穆迪 (MCO) 2005 Q2 法說會逐字稿

Welcome to Moody Corporations second quarter 2005 results 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 Michael Courtian, Vice President, Investor Relations and Corporate Finance.

Thank you, good morning everyone and thanks for joining us on this teleconference to discuss Moody's results for the second quarter of 2005.

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

Moody's released it's result for the second quarter of 2005 this morning, and the earnings release is available on our Website at IR.Moodys.com.

Ray McDaniel, Chairman and Chief Executive Officer of Moody's Corporation will be leading this morning conference call.

Also on the call this morning is Linda Huber, Chief Financial Officer of Moody's Corporation.

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 a Safe Harbor for such forward-looking statements.

I would like to direct your attention to the management discussion and analysis section and the risk factors discussed in our annual report on Form 10(K) for the year ended December 31, 2004, and our other filings made by the Company from time to time with the SEC.

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

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

And I would like also to point out that all per share amounts referred to in our press release and on this conference call, reflect the two-for-one stock split, which became effective in May.

I'm now pleased to turn the call over to Ray McDaniel.

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

I'm begin our prepared remarks this morning with a brief summary of Moody's second quarter results.

Linda will then take you through the quarters operating highlights, provide some commentary on revenue and expenses, and update you on our share repurchase program.

I will then review developments in the legal and regulatory area, and finish with Moody's outlook for 2005.

After that we will be happy to respond to your questions.

We are pleased to report another quarter of good results at Moody's.

Robust growth in a number of our businesses more than offset modest performance in others, and helped the Company produce strong overall results.

Revenue in the quarter rose $447 million, and was 25% higher than in the second quarter of 2004.

We benefited from continued favorable conditions in a number of our ratings businesses, and from continued strength in our research business.

Operating income for the second quarter was $253 million, and grew 27% year over year.

Foreign currency translation contributed approximately 130 basis points to the quarter's revenue growth, and approximately 150 basis points to operating income growth.

With the dollar strengthening a bit Moody's revenue growth received a smaller boost from foreign currency translation than it has in some recent quarters.

Diluted EPS for the quarter were $0.47, 38% higher than the prior year period.

Diluted EPS in the quarter included charges of $0.02 cents per share for the settlement of sales tax matters related to Moody's operations in Japan from 2000 through June 30, 2005.

And $0.03 per share related to stock-based compensation.

Second quarter 2004 diluted EPS of $0.34 per share included $0.03 per share related to legacy tax exposures assumed by Moody's in connection with its separation from the Dun & Bradstreet Corporation in 2000, and $0.01related to stock-based compensation.

Our earnings release includes tables showing the nonGAAP financial measure that are derived after excluding the stock compensation expense, and expense related to provisions for legacy tax obligations from our 2004 and 2005 results.

At this point I will turn the call over to Linda who will take you through some more detail on revenue and expense.

Thanks, Ray, and good morning everyone.

First I'll provide some details for the quarter starting with our U.S. businesses.

Moody's U.S. revenue was 282 million in the second quarter which was up 22% year-over-year.

At Moody's investor service U.S. ratings revenue rose 25% year-over-year outpacing growth in the U.S. research revenue which still grew at a good 18% rate.

U.S. structured finance was once again the largest contributor to growth on a dollar basis, with revenue increasing more than 40% compared with the prior year.

Moody's benefited from continued robust activity in the residential mortgage and home equities securitization sectors, reflecting continued strength in the housing market combined with high ratings coverage.

We also generated strong revenue growth from rating U.S. commercial mortgage backed securities and collateralized debt obligations.

U.S. corporate finance revenue was down slightly from prior period, based on a significant decline in high yield issuance, which was largely offset by a recovery in investment grade issuance and strength in bank loan ratings.

U.S. financial institutions ratings revenue rose in the low double-digit percentage range compared with the prior year period, with growth from the enhanced analysis initiative which we call EAI, and new ratings relationships offsetting weak issuance related revenue.

Finally U.S. public finance revenue grew 20% compared with the second quarter of 2004, reflecting a large year-over-year increase in the refunding of outstanding bonds which more than offset a decline in new money issuance.

Over at KMV, U.S. revenue at Moody's KMV declined in the mid single-digit percentage range on a year-over-year basis in the second quarter, reflecting higher than expected merger related subscription cancellations, and longer sales cycles for subscriptions and credit decisioning software.

Now I would like to shift focus a bit to our international business.

Moody's continued to generate strong growth outside the U.S. with revenue rising faster in international markets than domestically.

