Moody's Corporation
Q4 2019 Earnings Call Transcript

Published: 12 Feb 2020

[Operator:]

Good day, and welcome, ladies and gentlemen to the Moody's Corporation Fourth Quarter and Full Year 2019 Earnings Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company, we will open the conference up for question-and-answers following the presentation. I will now turn the conference over to Shivani Kak, Head of Investor Relations. Please go ahead.

[Shivani Kak:]

Thank you. Good morning, everyone and thanks for joining us on this teleconference to discuss Moody's fourth quarter and full year 2019 results, as well as our outlook for full year 2020. I'm Shivani Kak, Head of Investor Relations. This morning, Moody's released its results for the fourth quarter and full year 2019 as well as our outlook for full year 2020. The earnings press release and the presentation to accompany this teleconference are both available on our website at ir.moodys.com. Ray McDaniel, Moody's President and Chief Executive Officer, will lead this morning's conference call. Also making prepared remarks on the call this morning is Mark Kaye, Moody's Chief Financial Officer. During this call, we will also be presenting non-GAAP or adjusted figures. Please refer to the tables at the end of our earnings press release, 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 towards 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, 2018 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.

[Ray McDaniel:]

Okay. Thanks, Shivani. Good 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. Mark Kaye will then follow 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 achieved 16% revenue growth in the fourth quarter of 2019. With Moody's investors service rebounding from the market disruption we experienced in the prior year period, as well as strong organic performance from Moody's analytics, which delivered double-digit growth for the fourth consecutive quarter.

[Mark Kaye:]

Thank you, Ray. For MIS, fourth quarter revenue was up 21% from the prior year period, and above the 18% increase in overall debt issuance due to a favorable mix from infrequent corporate and financial institution issuers. As a result of this favorable mix, transaction revenue increased 31%. As Ray mentioned earlier, MIS also benefited from strong U.S. Public Finance issuance, including increases in refunding supply and taxable transactions. Strong business performance and cost discipline, resulted in 130 basis points of constant dollar organic adjusted operating margin expansion, partially offset by 50 basis points from acquisition. MA continue to deliver double digit revenue growth, driven by strong contributions from the RD&A and ERS lines of business. As Ray mentioned earlier, MA has now delivered organic double digit growth in the last four consecutive quarters. RD&A revenue grew 12%, driven by credit research and data feed, as well as strong demand for Bureau van Dijk products, specifically, compliance and loyal customer solution. On an organic basis RD&A delivered double digit revenue growth of 11%. In ERS revenue grew 20% for the quarter or 16% organically, led by strong demand for credit assessments and loan origination solutions and products, that enable compliance with new accounting standards for banks and insurance. Our RiskFirst acquisition also contributed to this growth. In the fourth quarter, the MA adjusted operating margin decreased to 160 basis points, primarily due to severance and divestiture related expenses. On a trailing 12 month basis, constant and organic adjusted operating margin expand by 180 basis points, partially offset by a 40 basis point contraction from acquisitions.

[Ray McDaniel:]

Thanks Mark. I just like to remind everyone that Moody's will be hosting its next Investor Day on March 11, 2020, here in New York City. The event, which will be webcast live 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 are the conferences that we expect to attend in the next few months in Orlando, London and New York City. Please contact your bank representative to request a meeting with Moody's management at these events. This concludes our prepared remarks, and joining Mark Kaye and me for the question-and-answer session is Rob Fauber, our Chief Operating Officer. We'd be pleased to take your questions. Operator?

[Operator:]

Thank you. Our first question comes from Manav Patnaik with Barclays.

[Manav Patnaik:]

Thank you. Good afternoon, almost afternoon to you guys. The first question is just on the ESG side, that you had this slide with all the initiatives, and I get, what you're doing for your own, I guess, corporate angle. You've acquired a lot of the data assets that I think helped the credit rating side, which you said has been doing that for a while. So, I was just curious, what else should we be looking forward to in terms of, incremental revenues, in terms of your ESG efforts down the road?

[Ray McDaniel:]

Sure. I'll let Rob tackle those. Rob, please?

