Q4 2019 Earnings Call
Please standby.
Good day, and welcome ladies and gentlemen.
Ration fourth quarter and full year 2019 earnings conference call.
At this time.
This conference is being recorded and that all participants are in listen only mode.
Requested the company will open the conference up for question and answers following the presentation.
Now I'll turn the conference over to Shibani talking head of Investor Relations. Please go ahead.
Thank you good morning, everyone and thanks for joining this teleconference viscosity fourth quarter and 40 infantry 19 years old.
Our outlook.
I'm Shibani couch head of Investor Relations. This morning movies released its results.
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Twentytwenty the earnings press release on a presentation to accompany this teleconference. That's available on our website.
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Ray Mcdaniel, Moody's President and Chief Executive Officer will lead this morning.
Okay, and making prepared remarks on the call. This morning, Okay pretty chief Financial Officer.
During the school people could be presenting non-GAAP adjusted figures. Please refer to the tables at the end of Bonnie personally filed this morning for reconciliation between just as much as mentioned during the school.
Before we begin I call your attention to say called the language, which can be found.
Earnings release.
Today's remarks may contain forward looking statements in meetings, the private Securities Litigation Reform Act 1995.
Yeah, I would say direct your attention to the management's discussion and analysis section under risk factors discussed <unk> annual report.
Okay for the year ended December 31st 2018, I didn't bother you see filings made by the company, which were available on our website.
These together.
The statement.
Important factors.
Actual results could differ materially but contained in any such forward looking thing.
I do feel like foreign capital into the comedian maybe on the call. This morning I.
I mean.
I'll now tenants.
Got it.
Okay. Thanks Bonnie.
Morning, and thank you everyone for joining today's call.
I'll begin by summarizing Moody's fourth quarter and full year 2019 financial results and provide an update on the execution of our strategy.
Worked very well done call with further details on our results and comment on our outlook for 2020.
After our prepared remarks, we'll be happy to respond to your questions.
I'd like to start with a few highlights first Moody's cheap 16% revenue growth in the fourth quarter of 29 team.
With Moody's Investor service rebounding from the market disruptions experienced in the prior year period, as well with strong organic performance for Moody's analytics, which delivered double digit growth for the fourth consecutive quarter.
Second in the fourth quarter 29 team adjusted operating margin of 45.3% was up 30 basis points as compared to the prior year period.
Next we're pleased to introduce a full year 2020, adjusted diluted EPS guidance range of $9 in 10 cents to $9.30.
This guidance includes the expected dilutive impact of the regulatory data core for argued see acquisition as well as projected share repurchases of $1.3 billion.
With the announced or do you see acquisition, we continue expand our risk assessment offer helping and increasingly wide range of customers make better decisions. The combination of or de sees compliance data with you all van bikes capabilities positions Moody's to become a leader in the know your customer for K White see standards.
And finally I'm pleased to Moody's has continued to enhancing sustainability engagement and disclosure as a corporation and to invest an important new U.S.G. tools for our customers.
I'll talk more about the work we're doing in the progress we're making in these areas shortly.
During the full year 29 during full year 29 team, we've achieved 9% revenue growth driven by 13% and 6% increases in May I know my house revenues respectively.
Moody's adjusted operating income of $2.3 billion was up 8%.
Adjusted diluted EPS increased 12% driven by strong business performance.
Moving on to fourth quarter 2019 results robust performance across both business segments contributed to a 16% revenue increase for Moody's overall with 21% growth and then my ass and 10% growth in that Matt.
Moody's adjusted operating income of $559 million was up 17% from the prior year period.
Strong revenue growth combined with ongoing cost discipline drove 60 points of organic adjusted operating margin expansion.
This was partially offset by a 30 basis point combined impact from acquisitions on the divestiture Moody's analytics knowledge services or Max.
Adjusted diluted EPS of $2 was up by 23%.
Over the course of 2019 credit market sentiment became more positive.
This is especially evident in fourth quarter in comparison to the so you get significant market disruption experienced in the prior year period.
Favorable progress I'm, certainly overarching geopolitical concerns as well as generally benign macroeconomic backdrop that accommodative stance is from central banks allowed for low benchmark rates tight spreads and active debt capital markets activity.
Notably high yield bond issuance improved substantially following a period of minimal activity in December of prior year.
I'd like to spend a moment discussing another active sector us public finance reitmeier celebrated issuance grow by 84% in the fourth quarter versus 2018.
The favorable low rate environment incentivized to public entities to issue taxable bonds as a source of refunding is lower benchmark rates offset text it's damages.
This resulted in levels of issuance not seen since the U.S. tax cuts in jobs Act was enacted started 2018.
We expect the tight credit spreads and low benchmark rates will continue to support elevated refinancing activity and Tony Tony which Mark will discuss shortly.
Our capacity to operate successfully in the capital markets depends on our ability to provide trusted insights and standards that helped decision makers act with confidence to that end our performance in historical rank ordering and drives investor demand for our credit ratings, we remain focused on analytical expertise and robust credit methodologies to provide.
Predictive predictable and transparent ratings.
As you know our strategy is focused on continuing to enhance our core ratings and analytics businesses, while expanding our rich set of risk assessment capabilities into adjacent product areas and across new geographies.
On that note I'd like to take a few minutes to review, our recently announced acquisition of RBC and highlight our presence in the Chinese market.
Starting with our DC as I mentioned earlier the acquisition provides Moody's with a strong leadership position in the know your customer market.
Our DC has a specialized in unique data set of over 11 million curated profiles on individuals and is expected to act as an accelerator for bureau been dikes already fast growing set of compliance products.
Together, they will offer more efficient onestop customer solution that otherwise would be time intensive and costly to build.
Together on a pro forma basis for 2019 Bureau of index compliance products and our DC generated sales of approximately $150 million.
We expect this figure to more than double by 2023.
In addition, there combined capabilities have the opportunity to establish a global assessment standard for a market that was worth $900 million as a 2019.
This market has been growing at a compound annual growth rate of approximately 18% over the last five years.
We're very excited about the future opportunities the RDC acquisition presents and its alignment with Moody's core purpose bring clarity knowledge and fairness to an interconnected world.
Moving to truck I.
I want first note that we are obviously following developments relating to krona virus very closely and had been working to ensure that we're supporting our teams impacted areas.
