穆迪 (MCO) 2004 Q4 法說會逐字稿

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

At this time, I would 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 up for questions and answers following the presentation.

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

Please go ahead.

Good morning, everyone, and thank you for joining us on this teleconference to discuss Moody's results for the fourth quarter and full year 2004.

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

Moody's released its results for the fourth quarter of 2004 this morning, and the earnings release is available on our website at IR.Moodys.com.

John Rutherfurd, Jr., Chairman and Chief Executive Officer of Moody's Corporation, will be leading this morning's conference call.

Also on the call this morning are Ray McDaniel, President and Chief Operating Officer of Moody's Corporation and President of Moody's Investors Service; and Jeanne Dering, Chief Financial Officer of Moody's Corporation.

They will be available to answer your questions following John's remarks.

Before we get started, I would 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 would 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 31st, 2003, and in other securities 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 this morning.

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

I should point out that some members of the media might be on the call this morning in a listen-only mode.

And at this point, I am 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, I'll provide a summary of Moody's fourth-quarter results, and Ray will discuss our operating highlights for the quarter and provide and update on the regulatory environment.

Following Ray's comments, I will provide some detail on the legacy tax provision we made in the quarter, discuss the dividend increase and proposed stock split we announced today and update you on our share repurchase program.

I will conclude by providing Moody's outlook for 2005.

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

Now, let me talk about Moody's reported record revenue and profitability for the fourth quarter of 2004.

Revenue in the fourth quarter rose to 392 million.

Revenue for the period was 12 percent higher than in the fourth quarter of 2003, and exceeded our expectations by a good margin.

When we provided guidance on our conference call in October 2004, we said that we expected macroeconomic and capital market conditions in the fourth quarter to be similar to the third quarter, except that we expected long-term interest rates to rise somewhat in response to rising short rates, causing some slowing in mortgage-related activity.

We said that we expected revenue would be generally the same in the fourth quarter as the third, with positive revenue seasonality in certain sectors offsetting less favorable capital market conditions.

However, US corporate and mortgage interest rates did not rise as expected in the quarter, and also issuance activity in several sectors of the US and European structure finance markets picked up, due to favorable spreads.

Consequently, issuance volumes proved to be greater than expected.

Operating income in the fourth quarter was $206 million, and grew at a faster pace than revenue, reflecting the impact of unanticipated revenues and Moody's relatively inelastic cost base.

Foreign currency translation contributed almost 200 basis points to the quarter's revenue growth and almost 150 basis points to operating income growth.

Diluted earnings per share for the quarter were 80 cents, an increase of 43 percent over the fourth quarter of last year.

As noted in our press release, fourth-quarter EPS included a charge of $1.6 million, equivalent to 1 cent per diluted share, related to legacy income tax exposures that were assumed by Moody's in connection with its separation from Dun & Bradstreet in 2000.

Those are described in Moody's annual and quarterly SEC filings.

Earnings per share for the fourth quarter of 2003 included a legacy income tax charge of $16.2 million or 10 cents a share.

In addition, EPS for the fourth quarter of 2004 included 8.7 million of pretax expense related to stock options and other stock-based compensation plans, equivalent to 4 cents per diluted share, compared with 2.8 million or similar expense or 1 cent per diluted share in the fourth quarter of 2003.

Our earnings release includes tables showing the non-GAAP financial measures that are derived after excluding these items from our results.

Now, I would like to ask Ray to provide a review of Moody's operating results for the quarter and provide an update on the regulatory environment.

Thanks, John.

I'll begin by discussing operating highlights for our US businesses.

Moody's US revenue reached $240 million in the fourth quarter, growing more than 10 percent year over year, and Moody's Investors Service US ratings revenue grew more than 10 percent year over year, and research revenue continued to grow significantly faster, at more than 15 percent.

US structured finance was again the largest contributor to growth on a dollar basis.

Revenue rose in the low double-digit percent range, compared with the prior year.

Moody's benefited from continued robust activity in the residential mortgage and home equity sectors, reflecting continued strength in housing markets, based in part on the unexpected persistence of the low interest rate environment.

The commercial mortgage-backed securities and credit derivative sectors also performed well.

US corporate finance revenue grew in the high teens percent range, reflecting strength in rating bank loans and high-yield bonds that offset the impact of a significant decline in investment-grade issuance.

US financial institutions ratings revenue rose in the high single-digit percent range year over year, benefiting from good issuance by real estate investment companies and banks as spreads narrowed, creating refinancing opportunities.

Finally, public finance revenue declined 10 percent in the quarter versus the prior year as new money issuance decline from the prior year, reflecting reduced borrowing needs as a result of improving tax receipts.

Moody's KMV reported low double-digit percent increase in US revenue, based on growth from credit risk assessment products and credit processing software to support commercial lending decisions.

Moody's also continued to generate good revenue growth in international markets, strongly aided by the favorable impact of dollar depreciation on non-dollar revenue.

Total international revenue of $151.3 million in the fourth quarter was 13 percent higher than in the prior-year period, with foreign exchange accounting for almost 5 percent of the growth.

International revenue accounted for 39 percent of Moody's total in the quarter, up from 38 percent a year ago.

