穆迪 (MCO) 2001 Q1 法說會逐字稿

Good morning. My name is Stephanie and I will be conference facilitator today. At this time, I would like to welcome everyone to Moody's Corporation first quarter results teleconference. At this time, all participants are on a listen-only mode. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press the 1 on your telephone keypad, and questions will be taken in the order that they are received. If you would like to withdraw your question, press the pound key. All media and individuals will be placed in a listen-only mode in the duration of the call. As a reminder, this call is being recorded today, Thursday, April 19, 2001. I would now like to turn the conference over to Mr. Robert Becton. Go ahead, sir.

Thank you. Good morning everyone and thanks for joining us for Moody's first quarter teleconference call. This is Robert Becton, Vice President, and Investor Relations. Moody has released first quarter results after the close of the market yesterday, and its earnings release is available on our web site at www.Moodys.com. John Rutherfurd, Jr., President, and CEO will be on call this morning. In addition to John, Jeanne Dering, Chief Financial Officer, Raymond McDaniel, Senior Managing Director, Global Ratings and Research, John Goggins, General Counsel, and I will be available to answer your questions following John's remarks. I want to add that certain statements made today may be forward-looking within the spirit of the Private Securities Litigation Reform Act of 1995. This Act provides safe harbor for such forward-looking statements; recalling attention to the management's discussion and analysis and risk factors sections, for such information statement attached to the Form 10 filed with the SEC in accordance to the separation and other Moody's and other brand streets and the safe harbor statement under the Private Securities Litigation Reform Act of 1995 contained in our press release issued yesterday, which set forth important factors that could cause actual results to differ materially from those contained in any press-reported forward-looking statements. I will identify now that some members of the media maybe on the call this morning in the listen-only mode. I am now pleased to turn the call over to John Rutherfurd.

Thank you, Bob, and thank you all for joining us on today's call. On this call, I am going to discuss the highlights of our first quarter and provide some commentary to put our financial results in the perspective, and I will ask Raymond McDaniel to comment on our international results, and then on with our outlook for the rest of 2001, and go to questions. We did have an excellent first quarter. We achieved record revenues, income, and earnings per share. We demonstrated the great strength of the franchise. When the United States fixed income markets revived during the first quarter of 2001, Moody's delivered value to the markets and generated record financial results. Moody's record revenues in the first quarter were 180.2 million, an increase of 29% from 139.3 million for the first quarter of 2000. As the growth in revenues was greater than our expectations, our operating margins also increased beyond our long-term normal margins of 48%. As a result, operating income in the first quarter rose 41% to 89.8 million. Diluted earning per share in the first quarter was 30 cents, which as we announced last week, was above the First Call consensus of analyst estimates at 24 cents. This compares to 22 cents in the first quarter of 2000. On a pro forma basis, diluted earnings per share were 29 cents compared with 20 cents a year ago, an increase to 45%. The pro forma base that includes interest on a $300 million of debt outstanding, but excludes interest income, because we do not expect to have significant interest income after we complete our current share repurchase program. In the first quarter, our growth benefitted from comparisons with the relatively weak first quarter of 2000. More importantly, we also benefitted in the first quarter from two economic and capital market trends in the United States, the strong rebound in US capital markets, and the continued growth in structured finance.

I will talk a little bit about each of these trends. First, the strong rebound in US capital markets. Bond issue entered record levels in the first quarter following the three-rate-cuts by the FED. Issuance was strong in all sectors of the market. The number of investment grade issues in the United States was 53% higher than the first quarter of 2000. A surge in financing to take advantage of lower interest rates drove a 43% increase in municipal issuance. As we discussed in our fourth quarter conference call in February, reduced rates and spreads have helped drive our shift from short-term to long-term financing in both the US corporate municipal markets. Treasures of investment grade companies took advantage of the Federal Reserve cuts to reduce their commercial paper and medium term note issuance and lock in lower interest rates for long term liabilities. Total commercial paper outstanding at the end of March was down 11% from the year-end. An issuance in the medium term note market was down 58% from the first quarter of 2000. In the high yield market, there was recovery in the first quarter, despite raising the forward rates. A number of high yield issues increased 97% over the first quarter of 2000. We do not see this growth continuing, however as month-to-month volume trends during the quarter were down. In the leverage syndicated bank loan market, credit concerns and regulatory calls for lending restraint have reduced the volume of bank loans. This trend will probably continue.

