Moody's Corp

NYSE:MCO

Earnings Call Transcript 2018-Q4

[Operator]

Good day, and welcome ladies and gentlemen to the Moody’s Corporation Fourth Quarter and Full Year 2018 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 question and answers following the presentation.

I will now turn the conference over to Salli Schwartz, Global Head of Investor Relation and Strategic Capital Management. Please go ahead ma'am.

[Salli Schwartz]

Thank you. Good morning everyone. And thanks for joining us on this teleconference to discuss Moody’s fourth quarter and full years 2018 results, as well as our current outlook for full year 2019. I am Salli Schwartz, Global Head of Investor Relations and Strategic Capital Management.

This morning, Moody’s released its results for the fourth quarter and full year 2018, as well as our current outlook for full year 2019. The earnings press release and a presentation to accompany this teleconference are both available on our Web site at ir.moodys.com.

Ray McDaniel, Moody's President and Chief Executive Officer will lead this morning conference call. Also making prepared remarks on the call this morning is Mark Kaye, Moody’s Senior Vice President and 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 release filed this morning for a reconciliation between all adjusted measures mentioned during this call and GAAP.

Before we begin, I call your attention to the Safe Harbor language, which can be found toward the end of our earnings release. Today's remarks may contain forward looking statements within the meaning of the private securities litigation Reform Act of 1995. In accordance with the Act, I also direct your attention to the management's discussion and analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2017 and another SEC filings made by the company, which are available on our Web site and on the SEC's Web site.

These together with the Safe Harbor statements 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 maybe on the call this morning in a listen only mode.

I'll now turn the call over to Ray McDaniel.

[Ray McDaniel, President and Chief Executive Officer]

Thank you, Sally. Good morning. And thank you to everyone for joining today's call. As we begin, I would like to note that we have revised our approach to our earnings call to focus more of our commentary on the factors underlying our financial results. We hope you will find this helpful and as always welcome your feedback.

Additionally, we have changed our disclosure of certain guidance metrics in an effort to provide greater transparency in areas that are most relevant and predictable. Mark Kaye will go into greater detail and the guidance changes shortly. I will begin by summarizing Moody's full year and fourth quarter 2018 financial results. Mark will then follow with comments on our outlook for 2019. After our prepared remarks, we’ll be happy to respond to your questions.

During full year 2018, Moody's achieved strong results, driven by robust performance of Moody's analytics, prudent expense management and the benefit of a lower effective tax rate offsetting weaker than expected global debt issuance in the fourth quarter. Full year 2018 adjusted operating margins increased across the corporation, including at both Moody’s Investor Service and Moody's Analytics. Adjusted diluted EPS grew 22% year-over-year. In the fourth quarter, Moody's total revenue declined 9%. As you're aware, we experienced a difficult issuance environment with high yield bond activity, the weakest since the global financial crisis.

MA revenue, which does not correlate with debt capital markets activity, grew 5% led by strong RD&A performance. Despite top line softness in MIS, Moody's Corporation adjusted operating margin increased by 40 basis points for the quarter. Our improved operating leverage combined with a lower effective tax rate grew adjusted diluted EPS by 8% year-over-year. As you can see in the charts on Slide 7, adjusted operating margin increased in both MIS and MA by over 150 basis points in the fourth quarter of 2018. This was due to expense efficiency initiatives across both businesses, lower accruals for incentive compensation in MIS and the roll off of Bureau van Dijk's deferred revenue haircut in MA.

On our last earnings call, we announced a restructuring plan. The restructuring charge we took in the fourth quarter of $49 million exceeded our previously announced range of $30 million to $40 million due to the acceleration of staff reductions and acquisition integration, which together also allowed for real estate rationalization. Our total restructuring program is now expected to be in the $70 million to $80 million through the first half of 2019. We are increasing our anticipated annualized pretax savings to a range of $40 million to $50 million, which is $10 million higher than the range we previously announced. We will begin to realize the majority of the annualized run rate savings in the second half of 2019.

These savings will create financial flexibility for various capital market conditions and provide options to reinvest in our business or bolster margins. We believe that the restructuring charge, acquisition synergies and other cost management efforts will contribute to margin stability in full year 2019.

After announcing the Bureau van Dijk acquisition, we focused on deleveraging and successfully reduced our net debt balance in 2018. In December, we issued $800 million in bonds. The pie chart on the right shows that $450 million was used to pay down senior notes that were coming due in July 2019. A portion of the proceeds was also used to pay down our remaining outstanding term loan in commercial paper. As a result of this financing, we do not have further debt maturing until September 2020.

In the fourth quarter of 2018, issuance was impacted by a variety of geopolitical and macroeconomic concerns, leading to market and interest rate volatility as well as widening spreads. Notably, there was no U.S. high yield bond issuance activity in December. Even with these challenges, economic fundamentals remain sound in developed markets with stable U.S. and European economic growth and unemployment rates at multiyear lows. The drop in global debt issuance of almost 30% in the fourth quarter of 2018 led to a smaller decline in MIS revenue of 18%, demonstrating the strength of the business model. MIS' revenue was buttressed through its recurring revenue base was supported by increased monitoring fees from recent new mandates as well as pricing.