Moody's Investors Service reported low teens percent growth in international revenue, with high single-digit growth in local currency.

International structured finance revenue grew in the low teens overall and high single digits in local currency.

Good growth in credit derivatives was partially offset by weakness in residential and commercial mortgage-backed securities.

Despite favorable currency translation international corporate finance revenue in the fourth quarter declined from the prior year.

Corporate issuance volumes in Europe declined more than 20 percent, compared with the strong prior-year period, even though the speculative grade market was active.

Stronger corporate cash flow reduced borrowing needs among investment-grade issuers, and M&A activity remained modest.

International financial institutions ratings revenue rose in the mid-20s percent range and 20 percent in local currency, reflecting strong growth in new rating relationships with European and emerging market banks, which more than offset the impact of lower issuance in some market segments.

Moody's research business continued its very strong international performance, with revenue rising more than 30 percent year over year and over 20 percent in local currency.

Finally, Moody's KMV generated $20 million of international revenue, 10 percent more than the fourth quarter of 2003, with little foreign exchange impact.

Revenue included good growth from credit risk assessment subscription products.

Moody's operating margin for the fourth quarter was 53 percent, compared with 50 percent a year ago.

As we have mentioned in the past, a large part of our expense base is related to our (technical difficulty) and is relatively fixed despite near-term fluctuations in market activity.

Therefore, our margin expansion in the quarter is a result of unexpectedly strong revenue growth.

Finally, I would like to make a few comments on the ongoing regulatory review of the credit ratings industry internationally and in the US.

Internationally, Moody's has announced that we endorse the code of conduct for rating agencies that was released as a joint initiative of International Organization of Securities Commissions, called IOSCO, and the credit ratings industry.

Moody's internal code of conduct is already substantially consistent with the code, and we will periodically report on both our progress in areas addressed by the code and any areas where Moody's is not currently in compliance.

Additionally, the Committee of European Securities Regulators, called CESR, is considering whether the European Union should institute regulation of rating agencies and, if so, the form and scope of such regulation.

CESR has held public hearings, and we continue to be an active participant in the CESR process.

In the United States, last week, Moody's participated in the US Senate hearing examining the role of rating agencies in the capital markets.

Discussion at the hearing focused on how credit rating agencies manage potential conflicts of interest, the nature of competition in the industry and whether additional oversight by the SEC is warranted.

In general, we found the tone of the session constructive.

Before the Senate hearing, the SEC released a press releases stating that it expected to propose standards in March 2005 for those rating agencies in the United States designated as nationally recognized, and was working with the industry on a voluntary framework of compliance that would include self audits and inspections and incorporate the important standards of professional practice included in the IOSCO code of conduct.

We are currently working with the SEC and other members of the industry on the development of the SEC voluntary framework.

At this point, I will turn the call back to John.

Thank you, Ray.

As we noted in our earnings release, Moody's results for the fourth quarter included a 1 cent per share charge related to legacy income tax exposures that Moody's assumed in connection with our separation from Dun & Bradstreet in October 2000.

In the fourth quarter, Dun & Bradstreet and the IRS reached a settlement in the matter referred to in our securities filings as utilization of capital losses.

The fourth-quarter charge adjusted our legacy tax reserve for this matter to reflect Moody's estimated share of the anticipated settlement amount.

On our Form 10-K for 2004, we will include additional disclosures on the status of this and other legacy tax matters.

I would like to remind you that, as our securities filings state, the estimated maximum exposure on our legacy tax matters is greater than the probable exposure for which we have reserved.

I would like to speak for a few moments about capital allocation.

Moody's is committed to returning its excess cash to shareholders or approaches (ph) to pay a modest dividend and buy back shares opportunistically, using a discounted cash flow model with derivative (ph) of assumptions to determine a range of fair values for the shares.

Our goal is to return capital to shareholders in a way that serves their long-term interest.

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

As we have said before, we regularly assess our policy and the mix between dividends and share repurchase to insure that the policy will produce the right long-term outcome for our shareholders.

Today, we announced that our Board of Directors approved an increase in our cash dividend from the current quarterly rate of 7.5 cents a share to 11 cents a share, effective with the June 15, 2005 dividend payment.

The Board also approved a proposed 2-for-1 stock split, which is subject to shareholder approval of an increase in our authorized shares at the annual meeting in April.

After the split, the new quarterly dividend will be 5.5 (technical difficulty) share.

We will announce the results of the shareholder vote on the increase in authorized shares and the status of the proposed stock split following the annual meeting.

Turning to stock buybacks, Moody's did not repurchase any shares during the fourth quarter of 2004, although we issued 1 million shares under our employee stock compensation plans.

For the full year 2004, we repurchased 3.5 million shares at a total cost of $221 million.

Since becoming a public company in September 2000, and through the end of December 2004, Moody's has repurchased over 26 million shares at a total cost of $1.1 billion, including 13 million shares to offset shares issued under employee stock plans.

At the end of the fourth quarter, Moody's had more than (ph) $600 million of cash on its balance sheet.

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

At quarter end, we had $548 million of authorization remaining in the $600 million share repurchase program that our Board of Directors approved in May 2004.

