穆迪 (MCO) 2002 Q4 法說會逐字稿

Good morning and welcome ladies and gentlemen to the Moody's Corporation fourth quarter and full year results conference call.

At this time I'd like it to inform you this conference is being recorded and all that participants in are a listen-only mode.

At the request of the company we open up the conference for questions and answers after the presentation.

I would now like to turn conference call over to Michael Courtian vice president and investor relations and corporate finance much please go ahead, sir.

Thank you. and good morning, everyone, and thanks for joining us on this teleconference to discuss Moody’s results for the fourth quarter of 2002 and the full year.

This is Michael Courtian, Moody's vice president and investor relations and corporate finance.

Moody’s released its results for the fourth quarter of 2002 and the full year after the market closed yesterday.

And the earnings release is available on our web site at IR.moody's.com.

John Rutherfurd Jr.

President and Chief 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 investors service and Jeanne Dering, Chief Financial Officer of Moody's Corporation.

They’ll be able to answer our questions following John's remarks.

Before we get started, I'd like to call your attention to the cautionary language set out at the end of our earnings release 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 for the safe harbor for such forward-looking statements.

I’d like to direct your attention to the management discussion and analysis section and the risk factors discussed in our annual report on form 10-K for the year ended December 31, 2001.

I'd also like to point out the safe harbor statement under the 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.

Please turn the call over to John Rutherfurd.

Thank you, Michael and thank you all for joining us on today's call.

On this call I'm going to discuss the highlights of our results and comment on Moody's U.S. business.

Next Ray McDaniel will review our international results and provide comments on the regulatory environment.

Following Ray's comments, I will give you a update on your share repurchase program and conclude by discussing Moody's outlook for 2003.

After the prepared comments, my colleagues and I will respond to questions.

Moody’s reported robust results for the fourth quarter of 2002.Revenue rose to $271.9 million in the fourth quarter, an increase of 23% from $220.9 million in the same period of 2001.

Reported revenue included 16 million from KMV which Moody's acquired in April of 2002.

Excluding KMV fourth quarter revenues grew 16% year over year.

Fourth quarter operating income of $129 million rose 16%, from $111 million in 2001.Net income for the quarter was $69.8 million, increase of 19% from $58.8 million last year.

Diluted earnings per share were 45 cents, increase of 22% of fourth quarter last year.

Reflecting a slightly lower effective tax rate and -- and impact of share repurchases.

For the full year 2002, Moody's reported outstanding results following our very strong performance in 2001.Revenues surpassed 1 billion in 2002, and year to year growth was more than 200 million dollars, or 28%.Excluding KMV, revenue for 2002 was$981.2 million, up 23% from the prior year.

Operating income of $538.1 million for 2002 was up 35% from $398.5 million for 2001.

Net income for 2002 was $288.9 million, an increase of 36% from $212.2 million for 2001.Diluted earnings per share for 2002 were $1.83, an increase of 39% from $132 for 2001.I'd now like to discuss some highlights of our fourth quarter results.

Moody’s revenue in the fourth quarter was somewhat higher than we had expected, based mainly on strong structured finance activity.

In the United States, revenue totaled $175.4 million for the fourth quarter, year to year growth of 18% on a reported basis, and 14% excluding KMV.

International revenue was $96.5 million in the fourth quarter, 33% higher than in the prior year period on a reported basis, and 20% higher excluding KMV.

International revenues accounted for 35% of Moody's total in the quarter, up from 33% for the fourth quarter of 2001.Revenue in the fourth quarter was about 24 million higher than the third quarter.

Reflecting the year end strengths that we have typically seen in structured finance.

Both within and outside the United States.

As well as strong sales of software and training products in KMV.

Fourth quarter revenue was almost equal to the second quarter, which was our record quarter.

As increases in structured finance and MKMV, were all set by lower revenues in corporate finance and financial institutions in the second half of the year.

Our operating margin in the fourth quarter, which was about 47% was notably lower than both the prior year margin and the first nine months of this year.

During the fourth quarter, we accelerated investment spending in several areas, and we made a large contribution to the Moody's foundation, which are noted in our earnings release.

We also had nonrecurring costs at MKMV related to management succession and for patent licensing matter that relates to our pre-KMV business.

Now I'd like to ask Ray to talk about your international business, and the status of the SEC's review of credit rating agencies.