[Rob Fauber:]

Yes, sure. Good morning or almost afternoon Manav. So, just to give you a sense of kind of where we are from a revenue perspective with ESG, we're generating somewhere between $15 million to $20 million in revenues there. Unlike, some other companies that are in that ESG space, we don't have an index business to help us monetize our ESG content. So, really, we see the opportunity across two broad customer segments. It's really issuers on one hand, and investors and financial institutions on the other. And we're leveraging the content from the Vigeo Eiris and Four Twenty Seven businesses that we've acquired, and integrating that also across a wide range of offerings in MA. Maybe, just to talk about the issuer stock for a second. So, we're seeing some real ongoing growth in what we call the labeled bond market, this has started as the green bond market and has evolved to kind of a broader sustainability bond market. We think that market is going to hit something like 400 billion in issuance this year and that's up almost 25% from 2019. And through Vigeo Eiris, we offer something called a second party opinion on label bond issuance for issuers. And we did something like 120 of those last year. So, that makes us one of the world leaders in that space and we're further making some refinements to that offering. And Four Twenty Seven, we've got a few other offerings for issuers, sustainability ratings, sustainability linked loan assessments, and we're working on rolling out a climate assessment for issuers. And then over that second segment and I talked about investors and financial institutions. We've got ESG ratings on something like 4700 publicly listed companies, climate risk scores and over a million facilities. We're selling that to people for portfolio construction monitoring. And we're also now as I said, integrating that content into our MA offerings and we're seeing demand from data feeds, green stress testing, fiscal risk scores on our REIS platform that we just mentioned, even ESG training. So, a number of ways that we're looking to monetize all those.

[Manav Patnaik:]

Got it, that's helpful. And then reading your comments around China, you referred to the trade agreements and so forth. Does that change your strategy in terms of partnering with CCXI, or maybe going back after your license, and so the domestic side of things?

[Ray McDaniel:]

Yes. The trade agreement, we view it as very positive. Certainly, for the financial services sector and the opening of the financial services sector, we think that's a positive for us, it's also should be a positive for the Chinese market. What it does, is, it really codifies and clarifies that we have some different options in that market, we can pursue a license, we can continue with our joint venture in CCXI, and we could think about changing our ownership position in CCXI that was made clear in the trade agreement. So, what we're doing is evaluating those options. As I've said in previous calls, we are very pleased with the position that we have in CCXI. It has been a very successful business today. So, I think the greatest likelihood is that we will want to continue with CCXI, and see what our joint venture partner would like to do as far as our combined future.

[Mark Kaye:]

Just to add a couple of numbers around that. We have 30% ownership in the leading rating agency CCXI, which has, just a reminder a little over 700 employees and 1500 customer relationships. We estimate that CCXI had around a 42% share of its $280 million single rating domestic market in 2019, and that was up slightly from the 39% in 2018.

[Manav Patnaik:]

Thank you, guys.

[Operator:]

Our next question will come from Michael Cho with JPMorgan.

[Michael Cho:]

Hi, how are you doing? Thanks for taking my question. My first question is just around the Moody's Analytics margin guide. I was hoping you touched on this in the opening commentary, but I was hoping you could provide a little more commentary on the MA margin progression from 2019 to the 2020 guide. I guess, I'm thinking about core operating leverage investments and dilution from impacts or dilution from acquisitions at balancing those kinds of variables.

[Mark Kaye:]

Good morning, Michael. This is Mark. I'll start maybe with 2019 and then I'll move forward towards 2020. So, for 2019, certainly in the fourth quarter, we did report a decrease in margin of 160 basis points during the quarter. It's important to note that the margin itself would have been more than 250 basis points higher in the quarter, that if we excluded incentive compensation and severance expenses, over and above the prior year period. And nonetheless, we like to look at MA's margin typically on a trailing 12 month basis. And for 2019, we did see an increase of 140 basis points from 26.4% to 27.8%. It's worth noting that that 140 basis points increase included a headwind of approximately 40 basis points from the inorganic acquisitions we did in 2019. And so, we really saw a run rate of around 180 basis points or call it approximately 200 basis points or so in 2019. If we step forward to 2020, what we're expecting to see is on a constant dollar organic growth rate increase of around 260 basis points, for the MA fully allocated margins. And that will put us approximately 30 basis points. As a management team, it's also worth noting that that includes around 50 basis points of headwinds from ongoing investment in the business. So not only are we able to grow margin consistently, across the years, we're also able to invest in the business in terms of improving our profile.

[Michael Cho:]

Okay. Great, thank you. That's a great color. I just wanted to pivot slightly around for regulatory data? I saw that you mentioned about $150 million of pro forma revenues looking to double in three years. So, I guess, how fast this regulatory data revenues growing today? And is there something that gives you so much confidence to double that in few years? Thanks.