For MA, total revenue grew 5% in the fourth quarter or 7% excluding the negative impact from foreign exchange. RD&A revenue grew 17% due to Bureau van Dijk strengthened the core business and contribution from the REE's acquisition. Bureau van Dijk added $90 million of revenue in the fourth quarter at a 48.2% adjusted operating margin. As expected, ERS revenue declined by 17% in the quarter as we continue to transition to a software-as-a-service or SaaS operating model. We anticipate ERS revenue growth to resume in 2019.

I would like to provide additional details about our progress with SaaS transition and ERS. The chart on this slide illustrates 2018 slight decline in total revenue as 15% growth in subscription revenue was offset by 28% decline in one-time revenue from software licenses and services. Due to the shift in product mix, recurring revenue as a share of total ERS -- as a percent of the total ERS business, reached 77% in 2018, up from 69% at the end of 2017.

Expansion of the recurring revenue base will drive ERS revenue growth in 2019 despite our expectation of a further contraction in one-time revenues. This year's revenue outlook is supported by 12% growth in 2018 sales of subscription products, which lifted aggregate ERS sales by 6% despite 10% decline in sales of one-time software licenses and services. The acceleration in total ERS sales growth since early 2018 indicates that we've worked through the inflection point in the SaaS transition. Importantly, the expansion of our subscription business enhances the profitability of ERS, contributing to our expectation of further improvement in MA's adjusted operating margin in 2019. In terms of business fundamentals, our outlook for ERS reflects solid demand from banks and insurers for analytical tools that enable adoption of new accounting standards in next-generation products that support automation trends.

Before turning the call over to Mark to discuss our full year 2019 outlook, I'd like to take a moment to review Moody's ongoing strategic priorities. We continue to defend and enhance our core ratings and research businesses, while pursuing strategic growth opportunities, both down the corporate credit pyramid and across into new geographies and adjacent product areas. We are focused on providing information, insights, solutions and standards to promote market transparency and fairness. Both are necessary conditions for market confidence, which in turn supports healthy financial markets overtime. Underpinning these efforts, we are enhancing our technology infrastructure to enable automation, innovation and efficiency and remain supportive of the diverse and inclusive workforce.

Our recent acquisition Reis, which closed on October 15, 2018 is a good example of expansion into adjacent product areas. Reis, a leading provider of U.S. Commercial Real Estate or CRE data, has built a unique data set over four years. We have observed growing demand from our asset management, banking and insurance customers for a reliable source of integrated information and analytics to support management of their substantial exposures to CRE. By combining Reis proprietary data with MA's specialized expertise, Moody's is powerfully positioned to meet the need for standards that enhance operational efficiency and analytical precision in this market.

I'll now turn the call over to Mark to review our outlook for 2019.

[Mark Kaye]

Thank you. As I alluded to you at an industry conference call in late 2018, we are enhancing the transparency around certain of our guidance metrics, while at the same time curtailing other metrics where we feel there is less value to providing them, or they are inherently difficult to accurately predict. For 2019, we have added MIS and MA adjusted operating margin segment guidance, as well as net interest expense guidance. We removed Reis revenue guidance at the sub-segments or line of business level.

I want to emphasize that our reporting of actual results will remain unchanged. And in particular, we will keep reporting sub-segment revenue results every quarter in our earnings press releases and in our SEC filings. Moody's outlook for 2019 is based on assumptions about many geopolitical conditions and macroeconomic and capital market factors, including but not limited to, interest in foreign currency exchange rates, corporate profitability and business investment spending, mergers and acquisition, and the level of debt capital markets activity. These assumptions are subject to uncertainty and results for the year could defer materially from our current outlook. Our guidance assumes foreign currency translation at the end of the fourth quarter 2018 exchange rates. Specifically, our full cost reflects exchange rates for the British pound of $1.27 and for the euro of $1.14.

Slide 18 outlines variety of drivers we considered when setting up 2019 guidance. I will mention a few key items now. For MIS, we believe that stable economic fundamentals of GDP growth of 2% to 3% in the U.S. and 1% to 2% in Europe will underpin global debt issuance activity. However, market volatility may moderate the pace of new mandates includes their ability in annual global debt issuance. For MA, product innovations will unable sustained core RD&A growth. ERS revenue growth should resume as the transition from licenses and services to SaaS based product has passed the inflection point. We remain on track to achieve our Bureau van Dijk run rate synergy targets of approximately $45 million by year end 2019. As Ray outlined earlier, companywide, annualized pretax savings as a result of our restructuring activities are now anticipated to be in the $40 million to $50 million range with an estimated pretax savings of $30 million to $35 million in 2019. We will continue to strategically manage our real estate footprint and hiring activities.

As you can see from this slide, we have been able to achieve high-single digit revenue growth over the last four years and concurrently grow the adjusted operating margin by 170 basis points. This has allowed us to generate incremental free cash flow. For 2019, we are forecasting revenue growth in the mid single-digit percent range and adjusted operating margin of approximately 48%, and free cash flow in the range of $1.6 billion to $1.7 billion despite our flat to down issuance outlook. Listed here are additional items for Moody's guidance in 2019. A complete list of Moody's guidance is included in table 13 of our fourth quarter 2018 earnings press release, which can be found in Moody’s Investor relations Web site at IR.moodys.com.

