穆迪 (MCO) 2018 Q4 法說會逐字稿

Good day, and welcome, ladies and gentlemen, to the Moody's Corporation Fourth Quarter and Full Year 2018 Earnings Conference Call.

At this time, I would like to inform you that this conference is being recorded.

(Operator Instructions) I would now turn the conference over to Salli Schwartz, Global Head of Investor Relation 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 Fourth Quarter and Full Year 2018 Results as well as our current outlook for full year 2019.

I am Salli Schwartz, Global Head of Investor Relations and Strategic Capital Management.

This morning, Moody's released its results for the fourth quarter and full year 2018 as well as our current outlook for full year 2019.

The earnings press release and a presentation to accompany this teleconference are both available on our 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 Kaye, Moody's Senior Vice President and Chief Financial Officer.

During this call, we will also be presenting non-GAAP or adjusted figures.

Please refer to the tables at the end of our earnings release, filed this morning, for a reconciliation between all adjusted measures mentioned during this call and GAAP.

Before we begin, I call your attention to the safe harbor language, which can be found toward the end of our earnings release.

Today's remarks may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

In accordance with the act, I also direct your attention to the Management's Discussion and Analysis section and the risk factors discussed in our annual report on Form 10-K for the year ended December 31, 2017, and in other SEC filings made by the company, which are available on our website and on the SEC's website.

These, together with the safe harbor statement, set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements.

I would also like to point out that members of the media may be on the call this morning in a listen-only mode.

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

Thank you, Salli.

Good morning, and thank you to everyone for joining today's call.

As we begin, I would like to note that we have revised our approach to our earnings call to focus more of our commentary on the factors underlying our financial results.

We hope you will find this helpful and, as always, welcome your feedback.

Additionally, we have changed our disclosure of certain guidance metrics in an effort to provide greater transparency in areas that are most relevant and predictable.

Mark Kaye will go into greater detail on the guidance changes shortly.

I will begin by summarizing Moody's full year and fourth quarter 2018 financial results.

Mark will then follow with comments on our outlook for 2019.

After our prepared remarks, we'll be happy to respond to your questions.

During full year 2018, Moody's achieved strong results driven by robust performance 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 fourth quarter.

Full year 2018 adjusted operating margins increased across the corporation, including at both Moody's Investors Service and Moody's Analytics.

Adjusted diluted EPS grew 22% year-over-year.

In the fourth quarter, Moody's total revenue declined 9%.

As you 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&A performance.

Despite top line softness in MIS, Moody's Corporation adjusted operating margin increased by 40 basis points for the quarter.

Our improved operating leverage combined with a lower effective tax rate grew adjusted diluted EPS by 8% year-over-year.

As you can see in the charts on Slide 7, adjusted operating margin increased in both MIS and MA by over 150 basis points in the fourth quarter of 2018.

This was due to expense efficiency initiatives across both businesses, lower accruals for incentive compensation in MIS and the roll-off of Bureau van Dijk's deferred revenue haircut in MA.

On our last earnings call, we announced a restructuring plan.

The restructuring charge we took in the fourth quarter of $49 million exceeded our previously announced range of $30 million to $40 million due to the acceleration of staff reductions and acquisition integration, which, together, also allowed for real estate rationalization.

Our total restructuring program is now expected to be in the $70 million to $80 million -- is expected to be $70 million to $80 million through the first half of 2019.

We are increasing our anticipated annualized pretax savings to a range of $40 million to $50 million, which is $10 million higher than the range we previously announced.

We will begin to realize the majority of the annualized run rate savings in the second half of 2019.

These savings will create financial flexibility for various capital market conditions and provide options to reinvest in our business or bolster margins.

We believe that the restructuring charge, acquisition synergies and other cost management efforts will contribute to margin stability in full year 2019.

After announcing the Bureau van Dijk acquisition, we focused on deleveraging and successfully reduced our net debt balance in 2018.

In December, we issued $800 million in bonds.

The pie chart on the right shows that $450 million was used to pay down senior notes that were coming due in July 2019.

A portion of the proceeds was also used to pay down our remaining outstanding term loan in commercial paper.

