穆迪 (MCO) 2002 Q2 法說會逐字稿

Good morning and welcome to the Moody's Corporation Second Quarter Results Conference Call. All parties will be in a listen-only mode until the question and answer session at today's conference. Also, at the request of Moody's Corporation today's conference is being recorded. If you have any objections, please disconnect at this time. I would now like to turn the call over to today's speaker, Mr. Michael Courtian, Vice President, Investor Relations and Corporate Finance. Thank you. Sir, you may begin.

Thank you. Good morning everyone, and thanks for joining us on this teleconference to discuss the Moody's results for the second quarter of 2002. This is Michael Courtian, Vice President of Investor Relations and Corporate Finance. Moody's released these results for the second quarter of 2002 after the market closed yesterday, and the earnings release is available on our website at "moodys.com". John Rutherfurd, Jr., the President and Chief Executive Officer of Moody's Corporation will be leading this morning's conference call. Also on the call this morning are Ray McDaniel, President of Moody's Investor Service; Peter Crosbie, President of Moody's KMV; and Jeanne Dering, Chief Financial Officer of Moody's Corporation. They will be available to answer your questions following John's remarks. Before we get started this morning, I'd like to call your attention to the cautionary language set out at the end of our earnings release. Certain statements my colleagues and I make today may be forward-looking within the spirit of the Private Securities Litigation Reform Act of 1995. This act provides the Safe Harbor for such forward-looking statements. I'd like to direct your attention to the management's discussion and analysis section of the risk factors and the risk factors discussed in our annual report on Form 10-K for the year ended December 31st 2001. I'd also like to point out the Safe Harbor Statement under Private Securities Litigation Reform Act of 1995 contained in our press release issued yesterday evening. These set forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. I should point out that some members of the media might be on the call this morning in a listen-only mode. And I'm now pleased to turn the call over to John Rutherfurd.

Thank you Michael. And thank all of you for joining us on today's call. On this call, I'm going to discuss the highlights of our results for the second quarter of 2002 and why they differed from our expectations at the end of the third quarter. Ray McDaniel will then comment on our international results and talk about our rating process, a topic which is attracting a lot of attention. I will then provide an update on our share repurchase program and conclude by discussing our outlook for the remainder of 2002. After my prepared comments, my colleagues and I will respond to questions. Moody's reported record results for the second quarter of 2002. Revenue rose to 271.5 million in the second quarter, an increase of 32 percent [compared] to 2001. Reported revenue included 12 million related to KMV which Moody's acquired on April 12, 2002. Excluding KMV's revenue, second quarter 2002 revenue would have been 259.5 million, up 26 percent year-over-year. Second quarter operating income of 147 million, rose 41 percent from a 104 million in the second quarter of 2001. Net income for the second quarter rose 78.7 million, an increase of 42 percent from 55.5 million in the second quarter of 2001. Diluted earnings per share for the second quarter of 2002 were 49 cents compared with 34 cents for the second quarter of 2001, an increase of 44 percent. Moody's strong second quarter results reflected revenue gains in all lines of business: ratings, research and Moody's KMV.

Moody's United States revenue totaled $176 million for the second quarter of 2002, an increase of 21 percent from the prior year period. International revenues of 95.5 million in the second quarter were 62 percent higher than the prior year on a reported basis. International revenues accounted for 35 percent of Moody's total in the quarter, up from 29 percent for the second quarter of 2001. Our operating margin was 54 percent, up from 51 percent a year earlier and above our long-term target. During the second quarter, we made excellent progress integrating the KMV acquisition. Both the integration of KMV and the Moody's Risk Management Service business and integration of the combination with Moody's Corporation, we're making excellent progress in organizing to serve our customers and rationalizing our product [offering]. We have retained the senior management from both KMV and Moody's Risk Management Services. Financial targets and incentive programs have been established, and results to date have exceeded our expectations. The financial details are included in the earnings press release. Now, I'd like to highlight a few of the reasons why our performance exceeded our expectations for the second quarter and comment on our forecast for the persistence of these reasons. At the end of the first quarter, we expected rising interest rates and significant decline in interest sets for these sectors of our business. We thought corporate refinancings would run their course, business investment and M&A spending will remain weak, depressing corporate issuance. Late driven mortgage activities would decline, and other issuance driven by consumer spending would lessen with declines in consumer confidence.