I should also note that at the beginning of this year, Moody's implemented a program to deliver increased values to issuers and sell bonds less often than annually, and to investors in these securities, which are mainly high yield securities. We greatly increased the number of these issuers on which we provide research cover. We also increased the depth of our research on these issuers by ____06:40 and planned visits. We charge per issuers and investors for the improved research coverage. Our objective for this program was a $20 million increase in the annual revenues from the issuers over four years. We are well ahead of the current master goal, having reached 9 million of revenues already in this year. We recognize these revenues' ratability over the annual contract of issuers. The second trend was continued growth in the United States structured finance. The public market for asset-backed securities in the United States had record issuance in the first quarter. In addition to the falling interest rates, growth in this area was driven by a strong demand from the investors seeking highly rated debt security including securities backed by Home Equity loans, Auto loans, and credit cards. The residential mortgage-backed security market in the United States was also boosted by refinancing and Moody has greatly increased its market share in this market during the first quarter. Capital market conditions were also very favorable for credit derivative since the BA AA spread was high and fixed to floating spread were reasonably priced. By way explanation, responses of these instruments take advantage of credit market spread and most credit derivatives were sold as floating rate instruments. Therefore, market conditions were favorable for credit derivative transactions and our coverage and revenue yield was very strong in this market in the first quarter. Now, Ray McDaniel will talk about our international businesses.

Thank you, John. The growth of global capital markets, certainly in Europe and including important domestic markets such as Japan, is the major driver of Moody's performances. Capital markets in Europe are expected to continue to show strong growth as the process of European economic and monetary integration continues. In Japan, ongoing challenges for the economy and banking system restructuring should continue to support capital market growth and innovation, especially in structured finance. Smaller regional markets in Latin America and the Asia-Pacific region remain more volatile, but are driven by similar underlying reform and restructuring imperatives. Middle East continues to achieve strong growth in international markets with year over year international revenues rising 22% in the first quarter to 48.3 million. International revenues represented 27% of Moody's total in the first quarter, down from 29% for the full year 2000 due to the relative strength of the US capital markets. In Europe, the structured finance business grew more than 80% compared to the first quarter of 2000 and represented about one third of total European revenues compared with about 25% of revenues for the full year 2000. In addition to the structured finance business, Moody's also saw strong first quarter growth in insurance and local government ratings. European corporate revenues despite a slowdown in high yield issuance and lingering uncertainty over interest rates were steady against very strong first quarter 2000 comparisons.

.

In Japan we saw strength in all major business lines with structured finance matching its outstanding first quarter of 2000 performance; an outstanding growth in both the corporate and banking sectors. In Canada, where Moody's last month announcement acceleration of its investment in domestic market ratings and research, we achieved substantial growth in our ratings business, driven by doubling in revenues from the corporate sector versus the prior year as a result of the two first quarter rate cuts by the Bank of Canada. Latin America also saw a solid double-digit growth in the first quarter of 2001, due to a combination of increased cross border activity and further expansion in Moody's rating in the domestic Mexican and Brazilian markets. The only regions not to show growth in the first quarter were Australia and Asia, excluding Japan, where slow economic conditions have constrained cross border issuance volumes. The results that we achieved outside of the United States in the first quarter once again demonstrates the excellent returns that have been delivered by our program of international expansion. Now I will turn the call back to John.

Thank you, Ray. In the first quarter, we also continued to achieve success in our two non-rating businesses. Credit research revenues grew 20% due to strong demand for research delivered over the Internet. Moody's risk management services had 61% revenue growth over the first quarter of 2000, based both on the acquisition completed in January last year and also on the fundamental underlying growth of the credit risk management business. So our first quarter results show the underlying strength of our franchise and our ability to take advantage of both long term and short-term trends in the worldwide credit market. Now I will comment on our outlook for the remainder of 2001. We expect continued strong performance based on the continuation of positive capital market and macro economic trends. In the United States, interest rates are significantly lower than in 2000 and have been driven even lower by the initial 50 bases point rate cut announced by the FED yesterday. The favorable environment should continue to drive refinancing in the mortgage-backed and municipal market and should increase refinancing activity in the corporate sector.