Total international revenue of 165 million in the second quarter was 30% higher than in the prior year period, with foreign currency translation accounting for almost 4% of this growth.

International revenue accounted for 37% of Moody's total growth in the quarter, up from 35% in the year ago period.

Moody's investors service reported mid-30s percentage growth in international revenue with foreign currency translation contributing slightly more than 400 basis points of growth.

International structured finance ratings revenue was the largest contributor to this growth on a dollar basis, and increased more than 40% year-over-year.

We generated exceptional growth from rate and European commercial-backed and asset-backed securities, and had generally strong performance in other asset classes across geographic regions.

International financial institutions revenue grew by more than 40% year over year driven by robust issuance by European banks and insurance companies taking advantage of attractive market conditions.

International corporate finance revenue rose in the high teens percentage range, led by strong investment grade issuance across most regions which more than offset the weakness in the smaller speculative grade in international market.

Moody's research business continued its very strong international performance with revenue rising more than 30% year-over-year including currency gains.

Finally Moody's KMV generated 17 million of international revenue, modestly more than it did mountain second quarter of 2004 with little foreign exchange impact.

Good sales of risk products and credit decisioning software in Europe were largely offset by higher than expected cancellations, a number of which were the result of mergers.

Sales of risk products in Asia declined year-over-year due to extended contract negotiations in the current year.

Next I'll move on to expenses.

Moody's expenses for the quarter totaled 194 million, and rose 23% over the prior year period.

The operating margin for the quarter was 57% compared with 56% a year ago.

And as Ray noted earlier, we recorded a $9.4 million charge in the quarter related to a recently completed tax audit by Japanese taxing authorities.

The quarter's expenses also included 12.3 million for stock-based compensation, compared with 7.2 million in the 2004 period.

Now I would like to make a few comments on capital occasion and stock buybacks.

Moody's is committed to using it's strong cash flow to create value for shareholders by investing in growing areas of our business, or by making acquisitions in related businesses.

In addition we are committed to returning excess cash to shareholders.

Our philosophy on returning excess capital continues to be, to pay a modest dividend and to repurchase shares.

During the second quarter of 2005 we repurchased slightly under 0.5 million shares, and issued 1.2 million shares under employee stock compensation plans.

Since becoming a public company in September 2000, and through the end of June 2005, Moody's has repurchased 53.5 million shares at a total cost of 1.1 billion, including 29.7 million shares to offset issuances under employee stock plans.

Given Moody's strong cash position which you may have seen at the end of the quarter stood at $930.8 million, and continued free cash flow generation, we are revising our approach to share repurchases.

We will be employing a more systematic approach for a portion of our repurchase activities.

These systematic buybacks will only constitute a portion of our potential repurchase activity, as we want to continue to be able to be prepared to act opportunistically when conditions warrants.

This move to initiate a systematic element to repurchase activities will be conducted within our existing 600 million repurchase authorization, of which 528 million is remaining.

Our goal is to return capital to shareholders in a way that serves their long-term interest and as a result our share repurchase activity will continue to vary from quarter to quarter.

And with that I will turn it back to Ray.

Thank you, Linda.

I would like to discuss two legal matters and provide an update on developments in the regulatory environment.

Since our last 10(Q) Moody's has received two subpoenas from the New York Attorney General's office seeking documents and other information.

The first subpoena relates primarily to Moody's rating of the jumbo prime residential mortgage business from June 2000 through June 2003.

The second subpoena relates primarily to Moody's ratings of reinsurance companies since 1997.

Moody's is currently responding to these requests, and we intend to continue to cooperate with these inquiries.

We have included more detail on these matters in the contingency section of our second quarter 2005 10(Q) which we filed with the SEC this morning.

On the regulatory front you will recall that in December 2004 the International Organization of Securities Commission, known as IOSCO, published a code of conduct fundamentals for credit ratings agencies.

This document proposes standards for credit rating agencies in a number of areas, including the quality and integrity of the rating process, independent of the avoidance of conflicts of interest, and responsibilities to issuers and the investing public.

Moody's endorsed the IOSCO code earlier this year, and in June we published our own code of professional conduct pursuant to the IOSCO code.

In keeping with the IOSCO code, Moody's will publish a report annually on our state of compliance with our code of conduct and the IOSCO code.

Moody's code of professional conduct is available in the Regulatory Affairs SEC of Moody's Website.

Also in June congressman Michael Fitzpatrick of Pennsylvania introduced a bill titled the credit rating agency duopoly Relief act of 2005, for consideration by the House of Representatives.