As a result of this financing, we do not have further debt maturing until September 2020.

In the fourth quarter of 2018, issuance was impacted by a variety of geopolitical and macroeconomic concerns, leading to market and interest rate volatility as well as widening spreads.

Notably, there was no U.S. high-yield bond issuance activity in December.

Even with these challenges, economic fundamentals remained sound in developed markets with stable U.S. and European economic growth and unemployment rates at multiyear lows.

The drop in global debt issuance of almost 30% in the fourth quarter of 2018 led to a smaller decline in MIS revenue of 18%, demonstrating the strength of the business model.

MIS' revenue was buttressed through its recurring revenue base, which was supported by increased monitoring fees from recent new mandates as well as pricing.

For MA, total revenue grew 5% in the fourth quarter or 7% excluding the negative impact from foreign exchange.

RD&A revenue grew 17% due to Bureau van Dijk, strength in the core business and contribution from the Reis acquisition.

Bureau van Dijk added $90 million of revenue in the fourth quarter at a 48.2% adjusted operating margin.

As expected, ERS revenue declined by 17% in the quarter, as we continued the transition to a Software-as-a-Service, or SaaS, operating model.

We anticipate ERS revenue growth to resume in 2019.

I'd like to provide additional details about our progress with the SaaS transition in ERS.

The chart on this slide illustrates 2018's slight decline in total revenue, as 15% growth in subscription revenue was offset by a 28% decline in onetime 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 onetime 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 onetime 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 Reis, which closed on October 15, 2018, is a good example of expansion into an adjacent product area.

Reis, a leading provider of U.S. commercial real estate, or CRE data, has built a unique dataset 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 Reis' proprietary data with MA's specialized expertise, Moody's is powerfully positioned to meet the need for standards that enhance operational efficiency and analytical precision in this market.

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

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 or they are inherently difficult to accurately predict.

For 2019, we have added MIS and MA adjusted operating margin segment guidance as well as net interest expense guidance.

We've removed 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 subsegment 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 fourth quarter 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 out 2019 guidance.

I will mention a few key items now.

For MIS, we believe that stable economic fundamentals of GDP growth of 2% to 3% in the U.S. and 1% to 2% in Europe, will underpin global debt issuance activity.

However, market volatility may moderate the pace of new mandates and cause variability in annual global debt issuance.

For MA, product innovations will enable sustained core RD&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 million by year-end 2019.

As Ray outlined earlier, company-wide annualized pretax savings as a result of our restructuring activities are now anticipated to be in the $40 million to $50 million range, with an estimated pretax savings of $30 million to $35 million in 2019.

We will continue to strategically manage our real estate footprint and hiring activities.

As you can see from this slide, we have been able to achieve high single-digit revenue growth over the last 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 $1.6 billion to $1.7 billion, despite our flat-to-down issuance outlook.

Listed here are additional items for Moody's guidance in 2019.

A complete list of Moody's guidance is included in Table 13 of our fourth quarter 2018 earnings press release, which can be found in Moody's Investor Relations website at ir.moodys.com.

In 2019, we forecast global debt issuance to be flat to down 5%, driven by volatility and spread widening relative to 2018.

We also expect moderating M&A, new CLO 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&A transactions provide a base for upcoming issuance activity.

For MIS, we expect total revenue to increase in the low single-digit percent range, as we execute on our ability to grow revenue despite the issuance headwind I just spoke about.

We project that capital market conditions will be more constructive.

And in the fourth quarter 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&A and refinancing activity.

Tighter investment-grade and speculative-grade spreads, along with still low, although 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 a historically slow December month.

We will continue to monitor monitory 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 base and implement technology to increase efficiency in our ratings processes.

However, we also have to account for a reset of the incentive compensation pullback to 100%, assuming, of course, we meet 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 2018.

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 Reis.

That constant dollar organic growth is also projected to increase in the low double-digit percent range.

We anticipate MA adjusted operating margin increasing 250 to 350 basis points to a 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 MA's margin expansion, which is bolstered by the roll off Bureau van Dijk's deferred revenue haircut.

