穆迪 (MCO) 2003 Q2 法說會逐字稿

Good morning and welcome to Moody's Corporation's second-quarter 2003 results teleconference.

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

At the request of the Company, we will open the conference for questions and answers after the presentation.

I will now turn the conference over to Mr. Michael Courtian, Vice President of Investor Relations and Corporate Finance.

Thank you.

Good morning, everyone, and thanks for joining us on this teleconference to discuss Moody's results for the second quarter of 2003.

This is Michael Courtian, Vice President of Investor Relations and Corporate Finance.

Moody's released its results for the second quarter of 2003 after the market closed yesterday, and the earnings release is available on our web site at IR.Moody's.com.

As required by the Securities and Exchange Commission regulations, we've furnished Form 8-K to the SEC containing our earnings release.

The earnings release contains disclosure of certain non-GAAP financial measures and we may discuss our results in terms of these non-GAAP financial measures during this call.

Information reconciling our non-GAAP financial measures to our reported GAAP results is presented in the earnings release and we encourage you to refer to that information in connection with our discussions on this teleconference.

John Rutherford, Jr., President and CEO 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 Jean Dering, Chief Financial Officer of Moody's Corporation.

They will be available to answer your 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.

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 and the risk factors discussed in our annual report on Form 10-k for the year ended December 31, 2002 and in other filings made by the Company from time to time with the SEC.

I would 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.

At this point, I'm pleased to turn the call over to John RUTHERFORD.

JOHN RUTHERFORD, JR.: Thank you all for joining us on today's call.

I would like to begin this morning by discussing the highlights of our results and commenting on Moody's U.S. business.

I will also review results from Moody's KMV, our quantitative credit assessment business.

Then Ray will review our international results and comment on regulatory development.

Following Ray's comments, I will give you an update on our share repurchase program and conclude by discussing Moody's outlook for 2003 and our long-term target.

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

Moody's reported revenue and earnings per share for the second quarter.

We had a record quarter.

We're very pleased that that happened.

Revenue rose to $312.7 million, an increase of 15 percent from the second quarter of 2002.

On a pro forma basis, assuming that Moody's April, 2002 acquisition of KMV had taken place on January 1, 2002, revenue growth would have been 14 percent.

Moody's year-to-year growth for the quarter included the favorable impact of currency translation, mainly due to the strength of the euro and to a lesser extent, the British pound.

Currency translation contributed approximately 250 basis points to revenue growth for the quarter.

Diluted earnings per share for the second quarter of 2003 rose to 66 cents, an increase of 35 percent from 49 cents for the second quarter of 2002.

Earnings per share for the quarter included a one cent impact related to the Company's previously announced decision to begin expensing stock options and other stock-based compensation plans in 2003.

Overall, Moody's results for the quarter reflect the benefit of the low interest rate environment and narrowing credit spreads in several segments of our rating business.

In addition, growth in our non-ratings business, which are not interest rate sensitive, should help Moody's continue to grow when interest rates eventually rise.

Let me take a few moments now to review some additional highlights for the quarter.

Moody's revenue in the United States totaled 209.4 million for the second quarter, a 16 percent year-over-year increase, both on a reported basis and a pro forma basis, assuming that we had owned KMV for the entire second quarter of 2002.

International revenue was 103.3 million in the second quarter of 2003, thirteen percent higher than the prior year period on a reported basis and twelve percent higher, assuming that we had owned KMV for the whole second quarter of 2002.

These figures include the favorable impact of currency translation.

International revenue accounted for 33 percent of Moody's total in the quarter, roughly in line with the 34 percent for the prior year period.

Within the United States' rating business, structured finance revenue grew in the high single digit percent range.

This is slower than the growth we saw last year, but in line with our expectation.

We had good growth in revenue from rating commercial mortgage-backed securities and credit derivatives.

In the asset-backed commercial paper, or ABCP market, concerns about the possible effect of changes in accounting treatment of special-purpose entities have slowed the formation of new programs.

On the positive side, we do not foresee much additional erosion of existing programs.

With bank regulators indicating a desire to postpone the impact of the accounting pronouncement on bank capital requirements, we continue to believe that a large part of existing ABCP programs will be restructured so that they can form to this new requirement.

Revenue growth in our U.S.

Corporate Finance business has accelerated to the mid-teens percent range in the quarter.

Strong activity in high yield bonds and bank loan ratings remain the primary drivers.

