Good day, and welcome, ladies and gentlemen, to the Moody's Corporation Third Quarter 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 Steve Mayer, Global Head of Investor Relations and Communications. Please go ahead.
Thank you. Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's Q3 2018 results as well as our current outlook for full year 2018. I am Steve Mayer, Global Head of Investor Relations and Communications. This morning, Moody's released its results for the Q3 of 2018 as well as our current outlook for full year 2018. The earnings press release and the presentation to accompany this teleconference are both available on our website at ir.moodys.com.
Ray McDaniel, Moody's President and Chief Executive Officer, will lead this morning's conference call. Also making prepared remarks on the call this morning is Mark McKay, 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 press release that was filed this morning for a reconciliation of GAAP to all adjusted and organic measures mentioned during this call. And 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 statements, set forth important factors that could cause actual results to differ materially from those contained in any such forward looking statements. Would also like to point out that members of the media may be on the call this morning in a listen only mode. I'll now turn the call over to Ray McDaniel.
Thank you, Steve. Good morning and thank you to everyone for joining today's call. Before we begin, I'm pleased to welcome Mark Kaye to his first earnings call. Mark joined Moody's on August 20 as Senior Vice President and Chief Financial Officer. I'll begin by summarizing Moody's 3rd quarter year to date 2018 financial results.
Mark Kaye will then follow with additional Q3 financial details and operating highlights. I will conclude with comments on our current outlook for 2018. After our prepared remarks, we'll be happy to respond to your questions. In the Q3, Moody's revenue of $1,100,000,000 was up 2% from the Q3 of 2017. This result reflected strong growth from Moody's Analytics, partially offset by a decline at Moody's Investor Service as non financial corporate debt issuance slowed versus the record level in the prior year period.
Operating expenses for the Q3 of 2018 totaled $614,000,000 approximately flat to the prior year period. Operating income was $467,000,000 up 4% from the Q3 of 2017. Adjusted operating income of $514,000,000 was up 3%. Foreign currency translation had an immaterial impact on operating income and adjusted operating income. The operating margin was 43.2% and the adjusted operating margin was 47.6%.
Moody's diluted EPS for the quarter was $1.59 per share, down 2% from the Q3 of 2017. Adjusted diluted EPS for the quarter was $1.69 up 11% and excluded $0.10 per share related to amortization of acquired intangible assets. 3rd quarter 2017 adjusted diluted EPS excluded a 0.2 $3 per share foreign currency hedge gain and a $0.12 per share and $0.12 per share related to amortization of acquired intangible assets and acquisition related expenses associated with the Bureau Van Dijk acquisition. Turning to the year to date performance, Moody's revenue for the 1st 9 months of 2018 was a record $3,400,000,000 up 11% from the prior year period. U.
S. Revenue was $1,800,000,000 up 3% and non U. S. Revenue was $1,600,000,000 up 23%. Foreign currency translation favorably impacted Moody's revenue by 1%.
Moody's Investor Service revenue of $2,100,000,000 was up 3% from the prior year period. U. S. Revenue was $1,300,000,000 up 1% and non U. S.
Revenue was $848,000,000 up 8%. Foreign currency translation favorably impacted MIS revenue by 1%. Moody's Analytics revenue was $1,300,000,000 a 28% increase from the prior year period. U. S.
Revenue of $513,000,000 was up 9% and non U. S. Revenue of $752,000,000 was up 45%. Foreign currency translation favorably impacted MA revenue by 2%. Organic MA revenue for the 1st 9 months of 2018, which included Bureau Van Dijk revenue as of August 11, was $1,100,000,000 up 9% from the prior year period.
Moody's Corporation operating expenses for the 1st 9 months 2018 were $1,900,000,000 up 12% from the prior year period. This growth was primarily driven by the inclusion of Bureau Van Dijk operating expenses as well as incremental compensation related to salary adjustments and hiring, partially offset by lower accruals for 2018 incentive compensation awards. Foreign currency translation unfavorably impacted expenses by 1%. Operating income was $1,500,000,000 up 10% from the 1st 9 months of 2017. Adjusted operating income of $1,600,000,000 was up 11%.
Foreign currency translation favorably impacted operating income and adjusted operating income by 2% each. Moody's operating margin was 44.1% and its adjusted operating margin was 48.5%. The effective tax rate for the 1st 9 months of 2018 was 21%, down from 29% in the prior year period. The decline was primarily due to lower U. S.
Statutory tax rate and net uncertain tax position benefits related to a statute of limitations expiration and audit settlement. Primarily due to our expectation for continued lighter debt issuance into the Q4, we are reducing our outlook for full year diluted EPS to a range of $6.95 to $7.10 and adjusted diluted EPS to a range of $7.50 to $7.65 In response, we intend to undertake cost management activities, which will result in a 4th quarter restructuring charge $30,000,000 to $40,000,000 and an aggregate charge through the first half of twenty nineteen of $45,000,000 to $60,000,000 We expect this to result in savings of $20,000,000 to $25,000,000 in 20.19 and aggregate annualized savings of 30 to $40,000,000 thereafter. I'll now turn the call over to Mark to provide further commentary on our financial results and other operating updates.
Thanks, Ray. I'll begin by reviewing Q3 2018 revenue at the company level. As Ray mentioned, Moody's total revenue for the Q3 was $1,100,000,000 up 2%. US revenue of $560,000,000 was down 5%. Non US revenue of $521,000,000 was up 10% and represented 48% of Moody's total revenue.