I'd like to conclude my comments this morning by discussing our outlook for 2005.

Moody's outlook for 2005 is based on assumptions about many macroeconomic and capital market factors including interest rates, corporate profitability, business investment spending, merger and acquisition activity, consumer spending, residential mortgage, refinance activity, securitization levels and capital market issuance.

There is an important degree of uncertainty surrounding these assumptions, and if actual conditions differ from these assumptions, Moody's results for the year may differ from the outlook presented.

In the United States, we expect mid-single-digit percent revenue growth for the ratings and research business for the full year 2005.

In the US structured finance market, we expect that revenue from rating residential mortgage and home equity security will decline by approximately 20 percent or more in 2005 from the record level in 2004, due to lower-than-expected issuance volume and our expectation that market share gains in 2004 will be difficult to sustain.

We expect good year-over-year growth in several other sectors of United States structured finance, including asset-backed securities and credit derivatives, and flat to modest growth in asset-backed commercial paper and commercial mortgage-backed securities.

Accordingly, for the full year, we expect a modest decline in US structured finance revenue.

In the US corporate finance business, we expect that modest growth in investment-grade issuance and bank loan ratings and revenue for more enhanced analysis initiative will offset relative weakness in speculative-grade bond activity, resulting in high single-digit percent growth in revenue.

Flat issuance volume in the financial institution sector in the United States is expected to be offset by revenue from our enhanced analysis initiative and new rating relationships, allowing low double-digit percent growth in this sector in the United States in 2005.

We expect a second consecutive year of modest year-to-year revenue decline in US public finance.

We're also forecasting continued strong growth in the US research business.

Outside the United States, we expect growth in ratings and research revenue in the range of 20 percent, with double-digit percent growth in all major business lines in almost all regions, assisted by favorable foreign currency impacts.

Our projection assumes improved corporate issuance in Europe, after a relatively weak 2004. modest issuance growth in the financial institution sector, and in that sector, good growth in new rating relationships, and growth in several sectors of structured finance in Europe and Japan.

In addition, we expect continued strong growth in international research revenue.

Finally, we continue to expect global revenue to rise in the midteens percent range at Moody's KMV, reflecting good growth in both credit risk assessment subscription products and credit processing software products.

For Moody's overall, we expect high single-digit percent revenue growth for the full year 2005, including the positive impact of currency translation.

We expect the operating margin before the impact of expensing stock-based compensation to be down approximately 100 basis points in 2005 compared with 2004.

This reflects slower (ph) revenue growth in 2005 than in 2004 and investments we are continuing to make in expanding geographically, improving our analytic processes, pursuing ratings transparency in compliance initiatives and in Moody's Investors Service business and introducing new products and improving our technology.

For 2005, we expect that year-over-year growth in diluted earnings per share will be in the high single-digit percent range.

This expected growth excludes the impact of the legacy tax provisions in 2004 and the expensing of stock-based compensation in 2004 and 2005.

The impact of expensing stock-based compensation is expected to be in the range of 18 to 20 cents per diluted share in 2005, compared to 11 cents per diluted share in 2004.

And this estimated 2005 impact excludes any effects of adopting Statement of Financial Accounting Standards No. 123(R), share-based payment, which will be effective as of July 1, 2005.

That concludes our prepared remarks.

We will be pleased to take any questions you may have.

(OPERATOR INSTRUCTIONS).

Peter Appert, Goldman Sachs.

Thank you for the detailed guidance.

Can you talk specifically, though, about the first quarter, in terms of the pipeline you see, and the relative confidence it gives you in the near-term revenues?

Thank you, Peter.

I'll ask Ray to comment on that.

Because the long interest rates have not moved up -- either the benchmark treasuries which a lot of our corporate sector is based off of, or the long mortgage rates -- we still see a pretty good pipeline.

It's not at the levels that we saw during some periods of 2004, and in particular, we are seeing a shift in the relative strength between the high-yield sector and the investment-grade sector of corporate, where we're seeing some more strength in the investment-grade sector.

And we are starting to see some slowing in high yield.

And then, specifically the enhanced analysis initiative, Ray -- can you tell us how big that is from a revenue perspective currently, and if the profitability on those revenues are similar to what you're doing overall?

The revenue for 2004 was about $11 million for our enhanced analysis initiative, and the operating contribution from that was below the levels of Moody's overall margins.

We would expect in 2005 to grow that 11 million, and we still believe that we can reach our 2007 target of $50 million in incremental revenue from this effort.

With regard to the -- I guess following on the pipeline issue, it might suggest, then, that as I think about how the quarterly progression goes in '05, that you would anticipate that the pace of growth from a revenue and profitability standpoint would decelerate as the year progresses.

Is that a fair assessment?

Yes, I think it's probably a fair assessment, subject to a couple of caveats.

There are some seasonal patterns to issuance, and I think that those seasonal patterns will continue to reveal themselves in some of the areas that have stronger seasonality.

I would also look importantly to how the expected rising interest rate environment relates to strong economic activity and growth in mergers and acquisition activity, business spending, et cetera.

So that mix is going to be important for us to watch, in terms of trying to look at the quarterly projections.