Investment-grade issuance has slowed during the quarter, reflecting the continued weakness of the primary forces that would normally drive growth in this sector.

Those are economic activity and business investment.

Public Finance revenue was up 17 percent year-to-year.

The favorable interest rate environment and the weakness of municipal tax receipts contributed to growth in both refinancings and new money issuance.

Our research revenue continued to grow nicely, rising over 30 percent in the US.

As a result of increased investor focus on credit risk, we continue to see strong sales of new products to existing clients, as well as sizable growth in new clients.

New products we have recently introduced include Ratings Interactive, a Web-based tool that allows investors to retrieve up-to-date rating (indiscernible) presented as they would like to see them.

Moody's clients have also responded very positively to the expansion of our Default Research Services, which provides default and ratings performance data for segments of the credit market -- and to our new Structured Finance product that helps investors monitor the performance of the collateral underlying (indiscernible) finance investments.

Finally, we continue to find strong demand among large financial institutions and third party information providers for rights to incorporate Moody's ratings into their internal systems and clients' Web sites.

We are also making good progress on a new product, which we are calling our Enhanced Analysis Initiative.

This effort involves the teams of accounting, risk transference and corporate governance experts that we have discussed with you during the last several conference calls.

These experts are working alongside the Moody's rating analysts to develop analysis and commentary on the quality of issuers' financial reporting, their use of off-balance sheet structures and whether or not risks have actually been transferred to those structures and their corporate governance.

We expect to start our reports on financial reporting by publishing industry reports.

Over the next twelve months, we expect to have reports published on approximately 200 leading U.S. companies.

Longer-term, our goal is to fill out our U.S. coverage and expand globally.

In terms of financial targets, our aim for this year is to get to a run rate of about $50 million in annual revenue within the next five to seven years.

Turning now up to Moody's KMV, revenue for the quarter totaled 26.2 million, an increase of 27 percent from the second quarter of 2002 on a reported basis and 16 percent assuming we had owned KMV for the entire second quarter of last year.

KMV's growth in the quarter mainly reflected growth in subscription revenue related to quantitative credit-risk assessment products.

Next, I'd like to comment on Moody's expenses and margins for the quarter.

Expenses for the second quarter of 2003 totaled $136 million, nine percent higher than in the prior year period on a reported basis.

Assuming Moody's had owned KMV for the entire second quarter of 2002, expenses for the prior year period would have been 126.3 million and second-quarter 2003 expense growth would have been eight percent.

Second-quarter 2003 expenses included $3 million related to stock-based compensation plans, which we started expensing this year.

Moody's operating margin for the quarter was 57 percent, up from 54 percent in the second quarter of 2002.

The factors driving this quarter's high margin were -- first, better-than-expected revenue growth; our pro forma revenue growth of 14 percent in the second quarter was well above our first-quarter guidance for revenue growth in the year, which was in the mid to high single digit range.

Also, we had low real growth in expenses -- that is removing option expenses and foreign exchange.

This was in part due to the lower incentive compensation expense year-to-year because of the very high growth rates that we achieved in the second quarter of 2002.

Next, let me address briefly Moody's tax rate.

As you read in our earnings press release, Moody's effective tax rate was 41.5 percent in the quarter, unchanged from last year but down significantly from 44.2 percent in the second quarter of 2002.

Two important factors contributing to the year-over-year improvement in the tax rate are the continued operating growth in jurisdictions with lower tax rates in New York and the establishment of a New York captive insurance company, which was approved by the state insurance authorities during 2002.

Our target remains to reduce our tax rate to the 40 percent range over time.

We expect this to happen as revenue continues to grow faster outside New York City and State and within.

Now, I'd like to ask Ray to talk about our international business and the status of the regulatory review of the credit rating agencies taking place in the United States and overseas.

Thank you, John.

Moody's again achieved good revenue growth in international markets during the second quarter of 2003.

Moody's International revenue rose to 103.3 million in the quarter, an increase of thirteen percent from the prior year period on a reported basis and two percent pro forma, as if we had owned MKMV for the entire second quarter of 2002.

Currency had a significant favorable impact on the quarter's international revenue growth.

While International revenue growth in this quarter was slower than we have seen in prior quarters, we continue to believe that international markets present some of the most attractive long-term opportunities for Moody's.

For the quarter, International revenue represented 33 percent of Moody's totals, as John said, essentially in line with where it was in the second quarter of 2002.