In 2019, we forecast global debt issuance to be flat to down 5% driven by volatility and spread widening relative to 2018. We also expect moderating M&A, new CLO formations and refinancing of leverage debt. The chart on the right shows our forecast for slower pace of the new mandates in 2019 relative to the past two years. These headwinds will be partially offset by an expanding global economy, deployment of investor cash balances and low credit defaults. Upcoming refinancing needs and the already announced 2019 M&A transactions provide a base for upcoming issuance activity.

For MIS, we expect total revenue to increase in the low single digit percent range as we execute on our ability to grow revenue despite the issuance headwinds I just spoke about. We project that capital market conditions will be more constructive than in the fourth quarter of 2018, but believe that the full year 2019 market environment will be more difficult on average than 2018. Overall, we see positive economic fundamentals, moderating declines in M&A and refinancing activity. Tighter investment grade and speculative rate spreads along with still low, although slightly rising default rate should support more constructive issuance markets in the second half of the year.

In the last few weeks, issuance markets have improved following the Federal Reserve's recent announcement. We have seen healthy U.S. investment grade issuance activity and the return of U.S. speculative grade issuers to the markets, following a historically slow December month. We will continue to monitor monitory policy along the other macro and geopolitical factors affecting the credit market. We expect MIS adjusted operating margin to be approximately 58% in 2019. We will manage our expense base and implement technology to increase efficiency in our ratings processes. However, we also have to account for a reset of the incentive compensation pulled back to 100% assuming of course we meet our full year operation targets. We are investing in the MIS business to support our strategy of expansion into the Chinese and Latin American markets, pursuing opportunities and adjacency and enhancing our technology infrastructure.

For MA, we expect total revenue to increase in the low double digit percent range, underpinned by strong sales growth in the second half of 2018. We anticipate broad based strength across all product areas and businesses. The drag from FX will be offset by the acquired gross from Omega Performance and Reis thus constant dollar organic growth is also projected to increase in the low double digits percent range. We anticipate MA adjusted operating margin increasing 250 to 350 basis points, the 29% to 30% range in 2019. This improvement has several primary drivers, including a combination from strong sales growth of Bureau van Dijk and the ERS transition to more SaaS based offerings, which improves both recurring revenue and earnings predictability.

Ongoing discipline and expense management further underpins MA margin expansion, which is bolstered by the role off of Bureau van Dijk to first revenue haircut. In 2019, we plan to return capital through $1 billion of share repurchases and an annualized evidence of $2 per share. Today, Moody’s is pleased to announce a $500 million accelerated share repurchase program that will be completed during the second quarter of 2019. In addition, on February 12th, Moody's Board of Directors declared a regular quarterly dividend of $0.50 per share of Moody's common stock, a 14% increase from the prior quarterly dividend of $0.44 per share. This dividend will be payable on 18th of March to stockholders of record at the close of business on the 25th of February. This increased dividend is in line with our target dividend payout ratio of 25% to 30% of adjusted net income.

Before turning to Q&A, I would like note a few principal takeaways. We are confident in Moody's ability to deliver revenue growth and drive productivity gains to support strong margins in 2019 despite the relatively weakened global debt issuance outlook. We continue to invest in custom offering of information, insights and solutions and standards that enhance market transparency. Finally, we will maintain our disciplined and thoughtful approach to capital management.

[Ray McDaniel, President and Chief Executive Officer]

Thank you, Mark. This concludes our prepared remarks. And joining with Mark and me for the question-and-answer session are Mark Almeida, President of Moody's Analytics and Rob Fauber, President of Moody's Investors Service. We'd be pleased take any questions you may have questions.

[Operator]

[Operator Instructions] And our first question comes from Toni Kaplan with Morgan Stanley. Please go ahead.

Toni Kaplan

Rob, I was hoping you could give some additional color on the issuance environment and the drivers in terms of the flat to down low single that you've called out and especially one thing I was curious about was you saw some really big moves in spreads in the fourth quarter, as well as at the beginning of this year in some really short periods of time, and so just wanted to get a sense of and your experience. What does that mean for the issuance environment? So that would be super helpful? Thank you.

Mark Almeida

Toni, this is Mark. Rob and are going to jointly share some commentary on this particular question. As we think it's important to give both the bank perspective from what we're hearing, as well as our internal view. In terms of bank feedback that we're hearing for both U.S. and Europe and in particular for the U.S., there are three key points that are being quite pervasive. The first is capital market conditions have obviously improved since December, but issuance activity has remained relatively modest thus far. And we are anticipating or at least banks are anticipating large cap cash repatriated to retrench the market in late 2019, and that would certainly help investments grade. And then lastly in relation to the U.S., M&A still is a driver of issuance activity in 2019, but the banks expect us to be down from elevated 2018 levels.

In terms of what we are hearing from the banks in terms of feedback for Europe, a hard Brexit does remain a potential driver of downsize. Overall, investor demand does remain healthy but there is some concerned redemand for Baa2 or below issuance following the ECB's halt of corporate sector repurchase program. And then lastly from the banks in relation to Europe, strong reverse, the Yankee issuance and it's possible due to favorable relative value dynamic of the euro versus the U.S. dollar.