[Ray McDaniel:]

Yes. So, the combination of RDC and BvD as we talked about its really, we think a very natural fit between two very well established providers in the KYC 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 the people data, the entity data all from one provider. We think that's relatively unique in the market and has the potential to be really ultimately the standard in the KYC space. So, RDC, 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 that we've got at MA and BvD and particularly outside the U.S. as well, are going to give us an opportunity to really support the growth there. The compliance solutions at BvD are the highest growth product segment that we got there. So, we have a good experience in that segment already and we think RDC is just going to further support that.

[Michael Cho:]

Thank you.

[Operator:]

Our next question will come from Alex Cram with UBS.

[Alex Cram:]

Hey, good morning everyone. Just wanted to - I know you gave obviously guidance on the rating side and 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 seeing so far this year is pretty good issuance strength and pretty good environment. But when I think about the second-half, you have an election, you have some other uncertainty. So, just wondering, what you're hearing from corporate? Could this be a year of two half's or how are you thinking about the year for now?

[Ray McDaniel:]

I'll let Mark and Rob handle the bulk of this, but I just want to confirm. Yes, we have seen a good issuance environment in January and 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, have continued into the early first quarter. But, as far as we look forward, I'm going to let Mark and Rob tackle that.

[Mark Kaye:]

Alex, again to your question, I think what we'll do here is similar to what we've done in the past. Now, I'll talk a little bit about issuance drivers that we're hearing from some of the banks, and then I'll turn it over to Rob to follow-up with our internal viewpoint. Starting with U.S. investment grade. The banks have seen solid activity to start the year with an expectation that volumes will pick up once more corporate come out of the earnings blackout period. Furthermore, spreads remain tight and the yield curve receptive also encouragingly. There are indications that some of the largest offshore cash holders will be mostly absent from the market in 2018 due to U.S. Tax Reform, are slowly starting to return to the markets. Despite a strong start to 2020 for U.S. Investment Grade issuance, a several factors are driving cautious full year outlooks from the banks. These include a tough comfortable M&A driven issuance, concerns around the economic impact of the coronavirus and potential volatility in the second-half of the year stemming from the U.S. election cycle. Overall, the banks call for U.S. Investment Grade issuance to be flat to down 5%. Similar to U.S. Investment Grade, the bank's outlook for U.S. speculative grade issuance is mixed, while issuance falling for both fixed and floating rate U.S. speculative grade deck has had a strong start to the year. And banks expected overall preference will fix rate issuance to merge over the years driven by ongoing low benchmark rates and tight spreads. Now the banks also indicated that they see refinancing in M&A driven issuance to be lower for U.S. speculative grade, and a high yield bond volume in particular face they're relatively tough comparable to a strong 2019. Additionally, the bank noted broader macro uncertainty in the U.S. elections later in the year, it also weighing on their forecasts. They are calling for U.S. speculative grade issuance to decline in the high single digit percent range in 2020. Now turning to Europe. Feedback from the banks is that the investment grade market they seem similar, but maybe, more accentuated dynamics, compared to the U.S. with tailwinds from the ECBs corporate bond purchases in both benchmark rates. Investment grade dynamics or relative value dynamics in Europe continue to encourage a Reverse Yankee issuing, which comprise more than a quarter of total investment grade issuance in Europe last year. Now, in addition, ongoing political uncertainty concerns around macroeconomic environment and lower expectations of the residual net investment hedge capacity for U.S. issuance, all contributing to relatively conservative 2020 outlook. As a result, the banks are expecting European investment grade volumes decline between 5% and 10% for the year. And then finally, interestingly, now banks expectations with European high yield are slightly more constructive, improved market sentiment around the easing of trade tension, dovish central bank policy, a greater confidence in the speculative grade M&A pipeline are offsetting fears around still weak economic data and the potential impact of the coronavirus. Overall, banks are expecting European speculative grade issuance to be largely flat, with stronger issuance for fixed rate debt or fitting a slight decline in floating rates issuance. And I'll hand it over to Rob to talk on MISs as 2020 issuance expectation.

[Rob Fauber:]

Yes. Okay. So, just to kind of triangulate to 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 issuance. That is inclusive of bank loans. And we think that bank loans will be down slightly in 2020. So, our bond issuance outlook, I would say, is up very modestly over prior year. Just kind of comparing and contrasting to what Mark just talked about from the banks, we're also thinking about the potential for that second-half volatility due to the U.S. Presidential elections. And I'd say that, our view on M&A is that it's probably moderated a little bit versus what we were thinking 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 the forward calendars. So, a little bit lighter M&A, and LBO acquisition financing in the forward calendar. Relative to the banks, actually we're a bit more positive in a few of the asset classes that Mark touched on. U.S. 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. U.S. leverage finance, we think we're actually going to see some growth, modest growth in U.S. high yield after what was a really strong year, obviously, in 2019, that's supported by those tight spreads and what we think is going to be, healthy refi activity. And probably on leverage loans, pretty similar activity to last year. In Europe, again, we're probably at the high end of those investment grade estimates, that Mark talked about coming down to 5% and down 5% to 10%. And I think we're going to see, in leveraged finance, we're expecting to see some healthy growth and high yield, kind of offset with a decline in bank loans and so that, that puts us at probably flattish in terms of European leveraged finance, which is pretty close to I think what the banks are calling for.