Within the Moody's Investors Service, or MIS ratings and research business, International revenue rose in a mid-teen (indiscernible) year-over-year.

The strongest growth segments of the International business were Structured Finance And research, which each increased almost 40 percent year-over-year.

These sectors were also the primary beneficiaries of the favorable currency exchange rates.

Within Structured Finance, the European credit derivatives and residential mortgage-backed segments strengthened after relatively low growth in the first quarter.

European corporate and financial institutions issuance was essentially flat, year-over-year.

As a result, revenue from rating corporate issues declined a bit in the second quarter of 2003, compared with the prior year period, and Financial Institutions revenue was about unchanged.

Our Asian business achieved high single digit growth in the second quarter, as concerns about SARS and political tensions abated somewhat.

As in Europe, the growth was led by regional Research sales and Structured Finance.

Structured Finance experienced especially strong growth in revenue in the Southeast Asian and Australian markets, although those are off of lower bases.

Revenues from Latin America and Canada declined on a combined basis versus the second quarter of last year, due to sluggish cross-border issuance.

However, the impact on our overall International business was slight due to the relatively small size of these regions compared with Europe and Asia.

I would also like to make a few comments about the ongoing examination of the credit rating agencies taking place in the U.S. and overseas.

As many of you know, the SEC issued its Concept release on June 4th.

For those of you who are interested, the Concept release can be downloaded from the SEC's web site at www.SEC.gov.

The Concept release included a broad range of questions related to the role and function of rating agencies, including whether to continue using credit ratings in U.S. federal Securities laws.

If so, the criteria for designating eligible ratings for such use and possible oversight of ratings agencies whose ratings are eligible for use in Securities laws.

The SEC is inviting comments in response to its Concept release through July 28th from market participants, other regulators and the public.

Following that, the SEC may propose rules and/or legislation later this year or early next year.

Regulators in the U.S. and internationally are taking a careful, deliberate approach to the issue of ratings industry regulation.

There have been no findings of misconduct; ratings have been verified as providing predictive opinions about credit risk and they serve the interest of both market participants and public policy by reducing information asymmetry and protecting investors.

We continue to work closely with the SEC to assist them with their review.

Broadly, our approach has been to disclose, as fully as possible, our rating practices and performance.

Our efforts are aimed first at reviewing the means by which we manage conflicts of interest and preserve our independence -- and second, to respond with verifiable analysis to anecdotal criticisms about the industry's ratings performance.

We believe that Moody's has industry-leading practices with respect to our corporate practices, our Ratings Committee processes and our professional standards and that are methods and practices should help satisfy the SEC about the reliability of ratings and help inform any potential rule proposals or legislative recommendations.

We also believe that Moody's can continue to contribute to market efficiency and investor protection and in turn, succeed as a business under a variety of potential outcomes.

I note, however, that if the outcome of the current review process is to retain ratings in federal Securities laws and enhance the nature and degree of oversight, Moody's will undoubtedly incur additional costs in complying with such oversight.

Overall, Moody's has been pleased to participate in this process and we will continue to the regulators and market participants in any way we can.

Now, I'd like to turn the call back to John.

JOHN RUTHERFORD, JR.: Thank you, Ray.

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

Moody's takes an opportunistic approach to share repurchase to ensure that it is in the best long-term interest of our shoulders.

Our level of share repurchase will vary from quarter to quarter.

During the second quarter, we did not repurchase any shares.

Since we became a public company in 2000, we have repurchased over 20 million shares at a total cost of about $760 million.

This includes 6.7 million shares repurchased to offset stock issuance under employee stock plans.

At the end of the second quarter, Moody's had approximately $290 million remaining under the $450 million share repurchase program that the Board of Directors authorized in 2002.

We continue to anticipate completing the current share repurchase authorization by mid 2004.

I'd like to conclude my comments this morning by discussing our outlook.

A number of the capital markets sectors in which Moody's provides ratings experienced higher issuance in the second quarter of 2003 than the first quarter of 2003 or in the prior year period.

Low interest rates and narrow credit spreads were the most significant drivers of robust refinancing.

The fundamental long-term drivers of debt issuance, which are economic activity and business investment, remained weak in the quarter and Moody's does not foresee any notable improvement in 2003.

Within the ratings business, we have increased our expectations for full-year 2003 global Structured Finance revenue growth to the low double digit percent range.

In the U.S., residential mortgage refinancings have not declined as quickly as we had anticipated and declines in related securitizations may not occur until the latter part of the year or 2004.