Recurring revenue of $619,000,000 was up 16% and represented 57% of total revenue. The impact of foreign currency translation on Moody's revenue was negligible. Looking now at each of our businesses, starting with Moody's Investor Service. Total MIS revenue for the quarter was $645,000,000 down 7%. US revenue decreased 10% to $385,000,000 Non US revenue of $260,000,000 was down 2% and represented 40% of total MIS revenue.
The impact of foreign currency translation on MIS revenue was negligible. Moving to the lines of business for MIS. 1st, corporate finance revenue for the Q3 was $296,000,000 down 15%. This result primarily reflected a decline in U. S.
Investment grade and global high yield bond issuance activity. U. S. And non U. S.
Corporate finance revenues were down 21% and 4%, respectively. 2nd, structured finance revenue totaled $125,000,000 down 2%. This result reflected lower U. S. CMBS rated issuance, partially offset by new CLO formation in EMEA and the U.
S. U. S. Structured finance revenue was down 9%, while non U. S.
Revenue was up 13%. 3rd, financial institutions revenue of $120,000,000 was up 17%, driven by strong issuance activity primarily from M and A related financing in the U. S. Insurance sector. U.
S. Financial Institutions revenue was up 48%, while non U. S. Revenue was down 3%. 4th, public project and infrastructure finance revenue of $99,000,000 was down 9% and primarily reflected a decline in global infrastructure and project finance issuance.
U. S. And non U. S. Public project and infrastructure finance revenues were down 7% and 13%, respectively.
Turning now to Moody's Analytics. Total revenue for MA of $436,000,000 was up 18%. U. S. Revenue of $175,000,000 was up 9%.
Non U. S. Revenue of $261,000,000 was up 26% and represented 60% of total MA revenue. Foreign currency translation had an unfavorable impact on MA revenue of 1 percentage point. Organic MA revenue for the Q3 of 2018, which included Bureau van Dijk revenue as of August 11 was $399,000,000 up 8% from the prior year period.
Moving now to the lines of business for MA. First, research data and analytics or RD and A revenue of $283,000,000 was up 29%. U. S. And non U.
S. RD and A revenues were up 9% 50% respectively. Organic RD and A revenue, which included Bureau Van Dijk revenue as of August 11, was $246,000,000 up 13% driven by strength in sales of credit research and rating data fees. 2nd, Enterprise Risk Solutions or ERS revenue of $113,000,000 was approximately flat to the prior year period. This result reflected strong growth in loan origination solutions and the timing of revenue recognition under the new revenue accounting standard ASC 606, offset by the decline in software license revenue as the business transitions to subscription based products.
U. S. ERS revenue was up 9%, while non U. S. Revenue was down 4%.
Trailing 12 months revenue and sales for ERS increased 6% and 4% respectively. At the end of the Q3 of 2018, trailing 12 month subscription sales were up 9% versus the prior year period, while one time sales inclusive of perpetual licenses and service fees, were down 11%. During the same 12 month period, ERS revenue from subscriptions was up 11% and one time revenue was down 6%. Moving on professional services, 3rd quarter revenue of $40,000,000 was up 7%. U.
S. And non U. S. Professional service revenues were up 11% and 5%, respectively. Turning now to operating expenses.
Moody's 3rd quarter operating expenses were $614,000,000 approximately flat to the prior year period. This result reflected the inclusion of Bureau Van Dijk operating expenses as well as incremental compensation related to salary and hiring, offset by lower accruals for 2018 incentive compensation awards. Foreign currency translation favorably impacted operating expenses by 1%. On January 1, 2018, the company adopted the new ASC 606 revenue accounting standard using the modified retrospective approach. We continue to expect the impact of the adoption to be immaterial to Moody's Corporation revenue and expenses for the full year 2018.
As Ray mentioned, Moody's operating margin was 43.2% and the adjusted operating margin was 47.6%. Moody's effective tax rate for the quarter was 24.4%, down from 31.4% in the prior year period. The decline primarily reflected a lower U. S. Statutory tax rate.
The 3rd quarter 2018 effective tax rate included an increase in uncertain tax positions related to non U. S. Tax matters, offset by a decrease related to the transition tax liability, each being approximately $65,000,000 Now, I'll provide an update on capital allocation. During the Q3 of 2018, Moody's repurchased approximately 400,000 shares at a total cost of $66,000,000 or an average cost of $174.33 per share. Moody's also issued approximately 100,000 shares as part of its employee stock based compensation plans.
Moody's returned $84,000,000 to its shareholders via dividend payments during the Q3 of 2018. And on October 22, the Board of Directors declared a regular quarterly dividend of $0.44 per share of Moody's common stock. This dividend will be payable on December 12, 2018 to stockholders of record at the close of business on November 21, 2018. Year to date, Moody's repurchased approximately 900,000 shares at a total cost of $147,000,000 or an average cost of $168.37 per share and issued a net 1,500,000 shares as part of its employee stock based compensation plan. The net amount includes shares withheld for employee payroll taxes.
Moody's also returned $253,000,000 to its shareholders via dividend payments during the 1st 9 months of 2018. Outstanding shares as of September 30, 2018 totaled 191,600,000 approximately flat to a year ago. As of September 30, 2018, Moody's had approximately $318,000,000 of share repurchase authority remaining. At quarter end, Moody's had approximately $5,000,000,000 of outstanding debt and approximately $975,000,000 of additional borrowing capacity under its revolving credit facility. Total cash, cash equivalents and short term investments at quarter end were $1,100,000,000 down 3% since December 31, 2017, with approximately 87% held outside the U.