[Alex Cram:]

Okay, great. I'll ask a very quick follow-up on the same topic. In Europe, I mean, Europe issuance has been a little bit more anemic than the U.S. I think you said this yourself. And rates have been negative, which should have been favorable. But, I guess, what I'm wondering is, you saw one country Sweden recently get off the negative rates. I mean, has that changed anything in conversations? I guess, I'm hoping for maybe corporate seeing the bottoms are in and now let's go, or is that a little bit too optimistic at this point, any comments?

[Ray McDaniel:]

Yes. As far as the influence of negative rates, obviously, that the intention is that, that is accommodated and encourages economic growth. But, in fact, it seems to me that that actually does represent a drag because of what it does for business confidence. And so, I think, the very attractive borrowing conditions are encouraging, refinancing and they are supportive of opportunistic issuance activity. But they're really not contributors to companies thinking about it being time to invest in property plant and equipment and business expansion. So, I think overall, those largely offset, and that's what's driving the outlook for modest declines for European investment grade and flat for high yield. It ends up being kind of a push, I think, actually.

[Operator:]

The next question will come from Toni Kaplan with Morgan Stanley.

[Toni Kaplan:]

Thank you. So, there's a lot of moving pieces in MA next year. I guess, could you help us with what the organic growth rate implied in the guidance is for MA? And also, just with regard to ERS, just given the past four quarters or so benefited from this transition, should we expect continued high levels of growth, or does that start to fade a little bit, now that you have left that?

[Rob Fauber:]

Yes. Tony, hi. This is Rob. So, I think when we think about organically for MA, I think our guidance would have been for organic will be in a 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, assessment and loan origination products as well as our products for the IFRS 17 accounting solutions. And customers have continued to show a preference for purchasing hosted software instead of installed software. And as we've talked about that on some prior calls, that leads to a bit more steady revenue stream overtime and the subscription revenues for us to really kind of the high teens for the year. Excluding the revenue related to some multiyear installed software subscription sales in 2019, the growth rates for ERS would have been in a low double digit range for 2019. And that's probably the zip code of what we would expect for an 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 RiskFirst.

[Toni Kaplan:]

That's very helpful. And then just on the free cash flow guidance, maybe a little bit lighter 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 or something else.

[Mark Kaye:]

Toni, good afternoon. Maybe a big place for me to start is really just to put things in context, certainly, over the last five years, free cash flows exceeded more than 100% of our net income number. If I look at 2019 and 2020, and I thought it was a 2019 number of approximately $1.6 billion for free cash flow, that looks like a 9% growth rate to the midpoint of our 2020 guidance, which is $1.75 billion. However, there are two adjustments that are definitely worth considering to make it more of a comfortable apples-to-apples viewpoint. Those related capital additions, which were relatively light in 2019, at $69 million, vis-à-vis sort of the normal 100-ish run rate, which we're expecting in 2020. And the second impact relates to incentive compensation. Just a quick reminder here, 2018 incentive compensation is paid usually in the first quarter of the following year. So in this case, the first quarter of 2019 and that amount was $169 million. For 2019, the incentive compensation is paid in the first quarter of 2020, and that amount is $237 million. So, if you adjust the both capital additions and incentive compensation, the underlying growth rates in free cash flow is around the 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 with.

[Toni Kaplan:]

Thank you.

[Operator:]

Next question will come from Andrew Nicholas with William Blair.

[Andrew Nicholas:]

Hi, thanks for taking my questions. Even she continues to be a big topic and you've spoken on both those on prior calls about the different things Moody's has done to incorporate ESG 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 between the largest players.

[Ray McDaniel:]

Sure, Rob.