Our main concern us for the health and safety of the local populations and our employees.
And then spirit Moody's Foundation has donated to give to Asia, a nonprofit organization serving health needs in the area to combat the spread to be outbreak.
While the initial and most concerning impact is on human health the risk of contagion could affect future economic activity in global financial markets immediate the most significant impact of in China itself. However, given its importance as will the second largest economy, a broader slowdown it's certainly possible.
That being said Chinese and other authorities have substantial policy tools at their disposal to mitigate the impact to global GDP.
Switching situation remains fluid and we will continue to monitor it actively.
I'd like to take a moment to discuss the us trying to phase one trade agreement.
The development of the domestic Chinese market is an important driver of our long term growth opportunity.
We are therefore pleased that China has taken important steps towards opening the market to credit rating agencies and the bilateral trade agreement acknowledges and showing certain commitments, which we support.
Moody's used to trade deals at positive for both trials using us growth.
Yes, I am I guess rigs, both the cross border market and in the domestic market through our 30% interest in CCX side, one of the largest domestic rating agencies in China.
And just trying to its financial market continues to expand and deepen we continue to explore ways to better serve customers and contribute to the development of that market.
China related revenues, including from cross border activity for MKS, and I may totaled $176 million and full year 2019 up 17% from the prior year.
In addition, Moody's attributable income from CCX side totaled $17 million in full year 2019.
From $15 million in the prior year.
Before I turn this over to Mark I'd like to highlight some of the key initiatives that we have undertaken that underscore our commitment to our stakeholders into a sustainable future.
He joined the UN global come back for you NGC initiative and enhance our voluntary SG related disclosures in our securities filings consistent with guidelines from the sustainability accounting standards Board and recommendations from the task force on climate related financial disclosures.
Disclosure enhancements are well recognized.
We are well recognized by the foot cheaper, good and Bloomberg gender equality indices, but which moody's satisfied the requirements for inclusion for the first Tom.
On the business from the made strategic investments in our U.S.G. risk assessment capabilities, which are becoming increasingly important to investors and other stakeholders.
In 2019, Moody's acquired majority Stakes in digital Iris and for 27.
We have now integrated data from for 27 with research firm MKS and the recent network in M&A.
In addition, Moody's acquired a minority stake in Syntel Green Finance, which provides CSG data and ratings to the Chinese market.
We believe that these investments enable us to offer customers more holistic movies product suite, which our customers continue to recognize its industry leading.
Employee diversity and inclusion remain integral to our culture and essential to our future growth prospects.
Many 19 was yet another strong year for third party recognition of our achievements in this area.
We continue to work towards the goal of embedding our CSR strategy and mindset throughout our communities and I'm pleased to report that Moody's was verifiably carbon neutral during 2019.
In 2020, and beyond we will continue to differentiate evolve and demonstrate thought leadership in these areas I will now turn the call over to Mark K to provide further details on our fourth quarter performance and our outlook for 20 Twond.
Thank you Ray.
For.
Fourth quarter revenue was up to 21% from the prior year period and about the 18% increase overall issuing due to favorable mix from infrequent corporate and financial institution issuers.
As a result at the favorable mix transaction revenue increased 31%.
As Ray mentioned earlier I guess also benefited from strong public finance instrument, including increases in refunding supply in taxable transaction.
Strong business performance and cost discipline resulted in 130 basis points constant dollar organic adjusted operating margin expansion, partially offset by 50 basis points from acquisition.
And then continued to deliver double digit revenue growth driven by strong contributions from the argue in eight years and lines of business.
You mentioned earlier, we May has now delivered organic double digit growth in the last four consecutive quarters.
Our DNA revenue grew 12% driven by credit research and data feed that's what it's drums amount will be herbicide products, specifically compliance in the custom solution.
On an organic basis are you may delivered double digit revenue growth of 11%.
In Europe revenue grew 20% for the quota was 16% organically led by strong demand for credit to fit and loan origination solutions and products that enable compliant you accounting standards for banks and insurance.
Our risk acquisition also contributed to this growth.
In the fourth quarter any adjusted operating margin decreased 160 basis points, primarily GCC and divestiture related expenses.
On a trailing 12 month basis.
Thanks, and organic adjusted operating margin expanded by 180 basis point, partially offset by 40 basis point contraction from acquisitions.
We remain disciplined in managing expenses to drive strong operating performance in the fourth quarter total operating expenses increased 7%, primarily due to incentive compensation and operating expenses attributable to acquisition and the next divestiture completed within the last year.
These were partially offset by saving on the restructuring program.
Well the full year 2019, total operating expenses increased 10%.
Merely due to higher incentive compensation operating expenses attributable to acquisition the next divestiture and the restructuring charge.
Turning to relieve full year 2020 Titan.
The outlook for 2020 based on assumptions about meeting geopolitical condition and macroeconomic and capital markets method.
Include not limited to interest in foreign currency exchange rates corporate profitability in business investment spending mergers and acquisition and the level of debt capital markets activity.
These assumptions are subject to uncertainties and results for the could differ materially from up current outlook.
Our guidance assumes foreign currency translation at end of quarter exchange rate.
Picking up more costs reflect exchange rates for the British pound $1.31 thing and for the euro of $1.11 thing.
Slide 19 topline right you drivers, we consulted with setting up 2020 guidance.
In particular.
Am I guess, we believe it stable economic fundamentals with GDP growth of one of the half to 2%.
And one to one of the Hopper sink in Europe, and Japan global debt issuance.
Relatively tight credit.
And low benchmark rate should support at favorable issuance mix with elevated refinancing and opportunistic activity.
Or M&A.
Research and data feeds is when its European died will drive our DNA ratings performance.
Growth in yards will persist benefiting from demand for Fyseventeen product contribution from the risk acquisition.
The core business plus the Max divestiture will support strong adjusted operating margin expansion.
Late in 2020.
I would make RDC in other recent acquisitions are expected to create margin headwinds in the short term.
I'd also like to highlight that starting with the first quarter 2010 will no longer at Port professional services as a separate line of business.
Fit Moody's analytics learning solutions will be reported as part of our DNA.
Ladies full year 2020 financial performance will benefit from the $60 million in run rate savings from the restructuring program, which will enable improvement to the 2020 adjusted operating margin.