You have not actually made any cash outlays with regard to the tax legacy reserves yet, have you?

Peter, this is Jeanne Dering.

No, we have not yet made any cash payments.

Douglas Arthur, Morgan Stanley.

I've got one question.

I think Lisa has a couple.

Ray, in terms of the first quarter, I think you mentioned a couple, three or four weeks ago, at a conference that, while you expect residential mortgages in the US to be down 20 percent in issuance, the pipeline was surprisingly strong at the beginning of the year.

Is that still true, or have you seen that market fall off?

We still do have a pretty good pipeline, and so we expect that the first quarter in the residential mortgage area will be a good quarter.

How quickly that pipeline drops off, based on our expectations for what is going to happen with issuance, in reaction to a rising rate environment, you probably can forecast as well as I can.

Great, and I think Lisa has a question.

Ray, can you just give us a little color on the fourth quarter in structured finance?

If you could just quantify the year-over-year percent change in the US and international, for residential mortgage-backed securities derivatives and asset-backs in particular.

And then, just looking at your '05 outlook, it looks like you expect asset-backs in particular to accelerate.

What is underlying your assumption for that expectation?

Then, just back to the fourth quarter again, if you could just speak in specifics to what areas in asset-backs softened a little bit in the quarter?

Let me start with the '05 versus '04 expectation, the asset-backed.

It's really our expectation that we will see a restoration of issuance in some of the areas in '04 that were relatively weak.

And there were aspects of the consumer term asset-backed market that were weak in '04.

We don't think that that is going to continue in '05.

With respect to the fourth-quarter for structured finance, we had low double-digit growth, both in the US and internationally, and I think we had mentioned before mid-teens growth in Europe for the fourth quarter over the year-ago period.

In the US, we had a decline in the term asset-backed revenue, compared to the prior year of mid-20s percent, and an increase in RMBS in the mid-20s percent.

Derivatives was also almost at 20 percent growth against the fourth quarter of 2003.

So that's the US story.

In Europe, it was much more oriented to the derivatives market, in terms of growth.

We had mid to high 20 percent growth in credit derivatives coming out of Europe with the RMBS and CMBS markets being down compared to the year-ago period.

Lisa, I would just like to add two points which I am sure you know, but others may not.

The numbers that Ray gave do include foreign currency; they are not in local currency.

And secondly, when we talk about residential mortgage, we include the home equity area in the residential mortgage sector, so we're talking about both.

Fred Searby, JPMorgan.

A couple questions for you.

First, there has been a lot of noise about Fitch and their being included in the Lehman index.

I wondered if you could give us some color or thoughts on that.

And then, just quickly, the dollar has reverted here and has gained some steam this year.

What are you baking into that which includes an FX assumption, dollar depreciation or appreciation -- it's not totally clear -- and to what degree or magnitude?

I'll try and answer the first question, and John Rutherfurd may want to amplify my answer.

First of all, I think that the inclusion of Fitch in the Lehman index shows the importance that the marketplace is placing on stability of ratings, whether it comes from any one rating agency or from the industry as a whole.

We interpreted that as being a strong vote in favor of the stability of ratings, which we also think is important, and which we have been trying to emphasize in our own ratings.

The sensitivity of the portfolio holdings to the Lehman index certainly is going to be, I think, limited somewhat by having a third independent opinion in the market, and I think that plays into another factor, which, frankly, we think is going to contribute to a healthy industry structure, which is having more credible, truly diverse opinions available in the marketplace.

I don't see this as being something that is harmful to Moody's or any other individual rating agency, but adding to the contribution that the ratings can provide the market, because the market is going to rely more on ratings in the aggregate.

Just to follow onto that, not to belabor the point, but just playing Devil's Advocate a little bit here, it looks like there was an end around, basically, because they had a more positive rating.

We have looked at it, and it looks like there is a slightly more positive bias to Fitch's ratings.

And do you think, A, this augurs for some kind of three-horse market, as opposed to the usual kind of Coke/Pepsi we have seen with you guys and market share?

And have there been any cases that you're starting to see increasingly, when you are more negative, and it ends up being S&P and Fitch, as opposed to S&P and Moody's, the traditional?

Well, there is always been some competition based around what I will loosely call rating standards.

But that competition is importantly constrained by the fact that there are not a tremendously large number of NRSROs in the US, and by the fact that the market likes to have more opinions rather than fewer opinions.

So, again, I don't see this as being an important change for how we view our business.

I think, Fred, the only other thing I would say is that in connection with differences in rating standards, we believe that we have taken the lead by providing, essentially on a quarterly basis, a scorecard of our rating accuracy.

We have adopted a scorecard which equally penalizes both rating too high and rating too low.

We would encourage market participants to look at that scorecard.

We have also published extensive research on how to incorporate our outlooks and watch lists into thinking about how our ratings go, and how that affects rating accuracy and stability.

And frankly, we wish that the market would look at the effects of outlooks and watch lists perhaps in a more comprehensive fashion then they have to date.

Just -- I'm confused on the FX assumption, whether you're baking in dollar depreciation or appreciation, and to what magnitude in that guidance?