Thank you, John.

Moody’s continued to achieve strong growth in international markets during the fourth quarter.

Moody's international revenue grew 33% to 96 and a half million in the fourth quarter, growth of 20% excluding KMV.

Full year international revenue rose 45% in 2002, to $342.3 million, increased 36% excluding KMV.

International revenue was 34% of Moody's total revenue in 2002, up from 30% in 2001.

We continued to see attractive environments for long growth in Moody's international business.

In the ratings and research business, which we were we referred to as Moody’s Investor Service or MIS, we continued to believe that increased utilization of structured finance both in the range of assets being securitize and expansion to new jurisdictions, will create opportunities for Moody's.

We have seen the effects of the secular trend in Europe and Japan, and expect that growth in other geographies will follow .We see the large number of unrated European corporation as an important universe of potential issuers for securities for Moody's to rate.

And although the pace of bank disintermediation, corporations borrowing directly from the public debt capital markets rather than through banks has progressed somewhat more slowly than we had anticipated.

We have still seen good growth in European corporate and financial institutions rating business.

And we expect to continue to see good long-term growth coming from that process.

At the same time, our research business is growing nicely, as more and more market participants value Moody's opinions and commentary., Finally, we expect international growth to continue at MKMV as companies adopt and refine tools for credit risk management and as banks respond to the new regulatory environment known as BALSO-2 now I'd like to make brief comments on the ongoing SEC investigation of the credit ratings industry.

As many of you know, the SEC published a report on the role and function of credit rating agencies.

The report summarized the first stage of the SEC's review process and identified areas that the commission will study further.

In our view there are several important principles reflected in the SEC's report.

First, ratings and rating agencies have been have become very consequential in the global capital markets.

Second, rating business has potential conflicts of interest.

We believe we manage those conflicts effectively and believe regulators wish to ensure that on an industry wide basis going forward.

Third unlike some other watchdog industry, no determinations were made of improper actions by any rating agency.

The next phase, SEC will develop potential recommendations for guiding the future role of function rating agencies which will be documented in a concept release due in late March.

This concept release will be followed by comments from market participants, other regulators and public and may be followed by proposed regulations and/or legislation later in the year.

We have worked closely with the SEC to assist them in their review and look forward to continuing to do so.

With regard to the question of additional recognized rating agencies, let me quote from the SEC's report.

Quote, the number of nationally recognized statistical rating organizations may very well increase in the foreseeable future, unquote.

We do not believe that Moody's value contribution to the market and as a result to our shareholders is dependent on the current industry structure.

So we are comfortable that we will continue to succeed regardless of new industry participants.

The rating agency industry is also attracting attention outside the United States, among finance ministers, and securities regulators.

Since an increasing part of our business is outside the United States, we recognize the importance of being a constructive participant in all global markets.

Now I'll turn the call back to John.

Thank you, Ray.

Let me now give you a update on our share repurchase program.

Moody's is committed to returning its excess cash to shareholders in the form of share repurchase.

Moody's took advantage of periods of relative weakness in the price of its stock during the fourth quarter and repurchased 5 million shares during the period at a total cost of $227 million.

That brought our cumulative stock buybacks since Moody's was spun off from dun and Brad street in September 2000, to 19.5 million shares at a total cost of $709 million dollars.

This includes 6 million shares repurchased to offset stock issuance under employee stock plans.

At the year end, Moody's had approximately $341 million dollars remaining under the $450 million dollars share repurchase program that the board of directors authorized last October.

We continue to anticipate completing the current share repurchase authorization at least by mid 2004.I would like to conclude my comments this morning by discussing our outlook for 2003.There is considerably more uncertainty about the global macro economy and the global geo-political situation now than at our last conference call at the end of the third quarter.

Nevertheless, despite the increased uncertainty, and somewhat better than expected results in the fourth quarter of 2002, we still expect that Moody's EPS will grow in the low double digits in 2003.

Before the impact of expensing stock options.

In Moody's rating and research business, we anticipate moderate growth in global structured finance revenues in 2003.Despite a significant decline in the housing sector and residential mortgage refinancing in the United States, and weakness in the growth of consumer debt outstanding.

Affecting asset-backed finance in the United States.

In global corporate finance, we expect to see moderate overall revenue growth in 2003, despite low business investment and mergers and acquisition activity in the United States.