[Rob Fauber:]

Yes, so you're right, just touching on the integration into credit ratings. I think, we're continuing to focus more and more on ESG and climate factors, both with our credit analysis and writing some very extensive research about that in leveraging the Four Twenty Seven and Vigeo Eiris content. So, we think that that presents an opportunity for us to really take a thought leadership position in the credit space around ESG and climate, and really reinforce 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 ESG opportunity through both the issuer space, and through what I'll call kind of that risk channel. Because, if you think about MA, we've got a huge customer base of banks and insurance companies, as well as fixed income investors and commercial and non-commercial property players, who are coming to us and asking us for ESG and climate contents. And as I said, we're able to sell data feeds, we're able to bundle that into stress tests and scenario analysis. We're able to do training around that. We're bundling it into the REIS 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 real competitive advantage for us, right. We have a huge installed customer base there. On the issuer side, as the ESG 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'll be a real opportunity for us because it leverages the model that we have in engaging with our issuers around the world.

[Andrew Nicholas:]

Great, that's helpful, Thank you. And then, just want to touch quickly on structured finance, I think structured finance revenue declined year-over-year which is a pretty big contrast the results of your largest competitor in the quarter. Is there anything you need to call out there with respect to the fourth quarter, whether it would be from a mix or the market share perspective? Thanks.

[Ray McDaniel:]

Sure, I'll let Rob start with this and see if there's anything else I can add.

[Rob Fauber:]

Yes. So the decline in the fourth quarter structure revenue was due almost entirely to CLO. So let me just touch on CLOs for a second and then a few of the other lines in structured finance. Around CLOs, this was primarily from lower MIS rated CLO volumes. And, we had market deal volumes that were down slightly on a year-over-year basis in the quarter, that continues to trend in the CLO market for the full year of 2019, where we saw total deal volumes by our countdown something like 10%. We're also seeing some headwinds in the CLO market given the wider liability spreads associated with deteriorating lending standards for the underlying collateral, the leverage loans. In terms of coverage, when structured finance investor concerns about risk are lower. We sometimes see less demand for MIS ratings, and that shows up in coverage over time, we're seeing that in certain asset classes that include CLOs in the quarter, given the current credit environment. Moving to a couple of the other asset classes. We saw some growth in U.S. RMBS, that growth in activity was spurred by pretty attractive spreads and the ABS volumes and revenues were essentially flat. U.S. CMBS which is another important line for us in structured, that revenue grew modestly. The deal activity was pretty robust in the quarter, weighted towards those single assets, single borrower deals. And in general, 2019 was a pretty strong year for CMBS activity. But, as I think we've talked about in the past, it's a particularly competitive rating market. Europe, I mostly have been talking about the U.S. and Europe was down a bit, again, CLO is the main driver there.

[Ray McDaniel:]

And I just want to emphasize what Rob was saying, in particular, with respect to the very easy access to the capital markets that increasingly low rated credits have had, and in combination with deterioration in loan covenant quality, it's causing us to think very carefully about what the underlying credit quality of assets going into the CLOs are. 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.

[Andrew Nicholas:]

Got it. Thank you.

[Operator:]

The next question will come from Jeff Silber with BMO Capital Markets.

[Jeff Silber:]

Thank you so much. I know you don't provide specific guidance by quarter. But is there anything to kind of call out from a seasonal perspective? I'm more specifically interested on the margin side to help us model? Thanks.

[Ray McDaniel:]

Mark anything on margin?

[Mark Kaye:]

Jeff, typically there are key elements in the way that I'll think about this is sort of it's called above the line and sort of below the line, because there's a single element I definitely want to touch on in a minute related to tax. But, if I try to think above the line, at least, for 2020 we are expecting a better than expected or higher than expected revenue results, certainly, in the first-half of the year vis-à-vis the same comfortable period last year. And we're expecting slightly lower growth rates vis-à-vis revenue in the second-half of the year, just given the way that 2019 and 2020 are being developed. If I look to items below the line, I think the one item that I've caught here relates to tax. And that's specifically, because the bulk of an excess tax benefits are recognized in the first quarter of every year, is most of the restricted stock base in the first quarter. And we are expecting excess tax benefits and full year 2020 at this point to be around $46 million compared to last year, which were around $44 million. And I think that's something that's we've taken into account, as you think through maybe not margin but EPS seasonality for the year.

[Jeff Silber:]

Okay, great. That's very helpful. And I know you talked 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 the 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 of the next few years? Thanks.

[Ray McDaniel:]

Yes, certainly, to the extent that some candidates have taken positions that might be less capital market or business friendly. We like most businesses would be impacted by that. I don't really want to comment on any individual proposals or policy suggestions. But, as any business would, we are paying attention to what the different candidates are saying about how they would govern, if they were to be elected. So, I know that's an open ended answer, but it's really a sort of a stay tuned answer.

[Jeff Silber:]

Okay, fair enough. Thanks so much.