The stated objectives of this bill are to increase competition, transparency and accountability in the rating agency industry.

We have communicated our support for these objectives to members of Congress, while also identifying aspects of the bill, that might introduce unintended consequences that would not improve market efficiency or investor protection.

The next steps in the process of the bill have not been announced but we will track its progress.

We believe that Moody's will have ample opportunity to participate constructively in the assessment and consideration of this bill, before action if any is taken.

Finally in April the SEC released for public comment a proposed rule defining the term, nationally recognized statistical rating organization.

This proposed rule is available on the SECs Website.

In summary, the rule proposes to define an NRSRO, as an entity that issues publicly available credit ratings, is generally accepted in the financial markets as an issuer of credible and reliable ratings, and uses systematic procedures to ensure its ratings are credible and reliable, to manage potential conflicts of interest and to protect nonpublic information.

Numerous market participants including Moody's responded to the SECs request for comment, and our response is posted on the regulatory affairs section of our Website.

I would like to conclude this morning prepared remarks by discussing Moody's outlook for 2005.

Moody's overall revenue and earning growth rates for the second quarter were significantly above the full year growth rate guidance we provided when we reported first quarter results in April.

While we do not believe the growth rates Moody's achieved in the second quarter will be sustained through the remainder of the year, we have made a number of revisions to our outlook for the year.

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

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

In the U.S. we now expect low to mid-teens percent revenue growth for the ratings and research business for the full year 2005.

In the U.S. structured finance market, we now expect that revenue from rating residential mortgage backed and home equity securities, will rise in the high teens percent range from the record level of 2004.

This is a significant revision from our prior outlook which anticipated residential mortgage backed and home equity securities revenue declining in the high teens to 20% range.

We continue to expect good year-over-year growth in several other sectors of U.S. structured finance, including asset backed securities, credit derivatives and commercial mortgage backed securities, and we have trimmed our expectations for asset backed commercial paper, where we now forecast a modest decline.

We now expect a total U.S. structured finance revenue to grow in the mid-teens percent range compared with our previous forecast, which assumed revenue would decline slightly from 2004.

In the U.S. corporate finance business issuance in the speculative grade bond market remains weak, and will likely fall substantially below the volumes seen in 2004.

We expect this shortfall to be offset by stronger than expected growth in investment grade and bank loan ratings and by revenue related to our enhanced analysis initiative, resulting in high single-digit percent revenue growth.

In the U.S. financial institution sector we continue to expect that the impact of projected flat issuance volume will be offset by revenue related to our enhanced analysis initiative and from new rating relationships providing low double-digit percent growth in this second in 2005.

Based on a strong second quarter in U.S. public finance we have revised our revenue outlook for this business.

We now expect public finance revenue for 2005 to increase in the low teens percent range compared with 2004.

We continue to forecast good growth in the U.S. research business.

Outside the U.S. we expect growth in the ratings and research revenue in the high teens percent range with double-digit percent growth in all major business lines and regions, assisted by favorable foreign currency impacts.

Our projection assumes improved corporate issuance in Europe after a relatively weak 2004, and good issuance growth in the European financial institution sector, and several sectors of structured finance in Europe, including commercial and residential mortgage backed issuance.

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

Finally we expect global, global revenue at Moody's KMV to be in the high single to low double-digit percent range, reflecting growth in both credit risk assessment subscription products, and credit processing software products.

For Moody's overall we expect revenue growth in the 13 to 16% range 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 flat to up by 100 basis points in 2005 compared with 2004.

This incorporates our upgraded revenue outlook and investments we are continuing to make to expand geographically, improve our analytic processes, pursue ratings transparency and compliance initiatives, introduce new products, and improve our technology infrastructure.

For 2005 we expect year-over-year growth in pro forma diluted EPS will be in the 13 to 17% range.

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

The impact of expensing stock based compensation is expected to be in the range of $0.10 to $0.11 per diluted share in 2005, compared to $0.06 per diluted share in 2004.

The estimated 2005 expense excludes the effects of adopting statement of Financial Accounting Standards No. 123 R., shared base payment, which Moody's will implement effective as of January 1, 2006, based on the Securities and Exchange Commissions recent rule allowing deferral of the implementation date.

That concludes our prepared remarks.

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

Thank you [OPERATOR INSTRUCTIONS] We will take our first question from Karl Choi , Merrill Lynch.

I was wondering if you could refresh my memory or update us in the first half the percentage of your revenues that were from residential mortgage backed securities, and also commercial mortgage backed securities?