The macro economic and capital market conditions in United States during the first half of 2002 have been better than we anticipated and reflected a continuation of the momentum that grow Moody's strong results in 2001. Interest rates have been remained low and had been favorable for refinancings of financial institution and municipal debt. Consumer spending has continued over solid pace. The housing factor refinancing of existing mortgages and home equity loans have been particularly strong in the first half of 2002 and have accounted for around 20 percent of our financial results in excess of our expectations. Another 20 percent of our financial results in excess of our expectations have been due to International Structured Finance, both in Europe and Japan. For us, although, results above expectations have resulted from strong investor demand for financial institutions securities, which we expect to continue as long as this sector remains relatively unhurt by the anticipated financial reporting in the credit problem affecting some other sectors. Finally, in the public finance market, we expect new [active] volumes to remain healthy as long as interest rates remain favorable and lagging tax [receipts] may pay as you get financing difficult. In addition, we expect secular growth of corporate and structured finance in Europe to continue. While we still believe that the momentum which we have experienced in the first two quarters will flow, it is difficult to project either the timing or the pace of deceleration. Now, with that, I'd like to ask Ray to talk about our international business and how we manage our ratings.

Thank you John. Moody's continue to achieve strong growth in international markets during the quarter. While Moody's United States revenue grew 21 percent in the second quarter year=over-year, international revenue continue to grow much faster. Moody's non-US revenue for the second quarter of 2002 totaled $95.5 million rising 62 percent from the year earlier period. In aggregate, business outside the US rose to 35 percent of Moody's total revenue from 29 percent a year ago. When you look at markets outside the US from a strategic perspective, we see two secular forces, which we think, will continue to drive strong growth. [indiscernible] news for the public debt markets like companies that have traditionally relied on banks for their financing should involve the universal companies issuing securities that Moody's can rate. At the same time, increased utilization of structured finance, both in the range of asset contributed to securitization transactions and in expansion into new jurisdiction should create additional opportunities for Moody's. During the second quarter of 2002, structured finance were named the fastest growing area at Moody's non-US business. In Europe structured finance revenue was over 50 percent in the second quarter compared with the same period of 2001, driven primarily by the credit derivative segments. In Japan, revenue doubled over the same period, as banks continue to shut up absolute securitization. Revenue from corporate and financial institutions ratings outside the US was up almost 19 percent and over 50 percent respectively in the second quarter of 2002 compared with 2001. International [indiscernible] revenue grew 47 percent to over $9 million reflecting new customers and products. We believe growing acceptance of structured finance by European and Japanese issuance will continue to create opportunities for Moody's. And in the European corporate and financial institutions market, issuance remains difficult to forecast although the overall picture remains reasonably positive.

I would like to spend a few moments now discussing some enhancements we recently announced to our rating process. Moody's management pays considerable attention to continually improving our ratings process and delivering a better product to all the constituents who use our ratings as both good business and support to market confidence. This has probably never been more apparent than in the first half of 2002. Moody's recognizes the increasing influence of several related disciplines and determining in issuance creditworthiness. In particular, this becomes more important for our analyst to weigh the reliability of published financial report, the existing [constructual] complex of balance sheet financing, and issues of corporate governance in assigning ratings. [indiscernible] Moody's have announced a formation specialist team to help our rating analysts scrutinize issues in each of these areas. These teams will contribute topical research and commentary in the areas of specialization, participate with analysts and meetings with issues and then rating committees, and assist in technical trends, for example, to better understand the credit consequences of alternative accounting principles. As in fact, one of the Moody's goals is to maintain the transparency of our rating process. We'll keep the investment, issuer and adviser community informed as we implement this and any additional enhancements to the rating process. Now I'll turn the call back to John.