S. As of September 30, 2018, Moody's ratio of net debt to trailing 12 month adjusted operating income was 1.8 times, down from 2.2 times as of December 31, 2017. This reflected execution of management's commitment to delever post the Bureau van Dijk acquisition. Cash flow from operations for the 1st 9 months of 2018 was $1,100,000,000 an increase from $350,000,000 in the 1st 9 months of 2017. Free cash flow for the 1st 9 months of 2018 was $1,000,000,000 an increase from $280,000,000 in the prior year period.
These increases in cash flow were largely due to payments the company made in the Q1 of 2017 pursuant to its 2016 settlement with the Department of Justice and various states' attorneys general. And with that, I will turn the call back over to Ray.
Thanks, Mark. I'd like to provide some highlights on our progress with Bureau Van Dijk integration and synergy activities. We are just over a year into the Bureau Van Dijk acquisition and the business continues to perform well. The revenue growth is on track to meet our 2018 forecast, while the direct adjusted operating margin for the Q3 year to date was in line with historical business performance at 49% and 44.3% respectively. We are particularly pleased with Bureau Van Dijk's very strong sales results.
On an FX neutral basis, sales were up 14% year to date with 21% growth in the 3rd quarter. This acceleration reflects strong demand for Bureau Van Dijk's product and the synergies that we're realizing as we drive distribution of Bureau Van Dijk data to more customers in more markets. Importantly, our success in this area positions us for better revenue growth as we move into 2019. I'll now discuss certain components of our full year guidance for 2018. A complete list of Moody's guidance is included on table 13 of our Q3 2018 earnings press release, which can be found at the Moody's Investor Relations website at ir.moodys.com.
Moody's outlook for 2018 is based on assumptions about many geopolitical conditions and macroeconomic and capital market factors, including interest rates, foreign currency exchange rates, corporate profitability and business investment spending, mergers and acquisitions, consumer borrowing and securitization, and the amount of debt issued. These assumptions are subject to uncertainty and results for the year could differ materially from our current outlook. Our outlook assumes foreign currency translation at end of quarter exchange rates. Specifically, our forecast reflects exchange rates for the British pound of $1.30 to 1 pound and for the euro of $1.16 to 1 €1. Moody's now expects full year 2018 diluted EPS to be $6.95 to 7.10 $0.40 the expected restructuring charge of $0.10 to 0 point 15 dollars and the acquisition related expenses of $0.02 to 0 $0.03 Excluding these items, adjusted diluted EPS is now expected to be $7.50 to $7.65 Before turning to the Q and A, I would like to provide a few updates on recent acquisitions, investments and initiatives.
On August 20, we announced the closing of the acquisition of Omega Performance, a leading provider of online credit training serving over 300 customers ranging from large global banks to local lending solutions. Omega Performance will enhance MA as a worldwide market standard in credit proficiency for financial institutions that offer consumer, small business and corporate lending. On August 30, we announced a definitive merger agreement to acquire REE's, a leading provider of U. S. Commercial real estate or CRE data and commenced a tender offer on September 13 to acquire all issued and outstanding shares of REIT's common stock at $23 per share.
The tender offer and acquisition were successfully completed on October 15. The REE's acquisition contributes to MA's development of a comprehensive suite of CRE data and analytics solutions, positioning MA to become a leading data and analytics provider in the U. S. Commercial real estate market, bringing efficiency to CRE analysis and enhanced capital flows. We are very excited to welcome our new Omega Performance and Reis colleagues to Moody's and work together to achieve the synergies and commercial opportunities we have identified.
On October 15, Mona Breed joined Moody's as Chief Information Officer. Ms. Breed will lead Moody's Global Technology Infrastructure and Programs as we enhance our technology capabilities and leverage our investments. And on October 17, we appointed Derek Vedala as Global Head of a newly formed cyber risk analytics group in MIS. This group will develop MIS' capabilities for evaluating cyber risk as it relates to operational and credit risk.
And earlier this week, we announced an investment and a fund managed by Team 8, a leading cybersecurity think tank and incubator that further supports our cyber analytics initiative. Finally, we recently announced our selection of the inaugural list of partners for ReShape Tomorrow, our global program to help owners of small and growing businesses overcome the challenges of expanding their enterprises. For more information on the programs and partners selected, please see the CSR press release we issued on October 24 or visit moodys.com/csr. 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 Faubber, President of Moody's Investor Service. We'd be pleased to take any questions you may have.
Thank Our first question comes from Vincent Hung with Autonomous.
Vince?
Hello? Can you hear me?
Yes.
Sorry. On the €34,000,000 of cost savings, where is it coming from? And what's the timing around that?
Thank you for the question. We have undertaken a careful review of our expense infrastructure to identify opportunities for efficiency. The cost management activities will primarily come from 2 separate and distinct areas. 1st, reducing, exiting and or subleasing certain real estate properties. And second, a targeted reduction in headcount with an emphasis on streamlining our operations, eliminating redundancies and meeting regulatory expectations.
We anticipate that the restructuring charge of $30,000,000 to $40,000,000 in the Q4 of 2018 and the additional $10,000,000 to $15,000,000 in the first half of twenty nineteen will result in an annualized pre tax benefit of $30,000,000 to $40,000,000 once complete and that the net pre tax benefit for 2019 on a standalone basis is estimated between $20,000,000 $25,000,000
Got it. And just follow-up, when we think about expenses, long term, is there anything else you can do beyond that?
Yes. The business is actually undertaking a number of initiatives at the moment with respect to automation and technology to address costs. And as we said before, we are first focusing on having the right people doing the right jobs in the right location. Since 2015, over half of our headcount adds have been at our support center in India. We have now opened our hub in Costa Rica and working with other locations, specifically related to the MIS business.
We are also investing in major programs specifically in MIS around the workflow system and an analytics system that we believe can provide simplification around our end to end ratings process and add additional efficiency gains to our staff. Thanks.