In 2019, we plan to return capital through $1 billion of share repurchases and an annualized dividend of $2 per share.

Today, Moody's is pleased to announce a $500 million accelerated share repurchase program that will be completed during the second quarter of 2019.

In addition, on February 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 of March to stockholders of record at the close of business on the 25th of February.

This increased dividend is in line with our target dividend payout ratio of 25% to 30% of adjusted net income.

Before turning to Q&A, I would like to note a few principle takeaways.

We are confident in Moody's ability to deliver revenue growth and drive productivity gains to support strong margins in 2019, despite the relatively weakened global debt issuance outlook.

We continue to invest in custom 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 Fauber, President of Moody's Investors Service.

We'd be pleased to take any questions you may have.

(Operator Instructions) And our first question comes from Toni Kaplan with Morgan Stanley.

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 wanted -- was curious about was you saw some really big moves in spreads in the fourth quarter as well as at the beginning of this year in some really short periods of time.

And so just wanted to get a sense of, in your experience, what does that mean for the issuance environment?

So that'd be super helpful.

Toni, this is Mark.

Rob and I are going to jointly share some commentary on this particular question, as we think, it's important to give both the bank perspective from what we're hearing as well as our internal view.

In terms of bank feedback that we're hearing for both U.S. and Europe, and, in particular, for the U.S., there are 3 key points that have been quite pervasive, effective capital market conditions have obviously improved since December.

But issuance activity has remained relatively modest thus far.

We are anticipating or at least the banks are anticipating large-cap cash repatriators, 2 returned to the market in late 2019, and that would certainly hope investment-grade.

And then lastly for -- in relation to the U.S., M&A still is a driver of issuance activity in 2019, but the banks expect this to be down from elevated 2018 levels.

In terms of what we're hearing from the banks, in terms of feedback for Europe, a hard Brexit does remain a potential driver of downside.

Overall, investor demand does remain healthy, but there is some concerned redemand for Baa2 or below issuance, following the ECB's halt of corporate sector repurchase program.

And then lastly, from the banks, in relation to Europe, strong reverse Yankee issuance is 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 Toni, triangulating into that 0 to -- flat to down 5% outlook.

So -- and there's a few components of that go into our overall build.

So starting with corporate finance.

There we're expecting some slight declines in the investment-grade space, modest declines in bank loans, and we think that'll be driven in part by less opportunistic refinancing.

The U.S. high-yield market, we actually think, we may see an increase in issuance there given the spread tightening from the fourth quarter where the yield curve is and also some very, very light 2018 comparables.

As Mark mentioned, M&A, we think will still be an important issuance driver, but we do think it's going to be down off of 2018.

2018, I think, the third strongest year on record.

So we think that'll be down something in the neighborhood of 10% or so.

For financial institutions, we'd expect issuance to be slightly lower.

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

And we also had some very strong M&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 was effectively rebased after the loss of all that advanced refunding volume in 2018 that was associated with the tax law changes.

And we're actually seeing some good activity in terms of new money transactions there.

And finally, in structured finance, looking at kind of a modest decline, driven really, primarily, by our outlook on CLO activity.

We've had now 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 fourth quarter and saw the leverage finance markets seize up, to some extent, we're scratching our heads like, I think, a lot of people were, because we are 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.

We've seen other quarters like this.

You think back to the first quarter of 2016 with 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 it, cyclical air pocket, albeit, a very hard air pocket.

And our next question comes from Manav Patnaik with Barclays.

I guess, my first question was more around the restructuring efforts and more than just the current restructuring you've kind of already talked about last quarter.

I was just wondering how to think about it long term in terms of where all do you see the buckets of opportunity?

And how we should think about how you could flex that should the top line environment get tough?

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&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 restructurer.

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 pretax savings amount in 2019 of $30 million to $35 million.

And then starting in 2020, we do expect annualized pretax savings of between $40 million and $50 million, which is $10 million more than what we announced previously in October.

And then lastly, as you can see in our guidance reconciliation, we do estimate an approximate $0.10 per share impact from the first half 2009 restructuring charge in our full year 2019 GAAP EPS numbers.

Got it.