Thank you Ray. Let me now give you an update on our share repurchase program. Moody's [who're limited] to repurchasing the company's stock, when doing so creates value for a long-term shareholder. Our approach to share repurchase is to use a discounted cash flow model with conservative assumptions, to estimate a value for the company's shares and to repurchase stock opportunistically when the market price falls below that level. We use the same process for shares issued upon the exercise of stock option. During the second quarter, our general objective is to return excess cash to shareholders in the finance acquisitions with debt. And our approach to accomplishing these objectives, which I described above were in conflict. Perhaps, the market had higher expectations for our results than our own expectations. As a result, the company repurchased a minimum number of shares during the second quarter of 2002. Moody's continues to generate strong cash flow. And as we paid the short-term bank debt, which along with cash on hand was used to finance on KMV acquisition. The company had cash on hand of approximately $80 million at the end of the second quarter. I'd like to conclude my comments this morning by discussing our outlook for the full year 2002. There are many reasons for uncertainty in our forecast. Interest rates have been low for a lengthy period. We expect them to rise at some point, which would reduce some of the cyclical components of our current financial performance.

It is particularly difficult to forecast turning points in the macro economy in the capital markets. Therefore, we cannot provide a narrow range of expectations for our financial results for the balance of 2002. Our current range of expectations is for 2002 year-to-year percent revenue growth in the low-to-high 20s including KMV, with higher growth in operating income, and with 2002 diluted EPS ranging from $1.65 to $1.78. Now, my colleagues and I will be happy to take any questions you may have.

At this time, if you would like to ask a question, press "*" "1" on your touchtone phones. All questions will be taken in the order they are received. You will be announced by name when we are ready for your questions. Again, press "*" "1", if you'd like to ask a question. One moment.

Lauren Fine, you may ask your question, and please state your company name.

Yes. Merrill Lynch. Congratulations on another good quarter. I have a couple of questions for you. One on the cost side, you know; as you indicated at the end of the first quarter, you did increase your cost accordingly in structured finance. And I'm wondering if there is still more ahead given the continued strength and if we should expect the rate of increase of costs to rise in the second half of the year. And then I'll ask my follow-up questions.

Ray, would you care to comment on staffing costs in corporate finance -- in structured finance?

Sure. Lauren, this is Ray McDaniel. We are continuing our hiring in both US structured finance and International structured finance. We certainly expect that will continue through the third quarter and probably through the rest of the year based on our current projections.

Okay, great. And then on structured finance, you know, over the -- you know, if I look on a quarterly basis through last year and into this year, sequentially, we continue to see increases. Is there a point that you, sort of, know that it has to continue with a certain run rate to support a level of economic activity? And then related to that, [mostly] in the past, as you've been able to look overseas and say that they needed a certain amount of public debt relative to the total capitalization of the European markets; does that give you comfort that there is a lot more room for structured finance overseas as a proportion of total capitalization over there as well?

Lauren, it's Ray, again. The international markets, we think, have very good long-term potential, really, based on the different nature of securitization compared with how it's evolved in the US. It has been more of a corporate asset based business outside of the US. And as consumer borrowing increases in Europe and in Asia, if it begins to replicate consumer borrowing levels in the US; that would present a great deal of upside for the international structured finance business. In the US, we -- as we mentioned in the script, part of the story is the cyclical refinancing that has been occurring in the mortgage and home equity loan sector. So while we continue to expect to see secular growth in asset-backed securities as consumer borrowing increases over time and in complex instruments such as CDOs and in the commercial mortgage-backed securities area. There are more cyclical factors affecting the US business than we see outside the US. Let me know if that answers the question for you.

Yes, you did a great job. Thanks.

