlighted insurance. We bought GGY. We bought [indiscernible]. We bought RiskFirst. All of that is now supporting that growth that you're seeing in insurance and asset management. So Craig, I'm going to come back to we're going to do things that are on strategy. We're not focused about is it big or small. It's got to make sense for us, for our risk assessment strategy and for serving our customers. We're hearing loud and clear from our customers where they want and need our help, and that's where we're investing organically and inorganically.

Okay. Thank you.

There are no further questions at this time. I would like to turn the conference back over to Rob Fauber with any additional or closing remarks.

Yes. Well, thank you, everybody, for joining today's call, and We look forward to speaking with you again in the summer.

This concludes Moody's First Quarter 2021 Earnings Call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the first quarter 2021 earnings section of the Moody's IR home page. Additionally, a replay of this call will be available after 3:30 PM Eastern Time on Moody's IR website Thank you.