And if I could just follow-up on that point.

So, I guess, these efficiencies that you're talking about, going forward, anyway to quantify how to think about how that impacts the margin or the cost profile?

Just any color there would be helpful.

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.

Just wanted 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 will think about the last few years, I think you've gotten the reputation to be very conservative.

And then at the end of the day, the market was just a lot better, and you have outperformed.

And most recently, obviously, if you just look at the fourth quarter, which was, I know, once in a blue moon environment, but clearly, it was completely different than what everybody had thought.

So just wondering as we approach, maybe, the end of the cycle, if the confidence level that you personally have is just a lot lower or how you would kind of gauge the range of outcomes that 2019 could actually bring?

Well, Alex, I guess, one way to answer the question about my level of confidence would be that we have decided to eliminate the subsegment or line of business guidance.

So I've been dealing with -- over the past years, have 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.

So...

And maybe, Alex, I could, maybe, add in terms of the upsides and downsides, as we see them, to the outlook and maybe that will help you out a little bit.

And maybe for a change, I'll start with the potential upsides.

If we see some real spread tightening that -- 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'd obviously be positive.

You combine that with the fact that investors have got some significant cash balances and that could be constructive for the issuance environment.

And of course, private equity firms are sitting on huge amounts of capital still to deploy and that we think is going to provide some support for the M&A volumes.

Now on the downside, to some extent, the inverse of what I just described, but if we don't see some spread tightening from here, I mean, that's clearly going to provide a headwind to what we're thinking about for the year.

And of course, if equity market volatility picks back up, that's not good for the high-yield market, and that is an area that we have been looking at for potential growth this year.

And then lastly, just thinking about things like a disorderly Brexit or Chinese-U.

S. trade discussions, of course, present the opportunity to have some sort of market dislocation, and we haven't factored that into our outlook.

Okay.

That was fair.

I know it's uncertain.

And maybe just specifically, Rob, I know this is a small business, but you -- when you went through the kind of outlook, more specifically, on the public side, you mentioned that you still see a little bit -- a very robust, I guess, comeback in '19.

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 issuance to be down further in '19.

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 it's small, but just curious.

Yes.

I mean, I guess, in general, you think about the advance refundings and 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 -- there's a bit of a bid-ask on some of these issuance outlook.

But in general, that's what we're seeing.

I guess, I would also say through the first 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 with Peter Appert with Piper Jaffray.

So since I've whined about the margins at MA in the last few quarters, I wanted to call out kudos to Mr. Almeida for the better results and the positive momentum going into '19.

And specifically, I was hoping, Mark, you could give us some more granularity on the drivers of that margin improvement.

How much is the function of the turn at ERS?

How much is the function of BvD?

And 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.

The -- we expect the top line to come back nicely in ERS in '19, so that'll help.

And we're managing expenses very rigorously there.

So ERS is contributing, the Bureau van Dijk business will be contributing.

And we've been taking actions across the MA business for some period of time.

So I think all of those things are contributing to the continued margin expansion that we're delivering in '19 and the acceleration in that expansion.

So it's really very much across-the-board.

Mark, in terms of where you see the upside then?

I mean, what do you think is reasonable in the next several years in terms of run rate profitability in this business?

Well, we've said for some time that we expect continued gradual expansion in the margin.

I think, of course, it's going to depend sensitively on what we're able to do on the top line.

But obviously, we're guiding to a very good year on the top line this year.

And I think we're in a good position to be able to continue to generate strong growth in the business and that should allow us to continue to deliver margin expansion.

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

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 Investors Service or CCXI.

So I'm actually quite excited about the opportunity.

And we're going to continue our dialogue with regulators and issuers and the investors to make sure we're offering what, in fact, the Chinese want, as part of their policy agenda and market opening.

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

On ERS, talk about on, kind of, maybe on multiyear basis, how close are you to, I guess, seeing the service 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?

Tim, 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 '18.

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 and 2021 should be even clearer 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 a Q4 incentive comp number?

And I guess, what is -- just trying to understand how much of a headwind that is.

I guess, what's a 100% payout or kind of normal for you now?