In the corporate sectors, treasurers of investment-grade companies will likely continue to take advantage of reduced rates and spread, to reduce their short-term liabilities and add more long-term liabilities. However, because of the variety of factors we have discussed, on balance we expect that revenues in the remaining quarters of 2001 will be lower than in the exceptionally strong first quarter. We are still above prior year period. The economic outlook for the United States remains uncertain and investment grade financing volume later in 2001 will likely depend on how corporations' investment decisions are affected by their views of the economy. In the high yield market, while the recovery was strong in the first quarter, it is unclear how lasting that recovery will be, even after yesterday's rate cut. The decline of consumer spending in the United States could also slow the rate of growth of business investment and asset-backed securitization. However, we do not expect the volumes of structured finance assets to decline because customers will not substantially reduce their overall indebtedness. Also because of the short duration of these assets, turnover will still support moderate growth in structured finance in the United States. Ray, would you please comment on the outlook for international market?

Our outlook for international markets remains strong and we expect international revenue growth of greater than 20% for the full year with a growth at that level or above in all regions, except Australia and Asia, excluding Japan. In Europe, we continue to expect reasonable economic growth coupled with possible cuts in interest rates. This combination would be positive for capital market activity, especially in the corporate sector in the second half of the year. Even if an interest rate cut is not forthcoming, we believe that resolution of uncertainty around rates would have a moderately positive effect on issuance. We expect continued strong growth, though not at first quarter rates in European structured finance, especially in complex instruments and asset classes where Moody's value added is highest. In Japan, we expect that after a particularly strong first quarter for the banking and corporate sectors, structured finance will resume at the primary growth sector for the rest of the year. In Canada and Latin America, we still expect growth of greater than 20%.

Thanks Ray. Based on these economic conditions and assumptions for the full year 2001, we anticipate mid-teen' revenue and operating income growth. Margin should decline from the high level that we saw in the first quarter as we add cost to support this substantial business growth. The strength of the first quarter could drive full year margins a bit higher than our long-term targeted level of 48%, though we would not expect that to continue in the 2002. We are expecting low to mid teens growth in as reported earnings per share, and close to 20% growth in pro forma earnings per share.

Economic conditions that could produce better results for Moody's current forecast include a further 50 bases point rate cut in the United States, which would stimulate coupon refinancing and rate cuts by the European Central Bank, which would stimulate corporate issuance. Lower than expected macro economic or capital market conditions would result in lower financial results. In the second quarter of 2001, Moody's currently expects to achieve revenue growth in the mid teen with single-digit growth in reported earnings per share and low teens' growth in pro forma earnings per share. So in summary, Moody's had an excellent first quarter. We achieved record financial results, we continue to build on our great franchise, and we continue to expand in the attractive global markets. Moody's is well positioned to benefit from long term economic and capital market trends and to capitalize on our excellent market position and brand. Before I open the call out for questions, I want to thank all of you who expressed your support for the company following the announcements we made last week regarding our settlement with the Anti Trust Division of the Department of Justice and our reassignment of the management responsibilities. Immediately following the announcement, we sent thousands of e-mails to customers across all our businesses and followed up with hundreds of phone calls and personal visits. Our clients were very appreciative of hearing the news directly from us, we are pleased, and what we have heard from our clients today, is that they see no business implications from the settlement. As a result, we continue to expect that there will be no materially adverse impact on our business. With this matter behind us, we are focussing on continuing to take advantages of the attractive opportunities in the market and delivering superior value to our customers, shareholders, and employees. Now, my colleagues and I will be happy to take any questions that you may have.

Once again, I would like to remind everyone that if you do like to ask a question, please press the number 1 on your telephone key pad. The first question comes from Joanne Park with Merrill Lynch

Hi! Great quarter, I just have a few questions. First of all, S&P announced that their revenues for the first quarter were not quite as robust as at Moody's, and I was just wondering if you have any thoughts on this, if you see that you are gaining market shares in certain areas or it is just a function of your mix of relationship versus transaction based revenues versus S&P and secondly, just wanted to ask about your second quarter revenue outlook by Business Line, if you see current similar trends in terms of where the growth is coming from.