In the United States public finance sector, issuers will likely continue to rely on public debt as tax receipts remain weak.

Nevertheless, because of an expected decline in refinancing activity, our outlook for public finance revenue is modestly lower in 2003.

We also expect a continuation of the strong growth from the research business, although not at the exceptional 30% rate that we saw in 2002.

Finally, we expect healthy growth in the Moody's KMV business.

Moody’s expenses for 2003 will likely reflect continued investment spending on enhanced rating practices, technology initiatives, and product development.

As well as continued hiring to support growth areas of the business.

Moody's expects a slight decline in operating margin in 2003, compared to the very high margin level in 2002.

Overall for 2003, Moody's expects that percent revenue growth will be in the mid to high single digits on a pro forma basis, as if we had owned KMV for all of 2002.On a reported basis, we expect that percent revenue growth will be in the high single digits.

With the impact of a lower effective tax rate and share repurchases, we expect the diluted EPS will grow in the low double digits before the expense -- before the impact of expensing options, which is expected to be about 4 cents a share.

The company has some financial flexibility due to lower planned performance-related compensation expense and charitable contributions, compared with 2002.

Should the economic environment or Moody's revenue be weaker than we expect.

Now my colleagues and I will be happy to take any questions that you may have.

Thank you.

Sir, the question-and-answer session will begin at this time.

If you're using a speaker phone, pick up the handset before pressing numbers.

Should you have a question, press star-1 on your push button telephone.

If you wish to withdraw that question, please press star-2.Your questions will be taken in the order they are received.

Please stand by for your first question.

Our first question is Kevin Gruneich with Bear Stearns.

Please state your question, sir.

Thank you.

A few questions.

Number one, I was wondering if you could describe what incentive compensation was as a percent of full year staffing cost.

And what your FTEs were at year end '02 and at least pro forma what that was in terms of an increase and if I could follow up.

Sure.

Jeanne, can you take those questions?

Kevin, for the full year 2002, incentive compensation quotes were roughly 25% of total compensation.

So consistent with what we've explained before in years when the company's growth versus the prior year is (inaudible) or incentive compensation odd (inaudible) are on the high side of that 15 to 25% range that we've talked about in the past.

In terms of the staffing at the end of the year, the total company staffing at the end of 2002 was a little bit over 2000 people.

Now, that includes the people that came with the acquisition of KMV and it does not include staffing that relates to our joint ventures in Korea and Argentina.

On a pro forma basis versus the prior year, the headcount increased by about 180 people, so without KMV the year end headcount was about 1850, and that's an increase of about 180 from last year, which is roughly 10%.

Great, thank you.

And just a follow-up on expenses.

On paragraph 1 on Page 3 of the press release, you talk about some -- what appear to be unique expenses in Q4, and I think the only one you isolated in the press release was the (inaudible) dollars which is consistent with I think the year ago contribution.

Could you isolate the expenses for these other items?

Well, I think my recollection is that the expenses for management secession, and at MKMV and the settlement of the intellectual property matter in and MKMV that related to the business before we acquired MKMV with $3.1 million dollars. .

And you expect that will not -- there's no reason for that to recur in coming quarters?

There's no reason for that to recur.

And in terms of the investment spending on enhanced ratings practices --.

Jeanne or Ray, can you refer to that?

The rating practices that we are talking about, we did appoint a number of credit officers for various aspects of the rating business, and we have also hired individuals for the specialist team of accounting and corporate governance.

We have a plan to hire people in the area of securitization and risk transfer, but have not to date brought any of those people on board.

Jeanne, do you know -- Ray will comment on the number.

Yeah, Kevin, just to -- just to break it down a little bit also.

We had investment in human resource, bringing people on board, and that was about a million dollars in 2002.

And that will grow in 2003.

We also had some investments in additional data sources and service as part of our enhanced analytic initiative, and that was less than a million, probably about half of that.

Thank you.

Operator: Thank you.

Our next question comes from Edward Atorino with Blaylock and Partners.

State your question.

Kevin asked the bulk of my questions.

I have a second question.

What were year end shares that the amount shown in the -- the average for quarter, right?

Ed, the year end shares outstanding were about 149 million.

That’s -- were outstanding at the end of the year versus what's in the summary financial information in the earnings release shows the average shares for the quarter.