In international Structured Finance markets, long-term forces and favorable currency translation are expected to continue to drive growth at or above 20 percent for the year.

In our Corporate Finance business, we now expect revenue growth in the high single digit percent range, based on continued strength in the U.S. speculative (indiscernible) market and international activity.

U.S. investment-grade debt issuance will likely remain sluggish versus prior year issuance, as the volume of outstanding debt still to be refinanced declines and the need for new borrowings to fund investment and mergers and acquisitions is expected to remain weak.

Financial Institution's issuance in the second half of 2003 should decline from the high level of the first half.

In the U.S.

Public Finance sector, we now expect revenue to grow in the mid to high single digit percent range.

We believe growth will remain strong in our Research business.

Finally, at MKMV, we expect percent revenue growth in the midteens on a pro forma basis and an improved operating margin, but we expect both revenue and operating income for the year to the below our 2003 plan.

On a reported basis, MKMV percent revenue growth is expected to be in the mid 30s percent range.

Overall for 2003, Moody's expects that revenue growth will be in the double digits to low teens percent range on a pro forma basis, as if MKMV had been acquired at the beginning of 2002.

On a reported basis, we expect that percent revenue growth will be in the low teens percent range.

Moody's expenses for 2003 will likely reflect continued investment spending on enhanced ratings factors, including our specialist teams, technology initiatives and product development and continued hiring to support the growth areas of the business.

Slightly better than prior guidance, Moody's expects the full-year 2003 margin will decline approximately 100 basis points, compared to 2002, before the impact of expensing stock-based compensation plan. (indiscernible) 41.5 percent effective tax rate for the second quarter is expected to persist for the full-year.

Overall, Moody's now expects full-year 2003 diluted earnings per share in the range of $2.18 to $2.24 cents before the previously reported first-quarter gain on an insurance recovery and before the impact of expensing stock-based compensation plans.

On a reported basis, diluted earnings per share is expected in the range of $2.19 to $2.25, including the five cent insurance gain and four cents in expense related to stock-based compensation plans.

The estimated four cents per share impact of expensing stock-based compensation plans will result in a reduction in projected year-to-year earnings share growth of approximately two percent in 2003.

Let me turn now to our current view of our longer-term targets for the business.

When we became a public company, we established long-term (indiscernible) growth targets for the business of low teens percent annual growth operating income and 15 percent annual earnings per share growth.

These are targets that we may exceed in some years and fall short of in others.

When we acquired KMV, we felt that we could provide additional returns for our shareholders and set -- (technical difficulty) -- 200 million in revenue and margins of 20 percent or greater before acquisition-related amortization by 2005.

These targets were based on the historical performance of the KMV business and our Moody's Risk Management Services business and our expectations for continued product development and customer penetration.

Based on recent results at Moody's KMV, we now believe that the business will probably not achieve the targets that we established at the time of the acquisition.

MKMV's revenue growth of about 16 percent in each of the last two quarters, while representing good progress, is below that we would need to attain the target.

The shortfall (indiscernible) our objectives have been in both the data capture and analysis software products and also in our quantitative risk-assessment products.

We will be sharpening our product development focus to improve ease-of-use and value of (indiscernible) for our customers and focusing our sales and marketing resources more specifically on customer segments.

We are working on establishing new, longer-term targets for MKMV and would expect to communicate (indiscernible) them with our full-year results early in 2004.

Despite lower expectations for Moody's KMV, who expect to continue to meet our 15 percent long-term growth target for Moody's Corporation and for Moody's Ratings and Research business, although we may exceed that target in some years and fall short in other years.

Growth in Moody's KMV above that rate will provide additional returns for our shareholders.

Finally, I should comment that -- as previously reported -- Moody's has adopted expensing of stock-based compensation prospectively -- effectively, for all options issued on or after January 1, 2003.

Accordingly, assuming the continuation of our current option program, such expense will increase each year over the option-vesting period, which is currently four years with a growing negative impact on growth in earnings per share.

Moody's current long-term target for 15 percent annual growth in earnings per share is on a pro forma basis before considering this transition.

It would be temporarily reduced to the range of 12 to 13 percent percent during the transition period.

That completes Ray and my prepared remarks.

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

Thank you, sir.

The question-and-answer session will begin at this time. (OPERATOR GIVES CALLER INSTRUCTIONS).