Douglas Arthur, you may ask your question and please state your company name.

Morgan Stanley. Public finance -- obviously, not a huge part of the business, but it did slow -- it looks like it did slow a little bit in growth rate from Q1 to Q2. And I've heard from others that, you know, the outlook for the rest of the year is strong. Particularly, as cash revenues are coming in weaker than expected. Can you comment on the outlook there for the rest of the year particularly in the US?

We do see continued strength in the municipal market. We do not expect to see growth rates in the third and fourth quarters year -- comparing year-on-year that we did in the first and second quarters. In part, because we believe that much of the refinancing that was available has really been wrung out of the system in the first half of this year; and also, because the fourth quarter of 2001 was a very strong quarter for municipal issuance. And so we have some tough quarterly comparisons.

And just as a follow-up -- there was -- there's been discussion in the journal certainly recently that in -- I don't have an up -- I don't have the latest week of data; but that the [Straight] corporate new issue marketing has slowed down ahead of August 14th. Are you seeing that or is that not impacting volume levels right now? And then, I guess, if it has slowed down; do you expect it to sort of pick back up after we get through the 14th?

Okay. I'd be happy to try and answer the question on the Straight Corporate issuance. Just to follow up with one other comment on the municipal volume expectations; I should add that because of the events of September 11th last year, we did see really a shutdown in the market for about three or four weeks following the 9/11 events. And that will have -- will certainly affect the growth comparison for the late third quarter period and early in the fourth quarter period. I would remind everyone though that we did see a strong fourth quarter in municipal finance last year. As far as straight corporate debt issuance is concerned, yes, we did see a slowdown late in the second quarter in corporate issuance. Second quarter issuance was down year-on-year, and we do not expect to see much strength in that in third quarter and fourth quarter. As you point out, there are some questions around issuance activity ahead of the August 14th deadline. We also do not expect a significant ramp-up in business investment or merger and acquisition activity in the near term.

Great. Thank you.

Joe [LaManna], you may ask your question, and please state your company name.

Yes, William Blair. Ray, I have a follow-up question on the comments you made regarding the growth in the international structured finance. I wonder if you'd elaborate on your point that a lot of that growth came from -- or some of that growth came from new assets and new jurisdictions. Can you elaborate on that?

Sure. We have seen assets, particularly corporate assets being securitized in continental Europe through the credit derivatives market -- CDO market. And that has taken on a much larger share of the international business than it has of the US business. So what we have seen is an expansion of assets being contributed, particularly corporate assets being contributed into the synthetic CDO market and the straight CDO market in Europe. We've also seen a growth in the CDO market in Japan, and an enabling legislation has just been passed in Taiwan, which should open that market for securitization; and we expect to see good growth in that market, albeit off of a small base.

And do you think this -- the expansion of the corporate assets being securitized -- is that more of secular trend or is it some cyclical factors going on driving that?

My speculation would be that it is partly driven by the current credit environment where transparence of risk and managing the risk -- the credit risk component of the asset portfolio is particularly important right now. But we would also expect to see the ongoing management of credit risk by financial institutions and transfers between banks and non-bank financial institutions as far as managing our credit. And we expect to see that continue on a secular basis.

Okay. Thank you.

John Britton, you may ask your question, and please state your company name.

Yes, good morning. Select Equity. John, I was wondering, can you just discuss a little bit more in depth what is going on at KMV right now, where they are relative to your expectations, and what your expectation is for the balance of the year particularly as the CDO markets in Europe and Asia take off?

Well, let me comment just very briefly that, as I mentioned, we believe that KMV is ahead of our financial expectations. That was due to slightly higher operating performance in the first half than we had expected, slightly lower purchase amortization -- purchase accounting amortization -- and finally a lower financing cost. We're also ahead of my expectations in terms of operating performance getting our old Moody's Risk Management Services -- which we refer to as MRMS and KMV together. And if you wouldn't mind I'd just like to ask Peter Crosbie to comment -- give us his thoughts on that if he would.