Sure.

Very happy to provide.

The fourth quarter incentive compensation number was $29 million.

It's worth noting that was meaningfully down on a year-over-year basis compared to the fourth quarter 2017 by around 60% or so.

So if you're thinking about looking on a go-forward basis, I would recommend around $50 million-ish a quarter for 2019.

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

Got a couple of questions.

Ray or Rob, I'm just curious your updated thoughts as you think about the U.S. market corporate debt levels out there in terms of looking at the debt ratios in aggregate, looking at the absolute debt that's outstanding there.

Do you see anything that's in your mind that you feel is unsafe, is getting to extreme levels?

This is a question we get a lot from investors.

And I have a follow-up.

The short answer is, no.

We -- there has been some increase in leverage, but there's also been a strong economic environment, which has supported profitability.

So while there has been some additional leverage in the market, I think, really probably, the more interesting question, Craig, is over the last 12, 24 months, the opening of the market and the receptivity to increasingly low-rated credits.

And if there were to be a hiccup in the economy, a recession, that's where I would be paying attention to potential problems.

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 -- as a general statement, has not gone as deep in the ratings scale as it has in the United States.

That being said, there's also been less additional leverage put on companies in Europe than in the U.S.

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

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 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 out?

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 customers' 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 product sold on a subscription basis.

We do have that in certain areas and that's a process that takes place over a period of time.

But a lot of this is just -- frankly, it's consistent with what customers want.

Customers are demanding this.

They're expecting this increasingly.

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 onetime revenues will now be slower than the ramp up in the acceleration in revenue from subscriptions.

Is that responsive?

And our next question comes from Jim (sic) [Jeff] Silber with BMO Capital Markets.

Typically, every quarter, somebody asks you to update your M&A thoughts.

So I guess, I want to 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 3 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.

And certainly, not just looking at M&A opportunities, but a number of opportunities internally to invest in our existing businesses to support organic growth.

And then to the extent that we don't meet our return criteria, we obviously engage in the return of capital, either through dividends, which we spoke about this morning, or through share repurchases.

All right, great.

And if I could just get into the weeds of a little bit on my follow-up regarding your guidance.

I appreciate the new way you're guiding revenues.

But just on the M&A side -- excuse me, the Moody's Analytics side, if I look at the impact of Reis and the Omega Performance acquisition, is that all coming in the U.S. or is there some non-U.

S. impact as well?

Reis is a 100% U.S., Omega is -- it's quite international.

It has a big chunk of U.S. It also has a sizable business in -- outside the U.S., particularly in Asia.

Having said that, bear in mind that Omega Performance is a relatively small business, so it just -- frankly, it doesn't move the needle dramatically for MA overall.

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

So a question on BvD.

I just wanted to ask about the growth rate there and, well, that continues to be in the low double digits.

And, well, what's been driving that in terms of products, geographies?

Is cross-selling starting to play a role?

Yes.

Bill, BvD is performing very, very well.

The -- we took a big hit due to FX in the fourth quarter, probably lost about 300 basis points on that business due to FX in the fourth quarter.

But the underlying business is performing quite well.

We talked about this before, but we've seen a very nice acceleration in sales growth in that business since we acquired it, and that continues to be the case.

And I think it's a function of a number of things.

I mean, frankly, the business -- it's just a very good business.

The number of customer use cases to which the Bureau van Dijk data can be applied is expanding.

There are some very interesting new opportunities that we are getting good traction with in the Bureau van Dijk space.

And in addition, we're starting to have some good cross-selling successes as well.

So we're very pleased with what we're seeing there, and we expect to see -- on the revenue line, we expect to see nice acceleration this year.

And then for my second question, I wanted to ask about new mandates in MIS.

And whether that was -- whether they were still strong in the fourth quarter, even during the tough December?

And how those are shaping up in Q1?

So this is Rob.

New mandates, they did decelerate in the fourth quarter from the third quarter and something in the range of about 10%.

And versus the fourth quarter of 2017, they were down close to 20%.

Now that's not nearly as sharply as the decline in the leverage finance markets around the world.

And it is interesting.