Peter Appert of Goldman Sachs.

John, I think you referenced that you are perhaps accruing bonuses at a low rate this year than last year.

Can you speak to why that might be in the context of the very robust earnings numbers and whether it might imply there could be some expenditures in the third or fourth quarter?

Thank you, Peter.

It's a good question.

We do not expect (inaudible) expenditures in the third or fourth quarter.

The reason for this is that we have, you know, our plan for managing directors and senior management, a plan which is based on our long-term normative targets.

In the second quarter of 2002, we had very, very, high growth, so we had to accrue very high bonuses in the second quarter of last year.

Since this year -- although we had a good quarter -- it was not as high as 2002.

We accrued lower bonuses for this year, and that is the reason for.

Does that really respond to your question?

Yes, it seems to imply -- I mean, the disconnect is just you had 33 percent or 34 percent EPS growth this year, versus 43 percent.

Yes, it's slower.

It's still an extraordinary rate, obviously, and it seems like a bit of a disconnect in terms of the compensation levels for your senior people.

Well, that is absolutely correct.

The only thing you need to understand, Peter, is that very few people are paid on EPS.

They are really (indiscernible) individuals.

Almost everybody else is paid on operating income.

With respect to operating income this year, we did 20 percent versus 41 percent last year.

Great, thank you.

May I ask just one other thing, and that is -- where are you in terms of rethinking the dividend payout ratio?

Is that part of the decision not to buy any stock in the current quarter?

Let me respond to your second part.

No, it isn't.

We have always decided to buy stock opportunistically.

The simple reason for that is if you buy it on a continuous basis, you understand -- anybody buying stock is also buying a put for which the Company has to get compensated.

Where we are on our thinking of our dividend policy -- as you probably know, we have told a number of our shareholders about -- and I think we've also told equity analysts about what they should do in terms of our dividend policy.

We started to consider it at the Board level, but we are far from making a decision on that.

We certainly recognize that capital allocation is very important for a business that generates a great deal of cash.

We also recognize that we have not been able to develop a great many opportunities for acquisitions, which would benefit our shareholders on an intermediate and long-term basis -- so that the question of dividend and share repurchase is very much a question that management and the Board will be considering probably for the rest of this year.

Thank you.

Lauren Fine of Merrill Lynch.

Just a couple of quick questions -- on the revenue side, I'm wondering where your confidence is coming from on International Corporate Finance, given some of the slowing trends.

Then wondering if you've taken into account some of the volatility of the dollar of late that foreign exchange might not help as much.

Then, on the cost side, maybe following up on Peter's questions, it still sounds, from your remarks, like you would expect your expense rate to maybe pick upward in the second half of the year, whether it's related to the comments Ray made about costs incurred to comply with the SEC, or the enhanced programs that you're looking at.

I'm wondering if you could comment on the expense rate?

Then, any update on looking at terming out of debt that you had mentioned on your last quarter conference call?

Sure.

Well, your first question was about International Corporate Finance.

Perhaps I could ask Ray to comment on that?

I'd be happy to, Lauren.

Our growth expectations for Corporate Finance internationally, for the rest of the year, are reasonably modest.

I think we would anticipate seeing a bit more activity than we did in the first half of the year in Europe, anticipating, perhaps, a falling rate environment.

But it is not an area where we are expecting to have growth that is significantly above anything we experienced in the first half of the year, although we do expect it to improve somewhat.

On the Asian side, I think that would come more from the trends that we saw in the second quarter with respect to a calming and return to normalcy of the market following the SARS scare early in the year and some of the political tensions, including those on the Korean Peninsula, assuming that those do not flare up again.

Lauren, can I ask Jeanne to comment on the foreign exchange situation?

Sure.

Lauren, in terms of our forecast, as I'm sure you know, there are a lot of potential pluses and minuses that we consider when we are thinking about our revenue outlook for the remainder of the year.

Potential variance in foreign exchange rates is one of them, and we all know that the Euro has been quite strong this year versus the dollar.

The current EPS range that we have in our outlook is about five or six cent range, and that embeds a fairly wide range of revenue expectations, so potentially variance in foreign rates is one of the many factors that we did consider when we thought about our outlook for the remainder of the year end our guidance for the full year.

But you are right, Lauren; that could certainly have either a negative or a positive impact on revenue growth for the remainder of the year.