Yeah, this is Ray.

U.S. residential mortgage backed securities as a percent of total U.S. revenue in the quarter was about 18%.

For the commercial mortgage backed securities, it would be mid to high, or mid single-digit contribution to total U.S. revenue.

And home equity loans is included the in the residential portion?

Yes, home equity is included in the RMBS component.

And second question is regarding KMV, is there a way to quantify the amount of software sales that you think were deferred and/or the amount of the impact from the mergers in the banking industry?

I do not have a quantification for the first part of your question.

The mergers and consolidations were running several percent higher than we had incorporated in our outlook at the beginning of the year, and at the end of the first quarter.

And last question is regarding the subpoenas, is there any more color that you can give, or is there any reason that you believe you received a subpoena, based on what S&P said this morning, it sounds like they did not receive any subpoenas?

Because this is a confidential matter, I have to refer you to the disclosure in our 10(Q) for what we are able to say about it at this point.

And in particular I cannot comment on any other rating agencies.

Okay.

Thank you.

Thank you Karl.

We will take our next question from Geoffrey Dunn, Keefe Bruyette & Woods.

Thank you, good morning.

I wanted to ask you about your guidance range, if you look at what guidance suggested to EPS last quarter and then compare to this quarter, it pretty much is only changed for the upside that you reported versus expectations today.

So I was wondering if you could give a little more color on your guidance for the remainder of the year?

Are your expectations for sector growth largely unchanged in the second half of the year, and this guidance just updates for the second quarter?

Or have you become maybe more aggressive on your expectations for the growth in the third and fourth quarters as well?

I will answer that broadly, Geoffrey.

As we said in our prepared remarks we do not expect the strength that we saw in the second quarter to continue through the second half.

And so to a large extent we are rolling through the second quarter performance into the second half.

We do have I think a better view on the Company's side of the ratings business, and on our research business.

The I think, significant variable that we have to contemplate in the second half , is how much of the strength we saw in structured finance particularly in residential and commercial mortgage backed securities, will continue through the second half of the year.

To answer a question that we often get, the pipeline currently for structured finance, the areas that have been showing strength, continue to show strength at this point in time, and the areas that have been soft are continuing to be soft.

So we don't really have a different view looking at the pipeline.

For the second half of the year than we did for the second quarter.

Okay.

Great.

That's helpful.

Thank you.

We will take our next question from Michael Meltz with Bear Stearns.

Following up on Karl's question, Ray, regarding the subpoenas, is it fair to say that this then is a Moody's specific issue, or maybe about a rated firm, as opposed to a broader industry review by the Attorney General's Office?

Well, first of all I certainly do appreciate the curiosity around this, and I understand that.

I do have to refer you back to the 10(Q) though, in terms of the extent of the disclosure that is appropriate for us to make.

Looking at the 10(Q), the disclosure language which says that the subpoenas relate to securities offerings, Moody's rated or sought to rate, our credit enhancement evaluations, our credit policies and procedures, and our ratings policies and practices.

Okay.

Which doesn't sound like a broader industry review.

Again, I can't comment beyond the 10(Q) but I think it is worth reading closely.

I will read it again.

A couple of questions for Linda.

Can you talk about the change in repurchase strategy?

I didn't quite understand stand the language you are using, is this a 10-B-1. one that you are going to be pursuing?

And second question, was always Gene's favorite, can you tell us what compensation as a percent of total expenses was in the quarter, and what incentive comp was accrued at as a percentage?

We will get to the second one in just a minute.

The thinking of what we are trying to do here, given as we said the strong cash position and the strong cash flow generation that the Company is experiencing made us take a fresh look at how we were dealing with share repurchase within our present authorization.

So what we are looking to do as you've correctly assessed, is to look both at systematic share repurchase and opportunistic share repurchase, so the short answer is, yes, we will be using both forums and that is what we are planning to do moving forward.

Just one second regarding your other question here.

The percent of compensation of total expense is 68% for the second quarter.

And if it's okay we will get back to you on the option expense.

It was actually the percent of incentive comp, but I would like to know what that sort of extra options expense will be on an annual basis.

Okay.

On that one we will still get back to you.

The bonus compensation was 17%.

Okay.

Thank you.

Sure.

We will take our next question from Peter Appert with Goldman Sachs.

Hey, Ray, two things, first in terms of your discussion with the pipeline, how far out can you see from that, what's the degree of visibility, how accurate is that as a predictor of your operating results?

It's good for the short run, the very near term outlook, meaning over the next month or two.

