Good day, and welcome, ladies and gentlemen, to the Moody's Corporation 4th 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 Sally Schwartz, Global Head of Investor Relations and Strategic Capital Management. Please go ahead, ma'am.
Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's Q4 and full year 2018 results as well as our current outlook for full year 2019. I am Sallie Schwartz, Global Head of Investor Relations and Strategic Capital Management. This morning, Moody's released its results for the Q4 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 website atir.moodies.com.
Ray McDaniel, Moody's President and Chief Executive Officer, will lead this morning's conference call. Also making prepared remarks on the call this morning is 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 ks for the year ended December 31, 2017, and in other SEC filings made by the company, which are available on our website and on the SEC's website. These, together with the Safe Harbor statement, set forth important factors that could cause actual results to differ materially from those contained in any such forward looking statements. I would also like to point out that members of the media may be on call this morning in a listen only mode. I'll now turn the call over to Raymond Tangle.
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 Tang will go into greater detail on the guidance changes shortly. I will begin by summarizing Moody's full year and Q4 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 at Moody's Analytics, prudent expense management and the benefit of a lower effective tax rate offsetting weaker than expected global debt issuance in the Q4.
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 Q4, Moody's total revenue declined 9%. As you are 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 and 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 Q4 of 20 18. 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 Q4 of $49,000,000 exceeded our previously announced range of $30,000,000 to $40,000,000 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 $70,000,000 to $80,000,000 is expected to be $70,000,000 to $80,000,000 through the first half of twenty nineteen. We are increasing our anticipated annualized pre tax savings to a range of $40,000,000 to $50,000,000 which is $10,000,000 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 twenty nineteen. 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 $800,000,000 in bonds. The pie chart on the right shows the $450,000,000 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 Q4 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 Q4 of 2018 led to a smaller decline in MIS revenue of 18%, demonstrating the strength of the business model. MIS' revenue was purchased through its recurring revenue base, which was supported by increased monitoring fees from recent new mandates as well as pricing.
For MA, total revenue grew 5% in the 4th quarter or 7% excluding the negative impact from foreign exchange. RD and A revenue grew 17% due to Bureau Van Dijk strength in the core business and contribution from the REE's acquisition. Euro Van Dijk added $90,000,000 of revenue in the 4th 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 the SaaS transition in ERS. The chart on this slide illustrates 2018 slight decline in total revenue as 15% growth in subscription revenue was offset by a 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 a 10% decline in sales of one time software licenses and services.
The acceleration in total ERS sales growth since early 2018 indicates that we have 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 and 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 over time. Underpinning these efforts, we are enhancing our technology infrastructure to enable automation, innovation and efficiency and remain supportive of a diverse and inclusive workforce. Our recent acquisition of REITs, which closed on October 15, 2018 is a good example of expansion into an adjacent product area. REITs, a leading provider of U.
S. Commercial real estate or CRE data has built a unique data set over 40 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 recent 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.
Thank you, Ray. As I alluded to at an industry conference 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 although 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 gross revenue guidance at the subsegment 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 acquisitions and the level of debt capital markets activity. These assumptions are subject to uncertainty and results for the year could differ materially from our current outlook. Our guidance assumes foreign currency translation at the end of the Q4 2018 exchange rates. Specifically, our forecast reflects exchange rates for the British pound of $1.27 and for the euro of $1.14 Slide 18 outlines a 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 with 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 and cause variability in annual global debt issuance.
For MA, product innovations will enable sustained core RD and A growth. ERS revenue growth should resume as the transition from licenses and services to SaaS based products has passed the inflection point. We remain on track to achieve our Bureau Van Dijk run rate synergy target of approximately $45,000,000 by year end 2019. As Ray outlined earlier, company wide annualized pre tax savings as a result of our restructuring activity are now anticipated to be in the $40,000,000 to $50,000,000 range with an estimated pre tax savings of $30,000,000 to $35,000,000 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 4 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 $1,600,000,000 to $1,700,000,000 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 Q4 2018 earnings press release, which can be found in Moody's Investor Relations website atir.newlease.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 and A, new CLO formation and refinancing of leverage debt. The chart on the right shows our forecast for slower pace of new mandates in 2019 relative to the past 2 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 and A transaction 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 headwind I just spoke about. We project that capital market conditions will be more constructive than in the Q4 of 2018. We 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 and A and refinancing activities, tighter investment grade and speculative rate spreads along with still low, albeit slightly rising default rates 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 market following the historically slow December month.
