穆迪 (MCO) 2003 Q4 法說會逐字稿

Good morning, and welcome, ladies and gentlemen, to the Moody's Investor Service fourth-quarter earnings release conference call.

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

At the request of the company, we will open the conference up for questions and answers following the presentation.

I will now turn the conference over to Mr. Jim Courtian.

Please go ahead, sir.

Thank you, operator.

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

This is Michael Courtian, vice president of investor relations and corporate finance.

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

John Rutherfurd, Jr., chairman and chief executive officer of Moody's Corporation, will leading this morning's conference call.

Also on the call this morning are Ray McDaniel, chief operating officer of Moody's Corporation and president of Moody's Investor Service, and Jeanne Dering, chief financial officer of Moody's Corporation.

They will be available to answer your questions after our prepared 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 10K for the year ended December 31, 2002, and in other filings made by the company from time to time with the SEC.

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 some members of the media might be on this call this morning in a listen-only mode, and at this point I'm pleased to turn the call over to John Rutherfurd.

Thank you, Michael.

And thank you all for joining us on today's call.

On this call, Ray McDaniel will review Moody's fourth-quarter and full-year results, and our operating highlights.

Following Ray's comments, I will give you an update on the regulatory environment and our share repurchase program, and conclude by discussing Moody's outlook for 2004.

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

To start, I'd like to note several senior management appointments that we announced a few weeks ago.

The board of directors named Ray McDaniel chief operating officer of Moody's Corporation.

In his new capacity, Ray will have responsibility for our Moody's KMV business, in addition to his responsibilities as president of Moody's Investor Service.

We also appointed two of our senior managing directors, Brian Clarkson and Chris Mahoney, to the newly-created positions of co-chief operating officers of Moody's Investor Service.

Brian assumes management responsibility for Moody's global structured finance and U.S. public finance ratings and research business.

And Chris assumes responsibility for the global corporate finance and financial institutions business.

Also, Chester Murray was named executive vice president international of Moody's Investor Service with responsibility for overseeing our offices, affiliations and business development activities outside the United States.

Finally, we have expanded Jeanne Dering's responsibilities to include oversight of Moody's technology function, in addition to her role as CFO.

These appointments will ensure that Moody's has the right management in place to continue to achieve market leadership and credit analysis ratings and research, and to continue to offer shareholders a superior long-term investment.

Now Ray will discuss Moody's fourth-quarter and full-year results.

Thank you, John.

Moody's reported robust results for the fourth quarter of 2003.

Revenue rose to $351 million in the fourth quarter, 29% higher than in the same period of 2002.

Operating income was $176 million and increased 37% from the prior year period.

In addition to fundamental growth in our businesses, we continued to benefit from the favorable impact of foreign currency exchange rates, which added approximately 250 basis points to Moody's revenue growth and 150 basis points to operating income growth.

In addition, revenue for the fourth quarter included approximately $8.5 million for adjustments to accounts receivable reserves, of which approximately $5.5 million related to prior years.

The earnings press release we issued last night contains more information on this item.

Diluted earnings per share were 56 cents, an increase of 24% over the fourth quarter of last year.

The quarter's earnings per share reflect a few items that we noted in the earnings release.

The expensing of stock-based compensation, which we implemented in 2003, had a 1-cent per share impact on EPS in the quarter.

The increase in reserves related to legacy income tax contingencies, which John will discuss later, have -- had an 11-cent per share impact.

And the impact of the revenue adjustments that I mentioned was 3 cents in the quarter.

Excluding the impacts of these items, our EPS in the quarter was 65 cents, an increase of 44% over last year.

As we have seen in the first three quarters of the year, the impacts of share repurchase and a lower effective tax rate were important contributors to EPS growth, in addition to our strong revenue growth.

For the full year 2003, Moody's reported record results.

Revenue was more than $1.2 billion, and year-to-year growth on a reported basis was 22%.

As you may recall, Moody's acquired KMV in April of 2002, so that our reported 2002 results do not include a full year of KMV revenue.

As noted in our earnings release, assuming Moody's had acquired KMV on January 1, 2002, revenue growth in 2003 would have been 20%.

For 2003, operating income, including stock-based compensation expense, was $663 million, 23% higher than in 2002.

The impact of currency translation contributed approximately 200 basis points of our revenue growth and about 150 basis points of operating income growth for the year.

In addition, 2003 revenue included $5.5 million for adjustments to accounts receivable reserves related to prior years.

Diluted earnings per share were $2.39 in 2003, an increase of 31% from 2002.

Excluding the full-year impacts of the items that I mentioned above, the details of which are in our earnings release, diluted EPS for 2003 would have been $2.47, growth of 35% over 2002.

Now I'll discuss some operating highlights for the fourth quarter.

