穆迪 (MCO) 2002 Q1 法說會逐字稿

Good morning.

My name Chris. I would like to welcome everyone to the Moody's Corporation 1st quarter 2002 tell conference. After the speakers remarks, there will be a question and answer session.

To ask a question, press star and then the number one on your touch-tone phone, and questions will be taken in the order they are received. To withdraw your question, press the pound key.

All media and individuals will be place made a listen-only mode for the duration of the call. As a reminder, ladies and gentlemen, this call is being recorded, today, April 24th,

2002. I would like to turn the call over to Mr. Michael Cordon, Vice President of Investor Relations and Corporate Finance. Go ahead.

Thank you.

Good morning, everyone. And thanks for joining us on the teleconference to discuss Moody's results for the 1st quarter of 2002. This is Michael Cordon, Vice President of investor Relations.

Moody's released its results for the 1st quarter of 2002 before the market opened this morning, and the release is available on our website at Moody's[INAUDIBLE].com John Rutherford, President and CEO of Moody's Corporation, will lead this morning's conference call.

Also on the call this morning are Raymond McDaniel, President of Investor Services, and Jeanne Dering.

They will be available to answer your questions following John's remarks. Before we start off, I'd like call your attention to the cautionry language set out at the [beginning] of our earnings release. Certain statements my colleagues and I make today may be forward-looking within the spirit of Private Securities Litigation Reform Act of 1995.

This act provides the safe harbor act for such forward-looking statements. I would like to direct your attention to the management's discussion and analysis segment and form 10-K for the year ended December 31st, 2001.

I'd like to point to the safe harbor statement under the Private Securities Litigation Reform Act of 1995, contained in our press release, issued this morning.

These set forth important factors that could cause actual results to differ materially from those contain in such forward-looking statements.

I should point out that members of the media may be on the call this morning in a listen-only mode. I'm pleased now to turn the

call over to John Rutherford.

Thank you, Michael and thank you all for joining us on today's call. On the call I will discuss the highlights of our results for the 1st quarter of 2002 and comment on our United States business and our non-rating businesses.

Raymond McDaniel will comment on our international results. I will then give you an update on our share repurchase program, provide comments on the KMB acquisition, which we recently completed.

And end with our outlook for the remainder of 2002. After my prepared comments, my colleagues and I will respond to your questions. Moody's reported record results for the 1st quarter in 2002 in both revenue and earnings. Revenue rose to $232 million in the 1st quarter, an increase of 29% from $180 million in the same period of 2001. Diluted earnings per share were 46 cents, compared with 30 cents in 2001. An increase of 53%. Moody's strong 1st quarter results reflected revenue gains in all lines of business. Moody's United States revenue totaled $164 million for the 1st quarter of 2002.

An increase of 24% from $132 million in the prior year period. The growth of U.S. structured finance revenue, which rose more than on 40% from the 1st quarter of 2001, was the major force behind this strong performance.

Within U.S. structured finance, we saw double-digit growth in all sectors and especially strong results in race financial mortgage-backed securities. U.S. Corporate Finance revenue was up modestly from 2001. And ratings revenue in our financial institutions and sovereign business rose at double-digit rates as issuers continued to take advantage of attractive interest rate environment and narrowing credit spreads, reflecting the market's more favorable view of credit risk in the sector. Public Finance revenue also grew at double-digit rate, reflecting both favorable interest rates and lower tax receipts, making pay as you go financing less possible. Moody's operating margin for the quarter was notably [above] our long-term target of 48%. The quarter's margin of 58%, up from 50% a year earlier, principally reflected unexpected revenue strength in structured finance.

Those of you who have followed Moody's for a while know our largest expenses are compensation-related costs.

It generally takes some time to add personnel in response to higher business volume.

Looking forward, we expect our margin to be lower for the remainder of the year as we increase staffing in areas of strong growth. I'd like to highlight a few of the macroeconomic factors we think are driving Moody's U.S. performance.

In the U.S. structured finance market, improved consumer confidence, and the strength of consumer spending has sustained issuance growth.