And could you -- would you be willing to give us a peek into the early '03 trends particularly in the non-structured finance categories?

Well, you know, it's really -- we haven 't finished thinking about January, so we're really not in a position to make any comments other than there's nothing in January that's inconsistent with the forecasts for the full year that I've shared with you.

Thank you.

Thank you.

Our next question comes from Joe LaManna with William Blair.

Please state your question.

Yes, I was wondering if you could give us a little more color on the structured finance business in terms of the components of it, and in terms of the fourth quarter what drove the growth, you know, to what extent was the mortgage finance business -- can you quantify that, how much that drove the structured finance growth?

Joe, it's Ray McDaniel.

I can't quote you the growth percentages for each segment of the business, but I can talk about it a little more generally.

We saw very strong -- continued to see very strong activity in the U.S. residential mortgage sector, but the fourth quarter we also saw good activity in CDOs and in the commercial mortgage security sector in the U.S.

So we had pretty broad-based strength in the U.S. structured finance market.

We also continued to see very strong growth in European structured finance, as it has been, that was driven by the CDO market which continues to be very strong.

But we also saw good growth in the AVS, and in residential mortgage securities in Europe.

And finally, it was a very strong quarter for commercial mortgage securities being issued out of Japan.

On the CDO-- on the CDO growth; that driven largely by rates or is there other factors going on driving that strong growth?

It is being, in Europe it is being driven large largely by the financial institutions moving credit risk into other sectors of the investment economy, as part of their management of credit risk in what is a difficult environment.

In the U.S., it has been driven, as you know, by spreads and the opportunities between high investment grade and lower investment grade securities. .

Okay, thank you.

Thank you.

Our next question comes from Carl Choy (ph) with Merrill Lynch.

Please state your question, sir.

First of all, on the public finance front, you mentioned in the release that you expect refinancing to be down in the -- in the year 2003, just wonder if you could give me a little bit more color.

And then a couple of housekeeping items, if you could quantify what kind of improvement in tax rate do you expect in '03 and the effect of effective interest rate at the end of the year.

Sure.

Let me take the first question, Carl.

Often when we think about future patterns of issuance, we essentially survey the investment houses for what they -- think issuance will be.

Generally, the sell side forecast of public finance issuance, first of all they're very wide, and second of all the central tendency of those forecasts is down a bit.

We believe that the reason for that is not because of a lack of desire to finance infrastructure in other projects or a pickup of tax receipts.

But it is simply that there have been quite a few refinancing based on lower rates this year, and we are -- and the forecast do not have as much refinancing in them next year.

I believe, for example that Merrill is projecting a decline of about 20% in municipal issuance, or forecasts for the public finance business is down low single digits, not anywhere near that.

So I hope that gives you the information on the public finance sector? .

That's helpful, thanks.

Do you want to ask Jeanne some questions about the numbers?

Yes, I have a question regarding the average interest rate at the end of the year, as well as the expected improvement of tax rate in '03.

In terms of the improvement in the effective tax rate in '03, at this point we are expecting a improvement in the range of 150 basis points and our effective tax rate.

In that -- and that is due to two main factors.

One is the fact that as the company's operation outside of the U.S. and importantly, outside of New York, continue to grow at a relatively fast rate, we benefit from lower effective tax rates in those jurisdictions.

And secondly, we've been able to implement some statutory structures that reduce our tax rate, the most notable of which is the New York state captive insurance company that we talked In terms of our effective borrowing rate as of the end of the year, we have outstanding the $300 million private placement, which is at an annual interest rate of about 7.6%.

And then the borrowings under our bank line of credit, or at a rate that is roughly equal to LBO(inaudible )-plus about 50 basis points so the effective cost of our short-term borrowing was around 2% at the end of the year. .

Thank you.

And I should add, Carl, that we are considering permanent -- more permanent financing in light of the share repurchase activity that we've been undertaking, as well as other strategic opportunities that we may have.

So if we did implement more permanent financing, clearly our costs would be higher than the current short-term rate.

And if that -- does that factor into your guidance for year?

We haven't at this point since we haven't finalized any plans, it may certainly be what we do, what we decide to do may not be totally factored into our plan, but we have made some -- we have made some allowance for that and we don't think that any difference between what we're thinking about today and what we may wind up doing would have an impact on our earnings per share.

Thank you.

Thank you.