Okay. This is Peter Crosbie. Our focus today has been on organizing a combined sales and service team, building a combined research and development agenda. We've not done integration of the development teams, but the research agenda and the development agenda for the product development going forward is now being coordinated and we've integrated our product management organization. So to date, we're still operating largely on an additive program from the two firms KMV and Moody's Risk Management Services; but with the new organizations in place we are expecting that we will be able to take advantage of the other combined organizations as Sprint starting perhaps in the third or fourth quarter of the year.

And have you seen any part of the above budget plans falling out directly from the expansion of the CDO market or CDO issuance in Europe in particular?

No, that you know, ad products are used by both CDO investors, I think and by our -- you know, institutions putting together issuance -- our CDOs; but there is no direct product linked at this time.

Okay. Very good. Thanks.

Your next question is from Kevin Gruneich. You may ask your question and please state your company name.

Hi, this is actually [Michael Maud] sitting in for Kevin Gruneich from Bear Stearns. I have two questions. Can you tell me what compensation as a percentage of total operating expenses were in the quarter and also what incentive [count] as a percentage of total compensation was in the quarter?

Jeanne, could you respond to this question?

Sure, John. As a percent of total compensation -- you're [inking] about incentive compensation point. Is that right? I am sorry.

Yes. Well, there is...

Okay. I think one of the questions that you asked was the translate compensation cost as a percent of total compensation. [indiscernible] your question correctly.

Yes, that's correct.

Okay. And in the -- I think we have talked about this in the first quarter, where the incentive compensation cost was in the range of about 20 percent, a little more of total compensation in the first quarter. In the second quarter, that percentage rose a couple of points, and compensation as a percent of total expense in the second quarter was about two-third.

Thank you.

John [Neff], you may ask your question, and please state your company name.

Hi, John Neff from William Blair. Just one question. Just was curious if the share repurchases have accelerated in this quarter so far from the second quarter's pace?

Well, because the results of the second quarter that we just announced yesterday were higher than the expectations that we had announced at the end of first quarter, when it became apparent that that was going to the case, we've had to suspend share repurchase. We will recommence share repurchase generally according to the ways that I outlined, as soon as it is legally permissible for us to do so.

Thank you.

[Chuck Greg] you may ask your question and please state your company name.

Chuck Greg from Atlas Capital in Dallas, Texas. Good morning. A handful of questions actually. First, with regard to share repurchases, can you give us a little bit of a flavor as to the ingredients of your valuation model? Secondly, despite a very strong first half, it sounds like you're basically holding guidance flat with consensus [casual] earnings in the second half of the year. I was hoping you could speak a little bit about that and possibly about maybe some seasonality point into that? And then finally, if you could just talk a little bit about KMV margin and anticipated growth rates or get to how you arrived at a fair purchase price of $210 million? Thank you.

Surely, the first question was to talk about the ingredients of the valuation that we do for share repurchase. We basically take somewhat conservative growth assumptions that frankly at the end of the first quarter were over the next two years somewhat less than what we had announced as our long-term earnings growth target simply because 2001 was so strong, and then returning to the long-term growth target in the third year out. The valuation that we did at the end of the second quarter also did not include the KMV acquisition, which we completed on April 12. We also make an estimate of the amount of cash flow that we will need to use to repurchase shares, which will be issuable in the future upon the exercise of options, assuming that we maintain our current option program. As you may remember, our current option program provides a flow of options each year of 2.5 percent of the primary number of shares outstanding.

And then we make assumptions about -- with regard to options -- about the growth of the share price, which generally corresponds to the growth of cash flow and to the volatility of the stock. And then we make some assumptions about terminal value, some number of years in the future and we generally take it out, you know, somewhere between five and ten years to get to the point where we're using the terminal value assumptions and a range of EBIDTA multiples. Now, I don't know whether that fairly answers your question, gives you the information you'd like. If it doesn't, I'll be happy to comment further.