RobFauber

And so maybe, Mark, let me add on to that and Toni, then triangulating to that flat to down 5% outlook, so there's a few components of that that go into our overall build. So starting with corporate finance, there we're expecting some slight declines in the investment-grade space, modest declines in bank loans and we think that'll be driven in part by less opportunistic refinancing. The U.S. high-yield market, we actually think we may see an increase in issuance there given the spread tightening from the fourth quarter where the yield curve is and also some very, very light 2018 comparables. As Mark mentioned, M&A we think will still be an important issuance driver, but we don't think it's going to be down off of 2018. 2018, I think is the third strongest year on record. So we think that'll be down something in the neighborhood of 10% or so.

For financial institutions, we'd expect issuance to be slightly lower, in part, you may remember from the earnings calls through the course of this last year us talking about European banks, building up levels of bail-in-able capital, so we actually think that that's going to slow down and will provide some headwind to financial institution issuance.

We also had some very strong M&A driven issuance out of the insurance sector in the past year. Well, moving on to the PPIF segment, here we actually think we'll see some moderately higher issuance and that's driven primarily by the growth in issuance out of the U.S. public finance sector, and you may recall that was effectively the issuance there was effectively rebased after the loss of all that advanced refunding volume in 2018 that was associated with the tax law changes.

And we're actually seeing some good activity in terms of new money transactions there. And finally in structured finance, looking at kind of a modest decline, driven really primarily by our outlook on CLO activity we've had now two years of very strong, not only new CLO formation, but a lot of refi activity. And so we think that this decline in CLO activity is going to be somewhat offset by increases in some of the other sectors really that are underpinned by economic growth. And then we triangulate all this obviously with the Wall Street banks and we think this is pretty consistent with the outlooks across the street.

Let me also talk about -- address your second point about these rapid spread moves, and I guess as we saw spreads blow out in the fourth quarter and saw the leverage finance markets seize up, to some extent, we're scratching our heads like I think a lot of people were because we're looking at the underlying fundamentals, and you still had economic growth, you had low unemployment, you had low default rates.

And so I guess our view was that this was a -- this was temporary. This was going to pass. We've seen other quarters like this, you know, you think back to the first quarter of 2016, issues around China and commodities and oil prices and so on. So our view is that this was going to pass, this was kind of a -- I guess I would call a cyclical air pocket albeit a very hard air pocket.

[Operator]

And our next question comes from Manav Patnaik with Barclays. Please go ahead.

Manav Patnaik

Thank you very much. I guess my first question was more around the restructuring efforts and more than just the current restructuring, you've kind of already talked about last quarter, I was just wondering how to think about it long term in terms of where all do you see the buckets of opportunity, and how we should think about how you could flex that should the top line environment get tough?

Ray McDaniel

I'll start and Mark may have some additional comments, but what is underpinning some of the activities that have gone into our current restructuring relates to the acquisitions we've made and rationalizing some of the costs post acquisition. So obviously, if we do any more M&A activity, we would be looking for the same rationalizations. Beyond that though, we've been very focused on what we can do as far as onshore and offshore labor and what we can do with automation and robotic processes. Those will be part of the story going forward for us as I think they will for obviously many firms. And so there will be opportunities in the future, but in terms of a large restructuring action, I don't think we're going to be a serial restructurer, we're going to be looking for efficiencies and opportunities outside of formal restructurings.

Mark Kaye

I was going to add just in terms of numbers to supplement Ray's remarks, so firstly we anticipate the action will be substantially complete by the end of June, and they will allow for an expected pre-tax savings amount in 2019 of $30 million to $35 million, and then starting in 2020, we do expect annualized pre-tax savings of between $40 million and $50 million which is $10 million more than what we announced previously in October, and then lastly as you can see in our guidance reconciliation, we do estimate an approximate $0.10 per share impact from the first half 2009 restructuring charge in our full year 2019 GAAP EPS numbers.

Manav Patnaik

And if I could just follow-up on that point. So I guess these efficiencies that you're talking about, going forward, anyway to quantify how to think about how that impacts the margin or the cost profile? Just any color there would be helpful. Thank you.

Ray McDaniel

I think that at a high level these opportunities are why we do not see any plateauing of the margin opportunities at either MIS or Moody's Analytics over time. We think that we've got room for margin expansion, it's going to be ongoing, subject of course to variability in the top line but that is part of the plan.

[Operator]

Our next question comes from Alex Kramm with UBS. Please go ahead.

Alex Kramm

Just wanted to come back to the guidance, and maybe this is for Ray, but just wondering how your confidence level is on the MIS side around this guidance? And I know it's a difficult question to answer, but you think about the last few years I think you've gotten a reputation to be very conservative, and then at the end of the day, the market was just a lot better and you have outperformed, and most recently, obviously if you just look at the fourth quarter which was I know once in a blue moon environment, but clearly it was completely different than what everybody had thought. So just wondering as we approach maybe the end of the cycle, if the confidence level that you personally have is just a lot lower or how you would kind of gauge the range of outcomes that 2019 could actually bring?

Ray McDaniel

Well, Alex I guess, one way to answer the question about my level of confidence would be that we have decided to eliminate the sub-segment or line of business guidance. So I've been dealing with over the past years I've been dealing with the fact that we have underestimated and overestimated, and we're trying to focus you and ourselves on things that are more in our control and those things that are more predictable. That being said, we have done a lot of work in support of the outlook that we put out at the MIS level, there will always be more uncertainty around MIS than I think we have around Moody's Analytics, because it is very Capital Market-sensitive, and so there are just externalities driving that business that are themselves cyclical.