I'll try to address that for you.

In terms of our 2005 outlook, we have assumed benefit from further depreciation of the dollar on the revenue side, a bit less than the benefit that we saw in 2004, probably about 150 basis points, and then a lower impact on operating income.

And when we made those assumptions, and I think this is still the case, the rates that we're assuming are a little bit lower.

The euro and pound exchange rates, namely, are a little bit weaker than the six-months forward rates.

So even though, as you said, rates have come in a little bit lately, the budget assumption is there'd be less (technical difficulty) forward rates that we were looking at.

Karl Choi, Merrill Lynch.

A couple questions.

One, I wonder if you would disclose, within the structured finance categories, the proportion of revenues from the major product lines, which are mortgage-backed and asset-backed.

And second question is regarding headcount.

Could you update us on the change in headcount in the quarter and for the full year, and what your expectations are at this point for 2005.

Area interested in the US structured finance market or global structured finance?

Well, I'll take both, but I suppose global more importantly.

Okay.

Let me do a little work here.

Okay, the residential mortgage-backed securities component of the global structured finance market is about 20 percent.

The commercial mortgage-backed securities component is about 15 percent, and the derivatives component is in the high 20s, not quite 30 percent.

The last of the large lines is term asset-backed, and that would be high teens -- 17, 18 percent.

And these are for the full year or for the quarter?

That's for the full year.

Any major differences for the US, then?

Well, residential mortgage-backed securities is a relatively larger portion of the US business, and the derivatives is a slightly smaller portion of the US business.

Great.

This is helpful.

And the headcount?

I'll try to address that question.

The headcount at the end of the year was roughly 2400, and that does not include the headcount of the Korean joint venture that we have.

And the 2400 is about 8 percent higher than the prior year, and that 8 percent growth was experienced both in the MKMV headcount and in the Moody's headcount, both within and outside the US.

So each of those sectors have roughly 8 percent headcount growth year to year.

And any thoughts about 2005, with respect to hiring plans?

We certainly continue to hire, and we're trying to target our hiring into some specific areas in the ratings side of the business.

First of all, our international business, which we are expecting good growth from in 2005, is getting a disproportionate amount of our hiring.

We are also doing that because we see some opportunities in some (technical difficulty) developing markets where we can make some investment now that if it doesn't pay back in 2005 will pay us back in future years.

In the US, we are doing some catch-up hiring from the fact that we could not react as quickly as the strong revenue performance in 2004 indicated, in terms of bringing people onboard.

That, I don't think, would be considered significant, but it is filling some gaps in our structured finance area and our corporate finance area, just to make sure that we are properly monitoring and covering the credits.

Finally, our enhanced analysis initiative -- we are continuing to hire both credit generalists and still a few specialists in that area, and much of that effort will be to allow people enough time and the proper expertise to improve our rating transparency.

And in 2005, we will also be hiring in KMV.

Yes, yes.

Sorry.

And if I could follow up with one last question regarding your expectations for the tax rate in 2005?

At this point, we are expecting that our tax rate in 2005 will be at a level that is similar to what we would think of as the underlying tax rate for 2004, which is excluding the legacy items.

But, as I am sure you know, the tax rate, as it will vary from quarter to quarter, based on the actual earnings and tax rates in the various countries in which we do business.

But we are not anticipating a substantial change in the normative tax rate year to year.

Michael Meltz, Bear Stearns.

John, can you just clarify the guidance that you're giving for '05 -- can you just tell us what type of yield scenario that is predicated on, maybe where you're expecting yields to end at year end?

And just two other questions -- Jeanne, can you tell us what compensation was as a percent of total expenses in the quarter, and then what the incentive comps percentage was of compensation?

And then, lastly, can you just remind us what your revenue mix looked like in '95, please?

Okay.

I guess the first question was about expectation for rates.

I think Ray is looking at it.

I'm looking.

In terms of the benchmark treasury rate, we're expecting that to be a bit above 5 percent by year end.

We would also expect mortgage rates to be up probably 75 to probably 100 basis points from where they are currently, so I think it's about 5.75 currently.

I'd have to say, though, that the long-term rates have not moved up early in the year the way we expected.

And so, the moves will have to be somewhat more aggressive, in order to hit those expectations, than we were thinking even a couple months ago.

We may learn more later today after Chairman Greenspan testifies.

Jeanne, do you have the information that Michael is looking for on compensation?

Sure, Michael.

In the fourth quarter, compensation expense was again roughly two-thirds of our total expense, so that the proportion didn't change much year to year.

In terms of the incentive compensation, in the fourth quarter of 2004, that percent of total compensation was about 17, 18 percent, whereas in the prior year it was closer to 25 percent.

And that reflects the fact mainly that our senior management incentive plan is based on growth versus the prior year.

So the growth rates in 2003 were higher.

And did you have another question?

I'm sorry.

If you can just give a broad outline of your revenue mix in '95, and how that has changed to currently?

I doubt, Michael, that we do that.

We'll have to get back to you.

But the broad outlines are that structured finance has become a much more important component of the business than it was at that time.

In '95, we had no business that is comparable to the MKMV business.