[Operator:]

Your next question will come from George Tong with Goldman Sachs.

[George Tong:]

Alright, thanks. Good morning. You expect global debt issuance volumes to be flat in 2020 coming off of a relatively strong year in 2019. With net issuance growth moderating, what's the risk that pricing comes in softer in MIS, particularly among your high yield and infrequent issuers?

[Ray McDaniel:]

No, I don't see that as being a risk to our outlook, particularly, given the fact that we're looking at strong relationships with investment grade issuers and high yield issuers looking to refinance at opportunistic points in time, are going to be most interested in getting to market. And so, I don't think that our expectations around pricing being softer would be a realistic concern at this point. I would say, that to the extent that issuance declines more than we are anticipating, some pricing relates to issuance, some of it relates to monitoring fees and things of that sort, but some does relate to issuance. And so, we're not immune in the pricing area from a downturn and absolute volumes, just to keep that in mind.

[Rob Fauber:]

The other thing I'd add onto that, that's also why we just keep investing back into the rating business to support the relevance of thought leadership. I mean, that's what you see with Climate and ESG. We've recently started to roll out a portal for our issuer customers, which we've gotten very good feedback about, and all of that is about supporting the value proposition in terms of a relationship.

[George Tong:]

Got it, very helpful. 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 MIS and MA? And what initiatives do you have to further drive MA margin improvement?

[Mark Kaye:]

Sure. Maybe, I think, the most important point to make here which emphasize here, is that that $60 million run rate savings from the 2019 restructuring program are really what's enabling our 2020 adjusted operating margin improvements, over 100 basis points. And keeping in mind, also, that MA is expected to grow slightly faster than MIS in 2020, which will be high single digits versus mid-single digits. And MA obviously, goes with lower rates, it does naturally limit a little bit of the margin growth over the course of the year. The actual balance of splits between the restructuring charges that we took in 2019, which seen even between real estate, and people-based action. I don't think there was a particular strong line differentiated between two segments. There’s more between actions around individuals last year and real estate, as well as ongoing efficiencies from M&A integration, I mean, that's sort of the way I would think about it, George.

[George Tong:]

Got it. Thank you.

[Operator:]

Your next question will come from Craig Huber with Huber Research Partners.

[Craig Huber:]

Yes, thank you. I want to start off if I could on the cost side. Mark, what was the incentive compensation in the fourth quarter and for the year? And what I'm trying to get to here is, your cost in the fourth quarter, checking out those onetime items you guys call out in your press release, that’s up $50 million from the first quarter. When you guys reported last time, at the very end of October, you thought it would be up less than $10 million versus the first quarter. I would have thought at that stage you probably had a pretty good sense what you thought incentive comp would be, the results were coming pretty well, literally a pretty good amount of incentive comp in the first three quarters. So, what changed so much that costs were up a $40 plus million versus what you thought the very end of October? That's my first question.

[Mark Kaye:]

Sure. And let me start by providing the numbers, and I'll give a little bit of messaging around them. Incentive compensation for the fourth quarter of 2019 was $73 million and that was the full year total for 2019 to $237 million. Just the relative comparable to 2018 fourth quarter was $29 million and full year he was roughly $169 million. So, if I take those incentive compensation numbers and you look at total operating expenses, on a quarter-by-quarter basis, they were up roughly 7%, vis-à-vis revenue for the quarter, which was up 16%, vis-à-vis adjusted EPS which was up 23%. And so incentive compensation was the primary driver of higher than expected expenses in the fourth quarter. A secondary driver was additional severance cost that we took in the fourth quarter. And if we exclude really those two drivers, we're very much in line with the guidance that we had given in the third quarter.

[Craig Huber:]

How much, Mark, was at extra severance costs? I don't think, I saw that in the press release. It must be immaterial?

[Mark Kaye:]

Additional severance cost that we took was approximately $14 million in the fourth quarter of 2019.

[Craig Huber:]

Okay, thank you for that. And then on the cost, as you think about the cost Mark, for this new year, can you just talk a little bit about the cadence over the course of the year how you think it may ramp up? I know you guys talked about costs for the whole year of low single digits, I believe, as soon as can be obviously down versus this big number you had in the fourth quarter. But, how should this sort of play out over the course of the year, including the acquisition of course? Thank you.