Consumers are continuing to borrow in the form of mortgages, home equity loans, auto loans and credit card receivables. In the U.S. corporate sector, treasurers continue to refinance short maturity debt with longer term obligations.

Treasurers want to lock in attractive financing costs while rates remain low and lessen their exposure to cost insensitive short-term markets.

Proforma in our non-rated businesses was very strong in the 1st quarter. Moody's's risk management services generated impressive results. Global revenue was up 53% from the 2001 quarter. Moody's Global Research revenue was up 27% from the year-earlier quarter. The most significant drivers of this include increased demand for our Internet-based research and new customers. This increased demand is dispersed geographically, including new customers in the United States as well as our receipts. Now, what I'd like ask Ray to talk about our international business.

Thank you, John.

Moody's continued to achieve strong growth in international markets during the quarter. While Moody's United States revenue grew 24% in the 1st quarter, year-over-year, we experienced even faster growth outside the U.S., where Moody's revenue of $68 million rose 40%.

We believe that our results reflect strong business fundamentals and our overseas operations.

Structured finance was the primary contributor to 1st quarter international growth. In Europe, structured revenue rose over 80% in the 1st quarter of 2002, compared with the same period of 2001, driven primarily by growth in the credit derivatives market. European activity in commercial and residential mortgage-backed securities and in the asset-backed commercial paper markets all demonstrated growth in the 15 to 20% range. Growth in the European asset backed segment was lower, but we believe it will return to more robust growth in the second half of the year. Revenue from rating European corporate and financial institutions was up 20% and 11% respectively versus the 1st quarter of 2001. Overall, issuance volume for European corps rates lagged the same period in 2001, but the number of issues increased since the decline in volume was almost exclusively attributable to the absence of the very large telecom issues of the prior year. In Asia, revenue growth was very strong, rising 47% from the 1st quarter of 2001. Outstanding growth in japanese structured finance business, which rose over 90% year-over-year, was the primary driver in the results.

Issuance is difficult to forecast, and the overall picture remains reasonably positive for combined corporate and financial institution issuance.

The pipeline of new rating requests remains strong. In addition, the European high yield is strong, but actual issuance has been light. Finally, non-U.S. research and risk management services revenue showed strong double digit growth. For the quarter, U.S. international business accounted for 29%, up prosecute 27% a year ago. Looking at the structural capital market trends outside the United States, Moody's continues to benefit as more companies use the public debt capital markets and structured finance. In Europe, the market continues to replace a portion of bank funding with borrowing, the process you've heard us talk about before.

In addition, structured finance continues

to be a more central and consistently-utilized financing tool for both financial and non-financial institutions. I will now turn the call back to John.

Thank you, Ray.

Let me now give you an update on our share repurchase program and the KMV acquisition. During the 1st quarter of 2002 we repurchased more than 800,000 shares at a total cost of approximately $31 million of which 700,000 shares offset issuance under Moody's stock plans.

We completed the acquisition of KMV on April 12th. The transition was structured as a $210 million cash purchase, which we initially funded as we said we would with a combination of cash on hand and our existing bank lines.

We will be putting in place permanent financing for the KMV acquisition so that it will not interfere with our share buyback program.

Peter Crosby, who was President and Chief Operating Officer of KMV before the acquisition, has been appointed President and chief Executive officer of the combined MRMS and KMV business and reports directly to me.

We are very pleased that the founding partners of KMV, Steve, Mac and Aldrick continue to be actively involved in the business.

Teams from KMV, MRMS and Moody's have been making good progress on the integration process.

I'd like to conclude my comments this morning by discussing our outlook for the 2nd quarter of 2002 and the full year.