Our next question comes from Brandon Dobell with Credit Suisse First Boston.

A of couple questions.

Can you give us an idea of what the stock option expense would have been last year, and second, kind of more generally on KMV, give us an idea of how you think of the addressable market opportunity in terms of what institutions might be purchasing software.

What do you think about penetration rates and also, once you sell into an organization, what is the future opportunity look like; there good up-sell or cross sell students opportunities in just trying to get a flavor for what kind of longer term plans of growth we can build into our model.

Thanks.

Jeanne Dering;

This is Jeanne Dering.

I'll take the question on the stock options.

Last year, when we published our annual report for the year we talked a little about stock options in our management's discussion and analysis, and we had estimated that the value of the stock options that were granted in February of 2002 was approximately $36 million.

And if under the prospective method of implementation the stock option expensing, is one-fourth of that, meaning one year's worth of vesting, had been reflected in our 2002 income statement, the pre-tax cost would have been roughly $9 million under that $36 million valuation.

Which would be a little over 3 cents impact on earnings per share.

Okay, great, thanks.

This is John Rutherfurd.Let me talk a little about MKMV.

In our -- the business that we had before we purchased MKMV, it was basically a business to provide software to commercial banks to help them make credit decisions.

And we have about 1500 customers globally for that business.

When we bought KMV, they had much higher end products to provide quantitative estimates of credit risk, and they had concentrated their customer relationships on about 100 customers globally, who were the hundred largest customers in the world.

We believe that there are very significant opportunities to penetrate over time those 1500 customers with whom we already have a credit decisioning relationship.

And those are all banks.

In addition to that, we believe that there will be increased adoption of the KMV product line, among non-bank financial institutions, among investment management companies, and among corporations who have large portfolios of corporate debt.

In the bank level, or the banking group of institutions, we believe that that process will be helped by the new bank regulatory regime which is often referred to as BDL-2 (inaudible) which provides lower regulatory capital requirements for institutions who have installed internal credit modeling facilities.

And we believe that many of those internal credit models will be ours because we have the best products in the market and also because the regulators are very familiar with our products and our capabilities.

In addition to those sources of revenue growth, we also have some important new products in the wings at KMV.

One of those products is a product to mark-to-market or value loans or securities that financial institution may have a position in, using the quantitative estimates of default probabilities that come out of the KMV system.

So that will give you an idea broadly of how we see the market for the MKMV developing.

Our target objective is to have 200 million of MKMV revenues by 2005, with a margin of a little over 20%.We do have an internal plan that meets those targets and we're very optimistic about our ability to execute on that plan. .

Great, very helpful, thanks a lot.

Our next question is John Neff with William Blair & Company.

Please state your question.

A couple of housekeeping questions.

The $6 million charitable donation that was made, that was just new to me.

I was curious, is that an annual contribution, and how is that the amount determined?

the first answer is that it is not an annual contribution.

Generally, the way we think about our charitable program is that we disperse to charities about -- between 7/10 of a percent and 1% of our U.S. taxable income.

So that's what we actually give the charities.

In years where we have very positive financial result as we did last year and 2001, and this year.

We made contributions to a foundation which in turn disperses the money to the charities on an annual basis per the formula that I've mentioned to you.

So, it's something we do in good years.

We did it last year and we're also doing it this year.

Okay.

Also, I don't know, can you talk about what the capital expenditures for 2002 were, and what the expectations for '03 are, as well as what cash and equivalents were at the end of the year?

I think we'll have to get back to you on the annual capital expenditure.

Very impressionistically, we have had a flat line of property planned and equipment.

That line did go up in the fourth quarter based on some technology investments that we made related to the fact that we are installing our own financial systems as opposed to relying on using DUNN, and Bradstreet as a service bureau..

The property plant and equipment line has gone up somewhat due to the KMV acquisition.

But we will have to get back to you on the actual numbers for CAPEX.

We also have not finalized our balance sheet at this point at this point, so I can't give you precise numbers for cash and cash equivalents at the end of the year, I'm sorry.

Okay, thank you.

Thank you.

Our next question comes from Jim Baker with Neuberger & Berman.

Please state your question.

John and Jeanne I had a few questions.

One, I don't know whether you have the segment operating profit results for the full year 2002 yet.

That was my first question.

You alluded to the fact that the cash flow and balance sheet data has not been finalized.