We had strong growth in the Moody's Investor Service ratings and research businesses in the U.S., with ratings revenue increasing over 20% from the fourth quarter of 2002.

Robust activity in our U.S. structured finance ratings business, where revenue grew more than 30% year-over-year, was the largest contributor to growth.

We benefited from issuance strength in a number of market segments, including asset-backed securities, residential and commercial mortgage-backed securities, and credit derivatives.

We also saw good growth in U.S. corporate bond ratings, reflecting very strong issuance volume in the high-yield market.

And our research business continued to turn an impressive results.

Moody's's total United States revenue was $217 million for the fourth quarter, and grew 24% year-over-year.

International revenue of $134 million in the fourth quarter was 39% higher than in the prior year period, and rose to 38% of Moody's total in the quarter, compared to 36% for the fourth quarter of 2002.

Moody's operating margin for the fourth quarter was about 50%, up from 47% a year ago.

Of note, the quarter's expenses included $2.8 million related to stock-based compensation plans, whereas no such expense was recorded in the prior year period.

International revenue grew 39%, to $134 million in the fourth quarter.

For the full year, international revenue rose to $451 million, an increase of 32% on a reported basis, or 29% assuming we had acquired KMV on January 1, 2002.

As I mentioned earlier, currency translation, especially the strength of the euro, had a favorable impact on our international revenue growth for the quarter, as well as for the full year.

Within the Moody's Investor Service business, international revenue continued to grow at a faster rate than U.S. revenue.

For the fourth quarter, international revenue was more than 40% greater than in the prior year period.

We saw more than 80% year-to-year revenue growth in the corporate ratings sector, and more than 40% growth in financial institutions, as fourth- quarter issuance was strong compared to relatively modest activity in the fourth quarter of 2002.

Revenue from international structured finance ratings increased more than 30%, primarily due to robust issuance in several asset classes, including the European asset-backed securities, collateralized debt obligation, and residental mortgage-backed securities markets.

And Moody's research business continued its strong international performance, growing more than 45% in the quarter.

Our Moody's KMV business had good results for the year.

Revenue reached $112 million, growth of 16% assuming that Moody's had owned KMV for the full year 2002.

We have continued to see strong growth in revenue from subscriptions to MKMV's quantitative credit risk assessment products.

We're particularly pleased with the growth in this part of the business, with its recurring customer relationships, with the -- with the most important global financial institutions.

And we are continuing to develop new products to support future growth.

While MKMV's 2003 performance is below our original growth targets for the business, we continue to believe that the company can, on average, grow in the 15 to 20% range for a number of years.

I'll now turn the call back to John.

Thank you, Ray.

Here are a few comments on the ongoing regulatory review of the credit rating industry in the United States and abroad.

In the United States, the SEC has not announced a specific timetable in its continuing review of the role and function of credit rating agencies.

At this point, we do not know what next steps the SEC may take, though we would not be surprised to see further action in the first half of this year.

The SEC is clearly taking a careful approach in its review, and whatever the outcome, we expect that there will be ample time for comment from all interested market participants.

We continue to work with the commission to assist the process in any way we can.

We're also continuing to speak with authorities outside the United States who are studying credit rating agencies.

These authorities include national regulators and lawmakers, and Pan-National organizations such as the International Organization Securities Commissioners, the Financial Stability Forum, the European Commission, and the European Parliament.

I will briefly mention two recent international actions.

First, a working group of the European Parliament last week completed a report about the rating industry.

While this report praised the work and reputation of the rating agencies, it also, among other things, called for additional inquiry into the rating industry, including the level and nature of competition and oversight in Europe.

Second, on Tuesday of this week the Italian Senate held public hearings about the role of rating agencies in the Italian market.

Moody's submitted a written statement, which is available on our web site.

Now I'll briefly discuss the increase in our reserves for legacy tax matters.

As many of you know, Moody's has contingent liabilities relating to legacy Dun & Bradstreet tax matters that we assumed in connection with our separation from Dun & Bradstreet in October, 2000.

Please refer to our 2002 10K and our third-quarter 2003 10Q for disclosures relating to these contingent liabilities.

As noted in those disclosures, the IRS has been auditing two D&B legacy tax matters, referred to in our financial statements as royalty expense deductions and amortization expense deductions.

Our financial statements have included reserves related to these matters, which we evaluated on an ongoing basis.

During the fourth quarter, D&B and the IRS commenced an appeals process on the royalty expense deductions matter.

In addition, IRS audits related to two years of the amortization expense deductions are nearing completion, and notices of the proposed adjustments have been issued.

Taking these latest developments into account, we increased our reserves for these matters from approximately $110 million to $126 million to reflect our current estimate of the probable exposure.

The probable exposure is less than the maximum exposure.

Currently we don't know when these matters will be resolved.

Our 2003 Form 10K will include additional disclosure.