It's guidance as a predictor of our performance over the next six months though, erodes pretty significantly as we move out.

Because many of these transactions come in the door, and are rated in fairly short order.

But in the context of that then my conclusion would be that you've got a sense that July was presumably pretty strong, August looks reasonably good, and to the earlier question it feels like then the second half guidance is conservative in the context of the strength and the guidance comment you made earlier.

Yeah, as I said a couple of minutes ago the important variable here I think probably the most important variable is what happens in terms of the flow of new transactions for the structured finance area, and because of the unexpected strength in the residential mortgage and home equity areas, how sustainable that strength that we have seen in the first half, and still the good pipeline that we have, how quickly that tails off.

And I don't have any further guidance on that at this point.

Fair enough.

Unrelated item, any pressures from a staffing standpoint, I'm wondering if turnover rates have gone up in the context of the pretty healthy market you guys are faced with, or any pressure to increase salaries?

The turnover that we have had is broadly in-line with turnover that we saw in 2004.

We have had some areas where turnover has been higher, and we will certainly do what we need, to make sure that we have enough good people in those areas.

I don't expect it's going to create broad-based changes in our compensation for the year.

And much of the turnover that we have seen has been with respect to our professional staff, but our more junior professional staff whom we use to leverage our rating analysts and managers.

One last think on the Japanese tax issue, just so I can be sure I understand, is the issue that the Japanese are saying that clients basically have to pay a sales tax on your services, and you are basically making up for those payments that weren't collected, so therefore on a go forward basis we assume that there is no implications associated with this?

Yes.

Basically that is correct.

We have one period here where we are going to have to consider it, before we can appropriately build that sales tax, and that would be for the third quarter.

We are looking at potentially a charge of 600,000 for the third quarter related to that.

But in the fourth quarter we expect that by that point we will be able to bill this through to clients.

Are there any other jurisdiction where sales tax is collected on your services?

Yes, there are.

I don't have a list in front of me, though.

So it's not something really unusual.

No, it's not.

Thank you.

We will take our next question from Brandon Dobell with Credit Suisse First Boston.

I wonder if you can address a couple geographic questions.

One, are there areas out there where you see as you look out a couple of years maybe even a year or two, where you might need a physical presence that's either larger than you have now, or to go and greenfield something where you see the potential for opportunity there?

And second would be in the context of India with McGraw's move there with Crisil, if you address how you view that market from a competitive perspective, or also from a longer term opportunity perspective?

Sure.

In terms of areas where we need to be with a physical presence and our geographic expansion, I think certainly there are some key emerging economies where we feel strongly we are going to be having to expand.

Those would include countries such as China, India, Russia, to some extent some of the other Asian countries, but I would also expect that that at least over the next couple of years, most of our hiring will continue to be in the geographic markets where we already have a presence, but those markets are growing well, and that's particularly western Europe, and the more developed economies in Asia.

With respect to India specifically, yes, we do think that that is an important country for us to have a presence in.

We currently have a minority interest in an Indian rating agency called ICRA, our interest is about 29%.

Frankly would like to have a majority position in ICRA.

ICRA is not a public company unlike Crisil, which is the major competitor in India.

And so our ability to move from a minority position to a majority position is dependent on our ability to persuade current shareholders that they may want to sell to Moody's.

Thanks, very helpful.

Last question would be pricing environment, maybe some color on the different segments to what you are seeing either from a competitive perspective, or from what their customers are saying about prices, is there any sensitivity these days?

Well, as far as making a broad statement about pricing, we have been working very diligently to increase both the quality and the scope of the ratings work that we are doing on the Company side of the rating business.

And to the extent that issuers and investors find value in that, particularly through the enhanced analysis initiative we do think there are some pricing opportunities.

In other areas we may not have the same kind of pricing opportunities.

Some portions of the business are more price sensitive than others, and that includes the public finance sector, and certain parts of the structured finance sector.

And I don't think we will have the same opportunity to raise prices in those areas, unless we are able to provide the same kind of increased value to either the issuers or the investors, that we've been able to do in the Company side of the business.

And we are as you might imagine working very diligently particularly with our structured products in the data, analytics and modeling area to make sure that we are increasing the value, by increasing both the transparency and the sophistication of what we are doing.

Okay.

Thanks, very helpful.

Douglas Arthur with Morgan Stanley, please go ahead.

Just to go back to structured finance for a second, you talked about it, but this quarter is by far and away the biggest quarter you ever had in structured finance, particularly on the dollar growth basis.