Discount rate?

The discount rate that we use is the current term structure.

There are no equity risk premiums?

Yes, we do use an equity risk premium. We have been using across the entire term structure about a 3 percent premium.

The second half?

Say again.

My second question was referring to...

Oh sure, your second...

...second-half guidance.

Yes, basically what we are doing is flowing through, as you correctly pointed out, the overage in the second quarter. In other words, we are flowing through an additional 11 cents, and at the low end, we were at a $1.54 to $1.57. We're now at a $1.65 on the low end, and in view of the fact that the results in the second quarter have been quite different than our expectations at the end of the first quarter which suggests that we need to be skeptical of our forecasting ability. Well, we've increased the range, as you've seen, to 13 cents there from the 3 cents that we were -- range that we had at the end of the first quarter.

Is seasonality a factor at all in the fourth quarter by either the US or the European market?

Well, in the past -- and you can see this on the business line chart, the quarterly business line chart and our investor presentation -- in the past, the fourth quarter was the strongest quarter in structured finance, and we assume that that was true because our corporations were trying to restructure their balance sheet before the end of the fiscal year and investment bankers were trying to earn their annual bonus.

Imagine how that happens?

However, in the first quarter, the [solitude] pattern, which had persisted for several years whereby the first quarter was lower than the fourth quarter, was broken. So we really don't know whether that seasonal pattern in structured finance will reestablish itself. In the rest of the business, there tends not to be any seasonal pattern.

Right.

Would you like me to comment on KMV?

Yes, I'm sorry the last question was KMV; $210 million purchase price, it looks like at the time the revenue run rate was about 45 million or so growing 30 percent to 40 percent a year with cash flow from ops in the $8 million to $9 million range on an annualized basis. Can you help us understand if just the case over the purchase price, the growth, the metrics, things like that are used to arrived at that price, etc.?

Well, I think that I will just say, make two comments and then we can see if that's responsive. The first thing was that there were other companies that were interested in KMV. The second comment is that we have combined the KMV business with our MRMS business, and we're in process of doing that as Peter has remarked. And one of the advantages of doing this is that we think we have a lot of cross selling opportunities; we also have margin improvement opportunities because we were investing in our own Moody's Risk Management Services area to catch up with KMV. And now that we have acquired KMV, we do not need to do this so that our long-term objective in 2005 is that KMV and our MRMS activity will have revenues of 200 million and taxes before amortization of acquisition -- I'm sorry -- pre-tax before amortization of acquisition purchase price of 45 million and after that -- after amortization of 38 million. And it is really in the context of our future expectation for those results that we do believe that the purchase price was a very good price for our shareholders. We also think that beyond 2005 -- that KMV can grow at a very healthy rate, probably for the next decade at least.

So that -- we believe that the valuations that ought to be put on that 2005 result represents a very healthy premium even after, let's say, a 14 percent discount rate to the price we actually pay.

Fine. So do you see substantial operating margin expansion as you grow this business integrated to cross selling?

Correct. In other words, the, you know, the 45 on 200 million is around 22 percent, pre-tax.

And I guess new business right now is in the 48 to 54 percent range?

We -- it is but we're not aware of too many opportunities that we have to buy another one like that.

I understand; thank you very much.

William Bird, you may ask your question and please state your company name.

Salomon Smith Barney. Just two questions -- one point of view on relative share gains versus S&P recently; and secondly, I was wondering if you could just discuss a little bit what if any changes, you know, the way you conduct business and [how likely you get a turnabout] from recent credit debacles, thank you?

Well, will, thank you. We've always said that because S&P does not separate the rating segment from the publishing segs, that it's very hard for us to really understand what their rating revenues are and that people who follow McGraw-Hill, such as yourself, may have a better view on this than we do. We think we're gaining on them primarily because we think we're stronger in structured finance than they are and because we have a greater percentage of our revenues based on transaction-based pricing at a time of relatively high volumes. But if you actually have some views as to the numbers, we'd be delighted to hear them. If you're passing on that, I'll ask Ray to comment on your second question, which is, you know, do you see changes in the business based on some of the defaults that have occurred recently.