Rob Fauber

And maybe Alex I could maybe add in terms of the upsides and downsides as we see them to the outlook and maybe that will help you out a little bit, and maybe for a change, I'll start with the potential upsides. If we see some real spread tightening and that's obviously continuation of the trend that we've seen in January, I mean, that could attract some more opportunistic issuance and more refinancing activity that would obviously be positive. You combine now the fact that investors have got some significant cash balances and that could be constructive for the issuance environment, and of course private equity firms are sitting on huge amounts of capital still to deploy and that we think is going to provide some support for the M&A volumes.

Now on the down side, to some extent the inverse of what I just described, but if we don't see some spread tightening from here, that's clearly going to provide a headwind to what we're thinking about for the year, and of course if equity market volatility picks back up, that's not good for the high-yield market, and that is an area that we have been looking at for potential growth this year. And then lastly, just thinking about things like a disorderly Brexit or Chinese-U.S. trade discussions, of course present the opportunity to have some sort of market dislocation and we haven't factored that into our outlook.

Alex Kramm

I know it's uncertain, and maybe just specifically, Rob. I know this is a small business but when you went through the kind of outlook more specifically on the public side you mentioned that you still see a little bit very robust I guess come back in 2019. I saw a six months survey I think at the end of December where a lot of the municipals actually said that they still expect issuance to be done further in 2019. Just wondering I don't know if you saw the same thing, but just wondering if you could kind of square those maybe different outlooks a little bit or what gives you confidence in that business? I know it's small, but just curious.

Rob Fauber

Yeah. I mean, I guess in general you think about the advanced refundings and that was like 20% to 30% of total issuance volume, and that got taken out of the market in 2018. So like I said, you're rebasing off of that. We have seen some new money financings which we feel good about. So I understand we -- you know, there's a bit of a bid-ask on some of these issuance outlook. But in general, that's what we're seeing, I guess I would also say, you know, through the first month of the year, we're seeing relatively healthy public finance volumes.

Ray McDaniel

And our comments earlier were that we expect that to be moderately higher. So it's not at a situation where we expect issuance to be exploding.

[Operator]

And our next question is with Peter Appert with Piper Jaffray. Please go ahead.

Peter Appert

So since I've whined about the margins at MA in the last few quarters, I wanted to call out kudos to Mr. Almeida for the better results and the positive momentum going into 2019, and specifically I was hoping Mark you could give us some more granularity on the drivers of that margin improvement. How much is a function of the turn at ERS? How much is it a function of BvD? Any additional color you can provide?

Mark Almeida

I think you've hit on the big ones. We have been doing a lot of work in the ERS business over a number of years. We expect the top line to come back nicely in ERS in 2019, so that'll help. And we're managing expenses very rigorously there, so ERS is contributing, the Bureau van Dijk business will be contributing, and we've been taking actions across the MA business for some period of time. So I think all of those things are contributing to the continued margin expansion that we're delivering in 2019 and the acceleration in that expansion. So it's really very much across the board.

Peter Appert

Mark, in terms of where you see the upside then? I mean what do you think is reasonable over the next several years in terms of run rate profitability in this business?

Mark Almeida

Well, we've said for some time that we expect continued gradual expansion in the margin, I think of course it's going to depend sensitively on what we're able to do on the top line, but obviously we're guiding to a very good year on the top line this year, and I think we're in a good position to be able to continue to generate strong growth in the business and that should allow us to continue to deliver margin expansion.

[Operator]

And our next question comes from George Tong with Goldman Sachs. Please go ahead.

George Tong

Given your expectations of a flat to down 5% issuance environment this year, can you talk about how you expect pricing to perform in the ratings business relative to last year?

Ray McDaniel

I think we've talked before about the fact that we have pricing opportunities averaging 3% to 4%, and that assumes that issuance is flat, so if issuance is down, 2%, 3%, 4% it's going to have an impact. Some of our pricing adjustments are unrelated to debt issuance, but some of them do relate to debt issuance. So we will have to be managing that carefully. If there's a decline in debt issuance from 2018, it will have some impact, nonetheless we will have contribution from price this year, I think regardless of whether there is a decline or not in issuance.

George Tong

One of your competitors recently received clearance to rate debt securities in China. Can you give us an update on your strategy in China? And if you have similar plans to expand beyond your JV to independently rate that there?

Ray McDaniel

Happy to offer a few comments and Rob may want to remark on this as well. We have a different business position than other international rating agencies in China. We have been there since 2006 via a very successful joint venture. We are pleased with our equity position. We're pleased with the position that CCXI, our joint venture holds in the Chinese market. Moody's has over 400 ratings on Chinese entities that are active in the cross-border market. Our joint venture has ratings on over 1,000 domestic market issuers in China. So we feel that we're in very good position having a joint venture that is licensed already, and in fact it's licensed in both the interbank and the exchange traded markets. That doesn't mean that we don't want to do more in China.

And we have put in an application for providing global cross-border ratings for the domestic market issuance. And we think that this is an opportunity really not just for MIS, but for Moody's Analytics and our combined businesses to provide a whole suite of products and services to the domestic Chinese market, whether it's through Moody's Analytics, Moody's Investor Service or CCXI. So I'm actually quite excited about the opportunity. And we are going to continue our dialogue with regulators and issuers and the investors to make sure we're offering what in fact the Chinese want as part of their policy agenda and market opening.