As we previously stated, the outlook includes the projected dilution and one-time charges related to the acquisition. Our 2002 outlook [announcement] made in February was from mid to high single digit percentage growth in revenues, with share repurchases and a lower tax rate, driving double-digit growth in earnings per share. We assume that the United States debt issuance was slow during the year after refinancings had run their course, due to weak business fundamentals and a lack of recovery in capital investments in merger acquisition spending. We also expected that growth in the United States consumer economy would moderate after several years of strength, which could lead to a slowdown of growth in structured finance volumes. However, expected favorable interest rates for much of the year would create debt issuance and continued consumer spending. In Europe, we assumed a solid outlook for corporate debt issuance and a continuation of the long-term growth in structured finance. Since our initial 2002 outlook, the macroeconomic environment in the United States appears to have improved modestly. Nevertheless, our expectations for issuance in the fundamental corporate and financial institution sector are largely unchanged because economic recovery may not immediately translate into long-term debt issuance. We expect that economic recovery will first lead to increased business investments in inventory, which will be primarily financed with short-term debt. Continued refinancing activity or a recovery in business investment financed by long-term debt could provide upside in these sectors. Downside could arise from earlier than expected or more aggressive federal reserve board interest rate increases.

In structured finance, the very strong 1st quarter results should drive higher than expected revenues for the full year. In Europe, we continue to expect good growth in the corporate sector as new issues enter the market. We also expect operating margins in 2002 to continue to exceed our long-term target of 48%. As spending for increased staffing and other investments will generally lag revenue growth. Depending on the timing and extent of these factors, we now expect 2002 year-on-year percentage revenue growth in the high single digits to low teens, with higher growth in operating income, and with the first half of the year being stronger than the second. Including the impacts of share repurchase and a slightly lower effective tax rate, Moody's expects 2002 diluted EPS to range from $1.54 to $1.57. For the 2nd quarter, we anticipate year to year percentage revenue growth in the range of mid-single digits to low teens. With continued strength in the United States and European structured finance being the most important growth driver. Operating income growth should be higher than revenue growth and including the impact of share repurchases, diluted EPS should range from 37 cents to 39 cents. The 2nd quarter and full-year outlooks do not reflect incremental 2002 revenue from KMV, which is expected to be slightly more than $42 million. However, the outlooks do include modest projections EPS dilutions related to the acquisition.

And one time transaction related charges, which are expected to be mainly in the 2nd quarter and in the range of $3 million to $5 million.

Now my colleagues and I will

be happy to take any questions you may have.

I would like to remind everyone, to ask a question, press star one on your touch-tone phone now.

Please hold for your first

question. Our first question from Kevin Gruneich of Bear Stearns.

Thank you.

Two questions on the staffing side. I was wondering if you could provide us with your [FTES] at the end of the quarter? And compare that with the end of '01?

And also the end of Q1 of '01? And secondly, I was wondering

if you could give us a percentage of total compensation that constituted inventive comp in Q1 of '02?

Thank you, Kevin. Jeanne, will you take those questions?

Sure, Kevin, our total FTES at the send of the 1st quarter are about 1750. And that does not include the people in our Korean affiliate, which, as you know, we're now consolidating.

That 1750 is about 75 people higher than we had at the end of 2001, and it's about 200 more than we had at the end of the 1st quarter of the prior year.

In terms of the percent of total comp that's represented by bonuses, is that -- was that your second question, Kevin, I'm sorry?

That is, what did you kru in terms of incentive costs?

The total inventive comp expense for the quarter was in the range of about 20% of total comp expense, so, it's a bit higher than the number we talked about before, which is 15%, because our results, as you know, were quite a bit ahead of our normative growth for the quarter.

How does it compare with Q1 of '01?

The incentive comp?

The incentive comp provision was a little bit higher than Q1 of '01. Our growth rate was higher and

also we've got a little bit of a higher base of people.

Thank you.

Again, to ask a question, press star, then the number one on your touch-tone phone.

At this time, there are no

further questions.

Should we give them just a second in case someone is slow hitting the button?

There are questions, one moment, please.

Your next question is from Lauren Fine of Merrill Lynch.

Are you there, Lauren?

Sir, we will go onto a follow-up question from Kevin Gruneich, again, please, from Bear Stearns.

Thank you.

Sure, Kevin.

Mac [McClowen], who is the "M" of KMV, had been the CEO of KMV in the past, and when the definitive agreement with Moody's came to pass, he decided that it was time for him to pass on the CEO position to Peter Crosby, who had been the Chief Operating Officer in the past.

Mac is going to work with us in a number of areas.