I wonder if you have a final figure for either deferred revenue on the balance sheet, both current and non-current, and also whether you have cash of operations for the full year off the cash flow statement.

And then I had a couple of questions more for John.

And that was, could you talk about the outlook specifically for financial institutions and sovereign risk revenue which as you pointed out did slow down a lot.

How does that look, specifically that portion in 2003 as you enter 2003?And finally, could you comment on the margin outlook for KMV in 2003, and I also wanted to understand whether the projection for slight decline in operating margin in 2003 compared to 2002 is before or after the stock option hit, which I estimate could be about 90 basis points alone.

That’s it.

Okay.

Let me start off with the questions about the balance sheet.

I'm sorry, the first question was margin by business line.

Right.

We have not ever really released margins by business line.

What we've said is that generally the margins in the U.S. are more or less the same.

We have in our research business, we do not charge the research business for the activities of the analysts who produce the research reports that we sell, nor do we charge the ratings business for the activities of the research business in generating press releases and other promotional and informational type activities.

So with that qualification, generally the margins in the rating businesses and research business in the U.S. are about the same.

They're a little higher than the margins outside the United States.

And frankly, that's primarily because of greater growth outside the United States, which tends to acquire more increase -- more -- tends to require more increases in staff and more ancillary expenses such as office space, going forward.

So I'm sorry not to be able to give you precise information --

John?

Yes.

I think you may have misunderstood my question a little bit on this one.

I appreciate that information, but the -- I was referring more towards the publicly disclosed type stuff for the ratings and research combined versus MKMV that you will eventually disclose in the annual report.

Okay.

Well, in MKMV, the margins for last year were approximately 10%.Excluding the one-time costs that I've referred to which were $3.1 million.

And excluding amortization of the $210 million purchase price.

Is that -- is that the question you're asking?

In effect, yes.

And I don't know if you have a specific number that you'd care to disclose, even after those two things.

It's about 10%.

Okay, I mean -- okay. 10% of the approximately $80 million of revenue, okay.

Correct. and you know, I've mentioned that the one-time costs of $3.1 million, and the amortization last year was $6.1.Jeanne will actually answer the question.

The roughly 10% operating margin is thinking about MKMV on the full year pro forma basis, the as-reported margin for the period of time that we own the company will be just a little lower than that.

And as John mentioned, the costs that aren't included in that margin are the one-time costs of $3 million.

Plus when we made the acquisition back in the second quarter, we had some one-time charges again of about $3 million that related to the acquisition.

And then the purchase accounting amortization for the period of time that we owned KMV in 2002 was about $6 million.

So those $12 million of costs are not reflected in the margin numbers that we talked about, and on a going forward basis the nonrecurring costs will be expected but we he will certainly continue to have acquisition amortization.

Okay.

So it's reasonable, then, to assume that, you know, for the full year, I guess the operating income for the ratings and research segment actually exceeded on a reported basis, the total of what you show in the income statement?

Jeanne Dering Yes.

Yes, that's true.

Okay.

That's all for that question .I guess then just to move on to the issue of deferred revenue cash from operations and maybe the outlook for financial institutions sovereign --.

Sure.

Before we get to that, just to make a comment that generally we expect margins at KMV, excluding acquisition related amortization, to progress to the 20-plus percent level on an annual basis in an orderly fashion.

That is, we don't expect a hockey stick in those margins.

Okay, and John, we should use 10% sort of as the base, going from 10 to 20-plus, in three years, not use kind of zero as the base.

Is that --.

That is correct.

Okay, we unfortunately, because we haven 't finalized the balance sheet yet, we can't answer your 2002 two questions related to the balance sheet.

And I'll ask Ray to talk about our outlook for financial institutions and sovereign.

Sure.

In the financial institution sovereign area globally, we are projecting, mid to high single digit revenue growth.

And that is broken down into low to mid growth single digit growth in the U.S., and low double-digit growth outside of the U.S..And we would expect the growth outside of the U.S. to be high single digit or low double-digit in Europe and low double-digit in Asia which is a smaller part of the market.

And Ray, could you remind me just how much of that revenue stream derives from the U.S. and internationally say for the full year 2002?

It's roughly a 50/50 split between the U.S. and the international business.

Thank you very much.

Financial institutions.

Thank you.

Our next question comes from Edward Atorino with Blaylock Partners.