Let me now give you an update on our share repurchase program and some changes to our management compensation structure.

Regarding share repurchase, Moody's is committed to returning its excess cash to shareholders via share repurchases.

We take an opportunistic approach to buybacks, and we use the discounted cash flow model with conservative assumptions to determine a fair value for the shares.

Our goal is to return capital to shareholders in a way that serves the interests of our long-term shareholders.

As a result, our share repurchase activity will vary from quarter-to-quarter.

During the fourth quarter of 2003, Moody's repurchased just under 1 million shares, at a total cost of $57 million, including approximately 800,000 shares to offset the issuance of shares under employee stock plans.

Since becoming a public company in October 2000, and through the end of 2003, the company has repurchased 23 million shares at a total cost of $881 million, including 9.3 million shares to offset shares issued under employee stock plans.

At the end of 2003, Moody's had approximately $269 million of cash on its balance sheet.

We are willing to let cash accumulate until we believe that we can repurchase shares at prices that benefit our long-term shareholders, as well as those that are selling.

At year-end, we had $169 million of authorization remaining in our current $450 million share repurchase program, and we continue to anticipate completing that program by mid-2004.

Regarding our employee compensation structure, as many of you know, annual bonuses for our managing directors and senior management are based on Moody's performance against our long-term financial targets, rather than annual bonuses.

We believe that this approach creates shareholder value, and we will keep it in effect.

However, beginning in 2004, Moody's will begin awarding long-term equity-based compensation as a mix of stock options and restricted stock, rather than exclusively as stock options as we have done in the past.

For managing directors and senior management, the mix will be 75% options and 25% restricted stock, and the vesting of the restricted stock will vary based on Moody's performance against long-term targets.

The introduction of restricted stock will somewhat de-lever our long-term performance incentive plan, and we believe that the combination of restricted stock and options will offer an appropriate balance of retention and incentive benefits under a variety of performance scenarios.

Coming off the recent strong years of growth and expecting more modest growth and more competition for our talent from investment bankers, we believe that this adjustment towards the retention aspects of restricted stock, while preserving the incentives represented by stock options, will best serve Moody's and our shareholders.

I'd like to conclude my comments this morning by discussing our outlook for 2004.

Moody's outlook for 2004 is based on assumptions about many macroeconomic and capital market factors, including interest rates, consumer spending, corporate profitability and business investment spending, and capital market issuance activity.

There is an important degree of uncertainty surrounding these assumptions, and if actual conditions differ from these assumptions, our results for the year may differ significantly from the outlook presented in this press release.

I should say at this point that many people think Moody's knows more about the capital markets than we actually do.

Forecasting what is going to happen in the capital markets is very difficult.

We do our best, but, as many of you know, we have a poor forecasting record.

We expect interest rates in the United States to rise during 2004, with reduced refinancings of debt and continued weak demand for financing to support business investment.

As a result, we expect to see lower issuance in the United States corporate bond market, both in the investment-grade sector and in the high-yield sector.

Despite the issuance declines, revenue from new products and growth in relationship-based revenue should produce modest growth in both the United States corporate finance and financial institutions sectors.

We are continuing to introduce our enhanced analysis initiative, consisting of financial reporting, off-balance-sheet risk transferrance, and corporate government assessment reports.

We plan to cover approximately 300 corporations and financial institutions in the U.S. by the end of 2004.

We have published 88 corporate governance assessments and 110 financial reporting assessments, and they are available on moodys.com as of the end of January.

Together, these assessments have generated over 30,000 user accesses.

We also expect good growth in consumer spending in 2004.

As a result, we expect that revenues from rating asset-backed securitizations, together with moderate growth in the commercial mortgage securitization and credit-derivative segments of the business, will substantially offset an important decline in revenues from rating residential mortgage-backed securities as the very strong refinancing activity of the past two years declines.

In the public finance rating business, we expect approximately 20% revenue decline in 2004 reflecting projected slowing of issuance related to both reduced refinancing activity and new [inaudible] borrowings.

We expect continued strong growth in the research business.

Outside the U.S., we expect to see double-digit revenue growth in the corporate and financial institutions rating business.

We are also projecting strong year-over-year growth for structured finance ratings revenue and in the research business, all producing approximately 20% rating and research international revenue growth, including the effects of currency translation.

Finally, we expect high-teens percent revenue growth globally at Moody's KMV.

Moody's expenses for 2004 will reflect continued investment spending on improving and increasing the transparency of our rating practices, technology initiatives and product development, and continued hiring to support growth areas of the business.

We will continue our investment in the enhanced analysis initiative.

Moody's expects the operating margin to decline about 100 basis points in 2004 from the level achieved in 2003, reflecting the investments we are making and the faster growth of the lower-margin MKMV business.