First of all, thank you for your initiating coverage on us and your excellent report. We very much appreciated that.

Ah, thanks.

With regard, frankly, you know, S&P does not report their ratings revenue separately. So, in a sense, you and other equity analysts may have a better view of this than we do, especially given the accounting changes, which S&P had last year. Nevertheless, I think that probably the fact that more of their business is relationship priced than ours and possibly, our strength in structured finance could have something to do with the difference.

Okay.

With respect to second quarter numbers like Business Line, we do not have estimates that we can share with you on those numbers but broadly, we would see a continuation of growth in corporate finance, maybe less in leveraged finance and bank loans in the next quarter. The first quarter was an absolutely tremendous asset-backed quarter. I would be surprised if volumes repeated themselves in the second quarter in the asset-backed market and you know, I would continue to expect mortgage refinancing, specifically with rate cut announced yesterday. In Europe the ECB has declined to reduce rates to this point, so I would expect continuation of strong structured finance volumes in Europe and sub sovereign financing coupled with some weakness in financial institutions in corporate financing.

Okay, great, thanks.

The next question comes from Chitra Sundaram with Goldman Sach.

Oh hi, thanks. A couple of numbers that I just missed actually. Firstly, you mentioned about a goal on the new type research services that you are providing on some of the issuance that do not come to market, necessarily every year and I missed that. Did you say 27 million in revenue?

Two zero, 20 million in four years?

Yes, in four years that is right. And you said the run rate currently was, I am sorry, I missed that as well.

Was 9 million.

9 million, that is right.

We think we made a very good start on that program.

Right, sure. In terms of year over year debt issuance, did you say it was 43%, in a particular category or overall.

Public finance.

Public finance. Great. Okay, just a couple of questions, I think most of mine have been answered. The first is on the operating cost, they increased about 20% year over year. What would you identify as, sort of the key drivers behind that?

Jeanne do you want to take that one?

Sure, John, thank you. Chitra, the main drive for us behind the operating costs increase year over year, are compensation. First of all, since the first quarter of 2000, have quite a few more people than we had last year in the first quarter, especially in Europe and other areas outside the US where we had very strong growth last year. Secondly, in central compensation provisions are higher in the first quarter this year versus last year, given the very strong results that we had in the first quarter.

I see. Now just an interesting question that arises, I guess, out of that, do you see a trend line or a kind of a step up in the way you all are paying your people, do you think that is a good change, your operating leverage in any way that is material, going forward, instead of now an independent company?

Well, we try to provide an attractive employee value proposition to our people taking all things into consideration. Recently, there have been increases in value for people in the number of the specialties where we have ratings analysts, especially in the hot segments of the market, so we do try to increase compensation to maintain our relative value proposition.

When you say it has gone up, what is it, 20% or 10%, can you give me some idea of how that has changed?

I think it is really the mix that has changed because overall, you know, we feel that our long-term margins are quite stable at 48%. As I said, we might go over that a little bit this year simply if there are unexpected revenues, but I think it is a change in mix towards the areas of the business where the analysts produced more value.

I see what you are saying. Right. The next one is on structured finance and you mentioned high quality securitization and these are kind of how I anticipate it to be. If there is a change you know, in terms of the economic variables, one of the changes is an overall that the property of assets gets securitized and then the new assets that are coming on the books of these finance companies are of somewhat lower quality with consumer debt being as high as the business and so forth. Could those kinds of factors impact the prospects for structured finance and asset securitization?

This is Raymond McDaniel.

Right.

Broadly speaking, certainly there can be an impact to the structured finance and asset-backed securities markets from credit shocks, but I would characterize those as being unanticipated events rather than predictable and predicted changes in the bond rates or charge-offs, and the credit shocks could be real specific, they could be something that effects the industry where charge-offs increase more materially. We would consider that less likely at this point, especially in a reduced interest rate environment.

Right, thanks, okay, and in terms of the credit rate downgrades versus the upgrades, net, net when you kind of look at your portfolio of companies that you all cover, has the Moody's track record as far as you have been more sort of downgrades versus upgrades and what does that indicate in terms of the balance between lower interest rate, you know, motivating treasurers to go back to the market, but then a declining profit in debt servicing ability forecast which, kind of, make people think twice about going back to the market?