Sure. I think the important change in the business is our acknowledgement that we cannot simply be a consumer of published financial information, which has really been the way that our credit analysts have approached upon the manual analysis -- company analysis historically. That's, in large part, what's been driving the announcement to enhance the analytic process with specialists in disciplines that we think are particularly influencing credit quality right now, including accounting and corporate governance. What we are not doing, however, is changing the way that we are trying to manage the rating system. We are not trying to incorporate more volatility in the ratings; we are trying to give as much as clarity and transparency as we can to our thinking and to potential rating changes and naturally through our press releases and our published commentary.

Thank you.

[Daniel Rollo], you may ask your question, and please state your company name.

Hi, [MRS] Securities. Congratulations on the quarter. This may be a sort of a larger type of question, but would you have any observations on the outstanding litigation as regards sort of the fundamental activities of the business and your prospects for defense against securities litigation? Thanks.

Well, in the United States, we believe that our position with respect to litigation is very favorable. The reason we believe that is that there is a case -- Jefferson County, Colorado -- against Moody's, where Jefferson County sued us because we issued an unfavorable opinion on some bonds that they were issuing and they sued us for interfering with the bond issuance process and they also sued us under the Antitrust Act. The district court held that our ratings were -- opinions that were protected under the first amendment and that decision was appealed to the Circuit Court and was affirmed. So we believe that at least in the United States where we do have the first amendment that our situation is quite favorable. Outside the United States, there is, of course, no first amendment; and the situation would depend on the particular jurisdiction.

Thanks.

At this time, I'm showing no further questions. As a reminder, to ask a question, please press "*" "1".

Operator, should we give it just a minute or two just to see if anyone else queues? Just like a minute?

Okay, sir. We do have a few people queuing up at this time. One moment.

Okay, let's give them a second. [indiscernible] some Slow Pokes.

Okay. Asa Graves, you may ask your question. And please state your company name.

Hi. Asa Graves, Wachovia Securities, and a proud member of the Slow Pokes. If you could just quickly -- most of my questions have been asked; but if you could go again, John? I think you said you had cash of 80 million at the end of the quarter and you had paid off all the short-term debt. What is the current debt load at the end of the quarter?

Well, we -- and yes, Asa, and thank you for joining us in whatever capacity. We've had the 300 million of debt outstanding that we had issued at the time of the spin.

Right.

You remember we did that because we were taking on some of the obligations that Dunn & Bradstreet had; and we also raised a few additional money to commence our share repurchase program. So that's the current debt outstanding.

Okay. And that's 761. And this might be early, Jeanne, with the balance sheet; we're not -- but do you have an idea of what the cash from operations was for the quarter and the CAPEX?

On [indiscernible], I think, you're right. It is just a little bit too early. We plan to file our 10-Q in a couple of weeks, and then we'll have that information available.

Okay, that is good enough. Thanks a lot guys, great job.

Thank you, Asa.

[Chitra Sundaram], you may ask your question, and please state your company.

Yes, thanks. JP Morgan. Just a question on the compensation of the percentage of revenues. I think, Jeanne, you said it was 67 percent. Correct me, if I am wrong. But John, have you guys planned for any kind of possible slowing in any other forms of debt issuance, if we start seeing mildly rising interest rates maybe some time in 2003? I mean how do you keep track of how compensation costs are rising? And in that regard, could Jeanne also indicate where the 67 percent stands relative to the historical percentage, say in, you know, the low I guess would have been in say 2000 and what the high has been maybe in 93? You know, so we get a sense of what the rating tends to be like?

Chitra, I am not exactly sure I understand your question. So let me -- let me try. Our compensation programs for managing directors and above are based on our long--term growth rate target, which as I think you know our 12.5 percent revenue in operating income growth and 15 percent EPS growth.