That's, what, around 8 percent of our revenue at the moment.

And generally, the corporate and financial institution franchises have grown faster than public finance.

So if you turn from the US to the international, obviously, we now have 39 percent of international revenues in the quarter.

That's up very substantially from what existed in '95.

You'll also note that there has been recently, in the last couple of years, an acceleration of the research business that has grown very rapidly.

And so, that has become a more important part of the business.

Ray or Jeanne, do you have any other --?

No, that's --

No, I think that's --

Broad strokes, that's it.

Sorry that we can't be more precise than that, Michael.

And one last question, John.

I missed it when you said what your cash balance was at year end.

Can you just give that number again?

Slightly in excess of 600 million.

John Neff, William Blair.

One question for you, which would be, out of your bond rating revenue, what percentage came from -- what was transaction-based versus relationship-based for 2004?

Jeanne, I think, has that information.

Yes, I can take a shot at that.

If we look only at the ratings revenue, versus total Moody's revenue, the transaction and relationship percentage is roughly 70 percent transaction, 30 percent relationship.

And that ratio is pretty consistent with what it was for the full year 2003.

On a total Moody's basis, which includes the research business and the Moody's KMV business, the transaction was roughly 57 percent of total revenue; relationship was 23.

Than we had research at 11 percent and Moody's KMV at 9 percent.

And again, those ratios are pretty consistent with what we saw last year.

William Bird, Smith Barney.

I was wondering if you could talk a little bit about what your position is on the Senate's perceived conflict of interest issue which was raised at the hearing?

And also, I'm just curious -- your point of view on whether the current rating cycles could look more like '94 or '99.

I'll try and address your first question.

The Senate questions that we received about conflicts of interest are actually very similar to the questions that we have received from regulatory authorities, both in the US and outside the US, over the last few years.

We addressed that by talking about the elements of our behavior that we use to manage the potential conflicts of interest that do exist in a model in which the issuers pay us and, frankly, I would argue in a model in which investors pay for ratings, as well, since investors have a stake in whether ratings are upgraded or downgraded.

But among the things that we talked to the Senate about was the fact that our analysts are not compensated based on the revenues that are generated from the credits they follow, that analysts may not hold securities of companies which they rate or in which they participate in rating committees, the fact that we use rating committees, the fact that we have published code of conduct, standards of business conduct, the securities trading policy which our entire population is required to complete.

All of that are elements to look at that, we would argue, should give comfort around conflict of interest.

But in my opinion, the most important element is, how good are the ratings?

What is the predictive content of the ratings?

Are we doing a good job based on our track record, or are we not doing a good job based on our track record?

And if we are not doing a good job, is that because we are not any good at what we do, or because there's something corrupt about the process?

And I think we feel very good about that track record.

I think the only other thing I would add to that is that there is interest in the fact that some of our Board members are directors or executives of rated companies.

Our directors, including Ray and myself, do not participate in individual rating decisions.

And frankly, we believe that it is in our shareholders' best interests to have experienced executives with contacts with other rating companies.

In terms of your question of what year would you look at, as you think about 2005, I think the year that we have tended to recommend that people look at was 2000.

That was a year with rising interest rates in the United States.

We were able to put about 7 points of growth on our scorecard (ph), due to good growth outside the United States.

While it's certainly not a perfect comparison, I think it's a better comparison than either '94 or '99.

Brandon Dobell, Credit Suisse First Boston.

A couple of quick questions, maybe for Ray.

As you look outside of the US at some of the developing markets, do you see any markets that look like or feel like what Europe is going through, with structural regulatory changes (technical difficulty) more debt to any places where you think that, a couple/three years down the line, you have an opportunity to kind of mimic what you have seen there?

From a different perspective, thinking about revenue and revenue growth from existing customers versus new customers, you mentioned a couple of times in the call, I think, both you and John, that new rating relationships -- how should we think about the mix of revenue contributions as we look to '05, kind of new versus existing?

In respect of whether we see an international opportunity that mimics the European opportunity, I think really, looking out over the next two to three years, I would say the most important international opportunity we have continues to be in Europe, although a larger Europe.

We are seeing requests for ratings coming in from Eastern European corporations, and with the expansion of the EU, we think that that is going to be an important catalyst for continuing the growth in Europe.

We also continue to see growth in Western Europe coming from the continued move to the financial markets -- I'm sorry, the capital markets -- by corporations which have not traditionally been in those markets, or the use of assets and capital markets securities which have not traditionally been in those markets.

So, over a two-to-three-year period, I would have to say that Europe continues to be the main focus.

Looking out over a longer horizon, though, I think we are importantly focused on opportunities in Asia, both developed Asia and developing Asia, and including markets such as the Chinese market, the Indian market and, for that matter, the Russian market.

And on the customer issue?

I don't have a breakout of the data, in terms of how much revenue in 2004 came from new relationships versus old, in front of me.

But I can give some numbers in terms of new rating requests that came in.

In 2004, between -- or our financial institutions and corporate finance areas combined, it was about 500 new rating requests.

And we are expecting a similar growth in 2005.

The other place where we have new customers is in our research business.