[Operator]

And our next question comes from Tim McHugh with William Blair. Please go ahead.

Tim Mchugh

Could you talked about maybe on a multiyear basis how close are you to, I guess seeing the services part of that revenue mix I guess bottom out or stabilize? I imagine you always have some within the mix. So how far away are we from that?

Mark Almeida

You're right. We will have to continue to have some. We think we're pretty much at a level that we will sustain for the foreseeable future. We'll probably see a bit of contraction on that line moving forward this year, but it's going to be much more shallow a decline than what we've seen in '18. So I guess the way I would say it is that line is stabilizing, flattening around the current level. And so the acceleration in revenue growth from the subscription side of the business will drive overall growth in ERS.

Tim Mchugh

And 2020 and 2021 should be even cleaner in theory, I guess from that factor?

Mark Almeida

Yes exactly. All things being equal, I would expect that that would continue to be the case over the coming years.

Tim Mchugh

And then on incentive compensation, I know you talked about qualitatively on margins that there's a headwind from returning to 100% payout. I guess can you give us the Q4 incentive comp number? And I guess what is -- trying to understand how much of a headwind that is, I guess. What's a 100% payout or normal for you now?

Mark Kaye

The fourth quarter incentive compensation number was $29 million. It's worth noting that was meaningfully down on a year-over-year basis compared to the fourth quarter 2017, by around 60% or so. And so if you're thinking about looking on a go-forward basis, I would recommend around $50 million-ish a quarter for 2019.

[Operator]

And our next question comes from Craig Huber with Huber Research Partners. Please go ahead.

Craig Huber

I've got a couple of questions. Ray or Rob, I'm just curious on your updated thoughts as you think about sort of U.S. markets corporate debt levels out there in terms of looking at the debt ratios in aggregate looking at the absolute debt that's outstanding there, did you see anything that's in your mind that you feel is unsafe, it's getting to extreme levels is a question we get a lot from investors, and I have a follow-up. Thank you.

Ray McDaniel

The short answer is no. We -- there has been some increase in leverage, but there's also been a strong economic environment which has supported profitability, so while there has been some additional leverage in the market, I think really probably the more interesting question, Craig is over the last 12, 24 months, the opening of the market and the receptivity to increasingly low-rated credits, and if there were to be a hiccup in the economy, a recession, that's where I would be paying attention to potential problems.

Craig Huber

And Ray do you feel the same way about Europe as well?

Ray McDaniel

Well, in terms of where to look for potential problems, yes, although the European high-yield market is not of the same scale as the U.S. high-yield market, and the issuance has not broadened -- as a general statement has not gone as deep in the ratings scale as it has in the United States. That being said, there's also been less additional leverage put on companies in Europe than in the U.S.

[Operator]

And our next question comes from Joseph Foresi with Cantor Fitzgerald. Please go ahead.

Joseph Foresi

I know this is going to be a real difficult question to ask, but I'll throw it out there anyways, typically you've talked about GDP as being core to issuance growth, but when there are quarters where there's a lot of economic volatility, clearly that changes, given the sort of present political climate kind of domestically and internationally, I'm wondering how are you able to risk adjust the numbers around that volatility? Maybe you could just talk a little bit about how that takes place.

Ray McDaniel

Joe, I'm glad you asked the question because I think it's important to emphasize that when we talk about the growth in global debt as being roughly in line with GDP, we are talking about over multiyear periods. There is certainly going to be dislocations and variations on a short-term basis, so we have to deal with that, and I really wouldn't talk about growth in debt being aligned with GDP in this quarter or even necessarily in 2019. I don't know if my colleagues have anything they want to add to that, but it's a long-term metric.

Joseph Foresi

And then just in the enterprise risk business, maybe Mark could spend a little bit of time describing for us what this transformation from services to software feels like on a sort of a day-to-day basis. Are you canceling projects, or rewriting contracts? Is there a certain percentage that are converting or not converting? Just so we can understand, I know you've described how far we are through it, but how do those conversations work sort of daily, and maybe you can give us some color on how far we're through and then just how you see 2019 playing out?

Mark Almeida

Sure. I mean, it's really a question of product strategy where we have migrated our product from what was previously a traditional software licensing and implementation services business, to much more of standard product typically delivered in a hosted environment, that is typically on the cloud where we are allowing customers to subscribe to those products. The works that we have to do to implement the product to put it into production for a given customer is simpler, it's cheaper for the customer, it's cheaper for us, doesn't take nearly as much time nearly as much customization.

So it's really migrating from what has been traditionally lots of customization of products from customer-to-customer installed on the customer's equipment behind their firewalls. So everything was quite bespoke. And moving to again much more standard product where all customers have access to the same code base, so it's very consistent with our mantra of, Build once, sell many times, sell it on a subscription basis so you have a recurring revenue.

So it's really not, I mean there is some migration of customers from old installed product to new hosted product sold on a subscription basis, we do have that in certain areas and that's a process that takes place over a period of time, but a lot of this is just -- frankly it's consistent with what customers want. Customers are demanding this, they're expecting this increasingly and this is how our customers want to buy software solutions from people like us. So it's really adapting our product offering to the needs of the market, and frankly that just -- that fits very well with our desire to run the business on a more of a subscription basis where we find the economics much more attractive.