[Mark Kaye:]

Maybe, best place to start here is with expense rent for the year. So we're expecting expense ramp guidance of somewhere between $20 million to $30 million on the first to the fourth quarter of 2020. Now, we are giving guidance for 2020 operating expenses in the low single digit range and this is primarily because merit increases in hiring are benefiting by the actions we took in 2019, through the restructuring program. And the second thing, I'll note is we do expect incentive compensation to return to more of a normalized level in 2020. So, back to that approximately $50 million per quarter. And the last reason I give is that we are incorporating inorganic acquisitions into our cost guidance as part of that expense ramp. I think for example, RDC, that's really what is part of the reason driving that low single digit for year.

[Ray McDaniel:]

And just as a reminder, RDC has not closed yet and so it is not part of the Q1 expense space, yet. So, that will be part of the ramp.

[Craig Huber:]

And then also Ray, if I could just quickly ask you. Your ratings transaction related revenues were up 32%, your main competitor was up 55%. It was interesting to me that your ratings transaction revenues for the fourth quarter were the third highest of the year, lagging the second and third quarter was, your main competitor, he was the largest of the year in the fourth quarter. Other than your comments about structured finance what else can you point us to the variability there? I mean, it's not normal that there's not much outperformance for one of you guys versus the other and stuff. But what happened in the fourth quarter? Thank you.

[Ray McDaniel:]

I think you've got it Craig. I think it is attributable disruption finance, and the fact that the bulk of structured finance revenues are transactional revenues.

[Craig Huber:]

Okay, thank you.

[Operator:]

The next question will come from Shlomo Rosenbaum with Stifel.

[Shlomo Rosenbaum:]

Hi, good morning. Thank you. Most of my questions have been asked, I just have a couple. It looks like the first month of the year was probably the best high yield issuance, at least for the last 20 years. And then on the flip side, the loans is probably the worst that we've seen in the last 20 years. When we see things like that, I know that loans are often a just kind of a substitute. I mean, they are substitutes for each other. But, how does that play out according to your expectation over as you go through the course of the year? Are you expecting them to kind of converge at some point in time when the refi activity places course with the lower interest rates, if you can just kind of comment on that?

[Ray McDaniel:]

I'll let Rob offer some additional color but, I think in a low rate environment like we're seeing and 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 the strength in high yield bonds versus loans, I would expect to continue through the year. But Rob may have some additional color on that.

[Rob Fauber:]

Not much to add. I think that's right, Ray. And maybe if we also look at fund flows that gives you a sense of investor sentiment. We had a solid year of fund outflows and leverage loans last year. We have seen a few weeks of inflows in January, the high yield side we've seen funding flows for several weeks to start the year again, I think more investor sentiment, kind of shifting as Ray said towards the fixed rate instruments.

[Shlomo Rosenbaum:]

Okay. And then this may be for Mark, you talked about some of the underlying growth in margin you expect in MA. Is there some commentary you want to give in terms of how that business is shaping in terms of the mix of business within MA? And how we should think about more of the longer-term year-over-year growth opportunity, given what seems to be a lot of headroom in terms of improving the margins over there?

[Ray McDaniel:]

Yes. Maybe, I'll start just a little bit. I think Mark may have touched on this a bit, where there's a good bid of shift going on in the ERS business, and I think that's an important driver of what's going on is. We're moving from that historical, traditional software licensing model with implementation services to much more of a standardized product, that's typically delivered in a hosted environment. And that means you've got it on the cloud and customers are subscribing to that product. So, what we're seeing from customers is they are interested in that, because it's more efficient and in many cases more cost effective for them, 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. And that's I think a part of what you're seeing there.

[Mark Kaye:]

And then Shlomo, if I step back and start to think holistically across the two segments, and here I focus maybe my comments a little bit on the adjusted EPS growth of 11% to the midpoint of our range. The majority, I call it, 90% of that is really driven by performance in the underlying segments, either MA and MIS. There is a little bit of supplemental benefit from lower share counts through our share repurchase program, and certainly non-operating income through management of our debt portfolio. But the point I wanted to highlight here is, we are absorbing around $0.21 worth of margin dilution from the ongoing M&A and investment activity in 2020. And I think that's an important part of the story, that we're not only able to meet our expectations and growth through actions, but also able to invest through the cycle and for the business.

[Shlomo Rosenbaum:]

Okay, thank you.

[Operator:]

The next question will come from Joseph Foresi with Cantor Fitzgerald.

[Steven Chang:]

Hi, this is Steven Chang coming on for Joe. I might have missed it somewhere before, but can you please provide some color on the break down between U.S. 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 press release, but should we no longer expect those numbers in the future?

[Ray McDaniel:]

Yes, sure. Sorry. Go ahead, Mark.