We have identified approximately $30 million of additional integration in 2020 that will fund like might like to now growth initiatives, such as SG, China and enabling technologies.
We anticipate that Moody's revenue will increase in the upper end the mid single digit percent range and then operating expenses will grow low single digit percent range.
If you're 2020 adjusted operating margin is full cost to be in the range of 48% to 49%.
We are targeting net interest expense to be between 180 and $200 million.
Full year effective tax rate.
The pays to be in the range of 20% to 22%.
Diluted EPS and adjusted diluted EPS, a full cost the range of $8 and $68 and eight.
And $9 and 10.2 $9 in 30 cents respectively.
Free cash flow is expected to begin the range of $1.7 billion to $1.8 billion full former somewhat guidance. Please refer to table 12, although earnings release.
In 2020, we plan to return more than $1.7 billion of capital to all stockholders through approximately $1.3 billion of share repurchases and more than $400 million in dividend.
We are expecting free cash flow to be approximately equipment to adjusted net income similar to 2019.
Today, we are announcing the beauty Ford is directed declared a regular quarterly dividend of 56 cents per share of Moody's common stock at 12% increase from the prior quarterly dividend to 50 cents per share.
Dividends will be payable on the 18th of March to stockholders of record at the close of business on the 20 endearing.
The increased dividend is in line with a target dividend payout ratio of 25% to 30% of adjusted.
Welcome.
In 2020, we focused global issue and to be approximately flat at deported conditions for refinancing activity are expected to be offset by moderating global economic growth and M&A.
The talking to run it shows the full cost 800 to 900 mandate in line with 2019.
For M&A, we expect total written to increase in the mid single digit percent range and strong execution of our strategy enables revenue growth despite flat issuing and fist time mandate.
Yeah Myos adjusted operating margin is anticipated to be 58, 59%.
Or m-, we forecast total revenue to grow in the high single digit percent range, given strong sales growth across the research and data businesses.
Well this year rates can be urban dike further bolstered by the RBC acquisition.
We expect the EMEIA adjusted operating margin to expand over 200 basis points to approximately 30%.
Some of the impact of the RDC acquisition.
Before turning the call back over to rate I would like to emphasize a few key takeaways.
We continue to execute a strategy that is driving the evolution into a globally integrated risk assessment company, helping customers make better decisions.
Acquisition of R&D fee is another important strategic step forward in this regard strengthening our position in the large and fostering key why fee market with potential for significant upside.
Core business strength disciplined investments and cost management will support continued revenue growth and margin expansion in 2020.
Finally, consistent with prior years, we're committed to being good stewards of capital and anticipate returning more than $1.7 billion tough stockholders in 2020.
I will now to pull back of the two rate with final remarks.
Thanks Mark.
Just like to remind everyone that Moody's we'll be hosting it's mixed investor day on March 11, 2020 here in New York City.
The event, which will be webcast log will feature presentations from management and showcase important aspects of the company's business. Please contact the investor relations team if you'd like additional information about this event.
And finally listed on this slide or the conferences that we expect to attend the next few months.
Orlando, London, New York City. Please contact your bank representative to request a meeting with movies management at these events.
This concludes our prepared remarks, and joining Mark K and me for the question answer session is Rob Fauber, our chief operating officer, we'd be pleased to take your questions operator.
Okay.
Thank you, ladies and gentlemen, you would like to ask a question. Please dial star one on your telephone keypad.
Speakerphone, please pick up your handset and make sure. Your mute function is turned off so that your signal reaches over equipment.
He will ask that you. Please limit yourself to one question with a brief follow up and you are then welcome to rejoin the queue for any additional questions. You may have again that is star one to ask your question and our first question comes from Manav Patnaik with Barclays.
Thank you.
Good afternoon oil was talking to you guys first question is just.
On the eastern side.
Slide with all the initiatives and I get what you're doing.
So your own I just spoke with angle.
Quite a lot of the data assets that I think help the candidate inside which you said has been doing that for a while I was just curious what should we be looking forward to in terms of incremental revenues in terms of yes, yes.
Yes.
Sure all all of that.
Rob tackle those.
Rob Please yes sure.
Good morning are almost algorithm enough.
So just to get a sense account, where we are from a revenue perspective with yesterday, we're generating somewhere between $15 million to $20 million in revenues there.
Unlike some other companies that are in that SG space.
We don't have an index business to help us monetize rds content really we see the opportunity across.
Two broad customer segments, it's really issuers on one hand, and investors and financial institutions over the other.
And we're leveraging the content from the Vizio Iris. Unfortunately, seven businesses that we've acquired and integrating that also across a wide range of offerings in M&A, maybe just to talk about the issues aside for a second so.
We're seeing some real ongoing growth in.
What what we call the label bond market at this stage started as the Green Green bond market and has evolved to kind of a broader sustainability bond market, we think that market's going to hit something like 400 billion in issuance. This year and that's up almost 25% from 2019 through does your Iris we offer something called us.
Second party opinion on label bond issuance for issuers, and we did something like a 120 of those last year. So that makes us one of the world leaders in that space.
And were further making some are some refinements to not to that offered through V and for 27, we've got a few other offerings.
Issuer sustainability ratings sustainability lengths Vernon assessments, and we're working on rolling out a climate assessment for issuers and then overdone second segment I talked about investors and financial institutions.
We've got BSG ratings and something like 4700 publicly listed companies.
At risk scores and over a million facilities.
We're selling activity for portfolio on construction monitoring.
We're also now as I said integrating that content into our M&A offerings, and we're seeing demand from data feeds green stress testing.
Fiscal risk scores on our re platform that we just mentioned even yesterday training sort of a number of what is that we're looking to monetize all those.
Got it that's helpful and then lean your comments on China, you referred to the key to clean and so forth does that change your strategy in terms of tuck ins that ccxfive or maybe going back on field license events of the domestic side.
Oh, yes the.
As I said the trade agreement.
We viewed as very positive.
Certainly for the financial services sector, and the opening of the financial service sector, We think thats.
A positive for for US. It's also should be positive for the Chinese market.
What it does is it it really codifies.
In clarifies that we have some different options in that market. We can pursue a license. We can continue with our joint venture in in two Cxi and yes, we could.
We could think about changing our ownership position.
Cxi that was.
That was made clear in the trade agreement.