Overall for 2004, Moody's expects that year-over-year revenue growth will be in the mid to high single-digit percent range.

With the impact of the slightly lower effective tax rate and share repurchases, we expect that diluted earnings per share will grow in the high single-digit percent range.

The expected earnings-per-share growth is before considering the impacts of the 2003 insurance gain and the legacy tax reserve increase referred to below, and before the impact of expensing stock-based compensation in both years.

The impact of stock-based compensation expense is expected to be approximately 10 to 11 cents per share in 2004, compared with 4 cents in 2003.

As previously discussed, Moody's implemented the expensing of stock options and other stock-based compensation on a prospective basis for options and other stock awards granted on or after January 1, 2003.

The expected increase in related expense in 2004 reflects, in part, the phasing in of expense over the current four-year stock plan vesting period, as new equity awards are granted, and it takes into account the restricted stock grants as well as the option grants that we planned for 2004.

That concludes our prepared remarks for today.

We will be happy to take your questions.

Thank you, sir.

The question and answer session will begin at this time.

If you are using a speakerphone, please pick up the handset before pressing any numbers.

Should you have a question, please press star 1 on your pushbutton telephone.

If you wish to withdraw your question, please press star 2.

Please stand by for your first question.

Our first question comes from Lauren Fine of Merrill Lynch.

Please pose your question.

Great, thank you.

A couple of questions.

The first, a quick one on the tax rate.

I just want to make sure, excuse me, I understand your guidance.

When you're saying the tax rate will be down a bit, do you versus mean the reported rate in '03, or the rate in '03 adjusted for the legacy tax reserve?

Lauren, this is Jeanne Dering.

We are comparing our '04 expectation to the tax rate in '03, excluding the adjustment for the legacy tax reserves.

Okay, great.

And then I'm wondering if you could give us a sense of some of the early trends that you're seeing in the year, recognizing that March is probably the more pivotal month, but specifically in the residential mortgage-backed business and any other categories.

And if you could tell us for 2003 what percent of ratings revenues were relationship-based?

And, if it is fair to ask you, to break down on corporate and structured finance and financial institutions, the breakdown between U.S. and international percentage of, you know, contributions?

Okay.

Lauren, it's Ray.

Let me start with the question on what we're seeing early in the year.

The -- there is momentum in January as a carryover from the fourth quarter of 2003.

I think it's well-known that the low interest rates created a great deal of activity in the fourth quarter, and some of that has spilled over.

In particular, we have not seen a dramatic falloff yet in the residental mortgage-backed securities pipeline, and the falloff has been especially modest for the home equity portion of that pipeline.

So we still see strength in the residential mortgage sector, despite the fact that we do expect a significant decline due to a reduction in refinancing, especially later in the year.

The -- I'm sorry, Lauren --

The percent of the ratings business that's relationship-based today?

Lauren, this is Jeanne Dering again.

For the full year 2003, in the context of the total Moody's business, total Moody's revenue, transaction-based revenue accounted for roughly 57% and relationship-based 24%.

The research revenue would be 10%, and then MKMV 9%.

Great, thanks.

And then my last question was on the ratings business, corporate, structured and financial institution.

If you could give us a sense today of the breakdown between international and domestic?

For the -- again, for the full year 2003, in the corporate end structured finance areas, the split between U.S. and international is roughly two-thirds/one-third.

In the financial institutions business, it's closer to 50/50.

Great, thank you very much.

Our next question comes from Joe LaManna of William Blair & Company.

Please pose your question.

Good morning.

When you were talking about the restricted stock, you mentioned that part of the reason for beginning the restricted stock was that Wall Street may be increasingly going after some of your people.

I think I heard you say that.

And I was wondering, if I did hear that correctly, if you can talk about turnover among your professionals.

Whether you've seen any increase in that with the Wall Street conditions improving?

Or what's your outlook for that for '04?

Thanks, Joe.

We have not really seen -- turnover has been very low at Moody's in 2003, and we haven't really seen a pickup in turnover at all.

We are just expecting that there will be increased hiring by investment banks and, as you may know, we pay bonuses in March, and so there could be some increased turnover after that, especially if the investment banks increase their hiring.

Okay, thank you.

I have an unrelated question.

Given that you're expecting lower issuance in corporate bonds this year, have you made any changes in your pricing of your frequent-issuer programs to account for that?

Yes, we have made some adjustments to our frequent -issuer program.

Really those adjustments, though, are focused on the longer-term business.

What we are trying to do with the pricing is to align the annual fee component for the frequent issuers with debt outstanding, so that there is a more disciplined tiering of the large issuers paying larger annual fees and smaller issuers paying smaller annual fees.

I think that will benefit us in 2004, but it's really part of a longer-term program.

Is it net-net a price increase?

Or is it more just a realignment?