We will continue to monitor monetary policy along with other macro and geopolitical factors affecting the credit markets. We expect MIS adjusted operating margin to be approximately 58% in 2019. We will manage our expense gate base and implement technology increase efficiency in our waiting processes. However, we also have to account for a reset of the incentive compensation pullback to 100%, assuming of course we need our full year operating targets. We are investing in the MIS business to support our strategy of expansion into the Chinese and Latin American markets, pursuing opportunities in adjacencies 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 twenty eighteen. We anticipate broad based strength across all product areas and businesses. The drag from FX will be offset by the acquired growth from Omega Performance and Reef, thus constant dollar organic growth is also projected to increase in the low double digit percent range. We anticipate NA adjusted operating margin increasing 2 50 basis points to 3 50 basis points to the 29% to 30% range in 2019. This improvement has several primary drivers, including a combination from strong sales growth at Bureau Van Dijk and the ERS transition to more SaaS based offerings, which improves both recurring revenue and earnings predictability.
Ongoing discipline in expense management further underpins NA's margin expansion, which is bolstered by the roll off of Euro van Dijk's first revenue haircut. In 2019, we plan to return capital through $1,000,000,000 of share repurchases and an annualized dividend of $2 per share. Today, Moody is pleased to announce a $500,000,000 accelerated share repurchase program that will be completed during the Q2 of 2019. In addition, on February 12, 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 the 18th March to stockholders of record at the close of business on the 25th 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 and A, I would like to note a few principal takeaways. We are confident in Moody's facility to deliver revenue growth and drive productivity gains to support strong margin in 2019 despite the relatively weakened global debt issuance outlook. We continue to invest in custom offerings of information, insights and solutions and standards that enhance market transparency. Finally, we will maintain our disciplined and thoughtful approach to capital management.
Thank you, Mark. This concludes our prepared remarks and joining Mark and me for the question and answer session are Mark Almeida, President of Moody's Analytics and Rob Fowler, President of Moody's Investor Service. We'd be pleased to take any questions you may have.
Thank
And our first question comes from Toni Kaplan with Morgan Stanley. Please go ahead.
Hi, good morning. Thank you. Rob, I was hoping you could give some additional color on the issuance environment and sort of 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 Q4 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 in your experience, what does that mean for the issuance environment?
So that'd be super helpful. Thank you.
Tony, this is Mark. Robert and I are going to jointly share some commentary on this particular question. We think it's important to give both the bank perspective from what we're hearing and sort of as well as our internal view. In terms of bank feedback we're hearing for both U. S.
And Europe and in particular for the U. S, there are 3 key points that have been quite pervasive. First is capital market conditions have obviously improved since December, but issuance activity has remained relatively modest thus far. We are anticipating, at least the banks are anticipating large cap cash repatriated to return to the market in late 2019, and that would certainly help investment grade. And then lastly, in relation to the U.
S, M and 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're hearing from the banks, in terms of feedback from Europe, a high Brexit does remain a potential driver of downside. Overall, investor demand does remain healthy, but there is some concern redemand for Baa2 or below issuance following the ECB's halt of corporate sector repurchase program. Then lastly, from the banks in relation to Europe, strong reverse the anti issuance, possible due to favorable relative value dynamic of the euro versus the U. S.
Dollar.
Yes. So maybe, Mark, let me add on to that. And Tony, 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 will 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 4th quarter, where the yield curve is and also some very, very light 2018 comparables. As Mark mentioned, M and A, we think will still be an important issuance driver, but we do think it's going to be down off of 2018. 2018, I think the 3rd strongest year on record.
So we think that will be down something in the neighborhood of 10% or so. For financial institutions, 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 edible capital. So we actually think that that's going to slow down and will provide some headwind to financial institution issuance. And we also had some very strong M and A driven issuance out of the insurance sector in the past year.
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 is 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 2 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 Q4 and saw the leverage finance market sees 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 temporary, this was going to pass. And we've seen other quarters like this, you think back to the Q1 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, I guess, I would call cyclical air pocket, albeit a very hard air pocket.
And our next question comes from Manav Patnaik with Barclays. Please go ahead.
Thank you very much. I guess my first question was more around the restructuring efforts and more than just the current restructuring you kind of already talked about last quarter. I was just wondering how to think about it long term in terms of where all you see the buckets of opportunity and how we should think about how you could flex that should the top line environment get tough?
Yes. Manav, it's Ray. 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 is relates to the acquisitions we've made and rationalizing some of the costs post acquisition. So obviously, if we do any more M and A activity, we would be looking for the same kind of 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 are going to be a serial restructure. We're going to be looking for efficiencies and opportunities outside of formal restructurings.
I was going to add just in terms of a couple of numbers to supplement Ray's remarks. So firstly, we anticipate the actions will be substantially complete by the end of June, and they will allow for an expected pre tax savings amount in 2019 of $30,000,000 to $35,000,000 And then starting in 2020, we do expect annualized pretax savings of between $40,000,000 $50,000,000 which is $10,000,000 more than what we announced previously in October. And lastly, you can see now that is reconciliation. You estimated a payment for sharing
impact. Got it. And then I could just follow-up on that. And so I guess the efficiency that you're talking about going forward, Any way to quantify how to think about how that impacts the margin or the cost profile? Any color there would be helpful.