So what we're doing is evaluating those options.
I've said in previous calls we're very.
Pleased with the position that we have received cxi.
It has been a very successful business today, and so I think I think the greatest likelihood is that we will want to continue with ccxfive.
And see what our joint venture partner would like to do as far as our combined future. Then just get a couple of numbers around that 30% ownership in the leading rating agency seasick side, which has just to remind you are a little over 700 employees in 1500 that customer relationship.
We estimate that TC, if I had around 42% share.
$280 million single rating domestic market.
In 2019 that was up slightly from the 51% in 2018.
Thank you.
Your next question will come from Michael Cho with JP Morgan.
Hi, Thanks for taking my question. My first question is just around the.
Ladies analytics.
Margin Guide I was hoping you touched on this and the opening commentary, but I was hoping you could provide more commentary on the ethane margin progression from 2019 to 2020 side I guess I'm thinking about core operating leverage investments and dilution from impacts.
Dilution from acquisition that balancing those kind of.
Variables.
Good morning that Michael this is that might affect 2000 in my team and then I'll before 2020.
For 2019, certainly in the fourth quarter, and we did reporting decreasing margin of 160 basis point and during the quarter. It's important to note that the margin itself would it be more than 250 basis points higher in the quarter, if we excluded.
Incentive compensation in severance expenses over the prior year period, and nonetheless, we like to look at any margin typically on a trailing 12 month basis and for 2019 did increase of 140 basis point and 26.4% to 27.8%.
Net net 140 basis points increase.
Food is a headwind of approximately 40 basis points on inorganic acquisitions, we did in 2019, and so we really saw a run rate somewhere around 180 basis points equaled approximately 200 basis points of so and in 2019.
For Q2 thousand 20, what we're expecting to fees on a constant dollar organic growth.
The increase of around 260 basis points.
For the end they fully allocated mochi that would put us approximately 30 basis points.
As a management team. It's also worth noting that that includes around 50 basis point headwind from London based in the business. So not only are we able to grow margin consistently across the years, we'll be able team based in the business in terms of improving our profile.
Okay, great. Thank you that's great color.
One of the pivot despite the.
Around regulatory data postpaid I saw that you mentioned.
About 150 million out or pro forma revenues looking to double.
In Q3 years, I mean, so I guess, how fast is regulatory data revenues growing today and is there something that gives you so much confidence to double that in a few years. Thanks.
Well, yes.
So the combination of already see and DVD as we talked about is really we think very natural fit between.
Two very well established providers and that say resi space and they have very complimentary offerings.
So together, we're going to have an integrated kind of end to end solution for customers. That's got to the people data density data all from one provider, we think thats relatively unique in the margin and has the potential to be really that ultimately the standard in the queue I see space.
So.
RTC I think has been growing generally consistent with what you've seen in terms of the market growth, but we think the combination and leveraging the sales capabilities and distribution.
We've got that.
And BBD, particularly outside the us as well are going to give us an opportunity to really support.
To support the growth there.
Brian solutions at BBB or the highest gross product segment that we got there. So we have a good experience in that segment already.
We think RTC is just in a further further support that.
Thank you.
Our next question will come from Alex Kramm with CBS.
Hey, good morning, everyone I'm just wanted to I know you guys, obviously guidance on the on the rating side, an issuance, but maybe just discuss a little bit more.
What you're seeing right now and how you expect the year to shape out I guess, what I'm, what I'm seeing so far this year as pretty good issuance strengths.
And pretty good environment, but when I think about the second half you know you have an election, yes.
So just wondering what you're hearing from corporate this could this be a year, perhaps or.
How are you were thinking about a year.
I point out.
Oh, all at all like marketing, Rob and of the bulk of this but maybe just won't confirm yes, we have seen a good issuance environment in January in early February even with the normal corporate blackouts that we have around this period.
We expected it was going to be good market conditions in the fourth quarter.
Continued into the early first quarter, but as far as tends to look forward I'm going to I'm going to what mark and Rob tackle last.
Like seven give your question I think what we'll do carry similar to what we've done in the Pos.
Well talk a little bit about issuance drivers that we keep hearing from some of the banks and then alternative to Rob to follow up with internal viewpoint.
Starting with you at investment grade the banks, the seeing solid activity start the year with an expectation that volume to pick up once more corporate commodity earnings blackout period.
For the most spreads remain tightened to yield curve receptive.
Encouragingly, there are indications that kind of the largest offshore cash holders Britney mostly absent from the market in 2018 to use tax or from a 70 starting to return to the market.
Despite the strong start 2020 for me this investment grade Ishman. Several factors are driving cautious full year outlooks from the banks have eating food a tough comparable M&A different issuance content around the economic impact for the quarter end virus and potential volatility in second half from year end from U.S. election cycle overall, the banks coal for.
You mentioned basement, great issuance to be flat to down.
5%.
At some of US you incandescent great. The banks eclipsing you a speculative grade issue is mixed.
It should funding for both fixed and floating rate you were speaking with great. Dick has had a strong started the year banks expected overall price principal fixed rate issue into marriage over the year driven by ongoing low benchmark rates and tight spreads. The banks also indicated that they see refinancing M&A driven issue to be lower for you a speculative grade.
And at high yield bond volumes in particular faith relatively tough comparable to a strong 2019. Additionally, the banks noted broader macro uncertainty in the U.S. elections later in the year. It also weighing on the full cost.
They are calling for you with sticking to the great issuance to declining the high single digit percent range in 2020.
Turning to Europe.
Feedback from the banks and setting basement, great market, you've seen some of that.
But maybe more accentuated dynamics.
Thank you Miss with tailwind from to get you see these corporate bond purchases and both have benchmark rates and they say great dynamics there.
Relative value dynamics in your continue to encourage reverse Yankee mission, which comprise more than a quarter of total investment grade issuance in Europe last year.
In addition, ongoing political uncertainty concerns around macroeconomic environment and lower expectations that the residual making basin Hitchcock Gpus issues and all contributing to relative to conserve the twin 20 outlooks as a result, the banks are expecting European investment grade volumes declined between five and 10% for the year.
And then finally interesting enough thanks expectation from European high yield a slightly more constructive.
Improved marketing spent around eating tree pension.
Dinesh Central Bank policy.
Great confidence in speculative grade in the pipeline.