It's a realignment and it will be an increase to the annual fee component of the frequent-issuer pricing.

So it will have a stabilizing effect and make us somewhat less subject to volatility in issuance in '04.

Okay, thank you.

Our next question comes from Kevin Gruneich of Bear Stearns.

Please pose your question.

Good.

I think perhaps along the same levels, you talked about, I think, in the third-quarter call, that you're bumping up with frequent issuers on some fee caps.

And I was wondering if there's a way to quantify the revenue foregone in Q4 and maybe the full year from those fee caps.

Kevin, this is John Rutherfurd.

That's a very good question.

We're working on improvements so that we can answer questions like that, but at the moment I don't think we're able to.

And then just a follow-up on the staffing side.

Could you isolate what your full-time equivalent staff was up in Q4 and for full year?

And also provide Q4 and full-year numbers in terms of incentive comp as a percent of staff comp?

Kevin, this is Jeanne Dering.

I will try to address those questions.

In terms of the staffing at the end of the year, we had about 2200 full-time equivalents, and that's up about 65 people from the end of the third quarter.

And the growth from the end of last year is close to 200 people.

And that includes Moody's and Moody's KMV, and then our Korean and Argentine ventures would add about another 100 people to that number.

In terms of the bonus expense, compared with last year -- For the fourth quarter, the incentive compensation expense was about 25% of total compensation expense, and that was driven by the high operating income growth and EPS growth that we saw in the quarter.

So, the expense was higher by a significant amount than it was in the third quarter.

For the full year, the bonus expense compared with total compensation was a little bit over 20%, compared with roughly 25% for 2002, and that's because in 2002 Moody's operating income growth was quite a bit stronger than it was in 2003.

Excellent.

And just finally, what currently do you have budgeted in terms of FTE growth in '04?

Kevin, it's Ray McDaniel.

On the ratings side of the business we will anticipate adding about 130 people.

We will also be adding to the MKMV and staff sides of the business at Moody's, but certainly not in those numbers.

A large part of the hiring that we will be doing is going to be international, as, in fact, the majority of the hiring for Moody's Investor Service will be international.

And the hiring that we're doing in the U.S. will be a continuation of our enhanced analysis initiative, where we hope to double the existing staff that we have there.

Thank you.

Our next question comes from Douglas Arthur of Morgan Stanley.

Please pose your question.

Yeah, I got a couple of questions.

Ray, I'm wondering if you can elaborate a little bit on structured finance product area trends in the fourth quarter.

Asset-backeds, CDO's-- I mean, you sort of made general comments about them.

And then differentiate between U.S. trends and international trends.

Secondly, I guess on somewhat of a more theoretical level, if the yield curve flattens out in '04, what -- how is that going to impact the growth of derivatives in the U.S.?

And then finally, Jim, I'm wondering if you can make a quick comment on the interest and other line small area, but it looked -- it was down quite a bit more than what you expected.

Thanks.

Okay, sure, Doug.

With respect to the segments of the structured finance business, the fourth quarter we really saw broad-based double-digit growth across almost all sectors, with the exception of the asset-backed commercial paper sector.

Residential mortgages was significantly stronger than we had anticipated it would be at the end of the third quarter and, as I mentioned before, the pipeline there continues to be stronger than we had anticipated, although down somewhat on a year-on-year basis at this point.

The international business was really driven by the European business, which continues to be dominated by the credit-derivatives portion of that business, although the growth we saw in Europe was higher in the asset-backed and residential mortgage-backed sectors in the fourth quarter of '03 than we had anticipated, and we view that as good news because it's diversifying the asset base that is supporting the growth of the European structured-finance business.

Elsewhere, internationally for structured, we did not see strong growth in Asia, really because that's driven by the Japanese side of our business and there was less balance-sheet-driven securitization in Japan with the economic recovery in the second half of the year.

I would add, though, that the pipeline there is strong as well.

Doug, this is Jeanne Dering.

I'll address your question on the other income and expense.

In the fourth quarter of 2003, the net other income and expense was a bit lower than in the third quarter.

And the main driver of that difference is a difference in realized foreign exchange gains and losses that we recorded in each quarter, and those gains or losses arrived from translation of asset and liability positions that are denominated in currencies other than the U.S. dollar.

And for the full year 2003 versus 2002, if we remove the impact of the insurance gain from 2003, the net interest and other expense was about the same year-to-year, and the differences that are reflected within that line are, again, differences in net foreign exchange gains and losses and then, secondly, higher expense for minority interest in 2003.

Great.

And just on the -- two followups on the yield-curve question.

I'm not sure you addressed that.

And what explains the big differential between financial institution growth in the U.S. versus Europe?

Thanks.

Yeah, Doug, sorry.

I didn't answer the yield-curve question.