First, he has relationships with very senior people at some of the largest KMV clients, and he will continue to maintain those relationships and develop new relationships with other large financial institutions. He will be also active in their product development activities. I've asked him to work on areas such as channel distribution, where KMV has done relatively little channel distribution of their product.

And finally, on areas where we could expand the business through acquisition.

Steve has really been the -- the person who, together with Aldrick, has acted as the inspiration behind their models and he -- and had served as their Chief Technical Officer. We're very enthused about his continuing role with us in developing new products and new areas for the business and also we hope that we will be working in areas where the technical capabilities of KMV can benefit Moody's.

And Aldrick is one of the founders of modern term "structure theory," which is one of the most important parts of current fixed income finance and he will continue to be active, as well.

So, we're very, very pleased that all three of these founding members have agreed to continue to give us the benefit of their wisdom and experience.

Thanks.

Your next question is from Lauren Fine of Merrill Lynch.

Thank you. Can you hear me this time?

Yes, we can.

Good! My questions have to do with KMV. I want to clarify on your guidance, on the revenue side, you're not including KMV in the guidance for the revenue or for the year, but if the earnings you are including it, is that correct?

Yes, that's correct.

And on the revenue side, I'm confused, I had thought when you made the acquisition or announced it, I should say that you indicated on a full year basis that KMV would generate $100 million and you wouldn't own it for the full year.

I may have misspoken at the time, Lauren.

What I had intended to say was that the combined revenues of KMV and MRMS on a proforma basis were going to be $100 million.

And of that, a little less than $40 million was MRMS and the rest was KMV. So, we're really not changing anything.

We're just saying that we're going to, you know, have a

little more than 2/3 of that $60 million that I had previously commented on.

Okay. And then a separate question, on structured finance, how much of that business comes in in the last month of the quarter?

A lot.

There is, within the quarter, seasonality and

structured finance and you know, I think it's fair to say that in March, a great deal of the revenues which propelled our higher than expected quarter were structure-financed revenues which came in in March.

Lauren, it is Raymond McDaniel. I would add that a large part of or a significant part of our growth and structure this year also came from our Japanese structured business and it is the year-end quarter, the 4th quarter in Japan for fiscal reporting purposes.

So, that's traditionally the heaviest quarter and the heaviest month of the quarter is March.

Okay.

That makes sense. And so, you know, given that from all models point of view, the revenue surprise in the quarter was equally to the operating income one.

You to go in with cost containment in the off chance the revenues don't come in in

the last quarter?

There are two things, lauren, we agree with your comment, but also tend to start off slowly on costs of the 1st quarter of the year, because we have less certainty in the 1st quarter of the year about how revenues will develop.

Okay, great, thank you very much.

Well, thank you!

Your next question is from Doug Arthur of Morgan Stanley.

Yeah, can you drill down a little bit on the phenomenal growth in structured FPBST? I guess "A," could you elaborate on the -- your kind of expectations for the rest of the year?

You've obviously, sort of, commented on it in general.

But specifically, in structured finance. Secondly, could you talk in a little more detail about the components of structured finance and the individual growth rates you see? And then third, did the growth in structured finance in Europe, where do you sort of see that on the timeline of how developed the U.S. market is? Is Europe as developed, or is there a long way to go in the growth potential there?

Ray, do you want to [this]?

Sure], I will be happy to get started that.

Doug, as far as the full year is concerned, as I think we mentioned in our introductory comments, we do expect the above plan growth in the 1st quarter to flow through for the year, so we do expect that we will have higher growth in global structured finance than we were anticipated three months ago.

It's probably most helpful to look at some of the individual components, though, in terms of understanding that.

In the U.S., we had a tremendous quarter in residential mortgage-backed securities, and we believe that that was really continued momentum from what we saw in the 4th quarter of last year; continued refinancing activity, home prices holding up better than might be expected.

But we don't expect that to continue at the [urgent] pace for the rest of the year.

So, we expect a decline in activity compared to the 1st quarter, particularly in the residential mortgage area.