Well fitting fields around the weak economic data and the potential impact to the point of buyers overall banks are expecting European ticketed radiation to be lucky.
With stronger issuance from fixed rate debt offsetting a slight decline in floating rate issue.
I'll hand, it over to update you in in my answers as 2020 issuance expectation yeah. Okay. So just to kind of trying to weights or what you heard.
From Mark in terms of our own issuance outlook.
And consistent with what we talked about on the earnings call back in the third quarter, we're looking at flattish assurance.
Thats inclusive of bank loans, and we think that bank loans will be down slightly in 2020, so our bond issuance outlook.
Very modestly over.
Over prior year.
Just trying to comparing and contrasting to what Mark just talked about from the banks.
We're also thinking about the potential for second half volatility due to the him.
Yes presidential elections, and I'd say the.
In our view on in or M&A is that it's probably moderated a little bit versus what we were thinking out four months ago or so.
Coming off some very elevated levels over the last couple of years and we are starting to see that in this word calendar, so a little bit lighter M&A and LDL acquisition financing in the forward calendar.
Relative to the banks.
Actually where we're a bit more positive in a few of the asset classes that mark touched on.
Yes investment grade I'd say, we're a little bit closer to the high end of that flat to down 5% range and by the high end I mean closer to flat.
You asked leveraged finance, we think we're actually going to see some gross modest growth and use high yield.
After of what was a really strong year, obviously in 2019 and AD supported by those tight spreads in what we think there's going to be healthy rifai activity.
And probably on leverage loans.
Pretty similar activity the last year.
In Europe.
Again, we're probably at the high end of those investment grade estimates.
Mark talked about kind of down to five and.
Down five to 10 and.
I think we're going to see in leveraged finance, we're expecting to see some healthy growth in high yield.
Offset with.
The decline in bank loans, and so that that puts us at probably flattish in terms of European leveraged finance, which is pretty closer I think what the banks or are calling for it.
Okay, Great I'll ask a very quick follow up on the same topic.
In Europe, I mean, Europe issuance has been little bit more Niemiec. Then you asked I think you said this yourself.
And rates I have been negative, which has been shut up and favorable but I.
I guess, what I'm, what I'm going to try and what I'm wondering as you saw one country, Sweden recently got off the negative rate I mean, how that's changed anything in conversations I mean, I guess I'm, hoping for maybe carpet seeing the bottom Zion and now, let's go or or or is that a little bit too optimistic.
At this point and any comments.
Yes, as far as as you know the influence of net rate well obviously.
That that the.
Intention is that that is accommodative then encourages.
Economic growth.
But in a winning in fact seems to me that that that actually.
Does present, a drag because of what it does for business confidence.
So I think the the be very attractive borrowing conditions, all encouraging refinancing and they are.
Supportive of.
Opportunistic issuance activity.
But there will be not contributors.
Two companies thinking about it being time to investing property plant and equipment and business expansion. So I think.
Overall debt was largely offset and that's what's driving.
The outlook for.
Modest declines for European investment grade and flat for high yield. It's it's ends up being kind of a push I think actually.
All right that's helpful. Thank you.
Your next question will come from Toni Kaplan with Morgan Stanley.
Thank you.
So there's a lot of moving pieces in.
And then next year I.
I guess could you help us with what the organic grocery implied in that guidance is for M&A and also just with regard to ers just given the past four corners yourself benefited from that SAS transition initially and expect continued high levels of growth or does that start.
To see it a little bit now that you have lapped that.
Yes, I'm trying to hi, this is rob so.
I think when we think about organically for M&A.
I think are John would have been.
For through organic being the low double digit range. So excluding the impact of M&A, specifically talking now about ers and obviously, we had some very strong growth both in the quarter and for the year.
That full year revenue growth was driven by very healthy demand for our credit I'm.
Assessment loan origination products as well as our products for the IRS.
17 counting solutions.
Our customers.
Continued to show a preference for purchasing hosting software instead of installed software and as we've talked about that on some some prior calls that leads to a bit more steady revenue stream over time and the subscription revenues for us.
Really kind of the high teens for the year.
Excluding the revenue related to some multi year installed software subscription sales in 2019, the growth rates for us would have been in a low double digit.
Range for 2019, and that's probably the the the ZIP code of what we would expect for ongoing run rate in the business is somewhere in that low double digit basis on an organic basis and probably around low teens. When you include risks first.
That's very helpful.
And then just on the free cash flow guidance, maybe a little bit later than what we had expected, but net income a little bit higher. So just wondering if there's anything impacting the free cash flow conversion in 2020, that's contemplated in the guidance like anything to call out with regard to working capital are all right.
Something else.
Tony I get that can often be.
Okay got it takes me to start is really just to put things in context that certainly over the last five years free cash flow.
Seeded and more than 100% of on net income number if I look at 2019 in 2020 and I start with the 2019 number.
Approximately 1.6 billion for free cash flow that looks like in 9% growth rate to the midpoint of about 2020 guidance, which is 1.5 billion.
However, there are two adjustments that are definitely worth.
Considering to make it more of a comparable apples to apples viewpoint and those related capital additions, which are relatively light in 2019 at 69 million as they need to be sort of the normal hundred ish run rate, which are expecting in 2020.
The second impact relates to feed the compensation and just a quick reminder, here.
2018 incentive compensation is paid usually the first quarter. Following your syndicate first quarter 2019, and that amount was 169 million for 2019 intends compensation paid in first quarter 2020, and that amounted to 237 million. So if you adjust for both capital additions and Anthony.
Think of compensation the underlying growth rates in free cash flow is around 15%.
Which is higher than the adjusted EPS growth rate of 11% at the midpoint and that's something we as a management team feel very comfortable.
Thank you.
Next question will come from Andrew Nicolas with William Blair.
Hi, Thanks for taking my question.
She continues to be a big topic and you've spoken on both those in prior calls about the different things Moody's has done to incorporate DSG into your ratings process in the business more broadly I'm wondering as the industry continues to evolve and mature what you view as the key areas of competitive differentiation.
You mean the largest players.
Sure well.
Yes so.
You're right just touching on the integration into two credit ratings.
Thank you.
We're continuing to focus more and more on yesterday in climate factors.
Both with our credit analysis, and writing some great extensive research about that and leveraging the for 27 and this year Iris content. So we think that that.