Really, on the U.S. credit-derivative side, to the extent that we see a narrowing of spreads, that is going to have an impact on the credit derivatives market.

We are not expecting a large volume in growth in transaction volume in 2004 versus 2003.

We are expecting to see more complex issuance, and that is premium-priced.

And so that's really what we expect is going to be driving the credit derivatives portion of the business and it is, we expect, going to be going against the headwinds of narrowing spreads, as credit conditions improve.

And as far as the non-U.S. part of the business ,where the credit derivatives sector is so important, I think it's really largely the same story, where the spread tightening and the appetite for risk-taking out of the banking system and in, for example, into the insurance system, is a material driver of the business.

And then the difference between U.S. and international and financial?

Oh, in financial institutions, the fourth quarter in Europe was really driven by volume issuance.

There was a very strong jump-up in volume activity by the European banking sector.

And that, because the early part of year had been relatively weak, did not cause a lot of issuers to hit annual fee caps, and so we realized most of the gain from that volume increase in the fourth quarter.

Thank you.

Our next question comes from Fred Searby of J.P. Morgan.

Please pose your question.

Thank you, and thank you for your candor.

It's refreshing.

A couple of quick questions.

One, I know it's probably not something you want to address.

I know you're not designed to detect fraud, but can you talk about what -- in the wake of Parmalat and what your rating was on Parmalat a year ago, and how it's, you know -- people have talked about bond phobia in Italy, and what you think the -- if there will be any repercussions similar to what we saw with Enron when there was a lot of hoopla and initially afterwards and then it abated?

But are we seeing that now?

If you could you fill us in on that?

Secondly, I was intrigued by your comment on the consumer strength.

And can you just elaborate where you see the consumer strength specifically?

I know we don't have is a crystal ball, but, I just -- what's driving that?

And I guess those would be the two most important questions.

Okay.

It's Ray.

Let me start with the Parmalat question.

We did not rate Parmalat So we were not in a position in the European market to be responding to whether our rating should have captured elements of fraud in Parmalat, as had occurred with Enron.

We did, however, rate a number of CDO's that included Parmalat in the asset pool.

And most of those were European.

About 60 transactions, European transactions, including Parmalat exposure, and there were a handful of U.S. transactions that included Parmalat exposure.

In Europe, the average exposure of the deals we rated to Parmalat was a little less than 1%.

In the U.S. the average exposure was closer to a half percent.

So the transactions that we have rated, particularly for the senior classes, we don't believe are going to be under any significant pressure as a result of the Parmalat failure.

In terms of regulatory response, it's difficult to tell.

At least it's difficult for me to tell right now.

There, as John Rutherfurd mentioned, the Italian Senate is conducting hearings into the role of rating agencies in the Italian market.

The outcome of that might be a call for regulation.

It might be a call for greater use of ratings in the Italian market, where the major rating agencies have not traditionally played as large a role as they have in the U.S. or in other western European countries.

On the consumer spending question, the comment really is just based on the consensus for 3.4% real consumer spending growth in 2004.

That's just the blue-chip consensus.

If you were to add, say, 1.7 of inflation, you'd get to 5.1% nominal, which would lead, we believe, to continued growth in the production of consumer assets, many of which, as you know, get recycled in the structured-finance vehicles.

So that's really what's behind that.

We also, as Ray said earlier, have seen a continued interest in home equity borrowing, which we -- and we report revenues from home-equity securitizations in our residential -- with our residential mortgages.

If I could follow-up with one quick question.

Is it correct if I surmise or summarize your comments earlier on retention, that historically your people have been poached when Wall Street starts coming back, but that you haven't seen that yet and don't expect it?

Would that be correct, that some of that pressure may have abated with the fallout in research and compensation that we're seeing on Wall Street?

I think the statement is completely correct.

While some of the people go into research functions, I think that, particularly in structured finance, many of the people that we lose also go into more transactional-based activities.

Okay, thank you.

Our next question comes from John Neff of William Blair & Company.

Please pose your question.

Hi.

Thank you.

Just a couple of quick questions.

Is there any, at this point, enhanced analytics revenue that's been generated by the work to date?

And, if so, what line item would that be in?

The short answer is yes, there has been additional incremental revenue.

Most of that revenue would appear in corporate finance going forward, but I should say that the revenue we generated in 2003 related to some of our early work in liquidity-risk assessments, and more of that work applies to our financial institutions group.

So, there was some additional revenue coming from the enhanced analysis initiative last year in financial institutions.

That will continue to grow, but we will also see more growth and ultimately more revenue coming out of the corporate finance area, ratings area.

Okay.

Great.

And I was just wondering if you could give us a little bit more color on the changes to the accounts receivables reserves?

Specifically just what drove that and accounted for it?

This is Jeanne Dering.

I'll try to address that for you.