And we'll take our next question from Anav Patnaik with Barclays.
Thank you. Ray, just I think in your comments you talked about the slowdown that you expect in the Q4 to be temporary. And I was hoping you and maybe Rob could just elaborate on that a bit and just explain why you are confident that it's only temporary and not maybe the start of something?
Sure. And I'll invite Rob to offer his thoughts as well. I don't think I said temporary, but we are looking at a number of headwinds and tailwinds. And so determining which of those are going to be stronger going into 2019 beyond is a little difficult to predict. But obviously, we are experiencing a rising rate environment to the extent that the rising rate environment is associated with strong economic growth.
That, as I've said before, encourages business expansion, business investment spending, merger and acquisition activity. The overall condition of the market we think is probably more important than the rates themselves. Rising rates with a maintenance of tight spreads, because again, we're in a strong economy is not a bad news story. What would be a bad news story as we've talked about again before is more of a stagflation environment. If for some reason we were we in the marketplace was experiencing a rise, especially a sharp rise in interest rates, but unrelated to underlying core business strength.
I don't think that that is going to be the situation. That doesn't look like the central case at this point, which is why you might interpret my comments as relating to a temporary slowdown. Rob, I don't know if there's anything else to add to that, but please.
No, I think that covers it.
All right. And Mark, welcome to the call. But just in terms of the cost actions, how much of this was driven by obviously the slowdown you expect in the Q4 versus how much of it was fresh set of eyes from your end and thinking that there's more room to be taken out here?
Thank you. And certainly very pleased to be a part of the Moody's management team. I think the restructuring program was really driven by a combination of factors. And I can really think of the 3 primary ones. First is the expected continuation of the relatively soft issuance environment through year end.
Secondly is an opportunity to rationalize our real estate footprint, specifically to include synergies from some of our recent acquisitions. And then third, it allows us to give a continued focus on optimizing our global softening operations for a greater efficiency, including some of the geographic rebalancing that I spoke about earlier.
Yes. And I'd just add that while it's always great to get a fresh set of eyes on the company's operations, This the timing was also importantly related to the completion of 2 recent acquisitions and some of the geographic rebalancing that we are doing, in part in response to regulatory expectations.
All right. Thank you very much.
And we'll take our next question from Alex Kramm with UBS.
Hey, good morning, everyone. So just I guess following up on Manav's first question in terms of the environment in the 2019 outlook. I know this is not a guidance call for next year, but your competitor S P as they laid out their initial issuance outlook calling for kind of 1% growth overall, corporate still down 4%. So curious if you could comment on that a little bit in terms of your own outlook or anything that you're seeing that may be different in particular these guys called out repatriation is still being something is going to weigh on the outlook. So maybe some color there would be really helpful how much that will be an impact for your business?
Sure. I'll let Rob comment on this. And you're right, we're not going to be offering a full outlook for 2019 on this call. But I know Rob does have some thoughts and perspectives on the environment.
Yes, right. Thanks, Ray. So we do like to get to the end of the year where we can see where issuance ends up and then be able to triangulate both our bottom up forecast with what we're also seeing from the Street. But that said, I'll give you a little feel for how we're looking at it. I mean, overall, we still have economic growth.
We saw today the U. S. GDP print the Q3 at 3.5%. Expectations for U. S.
GDP growth of close to 3% next year and the major economies in Europe in the 1.5% to 2% range. So continuing to see economic growth and Ray always talks about that. That's a key driver to issuance. I'd say modest geopolitical risks. We've got, I think, continued healthy investor demand.
And we're seeing that now with pretty constructive market conditions, albeit with some volatility and gradual rate increases. And again that's the key here is that they are gradual and well telegraphed. And we think also a strong M and A outlook going into next year. We've got a lot of LBO driven M and A activity now in the market. You can see that in the bank loan space.
We think that's going to continue as well as some of the jumbo M and A. We've also expect default rates, particularly spec rate default rates to remain low next year. That should contain spreads. And then we balance that against I would acknowledge that we're seeing both a combination of rates moving and I'd say in some cases relatively liquid issuers, which I do think has weighed on some opportunistic supply and we've seen that in the Q3. We're going to have to look at the sustainability of the bank loan supply if spreads are not further tightening.
And I think all in all that translates into a corporate issuance outlook that's roughly in line with 20 18 and we may see a modest rebound in U. S. High yield after a pretty sharp decline. And then maybe just touching on securitization, I think the trends there remain favorable or steady. It's a highly competitive market, but we do expect to see some growth on the back of, again, economic growth and consumer sentiment that will be supporting securitization markets.
Maybe just in terms of first time mandates, I think our view is that that's going to continue to provide some support for revenues going forward. So a lot of health warnings on that. We will tighten that up and be able to talk more about it on the next call.
That's great color. Thank you. And just one more quickly I think on the same topic. As you think into the remainder of the year, if I look at your updated guidance for the I guess implied guidance for the Q4, if I'm correct for the corporate side, I think you're assuming a pretty big ramp in the Q4, maybe something like 15% or so. It will be a pretty big ramp by historical standards and I know the Q3 was soft, but I think some people called your guidance this morning still fairly aggressive in that area.
So maybe just commenting on that real quick in terms of the more near term assumptions, what could still go wrong here?
Yes. Yes. I'm going to ask Rob to comment because it's certainly on the MIS side where you would potentially expect more volatility.
Yes. So, I mean, you can see where we are in terms of year to date growth. I would say that we are expecting 4Q to show some sequential growth certainly from 3Q 2018 and that's the resumption of that more typical sawtooth pattern that we have typically seen except for last year. This year we saw that typical summer slowdown. Last year, you remember every quarter saw sequential growth.