That.
Presents an opportunity for us to really take a thought leadership position in the credit space around BSG and climate and really reinforced the relevance.
The relevance of that business.
I talked a little bit earlier in that first answer about.
How I think we're going to monetize.
The U.S.G. opportunity through both the issuer space and through what I'll call kind of that that risk shareholder because if you think about M&A, we've got a huge customer base of banks insurance companies.
As well as fixed income investors and commercial.
Now commercial property players, we're coming to us and asking us for yes, cheap and climate content.
As I said, we're able to some fees were able to bundle that into stress tests in scenario analysis.
We're able to do training around that.
Bundling it into the release of platform. So there's a lot of ways I think we're going to be able to monetize that and I see that banking and insurance customer base as a as a real.
Competitive advantage for US right, we have a huge installed customer base there on the issuer side as the iOS cheap and climate solutions and these ratings and assessments become more and more important to companies I think the companies are going to want to engage.
With companies like us like we do in the credit rating process, where you engage with us and the methodologies are transparent and so.
I think that will be a real opportunity for us because it leverages.
The model that we have an engaging with our issuers around the world.
Great Hi, that's helpful. Thank you on that and then just wanted to touch quickly on structured finance I think.
Hi, its revenue declined year over year, which is a pretty big contracts. The results of your largest competitor in the quarter.
Anything unique to call out there.
That's the fourth quarter, whether it be from a mix or market share perspective. Thanks.
Sure I'll, let Rob start with us and.
Just as anything else.
Yes, So let me.
The decline in the fourth quarter structure revenue was almost due almost entirely too.
So let me just touch on dealers for second and then.
Their lives in structured finance.
Around.
No. This was primarily from.
Lower and minus rate its yellow volumes and we had market deal volumes that were down slightly on a.
Year over year basis in the corner.
Continues a trend the material or market for the full year 2019 were resolved total deal volumes.
By our countdown something like.
10%.
We're also seeing some headwinds in the solar market given the wider liability spreads associated with the deteriorating.
Lending standards for the underlying collateral the leverage loans.
In terms of coverage.
Structure structured finance investor concerns about risk are are lower.
You, sometimes see less demand for a minus rating that shows off in coverage over time, we were seeing that in certain asset classes that includes yellow rose in the quarter given the current credit environment moving to a couple of the other asset classes. We saw some growth in most RMBS.
That growth.
Activity was spurred by pretty attractive spreads.
And immediately us volumes and revenues were essentially flat.
CMBS, which is another important mine for us and structured.
That revenue grew modestly the deal activity was pretty robust in the quarter.
Weighted towards those single asset single borrower deals and in General 2019 was a was a pretty strong year for CMBS activity, but I think we've talked about the past, particularly competitive rating market.
Yes Europe.
Yes, we've been talking to us in Europe.
It was down a bit again.
The main driver that.
Yeah I just.
I just want to emphasize what what Rob the same in particular with respect to.
Very easy access to the capital markets that increasingly low rated credits have had.
Any combination with.
Sure relation in loan covenant.
Quality, it's a it's causing us to very carefully about data about what the underlying credit quality of assets going into the COO as our and.
We don't think that this is a point in time or point in the credit cycle.
Where a more liberal approach is really suited.
Okay.
Good color. Thank you.
Your next question will come from Jeff Silber BMO capital markets.
Thank you so much I know you don't provide specific guidance by quarter, but is there anything pits to kind of call off from a seasonal perspective I'm more specifically interested on the margin side to help us model. Thanks.
Mark anything on.
Margin.
Jay and typically there and your two elements.
The way that I'll think about this is sort of it's called US about line that sort of below the line. There's a seasonal element I didnt want to touch on the minute for any tax, but I'm trying to think above the line at least for 2020. You are we are expecting and better than expected higher than expected that revenue results certainly the first half of the ER visits.
Same comparable periods last year.
And we are expecting slightly and lower growth rates is that the revenue in the second half the year just given the way that 2019 in 2000 and the 20 on being developed if I look to items below the line I think the one item that I quach here really pick pack and that's specifically.
The bulk of and excess tax benefits are recognized in the first quarter of every year as most of the restricted stock based in the first quarter and we are expecting excess tax benefits.
Full year 2020 at this point fee around 46 million.
Compared to last which were around 44, nothing thats something its with taking into account.
If you think through maybe not margin EPS seasonality for the year.
Okay, Great that's very helpful.
And I know you talk a little bit earlier about some of the potential uncertainty going into the presidential election, and I know, it's way too early to call, but anything else from a political environment in terms of some of the proposals that are out there that could impact your business either positively or negatively over the course in the next years. Thanks.
Yes, certainly to the extent that some candidates have.
Taking positions if IP.
Less.
Capital market.
Core business friendly.
We like most businesses would be impacted by that I don't really want to comment on any individuals.
Proposals or policy.
Suggestions, but.
Good.
As any business would we are paying attention to.
What's the.
What the different candidates.
Our saying about how they would govern if they were to be elected so.
I know that I know, that's an open ended answered, but it's a really sort of a stay tuned to answer.
Okay fair enough. Thanks, so much.
Your next question will come from George Tong with Goldman Sachs.
Hi, Thanks, good morning.
Spec global debt issuance volumes to be flat in 2020 coming off a relatively strong year in 2019 with net issuance growth moderating what's the risk that pricing comes in softer and yes, particularly among your high yield in three customers.
No I don't I don't I don't see that as being a risk.
Through our outlook.
Particularly.
Given the fact that that we're looking at.
Strong relationships with investment grade issuers and high yield issuers looking to to refinance met opportunistic points in time.
Are you are going to be most interested in getting to market and so I don't think that I don't think that our expectations.
Around pricing being softer.
Would would be a realistic concern at this point.
I would.
I would say that you have to the extent that issuance declines more than we are anticipating some pricing relates to issue. Some of it relates to monitoring fees and things of that sorts of some does relate to issuance and so we're not immune.
In the pricing area from a downturn in absolute volume so just to keep that in mind and the other thing I'd add on to that met its also Robert just keep investing back into the rating business to support the relevance of thought leadership I mean, that's what you see with climate CSG.
We recently started to rollout.
Portal for issuer customers, which we've gotten very good feedback about an all those items about supporting the value proposition.