We have gotten a fairly substantial number of new customers, both in Europe and in Asia outside of Japan, in our research business.

And as those markets continue to develop, we believe that will be a good source of new customers.

I should just add a footnote here, that the new requests or new relationships that we established do not all turn into public ratings in the year of the relationship.

Many of them are companies seeking indicative ratings or bank loan ratings, so they would not necessarily show up in bond coverage.

And if I can squeeze one more in there, I think back on the Q3 call, you guys talked about pricing environment.

Wonder if we could get some or color on kind of how the year finished up, what expectations you have for '05 in terms of, I guess, splitting out ratings and research, and how should we be thinking about the pricing market right now?

Well, as far as pricing on the ratings side of the business, our basic price increases are similar to what they have been in prior years.

And where we have been able to add value through the enhanced analysis initiative, we have been able to increase in our revenues through pricing from the enhanced analysis work.

There are also some areas where we either feel we cannot increase prices, or in fact are offering lower prices.

Some of the more competitive and standardized areas of structured finance, that happens.

We've also introduced lower pricing in Europe for small- and medium-sized institutions, really, in reaction to a perception among some regulators and market participants that smaller institutions really don't have access or cost-effective access to ratings, and so we're trying to respond to that.

So there are some offsets to the price increases, but overall, I think we would expect to see as much coming from price in 2005 as we did in 2004.

And I'm sorry;

I don't remember the second part of your question, now that I have answered that.

That was actually just between ratings and research, if there's any difference in terms of how we should think about price.

Well, just structurally, the research business is a subscription business, or largely a subscription business.

But otherwise, I don't think there are any parallels that are important to draw between the two.

Jeff Rappaport (ph), Barons Riven Investments (ph).

The first question I wanted to ask is, can you outline the different scenarios that we could see occurring or happening from what is going on in Washington (technical difficulty) positive would be, what the neutral would be and what the negative scenario would be, and where you guys -- and how you rate the probabilities of those scenarios?

I don't think that that is terribly easy to do.

It seems to me that the best information is that the SEC has said that it will formalize criteria for the NRSRO -- that is, the recognized rating agency status -- in March of this year.

And we would expect the SEC to designate additional rating agencies, as they did last year, with the designation of dominion bond rating as an NRSRO.

As Ray said earlier on the call, we do welcome increased diversity of opinion about credit ratings in the market.

We think that benefits market participants.

In Europe, we will really have to see what the Committee of European Securities Regulators, CESR, recommends to the European Commission about regulation of rating agencies.

I don't think that there is any simple way to come up with scenarios and probabilities.

The other question is, when you look at your buyback, you bought back 3.5 million shares of stock for $221 million, which equates to $63 a share.

Obviously, the stock hasn't been anywhere close to that for a while.

Is there other ways -- why wouldn't you be paying a higher dividend, or is there other ways to return the cash to shareholders?

Or why are you not buying stock back at this present moment?

Well, I think we have always said that we would be patient, that we don't feel that having cash buildup on our balance sheet is necessarily a bad thing.

And we believe that a more opportunistic policy is both good in terms of producing value for longer-term shareholders.

We have a modest dividend, which is the same modest dividend that we have had, same policy that we have had, and frankly, we think it will benefit the shareholders.

My last question is, if someone was -- how does one gain market share in this business?

Is it by price only?

I'm sorry?

How does one gain market share in --?

In the ratings business. (multiple speakers) go with two rating agencies.

There are three rating agencies.

How would one go about gaining market share?

Would it be by price?

Well, we have always said that, although we pay attention to market share, that gaining market share is not a primary business objective for Moody's.

We recognize that it is a good thing for issuers to have more than one rating, and we recognize that it is also good for investors that there be more than one rating on a security.

We generally stress the quality of what we do, so that investors will ask a Company that is trying to sell them their debt, well, what is the Moody's rating, and possibly what are other ratings?

Jim Baker, Neuburger Berman.

I had a few questions I wanted to ask you.

One is, do you have the breakout between net interest expense and other income in the fourth quarter?

It looked like it was a very low number, and maybe with some other income that was unusual there.

Could you just clarify that?

And second, also, Jeanne, if you have the usual breakdown you usually give me on these calls between the Moody's KMV operating income, as opposed to the rest of the Company, and maybe on both a before-and-after stock option expense bases?

In terms of the other income and expense, it did move a bit quarter to quarter, and there are four main components of other income expense.

There is interest expense on the $300 million of debt that we have, interest income on our excess cash, foreign exchange transaction gains and losses, and then there are some small income and expense items related to joint ventures in the less than 100 percent owned entities.

The biggest differences between the third and the fourth quarter were greater foreign exchange gains in the fourth quarter than the third quarter and higher interest income, for two reasons.

One is our average cash balance was higher in the fourth quarter, and secondly, short rates have increased in recent months.

Could you just quantify the interest income and interest expense separately, just so we understand what that number is?

I think the quarter-to-quarter difference was roughly $2 million, in the range of 3 million in the fourth quarter and 1 million in the third quarter, for the interest income.

And then, the interest expense is fairly level, at about -- I think it's about 5.7, 5.8 million a quarter.