And I guess a couple of questions, what surprised you in the upside, you talked about the residential side, was there anything else on the derivative side that was particularly surprising to you?

Was there anything in the market that sort of pulled business into the second quarter, that might impact the growth rates in the second half?

Just wondering if you can kind of drill into it because it's such a stunning number, and I think Lisa has a more detailed follow up, thank.

Sure, thanks, Doug.

Yeah, obviously the second quarter for structured finance was very strong for us both in the U.S. and outside the U.S.

The U.S. was primarily driven by the really remarkable activity in the residential mortgage home equity sector, but I would also point out that we have very good growth in commercial mortgage backed securities and derivatives in the U.S.

So all three areas were big contributors with residential mortgages being the largest.

Certainly we look to interest rates on the residential side and the commercial mortgage backed side, and as being probably the most important contributors to issuance volume, and derivative of that the continued increases in home values which allow additional home equity borrowing, have been important in we will be watching that closely in term of whether that that sustains through the rest of year.

The story outside of the U.S. has really been in the second quarter related to the areas of the business that had historically been relatively small outside the U.S., that is the nonderivatives portion of the business.

And we had really excellent growth globally in the commercial mortgage backed securities area, as well as in residential mortgage with the commercial mortgage backed securities area being the larger of those two in terms of percent growth rates.

So it's broad-based in the sense of both business line and geography and outside the U.S.

I think is less purely attributable to the interest rate environment than to the acceptance of structured finance techniques, and the use of structured finance as an alternative financing vehicle for these asset classes.

And just as a follow up I mean typically when you talk about your outlook you mentioned concern about higher interest rates, obviously there's a lot of debate on what's going to happen to the yield curve for the balance of the year.

Is it fair to say that if the yield curve remains benign, or interest rate pressures remains benign for the rest of the year, your forecast on all of these areas could be on the conservative side?

A positive interest rate environment could mean that our forecasts are conservative.

I would make two caveats to that.

One is on the Company's side of the business, we will have a number of companies reaching their annual fee caps, and that is something that happens every year.

And so we earn more revenue issuance related revenue early in the year, rather than later in the year, when there is a robust issuance environment, as we have had this year particularly in the financial institutions area.

The other caveat is simply that with rates remaining low, I think we have to wonder how much refinancing, and what some of the market call product-flipping will continue to occur, in areas such as residential mortgages simply because that, those opportunities may have already largely been realized.

And so the low rate environment may not be as beneficial as if we were moving into a low rate environment.

Hi, Ray, it's Lisa.

Could you just elaborate just in detail in terms of if you could give us the year-over-year, the specific year-over-year revenue growth for the different sectors in the U.S. and overseas in structured finance, and then secondly could you just speak to the corporate growth outside the U.S., what specifically is driving that?

Thanks.

Sure.

With respect to the structured finance area, I don't want to through the specifics of every geography and every business line.

But we did have very strong double-digit growth in the U.S. in RMBS, CMBS and derivatives.

We had strong international growth in RMBS, CMBS, and the term asset backed market, the long-term asset backed market.

Outside the U.S. the largest percent growth came from commercial mortgage backed securities.

Inside the U.S. the largest percent growth came from residential mortgage backed securities, and just to provide a little more color on the commercial mortgage backed market, although it was strong really in all geographies around the world, the real explosive growth came from Europe.

With respect to corporate finance, we had good growth in our international corporate finance business.

It was double-digit growth both in Europe and in total international.

And that as you know is largely an investment grade market much more so than in the U.S.

So the weakness that we have seen in speculative grade issuance in both the U.S. and internationally had less of an impact internationally than it did the U.S.

So it was investment grade new issuance coming out of Europe and Asia that really drove the global corporate finance numbers.

Thanks a lot.

We will take our next question from John Neff with William Blair.

Hi, I was wondering if you could walk us through the revenue contribution for the enhanced analytics initiative, and what the year-over-year growth may have been?

John, I actually don't have those numbers in front of me but as we have communicated previously we expect to generate an incremental $50 million from this effort by the end of 2007.

We had about $11 million in incremental revenue from this in 2004 and we are still on track for reaching the $50 million number by 2007.

I apologize.

I just don't have the current outlook for '05 other than to tell you we are still on track.

Okay.

And then I am just wondering in regards to the new share buy-back approach when you talk about being more systematic can you give us, if there is one can you give us a sense of what the formula would be on a given quarter as to what you are going to be doing there?

John, I don't think we want to go that far into providing guidance but obviously we remain within our authorization and that's what we are looking to do.