So the transition from the old to the new is a little cumbersome, and you get results that we saw in 2018 where the run-off in the old software licensing and services business preceded the ramp up in the revenue growth from the growing base of subscriptions that we've got. But again, when we say we're through that -- through the transition or through the inflection point, we feel like the decline in the one-time revenues will now be slower than the ramp up in the acceleration in revenue from subscriptions.

[Operator]

And our next question comes from Jeff Silber with BMO Capital Markets. Please go ahead.

Jeff Silber

Typically, every quarter somebody asks you to update your M&A thoughts. So I guess I would do that this quarter.

Ray McDaniel

Well, as we talked about in our prepared remarks, we are committed to expanding the business both geographically and in terms of what parts of the credit markets we serve and adjacent product areas that are looking for risk assessments of one kind or another and look like they would attract standards providers. If we see good assets along any of those three dimensions, we would certainly be interested in them. We have been very pleased with the acquisitions that we have made over the past number of years, but we've also been very disciplined about trying to do that.

So we look at a lot more than we try to execute on and certainly a lot more than we successfully execute on. So I don't feel like we have must-acquire businesses in order to fill out our product and service portfolio, but if we see attractive assets, we're going to try to make them a part of Moody's.

Mark Kaye

And Jeff just to add on to that more broadly, we have a very disciplined approach that we adopt to capital allocation, and certainly not just looking at M&A opportunities, but a number of opportunities internally to invest in our existing businesses to support organic growth. And then to the extent that we don't meet our return criteria, we obviously engage in the return of capital either through dividends which we spoke about this morning or through share repurchases.

Jeff Silber

And if I could just get into the weeds, a little bit on my follow-up regarding your guidance. I appreciate the new way you're guiding revenues, but just on the M&A side, excuse me, the Moody's Analytics side, if I look at the impact of Reis and the Omega Performance acquisition, is that all coming in the U.S. or is there some of non-U.S. impact as well?

Mark Almeida

Reis is a 100% U.S., Omega is -- it's quite international, it has a big chunk of U.S, it also has a sizable business in -- outside the U.S particularly in Asia. Having said that, bear in mind that Omega Performance is a relatively small business, so frankly it doesn't move the needle dramatically for MA overall.

[Operator]

And our next question comes from Bill Warmington with Wells Fargo. Please go ahead.

Bill Warmington

Good morning everyone, and welcome back to Salli. So a question on on BvD. I just wanted to ask about the growth rate there and while that continues to be in the low double digits, and what's been driving that in terms of products geographies? Is cross-selling starting to play a role?

Ray McDaniel

Bill, BvD is performing very, very well. We took a big hit due to FX in the fourth quarter, probably lost about 300 basis points on that business due to FX in the fourth quarter. But the underlying business is performing quite well. We talked about this before, but we've seen a very nice acceleration in sales growth in that business since we acquired it and that continues to be the case, and I think it's a function of a number of things, I mean frankly the business it's just a very good business, the number of customer use cases to which the Bureau van Dijk data can be applied is expanding.

There are some very interesting new opportunities that we are getting good traction with in the Bureau van Dijk space, and in addition we're starting to have some good cross-selling successes as well. So we're very pleased with what we're seeing there and we expect to see on the revenue line, we expect to see nice acceleration this year.

Bill Warmington

And then for my second question I wanted to ask about new mandates in MIS, and whether it was still strong in the fourth quarter even during the tough December, and how those are shaping up in Q1?

Rob Fauber

So this is Rob, new mandates, they did decelerate in the fourth quarter from the third quarter and something in the range of about 10%, and versus the fourth quarter of 2017, they were down close to 20%. Now that's not nearly as sharply as the decline in the leverage finance markets around the world, and it was interesting. So despite the slowdown we had, 2018 was a very strong year for first-time mandate acquisition, actually we exceeded the prior year by I believe two first-time mandates, now not all of these first-time mandates ended up topping the market because of the disruption at the end of the market. But all of that sets up recurring revenue very nicely for us into 2019.

And interestingly when you look at the fourth quarter of 2018, we actually saw growth in first-time mandates in the United States versus the prior year quarter, and then all the other regions were down fairly meaningfully. We think we're going to see some contraction in first-time mandate acquisition in 2019 in a range of something like 900 and that's down from just under one 1,050 this year. But I think we had in the slides you can see even looking at the 900 and you compare back to 2016, still quite a healthy increase over those numbers.

Ray McDaniel

And if you go back earlier than 2016, it becomes even more stark in terms of the ramp up in new mandates.

[Operator]

And our next question comes from Dan Dolev with Nomura. Please go ahead.

Dan Dolev

Yeah, it's actually it's Dan Dolev. Thanks for taking my question. So if you guys look across you're guiding for about $1 billion of repurchases which is five times bigger than what you did in 2018. I mean the first question is, are you limiting your ability to sort of beat and raise by already putting in that much repurchase in the guide, and then kind of as a mini follow-up to that question, like if you kind of look through the entire P&L, like where do you think there is the most conservative at this point that's baked into that? Thank you.

Mark Kaye

Sure. And thank you very much for the question, Dan. I'd like to maybe reiterate in 2018 we really executed on the deleveraging or deleveraging associated with the Bureau van Dijk acquisition, and that was principally responsible for the lower relative share amount of share repurchases in 2018 versus historical years.