And then, just on the breakdown, you have the KMV breakout in terms of the operating income there?

For the fourth quarter, the Moody's KMV operating income -- and this is including the stock option expense or the equity compensation expense -- was about $4 million.

Moody's KMV normally has higher operating income in the fourth quarter, because it's a seasonally high quarter for revenue, and expenses don't increase at the same rate.

The equity compensation expense for Moody's KMV in the fourth quarter -- I don't have the exact number, but I would guess that it's in the range of $800,000-$900,000.

So that $800,000 or $900,000 would be included in that operating income number (technical difficulty).

And this is a long shot, but do you happen to have the cash from operations number for the year, cash flow from operations?

We are still finalizing the balance sheet and cash flow information that goes into our 10-K, so we will be publishing that in the not-too-distant future.

Fair enough.

And also, I just wanted to ask, maybe this is for Ray or for John, is the research -- the revenue was a little slower in terms of the growth.

And I know you had a tough comp versus last year.

But just -- I sort of noticed sequentially, throughout the year, it seems that the gains from quarter to quarter have been a little bit less than the very robust gains we saw in '03.

Do you have any comment on that, and also what it looks like going forward?

Well, I guess, as a general comment, the strong sales that we had in the second half of '03 fed through into the first half of '04, but also produced more difficult comps, '03 to '04 in the second half, so that the research business has continued to do very well, and we are expecting good growth out of research in 2005.

But I think that's really why you saw what you saw in 2004.

So maybe, Ray, we should think in terms of maybe more like a growth rate in the 20s as opposed to the 30s there, in terms of percentages?

Yes, I don't think a growth rate above 30 percent is really sustainable for the long term in research.

That's correct.

Fair enough.

And also, I just -- if I may, I just wanted to take issue with maybe a statement John made earlier, that the shareholders are served by your retaining cash on the balance sheet, as opposed to raising the dividend.

I think it's arguable that you folks haven't really taken enough account of the changes in the tax law that have taken place.

I know there was some uncertainty before the election whether President Bush was going to be reelected, and whether these policies were really going to be sustained for very long.

But now it looks like we're going to at least '08 and possibly 2010 or longer, with these very low dividend tax rates.

And I would just urge you to really reconsider whether you are paying enough out to the shareholders.

It seems to me you're getting a fairly low return on your cash, you're getting this income taxed twice.

And it seems to me that if you pay it out -- and also with the lack of acquisitions, lack of share repurchase, it just doesn't really seem to me as if -- why couldn't you have a dividend of $1 or $1.20, based on the kind of earnings power you have?

Well, first of all, I do appreciate that comment.

I think we have, from time to time, talked to our various shareholders about this policy.

We do understand that there is quite a difference in shareholder view here.

There are some shareholders who have said what you just said.

There are other shareholders who have told us, or people who have told us that, frankly, they don't buy our stock because of our dividend policy.

There are other shareholders who do support it.

It is something that we are continuously looking at, and it could certainly be that in the future, we would change our views on this.

I appreciate that, John.

Just the other thing I might throw on the table here is, could a special dividend -- as we have seen from some companies like Microsoft and so on -- possibly be warranted at some point, maybe distribute 500 million out at a time, and then sort of start over again, without having to necessarily raise the regular dividend?

We think that that sort of produces a windfall for a certain class of shareholders, and it doesn't seem to us to create very lasting value.

We did point out that we don't seem to have been able to conclude acquisitions.

That is also a fair statement.

We are always looking for positions that would enhance our position in the capital market.

We would be looking for companies that had a strong position in a particular market sector, and sort of financial profile that could be similar to ours over time.

We are not been able to do that, but we certainly haven't given up, either, and that could be a potential use of our cash.

We also have other legacy tax exposures which are described in great detail in our financial filings, and that will certainly be a use of cash, as is the 300 million of debt coming due this year.

But (indiscernible) all that, we do recognize that we would like our balance sheet to be probably more leveraged then it is now.

We haven't just found a way to accomplish that, which we think in the best interest of our long-term shareholders.

(OPERATOR INSTRUCTIONS).

Fred Searby, JPMorgan.

S&P -- the acquisition they are attempting to make in India -- what were your thoughts on that?

Does this say that to grow in emerging markets organically, you might need to make acquisitions?

Are you considering that type of move?

And then (indiscernible).

Well, India, as Ray has said, is a market that we believe is an extremely important market of the future.

Anybody who has not seen a study that a major brokerage firm prepared on the economy in 2050 would do well to look at that.

It talks about the tremendous importance of what they call the brick economies -- Brazil, Russia, India and China -- in 2050.

We have had a significant position in an Indian rating agency which is smaller than the agency that S&P has announced that it would like to acquire, but we certainly believe that we would like to strengthen our position in all of the brick economies, and we'll be looking for ways to do that.

Ladies and gentlemen, that concludes today's question-and-answer session.

At this time, I would like to turn the conference back over to Mr. Rutherfurd for any additional or closing comments.

Well, I would just like to thank all of you for joining us today, and we appreciate your continued interest in Moody's.

Once again, ladies and gentlemen, that does conclude today's call.

Thank you for your participation.

You may disconnect at this time.