In terms of our relationship.
Got it very helpful.
Do you expect 60 million in gross cost savings in 2020, driven by your restructuring program. How do you expect these cost savings to be split between some ebay and what initiatives do you have to further drive any margin improvement.
Sure and maybe I think most important point to make here were to emphasize here is that that 60 million in run rate savings from the 2019 restructuring program are really what enabling off 2020 adjusted operating margin improvement.
Over 100 basis points.
And keeping in mind or for that in a is expected to grow slightly faster than am I in 2020 settled in high single digits versus mid single digit M-, obviously goes with the lower rates.
Naturally limits little bit of the margin growth over the course of the here.
The actual balances splits between the restructuring charges and took in 2019 would see even between real estate and people based action I don't think that was particularly strong lines differentiated between two segments more between actions around individual posture and real estate as well as ongoing issues.
From M&A integration and that sort of the way I would think about George.
Got it thank you.
Yes.
Your next question will come from Craig.
Research partners.
Yes. Thank you will start off if I could on the cost side.
Mark what was the incentive compensation in the fourth quarter and for the year.
What I'm trying to get to here.
Is your costs in the fourth quarter ticking up this onetime why don't you guys coffee in the press release.
50 million from the first quarter when you guys reported last time.
At the end of October you thought it would be up less than 10 million versus the first quarter.
Thought at that stage, you probably had a pretty good sense, what you thought it sort of clump of being sold.
Pretty well.
But it appears that amount of its kind of call. It the first three quarters what changed so much that cost through up say 40 plus million.
Firstly you saw the very end of October 1st question.
Sure and let me start can mean by providing the numbers and I'll give a little bit of messaging around it and into compensation for the fourth quarter 2019 was 73 million.
And that's what the full year total for 2019 37.
Just a relative comparable to 2018 fourth quarter was 29 and full year 18 was roughly 169.
So if I take that incentive compensation numbers look at total operating expenses on a quarter by quarter basis, They were up roughly 15%.
The city revenue for the quarter, which was up 16%.
Visiting adjusted EPS, which was up 23%.
I think the compensation with the primary driver of higher than expected expenses in the fourth quarter.
Second driver was additional severance costs that we took in the fourth quarter and if we exclude really those two drivers were very much in line with the guidance we've given.
In the third quarter.
How much more towards that extra severance costs it will pick a solid in the press release.
Most of your traditional favorites.
Additional severance costs that we took was approximately 14 million in the fourth quicker.
19.
Okay. Thank you for that.
And then on the cost as you think about the cost more to this new year can you just talk a little bit thought the cadence. The course the year. How you think it maybe ramp up I know you could you talk with cost for the whole your.
Low single digits I believe I sense can you, obviously down versus the speaking that we have fourth quarter, but how should this replay at of course the year, including the acquisition of course. Thank you.
Sure maybe its place the stock curious with expense rent for the year.
We're expecting expense ramp guidance assembly between $23 million on the first to the fourth quarter and off 2020, we aren't giving guidance for 2020 operating expenses in the low single digit range.
This is primarily because merit increases in hiring are benefiting by the actions. We took in 2019 three to research program at the second thing I'll Macy's, we do expect incentive compensation to return to more of a normalized level in 2000, and twentys that back to that approximately 50 million per quarter.
The last reason I get it so we are incorporating inorganic acquisitions into our cost guidance as part of that extends rack. I think for example are you seeing that's really what is part of the recent driving that low single digit here.
Oh, just as a reminder, our DC has not closed yet and so it is not part of the Q1 extinct space yet.
So that that will be part of the ramp.
And then also rate if I could just quickly ask you youre retains transaction related revenues were up 32%. Your main competitor was up 55% it was interesting when needed.
Youre radians transaction revenues for the fourth quarter with third highest with the year.
Lagging the second and third quarter was.
Main competitors versatile more it was the largest fourth quarter other the your comments about structured finance what else.
Can you point is to put their ability there.
Not normal that is not much outperformance for when you guys versus the other and stuff, but what happened with fourth quarter.
Thank you.
I think you've gotta Craig in that I think it is attributable to structured finance and the fact that the bulk of structured finance revenues our transactional revenues.
Okay. Thank you.
Your next question will come from Shlomo Rosenbaum with Stifel.
Hi, Good morning. Thank you most of my question's been asked I just have a couple just.
So it looks like the first month of the year was probably the best high yield issuance or at least for last 20 years and then on the flip side. The loans is probably the worst but we've seen the last 20 years, when we see things like that I know that loans are often they.
Just kind of a substitute I mean, there's substitutes for each other but how does that play out of court into your expectation over as you go through the course of the are you expected them to expecting them to kind of converge at some point in time when kind of the refi activity kind of places its course with the lower interest rates. If you can just kind of comment on that.
I'll, let rob offer some additional color, but I.
I think in in a.
Low rate environment, like we're seeing and a with the yield curve being as flat as it is we would expect the fixed rate.
To continue to be preferred and so what we're seeing with which will strengthen in high yield bonds versus loans I would expect to continue.
Through the year, but Rob massive additional color on that are not much saturday's, that's right Ray and maybe if we also look to fund flows that gives you a sense of investor.
Sentiment.
We had a solid euros fund outflows leverage loans last year on 'em, we have seen a few weeks of inflows in January and a high yield side, we've seen fund inflows.
For several weeks to start the year again I think more.
Investor sentiment kind of shifting as ray said towards the fixed rate instruments.
Okay, and then is there.
This maybe for Mark you talked about some of the underlying growth and margin. They expect an M&A or is there. Some commentary you want to give in terms of how that business is kind of shaping.
In terms of the mix of business within a band and how we should think about more if any.
Longer term year over year growth opportunity.
Given what seems to be a lot of headroom in terms of improving the margins over there.
Maybe I'll start just a little bit Markel made us touched on this.
There's a good bit of.
Kind of shift going on to your us business and I think thats an important driver of what's going on is we're moving from that historical kind of traditional software licensing model with implementation services. So much more of a kind of standardized products that some typically delivered in a hosted environment and you know folks who are.
That means you're dependent on the cloud and customers are subscribing to that product. So what we're seeing from customers as they they're interested in that because if it's more efficient and.
And in many cases more cost effective for them, but it but it is for us as well. So we're continuing to see that trend in 2019, we think it will continue.