Then finally, with regard to costs, in a very broad sense -- and we made this comment before -- we recognize an environment which eventually -- we don't exactly know when -- will be an increased-rate environment that we need to make every attempt to develop new products and to undertake the spending that is necessary to develop those new products, so we will be spending more in the second half of the year on our so-called specialist teams.

We will be spending some more in the second half of the year on the initiatives that we have to grow our Research business.

That's why we still expect the margin to come down 100 basis points from last year.

We've always said that short-term trends in margins have to be looked at with a great deal of skepticism.

Then just on the debt -- the potential that you might term it out -- you had made that comment last quarter.

We might.

It is, in some way, related to the share repurchase issue.

You know, if we term it out, we would like to have a use for the proceeds, and we weren't, as I mentioned, purchasing shares during the second quarter.

Thank you.

Geoffrey Dunn of Keefe, Bruyette & Woods.

I was wondering if, first, you might be willing to quantify the position of the structured growth that came from RMBS (ph), just to give us a better idea of the sensitivity to potential decline next year in originations?

Well, before I note that, you know, RMBS (ph) was very strong in the corresponding quarter of 2002.

So, our revenues from residential mortgage in the second quarter of 2003 were high on a historical basis but they reflected low growth because 2002 was so strong.

Okay.

Then, judging by your guidance for the margin this year and the strength of the margin in the first half, it suggests that we should probably see a decent ramp up in spending, as you've indicated on various initiatives.

What are the implications for the '04 margin?

Is that spending expected to continue through '04?

It seems like if it does, then we should the thinking about (indiscernible) lower profitability over the next six quarters.

Well, I think that the basic answer to the question is that yes, we do continue to expect growth in expense; a lot of that growth is related to trying to (indiscernible) new products in both a ratings and a research business.

I would comment, however, that I believe that the main concern that that may provide is more execution risk than margin, because if we are successful in developing those products, finding market acceptance for those products, we believe that those products will have a high incremental margin.

Jeanne, do you want to make any additional comments on that?

The only additional comment that I would make is that for the six months this year, our operating margin -- although the margin was higher, notably higher than the second quarter in the prior year, we're running a little bit lower on margin for the year-to-date, or maybe just even with -- after considering the impact of expensing options.

So, that, in expectation of the lower margin for the full year, really does embed what John described as the in additional investment spending that we plan to make.

We typically do spend a little bit more lightly in the first quarter of the year, and then we ramp up our spending in important areas as we get a little bit more comfortable with the outlook for the year.

So it is -- I think the last couple of years, we typically had more expenses in the fourth quarter of the year than we have in the first and second.

With our current investment spending plan, we would expect that to happen again this year.

Just so I heard you right, it sounds like that on the execution side, you would expect the revenue potential to begin on these new initiatives to partially offset the expense spending in '04?

Yes, but relatively to a small extent.

I mean, the object here -- a good scenario for us, although it may sound somewhat scary to the listeners, we're going to have to lose some residential mortgage revenue.

We would like to get that over with in a relatively benign interest-rate scenario and then have medium to longer-term rates go up at a point in time, let's say, 2005, where we were generating significant revenues from the new product.

Thank you.

Douglas Arthur of Morgan Stanley Dean Witter.

Actually, I think Lisa has a few questions.

Can you please speak to the impact of pricing in the quarter?

Also, just more specifically on expenses in the quarter, what percentage of expenses were compensation-related, excluding stock options, versus what was it a year ago?

Ray, do you want to talk about impact of pricing in the quarter, or Jeanne?

On the ratings side of the business, the pricing that we have, as you know, is a combination of both individual securities issuance, pricing, or transaction pricing, and annual fees and then on the Research side of the business, our research subscription fees.

I would expect that -- and this is speaking roughly -- that about three points of our growth in the second quarter could be tracked back to pricing.

I would have to go back and look at that more closely to give you a more precise number, Lisa.

Jeanne, can you talk about the percentage of our expenses that were compensation, other than stock option expense?

Sure.

For the second quarter, Lisa, the aggregate compensation expense was, again, in the range of about two-thirds of total expense.

That's (indiscernible) the option, so the option expense would add $3 million and a couple of percentage points to that number.

The incentive compensation was about 20 percent of the total, whereas last year, as John described before, the bonus expense was higher because our operating income growth was higher.

So last year, the incentive compensation part of that was a bit over 25 percent.

Thank you.

Joe LaManna of William Blair.

Could you tell us whether the currency translation had any impact on last year's second-quarter results?