So we think we're back to that sawtooth pattern and think that 4Q 2018 will be up on 3Q 2018. We've got a again the technical issuance backdrop is good. I think our pipelines look generally healthy. The loan market is active. M and A inquiries are active.
But we will need to see some degree of improvement in opportunistic issuance in 4Q versus 3Q to hit our outlook. And I would also note that we're not looking the same levels of opportunistic issuance in 4Q that we saw in the first half of twenty eighteen, but certainly a pickup from the Q3. And the last thing I want to point out is 4Q is going to be a tough comp 4Q 2018 tough comp to 4Q 2017. You might remember we benefited from some of that pull forward in U. S.
PFG. We saw some late jumbo investment grade issuance and we put up something close to 20% revenue growth. So an acceleration pickup of revenue from 3Q into 4Q, but a deceleration of that kind of year to date growth rate. And that's how we got to our guide.
Makes a lot of sense. Thanks, guys.
And our next question comes from Toni Kaplan with Morgan Stanley.
Hi, good morning. Also wanted to ask on MIS. In terms of just the recent weakness in issuance, I know you could attribute part of it to rates, but do you also attribute part of it to tax reform? And when you do think about if so, when you do think about tax reform's impact on issuance, do you see it as more of an ongoing phenomena since companies would be paying less tax and have more cash on the balance sheets? Or would you think about it as this is a short term impact because of the repatriation aspect, so there's less of a need to issue right now.
And so therefore, maybe it's a little bit more temporary. So just wanted to sort of talk about what you think is driving the recent weakness in addition to rates?
Yes. I think I would place more weight on the repatriation, especially coming out of the tech sector. And that we discussed that earlier in the year as being a known headwind, but a somewhat concentrated headwind in that it was really the repatriation, the large dollars of repatriation were associated with the large technology companies and that a large part of the corporate debt market certainly in terms of our business coming out of the speculative grade sector is not an area where corporations have large amounts of offshore cash. So I think what we've seen in terms of a slowdown in spec grade bonds relates more to the rising rate environment and bank loans being favored over spec grade bonds rather than anything having to do with tax reform. That being said, the companies that have large amounts of overseas cash to be repatriated we'll have cash that can be repatriated again in 2019.
So, I don't expect that to be a very temporary or one off phenomena associated only with 2018.
Great. And just despite the top line weakness in Ratings, the margins in MIS held up well. I guess what were some of the levers you were able to pull in the quarter? I assume incentive comp was probably one of them. So it would be helpful to hear what that was during the quarter.
And I also think that last quarter we didn't have the incentive comp number for 2Q. So if you could give 3Q and 2Q incentive comp that would be helpful.
Thank you. Good morning, Tony. The Q2 2018 incentive comp number was 51,300,000 dollars The 3rd quarter number is $43,300,000 In terms of the MIS margins, quarter over quarter, the increase is approximately 140 basis points. We do, however, like to look at margins on a trailing 12 months basis. And there you'll see the increase is approximately 40 basis points.
The difference is really due to the normalization of the incentive compensation and ongoing cost control measures within MIS.
Thank you. And our next question comes from Joseph Foresi with Cantor Fitzgerald.
Hi. I was wondering what would be the
company's response to a prolonged issuance slowdown? Do you expect to protect profitability in that scenario? And how much flexibility do
you think you have there?
In terms of what protects the business model and business performance in a negative environment. There's a number of things to look at. On the revenue side, look to the steady growth in recurring revenue versus transaction revenue at MIS, pricing opportunities where we are providing particular value. The going forward benefit of new rating mandates that we have picked up in 2018, 2017, which translate into maintenance and capital market sensitive business and has a very heavy weighting to recurring revenue. As far as expenses are concerned, there's the formulaic flex in our incentive compensation that responds to what's happening with revenue and operating income.
We can also modulate the pace of investments. And those are a variety of different investments, whether they're technology related or otherwise. But I would underscore that we think there are some very important opportunities for the company that we do want to put investment against. And so for short term cyclical variations in market conditions, we are going to continue to invest even as we pull on these other levers to make sure that the business model is resilient.
And we'll take our next question from Peter Appert with Piper Jaffray.
Thank you. Good morning. So question for Mark Halmeida. Number 1, the BVD momentum, very impressive here in terms of the acceleration in quarterly revenue growth. So I was hoping you could just give us more color on what's driving that and the sustainability of that.
And then I'll get my follow-up in advance. On the ERS business, just any color in terms of progress and improving profitability there? Thank you.
Sure, Peter. Yes, BBD is as Ray described, BBD is performing very, very well. We're very pleased with what's happening in the business. We're seeing very good demand from a number of sources and in a number of use cases for the BBD product. We're also building some very solid momentum as we begin to cross sell the BBD product to the traditional Moody's Analytics customer base.
So, we feel like we're doing quite well and performing very well, particularly on the sales side with Bureau Van Dijk and that strong sales growth will start to manifest itself in very good revenue production in the coming quarters. So things going quite well there. In ERS, we are I would say that things are going very much as we've expected and as we've been describing for you. As you know, the business is going through a rather profound transition and that transition is going pretty much as we'd expect. We had about 7% revenue growth in ERS last year.
In the first half of this year, the business has grown 6%. We were flat in this last quarter in ERS. And our full year guidance would imply that our full year guidance of being down a couple of points would imply that the Q4 is going to be down for ERS. But the important thing to really look at to understand where the business is headed is to pick up on the details that Mark shared a couple of minutes ago. He mentioned that total ERS sales are up 4% on a trailing 12 months basis.