On into 2020 units I think.
Part of what you're seeing there.
Sure, Mike, Mike if I step back and know how to think holistically across the two segments.
And here I focused maybe my comments a little bit on the adjusted EPS growth of 11% to the mid point, our range and the majority I call. It 90% of that is really driven by the fulfillment and the underlying statement either in a and am I guess.
There isn't a little bit a supplemental and benefit from lower share count through share repurchase program and took me non operating income through management I'll get portfolio.
I wanted to highlight here as we are absorbing around 21 cents worth of margin dilution from the ongoing M&A and investment activity in 2020, and I think thats an important part of the story that were not only able to meet our.
Expectations and growth through actions battles able team based and through the cycle for the business.
Okay. Thank you.
Your next question will come from Joseph Foresi with Cantor Fitzgerald.
Hi, This is Stephen shank coming off of Joe.
I might have missed it somewhere before but can you. Please provide some color on kind of breakdown between us International revenue I know you gave numbers around China, specifically, but maybe some numbers on a broader level and moving forward I might have missed it on a pest wins, but should we no longer expect those numbers in the future.
Yes, sure sorry go ahead Mark.
In terms of that mix of the U.S. non U.S. revenue.
A little bit around 50, 50, and it's obviously very different between my estimate.
Not materially so across periods of time, and we certainly have removed as specific U.S. nandra guidance because of several reasons first is the geographic revenue mix has remained stable at that time and we also nurses.
Isn't outlier in providing geographic revenue guidance, when we really prefer to focus on those metrics that are you. Most often in most helpful. If you sell side analysts and investors.
We will continue to report actual U.S. nandra its revenue mix.
Form 10-K, and 10-Q, so you will be able to get it there and as you probably know very stable over time.
And just if you if you'd like to get the percentage split for 2019.
My apps, we were 40% international 60% U.S.
For Moodys analytics, we were 58% International 42, U.S. and then for the Corporation overall it was 47 international 50 for us.
Okay, Great. That's helpful and just one quick one I know, that's probably has been answered it throughout the whole called but I.
Hi, I'm just looking at the 40 849 margin range I know you talked about a good chunk in it coming from cost savings would be any business, especially RDC, but just was wondering if there any other factors baked into that 100, it's that maybe we should know about thank you.
I think they're probably at one point I'll Reemphasize me one print I'll add certainly the relative growth rates at the segment does make a difference and then the point I would add is that we also as a management team I hate to fight around $30 million of 2020 expense efficiencies that will.
On a like amount growth initiatives and which include he is China and kyi seeing some of the enabling technologies, but not just relying on Pos action to support the margin that ensuring that we are being efficient as a team and to support ongoing investments in the business.
Your next question will come from Bill Warmington with Wells Fargo.
Hi, good afternoon, everyone.
So.
A question for you on the.
Okay, well I see space.
Now that you've combined BBD and already see and you've got about $150 million run rate and a 900 million market, who is really the competition there now and with the already see acquisition do you have what you need to take share there.
Yeah, Rob.
Yeah.
The.
The primary players in the space.
Scientists.
Lexisnexis Dun <unk> Bradstreet and Theres, a whole host dose of other players in the market.
We do think that this gives us a very good.
Offering in the market as I talked about earlier, it's very very complementary fit between what RTC, Scott and what we've got.
And we think that.
Thats really going to be a good solution for the customers. The other thing I might mention is you know they've got a very.
Hard to replicate dataset at RTC and part of the real value in that dataset.
It can be used to train these AI models and the reason that's important is because those AI.
Powered solutions are going to be able to deliver some significant efficiencies to the customers. There's an enormous amount of spend and manual effort going on.
Financial institutions and corporations all over the world to comply to I see so we think these.
Solutions are going to be a.
Very compelling offering for customers and I'd, just like that that Thats spend that Rob is referring to is on top of the 900 million dollar market opportunity that that we see so there is there's a direct 900 million dollar market and then there is a very large.
<unk> expense base that goes on top of that for a firms that are trying to meet a no your customer required theres the vendor spend in the very large much larger and how spend at all these financial institutions always talking about just one other thing I'd add we talked about how complimentary on these datasets are which they are.
Our but it's also a we see a very nice fit in terms of where our Dcs geographic strength is which is here in the United States versus Bureau, Van Dyke, which has about 70, 75% of its customer base coming from Europe.
So the sales functions and reach that we have.
For each of these.
Businesses under a Moody's umbrella is now for the first time truly global for for these firms.
Yeah. Thank you for that panned out for my follow up I wanted to ask on.
He asked the question then you've given us some good color today on the rating agencies and what you guys are doing specifically with any see I wanted to ask about how you're seeing competition from two other places one.
The index providers and the second is the data providers, who had then going direct to the investment managers.
So.
Index providers.
A national space for them.
She is very national space for them, because they're able to build a whole suite of indices off of the U.S.G.
Data and ratings.
As I said, we don't have an index business, but what we do have.
It is a very large customer base that I talked about.
In banks financial institutions, and insurance companies and we're seeing demand. There. So we think we're going to be able to monetize the SG content little differently than some of our competitors, we're going to be able to monetize it and our commercializing it very effectively.
In the index space look data is very very important it's kind of the fuel to all of this.
But ultimately we don't think NIM I I tend to think it's not just going to be a beta.
Market I think there will be a need for insights and assessment is that I talked about.
The more important that these do you want to column DSG ratings become the more I think that the.
The customers are going to want to engage with somebody around that rating or assessment and so that's my sense. So.
There will be a.
Real need for data and data feeding investment managers for portfolio screening and and selection and all that but I think there is also going to be a need for insights.
Got it.
Thank you very much.
Ladies and gentlemen that does conclude our question and answer session. We'll now turn the call back over to Ray Mcdaniel for any additional or closing remarks.
Okay. Just wanted to thank everyone for joining a we will see some of you at our Investor Day, I Hope and we'll be speaking with everyone again in the spring. Thanks.
This concludes Moody's fourth quarter and full year 2019 earnings call. As a reminder, immediately following this call. The company will host the M.I.S. revenue breakdown under the fourth quarter 2019 earnings section of the Moody's IR homepage. Additionally, a replay of this call will be available after 330 PM Eastern time on Moody's.
Our website. Thank you.
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