To answer the question specifically first, in terms of downgrades versus upgrades in 2000, we certainly saw more downgrades than upgrades both in the speculative grade area and in investment grade. The ratio of downgrades to upgrades was more extreme in its speculative grade area and in the first quarter of this year, actually, the ratio of downgrades to upgrades in speculated rates has moderated a bit. As far as the broader question, certainly the downgrades and the full rates that we see in corporate securities do follow cycles with the overall business cycle, and we, as you can imagine, are closely watching and taking rating actions as we are talking to our customers in the corporate sector and hearing what their outlooks are, and what the industry reactions are to the largely or partly offsetting conditions of a better rate environment, as against continuing concerns about the overall business climate.

But at this point, I mean, it does not really indicate it one way or the other and you still think that, I think I would agree with you. In the near terms, certainly your rate reduction should help other than to completely offset by weakened environment. Okay, great. Is there any change in you capital expenditure depreciation forecast, what guidance given at the beginning of the year?

We are always looking for activities that we could add to our risk management services business and to expansions in the emerging markets, but you know, we do not have any significant activities in the pipeline at the moment. So the forecast is largely stable.

Wonderful, thank you so much.

Thank you, Chitra.

The next question is from Kevin Gruneich from Bear Stearns.

Thanks. I was wondering just looking at the cost side of the equation, you mentioned that you expect to increment costs going forward in the coming quarters, and I was wondering if you could isolate some specific plans along those lines that will pull your margins down and secondly, I was wondering if you could gather an FTE account for the corporation end of March this year versus a year ago.

Sure, +the broad idea, Kevin, is that last year we did carefully allocate expenses and particularly hiring to the growth areas of the business, particularly international, and so we have a number of openings that exist for staff, both domestically and internationally at the moment and we do plan to increase staff throughout the year. Jeanne, can you provide the head count number?

Kevin, at the end of March, we have about 1550 people, worldwide.

And that versus what a year ago...?

That versus a little over 1400, a year ago.

Right and generally, are you planning to broadly increase staffing?

Well, I would not say broadly. In the corporate areas, our staffing is largely industry-based though we would be filling positions where we feel we have weaknesses in industrial areas. In the transaction-based areas of structured finance, it is largely associated with transaction volumes, and estimated future transaction volumes.

Yeah, but it does sound like if you were being a little bit more conservative last year, given the environment, and you are still up at 10-11% year over year, that we can expect going forward that growth rate elevates.

Yeah, and that is why we are saying that we do not expect for the full year to have the margins that we showed in the first quarter. I should also emphasize that Europe is growing rapidly and that is an important area to where we are adding staff.

Understood, thank you.

Your next question comes from Michael Lifitz from _____ Advisor Services.

Good morning, great quarter. My question is focussed on the structured business in Europe and difficult question is could you, looking at what you have done in the quarter and then going forward, contrast cyclical phenomena as distinct from a secular growth. What I am focussing on, is that the assets that are in the these programs are not growing anywhere near as fast as the desire, frankly to get it off their balance sheets.

Yeah, this is Ray McDaniel. The situation in Europe is characterized first of all, by a much earlier stage of development than we had in the United States, which I think is well understood. The level of disintegration of financial assets in Europe is much less than in the US and so, well, I would agree with you that the addition of assets that can be securitized, if not growing anywhere near the rate of securitization itself, the stock of assets that is available to be securitized remains very, very deep, especially in a continent where securitization is in an earlier stage of development than in the UK, and so, we would see this as a long-term trend, and by long- term, I mean multi-year.

Okay, is there any difference in your mix this quarter than last quarter in that business on the continent?

Yes, we did see growth in European credit derivatives market and CMBS as compared to last year, and in fact prior years, CMBS being commercial mortgaged-backed securities.

Thank you.

The next question comes from John Bretons from Select Equity.