You kind of implied it didn't, but I just want to confirm that.

Last year, if we thought about year-to-year currency translation, there was a small favorable impact.

But what we've seen in the business is that the proportion of revenues that we're billing in Euros has grown and as Ray mentioned, much that has been the European Structured Finance and Research business, so that currency translation is having a larger impact this year, given the strength of the Euro.

Related to that, the International revenue growth without the currency translation -- the favorable currency translation this year -- you could just about back into it.

Do have the number the percentage growth rate would be?

The International revenue growth for the Moody's Investor Service (indiscernible).

In each of the first and the second quarter, a little bit less a roughly half of the growth has come from favorable currency translation on the Moody's Investors Service International business.

And that's where most of the translation is; there's very little in the MKMV business.

Thank you.

Kevin Gruneich of Bear Stearns.

I was wondering if you could give us a FTE figure in terms of percent increase year-over-year for the quarter?

Then I have a follow-on.

Sure, Kevin.

I will try to answer that question for year.

In terms of total people -- and I think, as we usually do, is excluding headcount and our joint venture -- was about 2,100 at the end of the second quarter.

This represents a year-to-year increase of about ten percent in total headcount.

Just given that in recent years, the RMBS (ph) businesses have been so strong.

Could you review what was in Q2 as a percent of Structured Finance revenues for the Company as a whole?

I can give you a rough idea of that.

In Q2, it was -- hang on one second -- it was about six -- maybe a little over six percent of aggregate Moody's Investors Service revenues.

Okay.

And just lastly, could you review with us the MKMV EBIT margins for Q2 '03?

And compare that to the year-ago period?

Jeanne, do you have the data at hand, or do we need to get back to Kevin on that one?

I might be able to give Kevin an idea of that bit.

For the second quarter of 2002 -- and this is the operating margin including the purchase accounting amortizations; you're thinking about it without the amortization, Kevin, right?

(Indiscernible) All-in.

I'll try to give it to you without the amortization.

The operating margin in the second quarter was in the midteens range, and was quite a bit higher than the first quarter.

As you recall, in the first quarter before the amortization expense, the MKMV business had just a slight profit margin for the year.

And the operating margin -- and that's on a pro forma basis, Kevin, so it excludes the purchase accounting amortization -- and the operating margin for the full year, we had a target of, say, low teens for the operating margin.

As you know, the MKMV business, while it's showing good growth, is running behind plan, so we would expect that for the year the operating margin is going to be hopefully in the double-digit range, but it's not going to be at the midteens range that we saw in the second quarter.

William Bird of Smith Barney.

I was wondering if you could just give us some general comments on Structured Finance issuance pipeline in the third quarter?

Also, on bonus accruals, I was just wondering if you expect them to be lower year-over-year in the quarter?

Then finally, what kind of issuance, or issuer behavior, have you seen, just in the last couple of weeks, given the volatility in rates?

Thank you.

I will try and take on the first part of your question, which is Structured Finance pipeline.

In the U.S. we still see a good pipeline in residential mortgages and what I would characterize as a solid but not spectacular pipeline in some of the other areas of asset-backed.

We had good growth in the first half in both commercial mortgage-backed securities and credit derivatives, and those pipelines also looked strong in the third quarter.

Going outside the U.S., as I think we mentioned in our prepared comments, the growth has been in credit derivatives and residential mortgages.

That is where we expect the growth, based on the pipeline, to continue to be in the second half of the year, rather than in other asset-backed areas.

I will comment a little bit on bonus (indiscernible) for the remainder of the year.

For the second half of the year, we continue to expect that our bonus expense would be below what it was for the prior year.

In 2002, we had very high growth in operating income, especially -- although the growth rate did trend down over the year, we still had growth that was well in excess of our normative target of low teens growth, so we had high growth bonus provisions.

If you think about the outlook that we have for the full year and what that implies for the second half of the year, its growth in operating income is below our normative targets.

Therefore, the bonus provisions will be a lot lower.

So whereas last year, we had bonus expense that was in the range of 25 percent of total compensation, this year, it's going to be more in the range of 15 percent or perhaps a bit higher that's in line with achieving full-year results that are consistent with our normative targets.

Just to comment one more time on that, the bonus plan that we have at Moody's, especially for the senior people, is quite highly leveraged.

It's based on achieving those normative targets.

So far, that bonus plan has served us relatively well.

From both a senior management and an investor perspective, it makes the business easier to manage.