[Mark Kaye:]

Sure. So, in terms of that mix of the U.S. non-U.S. revenue, we're a little bit around 50-50. I mean, it's obviously very different between MIS and MA, but not materially so across periods of time. And we certainly have removed specific U.S. non-U.S. guidance because of several reasons. First is the geographic revenue mix has remained fairly stable over time. And we also noticed that in field is an outlier in providing the geographic revenue guidance. And we really prefer to focus on those metrics that are used most often and most helpful to sell-side analysts and investors. We will continue to report the actual U.S. non-U.S. revenue mix in our Form 10-K and 10-Q. So, you will be able to get it there and as you probably know, very stable over time.

[Ray McDaniel:]

And just if you'd like to get the percentage split for 2019, for MIS, we were 40% international 60% U.S. For Moody's Analytics we were 58% international 42% U.S. And then for the corporation overall it was 47% international, 53% U.S.

[Steven Chang:]

Okay, great. That's helpful. And just one quick one. I know this probably has been answered throughout the whole call, but I'm just looking at the 48 to 49 margin range. I know you talked about a good chunk of it coming from cost savings in the MA business, especially RDC. But I just was wondering if there are any other factors baked into that 100 bps that maybe we should know about? Thank you.

[Mark Kaye:]

I think there are probably - one point, I'll reemphasize and then one point I'll add, certainly the relative growth rates of the segments do make a difference. And then the point, I would add, is that we've also as a management team identified around $13 million of 2020 expense efficiencies that will fund like amount growth initiatives, which include ESG, China, KYC, and some of the enabling technologies. So, not just relying on past actions to support the margin, but ensuring that we are being efficient as a team and to support ongoing investments in the business.

[Operator:]

The next question will come from Bill Warmington with Wells Fargo.

[Bill Warmington:]

Good afternoon, everyone. So, a question for you on the KYC space. Now that you've combined BvD and RDC and you've got about $150 million run rate in a $900 million market. Who's really the competition there now? And with the RDC acquisition, do you have what you need to take share there?

[Ray McDaniel:]

Yes, Rob.

[Rob Fauber:]

Yes. So, the primary players in this space, Refinitiv, LexisNexis, Dun and Bradstreet and there's a whole host 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 RDC has got and what we've got. And we think that's really going to be a good solution for the customers. The other thing I might mention is, they've got a very hard to replicate data set at RDC. And part of the real value in that data set is that 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 at financial institutions and corporations all over the world to comply with KYC. So, we think these AI solutions are going to be a very compelling offering for customers.

[Ray McDaniel:]

And I would just like to add that that spend that Rob is referring to is on top of the $900 million market opportunity that we see. So, there is a direct $900 million market and then there is a very large expense base that goes on top of that for firms that are trying to meet, know-your-customer requirements.

[Rob Fauber:]

Yes, there's the vendor spend in a very large, much larger in-house spend at all these financial institutions that Ray is always talking about.

[Ray McDaniel:]

Just one other thing I'd add. We talked about how complementary these data sets are, which they are, but it's also, we see a very nice fit in terms of where RDCs geographic strength is, which is here in the United States versus Bureau van Dijk which has about 70%, 75% of its customer base coming from Europe. So, the sales functions and the reach that we have for each of these businesses under a Moody's umbrella is now for the first time truly global for these firms.

[Bill Warmington:]

Thank you for that. And for my follow-up, I want to ask an ESG question. And you've given us some good color today on the rating agencies and what you guys are doing specifically, within ESG. 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 are then going direct to the investment managers?

[Rob Fauber:]

So, the index providers, ESG is very natural space for them, right, because they're able to build a whole suite of indices off of the ESG data and ratings. As I said, we don't have an index business but what we do have 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 ESG content a little differently than some of our competitors who are going to be able to monetize it, and are 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 and I tend to think it's not just going to be a data market, I think there will be a need for insights and assessments. And as I talked about, the more important that these - do you want to call them ESG ratings become, the more I think that the customers are going to want to engage with somebody around that rating or assessment. So, that's my sense. So, there will be a real need for data and data feeding investment managers for portfolio screening and selection and all that, but I think there is also going to be a need for insights.

[Bill Warmington:]

Got it. Thank you very much.

[Operator:]

Ladies and gentlemen, that does conclude our question-and-answer session. I will now turn the call back over to Ray McDaniel for any additional or closing remarks.

[Ray McDaniel:]

Okay. I just want to thank everyone for joining. We will see some of you at our Investor Day, I hope. And, we will be speaking with everyone again in the spring. Thanks.

[Operator:]

This concludes Moody's fourth quarter and full year 2019 earnings call. As a reminder, immediately following this call, the company will post the MIS 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 3