You gave the proposed tax rate and it was scrambled broken up.

Could you repeat the number.

Sure, Ed.

We're expecting our effective tax rate to decline by roughly 150 basis points.

Okay, thanks, I -- it just was broken up on the transfer.

Okay.

As a reminder, ladies and gentlemen, should you have any questions, press star-1 on your telephone at this time.

Our next question comes from Jeffrey Dunn, with KBW.Please state your question.

Thank you.

I was interested in your comment about new product out of KMV having to do with mark-to-market adjustments on loans and securities.

Is this a product that will also be extended into the derivatives markets and I guess especially the synthetic CDO world?

Well, in our current research that supports this product, generally we find that our modeling of capital market securities comes closest to the actual prices that are quoted, that credit default (inaudible) comes next, and loans are not quite as good.

And generally, we believe that this does reflect the quality of information available in the market, such that the market is more efficient in the bond area than it is in the credit default swap area, and both are quite a bit more efficient * than the loan market. * Having said that, it's quite -- we are certainly working between Moody's investor service, and Moody's KMV on what we could offer the credit derivatives market.

We have a product which we call CDO navigator, which we are actively working on and MKMV is working on a model of that, but because there are many securities often included in the CDO, you can understand that the problem of generating a forecast price for those CDO’s is much more complicated than a single instrument, whether it be a bond, a credit default swap or a loan.

Okay, fair enough.

Then, second, on your comments on the outlook for public finance market, I think you mentioned Merrill's forecast.

Do you think those forecasts could prove too conservative given maybe less than less sensitivity to rates this time around as we see the financial conditions of municipalities deteriorate?

Well, as I mentioned before, there's just a tremendous range of street forecast for the public finance market.

And I'll just remind everybody that Moody's has had limitations in its forecasting, which those who have followed us have clearly noticed..

So I'm certainly not going to say that we have a better crystal balance than anybody else has in the -- crystal ball than anybody else has in the market.

Okay, thank you.

Our next question comes from Neil Godsey with Think Equity partners.

State your question.

Thank you.

A couple questions.

A follow-up to a previous question.

And that is, with respect to your expectation on a slight decline in the operating margin in '03, is that before or after the expensing of options?

And then secondly, I was wondering if you could give some commentary on what you expect to happen with leverage on the balance sheet in '03.

I think you mentioned you accessed about 107 million of the credit facility for buybacks in the fourth quarter.

Do you expect that balance to increase or decrease or stay the same in '03 with respect to whatever buybacks you might be doing.

Thanks.

Sure.

The decline in margin that we mentioned, which is 140 basis points, approximately, is before, and I will just repeat that that -- before the inclusion of the expense of options.

With regard to the question of leveraging the balance sheet, we have always had as a general principle, that we would return excess cash to our shareholders and acquisitions of moderate size we would finance through long-term debt.

Now, we didn't do that to date with KMV, largely because we were uncertain about our abilities to repurchase shares at an attractive price, and we didn't want to have the negative carry of permanent financing.

As we now look forward, we are always interested in acquisitions of -- especially of rating agencies which seem very rare, and unlikely to us at the moment, and also to expand our quantitative credit assessment business and other similar quantitative businesses.

Also, as I'm sure everybody has known, the price of the stock has come down a bit, so certainly putting in place more permanent financing looks more attractive to us and we will be pursuing the possibilities of whether or not we should do that in the first quarter.

I would guess that you will see debt at the end of this year a bit higher than the debt at the end of last year.

Okay, thanks.

Operator: Thank you.

Our next question comes from Kevin Gruneich with Bear Stearns much please state your question.

Thank you, just two follow-ups.I was wondering if you could indicate your current thinking regarding staffing increases for '03, and secondly if you could isolate for us the transaction-related revenues. .

Well, Kevin, frankly, we're still in the middle of our budget reviews for 2003.We tend to focus on revenues first and then focus in on the expenses, and as you know, the largest part of our expenses is staff.

So I can't give you a number.

What I can say is directionally we are thinking that we need to increase staff to support the growth of our international structured business, particularly in Europe and Japan.

We're also bringing on staff to support what we call our specialist teams to improve our analytical expertise in accounting, risk transference corporate (inaudible) and corporate governance.

Other than those two areas, I expect staff increases in 2003 to be very modest.