And that's important because in the 1st two quarters of this year, trailing 12 month sales in ERS were flat. And so I think what that suggests is that we're beginning to make the turn and that the business is evolving from a traditional software licensing and project business to a true software as a service business where we're selling things on subscription. So I think the business performance is moving in the right direction and that is going to drive much better profitability in ERS. And I think you're starting to see that flow through to the MA margin more generally. We had very good margin expansion in MA this past quarter.
We continue to have good margin expansion on a trailing 12 months basis. That's the result of the high margin BVD business flowing through, but it's also a result of the good work that we're doing in the legacy MA businesses. And that's largely an ERS initiative.
Great. Thank you, Mark.
We'll take our next question from Jeff Silber with BMO Capital Markets.
Thank you so much. If I look at your MIS business and if I look at the types of clients that you develop ratings for, Where do you get the most incremental margins? And if you maybe can rank order them, that would be helpful.
Yes. I mean, the new rating mandates are certainly a very attractive source of revenue because they establish new relationships that we would expect would be very stable over time. That being said, that is not the highest margin business. New customers, new rating relationships require additional analytical capacity and analytical support capacity. So I think you can understand that where we have an established relationship and that entity decides to reenter the debt markets, that is a profitable opportunity for us because we already have the cost base installed in terms of our workforce that follows the company or the municipality.
And we are earning incremental revenue off of the additional issuance. Rob, do you want to add anything to that?
Yes. The other thing, so I think that's right. Balance of first time mandates versus the refi activity where we're already rating these companies. But then when you think about maybe on a sector basis, I think you might tie it to complexity. So where there's more analytical complexity, we tend to that tends to be reflected in the economics.
Think things like leverage finance, CLOs, CMBS.
Okay, great. And then just a couple of quick numbers questions. If you could just let us know the interest expense and share count embedded in your guidance for the full year? And also does your guidance include the impact of REE's?
The guidance does include the impact of REE's and Omega. The expectation in terms of an adjusted EPS impact for 2018 would be $0.02 consistent with the earlier release. And then in terms of the guidance around share repurchase or interest expense, we don't provide that.
Okay, great. Thanks so much.
Our next question comes from Craig Huber with Huber Research Partners.
Yes, hi. A couple
of questions. The first one, Ray, as you think out to next year, can you just walk us through sort of preliminary basis, some of the factors that may be more positive next year, less of a headwind next year versus what you're dealing with this year on the debt issuance side in the Ratings business? I have a follow-up. Thank you.
Yes, sure. I mean, certainly, a gradual and expected change in the interest rate environment would be more beneficial than anything that is unexpected or overly aggressive. Again, as we've said, tying that to GDP growth, we think is important. And also our expectation for continued low, in fact, decreasing default rates, which should keep spreads tight is also important. So really, I think it's going to be 2019 is going to be a question of are the policy actions expected?
And with that expectation, are we going to have an M and A and business investment, business expansion environment that is supportive of debt issuance to affect that expansion.
Maybe Ray, just maybe one area to add to. We saw 2017 saw a lot of issuance out of the Greater China region this year with some of the volatility. We've seen that slow down, but we believe there's a pretty big backlog of issuance out of China. So I think there's some potential upside to see that come back into the market in 2019.
And as I think about it, looking for upside as well, if in Europe in particular, if some of the things that people are worried about in terms of Brexit and whether there's a hard Brexit, the Italian budget situation, If those are resolved in a relatively more benign rather than less benign manner, that's certainly going to help with confidence and business expansion on the European side.
And then also with China, could you just update us on your thoughts on when you best might get your license over there to rate in the domestic market in China and sort of how you view this opportunity here long term?
Yes. We view it very positively, obviously. We have a license application in process. We also like the optionality that we have from our investment in CCXI, which is a well established rating agency in the domestic Chinese market. So as we look at China, it's the domestic market, it's the panda bond market for non Chinese issuers of renminbi that might attract international capital that's looking for international ratings and it's the traditional cross border market as well as the opportunities that come from Moody's Analytics and what we can do in China both in terms of the product and services that are offered by MA alongside MIS.
So it all comes together in a package in a very positive way. The challenge is exactly when and it has been a process in our experience in China that the Chinese authorities move very deliberately and carefully. And so trying to predict the timing is a little bit
Good afternoon, everyone. So the first question for you is to ask about how new mandates are doing and whether they're holding up in 3Q and into 4Q?
Yes. Bill, this is Rob. Let me take that one. So I'd say they decelerated a little bit in the Q3 in tandem with the kind of slowdown in issuance in the leverage finance market. So that's fairly typical.
But we're still overall on track for a very strong year. I mean, we're over 200 first time mandates again signed in the Q3. So yes, that's down from the Q2 of 2018. It's actually it's also down from last year's quarter. But we're now over 800 first time mandates for the year through September and we are still expecting to be above that 1,000 first time mandate mark for the full year.
And you might remember we're just north of that last year at something like 10.40. So a very strong pace. And I just touched on in my answer to Craig's question, we also have a number of unpublished mandates, particularly in China. So you've got some deals that haven't gotten approval to go to market, regulatory approval. Others are waiting on more favorable pricing conditions given the volatility in the Chinese market.
So there's a pretty robust backlog that hasn't gone into the market. And the other thing that's just worth noting is the first time mandate growth has been now strongest out of the U. S. For the year. Now you might remember we had a very mixed growth last year, but we've seen very strong growth out of the United States and we have a good pipeline there.