Thank you.
Yes. I think that at a high level, this is 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.
Our next question comes from Alex Kramm with UBS. Please go ahead.
Yes. Hey, hello, everyone. Just want to come back to the guidance and maybe this is for Ray, but just wondering how much 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 Q4, 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?
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.
And maybe Alex, I could maybe add in terms of the upsides and downsides as we see into the outlook and maybe that'll 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 a 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 and A volumes. Now on the downside, to some extent it's 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 just thinking 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.
Okay. That was fair. Thank you. 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 of a very robust, I guess, comeback in 2019.
I saw a 6 months survey, I think, at the end of December, where a lot of the municipals actually said that they still expect issues to be done further in 2019. Just wondering if 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 small, but just curious.
Yes. I mean, I guess in general, you think about the advanced refunding, I mean that was something like 20% to 30% of total issuance volume and that got taken out of the market in 2018. So like I said, you're kind of rebasing off of that. We have seen some new money financings, which we feel good about. So I understand we may there's a bit of a bid ask on some of these issuance outlooks.
But in general, that's what we're seeing. And I guess I would also say through the 1st month of the year, we're seeing relatively healthy public finance volumes.
And our comments earlier were that we expect that to be moderately higher. So it's not a situation where we expect issuance to be exploding.
And our next question is from Peter Appert with Piper Jaffray. Please go ahead.
Thanks. Good morning. So, since I've whined about the margins of 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 'nineteen. 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 a function of BDD? Any additional color you can provide? Sure, Peter. 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 will 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. Mark, in terms of where you see the upside there? I mean, what do you think is reasonable over the next several years in terms of run rate profitability in this business? Well, we've said for some time that pardon me, 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.
Your next question comes from George Tong with Goldman Sachs. Please go ahead.
Hi, thanks. Good morning. 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?
Yes. 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's a decline or not in issuance.
That's helpful. 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 debt there?
Sure. 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 is 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 investors to make sure we're offering what in fact the Chinese want as part of their policy agenda and market opening.
And our next question comes from Tim McHugh with William Blair. Please go ahead.
Thanks. ERS, excuse me, talk about on kind of maybe 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?
Jim, it's Mark. You're right. We will 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 2018.
So I guess the way I would say it is that line is stabilizing sort of 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.
And 2020 2021 should be even cleaner in theory, I guess, from
that factor?
Yes, exactly. All things being equal, I would expect that, that would continue to be the case over the coming years.
Okay. 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, how can you give us Q4 incentive comp number? And I guess what is trying to understand how much of a headwind that is? I guess what's 100% payout or kind of normal for you now?
Sure. Very happy to provide. The 4th quarter incentive compensation number was $29,000,000 It's worth noting that was meaningfully down on a year over year basis compared to the Q4 2017 by around 60% or so. So if you're thinking about looking on a go forward basis, I would recommend around $50,000,000 ish a quarter for 2019.
And our next question comes from Craig Huber with Huber Research Partners. Please go ahead.
Yes. Good morning. I got a couple of questions.
Ray or Rob,
I'm just curious your updated thoughts as you think about, say, the U. S. Market, the 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 feels unsafe, it's getting to extreme levels is a question we get a lot from investors? And I have a follow-up.
Thank you.
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 receptivity to increasingly low rated credits. And if there were to be a hiccup in the economy or reception, that's where I would be paying attention to potential problems.
And Ray, do you feel the same way about that about Europe as well?
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 broad as a general statement has not gone as deep in the rating scale as it has in the United States. That being said, there has also been less additional leverage put on companies in Europe than in the U.
S.
And our next question comes from Joseph Foresi with Cantor Fitzgerald. Please go ahead.
Hi. 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 sort of 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?
Yes. 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.
Got it. 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 kind of 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 kind of 2019 playing up?
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 work 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.
It 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 recurring revenue.
So it's really not I mean, there is some migration of customers from old installed product to new hosted products 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.
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 some you get the kinds of results that we saw in 2018 where the runoff 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.
Is that responsive? That makes sense. Thank you.
And our next question comes from Jim Silber with BMO Capital Markets. Please go ahead.
Thanks so much. That's close enough. Typically, every quarter, somebody asks you to update your M and A thoughts. So I guess I'll do that this quarter.
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.
And Jeff, just to add on to that more broadly, we have a very disciplined approach that we adopt to capital allocation. Certainly not just looking at M and 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.
All right. Great. 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 and A side excuse me, the Moody's Analytics side, I look at the impact of REITs and the Omega Performance acquisition, is that all coming in the U.