I guess I was coming from actually the angle of the fact that you all have continued -- you know, the hiring has continued, I think, pretty strongly. It might be that they've only been in select segments, you know, like you've mentioned structured finance, but I'm just trying to understand. How the hiring plans are going to be controlled relative to what you all see in the marketplace -- this kind of, you know, slowing issuance in any segments, as we go into 2003, particularly if you start seeing steadily rising in straight environment maybe sometime in 03?

Well, let me try -- let me try this answer. When we are thinking about this, we are definitely going ahead with the plans to hire the specialist teams, which Ray has commented on, because we believe that they are necessary to deliver the sort of product to the market, which the market wants at this point. Based on volumes, we will also either hire or not hire additional individuals in the fundamental franchises which are corporate finance and financial institutions. We do expect continued growth in structured finance, especially outside the United States, and we do have hiring plans for structured finance at the moment, both within and without the US. If volumes moderate next year, we would expect part of that growth to be paid for by reduced incentive compensation. Does that...

Yes, that's very helpful. And Jeanne would you be able to just comment on where the 67, am I right that you said the total comes to 67 percent of -- was it revenues or total cost?

Right, Chitra. The -- in the second quarter compensation expense was about 2/3rd of total expense.

Right.

And 2/3rd is the ratio that has actually held up rather well for the last couple of years. I think you[indiscernible] 2000 and 2001. I don't have the 2000 specifics in front of me; what I recall that that ratio was pretty close for that year as well. And in terms of our fluctuations quarter-to-quarter, the ratio of compensation expense to total expense can fluctuate within the 60; it may be into the low 70s depending on other expenses that we've had in our results in that quarter and also depending on as [general visit] to on the level of government's expense that is provided in a particular quarter, which in large part is dependent on the strength of the companies' results since that's the key metric in our senior management volume plan.

Right. Thank you.

Chuck Greg you may ask your question and please state your company name.

Hi, it's Chuck Greg from Atlas Capital again. I hope we can get a little more color on KMV; you set a $200 million revenue target in 2005? Does that include any of the revenues that Moody was already generating in that area that the...

Yes, it does. We had what -- 38 million of Moody's Risk Management Services revenues in our plan for 02, and now it's up from what -- around 30 in 2001 from the 200 million -- does include that number. Just for one more bit of color, we expect revenues for the combined entity to be slightly under a 100 million in the full year of this year -- on the -- if we were to include all of KMV's revenues for this year which is obviously not going to be the case, because we only acquired them on April 12.

All right. Thank you very much. And then finally, the tax rate. You had said that over time you expect the tax rate to come down. It looks like it held steady in that 44 percent range. Can you talk a little bit about what you hope to accomplish next 6 to 12 months on the tax rate?

Jeanne, will you comment on that?

Sure. I think that we have said in the past that as a part of our normative targets for EPS rose, we would expect over time about 0.5 percent a year due to lower tax rate. Our high level objective would be to reduce the tax rate from about the 44 percent range where it is today down to the 40 percent range, and I should comment that one reason we have a relatively high tax rate today is our high concentration of operations in New York, which is a very high tax rate due [in sections] to corporation. As our business outside of the US continues to expand, there will be a natural reduction in our tax rate since areas like UK, for instance, having more favorable tax environment, and also we will be over time undertaking tax planning activities on that were not prior to our stable of initiatives for Moody's as a standalone company and the tax planning activities were of a nature that were quite normal for corporations in terms of organizational structure, treatment of intellectual property, etc., and those activities will also help us to reduce our tax rate over time.

Thank you very much. Keep up the great work, guys.

Thank you.

As a reminder to ask a question press "*" "1". I'm sorry, no questions sir.

As there are no more questions, I would just like to thank everybody for joining us on the call, and we hope that you will be with us next quarter. Bye.

And this concludes today's conference call.