We also anticipated that there might be more of a decline in other areas of the business, in the CBO area, in particular, following the 4th quarter of last year, and we did not see as much of a slow down in some of those areas, CBO and CMS, as we had expected. On the European front, the market is developing somewhat differently than it is in the United States. It is developing more rapidly in the collateralized debt obligation area and in the credit derivatives area. That's playing a larger role at an earlier stage in the process than what we saw in the United States. We did see some softness in the asset-backed market in Europe in the 1st quarter, and expect that's going pick up later in the year, but in terms of the overall secular stage of the European market, we do believe it still has really a tremendous growth opportunity in front of it, although I would not necessarily look for it to replicate the business in the U.S. in terms of where the high growth sectors are.

That's great, thank you.

Can I just add a comment to that... The other way of saying -- of commenting on the difference between the European and the United States structured market is that there are fewer consumer assets in the european-structured market, and that's because of the different propensity to spend of U.S. and European consumers.

As everybody knows, U.S. consumers love to spend, and consumers around the rest of the world have a higher propensity of saving. What we think is going to happen over time is that as the world grows wealthier, and especially Europe growing wealthier and there is more of a wealth effect in Europe, that you will get more consumer indebtedness and will have more of a growth in consumer assets, which go under structured finance in Europe.

Your next question is from Peter Apert of Deutsche Banc.

Hi, good morning. John, I was hoping you might share with us your thoughts on what's happening if anything in Washington from a, you know, Congress or SEC perspective and, you know, what your expectations are in terms of whether we might anticipate action from a regulatory standpoint?

Sure.

As you may know, we have made a written submission to Senator Lieberman's committee, and we provided oral testimony to Senator Lieberman's committee.

Senator Lieberman has made a public statement that he is not planning to introduce legislation, and that he will wait for the SEC's review of rating agencies.

We've also provided a written response to representative Townsend's House Energy Committee, and we have not, as yet, been requested to provide oral testimony.

The SEC commissioners have instructed the staff to conduct a study of rating agencies.

We have met with the SEC staff, and our sense of the likely direction from the SEC is to provide more transparency around the definition of the so-called NRSRO, the designated rating agency.

And also possibly more supervision of business practices.

We do publish our methodologies for virtually all of the sectors that we rate, and we do publish, every year, a statistical analysis of our ratings so that we believe that we are providing both the market and any regulators with the information that they need to evaluate our performance.

We also have a number of internal conducts standards that we are making sure that the market understands.

The first is that the level of our rating does not depend upon the commercial relationships that we have with any customers.

The second is that we do not either take or abstain from [changing] the timing of any rating actions that we might do based on the effect of the our rating on the financials for the companies.

So, we are advising the market that we will take the role of umpire in a difficult situation and not get trapped into being a player in a situation by rating triggers or other ways that issuers, financial circumstances, may depend upon the rating.

We also very much do consider any information, especially new information, which either an issuer or its investment bankers may provide to us.

We believe that because of the nature of the effect of our rating and the effects that it can have on companies, that we should take a judicious process of carefully considering all of the information before coming out with our ratings, despite the fact that that may result in some delay in issuing the ratings.

And finally, we only take non-public information, which companies may provide us into account in making our rating decision.

And we do not disclose that in either press releases or research that we may issue about the company.

And we think that's the right way that we should act, that we should not be a conduit of unpublished information.

And if the SEC wants the information to be made more generally available, but it should be then that provide the rules for such disclosure.

So, what we're trying to do is make very clear both how we go about our ratings and our methodology, some overall important standards that we think are important to how a rating agency should operate and finally, publish on an annual basis the results of an analysis of our rating.

And these are the sorts of things that we believe are important for us to promote efficiency in the market, and we would urge any regulations, also, to be on the lines of promoting both transparency and market efficiency.

Okay.

It's possible, however, we would urge two things to be considered.

First, that in order to judge rating agencies it is important for them to publish [externally] all of their ratings so that their track records can be judged.

Secondly, it is important not to encourage shopping for the highest rating. And although there have certainly been comments about the industry structure in the past, one would note two things, first, that this industry structure has also evolved in Europe, where there is not a similar regulatory designation of approved rating agencies, and also that the current industry structure tends to discourage shopping for better ratings just as the current structure in the accounting industry tends to some extent, to discourage shopping for better opinions.