So despite the slowdown we had, 2018 is 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 disruption at the end of the market.

But all of that sets up recurring revenue very nicely for us into 2019.

And interestingly, when you look at the fourth quarter of '18, 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 and that's down from just under 1,050 this year.

But I think we have in the slides, you can see -- even looking at the 900 and you compare back to 2016, still quite a healthy increase over those numbers.

Yes.

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

And our next question comes from [Dan Doul] with [Nomura].

It's actually, [Dan Doul.]So if you guys look across -- you're kind of guiding for about $1 billion of repurchases, which is 5x 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, if you kind of look through the entire P&L, like, where do you think there is the most conservatism at this point that's baked into that?

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 Bureau van Dijk acquisition.

And that was principally responsible for the lower relative share -- amount of share repurchases in 2018 versus historical years.

In 2019, we're certainly returning, again, in the absence of investment in growth opportunity either through reinvestments back into the business or acquisitions that meet 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 '18 to '19, it's around 2-ish percentage points.

And certainly, we would see that as a best estimate, and while 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&L, where do you think your assumption would be most conservative?

Where do you see yourself kind of like surprising in '19?

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 the market psychology becomes to get money now rather than in 2020 or 2021.

That's the biggest opportunity for a pull forward of debt.

So that's -- not that I think we've put in a conservative approach, but if you're looking for where is the upside, that's just the biggest pool.

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

I have a follow-up.

Ray or Rob, as you look back on 2018, what's your best estimate here?

How much of an impact the tax law change in the U.S. made, say, the high-yield debt issuance in the year?

And 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 the last year or this 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 '17, there's big large offshore cash holders, representing something like 1/4 of U.S. investment-grade issuance.

It is a big number.

That essentially all dried up in 2018.

And the 15 largest cash holders closed out 2018 really without accessing the bond market in any meaningful way.

And it raised something like $130 billion in 2017.

And we're not expecting in our -- the outlook that we've put together, we are not expecting issuance out of that group in 2019.

And then also, guys, when you think about your debt issuance for the year outlook, I guess, down flat to down maybe 5%, I assume, you're thinking they'll be tilted much better than the back half of the year, potentially worse in the first half.

Is that a fair statement?

The sort of cadence for the year, how do you see it playing out?

Yes.

And certainly, the comparables are much more challenging in the first half of the year than in the second half of the year.

So I think -- I would still expect to see the sawtooth pattern, as we have -- as we typically see, but with the real year-on-year challenges coming in the first half.

So in that respect, you might look back to 2016 for a comparison of issuance, so.

And our next question comes from Alex Kramm with UBS.

Just a couple of quick follow-ups for Mark.

Sorry, if I -- 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 just 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 the last few years, the first quarter is usually pretty big, but any sort of color you can give us from a margin perspective there, would be helpful.

Sure.

So I'll address the tax rate question first.

2018 effective tax rate was 21.0%.

And that was probably lower, especially in the fourth quarter of 2018, compared to the third quarter of 2018, really driven by non-U.

S. earning and lower U.S. taxes on the release of an IFRS 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 the -- of the expectation of lower excess tax benefits.

You'll recall, in 2018, in the first quarter, we had around $38 million of excess tax benefit and we anticipate probably having half of that this year in 2019.

And that's really what's driving the higher guided tax rate in '19 compared to the actual rate in 2018.

Okay, great.

And secondly, real quick also, and I don't know if this came up, but I think when you took over as CFO, you kind of talked about corporate cost allocation and maybe your philosophy being a little bit different.

Is there -- has anything changed so far as you think about now that you're breaking out 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, that -- 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 2 numbers as guided.

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

Okay.

Just want to thank, everyone, for joining us on the call today.

And we look forward to speaking with you again in the spring.

Thank you.

This concludes Moody's Fourth Quarter and Full Year 2018 Earnings Call.

As a reminder, immediately following this call, the company will post the MIS revenue breakdown under the Fourth Quarter and Full Year 2018 Earnings section of the Moody's IR homepage.

Additionally, a replay of this call will be available after 3:30 p.m.

Eastern Time on Moody's IR website.

Thank you.