Mainly to replace turnover.

So, sorry I can't give you a number, but broadly speaking, we would not expect the staff increases in 2003 that you've seen at KMV for 2002.

Thank you, as a reminder, should you have a question, press star-1 on your telephones at this time.

Our next question comes from Jim Baker with Neuberger & Berman.

Please state your question.

I had one follow-up to one of the questions you answered for me before.

And that is, I want to understand on the amortization of the 2$200 million purchase price for KMV, which you said was about $6 million in 2002, which I think is a pro forma number, the full year.

How long does that persist?

Will it still that be much in '03 and '04?

When does that end give me some feel for that.

First of all, the $6 million is the actual number for the portion of the year that we own KMV for 2002.

Okay.

on an annual basis, that would be about $8 and a half million.

And the most -- the shortest term asset that's included in the purchase price allocation and the amortizable assets is software, which is generally amortized over a three to five- five-year time frame.

So after 2004, we would expect to be annual amortization rate to decline probably by about 25% or so.

Okay, and may be gone virtually entirely by 2007 or something like that.

Well, certainly by 2007 the shortest lived assets are fully amortized and then the longer lived assets are in categories such as customer list, which is generally a ten-plus year amortization period.

So the amortization will extend ten or so years.

Okay.

And could you remind me, Jeanne, my impression was software is the bulk of the assets, but maybe I'm wrong about that.

I don't have the details in front of me, but my recollection is that the client relationships are the biggest part of the amortizable asset.

Okay.

for KMV.

And the software was a smaller part of the overall value of the assets.

Thank you very much.

Thank you, our next question is from Christopher Diori (ph) with John A Lebanon Company.

Good morning, gentlemen.

Forgive me if you already answered this, I was off the call for about five minutes but my question was about revenues at KMV.

As recently as a presentation in January, the company noted Moody's KMV's is expected to have $95m to $100m in revenues in '02.

Including revenue for the full year, I see the reported numbers of 81.5 million for the full year.

If I plug for the first quarter and bit of April to add back to that for KMV revenues before the purchase, say plug about 5 million, I get to 86 and a half, 87 million.

Which is still about 8 to 13 million shortfall for the quarter.

I'm wondering, is my methodology right?

And if it is --.

We think that the number, as -- as if we had owned KMV for the full year, was $96.6m

Okay.

Which we feel was certainly within the range that we communicated and perhaps the methodology that -- and I don't -- this is just a guess.

That maybe the difference in methodology had to do with the two weeks in April that we had not owned KMV, plus the first quarter.

Okay, and could you comment, what did KMV -- what were KMV revenues for that period?

if you want to answer that, Jeanne.

Yes, if we think about the revenues for KMV for the first quarter of 2002, and then the roughly two weeks in the second quarter that we didn't own the company, the average aggregate of those revenues are roughly $15 million.

Okay, thank you.

Our next question is from Kevin Gruneich with Bear Stearns.

Repeating question on percent of -- (inaudible) and then secondly, we're staffing costs as a percent of operating selling and general administrative expenses still in the 67 to 68% range in the quarter and the full year?

I'm sorry, we lost your first question, Kevin.

First question was again, the percent of revenues that were transaction-based in the quarter, and then the full year.

John Rutherfurd Jeanne, do you want to answer that?

Sure.

First, for the full year, Kevin, the transaction-based revenue as a percent of the aggregate for Moody's was roughly 53%, and relationship revenue was about 30%, and then research revenue -- and that relationship revenue excludes research, so research added about another 9% to that.

And then KMV was about 8% of the total.

For the -- you asked about the fourth quarter as well ; is that right, Kevin?

Right.

for the fourth quarter, the relationships were not very different than the full year.

The transaction-based again was in the range of 53 to 55%, relationship-based in the ratings and research area again was in the range of 40% as a remainder of the MKMV.

.

Thank you if there are no further questions at this time.

I would turn the call over to Mr. Rutherfurd to conclude.

Thank you all for joining us on this conference call.

If, of course, any of you have questions, let me suggest further questions that -- let me suggest that you direct them to Michael Courtian, our vice president of investor relations, and corporate finance, and we all thank you very much for your support of Moody's.

Thank you, sir.

Ladies and gentlemen, this concludes our conference for today.

Thank you all for participating.

Have a great day.

All participants may now disconnect. --- 0