We would really rather not going any further into that.

And then for those of us who only want to exclude the $9.4 million Japanese sales tax charge in the quarter what would be the pro forma adjustment to the effective tax rate in the quarter?

I think we would have to talk further about that one, but we don't have that one right at our fingertips, sorry.

Thank you.

We will take our next question from William Bird with Smith Barney.

Please go ahead.

Yes, Ray, I was wondering if you could talk a little more about European structured issuance?

I know that in Europe there are a lot more infrequent issuers.

I was wondering if many of them came to market in Q2, also just wondering what's the best way to think about fee caps and the impact on second half growth?

Thanks.

In terms of the European structured finance, I think it's, it probably is fair to characterize issuance in particularly in the CMVS area as coming from what you might characterize as infrequent issuers, at least historically.

What I think is interesting, though, is that to the extent that these financing techniques gain acceptance on a broader base, and in more countries in Europe, we are certainly expecting that over the medium to long run that this is a secular trend, for issuance in European structured finance securities.

Whether that secular trend will show up in the second half of the year and having new issuers to the market continue with their activity in the near term, I don't know.

And I apologize I forgot your second question.

What's the best way to think about fee caps and impact on second half growth, like maybe you could give us a sense of what percentage of your business this would apply to?

The frequent issuers are largely investment grade financial institutions and corporations in the U.S. and in Europe.

And we have in our pricing plan an annual issuance, a cap in addition to the annual fees.

So the company would pay an annual fee of and then would pay a somewhat discounted per issue fee, and that is subject to a cap.

I do not have the list of caps in front of me, but it will have an effect for the largest issuers, and it will have an effect for the largest issuers earlier in the year.

So that's where we expect to have the capping take place most immediately.

Thank you.

We will take our next question from Rosa Yee, Tempo Advisors.

Josh Anderson with PIMCO, given all the focus on the housing market lately, given that many of the high risk mortgages, sub primes, IOs, NTAs, are ultimately sold through securities agency markets, and many of those subordinate bonds are also sold to the securities market and CEOs, which Moody's rates, given the growth of your business and those markets, what assurance can you give us that senior management has implemented controls for the last couple of years, to ensure that this is really true growth and not just Wall Street or other issuers just arbitraging your rating methodology?

In addition can you discuss your role in the housing market, and how you view your role in the housing market, given that much of your growth have come from securitizations as the housing market gets more and more frothy, are you guys willing to toe the line on any discipline at the risk of giving up earnings going forward?

Well, with respect to our rating analysis and methodologies, we clearly are accounting in our analysis for what may be more speculative product, in both the residential mortgage and home equity sectors.

We think we are being appropriately conservative in our analysis of that.

We do make our methodologies publicly available and you can get those from our Website.

But there is clearly a recognition that the product that is being included in residential mortgage, home equity sector, now is product of a different character, and probably a riskier product, and that is being accounted for in our analysis and credit enhancement levels on those securities.

I'm not sure if I answered your question or not, but if not maybe you can follow up.

Yes that answers the question.

Were we wanted to make sure that many of the high risk mortgages are actually being funneled through securitization markets, and ultimately Moody's and S&P are setting credit standards for those mortgages and we want to make sure that senior management is aware of what's going on, and that you guys are maintaining discipline to ensure that sensible lending is going on.

No, that very valid question and something that we are very attentive to, and again I would encourage you to look at the methodologies for these asset classes because I think those will be helpful in answering the question in more detail than I can on this call.

Thank you

[OPERATOR INSTRUCTIONS] we will take a follow-up question from Karl Choi with Merrill Lynch.

Just want to go back to the share buy-back question for a second here.

If you don't do any opportunistic share buy-back is there a way to quantify when you expect the current authorization will be exhausted?

We appreciate the focus on the share buy-back program.

We are just continuing to state that of the 600 million in authorization we had approved by our Board previously, we have 528 million remaining, we do not want to comment on how long that will last, and obviously any further sense of where we will go with authorization, is subject to our Board's view and we have not gotten there yet.

Is there an expiration date related to the authorization?

No.

Okay.

And second question, can you update us on your policy on unsolicited ratings?

Thanks.

Sure.

I think many on the call will know that for quite a period of time back in the late 80s and 90s we assigned unsolicited ratings and in some areas of the global business.

Beginning in the year 2000, we announced that we would be ceasing that activity.

And we are not currently assigning unsolicited ratings and have not been over that time period.

Thank you.

Next question, Steven Barlow with Prudential.