And I'd just add that the numbers we are seeing in Q3 are as expected and going into Q4. We did not anticipate, as I think everyone knows from our Q2 outlook, we did not anticipate the Q3 of 2018 behaving like the Q3 of 2017. Just a very unusual quarter that not only affected issuance, it affected new mandates, etcetera. It just drove an unusual performance profile last year that we've normalized back to typical market performance in 2018.
And then a question for Mark, and that's Mark Kaye. I have to make a distinction now. So more marks on the German bank as the saying goes. The at breakfast a couple of weeks ago, you talked a lot about your goals of introducing more automation to internal processes at Moody's using AI, machine learning, more data science. How does this play into the restructuring announced today?
Does it give you a chance to implement some of that?
Bill, thank you. Thank you for the question. I certainly continue on the path of introducing and encouraging the team to implement different and more automated digital approaches to how we think about finance and how finance function interacts with the business itself. We did spend some time with our Board talking about that in our October meeting and they are supportive of what we're trying to do here. On the restructuring, I do view this as an opportunity for us to create capacity both to expand margins and to be able to reinvest back into the business.
I think from my perspective, it's important to keep the investment at a level that's sustainable, but also which will add value over the long term.
Thank you very much.
We'll take our next question from Tim McHugh with William Blair.
Thanks. Just going to ask on ERS. I noticed the description of kind of where the growth came from is more the loan origination side of the product set. I guess, can you talk at all about, I guess, the regulatory related solutions and what you're seeing from the clients? And has, I guess, where the growth is coming from shifted a lot versus 2 to 3 years ago for ERS?
Yes, Tim. It has shifted a fair amount. I think we've talked about this before, but if you go back 2, 3, 4 years, we had a lot of demand being driven by post crisis regulation, whether it was Basel rules or stress testing protocols that were being applied to banks, whether in the U. S. Or in Europe, there was quite a bit of regulatory driven demand.
That has been replaced by demand from banks that are looking to bring more efficiency and looking to streamline their processes. So that's where the loan origination product has been doing quite well. Lots of banks trying to compete, trying to make credit decisions and lending decisions faster and more efficiently, particularly in the mid sized and small end of the corporate lending market. That's a very competitive business and to be able to make a decision, to be able to automate your decision process is becoming increasingly important and we see a lot of banks investing in that. We've also got demand coming from it's not strictly speaking regulatory driven, but we've got these new accounting standards.
For a number of years, we've been dealing with IFRS 9 outside the United States. That plays very well to our strengths and we've done a lot of business in that space. And now you've got a GAAP variant of IFRS 9 called CECL that is taking effect in 2020. That's driving a lot of demand for our solutions here in the U. S.
And again, that's largely there we're largely focusing on smaller institutions and we're doing quite well in that space. So those are the principal things that are driving demand for our ERS solutions at present. The one other area I should note is again an accounting driven issue related to insurance companies. There's a requirement called IFRS 17, which is coming into effect over the next couple of years. That also plays very well to our analytical capabilities and we've developed a solution for that and are seeing a lot of interest in it.
So those are the principal sources of demand for the ERS product currently.
Are you retaining, I guess, the legacy regulatory type of subscriptions or licenses? Or do you see clients drop those? Just trying to understand if you're declining on one part and growing at the other or I guess what the underlying dynamics are?
No. Those regulations, by and large, those regulations still exist and financial institutions still need to comply with those rules, again, whether they're Basel or most of the stress testing work that we have done has been with larger institutions and those institutions are still subject to those rules, even though they've been relaxed for some of the smaller institutions in the U. S. So, we don't see customer attrition or product attrition associated with the change in the volume of regulation. It's really a flow versus a stock question.
I guess the way I'd say it is, the stock of regulation is the same. We're just seeing less flow of new regulation driving new demand.
Okay. And then on BVD, just on the new sales, recognizing since it's a sales number rather than a revenue number that can bounce around. And I guess you're comparing it to the year ago quarter when there's maybe some disruption, I guess, because of the closing of the merger. Can you, I guess, address that? Just how steady has that sales number growth been?
And so just trying to understand how outside the norm a 21% growth rate is for BPD or if it's been volatile?
Yes. As Ray said, we had 21 percent sales growth in Q3, but I think the more useful number frankly is the 14% year to date sales growth number that he cited. And again, those are both of those are at constant FX rates, so you don't have any currency noise in there. But the 14% rate, again, I think is a good reflection of the underlying performance of the business. The 21% in Q3, frankly, reflected a bit of catch up that we had from some operational issues that we talked about in the Q1.
But 14% is a good number and that's meaningfully stronger than where the business was performing when we acquired it. So we feel very good about that and we are optimistic about being able to sustain that.
Great. Thank you.
Our next question comes from Shlomo Rosenbaum with Stifel.
Hi, thank you for taking my questions. I want to focus a little bit on the RT and A business. It seems like from the guidance that you're expecting something like a $25,000,000 sequential ramp in revenue. Where is that coming from? And if it's coming from the BVD business, it seems like the BVD business when you gross up for deferred revenue was actually down over just over $1,000,000 sequentially, if you can kind of put that in context?
Sure. I mean, first, as we just discussed, there's strong underlying growth in the BVD business And that acceleration in sales growth that we've talked about, that's going to start flowing through to the P and L and it will start hitting the top line. And so that's certainly contributing to a good strong Q4 that we expect. I think you've done the math correctly, Shlomo. The other thing you need to keep in mind is, you mentioned that you've got the haircut going away.
There was $22,000,000 of haircut in the Q4 last year. We don't have that problem this year in the Q4. And you've also got Reis coming in to the results next quarter. So you've got those three things, strong underlying growth in BVD, the reversal of the haircut, if you want to put it that way, and then Reis coming in, in addition to what I would characterize as very solid performance in the rest of the business.