In the fourth quarter, we conducted reviews and analyses related to accounts receivable reserves and revenue deferrals.

And in connection with those analyses, we trued-up reserves and deferred revenue accounts, and we determined that some of the adjustments that resulted included some amounts that related to prior periods.

And although we don't believe the amount is immaterial, we thought since it was slightly larger than some other adjustments that could be made from time to time, we thought it would be helpful to highlight it.

Okay.

So traditionally, then, on a quarterly basis, are there slight adjustments to that -- to those reserves?

On a -- I think that it's fair to say that adjustments of estimates are a normal part of the accounting and closing the books and financial reporting.

So, from time to time, our results would reflect adjustments of estimates.

And in this case it's just a little bit more than normal?

Right.

Okay.

And then I just -- quick question on Moody's KMV.

Barra introduced recently a product, I think, pretty much earmarked to compete with KMV.

I was wondering if you -- if one of the issues there, in terms of reducing the growth rate a little bit, is increased competition?

I think you're absolutely right that Barra has introduced a credit-based product.

There is also other forms of competition in the -- for the KMV.

Risk Metrics, for example, has product., and CreditSites has a product in this area.

We believe that our product is significantly better than the competitive products.

Frankly, including the Barra product -- we believe that the growth in the subscriptions to our KMV risk products will continue to -- will continue both in 2004 and for a number of years.

All right, thank you.

Our next question comes from Brandon Dobell of CSFB.

Please pose your question.

Hi, thanks.

A couple ones.

I wonder if you could characterize, maybe by the revenue segment, some general color on transaction versus relationship, walking down the structure of the financial -- You know, you mentioned on a broader basis earlier, we want to get a little more detail there.

And then kind of a more theoretical question, maybe for John or for Ray.

It looks like the '04 guidance is assuming a rising rate environment.

If we don't get a rising rate environment, I'd like to hear your thoughts on what that might mean for the different segments of the business, in particular the ones that have a little bit more leverage on the transaction side of the -- Thanks.

Sure.

In structured finance, which, as you know, is our largest business line, the only relationship part is asset-backed commercial paper, which is a regular -- relatively small part of the activity.

Similarly, public finance is virtually all transaction-based.

By contrast, corporate finance is about 50% transaction and 50% relationship, and financial institutions is a little bit more than 50% relationship.

Let me just add, also, Brandon -- It can be a little bit confusing to think about transaction versus relationship because of the way our pricing structures are evolving.

We are billing for annual monitoring fees in our company ratings area for infrequent issuers who have issued in prior years and whose credits we must continue to follow.

And so there is an annuity-based component to that, even though it's a transaction part of our business.

At the same time, on the relationship side of the business there is still some difference based on volume activity, because we have annual fees, but then we also have discounted issuance fees.

And so I think it's helpful to think about transaction versus relationship, but there is some overlap as you consider the business.

Okay, and your next question basically is, well, you know, what happens if rates don't go up?

I mean, I think I would still expect a decline in residential mortgage securitization revenues if rates don't go up.

And I would also expect some decline in corporate finance, simply because the 1994 cohort of corporate bonds was relatively small.

And that cohort may be coming off call protection at this time.

If rates don't go up, I think it would be helpful for the other aspects of the structured business, particularly commercial mortgage securitizations, asset-backed and, potentially, derivatives.

Okay.

That's very helpful.

Ray, I think historically you guys have given out at least kind of a directional number in terms of how much those annual monitoring fees contributed to revenue, or something like that.

Is there a way we can get some idea of what that looked like in '03 versus '02?

Well, I guess the short answer is I don't have that in front of me.

So I can't give your an answer.

I apologize.

Okay.

Not a problem.

Thanks.

Our next question comes from Edward Atorino of Blaylock & Partners.

Please pose your question.

I apologize for extending this.

John, over the years you've talked about the -- I guess, disintermediation in Europe, where they're going from their model toward the U.S. model.

Is there any current numbers as to how much of a transition is completed from the old bank financing to public financing in the, let's say, the European capital markets?

Yes, Ed.

I think that it's really quite small.

Still small?

Yeah, we will be updating the chart in our investor presentation that talks about the stock of rating.

Right.

At the end of the year.

You know -- as you probably know, that number did not grow very much in 2002, because a number of issuers that we had rated unfortunately went bankrupt.

We do expect that, with increasing global credit quality, that those numbers should be showing an increase over the next few years, primarily because we've always had a good stock of rating requests coming in the front door.

Thank you very much.

Our next question comes from Peter Slowkowski [ph] of Goldman Sachs.

Please pose your question.

Yes, good morning, everybody.

Just a quick one.

With regards to, sort of, the interest rate environment and what you're seeing, and expectations for '04 -- as rates continue to increase, are you foreseeing any activity on the commercial paper side if people are starting to fix that?