We are, obviously, also concerned about employee retention, and we always make an effort to think about both of those aspects of the plan as we put a new plan into effect for an additional year.

Did that answer your question?

Yes.

The final question was just, given the volatility in rates in the last few weeks, I was wondering what kind of issuer behavior you've seen?

Thank you.

In the corporate sector, Bill, it has continued to be strong but opportunistic, I guess is how I would characterize it, with the strength being in the speculative grade part of the market.

The investment-grade sector, year-to-date, has been down, based on volume of issuance, but (indiscernible) market has been up substantially.

The SPEC rate market, even though it has been up, has been very volatile.

We've seen a lot more stability coming out of, for example, Financial Institutions issuance than U.S.

Corporate Issuance.

On the Europeans side, again, we have seen relatively sluggish issuance volumes.

Those, as would you expect, have not been as affected by the -- (technical difficulty) -- coming out of the U.S. with respect to rates.

Brandon Dobell of Credit Suisse First Boston.

Just one quick one -- if you look at the credit spread impact on your business, maybe give us some color on when things widen or when things narrow -- what particular parts of the business are impacted, and how big is the impact?

What kind of narrowing or widening does it take to really make a difference to parts of your market?

I'll start with a couple of general comments and then ask Ray if he wants to amplify them.

Now, our spreads are typically good for fundamental credit.

That is corporate and financial institutions.

I would say that narrower spreads are lest good for most elements of Structured Finance because they make the intermediation part of Structured Finance less valuable.

They are particularly less good for the repackaging sector of Structured Finance, things like arbitrage credit derivatives and those types of securities and structures.

Ray, do you have (indiscernible) comment?

The only thing I would add to that is that given the difference in spreads we've seen in the last, really the 12 months or so -- but certainly the first half of this year -- between Financial Institutions, which have enjoyed narrower spreads than Corporate -- we might anticipate some offsets between Financial Institutions issuance and Corporate issuance if Corporate spreads tighten to the extent that Corporates may be accessing the bond markets directly rather than through intermediated sources.

Does that cover your question, or would you like some follow-up?

That was great.

I appreciate it.

John Neff of William Blair.

Just a couple of quick housekeeping questions -- Ray, you said earlier that you thought maybe three percentage points from pricing contributed to the growth this quarter.

How much of that was due to the recent price increase on Corporate issuance and Financial Institution issuance?

I think those would be roughly in line with the overall contribution of price to growth, as both of those sectors have more annual fee-based revenue associated with them than our Structured Finance sector.

Especially in the U.S. that's true.

So that there is a higher degree of certainty around the growth from pricing overall throughout the year coming out of those areas.

But we have made price changes this year in both the Structured Finance side of the business and the Company side of the business.

The only color I can really add to that is that in the Structured Finance side, price-changes still are dependent on activity -- transaction activity -- more so than on the Company side.

A question about the enhanced analytics revenue model -- is this going to be -- is the vision for this really a publishing type of a model, sort of adjacent to the core ratings research, or is this an effort that's going to be built into the ratings and perhaps (indiscernible) future price increases or pricing power in terms of the core ratings business?

It's certainly going to be built into the ratings business.

The model that we're trying to achieve here is that our opinions on matters such as financial reporting, our balance sheet structures and risk transference (indiscernible) corporate governance will be perceived as valuable by investors.

Therefore, investors will request issuers to go to Moody's and get these sorts of opinions.

So, we do expect most of the revenues from this initiative to come from issuer fees.

Now, we don't expect all of them.

As you know, we have a very vigorously growing Research business, but that is -- our aspiration is to have the same model become effective with regard to these new opinions, as our existing model with regard to credit opinions.

I would just add to that that we do not anticipate these being separate one-off services or components of our analysis that we would charge for independently with respect to issuers.

We believe that the value out of this will come from a deeper and more integrated understanding of the material elements of the Company's credit worthiness.

That's the value we're going to have to demonstrate.

Thank you.

(OPERATOR GIVES CALLER INSTRUCTIONS).

There are no further questions in queue.

I will now turn the conference back to Mr. John RUTHERFORD to conclude.

JOHN RUTHERFORD, JR.: Well, thank you all very much for attending the conference and thank you for your continuing support of Moody's.

Ladies and ,gentlemen that concludes the conference call for today.

Thank you all for participating, and have a great day.

All participants may now disconnect. (CONFERENCE CALL CONCLUDED)