Yeah, hi, good morning. I am interested actually in the dynamics of shifting from short-term paper to longer term. I was just wondering, if can you give some examples of how the revenue goes for Moody's, for instance a commercial paper relationship. Is that an annual feel at, let us say, at 3 1/2 basis points or sum fee charge annually, when that paper becomes due and what would the revenue picture look like under a long-term regimen, what is the dollar capture on the renewal component over the relationship component of that revenue, and what do you give up overall, because you are not doing an annual issuance.

I think that the answer is that on commercial paper, we charge, based on the stock of commercial paper outstanding, and on the longer term, we charge on the flow of the financing, and I would guess that our yield per billion is several times greater in the term market than in the short-term market.

Okay, so I guess to try and sketch out what the impact would be then, what is your sense of how this is plays out, probably not towards the end of even this year in 2001, but looking ahead of 2002 or later, how much are you eating tomorrow's revenue today, when your Fed cut rates and there is a whole lot of shifting out on the curve, how does that affect your longer term, you know, mediate term, growth prospects?

I think the answer is that, that for industrial companies and we are mainly talking about industrial companies here because financial institutions tend to match their assets and liabilities more closely by maturity. What we saw last year was very low issue.

Right.

And so, what we think we are seeing this year is more of a return to normalcy, especially as we have suggested we do not expect revenues in future quarters to be quite as strong as the revenues that we had in our first quarter.

Okay and on the structured side, what is the average duration, do you measure that, and has that also pushed out?

It depends by asset class, but the duration for car loans and credit card loans is pretty short.

Right, there is not as much discretion there is, have you seen any movement out in terms of longer maturities on the structure then?

No, we have not seen material change and I would have to go back and look at it by asset class to give you a more specific and more reasonable answer, to be honest.

Right. Okay, but there is an sense that this is, in other words, creating sort of a one-time boom, I guess, on the industrial side where it is going to be more difficult later on to account favorably on these numbers?

Oh no, where you get booms of that sort is not turning out short-term debt, you get it from coupon refinance and at the moment, we are not in a condition that is very favorable to coupon refinance. If you have a further decline in rates, then you could see a boom in coupon refinance and that is what really is very difficult to match in future years because it depends upon not only the difference between the current average coupon, but also the stock of those high coupon bonds which become refinance.

Okay that is helpful, thank you.

The next question comes from Lauren Fine from Merrill Lynch

Hi, thanks, just two really quick questions. One, if you could give us what the cash was at the quarter end and secondly, your commented on growth in structured finance in Europe. I am wondering if you could tell us what the growth rate was in the US?

Sure, Jeanne, can you comment on our cash at the quarter end?

The cash at the quarter end was normal within the range of $101 million and we have a very strong cash flow for the quarter.

And then our growth in US structured finance. The US structured finance business was off almost 50% over the first quarter of 2000.

Great, thank you very much.

Thank you, Lauren.

At this time, I would like to remind everyone again, that if you would like to ask a question, to press the #1 on your telephone keypad. The next question is from Max Philosus from ACS Value Fund.

Yeah, is your tax provision, a fair representation of cash taxes paid?

Ah, this is Jeanne Dering. I think that certainly, on a normative annual basis, it is a fair representation of taxes paid. I think you will see this, for the quarter of the taxes paid were a bit lower than the provision and that simply is astounding difference, and we will catch up on that during the year.

Okay, and then I was curious on your operating working capital. Your operating working capital is negative, and as you go to base business, that should throw off more cash, and I guess the new business of booking these long-term contracts, I guess, you know, would you expect your working capital to throw up even more cash as that business grows?

Do you want to answer that John?

Surely. I mean the main sources of negative working capital are subscription research business which has been growing very nicely, close to 20% a year, and our other rating activities which have annual fees, the most important of which is our frequent issue of pricing program. The $9 million that I mentioned also is of a subscription nature and that is a new item for us. So, in principle, what we would like to have is negative and growing negative working capital.

All right, I understand. And then just conceptually, it is not big deal, but why do you pay dividends?

Because some firms only buy stocks that pay dividends.

Okay.

There are no further questions at this time. Mr. Becton, do you have any closing remarks?

On behalf of myself and my colleagues, we would like to thank everyone for joining us on the call this morning, and we look forward to speaking with you again at the second quarter. Thank you.

Thank you for attending today's Moody's Corporation conference call. You may now disconnect.