In 2019, we're certainly returning again in the absence of investment in growth opportunity either through reinvestments back into the business or acquisitions that meet return profile to use the share repurchase as a mechanism to return cash back to our shareholders. In terms of the impact to the EPS growth rate from 2018 to 2019, it's around 2-ish percentage points, and certainly we would see that as a best estimate while not conservative, not aggressive, very much down the middle-of-the-road from our guidance.

Dan Dolev

And then in terms of sort of the conservatism if you look across the P&L, where do you think your assumption would be the most conservative? Where do you see yourself kind of like surprising in 2019?

Ray McDaniel

Well, Dan just if you look at the size of the different components of our business and the fact that MIS has more cyclicality to it, that's where you would look for upside, and the largest business in MIS is the corporate ratings business and in particular, the speculative-grade business where the market psychology becomes to get money now rather than in 2020 or 2021, that's the biggest opportunity for a pull forward of debt. So that's not that I think we've put in a conservative approach, but if you're looking for where is the upside, that's just the biggest pool.

[Operator]

And our next question comes from Craig Huber with Huber Research Partners. Please go ahead.

Craig Huber

Yes, hi. I have a follow-up. Ray or Rob if you look back on 2018, what's your best estimate here? How much of an impact do the tax law change the U.S., made let's say to high-yield debt issuance in the year? And how much of a headwind do you think that actually hurt?

Ray McDaniel

I don't think that was much of a headwind, Craig. We've talked about before that the limits on interest deductibility really would only have an effect at the low end of the respective (ph) grade range, and even then it only has a modest impact. So it certainly didn't discourage issuance in the first half last year by low-rated issuers, and then in terms of cash repatriation that's pretty concentrated with large investment grade credits particularly in the tech area, again does not have much of an impact on spec-grade because they don't have large cash pools overseas for the most part. So you'd have to count it as a headwind, but I would not count it as a material headwind for last year or this year.

Rob Fauber

Maybe just to put a couple of numbers around it too. If you look at investment-grade issuance in the United States and this is to the tax repatriation issue from 2015 to 2017 there's big large offshore cash holders representing something like a quarter of U.S. investment-grade issuance. It was a big number that essentially all dried up in 2018, and the 15 largest cash holders closed out 2018 really without accessing the bond market in any meaningful way. And they've raised something like $130 billion in 2017, and we're not expecting in our-- the outlook that we're particular we're not expecting issuance out of that group in 2019.

Craig Huber

And then also guys when you think about your debt issuance for the year outlook, I guess down flat to down maybe 5%, I assume you're thinking they'll be tilted much better than in the back half of the year potentially worse in the first half, is that a fair statement, cadence for the year, how do you see it playing out?

Ray McDaniel

And certainly the comparables are much more challenging in the first half of the year than in the second half of the year. So I think, I would still expect to see the sawtooth pattern as we have as we typically see, but with the real year-on-year challenges coming in the first half. And so in that respect you might look back to 2016 for a comparison of issuance stuff.

[Operator]

And our next question comes from Alex Kramm with UBS. Please go ahead.

Alex Kramm

Just a couple of quick follow-ups for Mark, sorry if this was asked already. On the tax rates, did you flesh out why the tax rate is lower than I think you got it last year? And then just related to that, can you just outline the share-based comp's benefit that you getting and how that should play out in terms of seasonality? I mean last year or last few years the first quarter is usually pretty big, but any sort of color you can give us from a margin perspective there would be helpful. Thanks.

Mark Kaye

Sure. So I'll address the tax rate question first. 2018 effective tax rate was 21%, and that was probably lower especially in the fourth quarter of 2018 compared to the third quarter of 2018 really driven by non-U.S. earnings and lower U.S. taxes on the release of an IRS notice that clarified certain elements of the U.S. Tax Reform. For 2019, we are guiding to 21% to 22% which is higher than the actual tax rate in 2018, and we're doing that primarily because of the expectation of lower excess tax benefit. You'll recall in 2018, in the first quarter (sic) [full year], that around $38 million of excess tax benefit that we anticipate probably having half of that this year in 2019 and that's really what's driving the higher guided tax rate in 2019 compared to the actual rate in 2018.

Alex Kramm

And secondly real quick also and I don't know if this came up, but I think when you took over as CFO, you kind of talked about corporate cost allocation, and maybe your philosophy being a little bit different. Has anything changed so far as you think about now that you're breaking out the margin for the two businesses, is any of that driven by maybe thinking about that a little bit different? Or still to come potentially?

Mark Kaye

That is something that we continue to think about as a management team and certainly did incorporate into our views of margin guidance expansion for both MA and MIS for 2019. I would add that is it is not material to those two numbers as guided.

[Operator]

And Mr. Ray McDaniel there are no further questions at this time.

[Ray McDaniel, President and Chief Executive Officer]

Okay. Just want to thank everyone for joining us on the call today and we look forward to speaking to you again in the spring. Thank you.

[Operator]

This concludes Moody's Fourth Quarter and Full Year 2018 earnings call. As a reminder, immediately following this call, the Company will post the MIS revenue breakdown under the Fourth Quarter and Full Year 2018 earning section of the Moody's IR homepage. Additionally, a replay of this call will be available after 3:30 p.m. Eastern Time on Moody's IR website. Thank you.