S. Or is there some non U. S. Impact as well?
REITs is 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 it just frankly, it doesn't move the needle dramatically for MA overall.
Okay, great. Thanks so much.
And our next question comes from Bill Warmington with Wells Fargo. Please go ahead.
Good morning, everyone, and welcome back to Salix. So a question on DVD. Just wanted to ask about the growth rate there and 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?
Yes. Bill, BBD is performing very, very well. We took a big hit due to FX in the 4th quarter, probably lost about 300 basis points on that business, due to FX in the Q4. But the underlying business is performing quite well. And we've 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.
And then for my second question, wanted to ask about new mandates in MIS and whether that was whether it was still strong in the Q4, even get into tough December and how those are shaping up in Q1?
Yes. So this is Rob. New mandates,
they did decelerate in the 4th quarter from the 3rd quarter and something in the range of about 10%. And versus the Q4 of 2017, they were down close to 20%. Now that's 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, 2 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. Interestingly, when you look at the 4th 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 the range of something like $900,000,000 and that's down from just under 10 $50,000,000 this year. But I think we had in the slides, you can see looking even looking at the $900,000,000 and you compare back to 2016, still quite a healthy increase over those numbers.
Yes. And if you go back earlier than 2016, it becomes even more stark in terms of the ramp up in new mandates.
And our question comes from Dan Deul with Nomura. Please go ahead.
Thanks. It's actually Dan Deul. Thanks for taking my question. So if you guys look across you're kind of guiding for about $1,000,000,000 of repurchases, which is 5 times bigger than what you did in 2018. I mean, the first question is, are you kind of 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 the question, like if you kind of look through the entire P and L, like where do you think there is the most conservatism at this point that's baked into that? Thank you.
Sure. And thank you very much for the question, Dan.
I'd like to maybe reiterate
in 2018, we really executed on the deleveraging associated with the bureaus and dike 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 investments and growth opportunities either through reinvestment back into the business or acquisitions that meet our return profile to use the share repurchases 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 see that as a best estimate, not conservative, not aggressive, very much down the middle of the road from our guidance.
And then in terms of sort of the conservatism in if you look across the P and L, where do you think your assumption would be the most conservative? Seems conservative, where do you see yourself kind of like surprising in 2019?
Well, Dan, just looking at 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 if the market psychology becomes get money now rather than in 2020 or 2021, that's the biggest opportunity for 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.
Your next question comes from Craig Huber with Huber Research Partners. Please go ahead.
Yes. Hi. I have a follow-up. Ray or Rob, as you look back on 2018, what's your best estimate here of how much of an impact the tax law change the U. S.
Made, say, the high yield debt issuance in the year? I mean, how much of a headwind do you think that actually hurt? 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 speculative grade range. And even then, it only has a modest impact. So it certainly didn't discourage issuance in the first half of 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. 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, those big large offshore cash holders represented something like a quarter of U. S. Investment grade issuances, there's 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 a meaningful way. And they've raised something like 130,000,000,000 dollars in 2017. And we're not expecting in our the outlook that we've put together, we're not expecting issuance out of that group in 20 19.
And 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 it will be tilted much better than that in the back half of the year, potentially worse than the first half. Is that a fair statement? Just sort of cadence for the year, how do you see playing out.
Yes. And certainly the comparables are much more challenging in as we have as we have as we typically see. But with the real year on year challenges coming in the first half. So in that respect, you might look back to 2016 for comparison of issuance.
And our next question comes from Alex Kramm with UBS. Please go ahead.
Yes. Hey, thanks for letting me on again. Just a couple of quick follow ups for Mark. Sorry, if this was asked already. On the tax rates, did you flush out why the tax rate is lower than I think you guided last year?
And then related to that, can you just outline the share based comps benefit that you're getting and how that should play out in terms of seasonality? I mean, last year or last few years, the Q1 is usually pretty big. But any sort of color you can give us from a modeling perspective there will be helpful. Thanks.
Sure. So I'll address the tax rate question first. 2018 effective tax rate was 21.0 percent and that was probably lower especially in the Q4 of 2018 compared to the Q3 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 for lower excess tax benefits. As you'll recall in 2018, in the Q1, we had around $38,000,000 of excess tax benefits. 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.
Okay, great. And then 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. Is there has anything changed so far as you think about now that you're breaking up the margin for the 2 businesses? Is any of that driven by maybe thinking about that a little bit different or still to come potentially?
Sure. Alex, thank you for the question. 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 it is not material to those two numbers as guided.
And Mr. Ray McDaniel, there are no further questions at this time.
Okay. I 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.
This concludes Moody's 4th quarter and full year 2018 earnings call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the Q4 and full year 2018 earnings session 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.