Got it. Thanks. And then I just want to ask in terms of the issuance commentary, S and P noted yesterday that they thought that the refi wall would be more meaningful in the second half of twenty nineteen as they look towards kind of pacing on the refis. Are you guys seeing that in the numbers that you're looking at as well?
Yes. When we look at the refi walls going out, actually multiyear, They are increasing each year sequentially through 2022. So in terms of assessing the importance of the refi wall in 2019, because it is growing and the 2020 refinancing in 2021 are obviously closer to the back half of next year. I think that's a reasonable expectation that refinancing may pick up later in the year. That being said, a lot of this ends up being, I think, company psychology and the expectations and predictions that Chief Financial Officers and Treasurers are making about where rates are going to go, where spreads are going to go.
And that could certainly drive issuance, refinancing issuance to get pulled forward further or to get pushed back further. So there's if we look at what has to be refinanced over the next few years, it is a very high wall. Predicting exactly what quarter or quarters that may happen is a more difficult challenge.
Got it. Thank you very much.
We'll take our next question from Alex Kramm with UBS.
Hey, thanks for the follow-up. I was actually going to ask of the refi wall as well, so that got stolen a little bit. But maybe just digging a little bit deeper, is there anything in the refi wall when you look in more depth that may be different? And when you think about the next few years that it may not be refinanced as much? Meaning, for example, are there a lot of issuers that may have used that money for synthetic repatriation that may just not refi that money when it comes to or anything else that you're hearing from companies that like, hey, we know this is coming due, but we're now in delivering mode.
So anything that will be different from that may make the wall look different than in previous years?
Well, the I mean, I think an important thing to keep in mind is that when we talk about opportunistic refinancing sector refinances on a much more regular basis, steady basis year on year on year. And international companies, both investment grade and speculative grade have a history of refinancing on a more regular basis. The opportunistic refinancing comes out of U. S. Spec grade and those aren't companies that have a lot of overseas cash as we've talked about before.
So I don't think that's going to be an important factor. You could certainly have companies deciding that they wish to deleverage, but again, the ability to deleverage across the speculative grade universe and the desire to delever across the speculative grade universe, I think is reasonably low. So yes, I can think of circumstances where refinancing may decline, but I don't think that's the central case.
All right, great. And last one real quick for Mark, Almeida, that is, follow-up on the BVD question and the growth there. I think someone cited quarter over quarter, but I think year over year, if my numbers are correct, that growth was pretty soft as well. I guess, maybe like 3%, 4%, 5%. So is there anything else going on other than the disruption like any sort of customer loss or anything else that may weigh on that growth even going forward?
Or you think we're now through this and some of the sales growth can actually translate into real revenue growth in the high single, low double digit growth? Just to circle back here.
Yes. I guess the short answer, Alex, is no. We feel the business is performing very well, as I said, better than it was performing pre acquisition. We're executing on our synergies. We're building momentum in sales production, which will manifest in good solid revenue growth.
So we feel very good about what's going on there and we view the numbers all very positive.
All right. That's it for me. Thanks.
And we'll take our next question from Joseph Foresi with Cantor Fitzgerald.
Hi. Some phone issues earlier, but I was wondering how sensitive is BVD and REITs to an economic slowdown? How tight are they to discretionary spending in the real estate market? Well, I'll speak to Bureau Van Dijk first. They do not appear to be like much of Moody's Analytics, all of Moody's Analytics really.
We don't see we have never seen much correlation between macroeconomic conditions either on the positive side or the negative side and the performance of our business. It seems to be generally very, very steady growth in the business irrespective of macro conditions, except if we're at a very extreme situation such as we had in 2,009, for example. And I believe that would be true of Bureau Van Dijk as well. If you look at their performance historically, as we did of course when we acquired the company, they performed well even in the depths of the financial crisis, they performed not spectacularly, but certainly above average, I would say. So we don't see much sensitivity in the Bureau Van Dijk business.
The REE's business, I mean, frankly, we've only owned it for less than 2 weeks now. So we don't have that much experience with it. But our impressions are that that is similarly not particularly susceptible to macro conditions within kind of a normal range of typical cycles. And I would just add Joe that for the REE's business in particular, we're looking at a business that is assessing, collecting data and with our analytics assessing risk in the commercial real estate sector, which actually may be in more demand in a more distressed environment. So we're new to REITs and we'll need some time to sort through this.
That would be one of the things I would be looking
for. Thank you.
And we'll take our final question from Craig Huber with Huber Research
Partners. Yes, thanks. I just have
a follow-up. Ray or Rob, get any sense from any of your clients in the U. S, for example, that are thinking about or starting to act on locking in some of these low rates that took out all these massive amount of spec rate bank loans here in the last few years? Were any of them in waves here, do you just give any sense of locking in the high yield bond market here as you kind of think out over the next year? Is that a strategy you think might get deployed more and more here?
Yes. I mean, it's something we are certainly going to be watching for to see whether floating rate converts back over to fixed rate. And then in looking at that, obviously, we would also be looking at the yield curve itself and how attractive longer term debt fixed rate paper is based on spreads and the yield curve itself. So it's a good area to pay attention to, I agree.
Great. Thank you.
And that does conclude our question and answer session. I would now like to hand our conference back over to Ray McDaniel for any additional or closing remarks.
I just want to thank everyone for joining the call today and we look forward to speaking to you again in the New Year. Thanks.
This concludes Moody's Q3 2018 earnings call. As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the Q3 2018 earnings section of the Moody's IR homepage. Additionally, a replay of this call will be available after 3:30 pm Eastern Time on Moody's IR website. Thank you.