And then also on the economic side, as conditions improve going forward, if you're seeing an increase in capital expenditure issuance for different companies?

Well, on the commercial paper side what we typically look at is commercial paper issued by nonfinancial institutions.

And that number has still been going down.

For example, in December of 2000 commercial paper for nonfinancial issuers was $316 billion.

And in December of 2003 that number had come down to $112 billion.

So, you can see that there has been a very large reduction in commercial paper outstanding, and some of that has gone into asset-backed commercial paper, which is reported by the government as commercial paper outstanding by financial issuers.

You know, I don't, as I said in -- or as we said in the comment, we do not expect a significant increase in business investment financed by debt.

There are a couple of reasons for that.

The first reason is that profits from current production are about 95% of business spending at the moment, so that business spending can be financed through current profits.

Also, there is a lot of short-term debt capacity in the economy, as indicated by the decline in commercial paper, and also the fact that commercial and industrial loans by banks has also come down quite a bit.

So, there's a lot of short-term debt capacity available.

Okay, thank you very much.

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Our next question comes from Jim Baker of Neuberger Berman.

Yes, good morning everyone.

I have a few questions here.

First of all, do you have the breakdown of how the reversal of the receivables reserves broke down to U.S., international, and between perhaps the categories of the MIS revenues, and if any of that is applicable to MKMV?

This is Jeanne Dering.

I'll try to address that for you.

The -- first of all, none of that was applicable to MKMV.

It was within the ratings and research business.

And the way that it broke down is roughly in line with the relative proportion of revenue in business unit and in geography by U.S. versus international.

So, if you look at the percent of revenue that corporate finance or structured finance accounted for for the year 2003, that's roughly the amount of the adjustment -- the percent of the adjustment that would have been reflected in that business unit.

Okay.

That's helpful.

Secondly, I think you mentioned -- what was the remaining share repurchase authorization at the end of '03?

At the end of '03, it was approximately $169 million, and that was out of the $450 million program that was approved in October of '02.

Okay.

And another question I had was do you have, for the full year, the cash from operations and capital expenditures?

The cash from operations and the complete cash flow -- I'm afraid that we'll have to wait until the 10K is published.

The capital expenditures -- I can give you some round numbers.

The spending on property and equipment for the year, I believe, was roughly $15 million.

And then there was about another $4 to $5 million that we invested in capitalized software products.

Okay.

And, you wouldn't know things like, I guess, some of the details, the tax benefits and stock options, deferred taxes, stuff like that?

I am afraid I don't have those details in front of me.

Okay.

And Jeanne, do you happen to know what the net debt was at the end of the year?

At the end of the year we had $300 million of long-term debt that had been put in place at the [inaudible], and no short-term debt.

And the cash was how much?

And the cash, I believe, was about $269 million.

269.

Okay.

And a final question I had was -- just within, you know, maybe this is for Ray or John -- within international, are you starting to see more activity in nontraditional areas, like Asia, outside Japan, Latin America, or any other parts of the world, that have not generally been part of your international focus?

This is Ray.

The European business continues to be the largest percentage growth-driver, as well as the largest dollar growth-driver for us.

And and so it's certainly been the basis for our international growth up through 2003.

The Asian region has become certainly more material to us, and Asia and Europe together constitute the very, very large majority of our non-U.S. business.

The Latin American and nontraditional Europe -- Eastern European businesses remain very small, as well as for emerging market countries in Asia.

So, I guess a short answer to your question is no, we continue to see the growth coming out of the developed markets, primarily Europe, supported strongly by the developed part of Asia.

Okay.

That's very helpful.

And one final -- do you happen to have the operating income breakout for MKMV for the year?

I know you'll be publishing that in the K eventually, but I just wonder if you have it now?

I can probably get it for you in a second.

The operating income for MKMV for the year was roughly $6 million.

That includes the -- MKMV's share of the expense for stock-based compensation.

And how much was that allocated for --

Oh, I'd say that was roughly a million dollars.

For the full year?

Okay.

Yeah, I believe so.

Okay.

I think I've exhausted all of mine.

Thank you very much.

Our final question comes from Edward Atorino of Blaylock & Partners.

Please pose your question.

John, what do you think of the Bond Market Association forecast for the various sectors of the bond market?

Well, the range of forecasts for the bond market is very, very large.

You know, when we do our forecasts we tend to look as many investment banks as we get -- as we can get.

We also, of course, look at the bond markets and I -- we haven't been consistently right, and I don't think that any forecaster has been consistently right.

True.

Thank you very much.

If there are no further questions, I will now turn the conference back to John Rutherfurd.

Well, thank you very much for joining us on the call, and thank you for your continued interest and support of Moody's.

Ladies and gentlemen, this concludes the conference for today.

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

All parties may now disconnect.