Ray, on the regulatory front you mentioned after HR 29-90 unintended consequences of the bill, I guess is how its written, can you elaborate on that, please?

Sure, thank you, Steven.

I think the two major consequences that we identified in the Bill that we think are not intended, are first whether the concept of registration to be a rating agency regardless of whether a firm wishes to be used in regulation or not used in regulation, may have the effect of eroding some of the first amendment protections that are associated with assigning credit opinions publicly to public companies.

That's a protection that I think has benefited the business tremendously because we are in the opinion business, and many people can disagree with opinions.

And often do.

And secondly the Bill incorporates or contemplates that the SEC would establish methodologies for rating agencies.

And since one of the stated objectives for the Bill is to increase competition in the rating agency industry, we think that if we have more competitors but they are required by SEC rules to pursue common methodologies that we will actually end up with fewer opinions and less true competition in the industry as a result of that.

And we have pointed out both of these factors to members of Congress who will be considering HR 2990 and have I think had constructive communications with them about whether these consequences are desirable or undesirable.

Thank you.

We will take our next question from Jim Baker with Neuberger Berman.

I wanted to ask if you could comment on the financial performance of KMV which barely broke even in the quarter, tiny profit, down significantly from last year.

I know some of it had to with the deferred revenue but what is the outlook for margin improvement in that business?

It seems like you have reassessed that a couple of times since the acquisition, and how are you feeling about the growth and margin potential of that business going forward?

Well, the growth for the business as we had mentioned was affected by, in the second quarter affected by really by two things, first of all as you point out the deferred revenue question, and secondly the fact that we did have attrition in the back sector, attrition or cancellation of subscriptions, that was due to mergers and consolidations that were above our estimates, and we think are going to return to a more normalized rate going forward.

As a result the top line growth was particularly affected at Moody's KMV We continued or we are projecting that we will have high sing to low double-digit growth for that business, for the remainder of 2005.

We do think that that will continue to be a double-digit top line growth business for us.

And we also think that we are going to be able continue to improve the profitability of that business along the lines that we had already been thinking.

Do you think there's any adjustment that maybe needs to be made to the cost structure there just given that perhaps they are growing a little slower?

I think you had once thought that had growth are grown at a 15, 16, 17% rate, it seems to be growing slower than that, now you are more talking double-digit, but not necessarily mid-teens to high double digit, so I'm wondering do you think you might have too much overhead in that operation?

If we conclude that the medium to long-term outlook for growth of this business is lower on the top line than we had been expecting I think it's very safe to say that we are going to be looking for opportunities to make sure that the bottom line continues to contribute at the level that we had been projecting.

Okay.

Thank you.

I just had one follow up.

On the question of the dividend could you just help us understand your philosophy behind not paying a higher dividend than you do?

I think the view given that we are pretty successfully demonstrating that we are a growth company is that our dividend will remain modest.

We think the more effective way to return value to shareholders is through share repurchase.

It's more economically efficient and we feel that that is the preferred way to go.

The fact that it is less tax disadvantaged now than it used to be doesn't mean that it is tax advantages to pay a dividend, and we are cognizant of that.

Okay.

But on the other hand these aren't really mutually exclusive alternatives.

If you really look at your capital requirements and your acquisition opportunities, it would seem as if you have to be buying back an awful lot of stock, in other words it seems to me that could you easily pay a dividend of $1 a share, and still buy back as much stock as you want, and really have no liquidity issues whatsoever, you are going to refinance your debt in a few months and then will you even be more, once you get past that, it seems like you, more of it would stay, I just don't understand how shareholders are advantaged by paying a lower dividend?

As you know we continually review both our dividend policy and our share repurchase policy.

We will continue to do that.

If we find that we are not able to return as much value to shareholders through share repurchase as is appropriate, I think we would have to turn to the dividend and consider whether something should be done there.

Thanks.

In other words, if the share count were coming down 2, 3, 3.5% a year, I could understand more, paying a nominal dividend because you are really just giving the yield in that form.

But if the share count has sort of gone down 0.5% or something, it doesn't seem as if, it's speaking as one shareholder, it's doesn't seem as if the low dividend is real that advantageous.

We understand, we are cognizant of that balance.

Thank you.

At this time there are no further questions.

Mr. McDaniel I will turn the conference back over to you for closing comments.

Okay.

Thank you very much everybody for joining the call.

I don't have any further comments other than to say we look forward to speaking with you after the third quarter.

So thanks again.

Once again, ladies and gentlemen this will conclude today's conference call.

We do thank you for your participation and you may disconnect at this time.