Okay.

Unrelated item, I'm just wondering, to what extent ratings requests give you reasonable visibility and specifically, I'm wondering, do you get rating requests beyond the next month or two that it would give you visibility into say the second half of this year?

Or is it strictly, you know, a very short-term indicator?

I think in Europe, where people are less familiar with the nature of the rating process and maybe less familiar with the utilization of the public capital markets for their funding, that it tends to be a longer term process. In the United States, where virtually all companies are familiar with the public capital markets and the rating process, the process may provide less visibility into future issuance.

This is Raymond McDaniel.

I would just add that in the structured finance side of the business, I think the view that rating requests give us is a relatively short-term view, transactions are brought in and are turned around, typically on a fairly short time frame. The other -- the other major area to think about would be, as John just mentioned, the European Corporate Finance sector, and it does give us a bit of a longer term horizon as new companies are thinking about entering the public capital market. So, it's a better medium-term gauge in European Corporate Finance than it would be in either U.S. Corporate Finance, where we don't have as many new companies entering the process or in structured finance, which is a short-term view.

Thank you.

Last item, I'm wondering, John, if you or someone can talk about the success of the competitive environment? It looks like your revenue performance in the ratings business is maybe a fair amount better than what we're seeing from S&P this year. Can you speak to the competitive situation?

Well, frankly I don't think -- it usually takes -- S&P doesn't separately publish the results of their rating business, it generally takes a while to try to understand the information they have released to the market.

And frankly, the people in your industry may have a better view of this than we would have at the moment.

So, any hints that you could give us would be greatly appreciated.

You're doing better than me.

Thank you, sir.

Thanks.

Next question is from Chris Walters of First Manhattan.

Hi. I was wondering if you could comment on pricing going on in Europe versus such, and maybe also relate the pricing that you're experiencing in Europe rather than the U.S.?

Ray, will you?

I'd be happy to talk about our pricing in Europe, but I don't have a great deal of information on competitors' pricing in Europe, However, our pricing in Europe largely follows the same pricing model that we use in the U.S. We have both per issue pricing and what we call "frequent issuer pricing," which is more of a relationship-based pricing plan for issuers more active in the capital markets. We have used that in both the U.S. and Europe for almost a decade at this point. There are some minor differences in our pricing as we look at domestic markets, particularly emerging domestic markets, but that is not really a material aspect of our European model. So, really, I think it's fair to think about our pricing in Western Europe and in the U.S. as being substantially the same and including these two different fee plans.

Do you see pricing improving in Europe, or do you see more competitive pressure over there?

I do not anticipate an acceleration of our revenues Europe coming primarily from pricing. I would expect it to come more from the growth of the public capital markets in Europe, new relationships, more assets through the structured finance process, entering the market rather than being really a pricing-driven growth story.

And just two kind of housekeeping items, where do you think you can drive the tax rate this year? And what do you expect your interest rate to be on the KMV debt?

I would guess that our tax rate this year would be around 20 basis points lower than our tax rate last year. The reason for that is that we're taking -- we do have some income outside the United States and we - because the KMV acquisition is a somewhat unusual event for us, we're taking advantage of that opportunity to [reapportion] some of the cash outside the United States. That's why the tax rate this year may be somewhat higher than it would otherwise be. With regard to the financing of the KMV acquisition, as I mentioned, we have financed it at the moment through cash on hand and bank loans, and we are planning to subsequently finance it on a permanent basis.

As a result, at the moment, the financing costs are relatively low in the order of [lieborg] plus 50.

And at the point in time where we obtain permanent financing, for example, 10-year private placement, we would expect the financing at that point to go up to a market-based rate.

So, the dilution from kmv this year is on the order of 3 cents or so?

More or less.

Okay. Terrific. Thanks.

Right.

three to $5 million charge.

Right, I understand.

Thank you.

Again, if you have a question, press star and then the number one your telephone now.

At this time, there are no further questions.

Well, thank you all for joining us. We appreciate you attending our conference and thank you all for your support of Moody's.